Farmers Insurance Group of Companies
Farmers Insurance Group of Companies
Wholly Owned Subsidiary of Zurich Financial Services Group
Incorporated: 1927 as Farmers Automobile Inter-Insurance Exchange
Total Assets: $10 billion (1997)
SICs: 6311 Life Insurance; 8741 Management Services
Farmers Insurance Group of Companies was a wholly owned subsidiary of B.A.T. Industries from 1988 until B.A.T.’s merger with Zurich Insurance Company, scheduled to be completed in 1998. The fifth largest property and casualty insurer in the United States in 1997, the company is headquartered in Los Angeles and operates in 30 states with a distribution network of over 16,000 employees. As a reciprocal insurer, the company is an industry leader in auto, fire, truck, and life insurance, as well as other customer services.
Founding Fathers, the 1920s
The company was the brainchild of cofounders John C. Tyler and Thomas E. Leavey, who started Farmers Automobile Inter-Insurance in 1927 to offer preferred insurance rates to rural drivers—an overlooked market. Tyler, the son of an insurance salesman from rural South Dakota, believed that farmers and ranchers, who had better driving rates than urbanites due to the lowered likelihood of accidents, ought to receive lower premiums. His partner, Thomas Leavey, also came from a rural background, and had worked for the Federal Farm Loan Bureau and the National Farm Loan Association prior to founding the company.
From the beginning, Farmers was organized as a reciprocal insurer or inter-insurance exchange. In other words, policy holders function as subscribers, exchanging contracts with each other to provide insurance against certain losses. Tyler became president and Leavey vice-president of the new company, and a sales manager and secretary completed the original staff of four employees. The company issued three million shares of common stock in 1927, as the Farmers Automobile Inter-Insurance Exchange. Tyler and Leavey convened the first meeting of the board of governors on March 28, 1928. Two weeks later, the company sold its first policy, insuring a 1928 Cadillac Phaeton.
The first two years of business proved the rural niche market to be fruitful. Forty thousand policies were issued, and the staff was expanded from four to 46, with 700 agents working out of 44 district offices. By 1931, the company worked in nine states, and by 1932, the Exchange’s assets were $1.08 million with net written premiums of $1.43 million.
The effects of the Depression meant closed doors for over 70 percent of stock insurance companies in the 1930s. Farmers not only survived, but grew stronger during this period. Prior to the bank moratorium declared by President Roosevelt in 1933, Farmers had converted all bank holdings into large cash reserves. Thus, when all national banks were closed, Farmers paid its claims in cash, rather than the non-negotiable paper payments made by other insurers. The company was tested by another disaster in 1933, when southern California was wrecked by a severe earthquake that damaged cars and buildings. Farmers again earned its customers’ respect by paying for all earthquake damage to cars under collision coverage, even though no such comprehensive coverage existed at the time.
Expansion and growth continued in the latter half of the 1930s. In 1935, a new reciprocal company, Truck Insurance Exchange, was launched to specialize in truck insurance. Farmers expanded into Kansas City and the midwestern states, and later moved into the Southwest. In 1936, the company was named the leading reciprocal in earned premiums for auto insurance by National Underwriter. The next year, premium income was just under $4 million—almost triple growth in just five years. In 1937, Farmers opened its Home Office on Wilshire Boulevard in Los Angeles. By 1940, Farmers was the leading Auto insurance carrier in the Pacific Northwest, with a new regional office open in Portland, Oregon. In 1942, Farmers added a third reciprocal company, the Fire Insurance Exchange.
Gasoline Rationing and Increased Expansion, World War II Era
Gasoline rationing during World War II did not significantly hurt Farmers profits. In 1943, assets reached $9.81 million and direct premiums were $8.82 million, with operations in 19 states. At the end of World War II, gasoline rationing stopped and prewar cars came out of garages and onto the streets. The poor mechanical quality of newly operational vehicles triggered a high rate of insurance claims, causing every insurance writer in the country severe losses. Farmers was able to withstand the claim volume due to its semi-annual renewal system (which allowed the company to adjust its rates to compensate for losses) and its corporate structure.
Growth continued in the late 1940s, with a new regional office in Colorado Springs and expansion of the Los Angeles home office. In 1948, when the company celebrated its 20th anniversary, the three Exchanges’ policies had reached 693,610 with assets of $30 million. Annual auto insurance claims almost reached 200,000, with over 22,000 truck claims. Farmers boasted a 90-day-or-less settlement rate for 79 percent of bodily injury claims and 74 percent of truck claims. Between 1949 and 1954, the company expanded into Wyoming, Texas, Illinois, Michigan, and Indiana. The role of regional offices was expanded to respond to growing business, and six more regional offices were added.
