How Prudential's Big Tech Bet Went Sour

How Prudential's Big Tech Bet Went Sour

Insurer has written down $2.3 billion deal by about half and faces regulatory scrutiny

In late 2019, Prudential Financial Inc. paid $2.3 billion for a three-year-old data-science startup that promised to modernize the age-old business of selling life insurance.

The deal for Assurance IQ has badly missed its financial targets and left Prudential facing questions from regulators.

In February, Prudential said it wrote down the investment by roughly half.

"Look, it was a peak period for these type valuations, and Prudential felt compelled to strengthen its digital capabilities,'' said Andrew Kligerman, a Credit Suisse Securities analyst. "It was unfortunate timing at the very least."

For its money, Prudential got an online insurance agency that primarily sold health and life policies, including some just big 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 its tech talent, algorithms and machine learning to sell large volumes of various types of insurance to middle-class households.

"It clearly has underperformed our financial expectations in the near term, but this is a strategic purchase that I would say we need to evaluate over the next five to 10 years," said Andy Sullivan, who heads Prudential's U.S. businesses. "Obviously we wish we would have paid less."

Prudential declined to comment on the regulatory inquiries.

Speaking generally, Mr. Sullivan said: "We care deeply about doing things the right way and our reputation."

A priority from the beginning was bolstering Assurance's compliance processes, he said.

The acquisition was unusual for Prudential, which has typically bought established companies to boost its market share in a geography or product.

The Assurance deal is one of the 10 biggest U.S. insure-tech acquisitions since 2010, according to PitchBook Data.

The startup, now based in Seattle, had dozens of scientists and engineers on staff and hundreds of commission-paid, part-time agents. Annual revenue was around $300 million.

It offered Prudential a way to leverage technology to reach cost-effectively what it calls the underserved mass market, households with assets under $100,000.

Within a year of the deal, some analysts were labeling it "a head scratcher," "a really poor acquisition" and "value destroying."

The unit was supposed to hit about $1 billion in annual revenue last year, but clocked in at $558 million. It was supposed to add to Prudential's 2020 and 2021 earnings. Instead, the unit's pretax losses have tallied $239 million.

Prudential disclosed in a February filing that it had received a government subpoena and other inquiries "related to the appropriateness of Assurance IQ's supplemental health product sales and marketing activity."

Prudential said it was cooperating with regulators. Assurance agents sell Medicare, Affordable Care Act and other health policies.

Assurance was part of a wave of startups that promised to transform the staid life-insurance industry. It was the idea of a pair of entrepreneurs. Michael Rowell, who started his career as a life-insurance agent, had previously founded a direct-to-consumer life-insurance distribution business. In 2016, he teamed with Michael Paulus, who had helped found a wealth-management tech firm.

Their concept was a digital update of television ads with toll-free numbers to motivate people to "call now" for insurance. It also provides analysis, including what's working and how to handle leads it generates.

Assurance's scientists developed search-engine, social-media and other online marketing techniques to steer millions of potential customers to Assurance's websites. The firm earns extra revenue by selling consumer data to other entities.

The technology seeks to help consumers make choices and speed up the application process, connecting them to a virtual call center with agents working from home in hours of their choosing. Prepandemic, the setup provided rare flexibility.

The co-founders bootstrapped operations, and by early 2019, they were searching for additional products to sell and a partner. Prudential was among insurers Assurance approached.

At the time, Prudential executives were looking for ways to grow. U.S. interest rates had remained low for a decade, pinching investment income and hurting sales of some products.

Prudential had been trying to develop "financial wellness" as a business strategy, and needed to spend more on technology.

"It did contribute to us saying, 'Yeah, we want to buy Assurance'," Mr. Sullivan said.

Within the insure-tech community, jaws dropped over the price. Still, investors drove up Prudential's shares 2.9% on the day of the announcement. A month later, Coverager, an online media firm in the space, concluded that Prudential vastly overpaid. "Prudumbtial" was its headline.

Coverager asserted that Assurance's key technology was the headset provided by agents themselves, to use in pushing older people to buy the funeral-expense policies. And it revealed that not all of the startup's leads came from advanced data science. Some came from Publishers Clearing House.

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

Whatever the source, some potential buyers are on tight budgets.

"The worst is where you feel you are trying to twist the arm of an elderly lady, where it will take food off her table to pay for the policy, or medicine out of her cabinet," said Tony-Dale Partin, an Assurance agent in 2020, who said he sought to find affordable options.

Policies providing $5,000 for a cremation and funeral run $20 to $50 a month, Prudential said.

Prudential said demographics are evolving as products are added to the menu. For now, Assurance's buyers average 60 years old with $53,000 in income.

Much of Prudential's optimism was pinned on expanding Medicare-related sales. In the deal announcement, Assurance's co-founders said they expected strong sales at year-end.

But the unit's fourth-quarter results were disappointing. Prudential cited insufficient staffing. The staffing problems persisted as the Covid-19 pandemic caused various disruptions.

Then there were the regulatory matters. Early on, Prudential named industry veterans to run Assurance's compliance, legal and risk-management functions. It bolstered audits of sales calls, installed anonymous hotline reporting and moved customer-complaint handling to Prudential, among other moves.

Hundreds of complaints had been mounting at the Better Business Bureau. Many people said they felt besieged by calls after providing contact details.

"I had to turn off my phone," one said.

Prudential says those complaints don't represent the typical consumer experience.

At the Federal Communications Commission, consumer groups questioned Assurance's consent process for such calls.

The National Consumer Law Center contended in a 2020 filing that Assurance's website wasn't properly warning consumers that clicking the "View My Quote" button made them vulnerable to hearing from 174 entities then listed by Assurance as partners, providing an array of products and services.

Assurance said its approach fully complies with rules, and the matter is 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 product type, and it is ending certain sales of contact information.

"If the lead isn't something we can solve with a product sale, we want it to go directly to a carrier that can solve it, as opposed to another distributor where the consumer gets passed, you know, multiple times," Mr. Sullivan said.

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