Stars and Stripes Forever

What makes an enterprise like this? How is it so different? And what can the rest of the industry learn from such a maverick institution? As I soon learned, the truth was at once both obvious and complex, easy to understand and hard to absorb. But at a time when individual life insurance numbers are at their lowest level since World War II, and regulatory reform has agents for both life and health worried about their futures, USAA is a case example of how success can be found from the least likely sources.

Name, Rank & Serial Number

USAA got started back in 1922, when 25 U.S. Army officers, unable to secure insurance for their automobiles because they were deemed too risky to insure, decided to insure each other. This was in Texas, where the law stated mutual insurance companies needed at least 100 members. The 25 officers didn't have that, obviously, so they formed something unique to Texas: a reciprocal inter-insurance exchange in which each member was jointly and severally liable for covering the costs of each other's claims. Any premium dollars left over at the end of the year were returned to the membership. Naming it the United Services Automobile Association, USAA was structured as a membership society, initially only open to military officers.

Over the years, USAA followed an organic growth cycle, using its steady influx of new members–and the revenue that came with them–to develop new product offerings and to expand the eligibility for membership itself. By the 1960s, when USAA started offering homeowners and life insurance, membership was well over half a million. After it began offering brokerage and banking services in the 1980s, its ranks grew to two million. But that growth paled before the explosion that happened in 1996, when USAA opened up to enlisted personnel as well as officers. As of 2009, anybody who honorably served in any branch of the U.S. military can become a member, as well as their family members. Case in point: my father-in-law served as a flight navigator in the U.S. Navy during the Vietnam War. He is a USAA member, and because he is, I can be, too.

As of June last year, USAA's total membership is 7.7 million, and growing by about 400,000 each year. Attending to all of those members are some 22,000 employees, mostly based in San Antonio, who sell and service a wide array of personal P&C insurance (mainly personal auto and homeowner's), life insurance (as well as traumatic injury coverage), banking, retirement planning and other financial services.

The company brought in $17.5 billion in revenue in 2009 and reportedly topped it in 2010, although official year-end figures are not yet available. According to the National Underwriter Life & Health Top 200 list (August 23, 2010), the company's life numbers tell an even more interesting story.

In 2009, USAA had $14.8 billion in admitted assets (#62/200), $365.8 million in individual life premium (#55/200), $880.8 million in net investment income (#41/200), $2.23 billion in total premium income (#58/200), and $297.4 million in total in-force (#37/200). On all of these lines, USAA did considerably better in 2009 than in 2008. In fact, its margins of growth were equal to, if not greater than, competitors such as Prudential MetLife, New York Life and other heavy hitters, leaving even the casual observer to conclude that USAA is a company punching well above its weight.

All this, I knew before I flew to Texas. What I wanted to know was what exactly USAA was doing to generate such success. Plenty of companies serve a niche market, but selling life insurance to combat personnel? This kind of work requires a special approach. But what kind, exactly?

Report to Headquarters

Two hours after I landed in San Antonio, I headed over to tour the USAA headquarters. As I entered the sprawling, 256-acre campus (a former horse ranch), I began to realize just how huge this place really was. The grounds are on par with a well-to-do university, but the main building is what really steals the show. At a mile long from end to end, it is the largest single-owner building in the country, and the largest building, period, in the state of Texas. The square footage, I am told, is slightly greater than that of the Pentagon. (Of course, that excludes any secret underground floors, my tour guide added, seeming to know more than he let on.) As we walked deeper into the building, I noticed that the HQ felt less like an office and more like a nicely done regional airport.

The comparison is not that far off. Because the place is so big, the campus has on hand about every ancillary service USAA can think of so employees do not need to make any time- and schedule-wrecking ventures off-campus during the day. In addition to all of the offices and conference rooms, there are multiple cafeterias, two Starbucks, a gym larger than the size of the National Underwriter office, and a media center with its own television and radio broadcasting studios. A services bureau is even on hand to run personal errands for employees for a modest charge. Numerous athletic fields surround the buildings, and there are multiple leagues for softball and basketball. One imagines that to get in USAA's top teams, you must first play in their minors.

Below the main floor is a concourse level that many employees will walk during the day for exercise. Were I working here, I would surely keep a pair or Rollerblades at my cubicle, especially since it is not uncommon for people to have to schedule five to 10 minutes of travel time just to make their meetings. The place is so big that rooms don't have numbers, they have coordinates. (Seriously.)

But what is the point of all this magnitude? In a word, centralization. Because USAA is a direct-marketing organization that mainly sells through telephone, web pages and a handy iPhone app it developed in-house, it doesn't really pay to have a hundred field offices all over the country. (Though that is beginning to change, in order to reach those clients who want face time instead of a phone call to buy coverage.) And since USAA tries to sell the same clients a wide range of financial products, having all of those units under the same roof makes it easier for cross-disciplinary teams to collaborate on developing, delivering and servicing blended products such as their recently released Home Circle and Auto Circle, both of which not only provide coverage but also provide support for buying a home or a car.

