One State Farm Plaza
Company Perspectives:
State Farm's mission is to help people manage the risks of everyday life, recover from the unexpected, and realize their dreams. We are people who make it our business to be like a good neighbor, who built a premier company by selling and keeping promises through our marketing partnership, who bring diverse talents and experiences to our work of serving the State Farm customer. Our success is built on a foundation of shared values--quality service and relationships, mutual trust, integrity, and financial strength. Our vision for the future is to be the customer's first and best choice in the products and services we provide. We will continue to be the leader in the insurance industry and we will become a leader in the financial services arena. Our customers' needs will determine our path. Our values will guide us.
State Farm Mutual Automobile Insurance Company, the cornerstone in the State Farm Insurance Companies group, has been the number one automobile insurer in the United States since 1942. Approximately one out of five cars in the United States is insured through State Farm. Through a network of over 16,700 agents, the company and its subsidiaries handle 71 million auto, home, life, and health insurance policies. The State Farm group also offers its customers mutual funds and a variety of banking services, including deposit accounts, CDs, and mortgages via the Internet and telephone.
George Mecherle Enters the Auto Insurance Business: 1920s
State Farm began in 1922 as one man's plan to offer low-cost automobile insurance to the farmers of Illinois: hence the name State Farm Mutual Automobile Insurance Company. State Farm's early success and strong standing in a volatile marketplace is surely due to the vision of the company's founder, George Mecherle. Mercherle's beginnings are as modest as the company's success is extraordinary. He was a farmer until he was 40, when his wife's failing health forced them to leave their farm and Mecherle started selling insurance with a Bloomington, Illinois, company. Running his own farm had shaped Mecherle into a man who was constantly looking to innovate and improve conditions. When, in his characteristic outspoken, straightforward manner, he told his boss at the insurance company some of his ideas for improving the business, the boss said, "Well George, if you don't like the way we run things, go start your own company."
Mecherle did just that. He brought to the auto insurance business a fresh perspective and, with the help of a few choice people, began instituting his own ideas, which began with establishing a mutual automobile insurance company. Unlike a capital stock company, which distributes dividends, a mutual company adjusts premium costs and will refund a portion of the company's surplus to policyholders during periods when claims are lower and income higher. At the time, the insurance industry set its own rates and did not distinguish between groups of drivers based on location, driving record, or any other risk criteria. Mecherle decided it was possible to form a mutual insurance company that catered to rural and small town drivers who, as a group, had fewer accidents and cost insurers less in claim payments. Because claim costs for this group tended to be lower, premiums could be lower, and State Farm undercut its competitor's rates significantly.
This innovation of tying insurance rates to risk level established State Farm's legacy as a smart insurer that passed savings on to the customer. The Wall Street Journal observed, "Until the late 1950s, the company's competitors were clinging to their traditional insurance rates while State Farm was boasting in ads of savings of 'up to 40%' on its auto insurance."
State Farm was also a pioneer in the practice of charging its customers an initial lifetime membership fee to cover the cost of processing new policyholders and the agent's commission. This one-time, nonrefundable fee allowed State Farm to keep the policy premium low, and it generated essential income that fueled the company's early growth.
Aside from its independent approach to rates, another key element in State Farm's success was its unique agent force. Normally, insurance agents represented a number of different companies, took large commissions, and shouldered a great deal of the paperwork involved in writing and maintaining policies. Mecherle simply tapped into the network of farmer's mutual insurance companies formed to protect members against fire or lightning damage, as well as farm bureaus and other local institutions established throughout various regions. His first agents were men who were well placed in the community, such as the officials from the local farm bureau or sometimes an area's school principal. These agents worked part-time for State Farm and received less commission than their counterparts selling insurance full-time for other insurance companies. Nevertheless, by selling a sound, affordable insurance package to a population that needed it, State Farm agents were able to make their money on sales volume. Furthermore, State Farm's central office in Bloomington handled most of the paperwork, which freed up its agents to spend the bulk of their time selling.
The strategy worked so well that State Farm outgrew its offices three times in the first seven years. The home-office staff grew from five people in 1925 to 183 in 1927. The company reached a point in the early 1940s where its operations had become so scattered, some employees wore roller skates to speed delivery of interoffice mail.
