Veterans life insurance

How Prudential’s Big Tech bet went sour

At the end of 2019, Prudential Financial Inc..

ERP -1.66%

paid $2.3 billion for a three-year-old data science startup that promised to modernize the age-old life insurance sales business.

The Assurance IQ deal largely missed its financial targets and left Prudential with questions from regulators. In February, Prudential said it cut the investment by about half.

“Look, it was a peak time for these kinds of valuations, and Prudential felt compelled” to beef up its digital capabilities, said Credit Suisse Securities analyst Andrew Kligerman. “It was an unfortunate moment to say the least.”

For its money, Prudential got an online insurance agency that mainly sold health and life insurance policies, some just large enough to pay for funerals, cremations or burials. At one point, Assurance got leads from Publishers Clearing House.

The goal was to use the upstart with his technological talent, algorithms and machine learning to sell large volumes of various types of insurance to middle-class households.

“It clearly underperformed our short-term financial expectations, but it’s a strategic buy that I would say we need to evaluate over the next five to 10 years,” said Andy Sullivan, who leads the business. from Prudential. Obviously, “we would have liked to pay less”.

Prudential declined to comment on regulatory investigations. Generally speaking, Mr Sullivan said: ‘We care deeply about doing things the right way and about our reputation. A priority from the start was to strengthen Assurance’s compliance processes, he said.

The acquisition was unusual for Prudential, which has typically bought established companies to increase market share in a geographic area or product. The insurance deal is one of the 10 largest insurance technology acquisitions in the United States since 2010, according to PitchBook Data.

The startup, now based in Seattle, had dozens of scientists and engineers on staff and hundreds of part-time, commission-based agents. The annual turnover was about 300 million dollars. He offered Prudential a way to leverage technology to profitably reach what he calls the underserved mass market, households with assets below $100,000.

Less than a year after the deal, some analysts called it a “headscratcher”, “a really poor acquisition” and a “value destroyer”.

The unit was supposed to reach around $1 billion in annual revenue last year, but it hit $558 million. It was supposed to add to Prudential’s 2020 and 2021 revenue. Instead, the unit’s pretax losses totaled $239 million.

Prudential typically bought established companies to increase market share in a geographic area or product.


Photo:

Jose A. Alvarado Jr. for The Wall Street Journal

Prudential revealed in a February filing that it had received a government subpoena and other inquiries “related to the relevance of Assurance IQ’s complementary health product sales and marketing activities.” Prudential said it was cooperating with regulators. Insurance agents sell Medicare, Affordable Care Act, and other health policies.

Insurance was part of a wave of startups that promised to transform the life insurance industry. It was the idea of ​​a couple of entrepreneurs. Michael Rowell, who began his career as a life insurance agent, previously founded a direct-to-consumer life insurance distribution business. In 2016, he teamed up with Michael Paulus, who had helped found a wealth management technology company.

Their concept was a digital update to TV ads with toll-free numbers to entice people to “call now” for insurance. It also provides analysis, including what works and how to handle the leads it generates.

Insurance scientists have developed search engines, social media and other online marketing techniques to drive millions of potential customers to Insurance websites. The company earns additional revenue by selling consumer data to other entities.

The technology aims to help consumers make choices and speed up the application process, by connecting them to a virtual call center with agents working from home at times of their choosing. Before the pandemic, the setup offered rare flexibility.

The co-founders started their operations, and in early 2019 they were looking for additional products to sell and a partner. Prudential was among the insurers approached by Assurance.

Prudential, when it bought Assurance IQ, was keen to make “financial wellness” a strategy.


Photo:

Jose A. Alvarado Jr. for The Wall Street Journal

At the time, Prudential executives were looking for ways to grow. Interest rates in the United States have remained low for a decade, which has had the effect of pinching investment income and hurting sales of certain products.

Prudential had been trying to develop “financial wellness” as a business strategy and needed to spend more on technology. “It allowed us to say, ‘Yeah, we want to buy Assurance,'” Sullivan said.

Within the insure-tech community, jaws dropped over the price. Still, investors pushed shares of Prudential up 2.9% on the day of the announcement. A month later, Coverager, an online media company in the space, concluded that Prudential had grossly overpaid. “Prudumbtial” was its title.

Coverager said Assurance’s key technology was the helmet provided by the agents themselves, to be used to push seniors into purchasing the funeral expense policies. And it revealed that not all of the startup’s leads came from advanced data science. Some were from Publishers Clearing House.

Assurance only bought leads briefly and then committed to creating its own, Prudential said.

Regardless of the source, some potential buyers have tight budgets. “The worst part is when you feel like you’re trying to twist an elderly lady’s arm, where that will take food from her table to pay the police, or medicine from her cupboard,” said Tony-Dale Partin, an insurance agent. in 2020, who said he was looking to find affordable options. Policies that provide $5,000 for a cremation and funeral cost between $20 and $50 a month, Prudential said.

Prudential said demographics change as products are added to the menu. For now, Insurance buyers are on average 60 years old with an income of $53,000.

Much of Prudential’s optimism hinged on expanding Medicare-related sales. In announcing the deal, the Assurance co-founders said they expect strong year-end sales.

But the unit’s fourth quarter results were disappointing. Prudential cited insufficient staffing. Staffing issues persisted as the Covid-19 pandemic caused various disruptions.

Then there were the regulatory issues. Early on, Prudential appointed industry veterans to manage Insurance’s compliance, legal and risk management functions. It strengthened sales call audits, installed anonymous phone support reports and moved customer complaint handling to Prudential, among other measures.

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Hundreds of complaints had accumulated at the Better Business Bureau. Many people said they felt besieged by calls after providing their contact details. “I had to turn my phone off,” one said. Prudential says these complaints do not represent the typical consumer experience.

At the Federal Communications Commission, consumer groups have questioned Assurance’s consent process for such calls. The National Consumer Law Center argued in a 2020 filing that Assurance’s website failed to properly warn consumers that clicking the “View my quote” button left them vulnerable to hearing from 174 entities while listed by Assurance as partners, providing a range of products and services. Assurance said its approach was fully within the rules and the case was pending.

One of Assurance’s websites recently listed about 2,000 partners.

Prudential says it shares insurance leads with no more than two to five partners, depending on the type of product, and it shuts down some contact information sales. “If the lead isn’t something we can solve with a product sale, we want it to go directly to a carrier who can solve it, as opposed to another distributor where the consumer is overwhelmed, you know, many times,” Mr. Sullivan said.

Investors pushed shares of Prudential higher the day the insurance deal was announced.


Photo:

Jose A. Alvarado Jr. for The Wall Street Journal

Write to Leslie Scism at [email protected]

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