I’ve spent a lot of time looking at auto insurers over the past few months: I always like an industry that can be largely understood by analyzing a handful of major players, looking at 10-15 years of market data, and understanding a few key trends. The positioning of the major players is quite evident with rudimentary analysis, and how they got to where they are isn’t too perplexing either; I’m a simple guy so that’s right up my alley.
But what I want to talk about today is a bit of a side-show; in my research, I’ve come across a few articles from the late 1990’s and early 2000’s about some companies that were supposed to change the industry forever – and in a way they did. I think their stories are worth discussing.
The first is eCoverage – a company that came into the picture in September 1999 by offering auto insurance to Californians over the internet. With plans to expand nationwide and into other lines, as well as the backing of big name investors with deep pockets, eCoverage had a straightforward consumer proposition: they promised to make insurance simple; users would be able to get quotes, buy products, and file claims online. In addition to ease of use, this was expected to save users money - at least 10% cheaper than existing offline and online providers, according to the company’s product development officer. The company proudly stated that they wanted to bring “speed, simplicity, savings and service” to consumers; it sounded pretty good.
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At the time, just a few months into the company’s existence and at a point in which they had no revenues, this was enough for Fortune to ask the billion dollar question:
“Could Tiny eCoverage Be The Amazon of Insurance?”
For the sake of comparison, Amazon’s (AMZN) revenue in the year ended December 31st, 1999, exceeded $1.6 billion; in case your math skills aren’t up to snuff, that’s $1.6 billion more than eCoverage was reporting at the time.
Based on the amount of press eCoverage garnered that seemed like a fair question – could this company be on the fast track to billions of dollars in sales?
While the company was able to raise $15 million in a second round of financing in November of 2000, this was a bit late to the party. The deep pockets that were expected to fund continued growth disappeared (likely licking their wounds from other speculative investments that had soured), and the company was forced to lay-off 80% of its employees two months later. Jon Kelly, who stepped in as CEO and unsuccessfully tried to stem the bleeding, summed up the company’s demise accordingly: "The overwhelming snag was money. We ran out of it."
According to InsuranceJournal.com, the company ceased operations in March 2001.
The second company is InsWeb, which was founded a few years earlier than eCoverage (1995) and became a publicly traded company four years later. InsWeb created the first online insurance marketplace, allowing users to receive insurance quotes from multiple providers by filling out a single form:
“InsWeb doesn't sell insurance - which some Web purists argue is a shortcoming - but instead is a matchmaker. It allows consumers to compare insurance rates online from companies that have prequalified them for a policy. The site aims to simplify the process and tries to cut down the amount of time it takes to get a quote from an insurer.”
One of the truly amazing things about InsWeb was that they actually had a plan for making money in the foreseeable future (that statement says a lot about the times); while consumers weren’t charged to use the service, insurance companies paid fees for a listing on the site.
Goldman Sachs (GS) was quite fond of InsWeb (and had underwritten the company’s IPO a few months earlier): when the investment bank released a list of their favorite picks for the coming year in January 2000, InsWeb was among the 89 stocks to make the cut.
A pre-IPO valuation for the company reached $500 million; three months after going public in September 1999, that valuation would approach $1 billion. Compare that to the results for InsWeb’s first quarter as a public company: $10 million in losses on $7 million in revenues.
Unfortunately, being a first mover isn’t worth much if the important suppliers think they’re better off without you: in April 2000, when State Farm decided to move on from InsWeb (they accounted for ~30% of their business in the prior quarter), the stock plummeted by more than 50% in one day; the company announced that they would need to lay off 40% of its workers as a result of the customer loss. From there, revenues started to fall and the red ink continued to flow (a plan for profitability is different than actual profitability).
InsWeb would soon find itself in the dustbin with countless other Internet stocks.
Flash forward a decade: in October 2011, Bankrate (RATE) purchased InsWeb’s lead generation and marketing business for $65 million in cash; the few pieces of InsWeb that were not sold to Bankrate continue on as a publicly traded company (called Internet Patents Corp) with a market cap of $25 million. Fifteen years later, investors are left with pennies on their original purchase.
As a whole, the equity markets were pretty perceptive about what lied ahead: they were dead right about the internet’s ability to disrupt the industry, particularly for insurers that didn’t want to risk alienating their agents: direct has moved from ~7% market share of personal auto premiums in the US in 1996 (with a small portion coming from online even four years later) to ~18% of personal auto premiums in 2013 – a pretty astounding change for a sizable market.
But people didn’t ask how these particular companies could manage to take on and outmuscle the incumbents - who had decades of underwriting experience, the financial strength to weather periods of adversity (like a few quarters without access to outside capital), and the ability to spend hundreds of millions on advertising (again, without being dependent upon outside capital).
Ultimately, they were dead wrong about who the winners would be; there are others like eCoverage and InsWeb, such as Quotesmith.com and ebix.com, who would plummet from their astounding heights in the months and years following the tech bubble. In the end, GEICO (BRK.B) and Progressive (PGR) would be the most noteworthy players to ride the tailwinds of structural change.
Speaking of Progressive, their 10-K filed in March 2000 offers an interesting comparison to the market darlings; note that PGR fell by two-thirds in the prior 15 months (per Google Finance), and had declined by more than 50% in the past year versus a gain of 21% for the S&P 500.
The 10-K for year end 1999 shows direct written premium growth of 16%, with the trailing five and ten year CAGR’s at 19% and 17%, respectively; that’s nothing to scoff at. At that point, the stock traded for slightly less than 2X book, with average ROE in the previous decade at a solid 20%. The market cap was less than 1X revenues, compared to more than 30X for InsWeb.
In his letter to shareholders, CEO Peter Lewis laid out Progressive’s core philosophy for winning in the years and decades to come:
“We view no distribution method through which we sell as superior to any other. No matter whether our customers choose to buy through an Independent Insurance Agent or direct through 1-800-AUTO-PRO or progressive.com, we believe that to get the business we seek, we have to provide the lowest price.”
As noted above, investors in eCoverage and InsWeb were ultimately slaughtered; on the other hand, investors who purchased PGR shares around the time that 10-K was published have made ~5X their money in the ensuing fourteen years, before dividends (which have been sizable after accounting for the special dividends paid in the past few years). The stock trades at a similar multiple of book value as it did back in March of 2000, meaning those returns have been driven by business results as opposed to market sentiment.
That’s certainly not to suggest spotting PGR was an easy or sure thing either – but it certainly sounds like a more promising proposition than the alternatives presented. I think the point I’m trying to make is best captured by something Warren Buffett (Trades, Portfolio) has said a few times before:
“There were 2,000 auto companies established in the United States in the 20th century… it's very hard to pick the winners. There will be a big auto industry five, ten, and twenty years from now that we will be selling lots of cars - I just don't know whose cars they're going to be...”
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.