The Start-up From Hell

You think your industry is tough? Philip Walker decided to break into life insurance.

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Andy Ryan

Too bad you couldn't have taken out start-up insurance.

That's what pops in to mind when you hear the saga of Heritage Union Life Insurance, Philip Walker's start-up from hell, the company birth no entrepreneur in his right mind would choose to midwife.

You think your industry is tough? Try breaking into life insurance, a field whose barriers to entry include, in Walker's words, "high overhead, onerous regulatory restraints, and lawyers out the ying-yang." Life insurance comes under the purview of the states, so there is no common application for licensure, and each state raises its own bureaucratic hurdles. Then there's the Catch-22 of getting rated. A.M. Best and Standard & Poor's aren't likely to bestow a top rating to a company without a track record and a colossal cache of capital -- and yet such a rating is nearly essential to getting business and building that track record.

So why this entrepreneurial death wish with life insurance?

"When you're a hammer, everything looks like a nail," says Walker.

Walker, 44, is a consummate data miner. Five years ago, he and a partner who had a similar background embarked on a search for a way to employ their skills in a more socially beneficial field than their former industry, credit cards. "Insurance came to the top of the pile," Walker says. "It's data-centric. It's risk based. It's mass consumer." Taking it further, Walker concluded that life insurance was more straightforward than health or disability insurance and less fraught with cost-management issues and fraud. Moreover, a golden opportunity awaits the company that can tap into a huge unserved and underserved market. According to the Life Insurance and Market Research Association, 2 in 10 American households have no life insurance, and among those that do, 40 percent say they need more. That's 48 million potential customers. Plus, starting a life insurance company would circle Walker back to his first job out of college and to a bit of gnawing, unfinished business.

IT'S ALL ABOUT THE IDEA. ISN'T IT?

Walker's first job, which followed a failed entrepreneurial fling -- the Phil Walker Roofing Company ("I had a lot of strong college friends") -- put him face to face with young couples around their kitchen table, trying to sell them life insurance, in the middle of what he soon saw as "a conflicted sales practice."

"I hated it -- with a passion," he says. "Because the right thing to sell to my customers was not the thing that was going to keep me employed. What I needed to sell to keep myself employed were highly leveraged investments, which I thought were too risky for my customers, and quasi-insurance/savings vehicles, which were too expensive for my clients, who were principally young families." Walker would say, "Bob, if you die, Mary's in trouble. You need the most coverage you can get, but you don't have a lot of money, because you're young like me. So we need to do it the most efficient way possible." He did that regularly for clients. That didn't please his boss. "I was blowing away my term insurance numbers, but I could never make my whole life numbers [which earned commissions that his manager shared in]. My boss kept riding me." Walker lasted less than a year.

"So I went off and took one of two jobs the Bible mentions as unsavory. My parents were glad that it wasn't prostitution," he says. "I went into currency trading." Walker joined Thomas Cook as a trader, ended up running a bunch of the company's divisions, and left in December 1998 for a job at Capital One, the credit card company, where he soaked up all he could. He built a lot of the company's Internet structure and had an insider's view of what was then the biggest direct-mail operation in the country, one conducting as many as 14,000 product tests in a year. Capital One sent Walker to Stanford's Executive Education program. His annual compensation reached $600,000. And in 2004 he left. Capital One, he says, needed to become a bank. He didn't want to work for a bank. What he wanted, now that he knew a thing or two about business, was to head his own business, and something more substantial than a roofing company with a couple of trucks.

Walker and Frank Lortscher, who bolted Capital One with him, started kicking around some ideas for businesses. They drew up a matrix of possibilities: subprime mortgages, collateralized lending, certain types of asset-backed lending -- all risk-based nails for their number-crunching hammers. Life insurance made it to the matrix after Walker realized that, having left Capital One, he'd lost his company-supplied life insurance coverage. He now found himself on the other side of the paperwork, facing an insurance agent "who immediately tried to sell me whole life and universal life policies, which were exactly the types of policies I didn't want to sell when I was a kid."

Walker again agonized over the inherent ills of buying life insurance, which many Americans deem one step up from a colonoscopy, and a small one at that. There's the incomprehensible terminology -- cash value, straight life, continuous-premium whole life, first-to-die insurance, decreasing term insurance. And add-on policy riders. Fine print on top of fine print. And the looming medical evaluation.

"It's the only financial services product where they actually poke holes in you," Walker says, alluding to the de rigueur blood test. "I can't imagine a worse sales process than one that gives you a product you can't understand, that's almost certainly not going to meet your needs exactly, that treats you like you are not being truthful, and at the end of the day pokes holes in you -- and then, having poked holes in you, maybe declines you."

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