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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO
COMMISSION FILE NUMBER 0-26083
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INSWEB CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-3220479
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
Incorporation or organization)
901 MARSHALL STREET, REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices)
(650) 298-9100
(Registrant's telephone number, including area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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NONE NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.001 PAR VALUE
(Title of Class)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The aggregate market value of registrant's voting and non-voting common
equity held by nonaffiliates of registrant, based upon the closing sale price of
the common stock on March 17, 2000, as reported on the Nasdaq National Market,
was approximately $133,283,000. Shares of common stock held by each officer,
director and holder of 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
Outstanding shares of registrant's common stock, $0.001 par value, as of
March 17, 2000: 35,006,062.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the definitive Proxy Statement for registrant's 2000 Annual Meeting
of Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Report are
incorporated by reference into Part III of this Form 10-K Report.
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PART I
THIS REPORT INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS. SUCH STATEMENTS
REFLECT OUR CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND OUR POTENTIAL
FINANCIAL PERFORMANCE AND ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD
CAUSE OUR ACTUAL RESULTS AND FINANCIAL POSITION TO DIFFER MATERIALLY FROM WHAT
WE SAY IN THIS REPORT. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, OUR
ABILITY TO GENERATE SIGNIFICANT REVENUES FROM OUR CORE BUSINESS; OUR ABILITY TO
ACHIEVE OR MAINTAIN PROFITABILITY; OUR RELIANCE ON AUTOMOBILE INSURANCE; OUR
ABILITY TO EXPAND OUR OPERATIONS; OUR RELIANCE ON A LIMITED NUMBER OF INSURANCE
COMPANIES FOR OUR CURRENT REVENUES; AND THE SUCCESS OF OUR ONLINE RELATIONSHIPS
IN ATTRACTING CONSUMERS TO OUR WEBSITE. WE MORE FULLY DISCUSS THESE AND OTHER
RISK FACTORS IN "ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND OPERATING RESULTS--RISK FACTORS" AND ELSEWHERE IN THIS REPORT, IN
OUR REGISTRATION STATEMENT ON FORM S-1 (333-78095), AS AMENDED, ORIGINALLY FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 1999 AND IN OUR OTHER
FILINGS WITH THE SEC.
ITEM 1. BUSINESS
OVERVIEW
InsWeb operates a leading online insurance marketplace that enables
consumers to comparison shop online and obtain insurance company-sponsored
quotes for a variety of insurance products, including automobile, term life,
homeowners, renters, home warranty, individual health, small group health and
Medicare supplement insurance. InsWeb's marketplace capitalizes upon the
advantages of the Internet to directly link consumers and insurance companies,
providing consumers with the insurance they need and insurance companies with
the customers they want. InsWeb has combined extensive knowledge of the
insurance industry, technological expertise and close relationships with more
than 54 insurance companies to develop a sophisticated, integrated online
delivery platform. InsWeb's platform enables consumers to efficiently research
insurance-related topics, search for, analyze and compare insurance products,
and apply for and receive insurance company-sponsored quotes for actual
coverage. In addition, InsWeb provides insurance companies with pre-qualified
consumers at substantially lower acquisition costs as well as the scalable,
cost-efficient distribution capabilities of InsWeb's Internet-based model.
INDUSTRY BACKGROUND
ELECTRONIC COMMERCE
The Internet has emerged as a global medium for communication, information
and commerce. International Data Corporation estimates that there were
239 million Internet users worldwide at the end of 1999 and anticipates this
number will grow to approximately 602 million users by the end of 2003. The
Internet possesses a number of unique characteristics that differentiate it from
traditional media and methods of commerce:
- users are able to quickly and easily communicate or access information
without geographic or temporal limitations;
- companies can more cost-effectively and efficiently reach and serve a
large and global group of customers electronically from a central
location;
- companies can provide personalized, low-cost and real-time customer
interaction;
- users enjoy greater convenience and privacy and face less sales pressure;
- users can access a vast amount of information regarding the pricing,
quality and specifications of products and services; and
- companies can easily obtain demographic and behavioral data about
customers, increasing opportunities for direct marketing and personalized
services.
As a result of these unique characteristics and the Internet's growing
adoption rate, businesses have a tremendous opportunity to conduct commerce over
the Internet. International Data Corporation estimates that commerce over the
Internet will increase from approximately $130 billion worldwide in 1999 to
approximately $1.6 trillion in 2003. While many companies initially focused on
facilitating and conducting transactions between businesses over the Internet,
more recently, companies have increasingly used the Internet for a wide variety
of consumer transactions, beginning with the distribution of commodity products,
including books, CDs and videocassettes. As consumers have begun to recognize
the advantages of electronic commerce and have become more comfortable with the
reliability and security of the Internet, companies have begun to offer more
complex products and services online. This trend has continued with the
proliferation of online financial services, beginning with comparatively simple
electronic banking transactions, progressing in complexity to stock trading and
mortgage lending and more recently extending to insurance products and services.
THE TRADITIONAL MARKET FOR INSURANCE IN THE UNITED STATES
According to A.M. Best, in 1998 the insurance market in the United States
totaled more than $875 billion of direct premiums written. Approximately half of
this market consists of personal insurance products such as automobile,
homeowners, term life and health insurance, which are sold to consumers by
insurance companies that compete, state-by-state, primarily on the basis of
price and service. Insurance companies have traditionally used one of three
separate and distinct distribution channels to market their products and
services: independent agents, exclusive agents and direct marketing.
Until the 1970s, the distribution of insurance products was dominated by
independent agents, who solicited and sold insurance on behalf of a broad array
of companies from which they received commissions. Historically, these agents
were able to offer consumers the ability to comparison shop by providing access
to information regarding policies available from multiple companies who
accounted for a substantial majority of the policies being sold at that time.
According to Conning and Company, Inc., however, the market share of independent
agency-based insurance companies for the sale of personal lines of insurance
decreased to 53% by 1972 and to 33% by 1996. Insurance companies representing
the remainder of the market distribute their products either through exclusive
agents, who offer only one company's products, or directly to consumers through
mass marketing techniques such as direct mail and telephone solicitation.
The fragmentation of the insurance industry into independent agent,
exclusive agent and direct distribution channels has made comparison shopping
across a broad range of insurance companies an extremely difficult and
frustrating experience for the consumer. Because of this fragmentation, there is
no single source where consumers can access information regarding the products
and services of a competitive sample of insurance companies. In addition, many
insurance products are complex and combine coverage for multiple risks, making
it difficult for the consumer to compare products on an "apples-to-apples"
basis. Price variability among insurance carriers is often significant. For
example, publicly-filed insurance rates posted on the California Department of
Insurance website in June 1999 show that, within some of the major metropolitan
areas in California, for the same consumer, there was up to a 160% price
differential for homeowners insurance premiums, a 408% differential for
automobile insurance premiums and a 415% differential for renters insurance
premiums. Consumers are often unaware of the extent of this potential price
variability because effectively comparing quotes requires them to undertake the
difficult and time-consuming task of separately contacting several companies and
agents, filling out multiple applications and facing repeated sales pressure,
with no guarantee of achieving their objective of a meaningful comparison.
For insurance companies, regardless of the distribution channel they employ,
the cost of acquiring and servicing customers remains a substantial expense and
reduces profitability. Just finding the customers who fit within the company's
specific targeted risk profiles is a very expensive and time-consuming process,
requiring inefficient advertising and marketing techniques that necessarily
target an overly broad range and large number of potential customers. Once these
customers are identified, significant additional resources are usually required
to effect a sale.
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The combination of these factors has led to an inefficient market that
benefits neither the consumer nor the insurance company. Prices are high,
comparison shopping is extremely difficult and the substantial costs of customer
acquisition and servicing continue to put pressure on profitability.
MARKET OPPORTUNITY FOR ONLINE INSURANCE
According to Forrester Research, the market penetration for sales of
personal insurance products which are researched and selected online, but
purchased through any distribution channel, is expected to grow from
$1.0 billion of personal insurance sales in 1999 to over $14.0 billion in 2004,
an annual growth rate of 70%. Insurance products are ideally suited to an
Internet-based distribution and servicing model for the following reasons:
- insurance products are information-based, thus requiring no physical
delivery or warehousing;
- complex insurance products can be made more understandable through readily
accessible supporting information and glossaries;
- through a single medium, consumers can access information regarding, and
compare the products of, insurance companies using any of the three
traditional distribution channels;
- consumers can compare the terms, conditions and exact coverages of various
insurance products at their own pace, without sales pressure;
- customer data can be efficiently captured through a website, allowing
real-time automated underwriting and streamlined overall processing; and
- insurance companies can reduce the high costs associated with distribution
and servicing through traditional channels.
The Internet can be used in a variety of ways to provide consumers with an
accessible source of pricing and explanatory information on insurance products
and services and provide insurance companies with a cost-effective means of
acquiring and servicing customers. To date, most efforts at using the Internet
to achieve these objectives have employed one of the following three models,
none of which fully capitalizes upon the inherent advantages of Internet-based
distribution:
- SINGLE INSURANCE COMPANY WEBSITE. Many insurance companies have
implemented their own proprietary websites to provide quotes and services.
These websites can be convenient for consumers and allow potential cost
savings for insurance companies; however, they typically provide no
comparative shopping opportunity for the consumer and each insurance
company is required to bear all of the initial and ongoing technology and
marketing costs related to its website.
- WEB-BASED INFORMATION DELIVERY. Several companies have established
websites that utilize publicly available rate data from generic filings
made by insurance companies with state regulators to provide estimated
quotes for a number of insurance companies. While offering online access
to information and the appearance of comparison shopping and requiring no
involvement on the part of insurance companies, this model affords no real
online transactional capability. The estimated quotes may differ
significantly from the price of any coverage actually offered by the
insurance companies, and some companies for whom estimated quotes are
given may not be willing to insure the consumer at all. In any case, the
consumer must still go through the tedious process of completing separate
applications for each insurance company in order to receive an actual
quote.
- WEB-ASSISTED AGENCY DISTRIBUTION. A third online model provides an
Internet-based distribution channel for traditional insurance agencies.
This model allows some limited comparison shopping and requires minimal
investment on the part of the agency. However, like the information
delivery model described above, the quotes provided are estimates that
have not been approved by the insurance company and the consumer must work
through the traditional agency process to receive a
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firm quote. In addition, the consumer does not have access to the products
of insurance companies that choose not to distribute their products
through independent agents, which represent approximately two-thirds of
the personal insurance market. Because the agencies must process
applications in the traditional way and must add additional personnel to
process additional applications, there is little opportunity to use
technology to reduce costs.