Two more companies were added to the Exchange in the 1950s. In 1950, the Mid-Century Insurance Company was organized as a multi-line carrier and a wholly owned subsidiary of the Farmers Insurance Exchange. In addition to services provided by the existing three Exchanges, Mid-Century offered coverage for Inland Marine, robbery, felony, burglary, personal lines, plate glass, selected bonds, and floaters. In 1953, Farmers acquired the Seattle-based New World Life Insurance Company, with assets of $27 million.
New Programs and Diversification, 1950s and 1960s
In 1958, written premiums reached $158 million for the Exchange as a whole. Between 1948 and 1958, the Fire Exchange grew from $575,000 in written premiums to $7.3 million, and the Truck Exchange quadrupled from $9 million to $36 million. In the late 1950s and early 1960s, the company built upon this growth by diversifying and adding new programs, including the 30/60 policy for mature drivers and the Truck Exchange’s Sentinel policies (among the first comprehensive commercial packages), the first monthly pay plan that was not a finance plan (1961), and the first drive-in claims office (1962). In 1959, Farmers began what would be annual participation in the Pasadena Rose Parade, launching its involvement in parades and community events nationwide.
The company’s fourth decade saw even greater growth than its third. Written premiums skyrocketed to almost $400 million by 1968, well over two times the achievement of 1958. The company continued to introduce new types of coverage, including discounts for non-smokers and the Alpha and Omega Plans (predecessors of the Universal Life Plan).
End of an Era, 1970s
In 1973, founder and CEO John Tyler died at the age of 86. Cofounder Thomas Leavey stepped up to the post of CEO. Five years later, Leavey retired in the 50th anniversary year of the organization he had cofounded, continuing to serve as an adviser until his death in 1980.
At the time of Leavey’s retirement in 1978, the company had exceeded $2 billion in written premiums, exceeding the 1968 figure more than five times over. Almost 7.5 million policies were in force, and the agency employed 8,778 full-time and 3,220 reserve workers. Nine new regional offices opened in the 1980s, bringing the total to 19. Customer files were directly computer-accessible from agents’ offices to maximize efficiency. By 1987, written premiums reached $5 billion and policies-in-force grew to over 10 million. Farmers was operational in 26 states, employing over 14,000 agents.
Earthquakes, Fire, and Acquisition, 1980s and 1990s
Sixty years of growth and innovation prefaced the most challenging decade in Farmers’ history in the 1980s and 1990s, including major acquisition and reorganizations and three disasters in California. In December 1988, Farmers was acquired by the United Kingdom-based British American Tobacco (B.A.T.) Industries, which became the sole stockholder of the company’s 68 million shares of common stock. Under B.A.T.’s parentage, Farmers continued its expansion, moving into Tennessee, Alabama, and Virginia, and becoming the number three property/ casualty insurer in the United States.
Although auto, fire, and life insurance continued to bring profits to the company, losses were incurred in commercial policy sales. The 1989 San Francisco earthquake, the 1991 Oakland fire, and the 1994 Northridge, California, earthquake posed major financial challenges to the company, as claims increased. Farmers’ members companies operated at a net loss in 1989 on Proposition 103 lines in California, and—according to National Underwriter (Haggerty, January 2, 1995)—record losses from the Northridge earthquake alone were estimated at $1.3 billion in 1995. In auto insurance, the leading four companies—Farmers, State Farm, Allstate, and Nationwide Group—together had added one percent of the market to their annual share between 1987 and 1991. However, in 1992, the “big four” only claimed .1 percent of the $5 billion market, and specialized underwriters began to compete for market share growth.
To simply say that Farmers is an America success story would be to ignore important elements that make up the company as a whole. It is indeed a successful company, and one with a rich history. A history of innovation and dedication.
To respond to these threatening circumstances, a number of organizational adjustments were made. Farmers changed the way it wrote commercial policies, establishing a Commercial Qualified Agent program and identifying commercial niches for whom the company created custom products. Emphasis on the expansion of the life insurance market was bolstered with new products, and several new annuities programs were announced as well. Farmers introduced new services to reduce the cost and inconvenience of auto claims: allowing approved auto shops to repair car damage, quick and inexpensive repair of auto windows, and the Farm Tow program were all introduced in the early 1990s. To keep its finger on the pulse of changing market conditions and state insurance regulations and needs, Farmers established state offices. By 1995, the company reorganized its core business operations into separate units for personal lines, commercial, and life insurance. In 1996, a special partnership with Citibank offered auto loans through Farmers insurance agents. That year, the company realized the top 10’s largest increase of 14.5 percent, with premiums of $8.55 billion. Such growth—largely due to the low 1994 premiums due to the Northridge earthquake—allowed Farmers to overtake Nationwide, becoming number four in the industry (from number six).
