#327 | The Making of a Juggernaut – Integrity buys Annexus

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Quick Take

Integrity buying Annexus was the acquisition heard ’round the insurance industry. The immediate prediction was that Integrity plans to use Annexus to build proprietary products for Integrity. While that may be true, I think it misses a finer point – Annexus is more of a marketing firm than a product development company. The real play, from my perspective, is twofold. First, Annexus can create stickiness in the Integrity system, almost as a service provider to other Integrity firms for marketing and distribution support. Second, Annexus may be able to bring distributors who have become reliant on Annexus marketing and products into the Integrity fold, accelerating Integrity’s already explosive growth. Product is a distant afterthought. Will there be proprietary Integrity products? Absolutely, but that would have happened with or without Annexus. Now, Integrity can combine proprietary product with a marketing goliath. That’s what makes this such a potent combination.

Full Article

Back in February, I wrote #303 | Consolidated Distribution, Proprietary Products, which covered the bombshell acquisition of Lion Street by Integrity Marketing Group. Since then, more bombshells have dropped. Integrity bought Ash Brokerage in early May, a shocking move for a highly successful, family-owned firm that didn’t seem to have any reason whatsoever to sell. A few days later, Integrity announced the acquisition of Hegemon Group International, which is World Financial Group founder Hubert Humphrey’s highly successful second act. A couple of weeks ago, Integrity also announced the purchase of PHP Agency, an enormous multi-level marketing firm led by charismatic CEO Patrick Bet David, who is practically a brand for entrepreneurship unto himself. Those acquisitions, along with a weekly string of final expense and medsupp agency purchases, cement Integrity as arguably the biggest distributor of individual life and health insurance products in the country.

But the biggest bombshell of all is the announcement just last week that Integrity bought Annexus, the behemoth quasi-insurer, quasi-distributor, self-styled product development company that lays claim to $7 billion in annuity sales and $150 million in life sales on an annual basis. If you were to just read the hyperbole around this transaction, you’d come to the natural conclusion that a partnership between Integrity and Annexus is going to create some sort of unstoppable juggernaut in the insurance industry. I’m not even sure what that would mean. Integrity and Annexus together are undoubtedly very big. But the real question is whether being big in this business is actually an advantage. And, if not, then what about the combination of these two firms makes them better?

First, let’s talk about Integrity. From my vantage point, Integrity itself is something like a glob of glue and each acquisition is a marble being stuck to it. All of these senior (medsupp/final expense) agencies are little marbles. They get swallowed up, fully relying on Integrity for their back-office support, technology, marketing, lead-generation and anything else that Integrity offers. The acquisition strategy works because in this case, the marbles are small, relatively uniform and there’s a lot of glue to go around.

That’s not the case for the bigger marbles, the capstone acquisitions – One Resource Group, Brokers International, Lion Street, Ash Brokerage, The Alliance, PHP and Hegemon. The problem with those firms, to extend the analogy, is that it takes a lot of glue to cover a big marble. In other words, Integrity has to pay an enormous amount of money for these firms at multiples high enough for figurehead and family founders to turn over the keys, selling 100% of their business in exchange for, based on folks who have seen Integrity deals up close, (mostly) cash and some residual interest in Integrity as a whole.

But that’s only half of the problem. With these big marbles, the glue isn’t as sticky. Why? Because unlike the smaller senior shops, there’s no integration play. Ash Brokerage, for example, almost certainly did not need Integrity’s help with its back-office, technology, processing, marketing or anything else. The same could be said for all of the other big marbles currently stuck to the Integrity glue. The only reason those firms are now owned by Integrity, in my view, is because the founders got paid to give them up – back-slapping protestations of “partnership,” “alignment” and “values” aside.

From far away, Integrity’s glue-and-marble lump looks like a solid wrecking ball coming to smash the competition and extract concessions from carrier partners. But upon closer inspection, it looks more like a 5th grade science project, all goopy and disjointed, with incongruous parts that don’t seem to fit together and have actual no reason to be together except for the glue of cash, one that looks to be spread paper thin over certain parts. It’s not nearly as solid as it looks.

