Life-sustaining measures: B.E. insurance overview.

Black insurance companies search for strategies to halt the erosion of their ranks

This October, prominent African American entrepreneurs, CEOs of some of the nation's largest black-owned firms and high-ranking execs from corporate America will flock to Durham, North Carolina. The reason: to celebrate North Carolina Mutual Life Insurance Co.'s 100th anniversary. In 1898, Dr. Aaron M. Moore, Durham's first black physician, and John Merrick, a former slave, founded the company. By 1939. Charles C. Spaulding, the third member of the original management team, had built the firm into America's largest black-owned company.

But amidst the festivities for North Carolina Mutual (No. 1 on the 1998 BE INSURANCE COMPANIES list with assets of $215 million), those who know the history of the nation's black insurance companies will also feel sadness. In 1975, the BE LIFE INSURANCE COMPANIES list had 39 firms. Now there are just 10 Plus, the National Insurance Association (NIA), the nonprofit organization in Las Vegas representing African American-owned life insurance companies, has only 13 members total.

The NIA's diminution raises questions. What are the most prescient and forward-thinking CEOs on the BE INSURANCE COMPANIES list doing to ensure not only their survival, but also continued growth? What caused the NIA membership to plummet, and how many black-owned insurance companies are likely to exist in 2000, or 10 years from now?

All NIA members began as home service companies writing insurance policies to cover burial expenses. Their agents sold the policies in people's homes and returned there to collect premiums. Many NIB firms belong to the Lite Insurers Council (LIC) in Atlanta, which represents 80 firms that use the home service distribution system. The LIC says home service companies garner 14% of all U.S. premium income and sell 29% of all U.S. Life insurance policies annually. These firms seek to serve the 72% of Americans making less than $50,000 annually. A small fraction of LIC members are still either entirely or partially dependent on the sale of policies for "final expenses." In 1995, these companies collected almost $6 billion in premiums and had life insurance in force worth $287 billion.

It's those numbers that have attracted attention and competition. On the selling side, mainstream insurance firms want entry into the $35-$40 billion multicultural insurance market. So, they open offices in black areas, host insurance festivals and advertise in BLACK ENTERPRISE. Many large firms also benefit from working with consortiums of black independent insurance agents. These urban small business owners are banding together to get better deals on policies from white-owned insurance companies.

All this attention pleases educated, middle-income African American consumers. They want more than standard whole life and term life insurance policies. Increasingly, they desire investment products that provide a return, such as annuities, which can be fixed or variable, guaranteed interest contracts and 401(k), 403(b), Keogh plans and IRAs. And the big firms are lining up to sell them these items along with policies.

The NIA knows this, and its membership is fighting back in different ways. In recent years, the three largest black-owned firms--the only ones that have assets over $100 million--have cut expenses, re-engineered their business plans and created new products. And the changes they've made and are continuing to make are slowly boosting each firm's premiums and profits. Their success should be instructive to other NIA companies.

Of course, these black-owned firms really don't have a choice. They do business in an era of financial Darwinism. And their CEOs know if their institutions don't adapt, they'll either die or be forced to merge with black or white firms that know how to survive.

In recent years, the growth of blackowned insurance firms has been stagnant. In 1995, the top 10 firms totaled assets of $688 million; last year, assets totaled $689 million. In addition, the premium income (the money they make from policies) of these firms has dropped from $161 million in 1995 to $143 million in 1997. The value of the top-10 firms' insurance in force has also been erratic, increasing from $180.4 billion in 1995 to $18.7 billion in 1996, then dropping off to $17.9 billion in 1997. Strategies used by North Carolina Mutual, Atlanta Life Insurance Co. and Golden State Mutual Life Insurance Co. may hold the keys to reversing these trends.

RATING THE FIRMS

Two companies, Standard & Poor's and A M. Best, (the oldest insurance rating company in the industry), rate the financial strength of insurance firms. S&P also judges how well companies will meet their insurance policyholder obligations. Higher-rated firms are seen as more likely to fulfill their obligations by paying claims.

In 1997, S&P analyzed only seven NIA companies. The ratings in S&P's "secure" range extend from "AAA" to "BBB." A "q" next to the rating shows it is based solely on quantitative analysis of financial data.

Last February, North Carolina Mutual received an "Aq," the highest rating of the NIA group. It was in the good range, but its capacity to meet obligations was deemed "somewhat susceptible to adverse economic and underwriting conditions." These may include recession or other economic changes that could decrease the sale of life insurance policies.