The beauty of many of State Farm's policies was that they benefited both company and customer. For instance, State Farm followed other companies in offering semiannual--and later monthly--policy payments, which customers found easier to pay and, at the same time, led to accounting advantages for State Farm. State Farm also streamlined operations from the start, simply collecting premiums for a renewed policy on a vehicle, whereas most automobile insurers rewrote the policy each year.
Before long, the company was turning away unsolicited applications for insurance that were coming from prospective customers in urban areas. In 1926, a subsidiary, the City and Village Automobile Insurance Company, was formed. However, because the company lacked economy of scale, it was soon absorbed by State Farm Mutual, which rewrote its bylaws to allow for the extension of services to those urban customers not originally eligible for State Farm insurance.
Growth and Diversification: 1930s-40s
In 1928, just six years after the company's founder told a banker in Bloomington, "I've never had an account here. ... I've never cashed a check here, as far as I know. I've never tried to borrow your money. But I'm going to start a little business in this town and, by golly, you're going to lend me the money I need to get started," the company opened its first branch office, in Berkeley, California, and annual income surpassed $1 million. In 1929, the company moved into its own eight-story building, to which it added five floors in 1934. In 1939, State Farm built another eight-story building next door, to which it also added five floors in 1948. In the early 1970s, the company built its present headquarters at a site on the eastern edge of Bloomington.
The company's growth was not just a matter of volume; State Farm continually expanded the services it offered. In January 1929, the company formed a subsidiary, State Farm Life Insurance Company, which, like its parent company, has flourished.
During the banking holiday that brought in the New Deal era, State Farm Mutual operated at a loss, but it continued to operate at a time when many insurance companies folded. The National Recovery Act eliminated discounts on auto parts, and increased wages under this act sent repair costs higher. State Farm tightened in its belt, dropped coverage in its highest risk areas, and continued to attract and satisfy customers.
In 1935, it diversified again with the formation of the subsidiary State Farm Fire Insurance Company, which in 1950 merged with State Farm Casualty Insurance Company to form State Farm Fire and Casualty Company, which quickly became the largest insurer of homes and pleasure boats in the nation. In 1937, George Mecherle became chairman of the board of directors. Ramond Mecherle, who had been with the company for 13 years, was elected president, and G. Ermond Mecherle, who had been acting as director of personnel, was elected secretary.
Under G. Ermond Mecherle's direction, State Farm established a progressive program that addressed employee welfare on several levels, including financial, physical, and educational. He also worked to improve morale. Posture chairs made their appearance as early as 1935.
In 1939, State Farm launched a campaign to reach one million automobile insurance policyholders. The "One million or more by '44" effort relied heavily on advertising, and the company's advertising budget, which amounted to only $16.25 in 1923, swelled to an astonishing $202,000 in 1941.
With the advent of World War II in 1941, car production for civilian use came to a standstill, gasoline was rationed, and rubber for new tires became largely unavailable. State Farm wrote only 607 fewer policies than the year before, which had been a record-breaking year of growth for the industry in general and State Farm in particular. State Farm kept growing, pulling further ahead of its competitors, both mutual and stock. In March of 1944, in spite of the war, State Farm had one million auto insurance policies in effect. This represented a 110 percent increase in five-and-a-half years.
Postwar Difficulties
The postwar years were chaotic and fraught with serious problems for the auto insurance industry. There was a shortage of dependable, well-educated personnel, as well as a severe lack of sufficient office equipment and office space. This was at a time when Americans were rediscovering their automobiles, driving them farther, and driving them faster. Claims were flooding into insurance companies, their numbers rising 41 percent in 1945, and 57 percent in 1946. The total underwriting loss for the industry during 1945 and 1946 was estimated at $300 million, and for a few months in 1946 State Farm was losing money at a rate of $1 million a month.
It took State Farm several years to regroup and effectively meet the demands of its customers. During this period, State Farm established stricter criteria for accepting new policy-holders, setting an age limit on cars and not accepting those policyholders who were very young or very old. State Farm also worked to educate the public in a national automobile-safety campaign. As part of a restructuring plan, branch offices were established in 1947, the first of which opened in Saint Paul, Minnesota, and a committee was appointed to restructure the overcrowded and disorganized Bloomington home office.