InsWeb believes that, while each of these models brings some benefits to
consumers and insurance companies, none adequately capitalizes on the powerful
advantages of the Internet. In order to accomplish this, InsWeb believes that a
model is needed that directly links consumers and insurance companies, allowing
consumers to compare insurance company-sponsored quotes for actual coverage from
a variety of companies on an apples-to-apples basis and enabling insurance
companies to take full advantage of the cost-saving potential of the Internet.
THE INSWEB SOLUTION
InsWeb has developed an online marketplace for insurance products and
services that fully capitalizes upon the advantages of the Internet to directly
link consumers and insurance companies, providing consumers with the insurance
they need and insurance companies with the customers they want. InsWeb has
combined extensive knowledge of the insurance industry, technological expertise
and close relationships with a broad array of insurance companies to develop a
sophisticated, integrated online delivery platform. InsWeb's platform enables
consumers to efficiently research insurance-related topics, search for, analyze
and compare insurance products and apply for and receive insurance
company-sponsored quotes for actual coverage. In addition, InsWeb provides
insurance companies with a flow of pre-qualified consumers at substantially
lower acquisition costs as well as an Internet-based model that is largely
automated and therefore cost-efficient and scalable, allowing substantial
increases in the number of transactions on the online marketplace with minimal
increases in costs.
BENEFITS TO CONSUMERS
ONE-STOP COMPARISON SHOPPING FOR MULTIPLE PRODUCTS. InsWeb provides an
online marketplace through which consumers can choose among products offered by
insurance companies using all three traditional distribution channels. To date,
InsWeb has developed relationships with 54 leading insurance companies
throughout the U.S. A consumer shopping for an insurance product at InsWeb's
online marketplace can receive quotes from InsWeb's participating insurance
companies who offer the product in the consumer's state. Consumers can receive
quotes for automobile, homeowners/renters, health and term life insurance
products in an unbiased marketplace in which consumers make their own decisions
based on the reputation of the insurance company, the level of coverage and the
price of the product being offered. Consumers save time, effort and money by
avoiding the need to contact and complete applications with multiple insurance
companies and agents.
ACCURATE, INSURANCE COMPANY-SPONSORED QUOTES. InsWeb works directly with
participating insurance companies to automate their data capture--I.E., the
processes by which they receive consumer data; underwriting--I.E., the
evaluation of consumer data to determine which consumers they are willing to
insure; rating--I.E., determining a price quote based on a consumer's data; and
quote generation--I.E., electronic presentation of price quotes to consumers. As
a result, InsWeb provides consumers accurate, insurance company-sponsored quotes
for actual insurance coverage. By contrast, the quotes provided by most online
quotation and information services are estimated primarily from insurance
companies' public rate filings, and consumers using these services may find
their actual premium to be significantly different from the initial quote they
received, if the quoted company is willing to insure them at all. InsWeb
believes that online consumers expect accurate quotes for actual coverage and is
committed to working directly with insurance companies to meet that expectation.
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EASE OF USE. InsWeb offers consumers who want to purchase insurance a
variety of helpful information in an easy-to-use format. At the click of a
mouse, consumers can access educational materials on insurance, including
answers to frequently asked questions, a glossary, informative articles and
ratings of insurance companies. InsWeb also provides its customers with
interactive website features to assist them in analyzing the type and amount of
insurance coverage that is most suitable for their needs. InsWeb enables
consumers to update and store their profiles after each interaction, so that
repeated visits are more productive.
CONVENIENCE AND CONTROL. InsWeb provides consumers with the convenience of
shopping from home or office, 24 hours a day, 7 days a week. InsWeb rapidly
responds to consumer inquiries with insurance company-sponsored quotes. InsWeb's
technology and systems are designed to seamlessly and automatically feed the
consumer's data to the insurance company, helping minimize the time and effort
required to consummate a transaction. Through InsWeb's online tools and
analyzers, consumers can assess and manage their insurance needs on their own.
Consumers do not face any sales pressure and may proceed at their own pace,
knowing that their information will be safely and privately stored by InsWeb so
that future sessions can be conducted without the need to reenter the
information. InsWeb is a member of the Online Privacy Alliance and a licensee of
the TRUSTe Privacy Program and adheres to their standards regarding the
protection of the confidential information of online consumers. See "--Privacy
Policy."
BENEFITS TO INSURANCE COMPANIES
LOWER COSTS OF CUSTOMER ACQUISITION AND SERVICE. InsWeb's sophisticated,
integrated technology platform allows each insurance company to offer its
products online regardless of the traditional distribution channel that the
company employs. The information systems of InsWeb's participating insurance
companies are closely integrated with InsWeb's website, enabling them to fully
capitalize on the advantages of its Internet-based distribution model. Because
consumers are pre-screened, insurance companies do not waste resources on
unqualified applicants. In addition, the efficiency and scalability of InsWeb's
Internet-based distribution model allows insurance companies to screen and
underwrite additional customers at minimal marginal cost. For insurance
companies that utilize agents, InsWeb frees up agent time and resources for more
productive, value-added uses, such as closing business and servicing customers.
ENHANCED ACCESS TO NEW QUALIFIED CUSTOMERS. InsWeb enables insurance
companies to take advantage of the Internet as part of their strategy to
accelerate growth and improve their market share. InsWeb provides insurance
companies with a flow of new customers that have been pre-screened based on each
company's unique selection criteria. By participating in InsWeb's online
insurance marketplace, insurance companies gain access to a growing population
of technology-oriented consumers who are increasingly turning to the Internet as
a preferred means of researching and purchasing products and services. InsWeb
offers insurance companies the ability to benefit from the growth of the
Internet and changes in consumer purchasing behavior, as well as improve their
competitive position in attracting desirable new customers.
RAPID MARKET FEEDBACK. InsWeb's advanced technology platform enables
insurance companies to obtain rapid feedback on their comparative performance
within the InsWeb insurance marketplace. This information allows insurance
companies to more quickly and easily adjust their product offerings to add or
remove particular products, change product features, adjust underwriting
criteria and distribute current information to prospective customers. InsWeb
believes that this access to market feedback offers its participating insurance
companies a competitive advantage over other insurance companies.
IMPROVED UNDERWRITING PROFITABILITY AND PRODUCT INNOVATION. Through InsWeb,
insurance companies can acquire and service customers at lower costs. Reduced
customer acquisition and servicing costs enable insurance companies to
underwrite their existing products more profitably and potentially to expand
their product offerings, since reduced costs may allow them to profitably
underwrite more and varied risks. In addition, InsWeb's database of consumer
information and behavior provides insurance companies with the ability to more
frequently and easily evaluate the comparative attractiveness of their existing
products, as
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well as the potential means to develop new products focused on previously
unknown or unreachable market opportunities.
INSWEB'S STRATEGY
InsWeb's strategy is to capitalize upon its expertise, technology and
relationships to provide the leading online insurance marketplace for consumers
and insurance companies. The key elements of InsWeb's strategy include:
ENHANCE THE COMPARATIVE SHOPPING EXPERIENCE FOR CONSUMERS. InsWeb's
objective is to provide consumers and small businesses with a comprehensive
selection of insurance products and services. To achieve this objective, InsWeb
intends to:
- add additional insurance companies to the InsWeb online insurance
marketplace;
- increase the number of states where its participating insurance companies
offer coverage online;
- work with its participating insurance companies to expand the products and
services they offer through the InsWeb online insurance marketplace;
- work with both new and existing insurance companies to offer consumers
more instant online quotes;
- offer products and services to small businesses; and
- expand its geographic coverage outside of the United States.
While expanding its products and services, InsWeb intends to continue to provide
the highest quality customer service and to enhance the overall user experience
on its website.
BUILD STRONG RELATIONSHIPS AND EXTENSIVE TECHNOLOGY INTEGRATION WITH
INSURANCE COMPANIES. InsWeb believes that its combination of extensive
technology integration, industry expertise and strong relationships with
insurance companies provides significant competitive advantages. Integrating
each insurance company into the InsWeb platform presents unique technical and
operational challenges and, therefore, requires a close working relationship
between the insurance company and InsWeb. Following the development process,
InsWeb's implementation and technology teams continue to work closely with each
insurance company on an ongoing basis to integrate InsWeb's infrastructure with
each insurance company's systems. InsWeb responds to each insurance company's
unique needs for integration and program development by offering a full array of
services, from software integration to change management and electronic commerce
strategy development. InsWeb also provides insurance companies with performance
feedback through its extensive consumer and transaction database. InsWeb intends
to continue to strengthen its relationships with participating insurance
companies and to work closely with newly added insurance companies to integrate
their systems with its infrastructure.
REDUCE CUSTOMER ACQUISITION AND SERVICING COSTS. InsWeb intends to continue
to develop technology-based solutions aimed at reducing the overall customer
acquisition and servicing costs of insurance companies. By focusing on the
continued development of its fully integrated, scalable technology platform,
InsWeb intends to enable insurance companies to better target and reach
prospective customers and realize economies of scale not attainable through
traditional insurance distribution channels or other Internet-based distribution
models. By continually incorporating and upgrading fully automated processes for
data capture and delivery, filtering, rating and quote generation, InsWeb
believes that it can significantly reduce customer acquisition costs. InsWeb
intends to continue to work with insurance companies in exploring additional
ways to utilize the InsWeb platform to further reduce the costs associated with
acquiring and servicing customers.
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LEVERAGE ITS TECHNOLOGY PLATFORM AND EXTENSIVE CONSUMER DATABASE. InsWeb
has invested significant resources to develop and deploy its technology
platform, as well as its extensive consumer and transaction database. InsWeb
intends to leverage these assets to enhance the breadth and value of its product
and service offerings. Specifically, InsWeb intends to:
- leverage its technology platform and consumer database to create
opportunities for insurance companies to expand their product offerings;
- continue to license its technology to selected insurance companies and
financial institutions to allow these companies to provide quoting
functionality on their websites;
- continue to provide insurance companies with rapid market feedback on new
product configurations and market performance; and
- leverage its technology platform to provide additional services to
consumers and insurance companies.
EXPAND BRAND AWARENESS AND PRESENCE. InsWeb intends to continue to use both
offline and online marketing campaigns to maximize consumer awareness and
enhance its brand recognition. InsWeb's objective is to become the preferred
online marketplace for insurance products and services. InsWeb will continue to
carefully target online companies with strong market reach, such as major
portals, as well as online companies that are a likely source of insurance
shoppers, such as personal finance, automobile purchase or mortgage origination
websites. Where appropriate, InsWeb intends to form co-branded relationships
with full or limited InsWeb functionality.
THE INSWEB ONLINE INSURANCE MARKETPLACE
The InsWeb online insurance marketplace is a Web-based marketplace that
links consumers directly with insurance companies and enables comparison
shopping for insurance coverage in a convenient and pressure-free environment.
