| INSWEB CORP Item 1A Risk Factors |
| You should refer to the explanation of the qualifications and limitations on forward-looking statements set forth at the beginning of Item 1 of this Report |
| We have a history of losses, we expect future losses, and we may not achieve or maintain profitability Given planned investment levels, we believe that we will incur operating losses for at least the next year |
| As of December 31, 2005, our accumulated deficit was dlra188dtta6 million |
| Our operating results for future periods are subject to numerous uncertainties, and we may not achieve sufficient revenues to become profitable |
| Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis in the future |
| If we are unable to achieve profitability or if our profitability is delayed we may need to seek additional financing to continue our business operations |
| Such financing could be on terms that are dilutive to our existing stockholders or could involve the issuance of securities that have rights and preferences that are senior to those associated with our common stock |
| Moreover, if such financing were not available or were available only upon terms that were unacceptable to us, we could be required to delay, reduce, or cease certain of our operations, any of which could materially harm our business and financial results |
| If we are unable to achieve cash flow breakeven or to generate working capital that may be required in the future, our ability to operate could suffer or cease Our operating activities to date have consumed substantial amounts of cash, cash equivalents and short-term investments (dlra5dtta3 million in 2005, dlra8dtta7 million in 2004, and dlra4dtta2 million in 2003) and will continue to require capital in the near future |
| At December 31, 2005, we had dlra10dtta3 million in cash, cash equivalents and short-term investments |
| In order to remain competitive, we must continue to make investments essential to our ability to operate, including investments in direct marketing, technology and general administration |
| In addition, we will continue to face the costs of being a public company |
| In the event that we are unable to generate revenues sufficient to offset our costs, or if our costs of marketing and operations are greater than we anticipate, we may be unable to grow our business at the rate desired or may be required to delay, reduce, or cease certain of our operations, any of which could materially harm our business and financial results |
| Our business is difficult to evaluate because our market is evolving rapidly and our business model is unpredictable An evaluation of our future prospects is very difficult |
| An investor in our common stock must consider the uncertainties frequently encountered by early stage companies in new and rapidly evolving markets |
| These uncertainties include: · an evolving and unpredictable business model, which makes prediction of future results uncertain and an investment in our common stock highly speculative; · the development of comparable services by competitors, which may reduce our market share; · the uncertainty of the extent to which the consumer market will adopt the Internet as the preferred medium for comparison shopping for and purchase of insurance products, which may limit our ability to generate revenue from consumers that visit our online marketplace or our insurance agency; · our ability to retain key employees; and 12 ______________________________________________________________________ · our reliance on key customers and ability to retain customers |
| Our business strategy may not be successful and we may not be able to successfully address these uncertainties |
| Moreover, our ability to take the foregoing steps may be hampered by our limited financial resources should we fail to rapidly increase revenues or should increased revenues be more than offset by increased operating expenses |
| We may incur unexpected costs or receive less revenue than we planned from recent initiatives that are part of our evolving business model and, as a result, our operations could be harmed In 2004, InsWeb launched its agent network program which provides online auto insurance consumers access to local insurance agents |
| Prior to September 12, 2005, the agent network program was conducted exclusively through an intermediary, NetQuote, Inc |
| During the year ended December 31, 2005, NetQuote, Inc |
| represented 29prca of auto transaction fees, compared to 8prca during the year ended December 31, 2004 |
| InsWeb does not have an exclusive or long-term contract with this intermediary |
| To lessen InsWeb’s reliance on this intermediary, and to maximize its revenue potential, InsWeb launched a proprietary agent network program (“AgentInsider”) to provide leads directly to local insurance agents who have registered with InsWeb |
| AgentInsider was launched September 12, 2005 and complements the offering of our intermediary |
| However, as is the case with many new initiatives, we have experienced a reduction in revenue per consumer, compared to the revenue per consumer we would have received from our intermediary for the same consumer lead, in the initial phases of the program |
| The length of time and extent of this reduction will depend on the rate of registration of local personal lines insurance agents and the degree of participation of these agents throughout the country |
| We expect that the agent network program, both through the intermediary and through our internally developed network, will continue to represent a significant percentage of auto transaction fees |
| However, the agent network is subject to a number of uncertainties, including the cost of developing and marketing the program, and the continued participation of our third party intermediary |
| If we are unable to create a positive offering, if NetQuote should cease to serve as our intermediary and we are unsuccessful in securing a replacement, or if the transition of the agent network program from the intermediary to our internally developed AgentInsider program is delayed or otherwise unsuccessful, the Company’s business may be harmed |
