Countrywide Financial driving into four more states: analysts cool to firm's efforts to diversify by expanding auto coverage.

Countrywide Financial Corp. is expanding its nascent auto insurance line into four more states in an effort to diversify its business--leaving some analysts less than impressed by the strategy.

After announcing initial coverage in Arizona in September, the nation's largest mortgage lender expanded its auto program last week into Colorado, Nevada, Indiana and Illinois. But some analysts are wondering why the Calabasas company would jump into such a competitive industry.

"I wouldn't look for it to impact the bottom line very much at all," said Mark Morgan, an analyst with New York-based Rochdale Securities. "It looks like a way to reduce reliance on mortgages-slightly--but auto insurance is a very competitive industry with high barriers to entry."

However, the lender is a savvy competitor and looks to have chosen the states for its foray wisely. Big insurance players such as Progressive Corp., Allstate Corp. and Gieco are firmly planted in New York, Florida and others states--but not in Arizona, Colorado and Nevada.

"None of the major insurance players have a big presence there," said Ed Groshans, an analyst with Fox-Pitt Kelton in New York. "I would expect them to stick with the states that aren't ultra-competitive. It will be interesting to see where they go next."

However, Countrywide spokesman David Backs said that the company plans to offer auto coverage in 25 states over the next year, and among those states are California, Florida and New York. "We're going after locations where Countrywide customers are present," he said. "So the bigger states are definitely part of the plan."

That kind of expansion could greatly boost the contribution that insurance makes to both its top and bottom lines.

Currently, the company offers about 500,000 customers either auto, homeowner or renters insurance, amounting to about 33 cents out of its year-to-date $3.28 per share diluted earnings.

Paul Miller, an analyst with Arlington-based Friedman Billings said that the move makes sense for the mortgage giant given that it already earns 8 percent of its net income from insurance products. "It is important when you look at profits," he said.

However, there are risks beyond simple barrier to entry. In the auto insurance market, there has been a move by California and other states to move away from setting rates based on ZIP codes to formulas based largely on driving records, which could open some insurers to losses.

Groshans said in a best case scenario auto insurance could add a "couple of cents on the dollar" around earnings time but may also bring huge hits that could drag earnings down.

"If I hear five years from now that Countrywide is one of the largest auto insurers in the country, I'd fall right on my back out of complete surprise," he said.

BY ALLEN P. ROBERTS JR.

Staff Reporter