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Report: M&A Flurry No Fluke
November, 26th 2009

It seems that announcements of mergers and acquisitions by insurance technology vendors are made daily, and a recent report by Novarica says this is not likely to change anytime soon.

In June 2008, Novarica predicted that M&A in the insurance software sector would continue, and the recent acquisitions of SceneGenesis by Mitchell, and McCamish by InfoSys proved them right. Also, with the purchases of EZ Data and Peak Performance by Ebix, and AgencyPort by Sword Group, Novarica says smaller, publicly traded companies are beginning to move more aggressively into this market, which has been dominated over the last few years by venture and private equity-[backed firms.

While analyst estimates vary, the general consensus is that U.S. insurers spend approximately $2 to $4 billion or more on industry-specific software applications per year, so its important insurers protect themselves.

Novarica suggests insurers understand which category their independent software vendors (ISV) are in, who is likely to buy them and why. For example, acquisitions of a Rising Star (an ISV entering the market with a new approach that will gain traction) or a Good Tech, Small Company (founder-controlled ISV that has a solid but not rapidly growing customer base) is likely to result in increased investment in the product, while acquisitions of stagnating product providers are likely to results in forced conversions or migrations. 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.

M&A in the insurance industry can become complicated. Unlike other industries where a technical monoculture has evolved (e.g. banking, manufacturing), Novarica says, the insurance software market is highly fragmented by:

Size: with a few dozen insurers with more than $5 billion in premium revenue, another 100 or so with more than $1 billion, more than 300 with more than $100 million and close to 1,000 with less than $100 million.

Lines of business: with personal, commercial, specialty, workers comp, life, annuity, disability, health and other product sets all requiring different types of core software solutions.

Distribution model: with insurers who sell directly or use captive agents, independent agents/brokers and large brokers such as Aon, Marsh and Willis all having different needs.

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