I took the liberty and printed the article you found:
Hidden Value Stocks: The Ultimate In Portfolio Insurance
July 29, 1999 7:31 AM EDT
By David H.M. Baker CFA
Analyst for worldlyinvestor.com
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I rarely write about IPOs in this column as many of these new issues have little in the way of hidden value.
However, there is always an exception to the rule and one company that I had the opportunity to meet with last week was so compelling I wanted to share it with all you.
The company is Insweb (quote, chart, profile) which went public last Friday at $17 and went to $44 and closed yesterday at $27.875.
I see Internet issues every day and have had the chance to meet with many of the managements of these hot new issues. I must say that INSW represents what I believe the most singularly impressive business model I have seen to date in the Internet space.
INSW is a product of more than four years of work and of tens of millions of venture capital dollars from some of the most reputable VC firms in the industry.
INSW is a vertical insurance portal, which offers its users the ability to input their profile, personal, property data and receive comparative pricing for auto, health, general, life and property insurance.
Historically, this has never been possible and it is important to point out that these are actual prices are not just quotes. This is free to the consumer.
I was initially intrigued by the stock because it was offering a valuable service to the consumer that heretofore has never been available. In fact in studies INSW found that the difference in the pricing of auto policies for a customer with the same profile could vary as much as 100%.
This company is harnessing the power of the Internet by making the information available to the consumer allowing them to make an informed choice, but as I discovered this was not the most powerful part of their model. In fact, it would prove to be just the icing on the cake.
INSW is attracting the consumers for the insurance company, pre-qualifying them and providing quotes. The individual is typing in his or her own data. This is the key, as the INSW solution is most attractive from the standpoint that it is actually an outsourced marketing, administrative and eventually processing solution for the insurance companies.
Today it costs the average insurance company $600 to write a $1,200 auto policy and it takes one million direct solicitation pieces to attract 4,500 new policyholders.
This is very expensive and it does not maximize the value of the insurance company's expertise. By utilizing INSW to attract and pre-qualify the new policyholders it can bring the costs of customer acquisition down by 50%. This is the hook.
Currently, INSW gets paid by the insurance companies to deliver the customers to the insurance company and INSW is paid regardless whether the insurance company writes the policy or not.
As the model progresses INSW believes it will evolve to the point where it closes the policy online for the insurance company.
This will allow INSW to capture a considerable stream of renewal income and allow the insurance companies to become virtual underwriting entities. Further, it intends to offer claims processing which would be a huge boon to its insurance company clients.
The company is initially concentrating on personal lines and intends to broaden its offering to commercial lines over the next several years.
So where is the hidden value you ask? INSW has a huge advantage in the fact that by the nature of the industry it has a first mover advantage (in most cases this is not an advantage) by the fact that any potential competitor will take two to three years to ramp to the level that INSW is at today.
Each state has its own insurance regulatory agency and to offer insurance in the US it must be approved on a state by state basis, which as you can imagine is an arduous process.
Further, INSW has married its proprietary front technology with the back end systems of all the major US insurance companies. This in itself would take several years to replicate by the most well funded and focused competitor.
Lastly, this management team is the deepest I have seen to date from any IPO, not just in the Internet sector. The top six executives have an average 25 years of experience in the industry, the senior VPs 17 years and the VP level executives 7 years, which provides considerable credibility to their vision and ability to execute on the stated model.
I purchased these shares for my clients around the $30 level and at the current $27.875 price they represent great value.
I doubt that they will remain at these levels for long, especially once the Wall Street analysts recommend the stock in the near future.
Unlike many Internet stocks, INSW has a compelling business model, projected attractive operating margins of 15%-20% and it has created this opportunity in a sector enjoying monumental barriers to entry.
All Internet stocks offer above average risk, however INSW I would argue provides the just about the lowest long term risk in the sector while potentially offering some of the most attractive capital appreciation potential.
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