State Farm Mutual Automobile Insurance Company

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State Farm Mutual Automobile Insurance Company

founded: 1922

Contact Information:

headquarters: 1 state farm plz. bloomington, il 61710-0001 phone: (309)766-2311 url: http://www.statefarm.com

OVERVIEW

State Farm holds first place among U.S. automobile insurance companies. Since its founding, more than 65.8 million policies in the areas of automobile, life, home, and health insurance have been sold. In the United States and Canada, State Farm has 69,600 employees and sells policies through 16,500 independent agents.

State Farm is a mutual company as opposed to either a private or public (also called capital stock) company. In the case of a private firm, the customers have no stake whatsoever in the company's success or failure, whereas a public firm's stockholders gain or lose depending on the company's performance. A mutual insurance company will raise the cost of premiums (insurance fees) across the board depending on the balance of claims versus payments in a given year. For instance, if there are a particularly high number of auto accidents and natural disasters one year, more people will collect on their policies, and if this exceeds the money taken in by the company, everyone's rates may rise. If there are fewer claims than expected, the mutual insurance company may present its customers with dividend checks.

COMPANY FINANCES

In 1994 State Farm collected $23.2 billion in premiums and returned $206 million in dividends. In 1995 premiums were $24.1 billion, and dividends were $1 million. In 1996, due to underwriting losses in the previous years such as those associated with the Northridge, California earthquake, no dividends were returned on premiums of $24.7 billion. In 1997, on premiums of $25.3 billion, $651 million in dividends were returned.

HISTORY

In 1922 Illinois farmer George Mecherle found himself in a difficult situation. His wife had become ill, so they left their farm and moved to Bloomington, where Mecherle got a job selling insurance. Because he had different ideas about the insurance business than his employer, he decided to start his own firm geared toward the farmers of Illinois; thus the State Farm Mutual Insurance Company was born.

State Farm expanded rapidly from the beginning, outgrowing its offices three times before 1929. The company, originally geared toward rural customers, began to attract an urban clientele, and in 1928 it opened its first branch office in Berkeley, California. That year its annual receipts were more than $1 million.

The company continued to prosper even in the midst of the Depression. It formed several subsidiaries and, in 1939, began a campaign to sign one million new customers by 1944. Despite the fact that America was fighting World War II during that period, the company still reached its goal in March 1944. In 1942 it became the leader in automobile insurance in the United States, a position it still retained more than 50 years later.

Surprisingly, State Farm had a more difficult time in the years of the immediate postwar era, due to increased driving and higher claims. But with reorganization and changes of some methods, the company began to prosper again. In 1965 it entered the health insurance business, having already begun life and home insurance subsidiaries decades before. During the 1970s and 1980s, State Farm faced a variety of legal issues, some of which were industry-wide. In the late 1980s and 1990s, it encountered new insurance challenges including increasingly severe natural disasters and the spread of AIDS.

STRATEGY

Two innovative elements of George Mecherle's 1922 strategy were still in force more than seven decades later: the tying of rates to risk level; and the use of a low-commission, high-volume agent force closely allied with the company.

Though it is now common practice, prior to the time State Farm began tying its insurance rates to the amount of risk involved in insuring a certain group, everyone paid the same rate. Statistics show, for example, that young urban males have many more accidents than mature rural females; therefore they are more costly to insure. When State Farm first lowered rates to its rural clientele in the 1920s, it was considered revolutionary.

In addition, State Farm also instituted a unique agent force. Before State Farm, agents represented a number of insurers and took high commissions. George Mecherle hired farmers and respected citizens he knew, made them representatives of State Farm exclusively, and paid them lower commissions. As Mecherle had expected, his agents were trusted in the community, and they made more money through high volume than they would have through high commissions.

INFLUENCES

The biggest influence on State Farm has been the can-do spirit of founder George Mecherle, described in the book The Farmer from Merna by Karl Shriftgiesser. Mecherle shepherded his company through the difficult times of the Depression and World War II, when gas rationing and other restrictions on automobile use decreased the need for auto insurance. State Farm pulled through and actually prospered.

FAST FACTS: About State Farm Mutual Automobile Insurance Company

Ownership: State Farm is a mutual company.

Officers: Edward B. Rust, Jr., Pres. & Chmn.; Vincent J. Trosino, Sr. VP & Treasurer

Employees: 69,600

Principal Subsidiary Companies: State Farm's subsidiaries include: State Farm Indemnity Company; State Farm Life Insurance Company; State Farm Life and Accident Assurance Company; State Farm Fire and Casualty Company; State Farm General Insurance Company; State Farm Lloyds; and State Farm County Mutual Insurance Company ofTexas.

