This past week Liberty Mutual said it would buy the Seattle-based insurer Safeco for $6.2 billion, bumping Liberty Mutual up from 6th place to be the 5th largest property and casualty insurer in the US. With the addition of Safeco, Liberty Mutual expands its brand in the western US by adding Safeco’s extensive network of agents.

As always, our question is how will this impact the online business for both Liberty Mutual and Safeco? Liberty Mutual has a strong agent network in the Northeast, but has also worked hard to build its presence online in the past couple of years and has become an important direct insurer. Safeco, by contrast, continues to do business primarily through its agents. It doesn’t take a huge leap to see the opportunity for Liberty Mutual to extend its online brand into Safeco’s footprint.

Looking at both companies over the past 12 months demonstrates Liberty Mutual’s progress in driving traffic to libertymutual.com against the relative stability in homepage visitors to safeco.com. Liberty Mutual’s homepage received over 330,000 unique visitors in March 2008 (up from just over 200,000 in March 2007), while Safeco received a little more than half that with over 170,000 unique visitors in March 2008.

Where these differences meet the bottom line is in wildly different volumes of business generated online. Looking at LibertyMutual and Safeco’s auto insurance business only, Compete data shows Liberty Mutual completing almost 50,000 auto quotes each month. Safeco only completes about 1,000 quotes online each month. If we imagine Liberty Mutual’s business model overlaid with Safeco’s existing online traffic, Safeco could be generating more than 25,000 auto quotes per month online – expanding Liberty Mutual’s overall online quote volume about 50%.

The challenge for Liberty Mutual is in convincing Safeco’s agents of the benefits that come with a more online-centric model while fighting off aggressive competitors in the West like the newly invigorated AIG/21st and GEICO. We’ll be watching closely!

New England was a tough place to get funded in the first quarter of 2008. Venture capitalists in the region cut Q1 spending by 27% from a year ago. The retreat by the New Englander investors was much sharper than by their non-New England colleagues who cut their spending just 2%. As a result, New England’s share of venture capital funding declined from 13% of total US funding in Q1 2007 to 10% in the first quarter of this year.

Do the cutbacks anticipate a tougher economic slowdown in the Northeast? Have New England entrepreneurs suddenly become less clever? Or is it just a dose of Yankee conservatism? Whatever the reason, the tighter purse strings won’t help New England innovators catch their rivals elsewhere.

Prof. Ross Gittel has published an article on the subject called “Demographic Demise” in the New England Journal of Higher Education. The University of New Hampshire professor shows that the New England states held six of the bottom ten rankings in young adult population declines (population ages 25-34) over the years 1990 to 2004. Gittel notes that this young cohort shrank by more than one-fifth in each of the New England states. His data show that while more than 6% of US full-time students go to college in New England, a decade later only 4.5% of 25-34 year-olds live here. He cites a 2003 study by the Boston Chamber of Commerce and the Boston Consulting Group which determined that half of the area’s college graduates get their diplomas and then leave the area – believing the attractions and opportunities were greater elsewhere.

The shrinking New England share data become really painful when we look at two high profile examples of lost opportunities. In 1974 amid rising oil prices and the Vietnam War, Bill Gates left New England to start Microsoft. Thirty years later, in 2004, with the Internet struggling with its recession, Mark Zuckerberg left New England, got angel financing for Facebook in California and founded his company in Palo Alto. Today the web sites of these two New England collegians account for 4% of all time spent online in the US, with this share more than doubling in the last year and growing at rate of 7% per month. Now, Microsoft employs more than 47,000 people in the US and Facebook plans to double its number of employees to 700 this year.

Ouch!

In November 2007, ING Direct acquired personal investment site Sharebuilder. While the acquisition was said to be strategic in that ING Direct would now be able to offer investment options to its current customers, the question is whether this acquisition has achieved that goal. Specifically, did the acquisition increase demand amongst ING Direct’s current customers for Sharebuilder products?

Read the farthest point to the right as: ~7% of ING Directs customers who logged in that month also began a Sharebuilder application, and, of that 7%, 5% completed it

The chart above shows the percentage of ING Direct’s active account managers (customers) who began a Sharebuilder application in the same month (represented by the yellow line) compared to the percentage of ING Direct customers who began and completed a Sharebuilder application (represented by the orange diamond). So what we can note from the chart above is that the yellow line is not trending upward, but instead looks relatively stable from the month prior to ING Direct’s acquisition of Sharebuilder in November to 3 months post-acquisition. This indicates that demand for Sharebuilder accounts by ING Direct customers has not increased post-acquisition as we’d expect.

