Sophic Capital is pleased to introduce you to our new client – Smart Employee Benefits (TSXV:SEB).

Smart Employee Benefits (“SEB” or the “Company”) is a technology company focused on insurance technology (“Insurtech”) solutions. It is a proven provider of cloud based, end-to-end benefit processing software and IT services/solutions for the life/group benefits marketplace. Founded in 2011, Smart Employee Benefits’ core expertise is automating and managing business processes. SEB does this through the combination of its proprietary technology, expertise, and third-party solutions and technologies. SEB has multiple technology and sales channel partnerships and manages mission critical business processes for over 150 blue chip and government accounts.

We spoke with CEO John McKimm and COO Mohamad El Chayah to learn more about the Company and its abundant opportunities.

Q: John and Mohamad, thank you for speaking with us. Let’s start with your backgrounds. How did you come to be running one of the largest employee benefit technology companies in the country?

John: Employee benefits is the second largest expenditure most companies have outside their direct payroll. It is an industry that is recession resistant, growing 4% to 8% per annum regardless of the economy. When I founded Smart Employee Benefits in January 2011, my research indicated that the technology solutions in the employee benefits industry were archaic. Data analytics were poor; errors and fraud were rampant; plan sponsors and plan members wanted more choices; and costs were escalating. My personal experience with prior companies that I was involved with confirmed these issues. Employee benefits was a “black hole”. You would look at it for a few hours once a year, ask questions where you got no answers from your broker or consultant, and then begrudgingly renew for another year without having anywhere close to the information one would normally have when making such material expenditure decisions. I saw this as a large business opportunity to create and build solutions that brought this industry “into the brave new world”, as they say in Star Trek. As to my background, I have been investing in and building companies since 1991, when I left the investment banking industry. My educational background is business and law. My work experience has been global across many industry sectors, with particular focus on technology and financial services.

Mohamad: I joined SEB and John in 2016 from Aon. John and I negotiated and finalized a transaction to purchase the Aon mid-market benefits administration business. We transitioned the business from an Aon infrastructure to the SEB infrastructure in 90 days. The Aon acquisition ignited the SEB journey of providing leading edge processing technology to the life and group benefits marketplace. I knew the Aon team well, and combined with the SEB team, I believed the Company could revolutionize how employee benefits administration is done.

In the past 4 years, we have made tremendous progress, onboarding new clients and doubling plan members under contract. Additionally, we have consolidated 7 platforms to one “FlexPlus” platform, migrated everything into the cloud, reduced costs over $5 million annually and added more than 15 new modules, each driving a new revenue model. Today, we have the largest sales pipeline and signed contracts in the history of the Company and have established strong traction in the “white-label” business model for small and medium enterprises – a truly unique transformational business model.

As to my background, I bring over two decades of experience in the IT and Business Services market, building high performance sales and delivery teams, driving sustained growth strategies, building progressive cultures, and driving creative, leading edge technology roadmaps. My experience and responsibilities have been global in nature, crossing many different cultures and geographies. I have held various leadership positions at several global IT and Business Services companies such as Atos Origin, Hewlett-Packard, and Aon Hewitt. I have helped Fortune 500 companies grow globally through mergers, acquisitions, integrations, and large complex digital transformation initiatives.

Q: Turning to Smart Employee Benefits, talk about the business as you see it?

John: SEB is an Insurtech company targeting the employee benefits industry. Our technology solutions include both software- and services-driven environments that automate business processes. We have over 20 strategic relationships with leading global and regional technology organizations and many more in our pipeline.

SEB has two interrelated revenue streams: IT Services and IT Software and Solutions. IT Services is a long-term contracted managed services business that is highly recurring. Over the last 12 months, IT Services recorded approximately $45 million of revenue, and its gross margins range from 15% to 20%. IT Software and Solutions also provides multiyear recurring revenue with 2021 sales about $17 million and gross margins typically over 70%.

Mohamad: Our targeted growth area is Benefits Processing. SEB’s solutions turn cost centers to profit centers for channel partners and reduce dependence on insurer processing environments. We currently have over 150 active clients and channel partner relationships that deploy our solutions and services as an integrated environment or as modules. This business is our growth engine, and frankly it is what gets us so excited about the Company’s future.

Q: What exactly gets you excited about Benefits Processing, Mohamad?

Mohamad: We provide our solutions via a white label business model, which will be a major disruptor to the traditional sales channels in the insurance, life and group benefits industry. SEB’s solutions gives clients and channel partners full control over their benefit processing and IT environments, allowing them to become their own “Amazon of Benefits”. They will have full capability to buy life and benefit solutions from multiple insurers/providers and manage the total benefit plan in one seamless, branded, single sign-on, processing environment. SEB manages all the technology pain points (ISO 27001 Certified) while providing a fully branded channel partner processing and IT environment.

Q: Are there any tech synergies between SEB’s IT Services and IT Software and Solutions as it relates to Benefits Processing?

Mohamad: Benefits Processing requires expertise across multiple areas of IT. While our competitive advantage lies with our benefits processing software, equally important is the support and services infrastructure around this software. Benefits processing software is a nucleus that integrates with multiple other solutions such as HRIS platforms, finance and accounting platforms, CRM solutions, and other IT environments to realize the full value proposition.

Like any enterprise software, our Benefits Processing solutions must integrate with a client’s infrastructure and then have services infrastructure support. While the core functionality is similar for all clients, there is a need to customize (or “white label”) our solutions to look like the client’s environment. Additionally, each client and channel partner has a unique IT environment and require customized reporting.

