Good day, ladies and gentlemen, and welcome to the Willis Towers Watson Acquisition Announcement conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require operator assistance, please press star then zero on your touchtone telephone. As a reminder, this call is being recorded. I would now like to turn the call over to Mr. Rich Keefe, Head of Investor Relations. Please go ahead.
Thank you. Good morning, everyone. I'm pleased that you are joining us for today's call regarding our announcement that Willis Towers Watson is acquiring TRANZACT. On the call with me today are John Haley, Willis Towers Watson's Chief Executive Officer, Gene Wickes, Head of our Benefits Delivery and Administration segment, and Mike Burwell, our Chief Financial Officer. Please refer to our website for the press release and supplemental materials that were issued earlier today. We will reference the supplemental slides during our prepared remarks. Some of the comments in today's call may constitute forward-looking statements. These forward-looking statements are subject to risks and uncertainties. Actual results may differ materially from those discussed today. The company undertakes no obligation to update these statements.
For a more detailed discussion of these and other risk factors, investors should review the press release issued this morning or refer to our most recent Form 10-K. After our prepared remarks, we'll open the conference call for your questions. I'll turn the call over to John Haley.
Hello, everyone. Thanks for joining us today for this call to discuss our acquisition of TRANZACT. We sent out some slides. I'll just mention the slides I'll be basically referring to. I'm not going to be reading the slides or following through them. If you want to turn to slide two to begin with, which has the key investor messages. We announced last night that Willis Towers Watson has entered into a definitive agreement to acquire TRANZACT. TRANZACT is a leading direct-to-consumer sales and marketing solutions provider in the large and growing U.S. Medicare market. When we were together at Analyst Day a few weeks ago, we talked about if we were to do a larger scale acquisition, it would be something which is in an adjacent market, and particularly an adjacent market that had the potential to transform some existing value chains.
This proposed acquisition we have fits right into that strategy. We've been talking about the direct-to-consumer space and looking for the right opportunity to help us get there. TRANZACT is that right opportunity for us. We think this is an attractive opportunity, since we've had good success in the employer-sponsored space, we feel the direct-to-consumer Medicare space is a good adjacency, given the demographics in the Medicare are growing, and it's going to continue to grow for years to come. We actually already have a very small part. About 3% or so of our operation is already in the direct-to-consumer space, this gives us the opportunity to get in there much faster in a bigger way than we think we could on our own. We strongly believe our focus on the Medicare market is going to have significant results. Culturally, we think TRANZACT's a great fit.
They're focused on consumers. What is the best product for them? What is the best experience for them? How do they get the consumer into the right insurance at the right price? TRANZACT will immediately provide us with capabilities and infrastructure that would have taken us several years to develop organically. Just to summarize the acquisition rationale, this significantly enhances our reach and agility in penetrating the expansive Medicare market. Excuse me, Medicare market. It allows WTW to create a true end-to-end consumer acquisition and engagement platform for healthcare by adding scaled retail capabilities to our portfolio of expertise. TRANZACT immediately provides us with capabilities and infrastructure that would have taken several years to develop organically. This transaction allows us to efficiently and effectively capitalize on the secular trends that are currently driving growth in the Medicare space.
It accelerates our approach to achieving sustainable competitive advantage, it broadens our access to consumers and diversifies our service offerings. Now on integration, Gene will touch more on this, TRANZACT will become part of the Individual Marketplace line of business within our BDA segment, augmenting our long-term revenue growth prospects in Medicare products. Mike Burwell will touch on the transaction terms, a little more detail on that. Basically, the purchase price is $1.2 billion, with a potential earn-out of $200 million. Importantly, this is immediately accretive to earnings in year one. By joining the complementary capabilities of TRANZACT and Willis Towers Watson, we're confident that we can drive value for our shareholders. Now, if you want to turn to slide three, I'll make a few comments with that slide in mind. Look, here's some of the key things about TRANZACT.
