CSC sees big business in US insurance market, but no Brexit downturn

Profile picture for user slauchlan By Stuart Lauchlan August 9, 2016
Summary:
CSC's merger with HPE Enterprise Services is on track for next March. Meanwhile CSC CEO John Lawrie is seeing healthy business coming through in areas such as the US insurance market.

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Mike Lawrie

CSC’s merger with HPE Enterprise Services will benefit both companies, insists the former’s CEO Mike Lawrie.

That’s his assertion based on three months of feedback from stakeholders and shareholders, following May’s announcement that Hewlett-Packard Enterprise will spin off its enterprise services business and merge it with CSC to create a  combined entity with about $26 billion in revenue.

Lawrie’s comments were made as the firm turned in first quarter losses of $21 million, down from a profit of $163 million for the same period last year. Revenues were up 7%  from $1.80 billion last year to $1.93 billion this year.

Lawrie insists:

My personal conviction around the strategic rationale and the synergy potential of the merger has, frankly, only increased since our announcement. The cultures are more similar than dissimilar, so there are a lot of positives.

He adds that clients and employees are on side with the merger:

I was out for two weeks or three weeks making many calls on clients in the United States and Europe, and this announcement was received well. The clients are supportive, they see the benefits of bringing together our two companies' offerings and respective capabilities.

Our employees are excited to complete the work ahead to establish a new dynamic company of such scale and potential. And our partners, we've reached out to our partners. They've reached out to us, and they're eager to work with us on extending their reach in the market.

Big business

On wider canvas, there’s still big business to be had out there, says Lawrie:

We announced an agreement with MetLife, in which CSC will administer nearly 7 million policies, enabling MetLife to significantly streamline its business, while expanding CSC's leadership in this important BPS segment. CSC will provide call center, operations and IT support, as well as policy administration on CSC's platforms.

Now, we consider this business an important next-generation offering for us, and it's worth noting that the MetLife agreement is by far the largest insurance BPS transaction of its kind in North America. It doubles the number of policies under CSC management, and establishes CSC as the largest provider of insurance BPS processing for life, annuity, and pensions in North America. So [it’s] a very significant proof point around this investment that we are making.

He adds:

It's one of the largest contracts we've signed in the last five years. And it's for a long period of time, 10-plus years. This is a market that is really beginning to accelerate in United States. We saw this happen in the UK, frankly years ago, and new businesses were created as a result of this market opportunity.

So we are seeing the same trend now in the United States that we saw six years ago, seven years ago, eight years ago in the UK. We expect this to accelerate. This is a pretty large market now. I'd estimate it's probably a $2 billion to $3 billion market today in United States. It's growing low-double-digits, but scale is really important here.

It’s also business that has decent margins, he notes:

The number of policies and the scale associated with that allows you to price and allows you to drive margins. So the margin profile on this business is good, and is accretive to our overall margin profile of CSC. So that was one of the reasons why this became apparent to us last year, in particular, when we signed three or four smaller contracts, that the margins were good here. There is a need for industry domain knowledge here.

So this isn't your classic BPS sort of outsourcing that doesn't have the margins. This requires actuarial skills and other insurance domain skills, which allows you to maintain a higher margin. So we think this is a growing segment. We think it's going to accelerate in the coming years, and as a result, we are investing in it.

We're really bullish on this. We think this can be a substantial business for CSC. This is mostly in United States, tied to life and annuity and pensions, whereas in the UK, we have a growing commercial lines, property and casualty business associated with our Xchanging acquisition.

Brexit?

On the subject of the UK, in a welcome move, Lawrie dampened down speculation about a negative impact from the Brexit vote in June:

In terms of Brexit, it's really too early to ascribe any major impact in terms of client behavior or client plans. What the impact for us is that, we obviously have greater exposure to the pound, and the pound certainly weakened – or the dollar strengthened vis-à-vis the pound - as a result of Brexit. That impact we are seeing, and we expect to see that throughout the year. But in terms of client buying behaviors, candidly, I have not seen any significant changes.

Overall, with the HPE merger on track for March next year, Lawrie argues that there’s a lot of positives ahead:

I don't want to minimize the amount of hard work that's involved. This has been heavy-lifting. There's a lot heavy-lifting to go. And there's continued headwinds in the business, but from my perspective as the CEO, we recognize those headwinds.

We're making investments. We're making improvement in the business now. We're taking a bigger step here with the merger with Enterprise Services. But I feel much stronger about the hand that we're holding right now than the hand we were holding three years or four years ago.

My take

The turnaround continues, but as the losses indicate, there’s a way to go yet. The HPE Enterprise Services merger is a good move, but it’s one that will carry its own financial pressures as the two firms move towards integration. Meanwhile a focus on building domain expertise around service management and specifically ServiceNow is an interesting template for future growth.