Honor, duty and life insurance: 5 Star Life Insurance Co. grows profitably by sticking to its mission of providing life insurance to the military and by finding niches elsewhere. (Market Competition: The Big Picture).

It's only seven years old, but 5 Star Life Insurance Co. is a small company that already has a lot going for it. The Alexandria, Va.-based company has a solid niche market, an enviable location and a supportive parent organization with plentiful resources.

5 Star is a reference to the rank of Gen. and later President Dwight Eisenhower, who in 1947 helped the insurer's parent come into being. Originally the Armed Forces Mutual Benefit Association, the parent organization's headquarters is only four miles from the Pentagon, the basement of which was home to the group's first office. Today the parent is AFBA, the 5 Star Association, a nonprofit organization whose downstream holding company, 5 Star Financial, owns the insurer, a bank, a family of mutual funds and an investment-management company that manages the funds. All of the companies are branded with the 5 Star name.

5 Star Life's president is Craig Piers, who headed John Hancock Mutual Life Insurance Co.'s group sales and marketing and who earlier was a captain in the Army. Second in command is Kim Wooding, executive vice president, who came to 5 Star in 1997 from Price Waterhouse, where she was an audit manager. The company last received capital support from its parent organization in 2000, but AEBA still provides considerable help with claims, administration and Web services. As a result, the insurer still has only 16 employees. Last year, it turned a $705,000 profit.

AFBA was founded to provide life insurance to members of the military. From 1950 to 1996, John Hancock was the underwriter. But in 1996, AFBA acquired an insurance shell, Western Fidelity Life Insurance Co., from JMJ Financial Corp., to become its own writer and better position itself as a provider of high-quality, low-cost life coverage.

5 Star Life's challenge today is to grow profitably in a competitive and mature marketplace, said Piers. Its strategy is to find market niches that aren't overserved, and to differentiate itself in niches that are well served. Piers said the key differentiations for his company are that it will issue policies even to soldiers heading off to war, and that its policies impose no terrorist clauses or territorial restrictions. 5 Star life insurance is also portable, and premiums don't rise because a soldier has left the service.

Members of the armed forces are entitled automatically to $250,000 worth of coverage under the government's Servicemen's Group Life Insurance program, and 5 Star Life often offers its products as a supplement to that coverage, though 5 Star's is cheaper, Piers said.

Piers and Wooding also have been working to widen their distribution as a way of spreading risk. 5 Star has found two other niches: payroll-deduction products and final-expense life insurance. In the former, 5 Star targets small to mid-sized companies, those with 15 to 1,000 employees, with which larger insurance companies aren't as active. 5 Star Life's worksite product provides life insurance with a critical-care benefit. Piers said many of the work-site customers are hospitals. While the company is licensed in all jurisdictions but New York, it concentrates its work-site sales in the Southern states.

People in their 60s and 70s are the target market for the final-expense whole-life policies, which have relatively small face amounts suitable for funeral expenses. The key to sales is the distribution network of independent agents, Piers said, but the company works to generate leads for them through the airing of radio and newspaper advertisements.

Competition is primarily from other associations. The Military Benefit Association of Chantilly, Va., offers term life and supplemental health coverage. The Uniformed Services Benefit Association of Kansas City, Mo., offers insurance products underwritten by New York Life Insurance Co. for active and retired service members and government employees. And the "10,000-pound gorilla" in the business, said Piers, is United Services Automobile Association of San Antonio, which has leveraged its automobile insurance business for the military into multiple lines of insurance and other financial products. Piers said 5 Star doesn't compete head-on, however, because it distributes through agents, while USAA reaches prospects through direct marketing.

Competitors in the final-expense line include the e AARP program, Mutual of Omaha In Insurance Co. of Omaha, Neb., and American Fidelity Life Insurance Co. of Pensacola, Fla. At the work site, 5 Star competes with American Heritage Life Insurance Co., a part of the Allstate Financial network; CNA Financial; Zurich Financial Services Group; and First Penn-Pacific Life Insurance Co., a unit of Lincoln National Corp.

5 Star's Web site, www.AFBA.com, is maintained by its parent organization and generates about 3% of company revenues. Prospects can use it to apply and/or enroll. It offers rapid ("jet") underwriting and contract holders can pay premiums online.

"We're very proud of our Web site and our information technology," said Wooding. "We were one of the first to use imaging technology and character recognition for scanning." Much support comes from the association's staff, she added. But Piers said the main value of the Web site is its role in educating clients and prospects.