When looking at the orange diamonds, however, notice that they are actually trending upward post-acquisition, significantly. This shows us that after the acquisition, ING Direct customers who started to open an account at Sharebuilder were more likely to essentially finish an account at Sharebuilder*. In fact, in February 2008, ING Direct customers were 5x more likely to complete a Sharebuilder application once started than in October or November.

The finding here is that while the acquisition of Sharebuilder did not exactly increase more demand from ING Direct’s customers in the short term, it did increase the likelihood for an ING Direct customer to complete the application. So what are the implications of this finding? The story the data may tell us here is that demand for investment options do not necessarily change, that a certain percentage of a group of people will always be in market looking at different investment vehicles. However, while a certain percentage of people are in market, these people are more likely to complete an application with a company where they already have an existing trusting relationship, and in this case, five times more likely. So, by acquiring Sharebuilder, ING Direct is in fact increasing its penetration into existing accounts. This increased account penetration will ultimately create more loyal consumers and thus could be the first indication that this acquisition will prove successful in the long run.

*For this study, we considered a person to complete a Sharebuilder account when they completed an account and selected a pricing plan

With affluent Americans making up a greater percentage of the online population than the population at large, there are unique opportunities for online marketers to reach this high-value target segment. One tool media planners can use to accomplish this is Compete’s Behavior Match product suite – a tool that scores the entire web and generates a list of the top several thousand sites matching the segment, in this case, affluent Americans (those earning $100,000 and up).

Of particular interest here are torso websites (those getting 50,000 to 500,000 monthly unique visitors) with high composition indices of affluent Americans. These sites, although usually under-leveraged by ad networks and underused by media buyers, reach valuable niche audiences and can be efficiently and effectively used by creative brand advertisers to achieve success. Among the top torso websites that accept advertising and whose audience is overrepresented by affluent Americans are:

(The first line to be read as: In February 2008, Affluent Americans were 2.69X more likely to visit battellemedia.com than the average internet user; 26,700 Affluent Americans visited the domain in the month.)

Torso Domain Findings:

• Composition indices of target segments among torso sites tend to dwarf those at larger sites, contributing to the efficiency of marketing campaigns on torso sites.
• Perhaps not surprisingly, news and media and blogging sites dominate this (advertising-supported) list. Moreover, the subject matter of these sites mirrors some of the higher paying professional fields: Advertising, Business, Finance, Marketing, Media, Technology, etc.

In addition to looking at the overall top-indexing torso websites, media planners and brand marketers can use Behavior Match to look within specific industries. For instance, marketers looking to reach affluent travelers may seek out travel-specific websites on which to advertise:

Torso Domain Findings – Travel:

• While larger websites and/or the online properties of more established offline brands such as Travel and Leisure or Fodors might already be sought out by marketers, Behavior Match can be used to identify hidden torso gems that might otherwise be overlooked (e.g. FlyerTalk, Cruise Critic, Cruise Mates).

Similarly, marketers looking to reach affluent financial services enthusiasts may use the tool to do the same:

Torso Domain Findings – Financial Services:

• Although larger financial service sites such as thestreet.com (Comp. Index 111, Feb. 2008) and smartmoney.com (Comp. Index 107, Feb. 2008) may often be the target of marketers looking to reach this affluent segment, marketers can identify properties that are more effective (higher composition indices) and efficient (lower CPM) such as those in the above list.

Media planners and others can use Behavior Match to harness the power of segmentation and track the ever-changing behavior of high-value target segments (e.g. affluent internet users). Furthermore, the tool allows planners and marketers to execute highly efficient campaigns by identifying appropriate “torso” websites which, on average, have lower CPM and higher target segment composition indices when compared to those with significantly more unique visitors per month.

With the dour state of the economy, would you be at all interested in investing ten-grand in a portfolio that returned 45% last year? If it was the Google Finance portfolio described in a previous blog, it wouldn’t be doing too much for you because you’d be down over 30% already. On average, the portfolios from our previous blog lost 24% of their value, were over 50% more volatile than the market and had weekly variances of nearly double the S&P 500.

This time we implemented a couple of changes. First, we tracked these portfolios on a weekly rather than monthly basis. Second, portfolio weights were dynamic; they were reconfigured each week to reflect actual query volumes. Of 215,000 unique visitors searching for the ten most popular securities on MSN Money in the first week of 2008, 31,000 of them queried Citigroup, Inc, which allocated 14% of the portfolio into that security. Since that figure dropped to 11% in the following week, the security’s weight in the portfolio was adjusted down by 3%.

