Allstate, which makes most of its money on sure things like selling insurance policies on homes and autos, is making a $1.4 billion bet that a lot of folks also want to insure their cellphones, laptops, tablets and other digital wonders.
This week, Allstate announced it is acquiring SquareTrade, a privately owned San Francisco-based firm that sells warranties on personal communication devices and appliances mostly though major retailers, either right from the store floor or online.
If you’re surprised that hawking such warranties is worth over $1 billion dollars, welcome to the club. I’d venture that many consumers often view product warranties as superfluous and something you don’t purchase when buying a phone, tablet or TV.
So this acquisition — coupled with a lack of information about SquareTrade’s finances — strikes me as a bit of a puzzle.
Obviously, Allstate CEO Thomas Wilson sees value in this deal, paid with cash and debt, even though it will dilute corporate earnings per share for three years.
Indeed, the SquareTrade pact reflects Allstate’s desire to buy or jump-start enterprises that engage with emerging technology and changing consumer tastes while protecting its core insurance business from nimble, marketing-savvy competitors like Progressive and Geico.
Just how much value SquareTrade brings is uncertain.
In a conference call this week with investors, Wilson spoke broadly about SquareTrade’s potential, noting revenues are in the “hundreds of millions” and have increased fourfold in the last five years.
“We think it has a lot of upside from where it is today,” Wilson told financial analysts.
SquareTrade, which has a London office, is poised for U.S. and international expansion and it also boasts relationships with big-name retailers, including online giant Amazon and bricks-and-mortar sellers including Target, Sam’s Club and Office Depot.
Those outlets funnel customers to SquareTrade, which then sells discount product warranty plans backed by two insurance carriers. (Allstate isn’t in that product warranty business line.) If an iPhone, computer or appliance gets damaged, SquareTrade pays for a replacement or the cost of repairs, according to its web site.
For the foreseeable future, the two companies will be run independently, asserts Wilson.
SquareTrade will be tucked among Allstate’s Emerging Businesses unit, which also includes its Esurance online insurance firm. In 2011, Esurance and Answer Financial were acquired for a total of about $1 billion.
The new acquisition promises to bring along some hipster technology and sensibilities to Allstate. SquareTrade co-founders Ahmed Khaishgi and Steve Abernethy, both Harvard Business School alums who trekked to Silicon Valley, are data mining and technology veterans.
They started SquareTrade in 1999, eventually deploying their expertise to modernize and speed up online the often-laborious product warranty process between consumers and insurers.
SquareTrade has displayed some marketing moxie. It uses YouTube videos to show how iPhones are damaged when dropped from various heights. To illustrate how water affects iPhones, the company asked a surfer to ride the waves with a phone tacked on the front of his surfboard.
The message: Insure your phones.
Despite staying at arm’s length right now, expect Allstate to get more involved. After all, a company doesn’t pay that type of money, and take even a modest earnings hit, just to leave an acquisition completely alone.
Eventually, look for Allstate to assist in the underwriting of SquareTrade’s warranties. The Northbrook-based Allstate, with $35 billion in revenues, also will find ways to market its insurance products and services to SquareTrade’s estimated 25 million customers.
But right now, SquareTrade is another opportunity for Allstate to peer beyond its mainstay home and auto insurance business, something Wilson apparently views as essential to keeping the company in sync with changing times.
In March, Allstate opened a 400-employee “innovation hub” in the Merchandise Mart, a long way from the culture of the north suburban corporate campus. Its directive is to explore ways to expand and improve the company’s technology and use of data.
Wilson also has advocated for Allstate using drones to fly over disaster sites to report back on the condition of clients’ homes, cars and businesses with pinpoint accuracy.
Allstate also is investing in driver-monitoring technologies, commonly called telematics in the car-insurance industry, which connect with a vehicle’s computer system and help insurers know if someone is driving a car under the influence or is not authorized to take the wheel.
Each of these high-tech possibilities are bets on the future that herald new opportunities and unique challenges, including regulatory oversight and privacy concerns.
SquareTrade, which is expected to be officially acquired in January, falls into this to-be-determined category because there’s much we don’t know about this company.
Allstate, a publicly held company responsible to shareholders, didn’t provide any of the company’s financials. It promises to do so at a later date.
It is not known if SquareTrade is making money or, for that matter, how its cash flow or finances are being managed. SquareTrade also declined comment, handing over my inquiry to Allstate’s communications team, which declined to talk to me or go beyond the statements made publicly.
So, here’s the best warranty I can muster right now: It’s going to take a while before we can determine if Allstate’s surprising bet on SquareTrade comes up a winner.
Twitter @rreedtribbiz
