fbpx

In Sophic Capital’s Smart Employee Benefits (TSXV: SEB) (OTCQB: SEBFF) – Meet the Management Team, we spoke with Smart Employee Benefits (“SEB” and the “Company”) CEO John McKimm and COO Mohamad El Chayah to learn more about the Company and its abundant growth opportunities.  Specifically, we discussed:

  • How SEB’s Benefits Processing business has evolved;
  • The opportunities presented by white labeling for channel partners, and;
  • SEB captures approximately 18% of the estimated $250 per annum spent on benefits processing.

We continue our discussion with SEB’s management.

Q: John, in our last report we discussed SEB’s opportunity for white labeling its solutions for channel partners. How does white labeling differ from how brokers currently do business?

John: Today, emerging clients (those with under 500 employees) select a broker who then gets competitive quotes. After selecting an insurer, the broker gets paid fees or commissions and the client works with the selected insurer to deploy the benefit plan in that insurer’s administration environment.  However, the plan’s choices are restricted to the insurer’s capabilities and benefit solutions.

Under SEB’s white label business model, the broker has their own administration environment and controls the processing administration relationship with their client. This strengthens their client relationship beyond sales. Clients get better real time analytics and more plan design choices. The broker can pool clients together to more competitive rates and thereby reduce costs. The broker can also access benefits from multiple insurers and process them in one seamless, single sign-on environment. This gives brokers access to multiple new revenue models, better analytics for their clients and more cost savings.

Sophic Capital - Logo - Colour

Smart Employee Benefits CEO John McKimm

Q: How does white labeling increase the per plan member spending?

John: With white labelling, the broker owns the relationship, including the administration and processing from end-to-end. They can add other insurance products like pet, auto, home, various life solutions and even non-insured benefits. Additionally, the end clients can subscribe to new programs like HR or employee perks. All of these additional service offerings, previously offered to our enterprise customers, increase per plan member spending. And they can now be made available to emerging clients in a cost-effective manner, generating new revenue models for the channel partner.

Mohamad: Plan members who might seek other insurance products on their own can now access a white-labeled broker portal instead. There, they can add new products to their benefits plan quicker and more cost effectively. This allows SEB and the channel partner to capture a greater wallet share from both gross processing revenues and new voluntary benefits premiums.

Q: Is your white label model successful?

John: We’ve proven that our white label business model is successful. When you look at our growth, especially versus our competitors, it demonstrates success in building a strong client base with long term contracts managing highly sophisticated technology environments. Our recent ISO 27001 Certification was a major factor in validating the strength of our solutions and services. ISO certification along with our customer list of some of the world’s most recognizable brands proved to our channel partners that our solutions and services were stable, methodical, and popular with existing plan members. 

Q: On average, what do you currently get for processing fees and how much more can you capture?

Mohamad: Currently, the processing modules deployed by the client drive our processing fees. We have over 25 modules that we can deploy to increase our current annual average revenue per plan member. Not all clients deploy the same modules, however, so some plan members generate less than $45 annually while others generate more.

Our objective is to increase the revenue capture over time. Typically, the $250 industry average is spent among multiple providers. SEB solutions can consolidate much of this spending into one environment.  Our solutions are scalable once a benefit plan is on our platform and capturing just a few dollars more per plan member off a large base drives meaningful increases in our bottom line.

Sophic Capital - Logo - Colour

Smart Employee Benefits COO Mohamad El Chayah

Q: What are the economics on each marginal dollar increase of your average capture per plan member per annum spent?

Mohamad: We estimate that every incremental dollar of revenue on the benefits side has a 56% flow-through to free cashflow. We are pursuing numerous opportunities as well as up-sell opportunities with existing clients which can increase this number.

Q: Wow! A 56% flow-through is significant. How do you see the business trending here in the next few years?

John: We have invested a lot to get to where we have a solid base of business and technology solutions that can truly scale. We think our contract base and the pipeline opportunities that are already signed or will be signed in 2022 can drive at least an additional $40 million of annual revenue in the Benefits Processing business by the end 2025.

Q: Geographically, where is your client base?

John: Mostly in Canada, but most of our clients and channel partner opportunities are subsidiaries of U.S. and global companies. We have solid reason to believe that we can penetrate non-Canadian markets via these relationships. Our solutions are all cloud enabled, and can be easily deployed globally. Plus, as a Canadian-based company, we have a significant cost advantage over local competition in the U.S. and other markets.

Sophic Capital - Logo - Colour

Q: Who are you winning business from?

John: Traditionally, enterprise and emerging client plan members interact directly with insurance companies. Our objective is to give brokers, consultants, and clients their own back-office environments. This allows every client and channel partner full control over their benefit processing and IT environments, effectively transforming them into their own “Amazon of Benefits”. It provides full capability to buy life and other benefit solutions from multiple insurers/providers and manage the total benefit plan in one seamless, branded, single sign-on, processing environment. 

Q: Are you seeing pushback from the insurance companies?

John: We have not seen major pushback from insurers yet, but we likely will. Today, third-party administrators control about 16% of benefits processing, mostly in the enterprise and government markets. When we announce several larger white labeled transactions with brokers and consultants targeting the emerging market, it will be a game changer for the sales and distribution of benefit solutions. That is when we will attract serious attention from insurers.

Q: Can you further elaborate on the value-prop and what drives a client or large broker network to subscribe to the platform?

Mohamad: Premiums are typically split with over 90% going to the insurer and up to 10% going to the broker or consultant as a commission fee. Included in the 90% plan is the underwriting fee and a plan administration fee, a portion of which usually goes to other technology partnerships including adjudication.

SEB’s objective is to own most of the administration fees and introduce new premiums with the sale of new benefit solutions. When a client or channel partner owns their back-office processing, they are no longer controlled by the insurer administration environment. This allows them to introduce alternative benefit solutions to the insurer doing the administration. Typically, an insurer will not administer another insurer’s benefit solutions. For clients wanting a benefit solution not available from their insurer doing the administration, they would have to deploy a second administration environment. This is both cumbersome and costly.  

SEB solutions change that dynamic by providing full independence, accommodating benefits solutions from multiple insurers and providers. Clients can administer all benefits in a single sign-on, fully integrated environment that is seamless for the plan member. This is the biggest reason large clients opt to use third-party administration environments versus an insurer’s environment.

John: Beyond the upfront economic value, the longer-term value-add is the incremental revenues channel partners can get and the resulting stickiness of those revenues. The more products layered on an existing relationship, the harder it is to move away. Our long-term client retention rates have been very strong – we have not lost any clients benefits processing since 2019 – and we believe channel partners can achieve similar results. As we have noted previously, SEB’s “white label” business model is unique in the group benefits industry. It will be a major disruptor to the traditional sales channels.

 

Sign up for Sophic Capital’s reports at https://sophiccapital.com/subscribe/

Disclaimer

The information and recommendations made available through our emails, newsletters, website and press releases (collectively referred to as the “Material”) by Sophic Capital Inc. (“Sophic” or “Company”) is for informational purposes only and shall not be used or construed as an offer to sell or be used as a solicitation of an offer to buy any services or securities. In accessing or consuming the Materials, you hereby acknowledge that any reliance upon any Materials shall be at your sole risk. In particular, none of the information provided in our monthly newsletter and emails or any other Material should be viewed as an invite, and/or induce or encourage any person to make any kind of investment decision. The recommendations and information provided in our Material are not tailored to the needs of particular persons and may not be appropriate for you depending on your financial position or investment goals or needs. You should apply your own judgment in making any use of the information provided in the Company’s Material, especially as the basis for any investment decisions. Securities or other investments referred to in the Materials may not be suitable for you and you should not make any kind of investment decision in relation to them without first obtaining independent investment advice from a qualified and registered investment advisor. You further agree that neither Sophic, its, directors, officers, shareholders, employees, affiliates consultants, and/or clients will be liable for any losses or liabilities that may be occasioned as a result of the information provided in any of the Material. By accessing Sophic’s website and signing up to receive the Company’s monthly newsletter or any other Material, you accept and agree to be bound by and comply with the terms and conditions set out herein. If you do not accept and agree to the terms, you should not use the Company’s website or accept the terms and conditions associated to the newsletter signup. Sophic is not registered as an adviser or dealer under the securities legislation of any jurisdiction of Canada or elsewhere and provides Material on behalf of its clients pursuant to an exemption from the registration requirements that is available in respect of generic advice. In no event will Sophic be responsible or liable to you or any other party for any damages of any kind arising out of or relating to the use of, misuse of and/or inability to use the Company’s website or Material. The information is directed only at persons resident in Canada. The Company’s Material or the information provided in the Material shall not in any form constitute as an offer or solicitation to anyone in the United States of America or any jurisdiction where such offer or solicitation is not authorized or to any person to whom it is unlawful to make such a solicitation. If you choose to access Sophic’s website and/or have signed up to receive the Company’s monthly newsletter or any other Material, you acknowledge that the information in the Material is intended for use by persons resident in Canada only. Sophic is not an investment advisor nor does it maintain any registrations as such, and Material provided by Sophic shall not be used to make investment decisions. Information provided in the Company’s Material is often opinionated and should be considered for information purposes only. No stock exchange or securities regulatory authority anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. Sophic and/or its principals and employees may have positions in the stocks mentioned in the Company’s Material and may trade in the stocks mentioned in the Material. Do not consider buying or selling any stock without conducting your own due diligence and/or without obtaining independent investment advice from a qualified and registered investment advisor. The Company has not independently verified any of the data from third party sources referred to in the Material, including information provided by Sophic clients that are the subject of the report, or ascertained the underlying assumptions relied upon by such sources. The Company does not assume any responsibility for the accuracy or completeness of this information or for any failure by any such other persons to disclose events which may have occurred or may affect the significance or accuracy of any such information.

The Material may contain forward looking information. Forward-looking statements are frequently, but not always, identified by words such as “expects,” “anticipates,” “believes,” “intends,” “estimates,” “potential,” “possible,” “projects,” “plans,” and similar expressions, or statements that events, conditions or results “will,” “may,” “could,” or “should” occur or be achieved or their negatives or other comparable words and include, without limitation, statements regarding, projected revenue, income or earnings or other results of operations, strategy, plans, objectives, goals and targets, plans to increase market share or with respect to anticipated performance compared to competitors, product development and adoption by potential customers. These statements relate to future events and future performance. Forward-looking statements are based on opinions and assumptions as of the date made, and are subject to a variety of risks and other factors that could cause actual events/results to differ materially from these forward looking statements. There can be no assurance that such expectations will prove to be correct; these statements are no guarantee of future performance and involve known and unknown risks, uncertainties and other factors. Sophic provides no assurance as to future results, performance, or achievements and no representations are made that actual results achieved will be as indicated in the forward looking information. Nothing herein can be assumed or predicted, and you are strongly encouraged to learn more and seek independent advice before relying on any information presented.