The life insurance industry is huge, getting smaller and is set in its ways.
Now two startups I spoke with earlier this month are growing rapidly as they show shrinking giants — such as MetLife and Prudential — how much they are missing the fundamental changes in the way life insurance customers’ expectations have changed.
My 1995 experience trying — unsuccessfully — to create a service to enable consumers to bypass agents and purchase auto and home insurance online helps me appreciate the challenges that these startups are facing.
I also identify with their mission — to make insurance a better service for consumers at a lower price.
Leaving open this opportunity to create superior value for policyholders is one of three reasons to bet that shares of MetLife and Prudential will keep going down:
- Their top lines are shrinking
- The industry is getting smaller
- Startups are exposing how much industry goliaths must change their ways
In the unlikely event that these goliaths were to acquire these startups and adopt their insights, MetLife and Prudential stock might become an attractive investment.
A Prudential spokesperson said December 16, “We don’t comment on competitor activity so unfortunately won’t be able to help you out with this one.”
I requested comment from MetLife and will update this post if I receive a response.
MetLife On the Decline
Founded in 1868, MetLife
The decline in its stock price echoes its weak third-quarter performance. While it did not do as badly as analysts had expected, its total revenues fell 14% to $16 billion in the quarter due largely to a swing from derivative gains to losses in the last year. Its underlying business was also worse off with total premiums declining 8%, according to Forbes.
Sadly, it faces a bleak outlook as demand for insurance products falls due to economic uncertainty cause by the coronavirus pandemic. While Forbes expects the economy to see some improvement in the last quarter — boosting total premiums and investment income — the high weekly unemployment claims cast doubt on that optimism.
Prudential Insurance Barely Growing
Newark, NJ-based Prudential Financial
By the end of 2020, its life and annuities revenue is expected to have risen at a 0.8% annual rate to $18.8 billion due to a recent increase in investment income. IBISWorld does not expect this to continue due to the pandemic’s ultimately negative impact on stocks and industry revenue.
Prudential’s third quarter results were mixed. Its total revenues of $13.3 billion were up 3.1% — though that growth rate fell 3.5 percentage points short of the Zacks Consensus Estimate. Growth came from higher premiums, net investment income, and increase in asset management fees, commissions and other income, according to Nasdaq.
Prudential’s group and individual life and annuities results were roughly flat to down. As Nasdaq reported, its U.S. Workplace Solutions’ adjusted operating income rose 0.5% from the previous year due to “higher contribution from Retirement and was offset by lower contribution by Group Insurance business.”
Its U.S. Individual Solutions’ adjusted operating income fell 1.7% mainly “due to lower contribution from Individual Annuities, partly offset by higher contribution from Individual Life,” wrote Nasdaq.
Life Insurance And Annuities Industry Getting Smaller
MetLife and Prudential are leading players in a shrinking market. The good news for life insurance and annuity companies — which supply policies aimed at helping consumers to preserve wealth, plan their estates, and save for retirement — is that they collect so much in premiums that they account for a whopping 20% of all corporate bond purchases.
The bad news is that industry revenue is falling fast. For the five years ending 2020, industry revenue is expected to fall at a 6.1% average annual rate with a far steeper 16.4% decline in 2020 alone to $723.3 billion, according to IBISWorld.
The good news for the industry is that by 2025, the industry is expected to rebound. IBISWorld forecasts 4.4% annual growth to nearly $898 billion thanks to the dissipating economic and health concerns related to Covid-19 that now dominate the global conversation.
As a result, employment and disposable income will increase and “facilitate the financial stability needed for consumers to purchase insurance from industry operators,” noted IBISWorld, which anticipates rising interest rates that will boost investment income.
Sproutt And YuLife Exploiting Incumbents’ Head in the Sand Mindset
I recently interviewed two startups that are providing life insurance consumers with services that help them live better and longer lives — at lower prices than provided by incumbents. This sets them apart from incumbents’ Head in the Sand strategic mindset which I described in my new book, Goliath Strikes Back.