Legal Issues and Community Involvement
Several legal issues surrounded Farmers in the 1990s. Farmers’ Truck Insurance Exchange affiliate was the subject of a legal investigation in the late 1980s and early 1990s. Marmac, a California engineering firm, sued Farmers and its affiliate for allegedly refusing to defend a third-party lawsuit. A $58 million judgment against the company launched an investigation to determine whether the conduct of the affiliate was present in all Farmers’ companies. In 1994, the original decision against Truck Insurance Exchange was reversed by the California Court of Appeals. That same year, both Farmers and State Farm were accused by California Insurance Commissioner John Garamendi of discrimination in homeowners’ insurance sales in low-income and minority areas of Los Angeles. In 1995, Garamendi ordered Farmers to pay $183 million in Proposition 103 refunds (Farmers was one of 20 companies ordered to pay a total of $1.2 billion). In 1996, Allstate and Farmers were named in a “double rounding” class action suit (alleging that auto insurance premiums were illegally rounded up twice annually).
During the 1990s, the company sought to increase its community profile through involvement in programs such as Partners in Pride, the March of Dimes, the Youth Education and Safety (Y.E.S.) program, and “The American Promise” public television series. The Farmers Action for Communities of Tomorrow (FACT) program brings the company’s services to underserved urban markets. FACT was jointly announced by Farmers and California Insurance Commissioner John Garamendi after the 1992 Los Angeles riots, and was intended to serve the needs of inner-city residents and businesses who could not afford property insurance because of redlining by insurance companies (declining to offer coverage in high-risk areas). By the company’s 70th anniversary in 1998, written premiums exceeded $10 billion with over 16.5 million policies-in-force and 8.5 million customers.
The Zurich Merger, 1997–98
After a decade under the ownership of B.A.T., Farmers was poised for another major ownership transition in the late 1990s. In 1997, B.A.T. and Zurich Insurance Company initiated a merger. Creating a new company to be called Zurich Financial Services Group, this merger resulted in the world’s fifth largest insurance group, with aggregate gross premiums of $45 billion, and worldwide market presence. This merger most likely signaled continued expansion for Farmers—the largest U.S. member of the ZF group—since the Zurich company offered mutual fund and other asset-growth products. Farmers was expected to develop new programs in auto, fire, life, and commercial lines, along with new financial products including auto loans and leasing, home loans, and education loans. With a solid history of managed relationships with affiliates, subsidiaries, and parent companies, Farmers would be an important partner of the new and powerful Zurich Financial Services Group.
Farmers Direct; Fire Underwriters Association; Truck Underwriters Association; Farmers New World Life Ins. Co.; Property and Casualty Insurance Subsidiaries (Mid-Century and Domestics).
Farmers Texas County Mutual; Farmers Insurance Exchange; Fire Insurance Exchange; Truck Insurance Exchange.
Banks, Howard, “A Zurich in Your Future?” Forbes, April 20, 1998, pp. 85–86.
“Calif. Insurers Face Redlining Charges As Texas Pilot Begins,” Best’s Review, November, 1994, p. 10.
“Court Decision Prompts Calif. Probe of Farmers,” National Underwriter, November 29, 1993, p. 16.
“Farmers Insurance: Over Seventy Years of Superior Service, The Story of the Farmers Insurance Group of Companies,” Los Angeles: Farmers Group, Inc., 1998.
“Farmers Plan Targets Calif. Inner Cities,” National Underwriter, May 16, 1994.
Haggerty, Alfred G., “Court Reverses $58M Judgment Against Farmers,” National Underwriter, August 29, 1994, p. 7.
——, “Farmers Ins. Group to Fight $183M Prop. 103 Refund Order,” National Underwriter, January 2, 1995, pp. 2, 29.
——, “Farmers, State Farm See Ratings Cut,” National Underwriter, May 8, 1995, p. 23.
Jennings, John, “European Giants in Flurry of Merger Activity,” National Underwriter, October 20, 1997, pp. 3, 23.
Otis, L. H., “Allstate, Farmers Fight ‘Double-Rounding’ Ruling,” National Underwriter, July 15, 1996, p. 12.
Pasher, Victor Sonshine, “Farmers Joins with Citibank on Auto Loans,” National Underwriter, June 16, 1997, pp. 1, 30.
Sciafane, Susanne, “Farmers Adding Agents in ‘Underserved’ Areas,” National Underwriter, October 2, 1995, p. 6.
——, “Top-20 Company Premium Growth Better Than P-C Industry Average,” National Underwriter, July 21, 1997, pp. 9, 40.
Sullivan, Brian P., “Are the Big Four Running Out of Gas?” Best’s Review, October, 1993, pp. 43–48 +.
Sweeney, Patrick M., “A Year of Modest Premium Growth,” Best’s Review, July, 1997, pp. 28–31.