USAA's credo is "services for the service," and that focus has not been lost as the company has grown. Walking the halls, it is obvious that this company bleeds red, white and blue. Cubicles often have little American flags on them, or ribbons to support the troops. At one large lobby between concourses stands a massive, 1/8th-scale replica of the torch-bearing hand of the Statue of Liberty. Military memorabilia and artwork is tastefully arranged throughout the facility, which given its scope, translates to an awful lot of memorabilia.

Nowhere is it more impressive, however, than in its hall of history, where USAA has on display hundreds of military unit pins neatly arranged in wall cases, and row after row of displays filled with uniforms and mementos that speak to the nature of the company's membership. The centerpiece of the vast collection are three bona fide Congressional Medals of Honor that USAA was given exclusive permission to put on display. That's how deep the reverence between the military and this organization runs. And it is precisely that reverence that drives everything else that USAA does.

The Officer's Club

That evening, I met with the top brass of USAA's life insurance operation at San Antonio's most exclusive restaurant, Club Giraud. Joining me is Eric Smith, president of USAA's life company, and his team: AVP of underwriting Jim Sandell, chief of underwriting Mike Belko, VP of products Greg Marion, AVP of products Rob Shaffer and chief of staff Mary Goebel.

We spent dinner breaking the ice, and I got the sense that while these people conducted themselves pretty much like how you would expect self-confident insurance executives to, there was something else about them that was hard to put a finger on, but I knew it for what it was: culture.

USAA has always stated that its mission, first and foremost, is to be of service to its members. That it returns its products to them only reinforces that, as does its refusal to commission sales personnel. But as my conversation with the life team went on, it was clear that what was really driving these people was a sincere need to serve their members. Only one of the team was ex-military, a Marine who still carried himself like somebody who could easily give a member of al-Qaeda a case of high-speed lead poisoning at 300 yards. All the rest were from a civilian background, but each have family members who served. This is important.

Eric noted that while it is not a requirement to have a military background, or to have a family member who did, in order to work for USAA. But the fact remains that USAA is extremely passionate–fanatical, one employee described it–about making life easier for American soldiers. Departmental meetings begin with a group recitation of the company's mission statement. Life claims are something to pay first and ask questions about later, if at all. One of my hosts noted that they are only acting as caretakers for their members' money. Eventually, it's all supposed to go back to them, either in the form of a claim, a premium refund, or in some form of service.

I found USAA's willingness to pay claims on good faith to be interesting. There is a story about how a young military widow lost her husband in Iraq, and while he had agreed to buy life insurance from USAA, he had not yet sent in the first premium check. USAA told the widow that if she sent in the $40, they'd cut her the full life claim. And they did.

Part of it stems from the very real conviction on the part of USAA that the military instills a sense of honor in people that makes them less likely to hedge numbers or commit outright fraud. But much like a mutual, with the policyholders being the owners, the drive is to make sure that the members are always satisfied. The proof is in the pudding: the company currently maintains a 99% customer approval rating, a 98% member retention, and 94% of USAA members say that they intend to be members for life. In 2002, J.D. Power gave a special award to USAA to commend it for exemplary customer service. This, in an industry all too easily vilified by the press and by the public as something that professes to care for its customers but in practice, does not.

A more cynical observer might not be surprised that the life team had so much good news to share. After all, their boss was sitting at the table. But when I asked them all to describe for me their USAA moment–that one time that their devotion to a special breed of policyholder really came to a head, the stories were goosebump-inducing.

One spoke of how he remembered getting the word out to active military in 2003, when they were deploying to Iraq, to either buy life insurance or to increase their coverage. Why? Because they might very well need it. Indeed, USAA's life claims among active military have quadrupled since the War on Terror began, but the company is still trying to get as much life insurance in the hands of combat personnel as possible.

Another team member spoke of how he felt on 9/11, watching the Towers come down, and how they had to get people to New York right that day to make sure survivor relations teams could make contacts with families who had lost someone in the attacks.

Another spoke of how working for USAA fulfilled his own need to try to live up to the legacy of his grandfather, who had fought in World War II. Stories like these all exemplified how deep the culture runs at USAA, but it also showed that the culture is, in a strange way, self-enforcing. It is so much a part of daily life, and it is so out in the open, that those who come to work here are either down with the program or they won't bother to sign on. In that regard, it is perhaps the most powerful engine of corporate culture I have ever seen.

It occurred to me that USAA is a cause surrounded by a business rather than a business searching for a cause. Most enterprises see themselves as the first, but are in fact the second. It is a distinction USAA is proudly aware of.

Wounded Warrior

The following morning, I met with life sales advisor Kenny Sutton, a retired combat meteorologist with the Air Force who served attached to the U.S. Army in Afghanistan and Iraq. He was seriously wounded in combat after insurgents ambushed his convoy. While trying to drive and shoot at the same time, he accidentally rammed his Toyota Hilux into a boulder and was ejected through the windshield. He woke up to insurgents stripping the gear from his body, and to the sounds of his unit mates coming to his rescue. He was sent to recover at Brooke Army Medical Center at Fort Sam Houston in San Antonio.

