Many insurers are hesitant to invest aggressively in AI & ML initiatives given that the ROIC is difficult to quantify. This conservatism combined with market disruption bodes well for technology & service providers that offer an Outsourcing option with a demonstrable ROI. Examples include Accenture, EXL Service, IBM Global Services and SS&C Technologies. Plus – our M&A advice for IT Services & BPO companies.
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It is difficult for legacy insurers to quantify ROIC as it relates to the broad application of artificial intelligence (“AI”) and machine learning (“ML”) tools across their day-to-day operations. Despite the fact that prospective use cases are numerous across Underwriting, Fraud Detection, Claims, Policy Administration and Back Office/ Middle Office operations – we expect insurers to take baby steps as it relates to AI & ML adoption.
Insurers are deliberate and measured as one would expect from actuarial-based organizations. This conservative culture combined with the disruption that insurance carriers have and will continue to face on the P&C Auto side due to rideshare programs, subscription auto offerings and the looming autonomous vehicle phenomenon (which will first manifest itself via fleet programs before going mainstream) will cause many insurance carriers to look to vendors that may help them reduce risk, slim balance sheets and reduce headcount.
Thus, while ML companies like DataRobot (pvt.) are executing well, the large strategic programs and dollars will primarily be allocated to technology and service providers that can literally change the composition of an insurance carrier’s income statement and balance sheet. We expect outsourced platforms to gain traction – particularly during a down market (so long as a potential down market isn’t as severe as the 2008-2009 downturn when many operating decision makers lost employment and decision cycles froze as a result). This bodes well for outsourced providers. Below we cover a few:
Accenture (tkr: ACN): Accenture employs approximately 4,500 insurance process professionals with a customer roster of more than 50 BPO insurance carrier customers. Accenture partners with a number of companies that deliver AI capability across industries – most notably Microsoft (we are fans of Microsoft’s strategy to open source much of its core AI capability via Azure). Progressive uses Azure’s Bot service and Cognitive services. Accenture’s largest pure-play Insurtech partner is Guidewire Software. If Accenture were to accelerate its M&A effort within insurance, P&C market leaders such as Guidewire (tkr: GWRE) and Solera Holdings would be a good place to start.
EXL Service (tkr: EXLS): EXL made its bones by providing BPO services to insurance carriers. Today, insurance carriers represent approximately 43% of revenue. Over time EXL has incorporated Analytics capability into its service delivery model. However, EXL remains predominantly a Services company as evidenced by operating margins that are consistently in the low-to-mid-teens (14.1% in the September quarter).
IBM Global Services (tkr: IBM): IBM’s BPO operation has a distinct advantage over other IT Services and BPO organizations of being able to draw upon its own software IP and other advanced technologies including AI, ML and blockchain. For years we have been critical of IBM for not pursuing industry-specific technology acquisitions that would provide fodder for IBM’s advanced analytics/AI/ML/Watson capabilities. Information Services targets come to mind including previously mentioned Solera, IHS Markit (tkr: INFO) and Verisk (tkr: VRSK) to name several. CoStar Group (tkr: CSGP), Guidewire and many others also fit the profile.
SS&C Technologies (tkr: SSNC): SS&C offers clients an outsourced/BPO model that I refer to as “Intelligent BPO” given that SS&C takes a technology-first approach to the Outsourcing model (see the link to our table at note’s end). Insurance carriers are the first customer cohort that may experience SS&C’s newly architected Singularity platform which natively incorporates AI, ML and RPA capability. SS&C clients may leverage cutting edge technology while capturing the benefits of outsourcing from the leading middle office, back office financial technology provider.
Software M&A Is the Answer for IT Services and BPO Companies
There are of course many IT Services and BPO companies that serve insurance carriers: Infosys (tkr: INFY), Wipro (tkr: WIT), Capgemini, Cognizant (tkr: CTSH) and Tata (tkr: “TCS” – India NSE) to name a few Tier I providers. In our view the best way for any of the IT Services and BPO providers to differentiate would be to acquire partner software companies. IT Services and BPO companies must move their core competency closer to the Technology end of the spectrum (see link below) and become less services-intensive. Otherwise, they run the risk of further commoditization. Software acquisitions would enable the services providers to increase recurring revenue as a percentage of total revenue while simultaneously increasing operating margins, free cash flow generation and market valuation (investors reward predictability). We acknowledge that this M&A strategy carries significant cultural risk. Acquiring software partners would help mitigate that risk. Last – pursue acquisitions of market leading software companies and/or those with a defensible niche. Acquiring “also-rans” will likely lead to a negative ROIC.
Access our Technology – IT Services/BPO spectrum graphic HERE.