What the ball needs is more glue. Integrity’s primary source of glue is cash. As I wrote in #303, Integrity has raised a couple billion in capital from private equity firms, but it’s also hard to imagine that their coffers aren’t running low after several acquisitions that were likely in the mid-9 figures. Integrity has long been rumored to be preparing for a blockbuster IPO, one that will hopefully deliver a 30x multiple worthy of the “insurtech” that Integrity strangely claims to be on its website. But if they get it, then there will be more than enough glue to go around.

The other source of glue for Integrity is integration. As I’ve already said, it makes sense to me that the operations of the smaller firms are actually being integrated, but that’s not the case for the bigger firms, the ones that actually need the most glue in order to stay stuck together. How, then, can Integrity create some sort of stickiness, some powerful adhesion, for these big firms in a way that drives system-wide value for being an Integrity partner even when there are no real economies of scale in operations? Enter Annexus.

What is Annexus? In the words of Co-Founder Ron Shurts in the video announcing the sale to Integrity, he says “Annexus is a product development company. We actually invent the widget…we create the actual product design, marketing material, the sales collateral, the technology platforms, the illustrations and ultimately we put that onto the insurance company’s paper.” As Shurts says in another podcast, “we’ve done things from a product development standpoint, whether it be 17 patents issued, 15 patents pending…I’ve got an actuarial staff of 17 actuaries.” The emphasis, clearly, is on Annexus’s prowess as a product development company.

Hence, the glue. In #303, I wrote that one of the inevitable effects of all of the consolidation in the distribution space would be products proprietary to these mega-distributors, effectively fragmenting the industry into firms with and without access. It seems as though Integrity sees things the same way. If you had the bottomless pockets of Integrity and a vision to corner the entire industry through proprietary products, you would have one single, solitary acquisition target in mind – Annexus. Although neither Integrity nor Annexus made any mention of future plans, it seems highly likely that future Annexus products will be primarily (if not exclusively) for the benefit of Integrity firms.

This prospect will likely send a shudder down the spine of annuity-oriented IMOs and life-oriented BGAs who have been selling Annexus products, but not for the reason you might expect. Annexus clearly brands itself as a product development company. That, in my view, is the sort of very savvy marketing that you’d expect from a very savvy marketing company. But is it the best way to think about Annexus? I don’t think it is.

Of the 100-odd Annexus employees on LinkedIn, 70% of the non-corporate staff (finance, accounting, etc) have sales and/or marketing titles and job explanations. Of the remaining 30%, 75% are in technology, which is arguably an extension of marketing based on the job descriptions I read. Only a couple of employees have job descriptions related to product. If you search the American Academy of Actuaries website, you’ll find zero actuaries in the directory that work for Annexus. In terms of personnel, Annexus doesn’t look like a product development company. It looks like a sales and marketing company with a hefty tech bent.

When I was running product for MetLife/Brighthouse and got the pitch from Annexus, there were folks from another firm in the room – Genesis Financial Products. The two firms formed a united front, but with two very different roles. Genesis was the product development and actuarial arm, Annexus was the marketing and distribution arm. The compelling value proposition for a firm like MetLife/Brighthouse was the ability to work with Genesis for an IMO-oriented product that would be distributed on Annexus’ exclusive distribution platform with a track record of success. It also seemed to me that not only we were working with two different firms, but we were even going to be paying two different fees – one to Genesis for the product piece, one to Annexus for distribution.

This separation of responsibilities is also supported by the fact that although Annexus talks often about its portfolio of issued and filed patents as proof-positive of its product development capabilities, a brief cruise through the USPTO website reveals 18 patents for Genesis Financial and just one for Annexus, which is an assignee on a Genesis patent. Most of those Genesis patents are more than 10 years old and deal with the first generation of Annexus products such as Athene BCA and Nationwide New Heights FIA. The patent angle is good marketing for Annexus – but I’m not sure it’s much more than that.

Over the past few years, Genesis seems to have faded from the narrative and is nowhere mentioned in the Integrity/Annexus announcement video. Its legendary founder, Richard Kado, is retired (based on his LinkedIn profile) and some of the folks who used to be affiliated with Genesis Financial Products are now branded under Genesis Financial Development, which doesn’t seem to have any nexus with Annexus (pun intended). If the product development engine for Annexus was Genesis and now Genesis is no longer a part of the picture, then what’s the secret sauce for Annexus?