Piers said 5 Star Life generally tries to contract with producers experienced in the company's market niches. Many agents come by means of referrals. In the final-expense area, Piers seeks producers with a good track record. In work-site marketing, it wants brokers that specialize in building relationships with client companies. The company also o has eight producers working with soldiers in Europe and "a handful" in the Pacific region, he said.

Over the past two years, as some life companies have struggled with the economic downturn, low interest rates and the stock market's decline, 5 Star Life has been able to grow and be profitable. "We're not insulated from market events, but we've had no major problems," said Piers.

Over the past 10 to 15 years, 5 Star has had to adjust as the military has increasingly focused on its core missions and outsourced work to civilian contractors. Piers said 5 Star has extended coverage to these civilians. It also sells to employees of the Department of Defense, the federal government, and state and municipal governments and to their families.

Advantages of Being Small

Piers, who had contacts with 5 Star during the time John Hancock was underwriting its policies, said working for a small company has its advantages. "It's easier to know what's going on," he said. "You're not detached, and you don't have to go through committees, so you can react faster." Development of a work-site marketing product, for example, took two years at Hancock but less than six months at 5 Star. "You take more of the credit and accept more of the blame here, too," he said. "You feel like you have an impact."

Wooding said she finds the small-company environment "exciting" and enjoys performing a variety of tasks, even fielding customer inquiries. She also is chief financial officer of AFBA 5 Star Funds, the family of mutual funds.

Over the next five years, Piers expects continued, profitable growth in revenue of 10% to 15%. He would like to see new products, possibly even a variable universal life product. His two major areas of concern are identifying the right distribution partners and pricing products correctly.

Wooding said she wants to see the company stay competitive in its product line without increasing risks, to look for more opportunities to reinsure products, to "properly manage our surplus" and to avoid growing too fast.

RELATED ARTICLE: 5 Star Life Insurance Co.

Headquarters: Alexandria, Va.

President: Craig Piers

Products: Individual life, group life, health plans

Licensed: 48 states, D.C., Guam, U.S. Virgin Islands, Puerto Rico

Incorporation: July 1, 1996, as AFBA Life Insurance Co. Parent established in 1947.

Financials (2002): Net premiums--$70.7 million; net premiums, group life--$64.0 million: earnings--$705,000; capital & surplus--$49.1 million; insurance in force--$32.5 billion

Reinsurance: Coinsurance with John Hancock Life, Monumental Life and Lincoln National Life

Web site: www.AFBA.com

RELATED ARTICLE: AFBA President Sets Tone of Stewardship, Fidelity

At 3 p.m. every workday, retired Lt. Gen. Charles C. Blanton leaves his seventh-floor office for a handshaking tour. The tour takes him to every corner of his Alexandria, Va.-based nonprofit financial-services company for military personnel. He shakes hands and talks with each of the 110 employees on site. He wants to know what's going on, and he wants to know what concerns they have.

Relationships matter to Blanton, the president of AFBA/The 5 Star Association. So do history, tradition and fidelity--core values of the military.

Blanton's influence begins with the tan brick-and-mortar building that became the association's home in the mid 1980s. It stands seven stories high along a main thoroughfare in Alexandria's historic district that is characterized by tidy townhouses and shops. AFBA occupies four floors and leases the rest. The courtyard in front of the building is bordered by Bradford pear trees that bloom white flowers in April just as the area's cherry blossoms bloom in pink. Flagpoles in the courtyard bear flags of the five branches of the military, the National Oceanic and Atmospheric Administration, and the Public Health Service, all of which are served by AFBA. A larger American flag on a higher pole waves in the middle of the area.

"We wanted a building that symbolizes the military," said Blanton, who along with the late Mort Wilner, a long-time director of the company, oversaw construction and helped choose its location from among 40 possible sites.

The general also honors those who have served. Letters, photos, certificates, proclamations and portraits hang on the walls of corridors, the boardroom and his office. He is eager to show the items to guests because they define what the association has been, is and will be. He also shows two dog tags on a key chain he keeps in his pocket. One is his; the other is his father's. It is his way of saying they will always be close.

AFBA is governed by a volunteer board of directors made up of seven active-duty members and seven retirees. Blanton became a member of the board in 1975 and became president of the association in 1982. Under his guidance, the association broadened its membership benefit offerings from life insurance to a full array of financial service products. "If we hadn't, we'd have been renting a lot more space in this building," he said.