| In August 2004, InsWeb launched its term life agency business in an effort to achieve increased revenue per consumer within its term life marketplace, resulting in a shift from a lead payment to a commission-based revenue model, which the Company believes will offer greater long-term financial benefit |
| This initiative is subject to a number of uncertainties, including the cost of developing the agency operations, and the continued participation of insurance carriers |
| Moreover, there are many insurance agencies selling term life insurance online, and it is increasingly difficult to find reliable sources of consumer traffic on reasonable terms |
| If we are unable to create a positive offering with this initiative or generate sufficient consumer traffic, we may lose business to competitors and/or our business may be harmed |
| Our future revenues are unpredictable, our operating results are likely to fluctuate from quarter to quarter, and if we fail to meet the expectations of investors, our stock price could decline significantly Due to the evolving nature of our business model and the high proportion of our revenues that are derived from consumer traffic to our website, our future revenues are inherently difficult to forecast |
| In light of recent changes in our business model, including the evolution of InsWeb’s agent network program, 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 |
| Moreover, our expense levels are based largely on our investment plans and estimates of future revenues |
| Accordingly, any significant shortfall in 13 ______________________________________________________________________ revenues relative to our planned expenditures would harm our results of operations and could cause our stock price to fall sharply, particularly following quarters in which our operating results fail to meet the expectations of investors |
| Factors that may cause fluctuations in our operating results include the following, many of which are outside our control: · We may experience consumer dissatisfaction with our online marketplace as we add or change features, or as the insurance coverage offered by participating insurance companies varies; · Consumer traffic on our online marketplace may decline as a result of the announcement or introduction of a competing online insurance marketplace or other new websites, products or services offered by our competitors; · We may experience increases in our direct marketing expenses due to unanticipated increases in the cost of online advertising for insurance; · Consumer traffic may also fluctuate as a result of changes in level of advertising by entities with which we have insurance marketing relationships; · Our revenues may be harmed if we lose one or more significant insurance company relationships or if any of our participating insurance companies merge with one another; · Our revenues may be harmed by inadequate levels of participation by local personal lines insurance agents in our new agent network initiative, if the agent network program offered by our current third party intermediary is unsuccessful or if our current intermediary should cease to serve in this capacity and we are unsuccessful in securing a replacement; · Use of the Internet by consumers may fluctuate due to seasonal factors or other uncontrollable factors affecting consumer behavior and may be affected by slow Internet performance due to technical problems or traffic bottlenecks on the network; · Our ability to convert site visits into transaction fees and/or revenue from insurance agency activities may fluctuate due to changes in our user interface or other features on our site; · Our ability to generate transaction fees may be adversely affected by changes in the underwriting criteria used by our participating insurance companies to determine which consumers will be offered quotes; and · Our ability to generate transaction fees and/or revenue from insurance agency activities may also be harmed due to technical difficulties on our website that hamper a consumer’s ability to start or complete a shopping session |
| We are exposed to increased costs and risks associated with complying with the increasing regulation of corporate governance and disclosure standards We have spent a significant amount of management time and external resources to comply with changing laws, regulations and standards relating to corporate governance and public disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and Nasdaq Stock Market rules |
| In particular, Section 404 of the Sarbanes-Oxley Act of 2002 requires management’s annual review and evaluation of our internal control systems, and attestations of the effectiveness of these systems by our independent registered public accounting firm |
| We have commenced documenting our internal control systems and procedures and will need to consider improvements that may be necessary in order for us to comply with the requirements of Section 404 by the end of 2007 |
| This process may require us to hire additional personnel and outside advisory services and will result in significant additional accounting and legal expenses |
| We may encounter problems or delays in completing the review and evaluation, the 14 ______________________________________________________________________ implementation of improvements and we may be unsuccessful in obtaining an unqualified report on our assessment of, and/or the effectiveness of, our internal controls over financial reporting from our independent auditors |
| While we believe that we currently have adequate internal controls over financial reporting, in the event that our chief executive officer or chief financial officer determine that our controls over financial reporting are not effective as defined under Section 404, investor perceptions of our company may be adversely affected and could cause a decline in the market price of our stock |
| Seasonality affecting insurance shopping and Internet advertising may cause fluctuations in our operating results We have experienced seasonality in our business associated with general slowness in the insurance industry during the year-end holiday period |