Consumers visiting the InsWeb online insurance marketplace can receive insurance
company-sponsored quotes for actual coverage for a variety of insurance
products, and also can use a variety of InsWeb's interactive website features
and insurance-related information to assist them in determining the type and
amount of insurance coverage that is most suitable for their needs. Consumers
can also access their personal insurance profile, allowing them to retrieve
insurance information stored during previous visits.
THE QUOTE GENERATION AND PURCHASE PROCESS
The quote generation and purchase process involves the following steps:
- data entry by the consumer;
- electronic underwriting;
- electronic rating and generation of price quotes;
- presentation of quotes to the consumer;
- delivery of leads to the insurance companies; and
- subsequent purchase of the insurance policy.
Quotes obtained through the online marketplace are free to consumers, while
participating insurance companies pay transaction fees to InsWeb generally based
on the delivery of qualified leads.
DATA ENTRY. To initiate a shopping session, a consumer completes an online
form that requests information such as the consumer's age, address and coverage
requirements, a process that InsWeb estimates takes approximately 10 to 25
minutes, depending on the type of insurance sought and the
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complexity of the consumer's profile. The quote form captures a comprehensive
set of information designed to address each of the participating insurance
companies' filtering and rating criteria. To assist consumers in evaluating and
fulfilling their insurance needs, InsWeb provides consumers a variety of
interactive website features and insurance-related information. In addition,
InsWeb provides online help throughout the data entry process. The consumer is
required to complete only one form to obtain quotes for a particular type of
insurance from all participating companies offering that type of insurance in
the consumer's state. Throughout the data entry process, consumers are presented
with the option of saving their data into their personal insurance profile.
Consumers who are returning to the online marketplace can simply enter their
user name and password to retrieve information they entered during previous
visits. This information can be used to automatically complete portions of the
quote form for other insurance products. Because the information insurance
companies use to filter, rate and provide quotes to a consumer is entered
directly by the consumer, the insurance companies can reduce or eliminate the
expense associated with collecting consumer data. Moreover, information entered
directly by consumers typically contains fewer errors than information provided
orally to an agent or insurance company representative, who must then enter that
information manually into the insurance company's system.
UNDERWRITING. InsWeb's software uses criteria set by each participating
insurance company to analyze a consumer's data and determine whether it fits
within the company's targeted risk profiles. InsWeb's system can provide rapid
feedback to an insurance company regarding the impact that particular criteria
are having on the number of leads being directed to that company, and also
permits individual criteria to be easily added or removed. Electronic
underwriting eliminates the expense of screening and quoting risks that an
insurance company ultimately may not want to accept. Electronic underwriting
also ensures that consumers are only presented with quotes from companies who
are interested in doing business with them. For a consumer who is not offered
coverage by an insurance company, no quote from that company is presented, thus
preserving the insurance company's opportunity to do business with the consumer
in the future.
RATING. InsWeb's rating process compares a consumer's data against criteria
used in an insurance company's underwriting process to generate insurance
company-sponsored quotes. InsWeb integrates each of its participating insurance
companies' rating criteria into its online marketplace through one of several
rating solutions, depending on the company's preference. These solutions
include:
- a customized interface between InsWeb's site and the company's own rating
engine, which may be housed on the company's legacy system or at InsWeb's
facility;
- an interface between InsWeb's site and a third-party rating engine of the
company's choice; or
- an integration of the company's rating criteria into one of InsWeb's
proprietary rating engines.
In each case, the rating process is developed in conjunction with the
participating insurance company.
PRESENTATION OF QUOTES. After a consumer has completed the form for a
particular product and requested quotes, the consumer is presented with a "quote
pad." The quote pad contains the logos of insurance companies interested in
providing quotes, along with prices for the companies offering instant quotes.
The quote pad also informs the consumer which companies will provide quotes on a
delayed basis, either via e-mail, mail or telephone. The response method varies
among insurance products and companies. Currently, substantially all term life
and health quotes are provided through instant quotes, while most quotes for
automobile insurance are delivered by e-mail. InsWeb is working with its
participating insurance companies to increase implementation of instant quoting
capability.
DELIVERY OF LEADS. InsWeb's participating insurance companies pay
transaction fees to InsWeb generally based on the delivery of qualified leads.
Qualified leads are produced in two ways: for insurance companies providing
instant online quotes, a qualified lead is produced when a consumer clicks to
request insurance coverage based on a specific quote; for insurance companies
providing e-mail or other offline
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quotes, a qualified lead is produced when a consumer clicks to request the quote
itself. In either case, InsWeb is paid a transaction fee whether or not the
consumer actually purchases a policy. Once a lead is generated by the consumer's
request for an application or offline quote, InsWeb transmits the lead to the
selected insurance company by e-mail, file transfer or direct connection to the
insurance company's information system. InsWeb provides each participating
insurance company with custom-formatted lead information based on the company's
individual requirements.
PURCHASE OF POLICY. After InsWeb generates and delivers a qualified lead,
insurance companies may respond directly to the interested consumer by e-mail,
mail or telephone to close the purchase of the policy or direct the lead to an
agent for follow-up. This portion of the transaction does not require further
involvement by InsWeb, although InsWeb monitors insurance company responses and
works with companies and agents to ensure that they are responding to leads
generated from the online insurance marketplace in a timely fashion. In
addition, InsWeb will perform the closing services, in both a traditional agency
and an online setting, for some participating insurance companies.
CUSTOMER CARE. InsWeb provides assistance to consumers throughout the data
entry, quote-generation, delivery and purchase process through embedded help
icons, which link to explanations of the various steps in the process and
through e-mail support. In August 1999, InsWeb introduced its Customer Care
Center to provide additional help to consumers working through the process of
shopping for insurance online. The Customer Care Center provides additional
consumer assistance through real-time chat and live telephone support.
AGENCY OPERATIONS
InsWeb, through its licensed affiliate, began providing closing services
comparable to traditional insurance agencies in October 1999. These closing
services include advising consumers about coverage options, confirming consumer
information, selling the policy, and taking a premium deposit. The InsWeb
affiliate receives a percentage of the premium for each policy sold. The agency
operations were initially limited to closing business on behalf of four auto
insurance companies in the state of California, but are intended to expand to
other states and product lines in 2000. Ten individual agents are employed by
the affiliate to perform these services.
PRODUCTS AND SERVICES
Insurance companies participating in InsWeb's online insurance marketplace
offer automobile, term life, homeowners, renters, and individual and small group
health insurance, as well as motorcycle insurance, and fixed annuities.
AUTOMOBILE INSURANCE. Automobile insurance comprises the largest segment of
the consumer insurance market, and, to date, has accounted for most of the
consumer traffic on InsWeb's online marketplace and a substantial majority of
its revenues. InsWeb believes that, for the foreseeable future, most of its
consumer traffic will continue to be generated by prospective purchasers of
automobile insurance. The number of automobile insurance companies participating
in the InsWeb online marketplace has grown rapidly; since January 1997, the
number of participating insurance companies has grown from two to 31. The
following table shows, as of March 31, 2000, the percentage of the U.S.
population residing in states where at least two companies offer automobile
insurance quotes on the InsWeb online marketplace:
PERCENTAGE OF U.S. POPULATION
NUMBER OF COMPANIES RESIDING IN STATES AND
OFFERING AUTO QUOTES NUMBER OF STATES JURISDICTIONS COVERED
- -------------------- ---------------- -----------------------------
2 or more............................. 46 plus D.C. 94.8%
3 or more............................. 37 85.5%
4 or more............................. 25 72.5%
5 or more............................. 18 55.9%
9
TERM LIFE INSURANCE. InsWeb began offering term life insurance quotes in
April 1996 through a single insurance company. The InsWeb online marketplace
currently offers comparative quotes for term life insurance from six or more
companies in all 50 states plus D.C. The following table shows, as of March 31,
2000, the percentage of the U.S. population residing in states where at least
six companies offer term life insurance quotes on the InsWeb online marketplace:
PERCENTAGE OF U.S. POPULATION
NUMBER OF COMPANIES RESIDING IN STATES AND
OFFERING TERM LIFE QUOTES NUMBER OF STATES JURISDICTIONS COVERED
- ------------------------- ---------------- -----------------------------
6 or more............................. 50 plus D.C. 100.0%
7 or more............................. 49 plus D.C. 93.3%
8 or more............................. 48 plus D.C. 92.9%
INDIVIDUAL HEALTH INSURANCE. InsWeb began offering individual health
insurance quotes in August 1998. Individual health insurance is available in the
form of preferred provider organization plans, health maintenance organization
plans and traditional indemnity plans. As of March 31, 2000, the InsWeb online
marketplace offered quotes for individual health insurance from at least one
insurance company in 40 states plus D.C. (representing 85.1% of the population)
and two insurance companies in 25 states (representing 69.1% of the population).
HOMEOWNERS/RENTERS INSURANCE. InsWeb began offering homeowners and renters
insurance quotes in July 1998. As of March 31, 2000, the InsWeb online
marketplace offered quotes for homeowners insurance from at least one insurance
company in 49 states plus D.C. (representing 98.8% of the population), two or
more insurance companies in 15 states (representing 34.8% of the population) and
three or more insurance companies in 8 states (representing 9.1% of the
population). The online marketplace offers quotes for renters insurance from at
least one insurance company in 48 states plus D.C. (representing 98.4% of the
population), two or more insurance companies in 9 states (representing 21.9% of
the population) and three insurance companies in 1 state (representing 1.8% of
the population).
OTHER PRODUCTS AND SERVICES. InsWeb's online marketplace allows consumers
to shop for other types of insurance in most states. These product lines include
small group health, motorcycle insurance and fixed annuities. At present, the
InsWeb online marketplace does not offer multiple quotes with respect to these
types of insurance, which are each offered by a single insurance company in the
state or states in which they are available. InsWeb's strategy is to expand the
range of insurance products and services offered through its online insurance
marketplace. From time to time, InsWeb licenses its insurance quoting
functionality to insurance companies and financial institutions on a selected
basis.
NON-U.S. MARKETS. In December 1998, InsWeb entered into a joint venture
with SOFTBANK Corp. to create an online insurance marketplace for the Japanese
market. InsWeb currently holds a 25% equity interest in the joint venture. The
joint venture is in the early stages of developing its online marketplace, which
is scheduled to be operational in mid-2000.
In April 1999, InsWeb added automobile insurance quoting functionality for
consumers to its online marketplace through one insurance company in Alberta,
New Brunswick and Ontario, Canada.