It is a Medicare marketplace leader. This strengthens the Willis Towers Watson position as the leader in the growing private Medicare marketplace, with around two million Medicare beneficiaries served. This is going to lower our customer acquisition costs. As I said, we have been getting into the direct-to-consumer space, in fact, our customer acquisition costs have been relatively high. This will drive them down. There's unmatched scale. We love the digital and technology that they have. Again, this is essentially a really new revenue source for Willis Towers Watson. TRANZACT brings the technology-driven direct-to-consumer solutions. Willis Towers Watson is going to bring the scale, the leading infrastructure, and the captive employer-based capabilities. This will be an industry-leading customer acquisition cost in the marketplace. The scale and digital channels will continue to drive down costs.
One of the things we like about this is we're combining both our B2B and the D2C channels, leaving us well-positioned to support really growing demand in the Medicare market across both of these areas. The data analytics and business intelligence will drive the future, significantly enhancing operational efficiency and value for the client. Combining our technological resources will drive further efficiencies. This diversifies Willis Towers Watson revenue streams and further reinforces our competitive position in the healthcare insurance market. With that intro to the deal, let me turn it over to Gene Wickes to give you a more in-depth look at TRANZACT. Gene?
Thank you, John. I want to tell all those on the call how excited I am for this transaction, and also thank John and our board for the faith that they have in us in putting this together. This acquisition for us is just terrific. The two companies, our Individual Marketplace business and TRANZACT, fit together very well. Where we're strong, TRANZACT had an area they needed to build, and where they're strong, we had areas we needed to build, and the two come together very well. TRANZACT has core capabilities that we do not have, such as digital marketing expertise, branded marketing solutions, ancillary product sales and knowledge, and other areas.
The breadth and depth of their lead generation capabilities, content management, and sales efficiency, combined with their leading-edge digital technology capabilities, deep industry expertise, and demonstrated ability to scale its talent base, make them a truly unique asset. As John said, we've been looking at how we can enhance this business, and this is a perfect opportunity for us to do that. Bringing them into the Willis Towers Watson family positions us for success in the unsubsidized individual consumer portion of the Medicare market space. Our success has been mostly in the subsidized space, and this gives us the ability to now expand into a much bigger space. TRANZACT employs about 1,300 colleagues, including 850 licensed agents, 200 technology professionals, and 65 digital marketers. They're headquartered in Fort Lee, New Jersey. They have eight locations, including five sales centers across the U.S., and a technology development center in Peru.
TRANZACT had about $260 million in revenue as of year-end 2018, have been growing at double-digit rates for the last few years. Most excitingly, we expect the TRANZACT business to grow at a 25%-30% rate for the next five years, we also expect their operating margin to be in the mid-20% range. The combination of TRANZACT and our Individual Marketplace is poised for growth, TRANZACT's proficiencies in the retail industry make it an attractive addition to our portfolio. On slide five, I showed this slide at the analyst day. The Medicare market is expansive and underserved. There's a huge untapped market potential, this acquisition significantly expands our addressable market with the large and growing market opportunities driven by industry trends. Industry trends in the U.S. aging population. The large baby boomer population continues to move into retirement.
There are about 10,000 seniors becoming eligible every day for Medicare, and the eligible over-65 population is expected to grow 3%+ per annum for the next 10 years. The other thing is the seniors coming from the active medical programs they've been in are comfortable with managed care. This current generation with the managed care products they've dealt with have had increasing exposure to those products. The value proposition of these Medicare products, the supplements, and the Medicare Advantage products is strong compared to traditional Medicare. With stagnant fixed incomes and fear about living resources, the seniors are more price-sensitive. Medicare Advantage's relatively fixed monthly cost, limited deductibles, and protection against unexpected costs is very attractive compared to traditional Medicare. Enrolling in private health plans is an alternative to traditional Medicare, and it continues to gain popularity.
