Software M&A Accelerates
Insurers continue to rely on software vendors to enable critical business
functionality, but many feel as if the sands are shifting. By Matthew Josefowicz
With a spate of deals in late 2009, the insur- ance software M&A market is resurgent,
with activity being driven by new players
as well as long-established market participants. There’s also the additional activity
caused by new potential investors attracted by the hype around the Verisk IPO and
Ebix’s coronation as a “hot stock” by
Fortune magazine. Amidst all this activity,
insurers continue to rely on software vendors to enable critical business functionality, but many feel as if the sands are
shifting under their feet.
While analyst estimates vary, the general consensus is that U.S. insurers spend
approximately $2 to $4 billion or more
on industry-specific software applications per year. However, unlike other
industries where a technical monoculture has evolved (e.g. banking) the insurance software market is highly fragmented by size of company, lines of business,
distribution model and a market made
up of specialized functional components
(rating, policy administration, claims,
etc.) as well as end-to-end suites.
The marketplace includes what
Novarica has termed “Portfolio Players”
and “Independent Software Vendors”
(ISVs). The Portfolio Players sell multiple
solutions or sets of solutions across categories. These players are mostly publicly traded companies, many of which
include significant services arms (CSC,
CGI, Accenture, TCS) or other software
and technology services assets
(LexisNexis). Two of the major players
in this market, StoneRiver and SunGard,
were recently taken private. New
entrants to this marketplace include
Ebix, Sword Group, and iPipeline.
Portfolio Players tend to be strategic
The ISVs are mostly privately held
companies that tend to focus on a single
solution or set of closely linked solutions. There are more than 100 independent software vendors serving various sectors of this market. Insurance
ISVs generally fall into one of three categories: “Rising Stars,” which enter the
market with a new approach and quickly gain traction; “Good Tech, Small
Company,” many of which are founder-controlled, and have a solid but not rapidly growing customer base or
“Stagnating Product Providers,” which
have large customer bases that generate
maintenance and services revenue, but
are not adding new clients to their outdated products. Of these categories, the
last is by far the largest.
In addition to these there are the tech
giants: Oracle, SAP, IBM and Microsoft,
some of which (especially the first two)
act like Portfolio Players in this market.
Oracle made a series of high profile
acquisitions in 2008.
Also newly reactivated in this market
are private equity and venture firms.
While many of these companies were in
a holding mode in 2008 and most of
2009, their interest in the sector has
The pace of M&A in the insurance
technology marketplace is likely to accelerate in 2010. This has different implications for insurers, acquirers and targets.
Insurers should make sure they
understand in what category their ISV
providers are located, and who is likely
to buy them or why. For example, acquisitions of a Rising Star or a Good Tech,
Small Company provider are likely to
result in increased investment in the
product, while acquisitions of stagnating product providers are likely to
results in forced conversions or migrations. Insurers should also protect themselves as much as possible through contractual means, including demanding
base code escrow and service-level guarantees that survive change of control.
Insurers that work with Portfolio
Players should seek to understand their
acquisition strategies, and what new
assets may be brought under their
Strategic acquirers should act quickly.
More financial investor attention to the
sector, and other well-funded aspiring
portfolio companies is likely to mean
fewer available targets and higher valuations. Portfolio companies or services
companies that have an interest in
adding a Rising Star or Good Tech, Small
Company ISV to their portfolios should
act quickly before those companies disappear from the market.
ISVs who may want to be rolled up
might consider themselves in the drivers
seat, but they should be aware of the
competitive risks of remaining small
while their competitors gain access to
the deeper pockets and organizational
stability of larger companies.
Overall, the consolidation trend is
likely to accelerate as smaller vendors
look to compete with a growing group
of mega-vendors. At the same time, portions of the market are still underserved,
and will attract new innovators to keep
the emerging mega-vendors on their
Matthew Josefowicz is director of the insurance
practice at Novarica, New York. He can be reached
For more about M&A
activity in the industry,
search “MGAs Hungry for