| In addition, online advertising for insurance products becomes more expensive during the holiday period as internet portals and other online firms dedicate an increasing percentage of their inventory to seasonal goods and services |
| We expect to continue to experience seasonality as our business matures |
| Because of this seasonality, investors may not be able to predict our annual operating results based on a quarter-to-quarter comparison of our operating results |
| We believe seasonality will have an ongoing impact on our business |
| Because a significant portion of our revenue is attributable to automobile insurance shopping on our online marketplace, we are especially vulnerable to risks related to the online market for automobile insurance or the automobile insurance industry generally Automobile insurance accounted for approximately 79prca of our transaction revenues in 2005, approximately 77prca in 2004 and approximately 79prca in 2003 |
| We anticipate that automobile insurance will continue to account for a substantial portion of our revenues for the foreseeable future |
| In addition, property and casualty insurance, including automobile insurance, is subject to operating cycles |
| During a cycle in which loss ratios rise, insurance companies may choose to restrict the amount of business they write while they await approval of rate increases from the various state insurance departments |
| Our business could be harmed if our participating insurance companies reduce their participation in our online marketplace |
| If we are unable to promote our brands and expand our brand recognition, our ability to draw consumers and agents to our services will be limited A growing number of websites offer services that are similar to and competitive with the services offered on our online insurance marketplace |
| Therefore, a positive recognition of our brand is critical to attracting additional consumers to our website |
| Our current consumer marketing program consists of the maintenance of certain network online relationships and other selective cost effective marketing campaigns, designed to maintain consumer awareness of InsWeb and our online insurance marketplace |
| InsWeb’s local agent sales and marketing efforts seek to identify personal line insurance agents interested in participating in the AgentInsider program through direct mail, email and telephone solicitation, referrals from other local agents and general advertising |
| In addition, sales efforts are directed toward signing carrier sponsored agreements, whereby insurance carriers promote and market the AgentInsider program to their participating local agents, both captive and independent |
| In order to attract and retain consumers and local agents and to promote and maintain our brands, we are continuing our financial commitment to both the consumer and agent marketing efforts |
| However, if our marketing efforts do not generate a corresponding increase in revenues or we otherwise fail to successfully promote our brand, or if these efforts require excessive expenditures, our business will be harmed |
| Moreover, if consumers or agents do not perceive our existing services to be of high quality, or if we alter or modify our brand image, 15 ______________________________________________________________________ introduce new services or enter into new business ventures that are not favorably received, the value of our brand could be harmed |
| Our ability to maintain a positive recognition of our brand also depends in part on the quality of the products and services consumers receive from our participating insurance companies or our insurance agency, including timely response to requests for quotes or coverage |
| If we are unable to provide consumers with high-quality products and services, the value of our brand may be harmed and the number of consumers using our services may decline |
| Competition in the market for online distribution of insurance is intense, and if we are unable to compete effectively with current competitors or new competitors that enter the market, the fees paid to us by participating insurance companies may fall, the fees charged by online companies with which we have strategic relationships may rise, and our market share may suffer The online insurance distribution market, like the broader electronic commerce market, is both rapidly evolving and highly competitive |
| Increased competition, particularly by companies offering online insurance distribution, could reduce the fees we are able to charge our participating insurance providers or increase the fees we are required to pay for online advertising, resulting in reduced margins or loss of market share, any of which could harm our business |
| In addition, our 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, online companies and third-party service providers |
| Accordingly, we may not be able to maintain or grow consumer traffic to our website and our base of participating insurance companies, our competitors may grow faster than we do, or companies with whom we have strategic relationships may discontinue their relationships with us, any of which would harm our business |
| We do not have exclusive relationships or long-term contracts with insurance companies, which may limit our ability to retain these insurance companies as participants in our marketplace and maintain the attractiveness of our services to consumers We do not have an exclusive relationship with any of the insurance companies whose insurance products are offered on our online marketplace, and thus, consumers may obtain quotes and coverage from these insurance companies without using our website |
| Our participating insurance companies also offer their products directly to consumers through insurance agents, mass marketing campaigns or through other traditional methods of insurance distribution |
| In most cases, our participating insurance companies also offer their products and services over the Internet, either directly to consumers or through one or more of our online competitors, or both |
