Vendor Consolidation Heats Up

A predicted wave of insurance technology vendor consolidation manifested itself on an impressive scale over the last week or so with the announcement of several deals.

Less than a month after its acquisition of commercial lines policy admin vendor ePolicy, Alpharetta, Ga.-based ChoicePoint announced that it had acquired Santa Barbara, Calif.-based personal lines policy admin vendor Steel Card; and IBM announced its purchase of Costa Mesa, Calif.-based major content management software provider FileNet (see related stories). The week also saw the announcement of ISO's (Jersey City, N.J.) acquisition of Orem, Utah-based estimation software and services vendor Xactware; as well as the announcement that agency and broker management systems software vendor Applied Systems' (University Park, Ill.) chairman and CEO, James Kellner, had joined with Bain Capital Partners (Boston) to buy out Kellner's former ownership partner, Vista Equity Partners (San Francisco).

The announcements gave credence to predictions by industry observers that insurance technology vendor consolidation was imminent. Among those observers were the authors of analyst firm Celent's May 2006 report "The Coming Wave of Insurance Software Consolidation," which asserted that, "significant new players are about to make themselves felt in the market, which was long the exclusive provenance of the 'big four' -- CSC, Fiserv, SunGard and CGI."

Playing on Alan Greenspan's famous phrase, San Francisco-based Celent analyst Donald Light describes the recent wave of consolidation as an expression of "rational exuberance." Light says that "the time is ripe for some of the leading firms to expand their footprint in the insurance technology arena and vendors that are in the middle of the market in terms of size are becoming attractive targets and perhaps finding it harder to sustain growth on their own."

In contrast to the heated buying and selling of the dot-com days, the current activity is not driven by a general stock market-related "insanity," according to Light. "What's driving this is extremely good results on the P&C side of the industry, quite respectable results in life insurance and very good results on the managed care side of the industry," he says.

Vendors such as Steel Card have begun to get traction in the market, and the appetite for insurance carriers to make investments in large-scale technology projects is as great as it has been since 1999, Light observes. "Buyers are in good times and they have become convinced of the value in replacing large parts of their legacy environment, for example."

Favorable economic conditions are also shaping the seller's perspective, according to Light. The question vendors face is, "'are your owners happy with a relatively small firm that is growing steadily versus opting for a payday in the near future?'" Light posits. "Our conclusion is that in a lot of cases people are going to go for the near-term payday."

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