The secure range low rating is "BBB." Williams-Progressive Life & Accident Insurance Co. in Opelousas, Louisiana (No. 8 on the BE INSURANCE COMPANIES list with assets of 58.3 million), got a "BBBq" rating. S&P says the firm has adequate financial security, but its potential to meet obligations is "susceptible to adverse economic and underwriting conditions."

The S&P's "vulnerable range" includes ratings from "BB" to "CCC." The second largest NIA company, Atlanta Life, had a "BBq" rating. Its financial security may be adequate, but its capacity to meet long-term policy obligations was seen as "vulnerable to adverse economic and underwriting conditions."

Four other NIA companies, Golden State, Reliable Life, Universal Life and Winnifield Life, all ranked at the "Bq" level. Their potential to fulfill obligations was "particularly susceptible to adverse economic and underwriting conditions."

The "B" level is a step above "CCC," which indicates "extremely vulnerable financial security." No NIA firms were rated at this level.

ANOTHER 100 YEARS

Bert Collins, North Carolina Mutual's president and CEO, is sure his company will succeed in its second century. Since 1996, the firm, which has offices in 11 states and the District of Columbia, has held an A.M. Best "B++" or "very good" rating. In 1998, Collins says he wants an "A."

Collins says the company's growth and good ratings have been keyed by its ability to create products attractive to the middle income market while maintaining its home service base of selling small policies worth under $15,000--the firm's "heart and soul."

To honor its anniversary and entice new customers, North Carolina Mutual recently created a "Centennial" universal life policy and a new whole life policy. The Centennial's attraction hinges on the fact that all life policies build cash for you after the cost of the insurance has been paid. The difference between universal and whole life policies is that the former offers yields to the purchaser on the cash-value portion--at a higher rate than on whole life policies. Collins says the Centennial has a "very attractive" 6% return, whereas most universal policies offer about 4%.

The firm is also broadening its base through two workplace sales plans. The first sells universal life policies through a payroll deduction plan. Customers include Dudley Products, (No. 64 on the BE INDUSTRIAL/SERVICE 100 list), the city of Raleigh and several historically black colleges and universities. North Carolina Mutual is also selling a direct group insurance product that will allow an employer to pay its employees' premiums. During the next five years, Collins project premium growth worth $15 million in each of these workplace sales divisions. And, he says with a laugh, that is not the traditional way "of selling policies over the kitchen table."

ATLANTA RISING

In 1997, Atlanta Life Insurance Co. added at least $3 million to its capital and surplus--which is an insurance company's equity. It also had a net profit of about $2 million. This was the first time the net income of the firm (No. 2 on the BE INSURANCE COMPANIES list with assets of $202 million) has gone up since 1995. But the firm, which operates in 17 states and gets nearly 60% of its premiums from Georgia, Texas and Illinois, achieved these goals through subtraction, not addition. How? Since becoming Atlanta Life's president and CEO in 1996, Charles H. Cornelius has been busy. He hired a new management team, sold the firm's real estate portfolio, slashed district offices from 35 to 23, made a corresponding cut in agents and reinvented its home service area.

The payoff has been greater efficiency and reduced distribution costs, although consolidating offices reduced 1997 premiums by $2 million. Cornelius says, "We shrunk, but we had income from operations for the first time in quite a few years. We are smaller and more profitable, and we are gearing up for growth mode in 1998."

Here's the plan. In 1998, the firm is increasing its minimum policy size from $1,000 to $10,000, which should be within the budget of its mostly working-class home service customers.

Plus, the company is unveiling products created specifically to attract members of the black middle-income market who earn about $50,000 annually. These items include 10- and 20-year term policies, an annual renewable term policy, a new annuity and an interest-sensitive whole life policy. With term policies, a customer insures his or her life for a set time and pays an annual premium based on age. The older you get, the more the policy Costs. Annuities are fixed-rate investment vehicles that can provide income during retirement. The difference, says Cornelius, is that unlike its lower-priced home service products, Atlanta Life's new middle-market policies have a minimum face value of $50,000.

These factors led A.M. Best to give Atlanta Life a "B" or "fair," and a positive rating. Now, the challenge will be to see if it can carve a middle-income niche, raise premiums and cut costs simultaneously.

GOLDEN OPPORTUNITIES

Larkin Teasley knows change is risky. Since 1991, the CEO of Golden State Mutual Life Insurance Co. (No. 3 on the 1998 BE INSURANCE COMPANIES list with assets of $102.7 million) has whittled its home service market while focusing on selling insurance to black and Hispanic middle income households earning $20,000-$50,000 annually.

