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

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3 December 2020
Donald Light

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.

(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.

  • July 2: Lemonade’s IPOwas priced at $29 per share, closed at $69.41 on the first day of trading – an increase of 139%, one of the largest first day price changes of the year
  • October 28: Auto insurer insurtech Root’s IPObegan trading.

Lemonade and Root are insurers, not 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 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.


Insight details

Insight Format
Geographic Focus
North America