SunGard Will Build Insurance Portfolio Through Acquisition

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1 Events, K. Harris Research Note 11 September 2003 SunGard Will Build Insurance Portfolio Through Acquisition The proposed acquisition of Sherwood International by SunGard is a "win-win" opportunity for the two companies, their shareholders and their customers. Core Topic Financial Services: Financial Services Drivers, Strategies, Direction and Vision Key Issue What technologies and processes will enable the real-time enterprise in financial services? On 10 July 2003, SunGard, a provider of integrated IT solutions for financial services providers, announced plans to acquire Sherwood International, a provider of software and services for the insurance industry and government sector. The transaction is valued at approximately $105 million. Subject to approval by Sherwood's shareholders, the deal is expected to close in September During the past few years, SunGard has been strengthening its insurance applications portfolio. The major move was through its acquisition of FDP in January 1999, which serves as the foundation for its insurance units, SunGard Insurance Systems. Since then, the unit has built out a range of solutions and services targeted to the life and pensions sector (including employee benefits). The unit's product portfolio includes a selection of front-office and back-office systems, including: Front-office sales support, such as Versatile Illustration Partner (VIP), electronic applications (eapps) and Insurance Workstation Back-office benefit and product administration systems, such as Comprehensive Administration Support System (COMPASS), Annuity Investment Management System (AIMS) and Comprehensive Life Administration System (CLAS) Client management and financial planning systems, such as Contact Partner and Finpack Although the current range of solutions meets best-of-breed criteria in the life and pensions market, the company is facing increased competition in the back-office solution market from new vendors offering toolset and framework approaches such as CGI and Sherwood International (as compared to productized policy administration packages). SunGard also is facing Gartner Reproduction of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The reader assumes sole responsibility for the selection of these materials to achieve its intended results. The opinions expressed herein are subject to change without notice.

2 pressures to expand its market reach outside of the United States, but is challenged by its current organizational structure. For these reasons, the acquisition of Sherwood International is promising. Sherwood International, which has major offices in London, Toronto and New York, offers a range of solutions and services to the insurance industry that greatly compliments SunGard's competencies. There is minimal overlap with customers in the U.S. market at present. The company offers applications targeted at life insurance, property and casualty (P&C) insurance, and reinsurance. Its life insurance products include: Amarta Life a model-based development environment for life insurance policy administration solutions Amarta Life Fast Start a modular solution for quick, tactical use of the Amarta framework ProCede an application for reinsurance management ICM incentive compensation management FrontTier Group group benefits solution, including group term and short- and long-term disability insurance Its P&C insurance products include: FrontTier P&C administration toolset with built-out application ProGen2 packaged application for midrange P&C administration ProGen 2 Fast Start packaged, client-based, interactive policy administration ProCede application for outward reinsurance management Amarta model-based development environment for policy administration Its reinsurance products include Amarta Risk, Senator and ProCede application management. Perspective on the Proposed Acquisition The acquisition will positively affect both companies, including customers and shareholders. SunGard has continually been attempting to build scale in its operations, especially for software. The pending acquisition will further help the company to achieve these goals. SunGard also will benefit in multiple ways, including: Expanding the product portfolio of SunGard Insurance Solutions group. Sherwood's products will provide SunGard 11 September

3 with a portfolio of end-to-end solutions for front-office and back-office functionality for life, P&C and reinsurance. Sherwood was a proponent of Java, and this will further expand SunGard's technology skill sets. Expanding its geographic reach. By merging Sherwood's presence (and customer base) in Europe (especially the United Kingdom), SunGard will have expertise, offices and products that are better suited to a global insurance market. This will further enable it to penetrate global accounts and compete with other vendors that had capabilities outside of the United States. SunGard also will be able to leverage Sherwood's presence in Asia to make further competitive inroads. Adding 88 customers from Sherwood, one quarter of them in the European market. Key customers include Abbey National Group, Aviva, AXA Liabilities Managers, Groupama, HartRe, Nationwide Building Society, Northwestern Mutual Life, Sage Life, Scottish Equitable International and Zurich Financial Services. Adding greater variety to its overall product mix and enhancing product synergy. For example, SunGard's frontoffice solutions complement Sherwood's life insurance backoffice solution. The union of the two companies will likely provide a good fit for shareholders and employees. Strengthening its position in the insurance vendor market, especially in competitive situations with larger vendors that offered a full product range such as Computer Sciences Corp. (CSC) or global competitors (such as Solcorp). Allowing SunGard to leverage Sherwood's offshore operations. Sherwood operates an offshore development team in Bangalore, India, that provides an additional set of technology solutions such as implementation of Sherwood's products, Web-enablement of legacy systems and migration to three-tier client/server solutions. SunGard can further use this facility for customer implementations, customization or future product development. Although the two companies mostly have synergies, there is some minor overlap between their life insurance product and professional services groups. Gartner expects that SunGard will merge both groups and find the best combination of skill sets to support future product development needs (which will most likely differ by regions) and for more-complex and customized deployments, such as using Amarta. Additionally, the future of the government solution of Sherwood is uncertain. The motivation behind this acquisition was insurance competency, which generates some questions regarding the future of the governmental side of the Sherwood's business. SunGard says it 11 September

4 will allow Sherwood's Public Sector (health agencies) unit to operate independently, and will encourage its growth in the United Kingdom. SunGard's history of acquisition points to a relatively slow integration process and a tendency of hands-off management of acquired properties (especially in the insurance arena). Gartner expects that to be the case with this proposed deal; however, more management will be required to oversee and implement integration of the range of insurance products than before. Gartner expects that the combined resources of Sherwood International and SunGard will increase SunGard's positioning in the global insurance IT market. If integrated, the insurance product portfolio will give SunGard life insurance customers new options for supplemental systems, as well as provide multiline insurers with options for cross-sector business operations. It also will provide prospects in reinsurance and P&C with a viable and financially sound alternative for a policy administration system and framework. Customer Recommendations SunGard customers should benefit from this acquisition through access to a greater variety of insurance solutions that will meet enterprise requirements, as well as more services to deploy and implement solutions. Insurers operating in multiple geographies will find that they now have options to deploy SunGard solutions across the globe, rather than limited to U.S.-based organizations. The addition of Sherwood technological competencies will further affect SunGard's future research and development, providing a greater range of staffing skill sets that bring in Java competencies. SunGard will now pose a greater threat to vendors of P&C and reinsurance systems, as well as global life insurance policy administration vendors. Sherwood International's insurance customers will greatly benefit from the acquisition. Sherwood, which has faced financial challenges during the past year, will now find stability through the acquisition. SunGard will work to promote the Sherwood product line and have more resources to market/distribute the solution which inevitably will lead to a greater number of deployments and intellectual property in the solutions. Prospects who liked the Sherwood technical approach, but were concerned with company viability, will now be able to select Sherwood in competitive situations. In the end, Gartner anticipates growth in Amarta and Sherwood solution deployments, based on the outcome of the merger. Bottom Line: The pending acquisition of Sherwood International by SunGard will raise the stakes in the insurance IT marketplace. 11 September

5 The final outcome will be a positive play by SunGard to enter the global life insurance, property and casualty, and reinsurance market expanding its touch globally and into other sectors of insurance. 11 September