Guidewire (GWRE) is a provider of core systems software to property and casualty (P&C) insurers. The company is benefiting from the shifting from old, legacy software systems to newer cloud-based systems as insurers are forced to deal with an ever complex and evolving landscape and need to have technology that can keep up with modern customer needs. Guidewire is the only real player in this market and has a long runway for growth and margin expansion.
Guidewire sells software directly to insurance companies who utilize it as their core operating systems. This is a SaaS recurring contract, but it is tied to direct written premiums. As the industry grows, GWRE feels the benefit.
Guidewire’s core is based upon its offerings of:
1. Policy Center: Policy Management System
2. Billing Center: Billings Management System
3. Claim Center: Claims Management System
The company also sells additional offerings such as predictive analytics and risk management. These offerings were once sold on- prem but now are sold in the cloud via Guidewire’s new SaaS offerings.
Given the complexity of an insurance company making the transition and porting over their client data, this has been a slow transition to the cloud. After hundreds of millions of dollars poured into their cloud offering, the company is looking forward to a profitability inflection. The shift to the cloud forced GWRE to bring operating margins down from 30% to negative operating margin. However, once the product was built, the company has been able to scale it back to mid-teens margin, with plans to double that margin from here.
The company also sells implementation contracts which are essentially breakeven service deals to help a customer make the transition. Guidewire has many partners that are also certified in this implementation.
Guidewire is riding several secular trends. The P&C insurance industry grows at a very consistent pace over time. As insurance costs continue to increase, insurance premiums also move higher, creating stable and predictable growth for the industry.
In recent years, the world has gotten far more complex and the insurance needs of customers have evolved. This has led to the need for insurance companies to adapt to these new conditions in rapid fashion. Further, new insurtech companies have popped up over the years, increasing competition. These new players are 100% cloud- based and have made it much easier for customers to switch and utilize their services. This is also forcing core legacy insurers to modernize.
Lastly, the explosion of AI applications is causing management teams to rethink their strategy and look at new offerings. To be able to invest in AI, these companies need to have a modern, core system run on GWRE. Taken together, Guidewire should have a long runway of growth.
Guidewire has created a first-mover advantage in modern P&C software. Having built up credibility over the last decade, the company is seen as the go-to solution in the market. Further, the company has proved that their offering works well and is reliable, a must for the insurance industry. It would be incredibly difficult for a new start-up to break into this marketplace given their lack of credibility.
On top of that, Guidewire has built an ecosystem of partners that advocate for their software as well as a marketplace for other insurance startups to integrate into the Guidewire platform. This makes Guidewire the core system of record that all other insurtech players need to work with.
We have been closely tracking Guidewire since their analyst day last fall. We believe the company is at an inflection point for growth as insurers are finally making the move to the cloud. This, in turn, is allowing margins to inflect substantially higher, leading to solid free cash flow growth for the next handful of years. With the recent market downturn, GWRE stock has been under pressure and came within range of our entry price target which led us to initiate a 2% position.
