January 27, 2012

Guidewire Prices IPO – Insurance Technology Sector on the Move

Earlier this week, Guidewire Software priced its IPO at $13.00 per share and started trading on the New York Stock Exchange (NYSE). The IPO has been highly successful as the share price climbed more than 30% on the opening day and continues to hold its ground. All in all, the company raised $115 million in gross proceeds of which the vast majority will be used to strengthen the balance sheet.

Founded in 2001, Guidewire provides core system software to the property and casualty (P&C) insurance industry. Its solutions serve as the transactional systems-of-record for, and enable the functions of a P&C insurance carrier’s business, including underwriting and policy administration, claims management, and billing. The company currently has more than 100 customers, including names such as Nationwide, CNA and American Family Insurance.

The insurance industry is in the midst (of which it has been for a long time) of a major replacement cycle of legacy technologies, which represents a huge opportunity for Guidewire and other technology vendors serving the dynamic insurance marketplace. According to Gartner, in 2010, P&C insurance carriers spent $4.0 billion on software and $10.5 billion on IT services, which encompasses outsourced custom development and maintenance.

Guidewire generated approximately $172 million of revenue in 2011 and currently is trading at north of 4.0x revenue. This premium multiple is largely driven by Guidewire’s scale, market position, historical growth and recurring revenue business model. For most vendors in the insurance technology space, given their limited scale and market share, we believe that the most likely exits are still via acquisition as seen by Accenture’s acquisition of Duck Creek Technologies in mid 2011. We continue to be excited about insurance technology and remain confidant that the sector will continue to se more capital and M&A activity.