In need of a job now that we has retired, he took a position a position as a life sales advisor with USAA, where his own military experience gives him an edge in selling to members. To prove it, he showed me a picture he keeps of himself being carried off the battlefield in Iraq. Though he was a USAA member at the time of his wounding, he did not upgrade his life coverage to include a traumatic injury rider, which for another few dollars a month provides an instant $25,000 payout to wounded soldiers. The stress of Kenny's recovery, both mental and financial, almost destroyed Kenny's family. That extra $25K would have made a world of difference to him.

"I show this picture to people and I say, don't end up like I almost did," he says, though sometimes his own customers get scared straight on their own. He spoke of one call he took from an infantryman in forward deployment in Iraq, who wanted to update his car insurance. During the call, Kenny heard the base come under insurgent small arms fire, and the call cut off. Kenny said that he expects this was not the first dropped call USAA has ever received like that, but having been on the receiving end of AK fire, he knew exactly why the call went dead. For three days he tried to determine the safety of the member until the member called him back, reporting that he was okay, and that if Kenny didn't mind, he'd like to go over his life insurance options, too.

I asked Kenny what it meant to him, as a Wounded Warrior, to provide services to the military. Kenny rattled off facts and figures about how for every USAA member there was, there were seven or eight other people who could be members but were not. A lot were active military who had an even greater aversion to discussing life insurance than usual because somewhere in the fine print of their job description, it reads, "to get killed for your country." Kenny appreciates that more than most, which is why for him, his job is more like a crusade. He remembers how much easier his life would have been had be bought a traumatic injury rider to his USAA life policy. He knows how shattering it is to young military families to lose their primary breadwinner, too. So he tries to get the member to focus not on having enough life insurance, but on enhancing what they have to protect their interests once they have come home. That simple shift in focus, treating every member like somebody whose homecoming is assured is a subtle but important detail.

For Kenny, it is not merely a way to sell insurance (although it is), it is a way to comfort fellow soldiers over the very real fear that they might not come home again. He reminded me that he doesn't get a commission when he closes a sale. But he gets the feeling that he helped a soldier. And in so doing, he relives a little bit of his own recovery from battle.

Hearts and Minds

My visit ended with another meeting with Eric Smith, this time for a one-on-one interview. After a day and a half of cultural immersion, it was time to discuss the practical challenges of serving a military client base, of figuring out the worst individual life market since World War II and building a bigger, better USAA. The first point I touched on was the company's rejection of an agency distribution model. USAA makes the vast majority of its sales through cold calls, but the number of app sales through iPhones, the iPad and the Web is growing fast.

For Smith, agency sales represent a fundamental break with the whole point of a group like USAA. Incentivized by commissions, agents may speak of servicing their clients' needs, but ultimately, that is just a means to the end of moving product, Smith says. With the agency world in turmoil because of low sales and regulatory uncertainty, Smith expects direct marketing to leapfrog agency sales as the key method to sell across the entire life insurance industry within five years.

When I mentioned to Smith murmurs that 2011 will be the year of mergers and acquisitions, he just shakes his head. Fully half of all M&A fails, and in the insurance world, the rate is even higher. There are firms out there that excel at that kind of growth, but USAA remains committed to entirely organic growth. The reason is because doing otherwise puts the membership focus in jeopardy.

"We could blow this thing out and bring in anybody in the world as a member if we wanted to," Smith says, "but then we would lose our way. We would forget why there was ever a USAA in the first place."

It is a sentiment that he says runs throughout the enterprise, and one he is dedicated to living up to. He has his work cut out for him. Because of the firm's tight risk tolerance, its investments took a fraction of the hit its peers did in 2009, allowing the company to expand operations while competitors retracted. "What happened at AIG could not happen here," he says. "It wouldn't even be up to me. The members would never allow it."

That said, Smith is driven to expand USAA's life footprint, and he currently feels that the company is seriously under-serving its potential client base. To combat that, the company has undertaken a number of initiatives to raise its public profile, since most military members, Smith notes, don't even know USAA exists. As such, the company has just rolled out its first nationwide television ad campaign. The actors in it are all current military, ex-military or civilians who showed up for the shoot in their own costuming. That was the case for some actors portraying a "welcome home" squad at the airport. "This is what we do already," one old-timer told the ad agency during casting. "Why don't we just wear what we normally wear?"

Eric had a hundred stories about how engagement from the members made his life easier, so I turned the discussion toward the recent controversy on retained asset accounts. I asked him how confident he was that his members would defend how USAA treated them. He laughed. "110%," he said. "110%."

Homecoming

I returned to New Jersey with a ton of notes, a head full of ideas, and a very special memento. In the military, soldiers have a tradition of giving each other commemorative coins that represent a unit one served with, or a ship they were stationed on, that kind of thing. As I left Eric's office, he gave me a coin that read "Proud Member United States Armed Forces" on the front, and "Army, Marines, Navy, Coast Guard and Air Force on the back." I showed it to my kids when I got home, and my seven-year-old son in particular showed interest in it. He asked me if it would be okay if one day he joined the army. "Absolutely," I told him. I just hope the little guy gets himself some life insurance when he does.