American Express plans major expansion in insurance

In 1987, Minneapolis-based American Express Financial Advisors bought a sleepy Green Bay insurance company, and for years seemed content to keep its insurance operation in that restful state.

Now Amex is shaking off the dust and aggressively moving on Geico and Progressive Insurance's turf with direct home and auto insurance aimed at existing credit-card and financial-planning clients.

Last year, American Express Property Casualty Cos. hired 80 new employees for a total of 550, built a new Green Bay headquarters in November and began heavily marketing special rates to credit unions.

It also just launched its online quote system, which takes applications, performs claim and credit reviews, issues quotes and commits to coverage over the Internet. Discussions also are underway with select large retailers to offer group rates to customers.

The insurance unit counts only 1 percent of American Express credit-card customers and 2 percent of Amex's 2.3 million financial-advice clients as its customers. The goal is to reach enough of those Amex customers to grow from 36 to 48 states and from $145 million in premiums to $1 billion in about five years.

"We think that there is ample opportunity to be a $1 billion-plus player in five to seven years just by [tapping] lots of our card member and AFA clients," said Kenneth Ciak, president of American Express Property Casualty Cos.

Bob Hartwig, economist and senior vice president of the Insurance Information Institute in New York City, said there's "no question" Amex can do it.

"But the big question is can they do it profitably?" Hartwig said. "It's a tough business. Auto insurance alone is a tough market, and there is always lots of competition no matter what state you go in."

Major auto insurers such as Geico and Progressive -- with $5 billion and $5.7 billion in respective premiums -- are established brand names in the direct selling of insurance. The largest auto carriers, State Farm ($22.4 billion in premiums) and Allstate ($14.5 billion), still sell mostly through agents but are making strides in selling online.

"Every one of the top 10 auto insurers I could name is a very tough competitor," Hartwig said.

Major names in homeowner insurance include the Chubb Group, Travelers MetLife and others.

"What seems unique to me is that Amex plans to only sell direct, and not through agents," Hartwig said. "I am not aware of another mix of a very large successful [diversified] financial services company that sells direct only. To my knowledge it's unique.

"I think that they are hoping that it will keep them nimble and allow them to cross-sell easily with their existing customer base."

Tactics boost premiums

Aggressive pricing and marketing helped premiums shoot up 12 percent last year and 22 percent in this year's first quarter. Last year, claims accounted for 74 percent of the $145 million in premiums. After expenses and investments, the firm had a return on equity of about 14 percent last year. It hopes to reach 18 percent, Ciak said.

By comparison, parent American Express in New York had a return on equity of 24 percent.

In the Midwest, Madison-based American Family Insurance will be a major competitor. It has $4.1 billion in total premiums and is Wisconsin's largest home and auto insurer and Minnesota's second-largest.

Spokesman Rick Fetherston said American Family will watch Amex but added, "I don't think any one company, particularly of that size, can have an immediately significant impact."

If successful, the expansion will help diversify American Express Financial Advisors into a business that is not sensitive to turbulent stock market conditions. Like the rest of the financial industry, Financial Advisors has seen its investment business hurt by an unstable Wall Street this year.

However, insurers must weather other storms, real and regulatory. The underwriting business has seen years-long periods of low profits thanks to major storms, market-share fights and state-imposed price caps.

Word gets around

To date, Amex's venture has made strides in Minnesota, largely through word of mouth. Minnesota is Amex's fourth-biggest insurance market, with $11.5 million in premiums. Amex hopes to reach $5.5 million in Wisconsin premiums by December.

Chris Book, a youth pastor and south Minneapolis resident, heard about Amex insurance from a co-worker.

"I got the auto quote right online. It was a no-brainer," Book said. "I did it in 10 to 15 minutes. I put in my information and saved it and checked around. I said, 'I am not getting anything cheaper anywhere else,' so I went for it."

He said he saved $492 a year by switching to Amex for the insurance on his Jeep Cherokee.

"Everyone I talk to says, 'I didn't know American Express did insurance.' I have hooked up three or four friends with it, [including] my dad," Book added.

While Amex would like to someday rival the size of Geico, the Berkshire Hathaway-controlled direct insurer that advertises nationwide with a gecko mascot, American Express plans to stick to stuffing brochures in credit card statements, peddling products through its financial planners and charging premiums directly to customers' Amex cards.

"If you are not a card member and not a credit union client or a financial adviser customer, you may not find us because we are not on the radio like Geico," Ciak said. "We have plans to be Geico-like in size, but not from a marketing or sales strategy. We really want to reach people through our card or financial advisers. They have higher retention rates."

Typical target

Scott Strauss and his wife fit the profile of Amex's target client.

"We were recommended by our American Express financial planner. We went to get a financial plan done. And you're always asked about your life insurance needs and your property and liability coverage as part of the process of putting together the plan. Our planner talked about the fact that they offered insurance and said we may want to consider the rates," Strauss said.

The Strausses were moving from a $150,000 house to a larger $290,000 house in Plymouth.

"We had to increase our coverage because the new house was more expensive than our old. Yet the combined premium for the house, plus a new umbrella [liability] insurance was still less than what we were paying for our previous house," Strauss said.

Ciak said the deals that customers such as Strauss brag about aren't the result of Amex significantly undercutting the market just to gain share.

"We are not buying business. If we were, we would be growing by 50 percent," he said.

AEFA started targeting niche groups in 1997, through an arrangement to sell insurance to Barnett Bank customers in Florida. Soon Amex expanded into credit unions and now has 25 on board. None is in Minnesota, something Ciak hopes to change.

"Our experience has been good in Minnesota. You have low levels of fraud," he said. "Minnesota is a pretty competitive state. All over Minnesota, you see State Farm and American Family. But our mission is to continue to demonstrate that if applicants are safe drivers, we have the financial spread and stability to be [their insurer].

"That is pretty straightforward, but that is our mantra."