Insurance providers have long looked to the security industry to help it mitigate losses from intrusions and other life-safety calamities as well as generate new revenues. But Tuesday’s big announcement that ADT has secured investments totaling $1.5 billion from State Farm has industry insiders SDM spoke with foreshadowing much bigger things ahead in the realm of IoT penetration into the smart home.
Details of the partnership, including Google’s additional pledge of up to $150 million for engineering, designing and marketing of new products, can be viewed here. For Apollo Global Management, ADT’s largest shareholder since its acquisition in 2016, the deal represents a considerable return on its initial investment without hurting ADT’s stock price, said Brian Ruttenbur, managing director and equity research analyst at Imperial Capital.
“So that's No. 1. The second thing is there’s an additional $300 million that State Farm is putting in to fund [product and technology innovation, marketing and customer acquisition] and they are going to put $100 million to work immediately into investments in ADT."
The third key piece in the announcement — and arguably the most important, Ruttenbur suggests — is the partnership is going to open up millions of new customers.
“ADT has roughly seven million customers. State Farm has between 13 to 14 million customers that have close to zero term. So the key to State Farm is bundling. You add auto, you add life insurance, you add homeowners, you add everything,” he continued. “And customers stay with State Farm, I think the average tenure is like 20 years. It is crazy. So there’s a great deal of loyalty. That is going to open up a whole new customer base for ADT, and, frankly, State Farm, to cross sell to with limited costs.”
'Capture all angles possible'
The collaboration between State Farm and ADT reflects the increasing momentum of insurance companies as a channel for the purchase or distribution of smart products, said Elizabeth Parks, president and CMO for Dallas-based research firm Parks Associates.
“State Farm’s enormous investment in ADT is another example of ADT diversifying its strategy to capture all angles possible. This new partnership with State Farm, coupled with Google’s investment in ADT, is a huge signal that major players are recognizing the need for integration across ecosystems in the home,” Parks said.
According to Parks Associates research, currently 4% of networked camera device owners indicate getting their smart home device from the insurance channel and 9% from the traditional security service channel.
“This is another very smart move by ADT and State Farm. For households not interested in smart home products, product discounts are the most effective means of addressing the concerns of non-owners/intenders,” she said. “In fact, Parks Associates consumer research shows that discounts through insurance providers specifically would make 9% of non-owners/intenders more likely to buy a smart home product.”
The benefits of a partnership with a security player offering interactive services specific to safety and security are extensive. Parks provided the following examples:
- Risk mitigation for fire, water, and theft claims reduces costs to insurer and consumer
- Data from IoT devices provides a window into consumer behavior that can inform underwriting
- Smart home tech reinforces a brand position of protection and prevention, as opposed to simply providing claims payments
- Consumers trust insurers with data
- Consumers will switch providers where smart home tech is offered as an incentive
- Smart home technology provides means of regular engagement with consumers, creating bridge to future revenue opportunities
Kirk MacDowell, president of consultative firm Macguard Security Advisors, also views the partnership between ADT and State Farm as a smart move by both entities. MacDowell points out that State Farm has been at the forefront of offering discounts to policy holders for a functional and monitored security system. He also cites analysis from Travelers Insurance that shows 77% of homeowners’ claims come from five causes: wind, non-weather water damage, hail, weather-related water damage and theft. Intrusion and water-detection sensors can alert homeowners and responding agencies through ADT quickly; thus, reducing the amount of water damage to the home, MacDowell said.
“The impact on the smart home sector will be additional awareness and some market expansion. You can expect to see additional like announcements from competitors to ADT,” he suggested. “It’s a natural progression. Share of wallet by offering more protection and detection capabilities to the residential and small business market is not only a good move, but one that clients desire. It takes upselling to a new level, reduces churn and ties the parties closer together.”
MacDowell is quick to note the ADT-State Farm partnership should be viewed as favorable for the entire industry.
“Independent dealers and integrators can also ride this wave,” he said. “Get in front of it by alignment with local independent insurance, real estate brokers and other home service trades and develop your own go-to-market combined strategy.”
'Water, water, water'
Water-leak detection and monitoring has long piqued the interest of John Loud, founder and proprietor of LOUD Security in Kennesaw, Ga. More than just a great upsell opportunity, he views the added revenue as essential to helping his and other dealer companies remain viable long-term in the face of so much residential market disruption — from DIY and other technology providers to onerous false alarm ordinances that could threaten their very livelihoods.
The question for Loud, as he explained, has long been, “How do we become relevant in a different way for the residential space? And to me the answer has always been water, water, water. I can't just sit in the residential pocket. I've got to grow and expand and think of other ways and resources for revenue.”
So for the past five years or so LOUD Security has attempted to raise awareness and create add-on sales for water-leak detection and monitoring via radio advertising campaigns and other means. All of which resulted in little penetration. He now expects the tide will likely turn in the industry’s favor in the wake of the ADT-State Farm announcement.
“Everybody worries about water to some extent or another, especially when they know of somebody that’s had to go through the replacement of hardwood floors and all the disruption that actually occurs,” Loud said. “If we can get the insurance companies to finally say, ‘We’re going to offer a 5%, a 10%, or even a 20% discount,’ who knows, because I think the money savings for the insurance companies can be absolutely staggering.”
Loud described the currently available sensor and shut-off valve technology as “tremendous” and especially convenient since contracting with a plumber is not necessary in most cases. The business model for independent alarm dealers would seem self-evident, even harken back to the days of free alarm system components.
“Think about three doors and a motion from years ago,” Loud said. “Why not go in there and offer three or five sensors to notify. Or we'll put in five sensors and a shutoff valve and we'll monitor that for you. They come with beautiful apps. If you leave your home to travel you can push the button and shut the water off. If it detects water, it'll actually automatically shut the valve off all on its own.”
The bigger picture for Loud, who was recently appointed chair of the Electronic Security Association (ESA), is the encouragement he draws from the spotlight the ADT-State Farm partnership shines on the industry’s pivotal position within the connected home.“This just shows that the attachment of the future home, as well as small business, to investments in technology advancements are clearly focused on the security industry to be the base platform,” he added. “So how is that not outstanding news for us?”