Every Benefits Processing contract requires IT Services for implementation and integration, ongoing support and maintenance, and ongoing enhancements and upgrades. Our software solutions take on and interact with a significant portion of the IT back-office; so there is a significant implementation process involved. There are also substantial regulatory benefits between the units as our IT business has the highest levels of government clearance, which has allowed us to win meaningful Benefits Processing and IT Services contracts within government agencies.

Q: Let’s start with the Benefits Processing business. How has it evolved over the last several years?

John: We have grown from the 265,000 plan members under administration that we acquired in the 2017 Aon transaction to 370,000 today. SEB has over $470 million of signed contract value, including several high-profile wins in 2021 – not a bad return on the $60 million we have invested into our Benefits Processing and IT Services businesses. Our solutions are deployed with over 150 national clients, both corporate and government. Our wins and client feedback suggest we have the leading benefits administration platform in the market.

Q: How will SEB grow its plan members under administration?

John: Before answering that, I have to say that although we have an extensive pipeline of opportunities to grow with new clients, we have ample opportunity to scale within those 370,000 plan members today. We can add more modules and features to existing deployments to give plan members more selection and one-stop shopping for their benefits and insurance needs. So that’s the first way we will grow business, and that comes through incremental increases in the revenue we receive per plan member.

We also have about 160,000 plan members that we have started to onboard this year that we classify as being “in transition”. Combined, it would bring our total plan members under administration to 530,000. Going forward we have been focused on our white label channel partner business model, targeting clients in the emerging market category. These are clients with under 500 employees, which account for over 65% of the premiums in the employer sponsored benefit sector. Traditionally, this segment has been the domain of the insurers. Our sales strategy targets channel partners who already have the employer client base, typically broker and consultant organizations.

Providing channel partners their own branded benefits processing environment supported by SEB creates a very strong value proposition. The channel partner gains access to multiple new revenue models and improves the stickiness of their client base. Our solutions turn their cost centers to profit centers. It is a big opportunity for us: we can see billions of dollars of premium potential in our active channel partner sales pipeline. This includes roughly 800,000 plan members that we expect to sign in the near-term.

Q: Where do you see your biggest opportunities over the next 3 years?

Mohamad: Our biggest opportunity is white labelling our Benefit Processing solutions in the emerging client marketplace through channel partner relationships. This represents approximately 65% of employer funded benefits premium. Our next largest opportunity is white labelling with channel partners, giving them full control over new insurance and benefit solutions that get sold to their clients. Previously, they were restricted to the insurer solutions that handle the administration.

Q: Who currently captures the most market share in the emerging market category?

Mohamad: Insurers dominate the emerging market category. Most clients in this segment are fully insured, and the insurer administers the plan.

Q: And how does SEB compete against the insurers in the emerging market category?

Mohamad: Our enterprise platform provides emerging clients with the same or similar functionality as the larger market clients enjoy – but does it in a highly cost-efficient manner. Whereas our direct client in the enterprise and government market is the employer, our direct client in the emerging market is the channel partner. These channel partners are the insurance brokers that have already aggregated the emerging market employer clients.

Q: Talk about the plan members using SEB’s Benefit Processing solutions.

Mohamad: Today, our Benefits Processing manages about 370,000 plan members. We have another 160,000 in transition which should be fully onboarded by mid to late 2022. Most of our clients are larger enterprises and government agencies that have thousands of employees. This segment accounts for approximately 35% of the employer funded premiums but less than 5% of total employers. This market has given SEB unique insights into the future trajectory of employee benefit plans. It is a market in transition, and SEB is uniquely positioned to digitally transform global clients and their consultants. This is a huge competitive advantage in driving our technology roadmap for the emerging market category and our clients.

Q: In general, how much of the benefits processing market do third-party administrators’ control?

Mohamad: They administer about 16% of the $45 billion large enterprise and government premiums, or approximately $7.2 billion. SEB is a major force in this market, commanding about 18% market share.

Q: Going back to my original question about SEB’s biggest opportunities in 3 years, can you elaborate on the white labeling SEB provides for channel partners?

Mohamad: We provide direct clients and channel partners a fully deployed processing environment under their unique brand. This model has been proven with direct client relationships. For channel partners, we white label a processing environment under their brand and then transition their plan members over to it. This moves plan administration for emerging clients from the insurers to our channel partners. Channel partners realize many benefits, including greater control of their processing environment, better analytics, fewer errors, less fraud, and access to multiple new revenue models such as sharing in underwriting premiums and selling new benefit solutions.

Q: Does white labeling create more complexity for channel partners?

Mohamad: Not at all. SEB manages the total processing and IT environment. We manage all the typical pain points that currently exist for the channel partner. Today, the typical channel partner deals with multiple insurers and multiple insurer processing environments. When their clients are on one white labeled processing environment, one that is highly automated and better integrated, the operational improvements are significant and far more cost effective. We create new revenue streams for channel partners and participate in the processing and underwriting economics.

Q: Where do you see your white label business in the next 24 months?

Mohamad: As I mentioned before, we have over 370,000 plan members under administration today, many of whom we can provide new benefits and insurance features and modules to increase our business. We also have an additional 160,000 plan members under contract that we have begun to onboard. But what gets us most excited is our extensive channel partner pipeline, which includes millions of potential plan members. We expect to sign 1 or 2 meaningful contracts in 2022 and have visibility into about 800,000 plan members in the near-term. Keep in mind, revenue from a new contract starts immediately after the implementation, taking up to 48 months from contract signing to full revenue run-rate. Our current spend per plan member is $45 per annum, on average. Some plan members pay less; some pay more; it all depends upon what features and services they implement, along with their individual scale and buying power. We expect this average revenue per plan member to grow organically over time.  

Q: Industry wide, what is the average annual amount paid to administer a plan member?

Mohamad: It’s about $250 across the industry. 

Stay tuned for Part 2 of this interview.

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