The first one is Manhattan-headquartered Sproutt — it sells and services people who purchase life insurance while outsourcing the risk to reinsurance companies. Sproutt rates its customers based on how well they take care of themselves. On average, Sproutt policyholders “receive 37% more coverage than the rest of the industry paying the same premium,” according to the company.
Sproutt has enjoyed rapid growth. “In the last six to eight months we have been growing quickly. In the last 12 months, we’ve enjoyed fivefold growth. The team has doubled, We have three offices: Tel Aviv, headquarters in New York, and a Kansas City sales office which has grown from one employee in January to 25 in December. We are just getting started. People are willing to buy the product,” according to my December 10 interview with cofounder and chief product officer Assaf Henkin.
Sproutt was founded by executives with prior experience outside the life insurance industry. As Henkin explained, “Sproutt was my third company. I helped start two companies in the Bay Area. SingTel acquired the second one [Amobee, a mobile advertising solutions provider, for $321 million in March 2012].”
Sproutt’s competitive advantage is its ability to analyze large amounts of consumer data and a mindset unshackled by life insurance conventional wisdom. “We were coming into life insurance from the outside with experience analyzing consumer big data. The insurance industry had hundreds of years of working well for big companies and not so well for consumers,” he said.
Sproutt saw an opportunity to adapt to industry changes faster than incumbents. “We thought that since technology and consumer needs were changing, the life insurance industry must also change. How is the life and health insurance industry broken? Based on our experience understanding people via data we saw opportunities for improvement in customer acquisition, underwriting, and customer experience. We found an industry with over $1 trillion in revenue that is stagnant and declining,” noted Henkin.
He has compelling insights into how traditional insurance companies are turning off younger people. “Younger people are not buying from agents. The insurance companies are finding out what is not good — you are overweight, you smoke, you have a family history [of life-shortening illnesses], or you live in certain areas [with lower life expectancies]. When the life insurance company finds out these things, it charges more for a policy.”
Sproutt’s concept of life insurance focuses on life, rather than death. “We flipped the script. We find out what’s going well — creating a win/win. We focus on positive attributes. We can more easily sell and keep customers over time. We are helping them to become healthier, to live longer, and to enjoy a higher quality of life,” he said.
Sproutt quantified that lofty idea. “We created a Quality of Life Index consisting of five elements: physical health, nutrition, emotional health, sleep, and overall balance. When consumers buy from us, we can leverage the score for better life experience and better value. If you lead a better life, we can reassess. We want a relationship that helps you live a better life,” Henkin said.
Sproutt does not carry the insurance risk. “We are managing general underwriters with access to specific processes. We do the underwriting, reinsurers and carriers take the risk. Payment is split between Sproutt and the carriers at different levels depending on the age of the policy: e.g., first year, years two through 10, and years 10 through 20,” he told me.
Sproutt says it is winning business from Prudential, AIG and TransAmerica. “They rely on a giant network [of agents]. We have direct to consumer relationships. They say ‘We have a website’ — but it won’t allow consumers to buy a policy, it will connect them with an agent. Two of our investors — Guardian Life and Mitsui Sumitomo Ventures — realize that it is a good idea to let a startup figure this out.”
Why do customers choose Sproutt? “You buy from a trusted brand. The number one reason is we are extremely transparent — we are very down to earth, we answer all questions, we don’t try to hide, we are accessible for the customer, we are available 24×7 and the customer can chat with a representative at any point, we have a trusted experience, and deliver value. This is in contrast to the traditional process. During the pandemic, consumers don’t want to meet with an agent, give fluids, or undergo a medical exam.”