INSWEB DATA SERVICES. InsWeb's extensive database currently contains more
than 5,800,000 consumer profiles generated during the consumer shopping
sessions, with approximately 1,200,000 profiles being added each quarter. InsWeb
provides specialized reports summarizing this information to insurance companies
that participate in the InsWeb marketplace for an additional charge. The reports
contain only aggregated data about consumers; no personally identifiable
information is available to the insurance company. The InsWeb data reports are
more timely and Internet-focused than other marketing reports available to
insurance companies. Currently, data products are available to participating
insurance companies for auto insurance and term life insurance.
10
INSURANCE COMPANY RELATIONSHIPS
As of March 31, 2000, InsWeb had relationships with 54 insurance companies,
including many large companies with established brand names that InsWeb believes
are attractive to consumers. These companies include:
TYPE OF INSURANCE INSURANCE COMPANIES
- ----------------- --------------------------------------------------------------------
Automobile.................. AAA Michigan Hartford
AIG Kemper
American Family Nationwide
Amica New York Central Mutual
Allstate Progressive
Avomark (Ohio Casualty) RelianceDirect
CNA Reliant
Country Mutual State Farm
Electric Insurance The Commerce Group
Explorer Travelers
GE Financial Assurance Tri-State
Term Life................... Amica MONY Life Insurance Company
CNA Ohio National
John Hancock State Farm
Lincoln Benefit (Allstate) Western Southern
GE Financial Assurance* Old Republic Life
Midland Life Zurich Kemper
Homeowners/Renters.......... AIG Nationwide
American Family State Farm
Homesite
Individual Health........... Blue Cross/Blue Shield of Florida Golden Rule
Blue Cross/Blue Shield of New Mutual of Omaha
Jersey
Blue Cross/Blue Shield of Virginia Pacificare
Central States
Healthnet*
- ------------------------
* Agreement signed and implementation in process.
To date, InsWeb has been dependent on a limited number of insurance
companies for substantially all of its revenues. The amount of revenues
generated from a given company depends upon a number of variables that are
difficult for InsWeb to control, such as the degree to which the insurance
company's quotes are competitive with those of other insurance companies, and
the proportion of consumers that fit within the insurance company's targeted
risk profiles, as determined by the filtering criteria that the insurance
company is using at any given time. Accordingly, the amount of revenue that
InsWeb generates from a given insurance company is likely to fluctuate from year
to year, both in absolute terms and as a percentage of total revenues. Revenues
from State Farm, AIG and American Family accounted for approximately 31%, 11%
and 11%, respectively, of InsWeb's revenues for the year ended December 31,
1999, and revenues from State Farm, AIG and RelianceDirect accounted for
approximately 40%, 16% and 10% of revenues for the year ended December 31, 1998.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
11
INTERACTIVE WEBSITE FEATURES AND INFORMATION
To assist consumers in evaluating and fulfilling their insurance needs,
InsWeb provides consumers with a variety of interactive website features and
insurance-related information, including:
- tools to help consumers estimate their coverage requirements for auto and
term life insurance;
- research capabilities to help consumers review the financial strength of
insurance companies nationwide;
- frequently asked questions on insurance;
- articles on a wide variety of insurance and personal finance topics; and
- glossaries of insurance-related terms.
MARKETING AND SALES
InsWeb's marketing program consists of a two-pronged effort, with
substantial resources directed both at attracting increased consumer traffic to
the InsWeb website and building and expanding relationships with participating
insurance companies. InsWeb believes that increased traffic will encourage
insurance companies to develop and expand their relationship with InsWeb, and
that enhancing the comparative shopping opportunities available through
increased insurance company participation will drive further increases in
consumer traffic.
CONSUMER MARKETING
InsWeb's consumer marketing program seeks to increase consumer traffic and
brand awareness through the establishment of relationships with online companies
as well as through direct offline and online consumer marketing.
ONLINE RELATIONSHIPS. InsWeb believes that relationships with high-profile
online companies can drive significant traffic to its site. InsWeb seeks out
relationships with companies whose websites feature a high volume of traffic or
a substantive focus that is related to the purchase of insurance coverage, such
as sites related to automobiles or homes. Agreements with these online companies
typically provide that InsWeb and the online company will share revenue from
transaction fees generated through the relationship, and some require InsWeb to
also pay a fixed fee to the online company. Online companies integrate links
into their websites connecting to InsWeb's marketplace. InsWeb provides
functionality to further integrate with online companies and, in some cases,
provides co-branding functionality whereby the online company's logo is
presented on the InsWeb marketplace to those consumers directed to InsWeb's
marketplace from a company's site. For some of InsWeb's more significant online
relationships, including those with Yahoo!, Snap.com and GO Network (Infoseek),
InsWeb has further integrated its functionality with these companies' sites by
customizing the look and feel of InsWeb's insurance-related content and
marketplace to replicate the design characteristics of the company's site.
Additionally, some of these companies have developed customized interfaces on
their own site to link to the InsWeb marketplace. InsWeb's agreements with
online companies typically have a 12-month term, with either party having a
right to terminate the agreement on 30 to 90 days' notice. Notwithstanding the
foregoing, the integration process requires a significant investment of the
company's time and resources, which InsWeb believes motivates the company to
maintain a long-term relationship with InsWeb.
InsWeb and Yahoo! have entered into an agreement pursuant to which Yahoo!
offers a co-branded version of the InsWeb online insurance marketplace on the
Yahoo! website. The agreement provides for InsWeb to be the exclusive provider
of online insurance quotation services on the Yahoo! site. Under the agreement,
InsWeb has agreed to pay to Yahoo! fixed fees plus a referral fee for each user
delivered to an InsWeb quote form from the co-branded site. This agreement
expires in September 2000.
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In December 1999, InsWeb and Microsoft entered into a two-year agreement
pursuant to which Microsoft's MSN Insurance Center on MSN MoneyCentral offers
co-branded comparative shopping services provided by InsWeb. The agreement
provides for InsWeb to be the exclusive provider of online insurance quotation
services on the MSN Insurance Center. Under the agreement, InsWeb has agreed to
pay to MSN fixed fees for certain traffic guarantees plus a fee for each user
delivered to an InsWeb quote form from the co-branded site in excess of certain
minimums.
In February 2000, InsWeb and America On-line entered into a two-year
agreement pursuant to which America Online offers a co-branded version of the
InsWeb online insurance marketplace across the Netscape Netcenter, Compuserve
and Digital City websites. The agreement provides for InsWeb to be the exclusive
provider of online insurance quotation services on the Netscape website and
premier insurance comparison-shopping aggregator of insurance offerings for
Compuserve and Digital City. Under the agreement, InsWeb has agreed to pay to
AOL fixed fees for certain impression targets plus a fee for each click-through
over a certain cumulative minimum threshold.
At December 31, 1999, future minimum payments under these three agreements
were $12,212,500 in 2000 and $9,925,000 in 2001.
As of December 31, 1999, InsWeb had agreements with 139 online companies.
The principal online companies with which InsWeb has relationships, based on the
fees InsWeb has incurred for their services during the six months ended
December 31, 1999, are as follows:
AutoMall InfoSpace.com
CarClub.com Looksmart
CarPrices.com Microsoft
E*Trade Snap.com
GO Network (Infoseek) Yahoo!
TRADITIONAL CONSUMER MARKETING. As part of its branding effort, InsWeb has
developed a consumer marketing campaign, which began in 1998 with radio
advertising in selected metropolitan markets and which was expanded in 1999 to
include national television and syndicated radio advertising. InsWeb also
conducts other consumer marketing activities, such as sweepstakes contests and
other promotional activities.
ONLINE DIRECT-RESPONSE ADVERTISING. InsWeb's online direct-response
advertising is intended to create a presence for InsWeb on a wide range of
websites whose audiences closely match its target audience. InsWeb's key
advertisements are delivered through content sponsorships, banners and keywords
on financial, news, real estate, classifieds, automobile, directory and general
interest sites. InsWeb's advertisements are targeted primarily to consumers who
are actively seeking insurance.
INSWEB REWARDS PROGRAM. In March 2000, InsWeb began a new initiative to
increase the value of a consumer's visit to the InsWeb site even if the consumer
does not obtain an insurance quote. The InsWeb Rewards Program presents
participating consumers with highly targeted offers for products and services at
preferential terms. Companies that participate in this program have the ability
to target particular market segments by defining various criteria to be met by
consumers in order to be presented with their offer. Consumers also will be able
to select the type of offers in which they are interested, including Auto, Home,
Financial Services, Health/Fitness, Travel and Entertainment/Dining. The offer
will be in the form of direct links to the rewards sponsor's website, submitting
the consumer's contact information to the reward sponsor for follow-up, or
electronic coupons that the consumer can print directly from the InsWeb site.
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BUILDING AND MAINTAINING RELATIONSHIPS WITH INSURANCE COMPANIES
InsWeb believes that establishing long-term relationships with reputable
insurance companies is essential to its ability to offer a desirable insurance
marketplace on its website. Accordingly, a significant portion of InsWeb's sales
and marketing organization consists of Client Development Group, whose role is
to market the online marketplace to insurance companies. The focus of this group
is to maintain and expand the product offerings available on the online
marketplace by selling InsWeb's services to new companies and expanding InsWeb's
relationship with participating insurance companies.
An insurance company's decision to participate in the online marketplace
typically involves significant discussions between InsWeb and the insurance
company regarding the types of products and services the insurance company wants
to offer, the markets in which the insurance company wants to initially
participate and the terms of the agreement between InsWeb and the insurance
company. In addition, both InsWeb and the insurance company devote significant
resources to complete the integration of the insurance company into InsWeb's
website. This integration process typically takes from three to six months to
complete.
Once an insurance company decides to participate in InsWeb's online
insurance marketplace, InsWeb's implementation team of more than 20 people work
with the company to integrate its insurance product information, which entails a
process of specification development, education, planning and activation.
Because of the complexity of interfacing with an insurance company's legacy
computer systems, the implementation team conducts a thorough assessment of the
company's business processes, technical capabilities and desired interface to
develop a comprehensive integration plan. Although the implementation process
can be costly and time-consuming for both InsWeb and the insurance company,
InsWeb believes that it represents a significant commitment by the company and
that the company typically views this expenditure of time and resources as an
investment in a long-term relationship with InsWeb. Once an insurance company's
initial implementation is complete, InsWeb works with the company to expand its
geographic coverage and add insurance products.
InsWeb pursues its relationship-building strategy with insurance companies
at three levels: executive management, middle management and operations
personnel. By investing in relationships at all three of these levels, InsWeb
believes that it will have greater success in maintaining and potentially
expanding those relationships. Additionally, InsWeb believes that strong
relationships at each level of an organization are important to ensure effective
coordination and product implementation.
