State Farm Insurance Companies
Summary
" ■■ State Farm Insurance is a personal lines property and casualty company that provides auto insurance, non-medical health, life, and homeowners insurance. The company has subsidiaries across the United States that sell all types of insurance.
" ■■ State Farm Federal Savings Bank, generally known as State Farm Bank, focuses on consumer-oriented financial products, complementing State Farm's insurance focus on personal lines. State Farm Bank is a non-traditional financial institution, as it does not have branch offices, it uses agents, telephone, mail and the Internet instead.
" ■■ State Farm is the main home insurer in the United States, the company has over 73 million policies in force and about 28 million households are insured with the company. State Farm insures one out of every five automobiles in the United States.
" ■■ State Farm has significant exposure to severe weather, such as windstorms and hail, given its top five market share throughout the United States. Another risk is the fact that the personal lines insurance industry is heavily regulated, which imposes limits on company’s ability to alter rates, or products.
Overview
State Farm Insurance is a personal lines property and casualty company that provides auto insurance, non-medical health, life, and homeowners insurance. The company has subsidiaries across the United States that sell all types of insurance. It also operates State Farm Bank, which provides additional financial services. State Farm Insurance is headquartered in Bloomington, Illinois.
State Farm Mutual Automobile Insurance Company markets automobile insurance and is the largest insurer of automobiles in the United States, insuring one out of every five automobiles. It also offers health insurance. State Farm Fire and Casualty Company's product lines include homeowners, boat owners and various commercial lines. The company is the United States' largest insurer of homes and pleasure boats.
State Farm Florida Insurance Company writes new business in Florida for homeowners, renters, and condominium unit owner's policyholders. State Farm County Mutual Insurance Company of Texas protects higher-risk motorists in Texas.
State Farm Federal Savings Bank, generally known as State Farm Bank, focuses on consumer-oriented financial products, complementing State Farm's insurance focus on personal lines. State Farm Bank is a non-traditional financial institution, as it does not have branch offices. The bulk of communication between the bank and its customers is through agents, supported by telephone, mail and the Internet.
State Farm Investment Management Corp. manages the State Farm Mutual Funds and the investment options for State Farm Variable Products. It has over 30 years experience managing investment company assets. State Farm VP Management Corp. is the broker-dealer for State Farm Mutual Funds and State Farm Variable Products.
For the fiscal year ended December 2003, State Farm Insurance reported revenues of $56,100 million, an increase of 12.88% from the previous fiscal year. In the same period, net income rose from $-1,994 million to $1,468 million.
History
George J. Mecherle started State Farm Insurance in 1922 as a small mutual automobile insurance company owned by its policyholders. In 1928, Mecherle decided to decentralise the company. Employees from the Bloomington, Illinois office, along with other employees hired in Berkeley, California, established the company's' first branch office at this time, which provided support for agents and brought service closer to the customer.
Over the years the company prospered, adding new subsidiaries in various states across the US. Company subsidiary, State Farm Fire and Casualty was started in 1935, to provide insurance for homeowners, and boat owners among others. Another subsidiary, State Farm Life and Accident Assurance, began offering life and accident insurance in 1961, to meet the demand for life insurance in New York, Connecticut and Wisconsin. In the same year, it started the State Farm County Mutual Insurance Company of Texas, to protect higher risk motorists in that state.
In April 2003, State Farm released seven savings strategies to help middle-income Americans get started with savings. State Farm developed the list in response to data from the 2003 Retirement Confidence Survey, produced by the American Savings Education Council.
Taking advantage of its extensive claims data, State Farm announced in November 2003 that it was implementing its annual vehicle insurance ratings for specific makes and models of vehicles.
SWOT analysis
Strengths
Major U.S. property and casualty insurer: State Farm is the main home insurer in the United States, the company has over 73 million policies in force and about 28 million households are insured with the company. One out of every five automobiles in the United States is insured by State Farm, meaning that State Farm is the main car insurer in the country. The company is licensed to sell insurance products in all 50 states, an advantage over other insurance companies operating there.
Wide distribution network: State Farm has about 76,000 employees working across the United States and Canada and nearly 17,000 agents who are trained to sell State Farm insurance products and 58,000 staff members. However, the company had to close some of its offices, including the Winter Haven office.
Weaknesses
Risky factors, weather and equity markets: State Farm has significant exposure to severe weather, such as windstorms and hail, given its top five market share throughout the United States. Another risk is the fact that the personal lines insurance industry is heavily regulated, which imposes limits on company’s ability to alter rates, or products. Additionally, State Farm is exposed to equity market volatility and it has asbestos exposure in discontinued operations, which further increases the risk the business faces. The exposure to equity markets was one of the reasons why the year 2001 experienced the largest underwriting loss ever. The year 2003 saw some improvements, and the property and casualty ratio for State Farm has improved, by moving from 125.1% in 2001 to 100.6% in 2003.
