Insight is no stranger to vertical software companies. Some of our most successful investments altered the status quo in large end markets: ARGUS Software in Commercial Real Estate (2006 investment), Medidata Solutions in Pharmaceutical and Biotechnology (2004 investment), and eVestment in Financial Services and Wealth Management (2008 investment) are just a few.
We mention these companies for two reasons: (1) They are generational software companies that disrupted some of the world’s largest vertical markets by annual spend and (2) the investments were made by Insight 10-15+ years ago. Vertical market B2B software is fascinating because market sizing and timing are fundamentally crucial to a successful business and investment. Many vertical software companies are going after end markets that do not have enough software spend (even if spend is increasing) to sustain a $100M+ ARR business. Furthermore, properly timing when a vertical market is ready for software adoption is an extremely difficult feat. A company must develop a crystal-clear understanding as to who its end buyer is, and more important, understand how willing that buyer is to alter their workflow to incorporate and adopt new software.
Insurance, and P&C insurance specifically, as an end market receives a resounding yes to the question of TAM. In the U.S., there was $673.8 billion in annual direct written premium (DWP) in P&C insurance in 2018.1 As a general benchmark, we think of the TAM for Core Systems Software to be 1% of annual DWP, or $6.7 billion in the U.S. Given that not every contract is negotiated for 1% of annual DWP, we could conservatively estimate the U.S. TAM for Core Systems Software to be ~$5 billion and likely 2-3x that figure globally. This analysis one level deeper was key to our investment in this space. While there is a long tail of P&C carriers that far outnumber the quantum of Tier 1 and Tier 2 carriers, the distribution of gross written premium and corresponding software spend on core systems is concentrated towards the top. The Top 10 carriers in the U.S. contribute roughly 50% of DWP. The Top 25 carriers contribute close to 65%. The Top 50 carriers bring that number to just over 75%.
In other words, building a large software company selling to P&C carriers is predicated on being able to land Tier 1 and Tier 2 carriers. That is not to diminish the importance of having technology that is extensible downstream, but quantitatively, you must be able to land the marquee carriers to build a really big business. As investors, once we came to this conclusion, we focused on identifying the leaders selling into the upper end of the market. We spoke to carriers, systems integrators, and market experts, and kept hearing two names: Guidewire and Duck Creek.
Guidewire has been the de facto leader in the P&C Core Systems market for over 10 years. As a public company, Guidewire has been nothing short of spectacular. Guidewire went public in 2012 for $18 per share and today trades north of $100 per share. From a technological perspective, it has mature products covering the key functionality for a carrier: ClaimCenter, PolicyCenter, and BillingCenter. Last and possibly most important, they are rock solid operationally. From speaking with carriers, we learned that one of the biggest concerns for a CIO when undergoing a core systems transformation is ensuring a successful implementation and rollout. While some describe Guidewire’s rollout as costly and time consuming, very few complain of a failed implementation. With a successful operational track record, we asked ourselves if this is a market that can and should have two winners. The market-sizing question certainly checked out, but that did not substantiate Duck Creek’s “right to win.”
We first met Mike Jackowski in August 2019. Mike, the CEO of Duck Creek since 2011, is nothing short of a P&C insurance legend. Prior to Duck Creek, Mike spent over four years as a Managing Director in Accenture’s P&C Software Division (Duck Creek’s predecessor prior to being spun out of Accenture) and seven years at Allstate. Mike had seen the P&C insurance market go through a decade of transformation and spoke with conviction when he described the current seismic shift in the market. After spending an hour with Mike, our team had the conviction that P&C carriers were ready for a next-generation SaaS offering. The industry had moved away from mainframe solutions in the late 1990s and early 2000s to on-prem offerings. Yet, it was still early innings for cloud-based SaaS solutions. Our team was astonished to hear how many Tier 1 and Tier 2 carriers were still on versions of software that had not been updated for 5-10+ years. Some were still using green-screen technology and had kicked the can down the road on a core-systems overhaul. Mike spoke with confidence when he described the opportunity for Duck Creek OnDemand, its SaaS offering. And the numbers backed up the presentation.
According to Duck Creek’s recent S-1: “Substantially all of our new bookings come from the sale of SaaS subscriptions of Duck Creek OnDemand…For the nine months ended May 31, 2019 and 2020, SaaS ACV bookings represented 82% and 95% of our total ACV bookings, respectively…for the nine months ended May 31, 2020, we generated subscription revenues of $59 million, an increase of 49%.”2 The numbers told a clear story: SaaS has become the largest growth driver of new business for Duck Creek. Anecdotally, Duck Creek also claims to have a head start in the development of Duck Creek OnDemand: “We have developed a substantial SaaS customer base and believe that we have established a meaningful first-mover advantage by demonstrating the superiority of SaaS solutions for core systems in the P&C insurance industry. We began offering SaaS solutions for core systems in the P&C industry in 2013 and signed our first customer in 2014.”2 If this story continues to unfold, Duck Creek will cement its position as the SaaS leader in the P&C Core Systems Software market.
We wish a big congratulations to the entire Duck Creek team on their IPO. We know this is just the start of Duck Creek’s story, and we could not be more excited to be along for the journey.
1 Annual Report on the Insurance Industry, Federal Insurance Office, U.S. Department of the Treasury, September 2019.
2 Duck Creek Technologies, Inc. Form S-1.
*The views expressed above are solely those of Insight.