The seniors we have now have a preference for online shopping, and that preference will only get larger. The demand for additional products and for these products is accelerating. If you look at slide seven, I just talked to slides five and six. Slide seven, we believe the synergy opportunities are substantial. As I said, these two businesses come together very well. We've identified synergies that we expect to be meaningful, and we'll be working to implement these as we integrate the two businesses. We see opportunities in consolidating the technology platforms, in enhancing the enrollment capabilities and improved conversions and placement rates, among other things. We also see significant opportunities for revenue synergies, leveraging technology capabilities and relationships, both at TRANZACT and at Willis Towers Watson.
From a relationship standpoint, acquiring TRANZACT enhances our scale, our balance, our carrier relationships, and further strengthens our position as a leader in the industry. Strong technology foundations of both Individual Marketplace and TRANZACT create competitive advantages as we put those technology platforms together. We will leverage our Willis Towers Watson front-end technology and back-office scale to drive more efficient policy conversion and issuance for TRANZACT. As John said, the direct-to-consumer channel is a very important channel for us, and acquiring this expertise provides us opportunities for further growth beyond the Medicare market and into ancillary products such as vision, dental, life, et cetera. It also broadens our product portfolio to gain transaction and develop market segments, such as the individual and family plans and new emerging market segments such as the pre-65 retirees and the new HRA legislation that is being contemplated.
TRANZACT's direct-to-consumer marketing capability enhances conversion and retention of our employer-sponsored participants. We see real benefits in our core business. Utilization of advanced analytics provides for more effective lead management, cross-sell conversion, and policy retention. All in all, we think that this is a terrific acquisition to enhance the business that we're already in. With that, I'll turn it over to Mike.
Thanks, Gene. To summarize on slide eight, I'd just like to summarize the key transaction terms. First, the deal will be immediately accretive on an adjusted EPS basis, excluding one-time transaction cost. As Gene mentioned, the growth trajectory of this business is impressive. Our long-term guidance is that we believe we can grow the top line of this business organically by 25%-30% on average over the next 5 years and operate it at a mid-20% operating margin basis and look for ways to potentially enhance that margin further as we go forward. On the transaction terms, the acquisition purchase price, as John said, was $1.2 billion in closing consideration with an additional potential earn-out of up to $200 million payable in either cash or stock in 2021 if certain financial targets are achieved.
The total purchase price includes $1.1 billion of cash consideration and $100 million of cash or stock considered payable at close. We have committed long-term financing from Bank of America Merrill Lynch to complete the transaction and expect no change in our credit rating outlook with a stable outlook from both Moody's and S&P. We are committed to deleveraging in the near term and returning our leverage ratio to historic levels. We're targeting a deal close in the third quarter of this year, subject to regulatory approvals. We're also pleased to say that Clayton, Dubilier & Rice, CD&R, will stay involved with us and assist with our integration. CD&R's interests are aligned with ours. CD&R will designate two representatives to serve on a governance committee along with two representatives from Willis Towers Watson that we will choose.
Additionally, we have received a commitment from TRANZACT's CEO and other members of management team to stay on and help execute the combined strategy and vision. If you move on to slide nine, I think it's fair to say we are very excited about this acquisition, as Gene said, as well as John's comments. This transaction shows Willis Towers Watson's renewed focus on strategic M&A opportunities. We view the direct-to-consumer Medicare market as a very attractive opportunity. TRANZACT significantly strengthens Willis Towers Watson's growth profile. This combination creates a solution platform with unparalleled capabilities across the employer, retail, and carrier services markets. Most importantly, we believe that this acquisition creates value for all stakeholders. For our shareholders, it creates both immediate accretion as well as significant long-term revenue and profitability growth opportunities.
For our clients and consumers, it broadens our client base so that we can help individuals in underserved markets navigate their healthcare options. For our business partners, it will allow us to develop deeper partnerships with our carrier partners and deliver greater volume. Thanks. Now we'll open it up for questions.
Great. Thanks, Mike.
Thank you. Ladies and gentlemen, if you have a question at this time, please press star then one on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. Our first question comes from the line of Shlomo Rosenbaum with Stifel. Your line is now open.
Hi. Good morning. Thank you for taking my questions. Hey, John, I just wanted to ask you have tended to make some bold acquisitions in the last decade plus I've dealt with you, and usually, there's something specific that you see in this acquisition in the company itself besides just the end markets. What would you point to for TRANZACT's kind of secret sauce?