Home insurance, construction, replacement, repair costs: homeowners insurance is facing some difficulties at the moment, due to the fact that according to some insurers, it is now increasingly used like a warranty product, rather than protection against sudden and accidental losses. Competitive actions over the course of previous years, such as offering low deductibles and inadequate exclusions for mould or water damage claims in the policy form, contributed to the lowered threshold for filing a claim affecting all homeowner insurers. At the end of 2002 the company announced an unexpected increase in homeowners insurance rates by an average 5.2%. According to State Farm, although mould and water claims are starting to stabilise now in the homeowners insurance market, construction, replacement and repair costs are increasing.
Higher property prices and inadequate replacement costs: real estate prices inflated well beyond the values upon the value on which the policy pricing was based. This "replacement cost shock" was a particular problem for insurers whose product routinely guaranteed replacement cost repayment. Although rising interest rates and poor economy have slowed the real estate prices in 2002-03 as in the mid- to late 1990s, the company is likely to experience more problems in this area.
Mutual status means lack of ability to raise capital: State Farm insurance is a large mutual insurance company, which means that it is owned by its policyholders. However, the mutual status restricts the potential for development transparency of its operations and it means that the company is unable to raise capital by selling stocks, which can be used for funding growth and paying for acquisitions.
Opportunities
Strong U.S. brand name: State Farm has been in the insurance business for over 75 years and during this time the company has grown from a small farm mutual auto insurer to one of the world's largest financial institutions. Further, its customer oriented service, strong distribution network in the United States and positive financial ratings all contribute to its brand image, which can be leveraged suitably.
Cost cutting management: State Farm decided in 2001 to restructure the organisation from 25 regions to 13 zones, planning to create an infrastructure that realises greater efficiencies in business processes. Expense reduction efforts were focused on analysing zone and corporate processes. In 2002, workforce was reduced by more than 2,800. Further expense savings occurred during 2003 and are expected to continue through 2004.
Small business insurance: having noticed a significant growth in the number of small businesses being set up, especially during 2002 and 2003, State Farm Insurance decided to focus on this growing market. The U.S. Census Bureau reports small businesses with 10 or fewer employees are growing at a much faster rate than the economy at large. Hence, this is a key component of State Farm's growing business initiative.
Threats
Rates increase too high: State Farm has continued to increase auto and fire rates in most parts of the country since 2002 to bring them more in line with rapidly increasing claim costs. It was decided that homeowners’ insurance rates will increase by an average 5.2% and the company would raise its automobile rates by an average of 9.2% state-wide. According to State Farm, it is due to the increasing costs in construction, replacement and repair. The property and casualty insurance is highly competitive in the United States and price increases may affect the new business generated, especially if other insurers will be offering products at more competitive prices.
New regulations: examples of new laws which had a direct impact on State Farm insurance business include Gramm-Leach-Bliley Act (The Financial Modernization Act of 1999, which includes provisions to protect consumers’ personal financial information held by financial institutions), the Health Insurance Portability and Accountability Act (HIPAA of 1996 protects health insurance coverage for workers and their families when they change or lose their jobs) and the Terrorism Risk Insurance Act (Terrorism Risk Insurance Act of 2002 establishes a temporary federal Terrorism Insurance Program that provides for a transparent system of shared public and private compensation for insured losses resulting from acts of terrorism, in order to protect consumers by addressing market disruptions and ensure the continued widespread availability and affordability of property and casualty insurance for terrorism risk). Further, laws on potential repeal of estate taxes can affect the life insurance business.
Competition: the markets for motor and homeowners insurance in the United States are highly competitive. Although State Farm is one of the strongest brands in the United States, the recent increase in prices means that it now might be faced with more fierce competition.
Company activity snapshot
" ■■ State Farm Insurance announced the closure of its Winter Haven office in April 2004. The company said it would shut its Winter Haven subrogation operations and transfer 67 jobs to four other corporate offices, the closest one in Jacksonville. By combining 38 separate units into four offices, State Farm is aiming to provide improved efficiency for its clients. The Winter Haven office, which serves as the Florida zone headquarters, lost 298 jobs through cuts and transfers since March 2003, when the company announced it was moving 219 life insurance positions out of Winter Haven into four main offices. This move forms part of the cost cutting measures introduced to boost efficiency in the business, after the company experienced significant losses in 2002;
" ■■ State Farm Insurance and Blue Cross/Blue Shield insurance are among the top 10 world-class financial services/insurance brands according to a Harris Interactive EquiTrend brand study, published in November 2003. Both companies improved their ranking positions from spring 2002 survey. Blue Cross/Blue Shield moved up to its No. 9 position from No. 18 and State Farm moved to No. 8 from No. 9. The study measured quality, which is the percentage of people who feel aware and informed enough about the brand to rate it. Approximately 2,900 respondents rated each brand out of a total of 1,152 brands measured;
- ■■ in December 2002 State Farm announced an increase in its automobile rates by an average of 9.2% state-wide, while homeowners’ insurance rates increased by an average 5.2%. The company explained that that even though mould and water claims are starting to stabilise in the homeowners insurance market, construction, replacement and repair costs are increasing. State Farm sells a new policy that does not cover mould, slow water leaks or foundation damage unless a customer pays extra, and according to the company, most people are not purchasing the additional coverage. State Farm also said that even though some parts of the state will see a rate increase, rates will drop in other areas.
