GMAC seeks to make top 5 in auto insurance
NEW YORK (Reuters) - A re-energized GMAC Insurance, backed by private equity funding, aims to be one of the top five U.S. auto insurers in the next five to eight years, chief executive Gary Kusumi said on Monday.
GMAC's advantage, according to Kusumi, is its status as a private company and its relationship with General Motors Corp. GM.N, the largest U.S. automaker.
GMAC is now ranked 21st in the auto insurance market by A.M. Best Co. Its ambitions will put further pressure on earnings at other insurers, industry analysts said.
"Our goal is to crack the top five in auto insurers within five to eight years," said Kusumi in an interview. He said he will expand his direct marketing with television ads, add more than 3,000 independent agents and cut rates.
Kusumi's goal would grow the modest-sized insurer nearly three-fold in that time. It had $5.6 billion in revenue last year, compared to Progressive Corp. (PGR.N), the third-largest auto insurer in the United States, which reported $14.8 billion in 2006 revenue.
Auto insurance rates will decline about 4 percent relative to inflation this year, and even more for good drivers, according to Robert Hartwig, head of the Insurance Information Institute.
Progressive said last week that May earnings fell 35 percent and has told investors it is cutting rates to retain and capture customers.
"Auto insurers are going to be very aggressive," said Cliff Gallant, an analyst with Keefe, Bruyette & Woods. "You can't watch television without seeing the Geico cavemen."
Geico Corp. is the insurance unit of Berkshire Hathaway (BRKa.N), the fifth largest car insurer. Others in the top five include privately-held State Farm, Allstate Corp. (ALL.N), and Farmers Group, a unit of Zurich Financial Services Group
(ZURN.VX).
Private equity firm Cerberus Capital Management LP CBS.UL bought a 51 percent stake in GMAC, GM's financial services unit, last November for $7.4 billion, leaving GM with 49 percent.
The purchase saved GMAC from being tied to the automaker's junk bond status, five levels below investment grade. Although GMAC is still ranked just below investment grade. Kusumi foresees an upgrade in the future, "but not tomorrow."
The Cerberus connection also allows GMAC to cut rates in support of its long-term strategy, compared to public companies that have to meet quarterly earnings expectations, said Kusumi. To date GMAC has lowered car insurance rates in 13 states.
THROW PUNCHES
"We will throw punches and we expect other insurers to throw them back," said Kusumi.
Through a spokesman, Cerberus declined to comment on its GMAC strategy. The $18 billion private investment firm is also buying a majority stake in automaker Chrysler Group, the U.S. arm of DaimlerChrysler DCXGn.DE, for $7.4 billion.
Insurance is GMAC's second biggest unit behind auto financing and represents about a third of the company's revenue.
Kusumi said he plans to cross-market to the 16 million current GMAC customers and sell to "affinity groups" such as GM employees and recreational vehicle networks. In addition to car insurance, GMAC also sells home, boat, motorcycle and all-terrain vehicle insurance.
He said he will appeal to independent auto insurance agents with products such as low mileage-discounts tied to OnStar, a security and safety service available in GM cars, so that motorists who drive less pay less. GMAC will also do direct mailings, Internet marketing and a television campaign later this year.
"A key piece is of our strategy is price," said Kusumi. "We are very good at competitive rates and we are willing to sit and wait for market conditions to get better."
