With the Nov. 9 announcement that LexisNexis was getting out ofthe insurance software business, the start of anothermerger-and-acquisition season has begun in the insurance softwareworld. There has been more activity in 2011 than in 2010, andopinions vary over whether 2012 will be an even busier year.

Technology channel editor Robert Regis Hyle posed four questionsto analysts Craig Weber of Celent, Deb Smallwood of Strategy MeetsAction, and Chad Hersh of Novarica on the M&A market. Here'swhat they had to say.

PC360.com: M&A activity among insurance softwarecompanies seems to go in spurts and then dies down for a while. Canwe expect that pattern to continue?

Weber: This most likely will continue, as certain types ofacquisitions seem to trigger competitive responses. Then we have arelatively quiet period as a new crop of attractive acquisitiontargets takes time to develop. But the overall economic mood playsa major role as well. As confidence in the sector grows, vendorsdraw new cards to reposition themselves for growth. Then as thingscool off, they might well stick with the hand they've got.

Deb Smallwood: There is a perfect storm brewing in insurance.M&A activity is cyclical; right now it's hot and willcontinue.  M&A is driven by the fundamentals of supplyand demand, has great potential to make money for investors and ITproviders, and there is a lot of money to be made in insurance.Insurance IT spending continues to be healthy, with strong growthprojections. Investments in software, product development, andsolutions are high, and new entrants continue to enter themarketplace.

Chad Hersh: Absolutely.  Essentially we would expectthe best vendors/solutions to be acquired, then if things happen asthey usually do, a new round of solutions will be built to replacethem (often by startups). The acquisitions typically happen inspurts because both vendors and financial investors tend to acquirein a 'me too' pattern. The period after a round of acquisitions andduring which new solutions are being built is typically the downperiod for acquisitions. The last lull—2007 and 2008—was somethingof an exception, caused by a financial crisis rather than the usualcycle.

PC360.com: How has the market downturn of the last fewmonths affected M&A activity for software solutionproviders?

Hersh: Not a lot. The majority of the acquisitions have been ofvendors that were performing quite well, not of vendors in need ofrescue. Obviously price multiples for acquireeshave not been as high as they may have been during the height ofthe market, but overall the M&A market certainly appears to berobust and likely to show continued activity. Our research showsthat overall IT spending among insurers is actually expected toincrease slightly in 2012, which means the cycle isunlikely to turn negative until the strongest vendors areacquired.

Weber: It's hard to say because it affects both buyers andsellers, and every situation is slightly different. But in general,rising financial markets tend to generate bigger offers, which meanthat owners of private companies have more incentive to cash out.If the downturn persists, sellers might find it hard to get theprice that they think their companies are worth.

Smallwood: It has not been affected by it at all. Valuations forinsurance IT providers are at an all-time high, with somevaluations exceeding six to eight times the sale/revenue, which istraditionally unheard of. And there are deep pockets of investmentdollars looking for the right investment. Lots of IT providers areshopping their companies and lots of buyers are looking for theright buy. If anything stalls the activity, it will be the highprice tags floating in the market.

PC360.com: Which areas of the softwareindustry are more likely targets for M&A—policy admin, claims,ECM?

Smallwood: The two areas that are likely to become targets areaswill be core systems and customer centricity offerings. The marketis saturated with best of breed policy administration systems, andinsurers are looking for the hybrid enterprise suite with best ofbreed capabilities. Although there are limited billing and claimsoptions in the marketplace, we will see consolidation. Policy adminproviders will buy other policy admin solutions for the businessand technology capabilities, insurance IP, and platform. And therewill be a battle over the limited billing and claimsacquisitions.

There is a renewed interest in customer centricity amonginsurers. They want solution offerings that have a combination ofsoftware that can manage the whole customer experience—includingcustomer communications, analytics, predictive modeling,relationship management, behavior analysis, and social mediaanalysis tools. Watch for the large players to continue to acquiresmall standalone solutions.

Hersh: It depends on how you view it.  Due to thenumber of vendors in the policy admin space, there are likely to becontinued acquisitions there. But a very limited number of billingand claims systems exist and having a policy system without billingand claims is becoming less and less of an option, so they may bemore likely to get snapped up quickly. Systems ancillary to policyadministration suites, ranging from reinsurance to verticallyfocused BI and analytics, are likely to follow as suite vendorslook for additional room to grow.

Weber: All areas are active to varying degrees, but there aremore policy admin systems out there than there are claims systemsor virtually anything else. And the way those systems develop, theyare often focused on a specific area, such as commercial lines orpersonal lines. So it's easier to imagine the value of a combinedentity where both companies bring a focused expertise that theother lacks.

PC360.com: Any predictions for 2012 M&A activity?Greater or worse than 2011?

Weber: I expect to see more activity in 2012. Despite the sloweconomic growth overall, the mood is surprisingly positive. Andwe've been saying for months that you need to stay ahead ofconsumer sentiment to position yourself for rapid growth whenthings heat up. So 2012 may be a great time for M&A forcompanies that want to capture more than their share of theirrespective markets.

Smallwood: If investors can get past the high price tags, andsee the possibilities, there will be an increased level of activityin 2012. At SMA, we predict one new mega M&A deal with theconvergence of focused core systems.

Hersh: It's impossible to predict. There will certainly be acontinued spate of acquisitions, but the pool of strong acquisitioncandidates may dwindle, impeding the volume of acquisitions.However, assuming the economy continues to be mildly positive, wedo expect a strong if not banner year for acquisitions. In fact, itwouldn't be surprising to see another deal or two announced byyear's end.