Sure. Thanks, Shlomo. I think if you look back to when we did the Extend Health acquisition, gosh, half a dozen years or so ago, I think when I talked with folks at the time, I saw that they were dealing in the
B2B Medicare market. I thought we could expand in a couple different ways, potentially. One of them was into the active space, the other was into the direct-to-consumer Medicare market. At the time, I thought the direct-to-consumer Medicare market was actually going to be the most attractive market. It turned out that the actives were really where the first significant expansion came from. We've been focused on getting into this direct-to-consumer market to begin with. I think one of the things we lack, though, is, and Gene talked about it, we sort of had this captive business with the B2B as to what we do. TRANZACT has done an outstanding job of getting relatively lower acquisition costs for their customer base and of bringing them on board.
I think one of the things that we like about them, just in this general space, is that they're able to do it, and they're already able, even though they're in the growth mode, to be able to do it profitably. We like that, I think one of the other things, probably as important as anything else, is we love the culture fit. We've spent a lot of time talking with TRANZACT. This is not something that we've just done in the last couple of months. This has been something we've been talking with them for a while, and we are convinced that the culture fit between the two organizations is really quite strong.
Great. What happened recently in terms of the growth rate of the business? When CD&R bought this thing, it had like $206 million of TTM revenue. The implication is kind of a compound annual growth rate of maybe between 8% and 9%, but the commentary about it growing strong double digits recently sounds like the organic growth really accelerated. I guess the question is, was it all organic? If it was all organic, what kind of changed in the last year or so?
Yeah. That was a bit of a pivot by TRANZACT, I'll ask Gene to comment on that a little bit.
Yeah. Shlomo, they were in some other businesses, and they moved out of those businesses and focused 100% on the Medicare space. What you're seeing is some of the other businesses they were in departing, and now you're seeing the pure Medicare, and they have a life business also, pure Medicare and life. They exited some other things they were focused on.
Okay. Just last for me, are you confident, John, that the management is incented enough to stay on beyond just the initial integration period?
Yes. As I said, we do think we have the right incentives there. As you know, this is not our first time doing this. We've been through this, and we understand how important the management team is to the success. We've talked with them a lot. We like them a lot. We think they like our organization, we feel like it's going to be a very good fit going forward.
Great. Thank you so much.
Thank you. Our next question comes from the line of Mark Marcon with Baird. Your line is now open.
Good morning. Gene, John, you both really hinted at this a lot during the Analyst Day, and you always come through. Can you talk a little bit about what, Gene, just building on what you mentioned just in Shlomo's question, what was the rate of the Medicare growth in the last couple of years? Is the 25%-30% growth expected on a go-forward basis an acceleration or a continuation of what that base business is doing?
Gene, do you want to talk about that?
Yeah. It's a continuation, Mark. Since 2015, the policies they've added have grown at about a 30% rate. Their Medicare space, this is a continuation of what they've been growing at in the Medicare space.
Okay, great. How would this business be impacted if we go to Medicare for All?
It depends on how it's implemented. Medicare for All could make this business just explode.
Yeah.
It depends on how much the insurance companies and other things are involved. Crystal ball, we think it'll explode.
That's what I would assume as well. In terms of just the revenue model, can you just go into a little bit of the basics in terms of how we should think about the revenue model and what some of the key metrics are that we can take a look at to judge how it's performing? Who would you describe as their key competitor?
Go ahead, Gene.
The revenue model is a little different than our revenue model. We both implemented 606. Under 606, because they don't have as much ongoing relationship with the retirees, where today, if we sell a policy, a retiree comes back each year because of the accounts we're keeping, we spread our revenue over the period that we're holding the policy. Their revenue is booked a lifetime value at the time of the sale. Their revenue comes in much quicker in regard to that. What you really are looking for is number of policies sold, and they get quicker acquisition of the revenue. What was your second question, Mark?
Just with regards to some of the metrics that you would provide As we gauge it in terms of is it going to be policy sold? How would you track it in terms of the baseline?
A policy sold would be the key metric.
Great.
Yeah.
By the way, Mike, you wanted to comment.
Yeah, I was just going to add, just in terms of the competitors set, we look at eHealth, HealthMarkets, GoHealth, would just be some of the ones that we tend to look at in terms of competitors.
The accounting here is essentially similar to eHealth, right? Yes. Correct.
Yeah.
Mark, that's a good comparison point for you.
Terrific. Thank you.
Thank you. Our next question comes from the line of Elyse Greenspan with Wells Fargo. Your line is now open.
Hi, thank you. Good morning. My first question is the assumption that the $1.1 billion, I guess the cash component will be financed all with additional leverage. Can you update us on your views about buyback now that you're entering into a more material transaction in terms of that kind of $400 million baseline we were looking to for the year? Is there any way you could give us a sense of what shares might've been repurchased in the first quarter?
Let me deal with the buybacks first, and then I'll let Mike talk about the cash price and how. Basically, we had said in our guidance that we had $800 million that we thought would be available for either buybacks or for acquisitions, and this basically depletes that. The only buybacks that we would expect to do until we pay down the debt would be buybacks that would prevent dilution. Just some buybacks at the margin there. Mike, do you want to talk about that?
Just in terms of looking at it from a purchase price standpoint, we said $1.1 billion is cash that we would have in a term loan. We also have another 100 million that we can pay in either stock or cash. We have that option, we'll decide at the closing.
Okay, then when you guys say that this deal is accretive to adjusted EPS, are you doing that relative to consensus EPS that might have been including some buyback? Is that relative to an internal metric that maybe had no buyback included within it? I'm just trying to get a sense of what EPS-
It's relative to no buybacks, Elyse.
Okay, then, throughout the prepared remarks, you guys made mentions of some synergies that you expect here on the revenue. It seems like also the expense side. Are there numbers that you guys want to put around that? Is it just that you'll update us as this deal closes and the integration commences?
Yeah, it's really the latter, Elyse. We'll update you in the future, but right now we're not commenting on that.
Okay. Thank you very much.
Thanks.
Thank you. Our next question comes from the line of Mark Hughes with SunTrust. Your line is now open.
Yeah, thank you very much. Good morning. Could you talk about your assumptions around the average lifetime value for the customers and then how customer retention has trended in the past?
Mike, do you want to talk about that?
Sure. Yeah, we look at four to five years in terms of lifetime value is how we've looked at it, Mark.
By the way, let me just add, this is not materially different. It's a little bit different, but it's not materially different than the existing business we have, the existing exchange business we have. The flows and everything are a little better under the TRANZACT business than under our existing exchange business, but it's essentially the same.
Yeah.
Then what % of enrollment is done entirely online today? Can you say what the cost difference is versus a more traditional enrollment over the phone with a licensed insurance agent?
Hey, Gene?
Yeah. I think somewhere in the 20%-30% range. The challenge with that is CMS has strict regulations that some scripts need to be read. One of the reasons it's not higher is because you have to have a person reading those scripts. What we have is a combination of online plus a phone rep. A lot of stuff is done online, and then it converts to a phone rep. Most of it is a hybrid of the two.
A final question. The 25% growth would add almost a point to your overall organic if you achieve that. How closely are the earn-outs tied to achieving that sort of top-line growth? Presumably, there's margin hurdles as well in the earn-outs. Could you talk about that?
Yes, there are both.
Very good. Thank you.
Thank you.
Thank you. Our next question comes from the line of Dave Styblo with Jefferies. Your line is now open.
Hi there. Good morning. Thanks for the questions. I think you guys did a great job of laying out the new revenue platform that this opens up in the Medicare space. I guess I'd be curious to hear a little bit more about TRANZACT, as I was doing some more due diligence on it. I was initially struggling to understand, are they a lead generator? Are they a broker from the conversations that we've had here? It sounds like they're primarily a broker, but I'm curious, is that solely the only way that they generate revenue, or do they perhaps generate leads and sell them to other third parties? If so, can you give us a sense of the revenue mix between the two?
Yeah, Gene, that's your bailiwick.
Yeah. They're essentially a broker. They keep most of their leads. In fact, they do buy some leads. They sell some, but it's an immaterial part of the business.
Okay. They sound a lot like eHealth. I guess, I'd be curious, as you looked at TRANZACT versus eHealth and some of the other players, what about TRANZACT made them perhaps the best fit and the best timing of the situation and all the other circumstances that come into play? Obviously, you guys talked about the technology and other fits, but is there any other comparisons about them versus the other, maybe assets that were available in the market that made TRANZACT stand out head and shoulders as to how they would fit in really well with your platform?
Well, I think, Gene has talked about how well we actually think the two platforms mesh and everything. I think the other thing I would emphasize is we feel very good about the cultural fit between the two organizations, and that's as important as anything else in considering acquisitions.
Great. Thanks so much.
Thank you. Our next question comes from the line of Greg Peters with Raymond James. Your line is now open.
Good morning. I had a couple of questions. First of all, on slide two, on bullet point number 4, you talk about the Individual Marketplace business, which is the combination of Willis Towers Watson's employer-sponsored business in the TRANZACT. We have the $260 million of revenue from TRANZACT. What's the corresponding piece for the Willis Towers Watson employer-sponsored portion?
Yeah. Gene, do you want to talk about that split?
Yeah. Our revenue compared to the $260 is, what, Mike? About $410-$420?
Yes, that's right, Gene. Yes, Gene.
Okay.
It's $400 million and growing.
Right.
Perfect. How will the TRANZACT platform interact with some of your other technology? Gene, I know you talked a little bit about it, but I'm thinking like Liaison and some of the other technologies you have.
Greg, where it will fit is we will, over the next couple of years, integrate this into the Individual Marketplace technology. We'll put the two technologies together. With Liaison and with our BenefitConnect, we have links between them, but the real linkage here is with the Individual Marketplace.
Okay.
The money that we've invested in the Individual Marketplace technology, as we've talked over the last couple of years, we've made it industrial grade. That's one of the real excitements for TRANZACT, is because they had upgrades to do, and we'll be able to move them into the Individual Marketplace technology. That's where the real key tie is.
Got it. Well, I have a number of other questions. I'm going to limit it to, I guess, two more. First of all, was there a process underway for TRANZACT, or maybe you can talk, was it shopped actively in the market? Can you give us some perspective on what led up to the inking of the transaction for you guys?
This was not a process that was shopped actively. We'd been engaged with them for a while and had our eyes on this asset.
Okay, great. Thanks for that. I guess the final question around the accounting. I know Elyse asked you a little bit about share repurchase, so I'm thinking about free cash flow, your guidance for 2019. I'm also thinking, when you say eHealth, I know they report financials in the terms around policies, around expected duration units. Is that something that you guys are going to be doing going forward?
We haven't yet decided exactly what we'll be reporting there, Greg, we'll come back to you on that. I would just say the other thing is, again, it's helpful to think of this a lot like our existing exchange business that we have. In the exchange business we already have, when we sell a policy, we don't get the cash flow immediately from that. That comes in over a four to five to seven year period. I guess over seven years, maybe four to five is the average, something like that. This is going to have the same kind of cash flow characteristics as our existing business, just a little bit better.
Okay. Just on the free cash flow guidance for 2019, pre-acquisition announcement, does anything change there?
Nothing really changes because there won't be much free cash flow from this, because as I said, the policies will take a while to come in.
Okay, perfect. Thank you.
Thank you.
Thank you. Our next question comes from the line of Meyer Shields with KBW. Your line is now open.
Thanks. Let me start with one big picture question, if I can. How much of TRANZACT's capabilities are exportable to the other segments besides BDA?
Our focus right now is going to be integrating TRANZACT and our existing exchange business, and we think that's what's going to keep us occupied for the next couple of years. We're not unmindful of the fact, though, that particularly in the space TRANZACT plays, there are capabilities that they'll have to have that could be exported to our other businesses, but it's not going to be an immediate focus.
