Countrywide diversifying into auto insurance: company ambitious with rollout timetable.

Countrywide Financial Corp. is moving quickly into the auto insurance business with plans to add the California market sometime next year.

Countrywide, which first launched Countrywide Insurance Group's auto insurance product in late September in Arizona, in recent weeks has added four additional markets--Nevada, Illinois, Indiana and Colorado.

The company said that it plans to be in 25 states by the end of 2007.

"The benefit is it's an increase in revenue diversification and income diversification," said David Backs, senior vice president for Countrywide. "In addition we expect to be able to cross sell products across various Country wide businesses, so we'll be able to generate more revenue per customer by offering additional products."

Calabasas-based Countrywide entered the insurance business through its Balboa Life and Casualty Group, which provides lender-placed insurance products, and Balboa Reinsurance Co., a provider of homeowner insurance, businesses that generated about $327 million in revenues in the most recent quarter ended Sept. 30.

But, whereas Balboa Life and Casualty works directly with lenders who require auto insurance coverage for those who have financed cars, the most recent move will take the company into the direct-to-consumer market for auto insurance products for the first time.

"They're already in the auto insurance business, but they're doing it from a different place," said Mike McMahon, managing director and an analyst at Sandler O'Neill & Partners L.P., an investment banking firm in San Francisco. "So it seems to me to be a logical extension to go into it directly. That's consistent with how they've approached businesses for a long time."

McMahon owns no stock in Countrywide, and Sandler O'Neill does not hold a position in the company.

The pace and strength of the insurance rollout is consistent with the way in which Countrywide has diversified into other businesses, analysts said.

The company has typically built new businesses from the ground up, moving quickly into the new markets.

"Countrywide has a history of studying, hiring the fight people and then aggressively building the business," McMahon said. "The bank is an example. They bought a tiny bank that was insignificant, and it's gone from $250 million in assets in 2001 to $85 billion today. It's huge growth, and the Capital Markets group has had tremendous growth. I don't think anyone will be saying, GEICO, Mercury, State Farm, Allstate and Countrywide, but on the other hand, I don't think Countrywide would get involved with something if it wasn't going to become meaningful."

Countrywide, which has been diversifying for some time now, recorded pre-tax earnings of $1.1 billion in its banking segment in 2005, up 84 percent from 2004. Its Capital Markets business earned $452 million before taxes in fiscal 2005, down from $479 million in the prior year due to the flattening yield curve, the company said.

By contrast, pre-tax earnings in its insurance segment for the same year totaled $184 million, offering significant opportunity for growth.

Earnings before income taxes for the company overall totaled $4.1 billion in 2005.

Countrywide Insurance Group plans to target its current customer base, a staggering 8 million customers in its mortgage business alone, for its auto products, primarily through direct marketing.

The Countrywide Insurance Group rollout was determined in part by the areas where the company has the largest concentration of existing mortgage customers and in part by the regulatory requirements in each state. Some have lengthier processes than others.

"Our belief is that if someone has an established relationship with Countrywide, they would be more likely to want to talk to us about purchasing an additional product," Banks said. "If we're a known quantity, we think it will help separate us from all the other companies trying to solicit their business."

In most of the states where it has launched so far, Countrywide is using a toll free number staffed with licensed insurance agents who are employees of the company.

In Arizona, Countrywide is also marketing its auto insurance products through agents based in branch offices.

The company's expansion plans are contingent upon the pace at which it receives approval from the different state regulators, and as a result, company officials said they could not provide details on the scheduling of new openings, but California is definitely on the list for the coming year.

"Until we get that regulatory approval that schedule is fluid," Backs said. "But I can say that we expect to be selling in California in 2007."

SHELLY GARCIA

Senior Reporter

Diversification Efforts Pay Off

                     Q3/06     Q3/05       Q3/06     Q3/05
Segment           Revenues  Revenues  Earnings *  Earnings

                            (in millions)

Mortgage Banking    $1,830    $1,931        $424      $703
Banking                503       381         371       278
Capital Markets        258       179         141        92

* Pre-tax

Source: Countrywide documents