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Prudential Financial's $2.35B insurtech deal seems worth price, analysts say

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Prudential Financial's $2.35B insurtech deal seems worth price, analysts say

Although analysts recognize the steep price tag attached to Prudential Financial Inc.'s planned acquisition of an insurtech startup, several still view the deal as a "wise use" of corporate cash.

The life insurer has agreed to buy Assurance IQ Inc. for roughly $2.35 billion, comprising $1.2 billion in cash, $680 million in debt and $470 million in equity. There is also the potential for an additional earnout of up to $1.15 billion if certain growth objectives are achieved in the 2020-2022 period.

Assurance IQ expects revenues of just under $500 million in 2019, after $120 million in 2018, according to co-founder and CEO Michael Rowell. He also said projections for 2020 and 2021 are $700 million and $1 billion, respectively, without taking into account any benefit from the Prudential tie-up.

"We don't think the deal price is exactly 'cheap,' RBC Capital Markets analyst Mark Dwelle said in a note, "but as a buy versus build decision it's likely a more thorough solution than Prudential would have considered on its own ... and clearly already has momentum that it might have taken Prudential many years to achieve."

He wrote that the deal "makes sense" and will give Prudential an "even more complete platform" for delivering its financial wellness initiatives. He also said the transaction will "at least slightly balance" Prudential's other core businesses because Assurance IQ is not sensitive to equity markets and interest rates.

Sandler O'Neill & Partners analyst John Barnidge said in an interview that he sees the deal as a "wise use of money," especially because the addition of the insurtech platform will allow Prudential to drive down its customer acquisition cost. He equated the startup to an online broker and noted that the multiples for broker transactions have been going up.

"This is a rather large transaction so the multiple is higher," Barnidge said. "[Assurance IQ] is a fast-growing company so the multiple I would argue is deserved."

Wells Fargo analyst Elyse Greenspan said in a note that the acquisition will help Prudential expand its reach into more of "mainstream America." On the deal call, Prudential executives discussed using the startup to expand into international markets as well. However, Prudential Chairman and CEO Charles Lowrey maintained on the call that his first priority is still to concentrate on expanding quickly in the U.S.

Barnidge said the insurance industry has already "dipped its toes a little bit" into these types of transactions, but that Prudential is "jumping into the deep end of the pool from the highboard." The analyst said he expects to see more such transactions, although it is difficult to say whether they will be as meaningful in size.

"There are probably not that many companies out there that are insurtech that are 4 years old that are going to garner a price like this," Barnidge said.

Prudential also added $500 million to its 2019 share repurchase program, which Barnidge said in a note "goes to show the board's comfort level with the current operating environment."

The transaction is expected to close early in the fourth quarter of 2019.

Shares in Prudential were up 2.9% to $81.96 as of 1 p.m. ET.