State Farm and ADT, a smart home provider, announced that State Farm will make a $1.2 billion equity investment in ADT, a move that will give the nation’s largest insurer a 15 percent ownership stake in ADT.
The investment also heralds a change in mindset, Paul Smith, State Farm’s chief operating officer, said in the media statements.
“This partnership gives State Farm the opportunity to provide smart home technology that takes us from our ‘repair and replace’ model to a ‘predict and prevent’ mindset,” Smith said.
State Farm has also committed to invest up to $300 million in an opportunity fund to support product innovation, technology and marketing that seeks to differentiate and improve the customer experience for homeowners.
“These innovations will help us take the next step into the future of home insurance and add more value for our customers,” Smith said.
As part of the new partnership, and by building on an existing relationship that ADT has with Google, the companies will combine next-generation security, innovative smart home technology and reimagined risk-mitigation capabilities to monitor, detect, help prevent and optimize against homeownership risks, according to the media statements.
Google has separately agreed to commit an incremental $150 million, subject to the achievement of certain milestones, to advance opportunities created by this type of innovation, according to ADT’s announcement.
The ADT announcement also discloses further details of the financial transaction, noting that State Farm will acquire 133.3 million shares of ADT’s common stock at $9 per share with its $1.2 billion investment.
In connection with State Farm’s equity investment, ADT will also be commencing a self-tender offer for up to 133.3 million shares of its outstanding common stock and Class B common stock at $9 per share, which will be funded by the proceeds from the State Farm equity investment. (Editor’s Note: Various online dictionaries of investment terms suggest that a self-tender in which a company buys back some of its own shares is intended to prevent another company from acquiring it. The ADT announcement explains simply that the “tender offer is expected to eliminate any dilution from State Farm’s equity investment.”)
After the equity investment and tender offer close, State Farm will own approximately 15 percent of ADT, and Google will continue to own a 6 percent stake.
With its investment, State Farm will obtain a seat on ADT’s board of directors and intends to designate Smith.
The equity investment is expected to close early in the fourth quarter of 2022.
State Farm’s announcement says that the partnership with ADT propels the insurer “into a new category, allowing the company to reimagine the homeownership experience and innovate new ways to apply Smart Home technology to home insurance, with customer benefits that may include lowered costs, reduced claims, and smart home security devices that help to proactively mitigate loss caused by water, fire, or intrusion.”
Join the ‘Predict and Prevent’ Club
Separately, at an investor conference yesterday, executives of another insurance industry participant that has built a business model around the idea of combining proactive home protection with insurance—InsurTech Hippo—were asked to comment on State Farm’s investment, which an analyst said was roughly the same size as Hippo’s overall market capitalization.
“It’s a new announcement, but it’s not a new development” in the market, said Hippo Founder and Executive Chair Assaf Wand, referring to the fact that almost all of Hippo’s smart home technology provider partners over the years, such as ADT, Ring, SimpliSafe and Notion, have had the ability to team up with other insurance companies.
“There’s no exclusivity,” he said, going on to discuss the time and effort it takes to design and “meticulously iterate” to get to the right product offering, get it to the right target customers, and to make decisions about discounts, etc.
Other Hippo executives classified the InsurTech’s target customers as “Generation Better” homeowners who embrace the idea of proactivity and will product better loss ratios at various points during the meeting.
“It took us four, five years to get to the state of where we are,” said Wand, explaining the effort that goes into delivering on smart home technology partnerships. “I think when we started, it was 10, 12, 15 percent attachment. And then we got to the 70, 80 percent….We had had times where we used to offer it or even send it to everybody, but then [for] a lot of people, it was just sitting on the mantle. That was a waste of money and attention,” he said, referring to fine-tuning needed after announcing a partnership.
Hippo’s Chief Revenue Officer Yuval Harry said the State Farm announcement is a good development in Hippo’s view. “It aligns with what we are trying to do with other partners…. When others are educating the market about the benefits, that’s positive for us.”
Stewart Ellis, Hippo’s chief financial officer, agreed, and added that while Hippo is very excited about smart home technology, for the InsurTech, it’s part of a “holistic home protection platform,” that includes home care services like “Book a Pro,” linking homeowners customers with professionals for maintenance and repair work.
During the nearly three-hour meeting with analysts, which was webcast as well, Hippo executives took turns explaining Hippo’s value proposition and its future path to profitability, which includes typical insurance carrier actions like rate increases, and also revenue growth from commissions and fees related to placing business as an agent and an MGA, through monetization of home protection services, and efforts directed toward growth of an embedded insurance channel placing homeowners insurance through partnerships with builders.
Hippo Chief Executive Officer Richard McCathron summed up the business strategy during the final minutes of the session when an analyst suggested that partnering with an better capitalized incumbent carrier might make sense in Hippo’s future.
“If an offer was made, our board would have to entertain the offer. But the reality is [that] to just optimize around the edges isn’t why any of us are here. This isn’t why we joined this company,” he said, referring opening comments he had made nearly three hours early, describing Hippo’s first value proposition as one of “redefining an old fragmented industry.”
McCathron concluded: “We think we can make a meaningful change to the home protection industry and we are heads down achieving that goal. We have the capital to do it. We have the time to do it.”
“We need to do a better job, frankly, of educating our investors on what does differentiate us. I think this today is a start of that—to really help folks understand we are not a traditional insurance company. We are not an MGA. We are not an agency. We are not a home protection services company. We are not a fronting carrier. We are all of those,” he said.
During the conference, McCathron also addressed questions about last week’s action to reduce Hippo’s workforce.
“We just needed to right-size the organization and we had never done this. We’ve been around now for six years …. It was time to do it. And because of the macroeconomic terms, it’s only prudent.”
“We do not want to find ourselves in a position where we need to go raise outside capital, unless it’s our choice because of some strategic opportunity that we have,” he said, noting that while he believes workforce cuts are done, there are other cost-cutting measures that Hippos is looking into—”with real estate, with contract renegotiation, all of the things that I think any public company, frankly, any company should be doing when there’s uncertain macroeconomic times. And we have the fortitude will to do it,” McCathron said.