Observations:

• Google Finance – Heavily vested in declining tech stocks like Google, Apple and Baidu.com, this portfolio has a balance just under $7,000. The combination of stocks in this portfolio are still quite sensitive to market fluctuations, while the growth in Caterpillar’s price may have tempered portfolio variance to only 41% over the market.
• Market Watch – With unique stocks and declining stocks like FuelCell Energy and Shuffle Master, the Market Watch portfolio has a balance of $7,400. This portfolio is currently the most sensitive to market fluctuations, and with all its stock heading south, it had more than twice the weekly variance of the market.
• Yahoo! Finance – This portfolio had a March 22 balance of $8,100 and this portfolio has suffered the least. With the inclusion of stocks like Bank of America, Washington Mutual and GE it is also the least sensitive to market fluctuations, but still has double the market’s weekly variance.
• MSN Money – With a balance of $7,800, this portfolio is in the middle of the pack. While it is more sensitive to market fluctuations than the Yahoo!, this portfolio’s combination of bank and technology stocks give it the least weekly variance of any FSE portfolio.
• CNN Money – This portfolio lost 21% since the beginning of the year, which left it with a balance of $7,900. It is below the FSE portfolio average in terms of market sensitivity and includes many of the same securities as the MSN portfolio. However, as a testimony to the power of portfolio optimization, these securities fail to offset one another resulting in a weekly variance of nearly 1½ times the market.

We recently had the opportunity to interview Jim Bruene, author of the popular blog Netbanker. Netbanker is a leading online finance and banking blog which covers everything from online banking to person-to-person lending to mortgage lead generation. Jim has been providing insightful analysis and research of the online banking and finance industry for over 10 years.

We asked Jim his thoughts on innovations in the online banking world. Here is what he had to say:

How has the increased use of the Internet transformed the way banks market to them?

The online channel (including email) provides a very low cost way to get marketing messages in front of the your online banking customers who are frequent website users. So online messaging is one of the first things banks look at today before adding more expensive print and offline media to the mix. And the ability to get your advertising in front of consumers as they are doing a rate/product search on a search engine has changed the dynamics of prospecting for new accounts. So the marketing mix has definitely changed and will increasingly be weighted to online tactics, although none of the old techniques are in danger of disappearing, except perhaps telemarketing.

What is the most over-hyped new technology or strategy (in terms of bringing real value) out there today?

Historically, the most over-hyped technology/strategy by far is mobile services. It’s finally just beginning to catch on (in the U.S.), 10 years after it was first hyped. I don’t think there’s anything that is being seriously over-hyped today. Most of the new things we are looking at have real promise because of the size and sophistication of today’s users. A few things won’t live up to their press releases, but that’s always expected.

Are the market conditions (e.g. credit markets and interest rates) increasing or decreasing the importance of the online channel? In what way?

For mainstream online banking, the market conditions aren’t that relevant. No matter what Wall Street is doing you still have to watch your balance and pay your bills. It’s a bit harder for the online savings specialists to poach customers when they can only offer rates 1-2% higher instead of 3-4%. However, the genie is out of the bottle in that market and consumers will continue to seek higher rates online, they’ve learned.

One niche market benefiting from tighter credit is the loan exchanges: both the new person-to-person lenders such as Prosper and Lending Club and other types such as LendingTree and Virgin Money. We know of at least a half-dozen more that are on the drawing board and could come to market in the next year or two. The personal finance press loves these sites and you can expect plenty of coverage this year and next.

How will the consumer experience change on bank websites over the next year?

It may not be next year, but going forward online banking will require less time and energy on the part of the end-user. Instead of logging in three times per week to see what transactions have cleared, consumers will receive periodic notices on their mobile phone, Facebook account, or regular email address. This is not a new development, but the mobile phone as a receiving device for banking info will accelerate the trend towards the use of alerts to stay informed rather than logging in.

What new product offerings do you see banks rolling out to consumers?

Although not so much a new product, really just an evolution of customer communications, will be mobile alerts that are increasingly two-way (you can reply back to move money or pay a bill). In terms of web-based delivery, we’ll see more banks do what Wells Fargo has done with its MySpendingReport, that is provide simple tools for users to track and view their spending. I also think we’ll see more banks and credit unions put in more social-media inspired services such as user forums, blogs, and Facebook widgets/apps.

You were in this business in the late 90’s when the Internet bubble burst. Do you see any similarities between the market we’re in now and what was going on back then? What are the biggest differences?

In terms of online financial services, there never really was much of a bubble. Online banking was just getting started in 1999/2000 so there weren’t many casualties, other than in the mobile area and a few non-bank portals that never achieved critical mass. And I don’t see too much overinvestment now. Financial services and banking are huge markets with enormous potential both to increase revenues, reduce costs, and improve overall customer satisfaction. The bubble today is in brick and mortar. I’ve been a banker and I understand the power of the branch for sales, service and brand image, but their value has peaked. No, I don’t think branches are going away, but over the long run, like the next 50 years, their influence will decline substantially.

Thanks Jim!