With the Nov. 9 announcement that LexisNexis was getting out of the insurance software business, the start of another merger-and-acquisition season has begun in the insurance software world. There has been more activity in 2011 than in 2010, and opinions vary over whether 2012 will be an even busier year.

Technology channel editor Robert Regis Hyle posed four questions to analysts Craig Weber of Celent, Deb Smallwood of Strategy Meets Action, and Chad Hersh of Novarica on the M&A market. Here's what they had to say.

PC360.com: M&A activity among insurance software companies seems to go in spurts and then dies down for a while. Can we expect that pattern to continue?

Weber: This most likely will continue, as certain types of acquisitions seem to trigger competitive responses. Then we have a relatively quiet period as a new crop of attractive acquisition targets takes time to develop. But the overall economic mood plays a major role as well. As confidence in the sector grows, vendors draw new cards to reposition themselves for growth. Then as things cool off, they might well stick with the hand they've got.

Deb Smallwood: There is a perfect storm brewing in insurance. M&A activity is cyclical; right now it's hot and will continue.  M&A is driven by the fundamentals of supply and demand, has great potential to make money for investors and IT providers, and there is a lot of money to be made in insurance. Insurance IT spending continues to be healthy, with strong growth projections. Investments in software, product development, and solutions are high, and new entrants continue to enter the marketplace.

Chad Hersh: Absolutely.  Essentially we would expect the best vendors/solutions to be acquired, then if things happen as they usually do, a new round of solutions will be built to replace them (often by startups). The acquisitions typically happen in spurts because both vendors and financial investors tend to acquire in a 'me too' pattern. The period after a round of acquisitions and during which new solutions are being built is typically the down period for acquisitions. The last lull—2007 and 2008—was something of an exception, caused by a financial crisis rather than the usual cycle.

PC360.com: How has the market downturn of the last few months affected M&A activity for software solution providers?

Hersh: Not a lot. The majority of the acquisitions have been of vendors that were performing quite well, not of vendors in need of rescue. Obviously price multiples for acquirees have not been as high as they may have been during the height of the market, but overall the M&A market certainly appears to be robust and likely to show continued activity. Our research shows that overall IT spending among insurers is actually expected to increase slightly in 2012, which means the cycle is unlikely to turn negative until the strongest vendors are acquired.

Weber: It's hard to say because it affects both buyers and sellers, and every situation is slightly different. But in general, rising financial markets tend to generate bigger offers, which mean that owners of private companies have more incentive to cash out. If the downturn persists, sellers might find it hard to get the price that they think their companies are worth.

Smallwood: It has not been affected by it at all. Valuations for insurance IT providers are at an all-time high, with some valuations exceeding six to eight times the sale/revenue, which is traditionally unheard of. And there are deep pockets of investment dollars looking for the right investment. Lots of IT providers are shopping their companies and lots of buyers are looking for the right buy. If anything stalls the activity, it will be the high price tags floating in the market.

PC360.com: Which areas of the software industry are more likely targets for M&A—policy admin, claims, ECM?

Smallwood: The two areas that are likely to become targets areas will be core systems and customer centricity offerings. The market is saturated with best of breed policy administration systems, and insurers are looking for the hybrid enterprise suite with best of breed capabilities. Although there are limited billing and claims options in the marketplace, we will see consolidation. Policy admin providers will buy other policy admin solutions for the business and technology capabilities, insurance IP, and platform. And there will be a battle over the limited billing and claims acquisitions.

There is a renewed interest in customer centricity among insurers. They want solution offerings that have a combination of software that can manage the whole customer experience—including customer communications, analytics, predictive modeling, relationship management, behavior analysis, and social media analysis tools. Watch for the large players to continue to acquire small standalone solutions.

Hersh: It depends on how you view it.  Due to the number of vendors in the policy admin space, there are likely to be continued acquisitions there. But a very limited number of billing and claims systems exist and having a policy system without billing and claims is becoming less and less of an option, so they may be more likely to get snapped up quickly. Systems ancillary to policy administration suites, ranging from reinsurance to vertically focused BI and analytics, are likely to follow as suite vendors look for additional room to grow.

Weber: All areas are active to varying degrees, but there are more policy admin systems out there than there are claims systems or virtually anything else. And the way those systems develop, they are often focused on a specific area, such as commercial lines or personal lines. So it's easier to imagine the value of a combined entity where both companies bring a focused expertise that the other lacks.

PC360.com: Any predictions for 2012 M&A activity? Greater or worse than 2011?

Weber: I expect to see more activity in 2012. Despite the slow economic growth overall, the mood is surprisingly positive. And we've been saying for months that you need to stay ahead of consumer sentiment to position yourself for rapid growth when things heat up. So 2012 may be a great time for M&A for companies that want to capture more than their share of their respective markets.

Smallwood: If investors can get past the high price tags, and see the possibilities, there will be an increased level of activity in 2012. At SMA, we predict one new mega M&A deal with the convergence of focused core systems.

Hersh: It's impossible to predict. There will certainly be a continued spate of acquisitions, but the pool of strong acquisition candidates may dwindle, impeding the volume of acquisitions. However, assuming the economy continues to be mildly positive, we do expect a strong if not banner year for acquisitions. In fact, it wouldn't be surprising to see another deal or two announced by year's end.