George Mecherle exhibited his characteristic leadership during this difficult time. According to Karl Schriftgiesser, author of the The Farmer From Merna, Mecherle told the organizational committee, "Let us assume ... that we are about to start all over, build a new company. ... Remember there is nothing sacred here, nothing that can't be done away with. Be as rough as you want. The only thing I insist upon is that you do not depart from the basic principles on which State Farm has been built--the membership plan, the continuous policy, 6-months premium, and the happiness of our agency force."
The committee restructured the company headquarters along geographical lines--with each department representing a region of the country and functioning independently on a day-to-day basis--which scaled down and refined operations significantly. When George Mecherle died in 1951, State Farm had over two million auto insurance policies in effect.
Expansion and New Offerings: 1960s-70s
Due to special requirements in state laws, State Farm Life Insurance was unable to do business in New York, Connecticut, and Wisconsin, so to serve these states the subsidiary State Farm Life and Accident Assurance Company was incorporated in 1961. The next year, State Farm General Insurance Company was established to protect low-value property.
In 1962, State Farm offered auto insurance at a 20 percent savings to students who were doing well in school, based on the hope that if they were home studying for their good grades, they would be less likely to be out driving cars. In 1963, the company instituted monthly premium payments, and agents were authorized to make on-the-spot auto claim payments of up to $250, which improved customer service considerably. In 1965, State Farm began offering limited health insurance. The policy offered $15 for every day a policyholder spent in the hospital. This payment was touted as a possible supplement to other health insurance a person may have, perhaps to help pay for a babysitter or a housekeeper while a mother was away from home.
In 1966, an advanced computer system was installed, linking regional offices to headquarters in Bloomington. This investment, and the attention State Farm was paying to customer service earned State Farm praise from consumer groups in 1970.
There were periods when State Farm experienced large underwriting losses, that is, when payments on claims were much higher than income provided by premiums. Through smart investing and the ability to mobilize to cut costs during loss years, however, State Farm has stayed on top. A classic example is underwriting in 1971, in which State Farm's profit was $263 million, compared to $38 million in 1970. State Farm made headlines with its $30 million refund to policyholders as a result of high earnings in 1971.
By this time, the company was known for its independent stands on controversial issues: company executives felt that the insurance industry should not be exempt from federal antitrust laws, as it had been for decades. State Farm also supported federal no-fault-insurance legislation. There was also criticism that the company discriminated against minorities. It divided urban areas up into different risk zones and charged higher rates to those in higher risk zones, which tended to be in the inner city. The company had also been challenged in a number of court cases in the late 1970s and in the 1980s with allegations of sex and racial discrimination in its hiring of agents. To criticism that State Farm has long been "creaming off" the best drivers, Vice-President Thomas C. Morrill once responded, "Every underwriter tries to screen risks, but this isn't to say we go only after the cream. We just try to exclude the dregs."
Battling Industry Challenges: 1980s
During the 1980s, the property and casualty insurance industry was rocked by a number of problems. The industry suffered sharp increases in claims costs, especially natural-disaster claims and environmental-cleanup costs in the commercial arena. The rising cost of car parts, labor, medical treatment, and litigation was also impacting the cost of insurance, and customers were complaining.
In 1988, in reaction to the rising cost of insurance, California voters approved Proposition 103, legislation calling for an overhaul of the state's insurance system, resulting in major rate reductions for auto, homeowners', and business insurance, and a regulatory panel to approve rate increases, replacing the long-standing system in which insurers set their own rates. State Farm was one of the insurers that appealed this ruling and, along with other insurers, was required to justify its rate levels.
In 1989, a policyholder lawsuit was brought against State Farm. The suit alleged that State Farm was holding as its reserve twice as much as the industry standard and led to a court order requiring State Farm to distribute $6.87 billion in refunds to policyholders. State Farm claimed its conservatism was practical and necessary; CEO Edward B. Rust, Jr., told Business Week, August 21, 1989, "When it comes to claim time, customers don't want an IOU."
In 1989, disaster-claim payments were more than twice as large as in any other year on record. Between Hurricane Hugo in South Carolina and earthquake damage in California, State Farm paid out nearly $35 million to cover damage to vehicles and $570 million for property damage.
