Why Insurers Should Care About Vendor Merger Mania

With 10 insurance IT mergers announced so far this year, compared to 11 for all of 2014 and 10 in 2014, it seems safe to say that mergers and acquisitions in the insurance technology space are on the upswing. 

Why is the sector so enticing? Well, just follow the money, says Matthew Josefowicz, CEO of Novarica -- specifically the $3.6 billion market capitalization Guidewire has achieved after the core systems provider's IPO a couple years ago

"[Guidewire's IPO] has drawn a lot of attention from people who previously didn’t pay a lot of attention to the insurance IT space,” Josefowicz says. “There’s certainly a lot of money flooding into the space, as yield is harder and harder to chase.”

With M&As coming fast and furious, Josefowicz says insurers must consider where their technology will sit in the corporate strategy of their providers. For example, if an insurer is using a solution from a portfolio company that has a large number of solutions and is likely to make more acquisitions, the insurer must understand what the vendors’ strategic commitment is to those products they rely on.

“Is it something that is likely to be replaced by something from an acquisition, or supplemented by something from an acquisition?” he asks.

If the insurer is working with smaller technology vendors that are likely to become a target, insurers must understand how a potential acquirer would think about that company, Josefowicz explains.

“Would a buyer think it’s a company with hot technology, and they would invest in it to get access to that technology?" he asks. "Or would they more likely think the company has older technology and an attractive customer base; and would they try to convert those customers to a new technology?”

The companies that do make buys are often looking for a bigger customer base, explains Donald Light, director, Americas P&C practice and senior analyst at Celent. That increases their revenue and ability to do more research and development, as well as the ability to cross-sell new technologies.

For Insurity’s acquisition of Oceanwide, both core systems providers, the customer base was a critical motivator, Light says. “Oceanwide has a large and growing customer base; Oceanwide also has a more global and geographically diverse customer base than Insurity,” Light says. “Oceanwide also has some attractive technology around its footprint in cloud; and rapid deployment of its solutions for simpler sets of requirements. All the same, they can get systems up and running quickly.”Motivations for CCC’s acquisition of DriveFactor, however, likely were different, Light says, as CCC is well known for offering applications associated with auto physical-damage repair, estimation, data sets and as an analytics provider.“This acquisition is really a diversification into an adjacent field: telematics. There is speculation that in the not-so-distant future, cars will  run diagnostics on themselves," he explains. "[CCC is] very interested in what happens to physically damaged automobiles. There’s a strategic motivation for what would seem like an adjacent acquisition but may be what they see as an important future path.”Light says the number of acquisitions is and has been on the upswing. “We ran a data set over four years, 2011 to 2014; and we do see growth.” In 2011, he says there were five acquisitions; in 2012, four; in 2013, 10; in 2014, 11; and there have been nine so far in 2015. “The activity is almost certain to be on the upswing, but we’ve got seven months left. It’s a good bet, but nothing is certain."Insurance Software and Services Vendor M&A: 2015

1. Patriot National acquires Vikaran
2. Verisk Analytics to buy Wood Mackenzie
3. Applied Systems acquires nxtech
4. Sapiens to acquire IBEXI
5. Insurity to acquire Oceanwide
6. DriveFactor bought by CCC Information Services
7. SNL Insurance acquires RateFilings.com
8. Capgemini buys IGATE for $4 Billion
9. Tindall Associates (TAI)  acquired by Joint Venture of msg global solutions and LOGiQ3
10. Mindtree’s acquisition of Discoverture

 
[See more in Insurance IT M&A: 10 Key Deals since 2014]

Josefowicz' read of the vendor side is that the push to consolidation also has to do with market trends, specifically the emergence of software suite providers and private equity.

“We’ve settled in the middle with the componentized suite,” Josefowicz says. “We went from a single monolithic solution that did everything vs. point solutions for different applications, and what we’ve settled on is a suite of point solutions from the same vendor that are easily integrated and play nicely together; that can be implemented sequentially or in whatever order the buyer needs.”

This in turn has put more pressure on single-solution independent software vendors, Josefowicz says, as insurers tend to look for larger, more-stable providers that can address a range of needs. “And so, from the software provider side, there’s a desire to become part of a portfolio to address client needs more effectively.”