One customer who switched from New York Life explained his reasoning. According to a December 16 email from Levi Gerber “I had been with NY Life for years, and had never really thought much about switching to another company. But I happened to come across an article about how Sproutt was trying to change life insurance by focusing on rewarding healthy behaviors, and as someone who is fairly active and tries to look out for my health, I thought it would be worth checking out. It was definitely a good choice. Sproutt was able to not only save me money on my policy, but also provide me with better coverage than I had with NY Life.”
London, England-based YuLife was founded in 2016 and it provides group life insurance and a “well-being application intended to offer insurance plans that inspire life and reward living,” according to PitchBook.
YuLife’s app encourages individuals to walk and meditate — rewarding them with Avios air miles, vouchers and gift cards for the financial, emotional and physical support. Businesses get insurance for their employees who earn rewards for living a healthy life.
YuLife began selling in 2019 and has since won many customers. “We built the solution between 2016 and 2018 and began selling in 2019. We have a Managing General Agent (MGA) model and get a commission on the policies we sell. We partner with third-parties which hold capital. We now have over 13,000 individual customers and over 250 corporate clients. And we’ve raised $17.6 million in seed and series A rounds,” according to my December 8 interview with Josh Hart, cofounder and chief product and technology officer.
Hart is a serial technology entrepreneur who dropped out of school. As he recounted, “I left school at 17 to start my first company and sold it to the UK’s largest app company. In my early 20s I started an agency that was the Google for work and sold it to my business partner. At 26, I took some time for myself and was playing computer games.”
Two rabbis came up with the idea for YuLife. “I had a phone call with two rabbis who had an idea for a new business — a technology-focused insurance company to help people live their best lives. One was a six foot tall body builder who had graduated with a first from Cambridge University. The other was a creative hippy and CEO of VitalityLife. They weren’t tech people but they had great ideas,” Hart told me.
YuLife’s mission echoes Sproutt’s. “We wanted to figure out how to change the life insurance industry for good so that policyholders can be healthier and live longer. It would have to do with apps to incentivize healthy activities and a healthy lifestyle,” said Hart.
In selling to companies, YuLife keys in on the needs of the executives running finance and human resources. As he explained, “We offer the HR director a way to bring well-being to existing employees and bring value to everyone in the company. We give the CFO control over their insurance costs — saving a couple of percentage points compared to the incumbent.“
YuLife gamifies life. “Every employee knows YuLife. We give them Amazon vouchers for being at the top of leaderboards for quests, meditations and other activities that will improve their health. We borrow ideas from games like Fortnite and have different ways of engaging users based on different marketing personas: such as achievers who want to maximize rewards, explorers who want to understand and break the game, and socializers who want fellowship. We want to make healthy activities fun,” he said.
YuLife competes with large incumbents including Unum, Canada Life, Zurich, and Aviva. “Canada Life white-labels services like ours. It is a bolt-on and employees don’t use it. Canada Life does not gamify the service, they don’t understand user engagement,” Hart said.
British supermarket chain, Co-Op, is a YuLife customer. In a December 16 email, its Health Wellbeing Manager, Paul Caudwell, explained, “We were facing increasing group life costs as a result of adverse claims experience when YuLife contacted us to explain how they’d like to break the mould of traditional underwriting. We were all ears. Hearing how they want to create healthy habits in colleagues, by focussing on their total wellbeing, with a view to then being able to dynamically underwrite group life really sang to us. Partnering with YuLife will not only strengthen our existing wellbeing offering, showing how much we care for our colleagues’ wellbeing, but potentially has the ability to reduce costs over time – a win win!”
As an insurance customer, Sproutt and YuLife’s missions and strategies strike me as vastly superior to the way that MetLife and Prudential operate.
Were an activist hedge fund to get a representative on the board of these incumbents, they could boost their stock prices by encouraging them to adopt the strategies of these upstarts.
Or perhaps — echoing Walmart’s 2016 acquisition of ecommerce purveyor, Lore — these life insurance incumbents could acquire the upstarts and put the startup CEOs in charge.