| In addition, most of our agreements with our participating insurance companies are cancelable at the option of either party upon 90 days’ notice or less |
| Furthermore, our agreements permit the insurance company to limit its participation to certain states |
| We have experienced, and expect to continue to experience, reductions in the level of participation in our marketplace or complete termination by participating insurance companies |
| These reductions in participation, terminations, or an inability to attract additional insurance companies to our marketplace could materially affect our revenues and harm our business |
| 16 ______________________________________________________________________ The outcome and impact of the securities class action lawsuit involving InsWeb is uncertain A securities class action lawsuit was filed on December 5, 2001 in the United States District Court for the Southern District of New York, (the “Court”) purportedly on behalf of all persons who purchased our common stock from July 22, 1999 through December 6, 2000 |
| The complaint named as defendants InsWeb, certain current and former officers and directors, and three investment banking firms that served as underwriters for InsWeb’s initial public offering in July 1999 |
| The complaint, as subsequently amended, alleges violations of Sections 11 and 15 of the Securities Act of 1933 and Sections 10 and 20 of the Securities Exchange Act of 1934, on the grounds that the prospectuses incorporated in the registration statements for the offering failed to disclose, among other things, that (i) the underwriters had solicited and received excessive and undisclosed commissions from certain investors in exchange for which the underwriters allocated to those investors material portions of the shares of our stock sold in the offerings and (ii) the underwriters had entered into agreements with customers whereby the underwriters agreed to allocated shares of the stock sold in the offering to those customers in exchange for which the customers agreed to purchase additional shares of InsWeb stock in the aftermarket at pre-determined prices |
| No specific damages are claimed |
| Similar allegations have been made in lawsuits relating to more than 300 other initial public offerings conducted in 1999 and 2000, all of which have been consolidated for pretrial purposes |
| In October 2002, all claims against the individual defendants were dismissed without prejudice |
| In February 2003, the Court dismissed the claims in the InsWeb action alleging violations of the Securities Exchange Act of 1934 but allowed the plaintiffs to proceed with the remaining claims |
| In June 2003, the plaintiffs in all of the cases presented a settlement proposal to all of the issuer defendants |
| Under the proposed settlement, the plaintiffs will dismiss and release all claims against participating defendants in exchange for a contingent payment guaranty by the insurance companies collectively responsible for insuring the issuers in all the related cases, and the assignment or surrender to the plaintiffs of certain claims the issuer defendants may have against the underwriters |
| InsWeb and most of the other issuer defendants have accepted the settlement proposal |
| In September 2005, the Court issued an order providing preliminary approval of the proposed settlement and set a hearing for April 24, 2006 to consider final approval of the settlement |
| If the Court does not approve the settlement, InsWeb intends to defend the lawsuit vigorously |
| The litigation and settlement process is inherently uncertain and we cannot predict the outcome, though, if unfavorable, it could have a material adverse effect on InsWeb’s financial condition, results of operations and cash flows |
| Laws and regulations that govern the insurance industry could expose us, or our participating insurance companies, our officers, or agents with whom we contract, to legal penalties if we fail to comply, and could require changes to our business We perform functions for licensed insurance companies and are, therefore, required to comply with a complex set of rules and regulations that often vary from state to state |
| If we fail to comply with these rules and regulations, we, an insurance company doing business with us, 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 expose us to additional costs, including indemnification of participating insurance companies for their costs, and could require changes to our business or otherwise harm our business |
| Furthermore, because the application of online commerce to the consumer insurance market is relatively new, the impact of current or future regulations on InsWeb’s business is difficult to anticipate |
| 17 ______________________________________________________________________ If we are unable to safeguard the security and privacy of consumers’ and participating insurance companies’ confidential data, consumers and insurance companies may not use our services and our business may be harmed A significant barrier to electronic commerce and communications is the secure transmission of personally identifiable information of Internet users as well as other confidential information over public networks |
| If any compromise or breach of security were to occur, it could harm our reputation and expose us to possible liability |
| A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions in our operations |
| We may be required to make significant expenditures to protect against security breaches or to alleviate problems caused by any breaches |
| We rely on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect secure transmission of confidential information, such as names, addresses, Social Security and credit card numbers, user names and passwords and insurance company rate information |
| Advances in computer capabilities, new discoveries in the field of cryptography, or other events or developments could result in a compromise or breach of the algorithms we use to protect consumers’ and insurance companies’ confidential information |
