#182 | Why You Should Care About Prudential Buying Assurance IQ for $2.35 Billion
The hottest insurance news this week (hell, probably this year) is that Prudential plunked down $2.35 billion for Assurance IQ, a start-up life insurance firm, with an extra $1.15 billion in earnout if Assurance IQ hits certain objectives. The mainstream financial and technology press has been all over this deal. Fortune is already declaring that “insurance is scorching hot” and Pru buying Assurance IQ is the chief piece of evidence. So what is this firm, why did Pru pony up for it, and why should you care?
The CEO of Prudential outlines the Assurance IQ model succinctly on the call announcing the transaction – “the beauty of the Assurance [IQ] model is that these are independent agents. And if you think that an agent does three things, right, he prospects, presents and closes. What Assurance does is eliminate the prospecting by the way they attract customers and then through data science, analyze those customers and then assign them to an appropriate agent. And that way, all the agent has to do is present recommendations and then close. Therefore the agents can be highly efficient and much more productive.” Prudential obviously sees this model as the future of insurance distribution. They want a piece of a high-cash, low-capital, non-correlated, high-growth distribution model – and who wouldn’t?
That’s exactly why Pru doesn’t seem to be bothered by the $2.35 billion pricetag and potential $1.15 billion earnout. Let’s look at the economics of the trade, which you can find in the presentation here on slide 16. Prudential states the multiple at 11 times EBITDA in 2021, assuming growth to $1B in revenue and a 20% margin. But we’re in 2019, not 2021. 2019 revenue will ring in at just $500M, dramatic growth over $120M in revenue last year. Their current pre-tax operating margin is probably around 12% because the 19% margin assumed in 2020 includes $25-50M in expense “synergies,” so if you back that out, the margin would have been 13% for 2020. At a 12% margin on $500M in revenue, you’re looking at $60M in pre-tax earnings – or, in other words, a spot valuation of this deal at 39 times EBITDA. Quite pricey.
Now, here’s the most interesting part of the deal. Prudential assumes “minimal revenue synergies” – in other words, they’re not planning on extensively cross-selling their own products on the platform. In fact, Assurance IQ’s fastest growing segment is health insurance, which Prudential doesn’t even offer. So why did these two firms tie up? Here’s what founder Mike Rowell said in the call “we gain a growing product suite and access to new markets and institutional expertise. Our combined capabilities…is an exciting next chapter for us.” This is a bizarre statement in light of the fact that Prudential doesn’t really plan on building products for their segments and doesn’t even currently offer its products on the platform. Over and over again on the call, Prudential people talked about how great Assurance IQ is, with the CEO even calling it “an extraordinary company.” What Pru brings to the table, however, is not so clear. In reality, Pru paid $2.35B for Assurance IQ like a private equity company would have paid $2.35B for Assurance IQ. Maybe there are some synergies. Who knows? If you listen to the call, who cares? Pru thinks they just bought the company that “cracked the code that nobody has cracked before, right?” That’s certainly worth $3.5B, if all goes well. It’ll be one heck of a write-off if it doesn’t.
So why should you care? This acquisition tells us one big thing – that Prudential thinks buying a speculative start-up venture at an aggressive valuation is a better bet than investing in its primary business lines. In other words, they’d rather deploy capital into a bet on the future of distribution than the future of manufacturing. It’s yet another sign that life insurers (and stock life insurers particularly) increasingly dislike actually being life insurers and would rather stick their fingers into other pots. Look at what Prudential CEO says about Assurance IQ – “[it] represents a new earning steam for us that is not sensitive to equity markets, interest rates or credit.” In other words, it’s not like manufacturing life insurance and annuities.
This acquisition tells us one other smaller thing as well – Prudential doesn’t think that it could have built the Assurance IQ model on its own for $2.35B. In fact, Prudential has been trying direct-to-consumer ventures for a while and has roundly failed, along with virtually every other life insurer, including my former employer. I got to see that firestorm up close and I can tell you with complete confidence that MetLife made the right decision to shut down its Direct business despite all of the promises made about the future of that distribution model. Insurers actually suck at selling insurance. Prudential knows that. That’s why they bought Assurance IQ. But what they didn’t do is even more interesting – they didn’t plow that $2.35B back into their century-old advisor force. They didn’t plow it into their existing third-party distribution relationships. Instead, they bought a start-up. Hmm. If you’re an independent agent, a BGA or a Prudential advisor, how does that make you feel?
