Property & Casualty

Auto Dips at Mid-Year; Homeowners to Spur Growth in 2007

A strong first half of 2006 was not enough to offset lost auto opportunity in the back half of the year for North America’s leading auto insurer, although improved customer retention and an uptick in raw new business growth were auto production bright spots.

State Farm® added 454,000 auto policies from January to June, which was the third best auto policy gain over the last ten years. Then from July through December, the Company added only 105,000 auto policies.

“Traditionally, we don’t experience the same kind of growth in the back half of the year as we do in the front half.  2006 was no different,” explained Executive Vice President Bill King. “This year’s auto growth numbers were interesting.  While we missed our growth targets, there were some considerable positives.  We held on to a lot of business and picked up about five percent more from the competitors than we did in 2005.”

In total, State Farm agents wrote more than 6 million auto applications in 2006.

Lapse cancellation rates improved in 2006, and agents wrote roughly 97,000 more raw new auto applications than they did the previous year. Raw new auto represents new customers who have chosen State Farm over a competitor.

Added car applications – those cars added by an existing customer – did not grow as robustly in 2006. 

Looking at how State Farm stacks up against its major competitors when it comes to auto growth, for all of 2006, GEICO® added more vehicles than State Farm, Allstate® and Progressive® combined. State Farm added more vehicles than Allstate and Progressive, but our total growth on a percentage basis was similar to those two companies. 

“There’s no doubt the market is extremely competitive, and it became even more competitive toward the end of 2006. State Farm has to compete on what sets us apart.  We’re providing the best value in the market,” said King. “And we’re making sure that value is balanced with a competitive price.”

State Farm will continue to use new rating variables, and roll out added support, to enhance its pricing in 2007 and beyond. 

A new rating variable used in conjunction with other traditional rating factors has been implemented in 49 states, one Canadian province and Washington, D.C. to help State Farm better match price to risk. State Farm’s lapse/cancellation ratios remain at historical lows following its implementation. In addition, loss ratios for added cars have significantly improved. 

Despite these pricing gains, the competition responded quickly.
“There are no plateaus, no places to rest,” said Ed Rust, Chairman and CEO.

State Farm leadership understands it must continue to refine pricing models, continuously adding rating variables based upon information gathered from customers.

The Company will make changes to agent systems that create a conversational workflow between agents and the customer to quote and bind auto and enhance the ability to learn more about a customer. The tool will roll out state by state beginning in mid-2007.

Homeowners:  A catalyst for growth

While State Farm looks to refuel auto momentum, it will lean on a valuable part of the machine, the homeowners product.

For years, looked upon as a retention device for auto, the homeowners product continues to be a key strategic tool in helping State Farm compete for customers.

“We are striking a balance between the needs of our customers, the opportunities for State Farm agents, and the regulatory and legislative environment,” said King. “The bottom line is that outside catastrophe-prone areas, we want to grow our homeowners book of business.”

Competitors who pulled away from coastal areas completely in the wake of the 2004 and 2005 hurricanes will not concede total market share. Rather, they will look inland at zones such as Great Western, Heartland and Great Lakes to bolster their books.

“In 2007 and beyond, the competition for homeowners outside of catastrophe areas is going to be severe,” said Jim Rutrough, Vice Chairman and Chief Administrative Officer. “Homeowners is a critical part of our growth engine.”

While looking to grow homeowners in non-catastrophe-prone areas, State Farm will not be pulling completely out of coastal areas. But the line is no longer drawn in the sand; rather, it’s further inland.

“We’re not going to cut-and-run,” King said. “We do, however, have to be responsible and manage our exposure to the damage these catastrophes cause.”

One of the keys, King said, will be to reduce the Company’s probable maximum loss without reducing the number of households insured.

State Farm’s fire affiliates represented 32.9 percent of overall net written premiums through December 2006. That figure was 32.1 percent in 2005 and 30.9 percent in 2004.

As with auto, there are tools to help meet the goal of profitable growth in homeowners.  At the end of 2006, a new homeowners rating variable was live in 30 states, and has improved the quality of homeowners business. 

There are no rest stops and there is no finish line. The Company has to proactively change, shape and modify its pricing in order to keep pace with the market and introduce customers to other products that meet their needs.

“Our homeowner’s product is a catalyst for growth,” Rutrough said.  “Customers are far more likely to explore our financial products if they have homeowners coverage.”