InsWeb markets its online marketplace to insurance companies employing each
of the three traditional distribution channels. InsWeb believes its online
insurance marketplace provides significant benefits to insurance companies
regardless of the distribution channel they use. InsWeb has also developed
programs targeted at the needs of specific channels. For example, InsWeb's
prototype AGENT IN THE MIDDLE software enables participating insurance companies
who employ an agency-based distribution model to present online quotes through
an agent rather than directly to the consumer. InsWeb's E-AGENT CERTIFICATION is
an Internet-based training program that provides agents with training in the use
of the Internet to process insurance quote requests.
TECHNOLOGY
ARCHITECTURE AND INTERFACES
Since its inception, InsWeb has invested significant resources to develop
and deploy its proprietary technology platform that InsWeb believes constitutes
a significant competitive advantage.
InsWeb's software architecture facilitates interoperability among software
components to maximize responsiveness, flexibility and reliability. This
architecture enables InsWeb to efficiently develop and deploy new insurance
company-specific modules for filtering, rating and data delivery. It also
simplifies the process of providing InsWeb's core marketplace functionality for
use on insurance company sites. In order
14
to speed implementation for each participating insurance company, InsWeb has
developed transmission software components which allow consumer data to be
custom-formatted for delivery to each insurance company based on the
requirements of the insurance company's computer system. InsWeb has developed
custom communication software to provide multiple types of real-time
telecommunication links to its participating insurance companies. These
components provide a variety of solutions to the insurance companies to best
meet their needs and interface with their legacy systems. InsWeb has devoted
significant time and resources to maximize the efficiency of integrating new
insurance companies into its online marketplace and to create a flexible,
customizable Web interface. InsWeb's front-end user interface is accessible to
consumers via standard Web browsers and is designed without unnecessary graphics
that would increase download time.
InsWeb's server software operates on servers running the Microsoft Windows
NT operating system. The software is designed for a high-volume transaction
processing environment, with a focus on reliability, redundancy and
around-the-clock availability. It is designed to enable the system to respond
rapidly and to simultaneously underwrite and rate a consumer's profile against
all participating insurance companies' criteria. The software is also designed
for scalability, enabling InsWeb to expand processing capacity through the
addition of more processors and servers as transaction volumes increase.
SECURITY
InsWeb employs third-party firewall technology to protect its corporate
network from intrusion and uses proprietary designs to isolate confidential data
on its network so that only selected information is publicly available on its
website. Consumer information is transmitted to InsWeb's site using Secure
Socket Layer encryption technology, a widely-used technology for transmitting
encoded data via a Web browser. InsWeb employs a number of other encryption
methods for delivery of consumer information to insurance companies. InsWeb
protects its system management functions using security models integrated with
the operating system. Additionally, some sensitive software applications
incorporate proprietary authentication schemes.
SITE OPERATIONS
InsWeb's hardware servers, storage systems, Internet connections, back-up
strategies and network are designed to allow its online marketplace to operate
continuously. InsWeb's main Web servers are located at its headquarters facility
in Redwood City, California. InsWeb uses multiple service providers to access
the Internet over multiple dedicated communication lines. InsWeb uses a separate
server to operate the software for each primary insurance product, as well as at
least one redundant server for each core product. InsWeb uses a number of
internally-developed and third-party software products to monitor the
performance and availability of its website and core products. InsWeb
continuously monitors consumer traffic, response times and capacity to ensure a
high quality of service for consumers and insurance companies. InsWeb maintains
a back-up facility in Irvine, California through a third-party service provider
to ensure the continuous operation of its online marketplace in case of a
failure at its main facility.
PRODUCT DEVELOPMENT
InsWeb devotes significant resources to improving the structure of its
products and delivering additional tools that allow insurance companies to
effectively reach consumers. InsWeb generally follows a semi-quarterly release
schedule for new versions of its online user interface, which may incorporate
technology advances, new product features and improvements in consumer
interactivity. InsWeb also devotes significant resources to refining its online
consumer tools and research materials and developing new support products.
During 1999, InsWeb implemented more than 60 site upgrades and product releases
for its core products in order to add new insurance companies to its online
marketplace, add new states for participating insurance companies and improve
the functionality and consumer experience of its website.
15
InsWeb is also researching new methods of designing more useful
insurance-related material and presenting it to the consumer in a more
meaningful context.
InsWeb's product development expenses were approximately $3.2 million in
1997, $10.1 million in 1998 and $8.9 million in 1999. Product development
expenses in 1998 included approximately $5.5 million of purchased software
licenses that were expensed due to InsWeb's decision not to integrate the
software into its products. As of December 31, 1999, InsWeb had a product
development staff of 101 full-time employees, all located at its headquarters in
Redwood City, California.
PRIVACY POLICY
InsWeb believes that the privacy of personally identifiable information of
Internet users is becoming increasingly important as the use of the Internet for
electronic commerce continues to grow. InsWeb has adopted a privacy policy for
information of users of its online marketplace. InsWeb does not disclose any
personally identifiable information of a user to InsWeb's participating
insurance companies until the user specifically requests insurance coverage
based on an instant online quote, or requests an offline quote or requests to
participate in an InsWeb Rewards Program. InsWeb does not sell or otherwise make
available to any other party any personally identifiable information concerning
its users. However, InsWeb does compile user information in its databases. This
aggregated statistical information is analyzed internally by InsWeb for
marketing purposes and to improve the content and site layout of its website.
This information is made available in aggregate form only, without individual
identification of consumers, to InsWeb's participating insurance companies for
their use in adjusting, refining and expanding their product offerings. InsWeb
is a member of the Online Privacy Alliance and a licensee of the TRUSTe Privacy
Program and adheres to their standards regarding the protection of the
personally identifiable information of Internet users.
COMPETITION
The online insurance distribution market is a new industry and, like the
broader electronic commerce market, is rapidly evolving and is highly
competitive. Increased competition, particularly by companies offering online
insurance distribution, could reduce the fees InsWeb is able to charge its
participating insurance companies or increase the fees it is required to pay to
online companies with which it has relationships, resulting in reduced margins
or loss of market share, any of which could harm its business.
InsWeb competes with:
- single insurance company websites that offer quotes for the company's own
insurance products online or by telephone;
- Web-based information delivery services that use generic filings with
state regulators to deliver estimated price quotes from various insurance
companies;
- Web-assisted agency distribution services, such as Quotesmith.com, that
provide an Internet-based distribution channel for traditional insurance
agencies;
- Intuit, Inc.'s InsureMarket website, which offers some insurance
company-generated insurance quotes;
- companies that provide quotes and sell insurance policies online;
- online workplace marketers that sell insurance to employees over their
employer's intranet; and
- providers of software technology to insurance companies and other
competitors that may target electronic commerce solutions for the
insurance industry.
16
InsWeb believes the principal bases for competition in the online insurance
distribution market include:
- brand awareness;
- variety and quality of insurance company selection;
- strength of relationships and depth of technology integration with
insurance companies;
- accuracy of insurance quotes;
- breadth and pricing of insurance product selection;
- speed, accessibility and convenience;
- quality and quantity of website content; and
- relationships with other online companies.
Based on published reports by Media Metrix concerning recent site visit
data, published estimates by Forrester Research and Cyber Dialogue regarding the
total number of consumers shopping online for insurance, and publicly available
financial and operational data of other companies offering online insurance
quotes, InsWeb believes that its website is one of the three leading insurance
marketplaces in the United States. InsWeb believes that, other than
InsureMarket, which offers insurance company-sponsored quotes for term life
insurance and a limited selection of such quotes for automobile insurance, no
competitors currently offer the opportunity to comparison shop from among
competing insurance company-generated quotes. InsWeb believes that its ability
to offer competing insurance company-sponsored quotes gives it an advantage over
companies that may provide estimated quotes, or insurance company websites that
only offer quotes from a single insurance company.
Notwithstanding the foregoing, some of InsWeb's current competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than InsWeb does.
In addition, InsWeb believes it will face increasing competition as the online
financial services industry develops and evolves. InsWeb's current and future
competitors may be able to:
- undertake more extensive marketing campaigns for their brands and
services;
- devote more resources to website and systems development;
- adopt more aggressive pricing policies; and
- make more attractive offers to potential employees, companies with which
we have distribution relationships and third-party service providers.
Accordingly, InsWeb may not be able to maintain or grow consumer traffic to its
website and its base of participating insurance companies, its competitors may
grow faster than it does, or companies with which it has strategic relationships
may discontinue their relationships with it, any of which would harm its
business.
GOVERNMENT REGULATION
The insurance industry is subject to extensive regulation under state laws.
Insurance laws and regulations cover all aspects of the insurance process,
including sales techniques, underwriting for eligibility, rates, compensation,
claim payments and record keeping by licensed insurance companies and insurance
agents. InsWeb performs functions for licensed insurance companies and is,
therefore, required to comply with a complex set of rules and regulations that
often vary from state to state. If InsWeb fails to comply with these rules and
regulations, InsWeb, an insurance company doing business with InsWeb, our
officers, or agents with whom we contract could be subject to various sanctions,
including censure, fines, a cease-and-desist order or other penalties. This
risk, as well as changes in the regulatory climate or the enforcement or
interpretation of existing law, could require changes to InsWeb's business or
otherwise
17
harm InsWeb's business. Furthermore, because the application of online commerce
to the insurance market is relatively new, the impact of current or future
regulations on InsWeb's business is difficult to anticipate.
A company that does business as an insurance agent is generally required to
be licensed in any state in which it conducts that business. Although InsWeb
does not believe that its historical activities constitute doing business as an
insurance agent under existing laws and regulations, InsWeb has received direct
and indirect inquiries from insurance regulatory authorities in several states
suggesting that its activities may be considered to fall under their licensing
jurisdiction. Should these or other regulatory authorities pursue inquiries and
ultimately determine that InsWeb's activities required licensure, InsWeb's
business could be harmed.
In order to provide its current and future closing services and conduct
other future business activities that require a license, InsWeb has caused a
wholly-owned subsidiary to be licensed as an insurance agent. This subsidiary is
currently licensed in 39 states and in the remaining eleven states where
corporations are not eligible to become licensed, InsWeb is licensed through its
officers or through resident agents that contract with InsWeb. InsWeb intends to
post prominently on its website the jurisdictions in which the subsidiary is
licensed. Links to agents that contract with InsWeb will be established to
afford consumers access to licensed agencies. InsWeb's operations depend on the
validity of and its continued good standing under the licenses and approvals
pursuant to which InsWeb's subsidiary, licensed officers and resident agents
operate. Licensing laws and regulations vary from jurisdiction to jurisdiction.
