Novarica: More Insurance Software M&A in 2010

Mergers and acquisitions in the insurance vertical software solutions industry will accelerate, according to "Insurance Software M&A 2009Q4 Update," a Novarica report published Nov. 19. The report also notes the increased competition of smaller, publicly traded companies in the insurance software market with established large vendors with a portfolio of insurance solutions.

The report cites renewed M&A activity in the third and fourth quarters of 2009, as well as the impact of Atlanta-based insurance e-commerce vendor Ebix's having been named to Fortune's "Hot Stock" list as signs indicating increased activity in the market during 2010. The report categorizes potential acquisition targets and provides advice to insurers, based on their vendor's category.

Report co-author Matthew Josefowicz, head of Novarica's insurance practice e says that numerous deals in the $30m to $75m range are likely but is reluctant to speculate about the potential of larger-scale deals involving larger vendors. "There might be a major merger or combination among the portfolio players, but that's hard to predict," Josefowicz concedes.

Josefowicz's co-author, Chad Hersh, a principal in Novarica's insurance practice, says that certain software solution areas are likely to see significant M&A activity, such as policy administration systems. "It's a fragmented space with many small players, which is typically a sign that a market is ripe for acquisition," he comments. "Industry observers can draw their own conclusions about vendors in this space who haven't enjoyed a significant number of new deals or face declining numbers [of transactions]."

The report encourages insurers to be aware of the potential of their solutions vendors to be acquired, based on the vendor's status as one of three types of companies: Rising Stars; Good Tech, Small Company; and Stagnant Product Provider. According to the report, "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 result in forced conversions or migrations."

Acquiring companies have gotten smarter, maximizing the value and minimizing the impact on acquired companies and their customers, according to Chad Hersh, one of the authors of the report. "We hope with lessons learned that carriers can have more confidence that acquisitions won't cause as many challenges as they have in the recent past," Hersh comments.

However, the report advises that, "insurers should protect themselves as much as possible through contractual means, including demanding base code escrow and service-level guarantees that survive change of control."

The Novarica report discusses specific companies likely to be active in M&A in the coming year, including Accenture, CSC, CGI, Ebix, IBM, iPipeline, LexisNexis, Microsoft, Oracle, SAP, SunGard, Sword Group, SunGard, Tata and Vertafore.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio