Is Apple an insurance company?

Well, not really, but it rakes in a lot of revenues from insurance. Apple Care functions like an insurance program. It is the standard warranty that every Apple product comes with. Typically, that includes a one-year warranty.

If you add in the Apple Care + (covers theft and loss), it is actually an insurance program, and AIG underwrites it.

AppleCare+ extends the warranty and service and adds an insurance program (covered by AIG) to your Apple device. Instead of the regular one-year warranty, AppleCare+ will extend your coverage to 2 or 3 years depending on the device.

Extending the standard Apple warranty, AppleCare+ includes accidental damage protection covering drops, screen breaks, and water spills on your Apple Phone; you can get it repaired at a reduced price.

Expanding to more countries:

Customers in the UK, Australia, Canada, Japan, France, Italy, and Spain can now get AppleCare+ through the same annual plan available to US customers. One hard requirement: Customers must have the “Find My iPhone” feature enabled on their devices at all times (or at least at the time of reporting a claim or the loss).

If you are so inclined, you can check out the specific terms, conditions, and limitations available at www.aigtheftandloss.com. Here is an extract:

AppleCare+ with Theft and Loss provides coverage for:

Up to two incidents of accidental damage from handling every 12 months from your date of purchase provided by Apple under AppleCare+, subject to the service fees listed below; and
Up to two incidents of theft or loss every 12 months from your date of purchase provided by AIG under Theft and Loss, subject to the deductibles below.

Service Fees and Deductibles: Theft or Loss Deductible $149

AppleCare+ Service Fees:

Screen or Back Glass Damage: $29
Other Accidental Damage: $99

For an iPhone 13, Apple Care+ costs $199 and AppleCare+ with Theft and Loss cover costs $269.

I think it is a pretty expensive insurance if you add the cost of Apple Care+ to the service fees and the deductible. Phone insurance products are notorious for being loss making and the deductible works to protect the insurer from fraud and a higher claims frequency. Find my phone helps to validate the loss in case of a theft. The insurer can make sure that the phone is well and truly lost.

A question of insurance revenue:

So how much revenue does Apple make from Apple Care+? Apple does not publish these numbers separately in its quarterly or annual filings, so there are several commentators and Apple watchers who have done their intelligent guesstimates and calculations. I went through several reputed sources to arrive at my estimate.

We will have to use an oblique approach. Here is what we know.

Apple Services as a whole contributed a revenue of $68 Billion in 2021, as per Seeking Alpha.

Foreseeing slowing phone sales, Apple needed to focus on its services business and has been growing it steadily since 2015. In 2020, Apple made an estimated $8.8BN from Apple Care, Apple Pay, and Other services (no breakup given in Apple’s financials as to what: “Other services” are).

Let us try and estimate the insurance premiums in the US market for the iPhone 13s since the bulk of the new iPhone sales come from the US, and the other markets for Apple Care+ are smaller than the US.

Back of the Napkin calculations

According to the “Business of apps,” Apple sold about 84.3 Million iPhones in the US in 2021. Let us do a rough calculation first. Let us assume an purchase rate of 1 in 10 phones for Apple Care, and 10% of those customers take Apple Care+. Some estimates suggest that the attachment/purchase rates are in the 20% range, but we will stay conservative for now.

A) Going by a 1 in 10 purchase rate gives us 8.43 Million Apple Care subscribers in the US

B) 10% convert to AppleCare+: 843,000 customers take Apple Care+

C) Cost of Apple Care. We assume that only new iPhone 13 buyers purchased the cover (last year’s release was iPhone 13). As per the AIG site, the cost is $269 for a two-year cover. We can assume customers take the cover for 12 months before they churn and stop paying.

D) To be more accurate, we can use the monthly cost from the AIG site. 1-month cost: $13.49 (from AIG theft and loss site- I used the figures for Ohio state)

Multiplying (D x 12 x B), we get $137 Million in insurance Gross premiums. That is a small number compared to the overall services revenue of $8 BN+ but it is a plausible estimate.

The $137 M of premiums or revenues comes from 1 country (the US) and new phone sales alone. You add the 8 additional countries the program is offered in and the volumes of phones sold in those countries, and it stacks up to be a good revenue earner. Add other Apple products and it grows further.

It is also possible that there are customers who take the coverage for two years so the premiums could go up to a cool $272 million in theory, just for iPhones.

Margin Contribution

If those are the premiums, how much do we think goes to Apple as fees /commissions from the insurer, AIG? Again, we can do an estimate:

The site Trefis.com estimates Apple’s gross margins to be 44% (2021), and CNBC reported a 62.8% gross margin for the services business in 2019.

To be safe, we assume that AIG pays Apple 44% of the Gross Written Premiums, and we have a very tidy Gross margin contribution of $60 Million from Apple Care+ on iPhone sales in the US. To save us all this trouble, Apple needs to “up” its disclosure in its financial filing.

That’s a tidy insurance income right there! This is what insurers call direct affinity business and what insurtechs call “embedded insurance”. Both of them can be schooled in how to do it well with a great customer experience by Apple.

No wonder Samsung is pushing its own Samsung Care+ version. Of course Samsung does not sell so many phones in the US, but that is a topic for another day.

References:

Apple Care+