Golden State's results have been mixed. On the downside, in 1997, A.M. Best gave it its sixth consecutive "C++" or "marginal" rating. Also, the firm had the unfortunate distinction of suffering its seventh straight year of declining net investment income--going from $9.7 million in 1991 to $8.1 million. Since 1995, Golden State's premium income has been stalled at about the $15.4 million level.

Teasley is expecting these numbers to change significantly due to Golden State's move into the Washington, D.C., and Maryland markets. Last year, the D.C. office, which specializes in sales to government employees, had the firm's highest sales in premiums. This was a coup since the office opened just last March.

Teasley is buoyant. He contends that since 1990 the company's middle-income base has grown from 20% to 60% of its business. He believes the higher wage earners he is attracting in D.C. represent the continuation of some promising trends for his firm. "We think if an employer endorses Golden State and permits the employee to pay by payroll deduction, it means there is a much better chance of the policy staying in force," he says. "Plus, the salesperson doesn't have to try to catch the person at home or during nonworking hours."

The future of Golden State's Hispanic sales initiative is less clear. "Latinos represent an opportunity," Teasley says. "They are at the lower end of the economic spectrum just like African Americans, and the large [insurance] companies have been slow to penetrate the market because of attitudes about ethnic people and Spanish."

Golden State is taking steps to reach Latino consumers. All its phone messages are in English and Spanish. Teasley also says the verbal prompts customers use to select information about products is bilingual, and he plans to hire bilingual sales agents. Unfortunately, he adds, Hispanic policy sales are still very low, and some Golden State employees have resisted entering that market.

By contrast, there is no resistance to technology at Golden State. It is the only NIA company with an Internet home page (www.gsmlife.com). The two-year-old site allows customers to learn about the company and its products, and to purchase insurance.

THE FUTURE OF THE NIA

Most of the CEOs of America's blackowned insurance companies feel uncomfortable speaking about how rapidly their industry's niche is shrinking. They are members of a small fraternity and are often friends. Consequently, they speak in generalities.

The NIA is a shadow of its former self. Over three decades ago, it had more than 40 members. Of course, there were also many more than 2,000 mainstream insurance companies as well. Both groups have suffered attrition as customers became more savvy and demanded not only insurance, but also other financial instruments that provide them with higher interest rates of return. As investment laws changed, brokerage houses merged with insurance companies, and commercial banks began offering new consumer products. And each competitive development hit insurance companies.

Consequently, when change rippled through the insurance industry, the NIA was hit by tidal waves. Unfortunately, says North Carolina Mutual CEO Bert Collins, that is the natural order of business, and the companies that grow stronger succeed while others fail.

Charles Cornelius, Atlanta Life's CEO, agrees. He adds that the NIA companies' greatest weakness is that "the firms are too small, while our greatest strength is that we know our marketplace and our customers know us." The reality, he continues, is that in order to grow, NIA firms must find some way to consolidate. In the past, firms such as Atlanta Life grew by taking over other NIA members. Now Cornelius says he wants to grow by selling more policies to a broader array of customers.

The contradictions are very apparent to Larkin Teasley. The Golden State Mutual CEO is also the president of the NIA. He says its membership understands lower- to lower-middle-income African Americans better than anyone else. Plus, the NIA firms have substantial financial assets. But, he admits, these assets may not be enough to save every NIA firm. Since segregation ended, the nation's demographics have changed more quickly than the NIA did. Consequently, many middle-class blacks who knew the NIA became the clients of white insurance firms. And that trend is too far out of the gate to stop.

So what happens now? Teasley, Collins and Cornelius can't say for sure, but each CEO predicts his firm will survive. They are less sanguine about the NIA's chances. While Teasley, the group's president, projects the NIA will make it to 2000, he is not sure how long it will last beyond that. Why?

After a pause, Teasley says, "In my personal opinion--not that of the NIA president--I believe that in 10 years only five African American-owned insurance firms will remain. The rest will have either died or been merged with other NIA members." As for the NIA itself, perhaps it wig be a memory.

1998 TOP 10 INSURANCE COMPANIES SUMMARY

BLACK-OWNED                                            PERCENT
INSURANCE COMPANIES            1996         1997       CHANGE

NUMBER OF EMPLOYEES              2,217         1,995   -10.01%

ASSETS(*)                     $680,020      $688,683     1.27%

STATUTORY RESERVES(*)         $494,293      $490,603    -0.75%

INSURANCE IN FORCE(*)      $18,703,293   $17,860,684    -7.51%

PREMIUM INCOME(*)             $150,112      $143,091    -4.68%

NET INVESTMENT INCOME(*)       $41,656       $46,592    11.85%

(*) In millions of dollars, to the nearest thousand.

Prepared by B.E. Research. Reviewed by Mitchell & Titus L.L.P.