Guidewire Software (GWRE) is one vendor at the forefront when it comes to modernizing the $2 trillion global property & casualty (P&C) insurance industry.Founded in 2001, Guidewire is disrupting the staid P&C insurance sector by replacing inefficient core infrastructure (often dating back to the ‘90s) with a next-generation operating platform that serves as a transactional system of record.
Those older systems still power about 80% of all insurance industry transactions, but they’re inefficient, costly to maintain, lack full automation and don’t integrate well with outside systems from partners.
The claims and adjustment process represents 60% to 70% of costs for insurers. Using core solutions from Guidewire—covering policy administration, underwriting, reinsurance, customer data management, claims management, pricing and billing—insurance companies can improve their operating efficiencies, reduce claims costs and boost the bottom line.
Guidewire’s Predictive Analytics solution enables P&C insurers of all sizes to build predictive models from multiple data sets—including third-party data covering things such as motor vehicle records, property inspections and credit reports. The model’s output is then applied to help users make better data-driven underwriting decisions, with the overarching goal to reduce the insurance loss ratio.
By embedding machine learning algorithms throughout the insurance lifecycle, insurers can improve the productivity of actuaries, claims adjusters and agents.
The company’s Predictive Analytics for Claims app uses AI technology to categorize claims based on their severity and the potential for litigation, automatically routing any high-priority claims that need the greatest attention to the correct departments.
The Predictive Analytics for Profitability app is useful for insurance ratemaking, portfolio optimization, assessing underwriting risk on each deal and reducing overall underwriting costs. For example, Good2Go Auto Insurance uses the Profitability app to improve its pricing capabilities, reduce its loss ratio and generally enhance its competitiveness in the market.
In October 2017, Guidewire paid $265 million to acquire Cyence, a software company that applies expertise in data science and machine learning to help improve insurance modeling for so-called 21st-century risks. Those emerging risks—including cyberattacks, reputation disruption and business interruption—are evolving rapidly, and often lack extensive claims histories that would help insurers when coming up with underwriting and pricing determinations.
To model those wildcard risks more effectively, Cyence offers a “data listening” and risk analytics solution that combines Web-scale collection and curation of external data with machine learning and risk modeling technologies to support an insurer’s actuarial and underwriting risk management functions. Cyence can be used to assess the risk level of a potential insured. The software includes the ability to measure the financial impact of customizable scenarios.
Cyence Risk Analytics examines the correlation of cyber risk within an insurance portfolio and the potential maximum losses that various disaster scenarios could have on that portfolio. For example, one 150-year-old insurance company successfully used an economic model developed with Cyence to quantify cyberattack risk in dollars and probabilities to aid its underwriters and agents when it comes to pricing cyber policies efficiently and cost-effectively.
Guidewire started as a provider of on-premises software. While on-prem still represents the vast majority of total revenue, the company is now transitioning to more cloud-based subscription offerings.
In the most recent quarter, subscription sales represented 60% of total bookings, at the upper end of the guidance range for the year of 40% to 60%. As a comparison, subscriptions in FY’18 contributed 36% of all bookings versus just 6% in FY’17.
Last October, Guidewire began to step up the marketing of its core InsuranceSuite offering for the cloud. In FY’19 (ended July), the company closed nine new InsuranceSuite Cloud deals, including one with the oldest mutual auto insurer in the U.S. and another with the largest domestic insurer in France.
Smaller insurers have been early cloud adopters, but there’s interest across all segments of the customer base. The higher subscription component is acting as a near-term headwind for the company’s top-line growth because of the increased ratable revenue mix.
In early August, Guidewire hired Mike Rosenbaum as its new CEO. Rosenbaum, former executive vice president of Product at Salesforce, is tasked with advancing Guidewire’s cloud business. Marcus Ryu, Guidewire’s co-founder, transitioned from the CEO role to become chairman of the board.
Guidewire shares in May hit a new all-time high at $109.06. At recent prices, Guidewire’s enterprise value is 8.5 times the FY’20 consensus revenue estimate of $798.9 million.