The applicable licensing laws and regulations are subject to amendment or
interpretation by regulatory authorities. Such authorities generally are vested
with broad discretion concerning the allowance, renewal and revocation of
licenses and approvals. The inability to obtain the requisite agent licenses or
other necessary licenses, permits, or authorizations could harm InsWeb's
business.
InsWeb transferred to its licensed subsidiary responsibility for the ongoing
operation of InsWeb's website in April 1999, and intends to conduct business
activities that require a license through this subsidiary and InsWeb's licensed
officers and agents. Offering services through this licensed subsidiary or
through licensed officers and agents could create conflicts with insurance
companies that have policies prohibiting them from employing insurance agents or
from selling insurance through agents that compete with their own exclusive
agents. These conflicts could result in a loss of business from these insurance
companies and could harm InsWeb's business.
InsWeb developed its Customer Care Center to provide assistance to consumers
who visit InsWeb's website through real-time chat and live telephone support.
InsWeb believes that the defined responsibilities of the service representatives
staffing the Customer Care Center should not require licensure; however, InsWeb
intends to comply with any licensing requirement of the jurisdictions served by
the Customer Care Center.
InsWeb faces additional regulatory risk because most of the laws and
regulations governing insurance agents contemplate or assume paper-based
transactions and do not currently address the delivery of required disclosures
or other documents through electronic communications. Until these laws and
regulations are revised to clarify their applicability to electronic commerce,
any company offering insurance products and services through the Internet or
other means of electronic commerce will face uncertainty as to compliance with
these laws and regulations. Moreover, there are a number of bills pending before
Congress that could fundamentally change the traditional role of state
regulation of insurance. InsWeb's policies and procedures may not be deemed
acceptable by any regulatory body examining its activities in light of these
potentially different laws and regulations. Any adverse regulatory actions could
seriously harm InsWeb's business.
In addition, many state insurance codes limit the collection and use of
personal information by insurance companies, agents, or insurance service
organizations and, under certain circumstances, the payment of insurance-related
compensation to unlicensed persons. If InsWeb does not comply with these
18
state laws, InsWeb could be subject to fines or other enforcement proceedings
that could harm its business. To date, InsWeb has not been notified by any
regulatory authority that its information practices or compensation
methodologies do not comply with these state laws.
INTELLECTUAL PROPERTY
InsWeb regards its intellectual property as critical to its success, and
relies upon trademark, copyright and trade secrets laws in the United States and
other jurisdictions to protect its proprietary rights. The INSWEB mark has been
registered in the United States, France, Germany, South Korea and the United
Kingdom, and applications are pending in several other countries. Other U.S. and
worldwide trademark applications include, but are not limited to, eAgent,
InsWeb.com, Powered by InsWeb, and Where You and Your Insurance Really Click.
InsWeb has applied for patents on its core technology and related patentable
subject matter, however no patent has yet issued, and thus InsWeb cannot yet
legally prevent a competitor from independently using similar functionality.
InsWeb's pending trademark registration and patent applications may not be
approved or granted, or, if granted, may be successfully challenged by others or
invalidated through administrative process or litigation. In addition, effective
patent, copyright, trademark, and trade secret protection may be unavailable or
limited in some foreign countries. InsWeb also seeks to protect its proprietary
rights through physical and technological security measures, and through the use
of confidentiality or license agreements with its business partners, employees,
consultants, advisors and others, and generally to control access to, and
distribution and use of, its software, documentation, business and other
proprietary information. Despite InsWeb's efforts to protect its proprietary
rights from unauthorized use or disclosure, employees, consultants, advisors or
others may not maintain the confidentiality of InsWeb's proprietary information,
and this proprietary information may otherwise become known, or be independently
developed, by competitors. The steps InsWeb has taken may not prevent
misappropriation of its proprietary rights, particularly in foreign countries
where laws or law enforcement practices may not protect its proprietary rights
as fully as in the U.S.
InsWeb licenses its trademarks and similar proprietary rights to third
parties. While InsWeb attempts to ensure that the quality of its brand is
maintained by these companies, they may take actions that could harm the value
of InsWeb's proprietary rights or the reputation of InsWeb or its services.
InsWeb may receive notice of claims of infringement of other parties'
proprietary rights or claims that its own patents or other intellectual property
rights are invalid. From time to time InsWeb has been subject to infringement
claims in the ordinary course of its business, including claims of alleged
infringement of the trademark rights of third parties by InsWeb and the
companies with which it does business. Any of these claims, with or without
merit, could be time consuming to defend, result in costly litigation, divert
management attention and resources or require InsWeb to enter into royalty or
licensing agreements. Licenses may not be available on reasonable terms, if at
all, and the assertion or prosecution of any infringement claims could
significantly harm InsWeb's business.
EMPLOYEES
As of December 31, 1999, InsWeb had 297 full-time employees, including 101
employees primarily engaged in product development, 125 in sales and marketing
and 71 in management and administration. InsWeb has never had a work stoppage,
and none of its employees are currently represented under collective bargaining
agreements. InsWeb considers its relations with its employees to be good. InsWeb
believes that its future success will depend in part on the continued service of
its senior management and key technical personnel and its ability to attract,
integrate, retain and motivate highly qualified technical and managerial
personnel. Competition for qualified personnel in InsWeb's industry and
geographical location is intense. InsWeb may not continue to be successful in
attracting and retaining a sufficient number of qualified personnel to conduct
its business in the future.
19
EXECUTIVE OFFICERS OF THE REGISTRANT
As of March 7, 2000, our executive officers were as follows:
NAME POSITION WITH THE COMPANY AGE
- ---- ----------------------------------------------------------- --------
Hussein A. Enan............... Chairman of the Board, President and Chief Executive 53
Officer
James M. Corroon.............. Vice Chairman of the Board 60
Mark P. Guthrie............... Executive Vice President, Chief Operating Officer and 38
Acting Chief Financial Officer
Marian C. Taylor.............. Senior Vice President, Secretary 51
HUSSEIN A. ENAN co-founded InsWeb in February 1995 and has served as its
Chairman of the Board and Chief Executive Officer since its inception and as its
President since May 1999. From March 1992 to November 1994, Mr. Enan was a
general partner at E.W. Blanch, a reinsurance intermediary that merged with his
own wholly-owned company, Enan & Company, a reinsurance intermediary, in
March 1992. Mr. Enan founded Enan & Company in February 1979. From
November 1970 to March 1979, Mr. Enan held various executive positions at BEP
International, a Canadian reinsurance intermediary.
JAMES M. CORROON has been a director of InsWeb since August 1996 and has
served as its Vice Chairman of the Board since August 1999. Mr. Corroon has been
a director of Willis Corroon of California, an insurance services firm, since
January 1996. From October 1966 to December 1995 Mr. Corroon held various
management positions with Willis Corroon and its predecessor entity, Corroon &
Black Corporation.
MARK P. GUTHRIE joined InsWeb in September 1997 as Senior Vice President of
Strategic Partnerships and has served as its Executive Vice President since
July 1998 and as its Chief Operating Officer since January 2000. From July 1995
to August 1997, Mr. Guthrie held various positions with Industrial Indemnity, a
nationwide property and casualty insurance company, most recently as senior
operating officer of national programs.
MARIAN C. TAYLOR joined InsWeb in July 1997 as Senior Vice President,
General Counsel and Secretary and currently serves as Senior Vice President and
Secretary. From April 1993 to June 1997, Ms. Taylor was engaged in the private
practice of law. From March 1992 to March 1993, Ms. Taylor was a vice president
of E.W. Blanch. From September 1990 to March 1993, Ms. Taylor was vice president
and corporate counsel of Enan & Company.
ITEM 2. PROPERTIES.
InsWeb's corporate headquarters and its principal administrative, product
development, sales and marketing operations are located in approximately 75,500
square feet of office space in Redwood City, California, which InsWeb occupies
under a lease expiring in September 2008, subject to InsWeb's option to extend
the term for an additional 10 years. InsWeb currently subleases approximately
15,180 square feet of this space. In October 1999, InsWeb entered into a 12-year
lease for approximately 160,000 square feet in San Carlos, California to house
InsWeb's future headquarters. InsWeb intends to move its executive,
administrative and marketing personnel to the San Carlos facility in the first
six months of 2000 with the technical staff scheduled to move later in 2000.
After the completion of these moves, InsWeb expects to sublease the office space
it currently leases in Redwood City.
InsWeb's Customer Care Center and agency operations is located in
approximately 17,000 square feet of office space in Westlake Village,
California, which InsWeb occupies under a lease expiring in July 2004, subject
to InsWeb's option to extend the term for an additional 10 years. InsWeb also
leases sales offices in Chicago, Illinois and Abindon, Maryland. InsWeb believes
that its existing facilities are adequate to meet
20
its needs for the immediate future and that future growth can be accommodated
through the leasing of additional or alternative space near its current
facilities.
ITEM 3. LEGAL PROCEEDINGS.
InsWeb is not a party to any pending legal proceedings which it believes
will materially affect its financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
InsWeb did not submit any matters to a vote of its security holders during
the quarter ended December 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
InsWeb consummated its initial public offering on July 23, 1999. Our common
stock is quoted on the Nasdaq National Market under the symbol "INSW." As of
December 31, 1999, there were approximately 212 stockholders of record. Because
many shares are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of stockholders
represented by these record holders. The following table sets forth, for the
quarters indicated, the high and low sales price per share of our common stock
as reported on the Nasdaq National Market:
PRICE RANGE
------------------------------------------
THIRD QUARTER FOURTH QUARTER
-------------------- -------------------
HIGH LOW HIGH LOW
-------- --------- -------- --------
Year Ended December 31, 1999................. $44.00 $15.44 $35.69 $16.00
We have not paid any cash dividends on our capital stock. We currently
intend to retain our earnings for use in the operation and expansion of our
business and, therefore, we do not anticipate paying any cash dividends in the
foreseeable future.
21
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Operating results" and the consolidated financial statements and the notes
thereto included elsewhere in this Form 10-K.