| System failures could reduce or limit traffic on our website or interrupt our communications with individual insurance companies and harm our ability to generate revenue Since launching our online marketplace, we have experienced occasional minor system failures or outages that have resulted in the online marketplace being out of service for a period ranging from several minutes to three hours while our technicians brought backup systems online |
| We may experience further system failures or outages in the future that could disrupt the operation of our website and could harm our business |
| Our revenues depend in large part on the volume of traffic on our website and, more particularly, on the number of insurance quotes generated by our website in response to consumer inquiries |
| Accordingly, the performance, reliability and availability of our website, quote-generating systems and network infrastructure are critical to our reputation and our ability to attract a high volume of traffic to our website and to attract and retain participating insurance companies |
| Moreover, we believe that consumers who have a negative experience with an electronic commerce website may be reluctant to return to that site |
| Thus, a significant failure or outage affecting our systems could result in severe long-term damage to our business |
| Additionally, several of our participating insurance companies have chosen a technical solution that requires that our website servers communicate with these insurance companies’ computer systems in order to perform the underwriting and risk analysis and rating functions required to generate quotes |
| Thus, the availability of quotes from a given insurance company may depend in large part upon the reliability of that insurance company’s own computer systems, over which we have no control |
| Our facilities and systems are vulnerable to natural disasters and other unexpected losses, and we may not have adequate insurance to cover such losses Our computer hardware operations are located in leased facilities in Gold River, California |
| A third-party service provider located in the Sacramento, California area maintains a backup of our critical systems |
| If both of these locations experienced a system failure, the performance of our website would be harmed |
| These systems are also vulnerable to damage from fire, power loss, telecommunications failures, break-ins, natural disasters and similar events |
| If we seek to replicate our systems at other locations, we will face a number of technical challenges, particularly with respect to database replications, which we may not be able to address successfully |
| Although we carry property and business interruption insurance, our coverage may not be adequate to compensate us for all losses that may occur |
| Our servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions |
| 18 ______________________________________________________________________ We rely on the services of our executive officers and other key personnel, whose knowledge of our business and the insurance industry and technical expertise would be extremely difficult to replace Our future success is substantially dependent on the continued services and continuing contributions of our senior management and other key personnel, particularly Hussein A Enan, Chairman of our Board and Chief Executive Officer, and the loss of the services of any of our executive officers or other key employees could harm our business |
| We have no long-term employment agreements with any of our key personnel, although Mr |
| Griffin and Mr |
| Loewe and certain other key employees are entitled to certain severance benefits should their employment be involuntarily terminated |
| We maintain a dlra2 million life insurance policy on Mr |
| Enan that names InsWeb as the beneficiary, but we maintain no similar insurance on any of our other key employees |
| InsWeb has granted stock options as incentives to executive officers, new employees and certain other key personnel |
| As the value of these incentives is highly dependent on an increase in the market price of our common stock, we may be unable to retain such key employees, nor retain or recruit other officers and key employees in the future |
| We may be subject to claims for infringement of intellectual property, with or without merit, which could be costly to defend or settle We may from time to time be subject to claims of infringement of other parties’ proprietary rights or claims that our own trademarks, patents or other intellectual property rights are invalid |
| We have been subject to infringement claims in the ordinary course of business, including claims of alleged infringement of the patent and trademark rights of third parties by companies and us with which we have business relationships |
| Any claims of this type, with or without merit, could be time-consuming to defend, result in costly litigation, divert management attention and resources or require us to enter into royalty or license agreements |
| License agreements may not be available on reasonable terms, if at all, and the assertion or prosecution of any infringement claims could significantly harm our business |
| Our stock price has fluctuated widely The trading price of our common stock has been volatile and may be significantly affected by factors including actual or anticipated fluctuations in our operating results, new products or new contracts by us or our competitors, loss of key insurance providers, conditions and trends in the electronic commerce and insurance industries, general market conditions and other factors |
| These fluctuations may continue and could harm our stock price |
| Any negative change in the public’s perception of the prospects of Internet or electronic commerce companies could also depress our stock price regardless of our results |
| Delaware law and our charter documents contain provisions that could discourage or prevent a potential takeover, even if such a transaction would be beneficial to our stockholders Provisions of Delaware law and our certificate of incorporation and bylaws could make more difficult the acquisition of us by means of a tender offer, a proxy contest, or otherwise, and the removal of incumbent officers and directors |