In the podcast I mentioned earlier, Shurts actually starts off with this answer to that question: “[the secret sauce was] initially the distribution model, the fact that we could give [distributors] proprietary access to products that no one else could get…that we give [distributors] a recruiting opportunity, back in the day. It doesn’t apply as much today.” In my experience, that’s a huge part of the history of Annexus’s success. Distribution on the annuity side of the business is oriented towards the ability to recruit agents. One way to recruit agents to your firm is to have an exclusive product, especially if you know that your brokerage override is locked and protected. Annexus was the first company to really work that angle.

But Shurts’ other answer to the question is equally as interesting. He says: “we spend so much time on Wall Street, every time a new index comes out, the very first place they call is Annexus.” I have every reason to believe this statement and, in my experience, it’s true. Why? Because the history of Annexus is inextricably intertwined with the rise of engineered indices in indexed insurance products. In fact, I would argue that you literally can’t tell the history of engineered indices without talking about Annexus.

Listen to anyone from Annexus talk long enough and you’ll inevitably hear multiple references to Nationwide for the simple reason that the incredible, jaw-dropping, blockbuster success of New Heights FIA put Annexus on the map. Yes, Annexus had some success prior to the financial crisis with a predecessor to Athene, but nothing even close to what happened with New Heights.

The original New Heights was released in February of 2014 to a lukewarm reception. The core concept of the crediting strategies were similar to what Annexus had deployed with Athene, a creative way to dynamically allocate between the fixed account and an indexed account with a spread, allowing for “uncapped” exposure to the S&P 500. Nationwide did around $435 million in FIA in 2014*, a significant percentage increase from their overall 2013 sales of $67 million, but a relatively small absolute increase. That trend remained through the first 2 quarters of 2015, with Nationwide on track for around $800 million in total sales.

However, in June of 2015 Nationwide added a now-legendary engineered index to New Heights – JP Morgan Mozaic. As Insurance News Net noted at the time, Nationwide vaulted from 15th in Q2 of 2015 to 5th place in Q3. By the end of the year, Investment News reported that Nationwide posted a 460% increase in sales to $2.5 billion. By 2017, Nationwide was #3 in FIA sales, clocking in at $4.6 billion. In 2018, sales jumped to $5.1 billion and then again to $5.4 billion in 2019, by then turning Nationwide into a household name in FIAs, a powerhouse seemingly built by Annexus.

In my view, that explanation misses the real story – the success of New Heights was about the index, not the actual product. Without JP Morgan Mozaic, New Heights was on track to make Nationwide a mid-tier FIA seller. But with Mozaic, Nationwide became a perennial top 3 FIA seller. Its success was built on the index, the marketing story and its fantastical illustrated performance. As a result, New Heights transformed FIA as a product category. Before New Heights, there were just a handful of engineered indices in the market. Now there are more than a hundred. The FIA landscape will never be the same – and the success of New Heights, developed with Annexus, is a key reason why.

Annexus, as a firm, brilliantly embraced the shift in the FIA market towards engineered indices. Every index tells a story. Every index has a brand-name attached to it. Someone has to tell that story – and that’s exactly what Annexus does exceedingly well. They’ve partnered with academics such as Roger Ibbotson. They’ve hired top tier index talent into the firm and made a marketing pitch out of their index due diligence process. They host huge symposiums for distribution partners and their agents espousing the benefits of the Annexus due diligence process and the indices that make it onto the platform. No one tells the engineered index story better than Annexus – and its “exclusive” partner distributors have been more than willing to fill the seats at Annexus events with agents to hear it.

Therein lies the rub with the acquisition of Annexus by Integrity. As Shurts says in the podcast, “we’re not an IMO. We’re not a BGA.” That’s right. Annexus’s success is dependent on the willingness of IMOs and BGAs to connect their agents with Annexus products, events, marketing collateral, thought leadership – the whole package. It only works if distributors lead the agents to the water. If Annexus is part of Integrity, independent distributors are likely to think twice about how much airtime they want to give Annexus.