Despite these problems for the property and casualty insurance industries, State Farm continued its strong position relative to its competitors in all of its insurance lines. State Farm's earned premiums on health insurance placed the company third among health insurers. In addition, the outlook for the life insurance industry was one of growth, and State Farm Life affiliates, ranked eighth among life insurers, were in position to capitalize on this growth. As the number of persons with AIDS continued to rise, and more AIDS-related deaths occurred, life insurers feared that the related financial burden could reach unprecedented proportions later in the decade. This situation lead to controversy over life insurers' right to screen applicants for AIDS.
Throughout its history, State Farm built a record on its ability to deliver automobile, other property and casualty, health, and life insurance at competitive prices. This was achieved through innovative marketing strategies, financially sound business practices, lobbying in the political arena, and large-scale public relations campaigns. In the competitive insurance industry, State Farm's ability to keep its customers well-serviced, along with its smart business practices, continued to be key in its future success.
1990s and Beyond
State Farm faced just as many problems in the 1990s, however, as it had during the previous decade. By 1993, natural disasters such as earthquakes and hurricanes had left most in the insurance industry scrambling to get their finances back on track. Meanwhile, State Farm's litigation record left it subject to negative publicity, which began to tarnish its "good neighbor" image. After an earthquake in California in 1994, customers filed suit against State Farm, claiming that the insurer had cut their coverage in an attempt to forego claims payments. State Farm settled the suit in 1997, paying out $100 million to those involved.
Then, in 1998, the firm was forced to pay $200 million in a class action suit that claimed State Farm life insurance agents had used misleading sales tactics. The firm also had to pay a string of punitive damages related to misconduct, including $25 million for document destruction and $9.5 million related to fraudulent medical claims. To make matters worse, an Illinois state court ruled against State Farm in 1999 after policyholders brought suit against the company for using poor quality replacement auto parts, which was in breach of the policyholder's contract. Throughout the litigation, State Farm maintained its innocence, claiming it had not acted in a fraudulent manner. The Illinois court thought otherwise, and in October the policyholders were awarded $456 million. Later that month, State Farm was forced to pay an additional $730 million in punitive damages for its misconduct. "While the legal judgments aren't an economic threat to State Farm, which has a policyholder surplus of nearly $45 billion, they do raise questions about whether something has gone awry inside the nation's largest property insurer, which has worked hard to become one of America's most trusted companies," claimed a 1999 Business Week article.
Despite its legal woes, State Farm went on with a "business as usual" attitude. Even with the negative publicity brought on by its public court battles, State Farm's customer loyalty remained high. In fact, in 1998 it lost just 4 percent of its auto insurance customers, a figure well below the 7.5 percent industry average.
State Farm made a move into the financial services sector in 1998 by creating State Farm Financial Services F.S.B, which offered services that included deposits, residential mortgage loans, home equity loans, and auto loans via the Internet, by mail, and by telephone. As a nontraditional banking concern, the State Farm Bank did not operate any branch offices. The company's focus on financial services continued into the new century. It began offering mutual funds and also started testing a wealth management services program that it created with Phoenix Home Life Insurance Co.
During 2001--the company's third largest catastrophe year in its history--State Farm faced several challenges. The company decided to exit New Jersey's auto insurance market due in part to the state's auto insurance regulations, which drove insurance rates down. The firm's homeowner's insurance sector was also plagued with a flood of claims related to mold, especially from Texas policyholders. In September 2001, State Farm stopped accepting new business in Texas. By 2002, it had dropped new homeowner business in 17 states.
High underwriting losses forced State Farm to report an overall net loss of $5 billion in 2001. As such, the company began positioning itself for financial recovery. It streamlined its 25 regions into 13 zones and began focusing on expense management. The company also launched a new advertising campaign with the tagline "We live where you live," a reference to its presence in the United States, Canada, and on the Internet. During 2002, State Farm continued to focus on restructuring its operations as well as increasing its reach in the financial services sector. While the company would no doubt face distinct challenges in the future, State Farm stood well positioned to continue its long history of success in the insurance industry.
Principal Subsidiaries: 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 Federal Savings Bank; State Farm Investment Management Corp.; State Farm County Mutual Insurance Company of Texas; State Farm Florida Insurance Company.
Principal Competitors: The Allstate Corp.; American International Group Inc.; Liberty Mutual Insurance Companies.
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