A saturated core systems market and software providers’ willingness to add missing pieces to core suites through acquisitions has led to a major uptick in vendor M&A activity.
Though adoption of new core products by carriers is expected to remain steady through 2017, the consensus is that trend is dying down, according to industry consulting firm Celent. As a result, software providers have turned to selling ancillary products around core suites to generate revenue and improve user experience. Recent acquisitions by Guidewire Software of EagleEye Analytics and FirstBest Systems; as well as Duck Creek's buy of Agencyport are prime examples, according to Celent research director Karlyn Carnahan.
“With the core systems market shrinking, vendors have entered new niches, resulting in greater product portfolios and applications,” she says.
Vendors are also attempting to enter new lines of business, she adds. In June, Insurity acquired Tropics, giving it entrance into the worker’s compensation market. That followed the vendor's previous acquisition of Oceanwide, which increased its profile in specialty lines. Meanwhile, Israel-based Sapiens gained entry into the U.S. small carrier market with its acquisition of Maximum Processing.
“There’s usually an internal period of time when vendors are distracted by work needed to process the merger that they lose a little of momentum in the marketplace,” said Carnahan. “The challenge is merging without losing momentum.”
As it stands, 10 vendor M&A deals have been completed in 2016, compared to just 30 total from 2011 through 2014, according to Celent. The number of mergers this year is also likely to surpass the industry’s 18 in 2015. The challenge for insurers who partner with vendors is assuring core systems are truly integrated.
“Insurers are trying to simplify integration and do not want technology to be an obstacle,” said Karen Furtado, Partner at Strategy Meets Action. “Carriers wonder, ‘Is my solution going to be viable in 10 years?’ How much will my software change and will it be worth it?’”
Recent investments by private equity firms in insurance technology startups and vendors have also added to the trend, Furtado says, citing General Atlantic’s partnership with Insurity. Other notable deals include Bain Capital and Vista Equity acquiring Vertafore in May, and Apax Partners buying 60% stake in Duck Creek.
Vendors have now grasped the role of consolidator under a two-pronged approach: purchasing assets that can easily integrate with core offerings and partnering with companies whose services aren’t a direct link, she says.
“Ownership changes will continue as private firms continue to get more involved in emerging technologies,” said Furtado. “Vendor consolidation is no different. Technology is changing quickly so providers will turn to consolidation to add needed complementary capabilities.”
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