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1995(1) 1996 1997 1998 1999
----------- ----------- ----------- ------------ ------------
CONSOLIDATED STATEMENT OF OPERATIONS
DATA
Revenues:
Transaction fees................... $ -- $ 6,617 $ 115,758 $ 3,151,423 $ 19,137,713
Development and maintenance fees... 199,351 551,406 789,337 2,673,450
Other revenues..................... 41,936 82,507 369,416 29,375
----------- ----------- ----------- ------------ ------------
Total revenues................... -- 247,904 749,671 4,310,176 21,840,538
Operating expenses:
Product development................ 773,713 2,899,737 3,209,587 10,077,497 8,870,530
Sales and marketing................ 551,964 2,009,701 3,166,644 8,953,700 33,477,172
General and administrative......... 699,690 2,730,066 3,258,881 6,639,816 13,474,201
Amortization of stock-based
compensation..................... -- -- 470,455 540,489 1,272,106
Amortization of intangible
assets........................... -- -- -- -- 3,129,047
----------- ----------- ----------- ------------ ------------
Total operating expenses......... 2,025,367 7,639,504 10,105,567 26,211,502 60,223,056
----------- ----------- ----------- ------------ ------------
Loss from operations................. (2,025,367) (7,391,600) (9,355,896) (21,901,326) (38,382,518)
Other income (expense), net.......... -- -- -- 600,000 (165,841)
Interest income (expense), net....... (5,851) 121,584 293,173 (1,188,550) 2,347,543
----------- ----------- ----------- ------------ ------------
Net loss............................. $(2,031,219) $(7,270,016) $(9,062,723) $(22,489,876) $(36,200,816)
=========== =========== =========== ============ ============
Net loss per share basic and
diluted............................ $ (677.07) $ (0.56) $ (0.62) $ (1.52) $ (1.52)
=========== =========== =========== ============ ============
Shares used in computing net loss per
share--basic and diluted........... 3,000 13,054,716 4,601,318 14,813,013 23,863,850
=========== =========== =========== ============ ============
Pro forma net loss per share--basic
and diluted........................ $ (677.07) $ (0.40) $ (0.43) $ (0.92) $ (1.17)
=========== =========== =========== ============ ============
Shares used in computing pro forma
net loss per share--basic and
diluted............................ 3,000 18,348,845 21,242,209 24,408,089 31,000,310
=========== =========== =========== ============ ============
- --------------------------
(1) Represents period from February 28, 1995 (Inception) to December 31, 1995
DECEMBER 31
-------------------------------------------------------------
1995 1996 1997 1998 1999
---------- --------- --------- ---------- -----------
CONSOLIDATED BALANCE SHEET DATA
Cash and equivalents......................... 6,150 6,806,899 2,360,153 8,337,133 $25,688,760
Short-term investments....................... -- -- -- -- 64.063,830
Working capital (deficit).................... (1,564,389) 6,738,942 2,039,789 5,496,879 91,362,020
Total assets................................. 423,294 9,352,924 5,139,749 49,356,748 118,280,904
Long term debt............................... -- -- -- 2,089,137 1,464,558
Total stockholders' equity (deficit)......... (1,184,168) 7,476,248 3.062,630 19,582,072 111,184,822
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS ANNUAL REPORT ON FORM 10-K AND IN PARTICULAR MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTAINS
FORWARD-LOOKING STATEMENTS WITH RESPECT TO INSWEB'S FUTURE FINANCIAL
PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO VARIOUS RISKS AND
UNCERTAINTIES, INCLUDING THE FACTORS DESCRIBED BELOW UNDER THE CAPTION "RISK
FACTORS," AS WELL AS IN INSWEB'S REGISTRATION STATEMENT ON FORM S-1 AND OTHER
DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, THAT COULD CAUSE
INSWEB'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE
CURRENTLY ANTICIPATED.
OVERVIEW
InsWeb operates an online insurance marketplace that enables consumers to
shop online for a variety of insurance products, including automobile, term
life, homeowners, renters and health insurance, and obtain insurance
company-sponsored quotes for actual coverage. In order to create this
marketplace, InsWeb has established close relationships with more than 49
insurance companies throughout the United States.
InsWeb was incorporated in February 1995. During 1995 and 1996, InsWeb's
operating activities principally involved the design of its online marketplace
and the development of a technology platform capable of handling the complex
processing requirements of numerous insurance companies as well as heavy volumes
of consumer traffic. From late 1996 through early 1998, InsWeb focused its
efforts on establishing relationships with leading insurance companies,
assisting them with the development of their online distribution strategies and
building custom interfaces between their information systems and InsWeb's
technology platform. In the second quarter of 1998, InsWeb initiated activities
designed to attract consumer traffic to its website, including commencing local
advertising campaigns and the establishment of strategic relationships with key
Internet portals such as Yahoo!, as well as other online businesses that are
sources of insurance shoppers, such as personal finance, automobile purchase and
mortgage origination websites. As a result of these activities, consumer visits
to the InsWeb site and completed shopping sessions (site visits in which a
consumer completes a quote form for a particular insurance product) have
increased substantially in subsequent quarters.
InsWeb's principal source of revenues is transaction fees. While quotes
obtained through InsWeb's online insurance marketplace are provided to consumers
free of charge, InsWeb's participating insurance companies pay transaction fees
to InsWeb generally based on qualified leads delivered to them electronically.
Qualified leads are produced in two ways: for insurance companies offering
consumers instant online quotes, a qualified lead is produced when a consumer
requests insurance coverage based on a specific quote; for insurance companies
providing e-mail or other offline quotes, a qualified lead is produced when the
consumer clicks to request the quote itself. In either case, transaction fees
are payable whether or not the consumer actually purchases an insurance policy
from the insurance company, and revenue from transaction fees is recognized at
the time the qualified lead is delivered to the insurance company.
InsWeb also generates development and maintenance fees from its
participating insurance companies. InsWeb charges a fee to design and develop
customized interfaces between an insurance company's information system and the
InsWeb site. Development fees are typically recognized when the insurance
company's integration with the InsWeb site becomes operational. Additional
development fees are charged as insurance companies add new products, increase
their geographic coverage and convert to instant quoting capability on InsWeb's
online insurance marketplace, as well as for periodic upgrades and changes to
insurance companies' information resident on the InsWeb site. InsWeb charges
maintenance fees for maintaining and servicing the programs of the individual
insurance companies and for maintaining any hardware at InsWeb's facility that
is dedicated to specific insurance companies. These maintenance fees are
typically payable monthly and are recognized as revenue ratably over the term of
the maintenance agreement. Prepaid development and maintenance fees are recorded
as deferred revenue until earned.
23
Development and maintenance fees are expected to account for a declining
percentage of total revenues as InsWeb's online marketplace expands and
transaction fees increase.
InsWeb initially focused its efforts on developing insurance company
coverage for automobile insurance in order to be able to offer true comparative
online shopping for this important segment of the insurance market. Automobile
insurance accounted for approximately 64% of total revenues in 1997, 75% in 1998
and 78% in 1999. Automobile insurance is expected to continue to account for a
substantial portion of InsWeb's revenues for the foreseeable future and may
continue to increase as a percentage of revenues as transaction fees account for
a greater portion of InsWeb's revenues. However, InsWeb intends to continue to
expand its online insurance marketplace by adding new products and additional
insurance companies and expects fees related to automobile insurance to
eventually decrease as a percentage of revenues as additional insurance
companies and products are brought online.
Despite the ongoing addition of new insurance companies to its online
insurance marketplace, InsWeb has been dependent on a limited number of
insurance companies for a majority of its revenues. Revenues from State Farm,
AIG and American Family accounted for approximately 31%, 11% and 11%,
respectively, of InsWeb's revenues for the year ended December 31, 1999, and
revenues from State Farm, AIG and RelianceDirect accounted for approximately
40%, 16% and 10%, respectively, of InsWeb's revenues for the year ended
December 31, 1998. InsWeb expects its revenues to become less concentrated as
new insurance companies are added to its online insurance marketplace. However,
because of the broad market presence of some of InsWeb's participating insurance
companies, InsWeb expects to continue to generate a substantial portion of its
revenues from a limited number of insurance companies for the foreseeable
future.
Product development expenses consist primarily of payroll and related
expenses for development and technology personnel. To date, InsWeb has not
capitalized any of its software development costs. Because the timing of the
commercial release of its products has substantially coincided with their
technological feasibility, all software development costs have been expensed as
incurred. InsWeb intends to continue to expand its online insurance marketplace
by adding additional product offerings and participating insurance companies and
expects that these activities will require additional personnel. Accordingly,
InsWeb expects that its product development expenses will continue to increase
for the foreseeable future.
Sales and marketing expenses consist primarily of payroll and related
expenses for InsWeb's sales and marketing personnel as well as consumer
marketing expenditures for advertising, public relations, promotions and fees
paid to online companies with which InsWeb has relationships and expenses
related to its customer care and insurance agency operations. InsWeb intends to
significantly increase its sales and marketing expenses in order to establish
and maintain relationships with insurance companies, attract increased consumer
traffic to the InsWeb site, and develop the InsWeb brand. InsWeb intends to
invest substantially in an integrated consumer marketing program including the
expansion and enhancement of its network of online relationships as well as
traditional offline and online advertising campaigns designed to increase
consumer awareness of InsWeb and its online insurance marketplace. At the same
time, InsWeb intends to continue to devote substantial resources to market the
InsWeb online marketplace to insurance companies, to add new insurance companies
and expand relationships with participating companies so that it can offer
consumers greater comparison shopping opportunities over an increasingly broad
selection of products.
General and administrative expenses consist primarily of payroll and related
expenses for InsWeb's management, administrative and accounting personnel,
expenses relating to site operations, professional fees and other general
corporate expenses. InsWeb expects that, in support of the continued growth of
its business and its operations as a public company, general and administrative
expenses will continue to increase for the foreseeable future.
24
In order to accelerate the development of its health insurance product
offerings, InsWeb acquired Benelytics, Inc., a developer of employee health
benefits selection and management software and reference data products. The
acquisition was effective on December 31, 1998 and was accounted for using the
purchase method of accounting. Accordingly, the purchase price was allocated to
the tangible and intangible assets acquired and liabilities assumed on the basis
of their respective fair values as of the acquisition date. The total purchase
price of $8.7 million consisted of 908,561 shares and warrants to purchase an
aggregate of 12,246 shares of the Company's common stock with an estimated fair
value of approximately $8.5 million and acquisition-related expenses and assumed
liabilities. Of the total purchase price, $7.3 million was allocated to goodwill
and $1.4 million to software and other intangible assets. The goodwill will be
amortized over three years, and the other intangible assets will be amortized
over two years.
Since its inception, InsWeb has incurred significant losses, and as of
December 31, 1999, InsWeb had an accumulated deficit of $74.4 million. These
losses and this accumulated deficit have resulted from the significant costs
incurred in the development of InsWeb's technology platform, the establishment
of relationships with insurance companies, their integration with the InsWeb
site, and InsWeb's marketing and sales activities. InsWeb intends to continue to
invest heavily in product development, sales and marketing and in its
administrative infrastructure. As a result, InsWeb believes that it will
continue to incur substantial operating losses for the foreseeable future.