Okay, that's helpful. A basic question, I guess. Given the great seasonality in BDA's revenues and margins, should we assume the same sort of seasonality for TRANZACT? Or are the revenues-
Yeah
Expenses more uniform?
No, it's similar to BDA. Yep.
Okay. Thank you.
Thank you. Our next question comes from the line of Michael Zaremski with Credit Suisse. Your line is now open.
Hey, thanks. Slide six shows the private Medicare enrollees growing by low single digits. Clearly TRANZACT's been growing by much faster than that. Could you just help explain what TRANZACT's secret sauce is to growing so much faster? Or maybe there's some structural changes going on in the marketplace in terms of who's taking share from who.
Yeah. Gene, do you want to go through that?
Yeah. The number of Medicare eligible isn't growing rapidly, but the 10,000 new policies a day coming on is a lot of share that the business is going after. The Medicare population, these policies are still fairly new in the Medicare population. A lot of sales are still being done to people who just have Medicare, who don't have supplemental policies and who don't have Medicare Advantage. It's really the policies going into this space as opposed to the space growing.
Yeah. We're to say it another way, the market for new sales is not just the new Medicare eligibles, it's the whole base out there generally.
Okay. Thank you. That's my only question.
Thank you. Our next question comes from the line of Adam Klauber with William Blair. Your line is now open.
Thanks. Good morning. Could you give us some idea how they acquire customers? Is it mainly from buying leads? Is it their own search engine optimization? Just any sense would be great.
Mike, do you?
Yeah. They do both. Certain of it, they have their own generation leads and do it, and others they procure. They do both. That's how they do it.
Okay.
It's mostly generation of their own. The buying of leads is a much smaller piece. They're generating their own through their digital marketing and through their carrier relationships.
Okay. As far as the private Medicare market is, I think you identified $35 million. Do you have a rough idea how much of that is digital today? Any thoughts what that could go to in the future?
Gene?
I don't. That's something we'll have to get back to you on.
Okay. As far as their carrier relationships, are there any major carriers, any major Medicare carriers that they don't have right now as far as partners? Do they really have most of the major ones right now?
They have good relationships with all of the majors. Some of the relationships are stronger than others. They have good relationships with all of them.
Okay. As far as, I think you mentioned up front, as far as potentially other products, there's ancillary products for individual health. Is that something you would accelerate going forward?
We would hope so.
Gene, do you have any? Yeah.
Okay. As far as funding, sounds like you use a fair amount of debt up front, but then you'll have to pay that debt throughout the year. Is that the idea?
Yes.
Okay. Thanks a lot.
Great.
Thank you. Our next question comes from the line of Paul Newsome with Sandler O'Neill. Your line is now open.
Good morning. One final follow-up question. Is there an ongoing CapEx requirement as you look out to continue to generate the fast growth of the supplement for this business? I'm just thinking about, is this business going to end up either needing cash in the future or is it cash generation in the future from a CapEx perspective?
Yeah. Obviously funding the growth, you continue to have to spend money to fund that. From a CapEx standpoint, there is technology involved in it, we see synergies between our existing business and this business. Honestly, it's not a huge CapEx number that we see overall. I don't see it growing. If anything, I see it going down or flat.
I think what we would say is that the marginal increase in our already existing CapEx is really small.
Great. Thank you. That was my only question. Appreciate it.
Thank you. Our next question comes from the line of Ryan Tunis with Autonomous Research. Your line is now open.
Hey, thanks. I guess my first one is, we've been talking about the 35 mil of unsubsidized, I'm wondering if in your minds, is that really the addressable market you're thinking about? Or is there a smaller subset of that that you'll be kind of thinking about, we have percentage of this. I don't know if it's the percentage of people that have supplemental and Medicare Advantage or what it is, just looking for maybe a little bit more granularity on how you think about that 35 mil.
Gene, do you want to talk about that?