Chief Competitors: State Farm competes with other large insurance companies including: AETNA; AFLAC; Allstate; Blue Cross/BlueShield; Chubb; Cigna; Metropolitan; Nationwise; and Prudential.

Ironically, it was in the boom years that followed the war when the company faced more challenges. Americans, eager to use their automobiles again and to take advantage of their newfound prosperity, were driving more than ever and making more insurance claims. In 1946 State Farm began losing $1 million a month. Still, Mecherle had a positive attitude, insisting on a few basic principles, but then telling his employees that anything else could be changed to meet the changing times. As a result, the company was able to reorganize, and by the time of Mecherle's death in 1951, State Farm had more than two million automobile insurance clients.

CURRENT TRENDS

The number one trend in the 1990s was the increased cost of doing business due to both natural and political factors. In the natural realm, a long string of disasters had an effect on the insurance industry in general, as well as State Farm in particular. These disasters included: Hurricane Hugo, which struck the Carolina coast in 1989; the San Francisco earthquake of 1989; Hurricane Andrew, which pounded south Florida in 1992; the Midwest flooding of 1993 and again in 1997; and the Northridge, California, earthquake of 1994. According to Best's Review, in 1995 homeowners' insurance companies suffered losses of $3.2 billion, a number exceeded only two other times in American history: in 1994 ($17 billion) and 1992 ($22.9 billion).

Another major source of underwriting loss was the AIDS virus. State Farm and other insurers faced controversy over whether they could screen applicants for the fatal, and expensive, disease before agreeing to insure them.

In the 1990s State Farm and other insurers were criticized from the political left for their reluctance to sell insurance to persons living in low-income minority neighborhoods, a practice known as "redlining." This reluctance was reflected either in an outright refusal to sell policies or by charging higher rates. The insurers maintain that this has nothing to do with racial discrimination and everything to do with money; since crime and vandalism rates are statistically much higher in inner cities, than in predominantly white suburbs, it is less cost effective to sell insurance in inner cities according to Michael McCracken in National Underwriter. McCracken also criticized State Farm for agreeing to settle with the U.S. Department of Housing and Urban Development (HUD) in exchange for its dropping redlining claims against the company.

State Farm received criticism from the other end of the political spectrum in 1997 when it was noted that the company, along with competitor Chubb, had provided a substantial portion of the funds needed to pay President Clinton's attorney in the Paula Jones sexual harassment case. The insurers contended that this was simply a payoff of a policy taken out by the president.

In addition to these political battles, State Farm faced a number of challenges in court in the late 1990s and, in the case of a California proposition to lower insurance rates, at the ballot box. These challenges often had a high price tag, even if State Farm won.

CORPORATE CITIZENSHIP

State Farm has joined the Corporate Alliance to End Partner Violence, a non-profit organization dedicated to combating domestic abuse. Individual employees are encouraged to get involved in their schools and communities. The company has also established several internal recycling programs.

EMPLOYMENT

As far back as 1935, State Farm had programs in place to boost company morale and even provided its workers with "posture chairs" to help their backs as they sat at desks for long hours. On the other hand, the company has had several gender-bias lawsuits filed against it.

CHRONOLOGY: State Farm Mutual Automobile Insurance Company

1922:: George Mecherle establishes State Farm, focusing on the farmers of Illinois
1928:: Opens its first branch office in Berkeley, California
1929:: Establishes the State Farm Life Insurance Company
1935:: Establishes the State Farm Fire and Casualty Company
1942:: Becomes the leader in automobile insurance
1944:: Gets its one millionth new customer
1965:: Enters the health insurance business
1971:: Due to high earnings, the company offers refunds to policyholders
1989:: Disaster-Claim payments are more than twice as high as any other year in the company's history
1992:: Due to Hurricane Andrew, insurance companies as a whole lose $22.9 billion
1997:: A.M. Best Company gives State Farm a Superior (A++) rating

State Farm employees have received favorable press. For example, a July 1996 article in Incentive magazine commended agents for the way they handled difficult times such as the aftermath of Hurricane Andrew in south Florida. Also, The Loyalty Effect by Frederick Reichheld listed 15 companies, including State Farm, as outstanding in the area of instilling employee loyalty.