The Eyes of Investors Are Upon . . . P&C Core Systems Vendors

North America-based vendors of core systems for property/casualty insurers have drawn more than their share of attention. They’ve attracted money, a lot of money. Why? And what does it mean for these firms’ investors and for the insurers that their systems?

(Image credit: Arek Socha/Quimono.)

Even in 2020, a very tough year, certain sectors have attracted the attention of investors.

North America-based vendors of core systems for property/casualty insurers have drawn more than their share of attention. They’ve attracted money, a lot of money. Why? And what does it mean for these firms’ investors and for the insurers that their systems?

First let’s look at some of the major deals in late 2019 and so far this year:

  • August 1, 2019: Insurity is acquired by private equity firm GI Partners from three other private equity firms. Terms were not disclosed.
  • July 20, 2020: Majesco agrees to be acquired by private equity firm Thoma Bravo for $13.10 a share. However a second bidder subsequently emerges.
    • And on August 8, 2020: Majesco sees Thoma Bravo increasing its offer to $16 a share which is then accepted by Majesco. The $16 price is a premium of 113% over Majesco’s average closing price of $7.52 during the 30-trading day period ended July 17, 2020.
  • August 14: Duck Creek Technologies’ IPO was priced at $27 per share and closed at the end of the first day of trading considerably higher. Duck Creek’s majority owners prior to the IPO, a fund of private equity firm Apax and Accenture, retained a significant ownership interest after the IPO.
  • November 12, 2020: Insurity acquires Code Objects, a core system vendor. Terms not disclosed.
  • November 24: OneShield receives a “growth investment” by Bain Capital Credit and Pacific Lake Partners. The financial terms are not disclosed.

(Note: This list is my selection of the some of the most consequential North American insurance core system technology transactions in 2019 and 2020. It does not include all insurance technology transactions during this period.)

Two more 2020 transactions are worth noting.

Lemonade and Root are insurers. Hippo is a both a distributor, and—with its recent acquisition of Spinnaker—an insurer. None are core system vendors. However, each firm’s go-to-market propositions depend significantly on newer forms of technology. And the positive market receptions of each IPO may have contributed to interest in the core system vendor transactions listed above.

So what has been going on?

The first thing to note is that all of the core system vendor deals involve private equity firms—usually as buyers or investors, and sometimes as sellers. In very simple terms, the private equity firm (for itself and for participants in its investment funds), after a holding period, wants to sell all or part of its equity interest in an IPO, or in a sale to another firm. Its goal is to have the sale price to be significantly higher than the purchase price (plus the net of subsequent related acquisitions or other transactions).

Success during the new owner’s holding period could be achieved through successful execution of some or potentially all of four strategies:

  • Gaining market share by winning new customers
  • Increasing revenue from existing customers (i.e., from the insurers using the core and related systems)
  • Expense control through expense reductions and/or by becoming more efficient
  • Entering new markets, for example, selling core systems or point solutions to life and group benefits insures

I believe most core system vendors will be focused on increasing revenue from current customers and expense control. The winning firms will excel in executing these two strategies. And perhaps, some winning vendors will gain significant market share. Lastly, entering new markets is a wild card, which is too hard for this analyst to call.

The implications for insurers center on the “increase current customer revenue’ strategy. A straightforward way to do this is by offering insurers additional services (e.g., data and analytics).

A potentially more important tactic, that many vendors are already following is deploying new customers in the cloud, and moving current on-premises customers to the cloud. Once an insurer’s systems are cloud-based, a vendor can also offer to manage that cloud deployment. This, and SaaS revenues for using the vendor’s software, all add to Annual Recurring Revenue (ARR), an increasingly important financial metric for vendors and their owners.

From an insurer’s perspective, if SaaS agreements and managed services provide favorable Price:Value relationships, then it could be a win-win-win for the insurer, the vendor, and the vendor’s investor.

Time will tell.

COVID-19, the Economy, the P&C Industry, and Technology Spending

On Insurity’s Acquisition of CodeObjects: Q&A with CRO Michele Shepard

Majesco Poised for Rapid Growth as Newly Private Company

Duck Creek CEO On Strategy Following $230M Investment

Hippo Secures $350 Million Capital Investment from MS&AD

Donald Light // Donald Light is a Director in Celent’s North America Property/Casualty Insurance Practice. His coverage areas include: technology and business strategy; transformative technologies such as digital, the Internet of Things, and driverless cars; core systems; and insurance technology M&A due diligence. His recent consulting work includes: developing a strategic IT plan for a specialty insurer, core system vendor selection support; a build vs. buy analysis for core systems; and several due diligence assignments. Light is widely quoted in the press and media, including The Wall Street Journal, The Economist, NBC and CBS Evening News, CNBC, National Public Radio. He is a frequent presenter at industry conferences including those sponsored by ACORD, PCI, and IASA.

Leave a Comment