Although InsWeb has experienced significant revenue growth in recent periods,
its operating results for future periods are subject to numerous uncertainties,
and there can be no assurance that InsWeb's revenue growth will continue or that
it will be able to achieve or sustain profitability. In view of the rapidly
evolving nature of InsWeb's business and its limited operating history, InsWeb
believes that period-to-period comparisons of its operating results are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
RESULTS OF OPERATIONS
The following table sets forth statement of operations data as a percentage
of total revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
-------- -------- --------
Revenues:
Transaction fees.............................. 15.4% 73.1% 87.6%
Development and maintenance fees.............. 73.6 18.3 12.2
Other revenues................................ 11.0 8.6 0.2
-------- ------ ------
Total revenues.............................. 100.0 100.0 100.0
Operating expenses:
Product development........................... 428.1 233.8 40.6
Sales and marketing........................... 422.4 207.7 153.3
General and administrative.................... 434.7 154.1 61.7
Amortization of stock-based compensation...... 62.8 12.5 5.8
Amortization of intangible assets............. -- -- 14.3
Total operating expenses.................... 1,348.0 608.1 275.7
-------- ------ ------
Loss from operations............................ (1,248.0) (508.1) (175.7)
Other income, net............................... -- 13.9 (0.8)
Interest income (expense), net.................. 39.1 (27.6) 10.7
-------- ------ ------
Net loss........................................ (1,208.9)% (521.8)% (165.8)%
======== ====== ======
25
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES
TRANSACTION FEES. Transaction fees accounted for $19.1 million, or 87.6%,
of total revenues in 1999, compared to $3.2 million, or 73.1%, in 1998. This
increase was the result of a substantial increase in the number of completed
shopping sessions and, to a lesser extent, increased revenues per completed
shopping session. The increase in shopping sessions resulted from increased
consumer traffic due to InsWeb's consumer marketing activities and the addition
of a substantial number of online relationships. The increase in revenues per
completed shopping session was due to increased insurance company coverage and,
to a lesser degree, increases in the average transaction fee per qualified lead.
Although transaction fees are expected to increase in fiscal 2000, they may not
grow at as high a rate as in prior periods.
DEVELOPMENT AND MAINTENANCE FEES. Development and maintenance fees
accounted for $2.7 million, or 12.2%, of total revenues in 1999, compared to
$789,000, or 18.3% in 1998. The increase in development fees resulted primarily
from an increased number of participating insurance companies whose integration
with the InsWeb online insurance marketplace became operational during 1999
compared to 1998. Maintenance fees increased as a result of the expansion in the
overall number of InsWeb's participating insurance companies.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenses decreased to
$8.9 million in 1999 from $10.1 million in 1998. This decrease was primarily due
to the $5.5 million cost of software licenses that were expensed in 1998 due to
InsWeb's decision not to integrate the software into its products. Exclusive of
this expense, product development expenses increased in 1999 over 1998,
primarily due to the hiring of personnel to support the requirements of InsWeb's
growing network of participating insurance companies and online relationships
and to design, test and deploy InsWeb's expanding line of product offerings.
SALES AND MARKETING. Sales and marketing expenses increased to
$33.5 million in 1999 from $9.0 million in 1998. This increase was due to
substantial increases in consumer marketing expenses, including increased costs
and fees associated with new and existing online relationships, costs related to
national radio and television campaigns, an increase in sales and marketing
personnel and operating costs associated with establishing the Company's
Customer Care Center to provide additional customer service.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $13.5 million in 1999 from $6.6 million in 1998. This increase was primarily
due to increased personnel and related costs, increased office and occupancy
costs associated with additional leased office facilities and increased
depreciation related to capital expenditures.
AMORTIZATION OF STOCK-BASED COMPENSATION. Amortization of stock-based
compensation was $1.3 million in 1999 compared to $500,000 in 1998. This
increase was attributable to the amortization of additional deferred
compensation charges related to certain stock option grants where the Company
has determined that the deemed fair market value on the date of grant was in
excess of the exercise price of the options.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets was
$3.1 million in 1999. This amount was attributable to the acquisition of
Benelytics in December 1998.
OTHER INCOME, NET
Other expense in 1999 primarily consisted of InsWeb's equity share of the
net loss of InsWeb Japan K.K. As of December 31, 1999, InsWeb owned a 25% equity
interest in InsWeb Japan K.K. Other income, net in 1998 represented income from
the sale of assets of InsWeb's property and casualty agents line of business,
net of a $50,000 non-compete fee. Additionally, the Company has a $5.5 million
letter of credit
26
securing the lease which is collateralized by a portion of the Company's
investments. This line increases to $9.0 million in May 2000.
INTEREST INCOME (EXPENSE), NET
Interest income (expense), net includes income earned on InsWeb's invested
cash and investments and expenses related to its outstanding debt obligations.
Net interest income was $2.3 million in 1999, compared to net interest expense
of $1.2 million in 1998. The increase in net interest income was primarily a
result of the repayment of the line of credit and the investment of the proceeds
from the issuances of preferred and common stock.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES
TRANSACTION FEES. Transaction fees increased to $3.2 million in 1998 from
$116,000 in 1997. These increases were primarily due to substantial increases in
the number of completed shopping sessions and, to a lesser extent, increased
revenues per completed shopping session. The increase in shopping sessions
resulted from increased consumer traffic due to InsWeb's consumer marketing
activities that were initiated in the second quarter of 1998 and the addition of
a substantial number of online relationships. The increase in revenues per
completed shopping session was due to increased insurance company coverage and,
to a lesser degree, increases in the average transaction fee per qualified lead.
DEVELOPMENT AND MAINTENANCE FEES. Development and maintenance fees
increased to $789,000 in 1998 from $551,000 in 1997. These increases were
primarily the result of increases in the number of new insurance carriers added
to the InsWeb online insurance marketplace.
OTHER REVENUES. Other revenues of $369,000 in 1998 related primarily to
fees received under a non-recurring license of software technology. Other
revenues of $83,000 in 1997 related to services that InsWeb no longer offers.
OPERATING EXPENSES
PRODUCT DEVELOPMENT. Product development expenses increased to
$10.1 million in 1998 from $3.2 million in 1997. The increase in 1998 was
primarily due to the $5.5 million cost of software licenses that were expensed
due to InsWeb's decision not to integrate the software into its products. The
remainder of the increase was due to the continued hiring of personnel to
support the requirements of InsWeb's growing network of participating insurance
companies and online relationships and to design, test and deploy InsWeb's
expanding line of product offerings.
SALES AND MARKETING. Sales and marketing expenses increased to
$9.0 million in 1998 from $3.2 million in 1997. These increases were due to a
substantial increase in consumer marketing expenses, including costs and fees
associated with new online relationships, as well as an increase in sales and
marketing personnel and related costs.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $6.6 million in 1998 from $3.3 million in 1997. These increases were
primarily due to increased personnel and related costs, increased office and
occupancy costs and increased depreciation related to capital expenditures.
AMORTIZATION OF STOCK-BASED COMPENSATION. Amortization of stock-based
compensation was $0.5 million in 1998 compared to $0.5 million in 1997. The
amortization is attributable to the amortization of deferred compensation
charges related to certain stock option grants where the Company has determined
that the deemed fair market value on the date of grant was in excess of the
exercise price of the options.
27
OTHER INCOME, NET
Other income, net in 1998 represented income from the sale of assets of
InsWeb's property and casualty agents line of business, net of a $50,000
non-compete fee.
INTEREST INCOME (EXPENSE), NET
Net interest expense of $1.2 million in 1998 was due to interest paid on
increased borrowings. Net interest income in 1997 resulted from InsWeb's
investment of proceeds received from the sale of preferred and common stock.
LIQUIDITY AND CAPITAL RESOURCES
InsWeb has financed its operations primarily through private placements of
equity securities, borrowings from an affiliate of one of its investors and an
initial public offering of its common stock, which raised net proceeds of
$89.6 million in July 1999. At December 31, 1999, InsWeb's principal source of
liquidity was $89.8 million in cash, cash equivalents and short-term
investments.
Net cash used in operating activities was $32.4 million in 1999 compared to
$18.0 million in 1998. In each period, the use of cash primarily consisted of
InsWeb's operating loss before noncash items. In 1999, the noncash items
included amortization of intangibles of $3.1 million associated with the
acquisition of Benelytics, Inc. in December 1998, amortization of deferred
compensation of $1.2 million and depreciation and amortization of fixed assets
of $1.8 million. In 1998, the noncash items included a loss on software licenses
of $5.5 million, $650,000 from the sale of property and casualty agents line of
business and $350,000 of revenue from an agreement to license software.
Increases in accounts receivable and deposits, partially offset by increases in
accounts payable and accrued expenses, also contributed to the cash used in
operations in 1998 and 1999.
Net cash used in investing activities was $74.2 million in 1999 and
$3.9 million in 1998. Net cash used in investing activities in 1999 primarily
consisted of the purchase of short-term investments with the proceeds from the
issuances of preferred and common stock. Net cash used in investing activities
in 1998 primarily consisted of investments in leasehold improvements and
purchases of equipment and furniture.
Net cash provided by financing activities was $124.0 million in 1999 and
$27.9 million in 1998. Net cash provided by financing activities during 1999
primarily consisted of net proceeds of $56.3 million from the issuance of
preferred stock, offset by the repayment of $19.3 million in borrowings under
the line of credit and net proceeds of $89.6 million from the public offering of
common stock. Net cash provided during 1998 primarily consisted of
$19.3 million in net borrowings under the line of credit and $8.0 million in
proceeds from the issuance of preferred stock.
InsWeb had no material commitments for capital expenditures at December 31,
1999 but expects such expenditures to total approximately $17.6 million in 2000.
Such expenditures will primarily be for equipment, software, furniture and
leasehold improvements, including approximately $11.3 million related to its new
headquarters facility. To secure its obligations under its principal lease,
InsWeb has provided the lessor with a $5.5 million letter of credit which is
collateralized by a portion of InsWeb's investment portfolio. This letter of
credit will be increased to $9.0 million in May, 2000. InsWeb also has total
minimum lease obligations of $112.0 million through 2011 under noncancelable
operating leases. In addition, InsWeb is obligated to make minimum payments
totaling $22.1 million through April 2001 under various marketing agreements
with its online partners.
InsWeb currently anticipates that its balances of cash and cash equivalents
and short-term investments, together with cash generated by its operations, will
be sufficient to meet its anticipated cash needs for working capital and capital
expenditures for at least the next 12 months. InsWeb may require additional
capital prior to the end of this period if, for example, it were to experience
greater than expected losses from operations or if it were to pursue one or more
business acquisitions or investments. InsWeb cannot be
28
certain that additional financing will be available when required, on favorable
terms or at all. If InsWeb is not successful in raising additional capital as
required, its business could be materially harmed. If additional funds are
raised through the issuance of equity securities, the percentage ownership of
InsWeb's then-current stockholders would be reduced.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial