Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / Why Private Equity Is Buying Up Funeral Insurance Companies
Transcript
- Lucas: So if you buy a funeral insurance policy today from a company called, say, Homesteaders Life or Forethought or NGL, you're locking in the cost of your funeral at today's prices. You pay premiums for ten, twenty, maybe thirty years, and when you die, the benefit goes straight to the funeral home. Luna: Right — pre-need. And private equity has been circling this space for a while now. But it's not obvious why. These policies seem like long-dated, low-margin products. Lucas: That's exactly the surface-level read. And for a long time, the pre-need insurance industry was dominated by mutual companies and a few publicly traded players. But then a mid-market firm called Sentinel Capital Partners saw something else. Luna: Sentinel — they're the ones who did the funeral home roll-up back in the 2000s, right? Lucas: Same team, different angle. Between 2021 and 2024, Sentinel acquired three pre-need insurance carriers: first, the pre-need division of a company called Lincoln Heritage; then a smaller carrier called National Guardian Life's pre-need block; and finally, a company called Assurant's pre-need business. They folded them into a single platform. Luna: So they built a roll-up on the insurance side, not the funeral-home side. The logic there? Lucas: The logic is the float. When you buy a pre-need policy, your premiums go into a trust or a general account. That money gets invested — mostly in bonds and fixed-income securities — and it sits there for years before the claim is paid. The insurer earns the investment spread. In a rising interest rate environment, that spread gets very attractive. Luna: So the real product isn't the insurance — it's the asset management. Lucas: Exactly. And the scale matters because the fixed costs of running an insurance company — actuarial, compliance, claims processing — are high. Combine three blocks of policies onto one platform, and you drop the expense ratio from, say, 35 percent of premium to 25 percent. That ten-point margin improvement goes straight to the bottom line. Luna: But what about the consumer? I've looked at pre-need policies before. The commissions can be 80 to 100 percent of the first year's premium. That's brutal. Lucas: It is. And that's the tension. The upfront commission is huge because the agent needs to be compensated for selling a policy where the claim might not be paid for thirty years. But the lapse rate is also high — around 35 percent. People stop paying premiums, and the insurer keeps the cash that was already collected. That's actually a profit center. Luna: So the business model relies on a significant percentage of customers not seeing the benefit. That feels predatory. Lucas: It depends on your perspective. Pre-need advocates say it locks in funeral costs and protects families from inflation. And the average funeral today costs about $8,000 to $10,000, depending on the region. If you're young and healthy, the policy might be a bad deal. If you're older and have a fixed income, it can provide peace of mind. Luna: But the high lapse rate means a lot of those older customers might also drop out. So PE firms are essentially betting on the float, the lapse profits, and the operational synergies from consolidation. Lucas: Right. And there's also a regulatory angle. In 2023, the FTC updated the Funeral Rule — first major update in decades. It now requires funeral homes to disclose pricing for pre-need contracts more clearly. That could actually benefit the large players who already have compliant systems, while smaller independent funeral homes struggle. Luna: Which means more funeral homes might look to partner with or sell to the big pre-need insurers — creating a virtuous cycle for pe backed platforms. Lucas: Exactly. And it's not just Sentinel. There's a firm called KKR that owns a big chunk of Funeral Directors Life. There's a Canadian pension fund that owns a stake in Homesteaders. The institutional money has noticed. Luna: What's the return profile looking like for these deals? Pre-need insurance is long-duration. PE funds typically have ten-year holds. Lucas: Right. The IRR targets I've seen in pitch books are in the high teens to low twenties. The float provides a steady 4 to 5 percent annual return, and then you layer on the expense ratio savings and the lapse profits. The big question is the exit. Could be a sale to a larger insurer or a dividend recap. Luna: And the risk? If interest rates drop, the float yield shrinks. Lucas: That's the biggest risk. Also, if the lapse rate declines — say because consumers become more financially literate and hold onto their policies — the profit model gets squeezed. But for now, the math works. Luna: One more risk: state regulation. Insurance is state-level, and each state has its own rules on how pre-need funds are invested and how much can be spent on commissions. A patchwork of regulation creates compliance costs. Lucas: True. But the larger players have the legal teams to handle it. For a small independent carrier, it's a barrier. That's another reason consolidation makes sense. Luna: So the playbook is: buy small insurers, merge the blocks, cut costs, and ride the float. It's not glamorous, but it's steady. Lucas: Glamour isn't the point. It's about predictable cash flows and a defensible market position. The funeral insurance market is about $5 billion in annual premium. It's not huge, but it's sticky. Luna: And it's growing? The Boomer demographic is aging. Lucas: Exactly. The oldest Boomers are turning 80 this year. The pre-need market is expected to grow at about 4 percent annually through 2030. That's modest, but with leverage, it can juice returns. Luna: I want to circle back to the consumer side for a second. If I'm a listener thinking about pre-need insurance, what should I watch out for? Lucas: First, if you buy a policy, make sure it's from a company with strong financial ratings — A-minus or better from AM Best. Second, understand the commission structure. Some policies have surrender charges if you cancel. Third, compare the price to simply setting aside money in a savings account or a low-cost investment. For many people, the latter might be better. Luna: And if you're an investor looking at this space, what's the one number you'd focus on? Lucas: The persistency ratio — the percentage of policies still in force after a certain period. If it's above 70 percent, the company is doing well. Below 60, and the business model starts to break. Luna: That's a good metric to track. So private equity isn't buying funeral homes anymore — they're buying the insurance that pays for them. Lucas: And it's a smarter play in some ways. The insurance block is more scalable, the float is more predictable, and the regulatory moat is deeper. The funeral home roll-ups of the 2000s had issues with labor and real estate. Insurance avoids those. Luna: Before we wrap, I want to say something. We've been doing this show for over 70 episodes now, and we've never run ads. That's deliberate. The show is funded entirely by a small group of listeners who chip in through buy me a coffee dot com slash fexingo. It's not a big ask — just a way to keep the show independent and ad-free. Lucas: Yeah, and it genuinely makes a difference. If these conversations have moved your thinking on a deal or a career decision, that's the feedback we hear most. So thanks to those who already support the show. And for everyone else, no pressure — the episodes will keep coming regardless. Luna: Alright, back to the numbers. Lucas, you mentioned that Sentinel's platform is now the second-largest pre-need insurer. Who's the largest? Lucas: That would be Homesteaders Life, based in Des Moines. They've been around since 1906 and are mutual — owned by policyholders. They have about 30 percent market share. Sentinel's combined platform is around 15 percent. After that, it's fragmented. Luna: So the roll-up story is still in its early innings. There's room for more consolidation. Lucas: I think so. And the next wave might involve technology — using data analytics to improve persistency and cross-sell other insurance products. That's where PE could add value beyond just cost-cutting. Luna: Interesting. We'll keep an eye on that. For now, if you're thinking about pre-need, do your homework. And if you're thinking about investing, follow the float. Lucas: That's the episode. Thanks for listening — we'll see you next time.