Remember when car insurance rates were based on just a few simple qualities?
For a long time, your age, your driving record, your hometown, and type of car you drove were the biggest determinants of how much you’d pay per year in auto insurance.
In a couple of years, that is going to feel like anonymity.
Customer analytics is altering car insurance rates by giving insurers a more granular level of information about their clients. Currently, miles driven, location and average speed are taken into account. Soon it will expand to include driver behavior, vehicle performance, and geolocation.
These individual data points are compiled and turned into “big data,” or higher-level analyses of patterns and trends.
As we increase the volume of data we make, the insurance industry increases the amount of data it takes.
This applies to everything that can be insured.
The Role of Software
Like other sectors, the insurance industry uses a diverse cluster of software. These include many of the usual enterprise software packages of CRM, compliance, payroll, and billing, but also include software unique to the industry like claims lifecycle management, fraud analysis, calculation and modeling, agent services, and policy administration.
The large-cap players in this type of software are the same in the enterprise software space overall; Accenture (NYSE: ACN), SAP (NYSE: SAP), SAS (SAS.ST), IBM (NYSE: IBM), and WiPro (NYSE: WIT), all offer software for the insurance industry. Mid-tier players in the space include CSC, Guidewire (NYSE: GWRE), and Perceptive Software (NYSE: LXK). There’s a lot of competition in the space
There’s even a little Atlanta-based company who’s gathered a lot of attention for having great promise, but it’s become a bete-noire because of its accounting practices.
A Play Saturated with Irony
Ebix Inc (NASDAQ: EBIX) is a small-cap company that makes software for different ends of the insurance industry: Property and Casualty Insurance, Life Insurance, Health and Employee Benefits, Risk Management, Annuity, and Insurance Tracking.
The company has shown continued revenue growth, decent profits, and good cashflow for the last three years. Short sellers, meanwhile, have complained of inaccuracies in the company’s financials, and the company has been hammered with lawsuits and investigations.
In 2012, news arose of a year-long investigation by Securities and Exchange commission into the company’s revenue recognition and internal controls, as well as the accuracy of its public statements. Last year, the company’s accounting practices were the subject of an FBI money laundering probe related to that SEC investigation and a class action lawsuit against the company.
When all of this news came out, things went a bit haywire for Ebix.
A Goldman Sachs affiliate was actually slated to acquire Ebix for $820 million (~$20 per share), but was scared off by the FBI criminal investigation.
Shares then plummeted 30% in a single day, and though Ebix executives said the allegations were false, value stayed down for the company. Then in February, it agreed to pay out $6.5 million to the class in the 2011 lawsuit, and declared a quarterly dividend of $0.075 per outstanding share.
Since dividends are often used as a palliative, this actually ramped up skepticism about the company’s wellbeing.
Ebix shares are only now beginning to recover after posting Q1 earnings and making announcements about new software offerings. If trends continue, Ebix will be back up to its pre-probe value.
Unfortunately, information about the FBI probe is either scarce or unreliable, so it makes it very difficult to make a straight recommendation about Ebix.
It is ironic that a company providing insurance software –something meant to delineate risks– should be wrapped in such a risky haze of uncertainty itself.
In its first quarter 2014 earnings, Ebix announced its revenue had improved sequentially, but had fallen against last year by 2% to $51.4 million. Likewise, net income and earnings per share declined year over year by 11% to $15.4 million or $0.40 per share. Cash was $10.8 million, down 24% against last year, but working capital ($47 million) was up both sequentially and against last year.
The company is still in good territory for most of its metrics.
Ebix Chairman, President & CEO Robin Raina said “We feel good about our direction — both in terms of vision and depth of offering. We now have successful enterprise solutions with references, which allows us to bid for large recurring revenue deals, that have high margins associated with them. If we can close in on some of the large deals in play at present, we will be able to impact both our revenue and margins meaningfully in future quarters.”
The company also announced it is branching out from insurance software, and getting into telemedicine and consumer health with a new product known as A.D.A.M OnDemand. Presently, the product functions as a digital education and research application for patients, medical students, and healthcare and pharmacy professionals. The company says it will eventually grow into “the world’s largest online aggregation of general physicians and specialists to offer medical advice and…treatment to consumers across country boundaries.”
To do this, Ebix plans to acquire smaller companies working toward similar goals.
Insurance is a changing business, affected by advancements in science and technology, legal policy, and the changing climate. Different sectors have different demands. While health insurance is booming in the United States, other areas are in a holding pattern. A recent study by Conning Research, for example, said the property-casualty insurance industry is in a decent loss reserve position right now, but that “the possibilities of adverse developments slightly outweigh positive developments.”
For software companies catering to the insurance industries, however, we can use a more traditional approach for analysis. While a company like Ebix would receive a passing grade under normal circumstances, litigation has cast a huge dark shadow over the company.