SSP (SSPH)

SSP is part of a consortium, with HP and Microsoft, which is supplying an IT system for United India Insurance. HP is the overall contractor and SSP’s subsidiary Sirius will supply the core insurance software. SSP paid £43.4m for Aim-quoted rival Sirius Financial Solutions in the spring, and this is a good example of the benefits from that deal.

The software will be used across all of UII’s business. It is one of the four biggest insurers in India with more than 10m customers. This is a seven-year agreement with an initial licence fee of $2.4m (£1.18m) but much more to flow through in services, support and maintenance revenues. The contract also puts SSP in a strong position to win more business in India, where it already has a development team.

But its business stretches far beyond the UII contract. SSP’s customers include large insurance companies, corporate insurance brokers, underwriting agencies and smaller, provincial intermediaries. The software is designed to help the businesses run more efficiently and cost effectively. Increasingly that means transacting business over the internet. It can be difficult to integrate internet applications with old software so the insurers need to invest in new back-office software.

SSP’s impressive list of customers includes Norwich Union, AXA, Allianz, Willis, Swinton, HSBC, and Jardine Lloyd Thompson. SSP has won its first business with Direct Line, which normally handles software development in-house.

SSP restructured its business following the Sirius acquisition. It now has four divisions - distributors and intermediaries, corporate brokers, insurance companies and international. The first two account for most of the current revenues but the other two have the greatest growth prospects.

Recurring revenues and transaction-related income account for three-quarters of group turnover. It was even higher before the Sirius acquisition. Even if transaction fees are excluded, SSP still generates half of its revenues from software rental, maintenance and other recurring services.

Recent interims for the six months to the end of September 2007 showed a 47 per cent increase in turnover to £26.4m and a 35 per cent rise in pre-tax profits to £2.71m. An initial contribution from Sirius helped but there was also underlying growth of 12 per cent from the continuing businesses. Executive chairman David Rasche says the company is “a bit ahead” in terms of cost savings from the integration of Sirius.

Mr Rasche says that the level of enquires from insurance companies about systems is higher than ever. Of course, there is a big difference between enquiries and sales, so this has to be viewed cautiously. At least SSP is getting the chance to pitch their products to potential customers even if the timing of the spending may be difficult to gauge.

On 24 September Towergate, which is a consolidator in the insurance broking sector, paid £276m for Open International. Open is one of SSP’s main rivals in the insurance broker market. More recently Towergate made an agreed bid for Aim-quoted insurance broker network Broker Network. Other insurance brokers may be wary of buying software from Open now that it is part of Towergate and if that happens SSP is well-placed to pick up the work.

SSP shares are trading on 13 times this year’s forecast adjusted earnings, falling to just over 10 times next year. The recurring revenues and transaction fees should help to shield SSP from any slippage in investment by insurance companies and brokers. Even if insurers take longer to invest in the software, the underlying requirement to increase efficiency and cut costs remains. SSP is well-placed to prosper over the next few years. Buy.

BULL POINTS:

• Strong position in the insurance software market

• Growing international presence

• Good recurring revenues

• High level of enquiries

• Cost savings from Sirius acquisition are ahead of plan

BEAR POINTS:

• Insurance companies might hold back spending on IT

• SSP needs to improve the performance of Sirius

Click for a guide to the terms used in IC tables.