They may not have a choice. Annexus has begun to be a brand in and of itself. Over the past few years, some distributors have become so dependent on Annexus marketing that virtually all of their business goes to Annexus products, essentially letting Annexus tell the story and then the distributor just places the business. It will not be easy for independent distributors to disentangle themselves from Annexus. They can’t just walk away. If they do, they’ll undoubtedly lose some of their top agents. The alternative, though, is to feed Integrity, which is a threat to their core business. Independent distributors are between a rock and a hard place.

The easiest escape route is to just sell to Integrity. That, I think, is the real brilliance behind Integrity buying Annexus. Yes, they’ll get some proprietary product and that will help create some stickiness within the group. Yes, they’ll be able to bring Annexus’ considerable marketing ability to the Integrity partners, giving them stories they can tell and recruit to. But the real power is in Annexus’ ability to bring other distributors into the Integrity fold. In that sense, Annexus doesn’t just act like glue – it also brings more marbles. Hence, the reason why Integrity was undoubtedly willing to pay a huge amount of money to completely acquire the company, even buying out Blackstone’s minority stake. There is no doubt in my mind that Annexus will make Integrity bigger.

However, I think there’s reason to believe that the core Annexus business model is less powerful than it first appears. Annexus can rightfully lay claim to billions in FIA production, but we have to dig a bit deeper to see where that’s really coming from – and the primary source is Nationwide. For the past 3 years, New Heights has continued to cruise along at around $3 billion in annual sales. From there, the list thins out. Of Athene’s $6 billion in FIA sales last year, around $1 billion of that was Annexus’ suite of BCA products. These are the legacy Annexus products, the ones that built the behemoth.

Newer Annexus products have received more tepid receptions. Transamerica rolled out a proprietary product with Annexus in 2019 and abruptly exited the FIA space altogether at the end of 2020. AIG launched X5 with Annexus in 2020 and in 2021, it notched sales of just under $125 million, making up a tiny sliver of AIG’s total of $6 billion in FIA that year. More recently, Annexus partnered with North American to release Secure Horizon, which is one of the most aggressively illustrated products on the market, but its Q1 2022 sales of $42 million were just a sliver of Sammons’ overall $1 billion in production that quarter. Just having an Annexus product is no guarantee of success, especially recently.

On the Life side, as I’ve written before, both Securian and Nationwide’s Annexus products use the street chassis. There is nothing unique about the products themselves. What makes them different is that they bolt on engineered indices selected by Annexus. From there, Annexus applies its considerable marketing and branding heft. That support, along with the fact that Nationwide only allowed New Heights IUL for use in premium financing, has undoubtedly grown sales. But the products themselves are nothing different from what’s available to everyone. The difference is in the indices, the support from Annexus and, in Nationwide’s case, the ability to use the product in premium financing.

Annexus has undoubtedly been hugely successful – but the question is why. The past 10 years have been dominated by the emergence of engineered indices in FIA. Annexus was perhaps the largest single beneficiary of that regime. There is no way to separate the success of Annexus from the near-universal adoption of engineered indices in both FIA and IUL. Their fates, it seems, are intertwined.

But times are changing. Higher interest rates make engineered indices less of a necessity to deliver something – anything! – that looks attractive to clients. Ultra-high illustrated performance in both FIA and IUL using engineered indices is coming under increasing regulatory scrutiny. At the same time, actual, real-world engineered index performance has been lackluster for some indices, particularly older-vintage offerings that were calibrated for a certain economic environment that no longer exists.

The question, in my mind, is how Annexus will shift its value proposition to adapt to the new regime, especially now that it is part of Integrity. Will Annexus pioneer the next great, industry-changing product or will it move more towards becoming the marketing and branding glue that holds together all of the disparate marbles in the Integrity wrecking ball?

If I had to bet, I’d go with the latter, and I think that’s the right way to interpret the impact of the Annexus/Integrity tie-up. It’s not about product. It’s about marketing. That’s what Annexus does better than anyone else – and that’s what makes this acquisition potentially so potent and potentially industry-changing, far more so than if it was just about proprietary product.

*All sales figures quoted are from Beacon unless otherwise noted