Will Assurance IQ work? The company claims “19 million people who are actively engaged on our platform” but, by contrast, has only sold 300,000 policies since inception. Given that 2/3 of the business is some form of health insurance and just 1/3 is Life, that ain’t much. But there’s a bigger issue. The model hinges on the use of independent insurance agents who get fed qualified leads from the system so that they can “skip the prospecting” and just make recommendations. That sounds great in the same way that a line worker at the Model T factory can just focus on clamping the headlight to the assembly. The fun part about being an agent is getting to know your customers and feeling like you’ve really helped someone. My guess is that most of these independent agents still want to know their clients and, believe it or not, probably don’t follow the Assurance recommended solutions because they have their own ideas. So if that’s the case, then what is Assurance but a lead-gen program for independent agents? And how many of those already exist? More than a few. That’s the core problem with the Assurance IQ model and that’s why I think Prudential grossly overpaid for the business. Time will tell. But no matter what happens with this acquisition, the signal is clear – Prudential thinks plunking $2.35B into a start-up is a better way to use capital than investing in its current businesses. We’re living in strange times.
*I’ve referred to Assurance IQ by its full name in this article because there’s another company, Assurance, also operating in the life insurance space and probably getting more than a few emails incorrectly congratulating them on making the sale of a lifetime.
After I wrote the initial article, I got a couple of interesting emails from folks who knew a few other tidbits about Assurance. One of those folks also pointed me in the direction of two articles (here and here) written by the folks at Coverager, a blog covering global direct-to-consumer insurance news. Coverager actually did some first-hand research in talking with current and past agents about Assurance to get their scoop on the business model. It ain’t pretty. As it turns out, most of these agents are mostly told to hawk Lumico Life, which is a subsidiary of Swiss Re’s IptiQ division, which white-labels insurance products for D2C companies such as this one. This triangulates with some data pulled by a friend from Lumico Life’s statutory filings, which show less-than-stellar sales and high lapse rates. The fact that Assurance puts most of their life business through Lumico explains why other insurers aren’t running around talking about how great Assurance is. Chances are pretty good the other carriers on the platform are just window-dressing and only get quoted when there’s an underwriting issue and Lumico won’t take the business through the rapid-issue platform.
But it gets worse. Most of these agents are trough-fed leads that Assurance says are generated with “online advertising” and curated with “data science.” When I first read that description, I thought I smelled BS but gave them the benefit of the doubt. I do a lot of searching online about life insurance and consequently most of the ads I see on my browser are related to life insurance. I have never – not once – seen an ad for Assurance. How is that possible? Well, Coverager says that the majority of leads being fed to the Assurance agents are actually from folks who signed up with Publisher’s Clearing House and get a phone call (a lot of robo-calls, actually) regardless of whether they said they’d like to be contacted or not. Coverager then backs up the claim by pointing out that web traffic to Assurance’s site is pretty small. Ouch.
But perhaps my favorite part of the whole story is watching the video of the two Mikes – or, better said, Salesy Mike and Sidekick Mike – talking about how great it is to be an agent in the Assurance system. Draw your own conclusions about the cream-of-the-crop being put forth to show the power of the Assurance system, but my take is that these folks are green as grass and don’t know any better.
The closer you look at this acquisition, the more it’s difficult to believe that Prudential didn’t get completely snowballed. Amazing, isn’t it? The second largest insurer in the country with a sterling brand got snookered by a couple of dudes in Seattle to pay more than $3B for a robocall shop. Lots of people are calling WeWork the peak of the “unicorn” bubble and saying that the time for unprofitable companies to soak up billions of dollars of capital is over. If what Coverager found is right, then it’s likely that Prudential blowing its war chest on Assurance IQ will mark the peak of InsureTech mania. Maybe then corporate executives at major life insurers will get back to their real jobs – you know, actually running a life insurance company.