Yeah. The 35 million is completely open. We're not going to make 35 million phone calls. The market is segmented. It's a lot of the data analytics that they have as they generate their leads. They get focused on certain segments in certain areas. They also do campaigns with the carriers, where carriers will come back and say, "Here's an area of the country we think there's real possibilities," and they'll focus in that area of the country with a particular carrier. Their carrier relationships are very strong, and they're working with the carriers to segment that 35 million as to where, month to month, the best focus should be.
Okay. My follow-up was just for Mike. Any indication on how this deal will impact cash flows? It should just be cash flow accretive in 2019, cash flow accretive in 2020. Just trying to think about how this affects the cash flow guidance you've given in the past.
No, as we said before, I think we're consistent with our cash flow guidance that we said 15% or greater, and that's really where we are.
Does this deal with the transaction cost, do you expect it to be cash flow accretive in 2019?
I would just go back to that we said 15% or greater. We're investing in the business, overall, and we're just comfortable with that guidance.
Thank you.
Thank you. We have a follow-up question from the line of Mark Marcon with Baird. Your line is now open.
I was wondering, can you give us any feel for how many policies they actually have in effect right now?
How many policies? Mark, maybe your question died off there.
How many policies they sold during the last year?
300,000, roughly. Yeah. I think we referenced it on one of the slides.
Okay. $300,000.
Next slide. Top of slide four.
Okay. Relative to the $35 million.
Oh, yeah.
Yeah.
Yeah. That's really the key points we wanted to make.
Yeah.
Yep.
Yeah. I just wanted to reinforce that.
Yeah, no, thank you.
This, with regards to the average commission, can you talk a little bit about that as a % of the premium?
Gene?
Mark, help me with the question.
Just the brokerage commission as a % of the premiums.
Oh.
However you look at it.
I don't know. I don't know what it is as a % of the premiums. Commissions in this space are set by regulation. They're not set as a % of premiums. CMS has commission tables that the carriers use. We're all essentially getting the same commissions. There can be difference in how quickly the carrier will pay that commission. The commissions in this space are the same commissions as we're getting in our other business. The big difference here is TRANZACT is also getting fees from the carriers. Not only are they getting commissions, but they're also getting marketing fees to market directly with the carrier. That's a big difference to our existing business.
How much are those marketing fees?
Significant.
They're not that big.
Yeah.
Yeah.
Okay. Lastly, with your current licensed brokers, will you have flexibility to shift your licensed brokers that are already within the platform over to TRANZACT and vice versa, depending on where the best opportunity is?
The answer of that is some. As I talked in Analyst Day, our focus for our brokers is much more service-oriented, take care of the retirees. They're coming with accounts, and the focus is service. The TRANZACT is much more focused on sales, closing the sale. We need to change the mix of that. We'll be able to help with overflow, but it won't be a complete we can move brokers from one to the other one. Their focus will be different.
Great. Thank you.
Thank you. Our next question comes from the line of Shlomo Rosenbaum with Stifel. Your line is now open.
Thank you for squeezing me back in. Just some technical questions. Hey, Mike, how come you're funding it with all debt initially? You have cash in the balance sheet. You're expecting a lot of free cash flow. Why would you be assuming all debt funding initially? How long would you expect to take to pay the debt down? Based on the commentary, it shouldn't be much more than a year, I would think. I want to check with you.
Yep. No, thank you, Shlomo, for the question. Some of the cash we have on our balance sheet is obviously set up for particular commitments we have in parts of the world. It's not just immediately have that accessibility. We do pay our bonus payments at the end of the first quarter, traditionally. We have both of those cash needs, then they come back over the later half of the year. Your question in terms of timing, yeah, we see it being able to be paid down in the no more than 18-month timeframe.
Thank you.
Thank you. This concludes today's question and answer session. I would now like to turn the call back to John Haley for any further remarks.
Okay, thanks very much for joining us on today's call. I hope you got the sense, we all are very excited about this combination with TRANZACT, and we're looking forward to closing and integrating the two companies. We will be updating you all at our quarterly earnings call in May. Thanks very much.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.