Berkery Noyes, a New York-based M&A Advisory firm, reported this week on Software M&A activity for 2008 across all vertical industries and, lo and behold, the two biggest transactions were insurance-related. First, there was the proposed acquisition of Mitchell International by CCC Information Services (still awaiting approval of the FTC) for $1.4B. Second was the private equity acquisition of TriZetto by Apax Partners for $1.26B. This was during a time when activity in the broader financial services vertical was down. (Click here to the see the report; Click here to see coverage in Insurance Networking News.)
These transactions demonstrate the increasing scale of vendor size in insurance technology and the industry consolidation that is underway. Granted, insurance technology is still a far less mature field than banking technology where very large vendors dominate the landscape. Moreover, the insurance technology consolidation that we see is greater on the claims side of the business than on policy administration. This is because state regulations allow the former more easily than the latter (far more state-by-state regulation differences exist on the underwriting side than on the claims side). All three of the vendors mentioned above serve the claims side of the business (CCC and Mitchell for P&C, and Trizetto for Health).
There are a large number of vendors in insurance technology. The Vendor Directory on www.InnovationInInsurance.com lists over 500. That gives a lot of raw material for consolidation. Moreover, there are yet more firms to be formed simply because there are so many functions in insurance that beg automation. I’m not suggesting that you will ever remove the need for people making decisions in insurance, but I am suggesting that there is still a lot of paper-pushing going on. Hence, insurance is one of the most fertile vertical fields for information technology growth.
February 9, 2009 at 7:00 pm |
Mike,
With the exception of IBM and CSC the insurance industry has traditionally been served by many boutique technology companies. CSC’s insurance division is the result of multiple boutique company acquisitions. Prior to acquisition, many of these smaller firms struggled to compete due to the capital requirements to launch new products or services. Few small companies qualify for a prime rate unsecured line of credit. Fewer still could qualify for a public offering to raise equity capital, and without the ability to go public, cannot raise capital from the vast majority of investors who have no interest in owning a minority position in a private company with illiquid stock.
While I don’t follow the insurance technology vendor M&A trends as well as I should, many of the insurance CIOs I speak with express concerns about the ability to remain vigilant about how to manage transitions created by the consolidation or weakness of some service providers.
I have recently wondered if we may now be seeing a trend toward industry aggregation. While many industry boutique firms are good at what they do they tend to be one time product players who don’t stay in business very long. It could be that we might see the individual company cannot compete with a strategically aggregated company.
P.S. I enjoy your website and blog…keep up the good work. Too much “hollow hype” is flowing around from the analyst these days
February 9, 2009 at 7:48 pm |
Thanks, Steve. I believe the industry would benefit from greater involvement by venture capital and private equity firms, who can bring needed capital to strengthen and grow these businesses. I put a vendor directory on my website primarily to give these professional money firms greater visibility of the vendors. I also have a capital sources directory on the site to give management teams greater visibility to the money firms that are knowledgeable of this space.