Talk From The Top

2006 was good; 2007 can be even better say State Farm Vice Chairmen

As the nation’s leading personal insurer posted profits in 2006, State Farm’s three vice chairmen were cautiously optimistic.  Chief Administrative Officer Jim Rutrough, Chief Agency & Marketing Officer Mike Davidson and Chief Financial Officer Michael Tipsord  all acknowledge the positive financial results and say there’s much more work to be done in 2007.

SFJ: The insurance industry had a very strong financial year. How did State Farm® end 2006?

MT: At a very high level, 2006 was a positive year from a financial performance standpoint. We saw an increase of almost $8 billion in our combined net worth for all State Farm affiliate companies (Group Net Worth) – moving the State Farm enterprise to $58.1 billion in overall net worth.  

This increase can be broken down into two major parts – 45 percent is due to an increase in the value of our equity investments with the remainder due to overall operations results, and the largest part being property and casualty (P/C) underwriting results.

Some may think this year’s results are so good because of the mild hurricane season, and that’s true to a degree, especially when comparing this year’s results to last year’s results.  But it’s important to remember that last year’s Group Net Worth through December 2005 had increased by $3.9 billion – even with hurricane-related losses. This demonstrates that the fundamentals of our non-catastrophe business are sound – evidenced in part by an underwriting profit of almost $1 billion in the auto lines of business in 2006. 

“Our overall policy and account growth was good. We added about 1.6 million policies and accounts.”
Jim Rutrough – Vice Chairman and Chief Administrative Officer

Although some criticize the industry for its positive 2006 financial results, it’s important to consider results in a long-term context. This is a volatile business, and the industry needs years of profit to fulfill the promises we make to our policyholders. 

SFJ: What was your assessment of growth in 2006?

JR: Our overall policy and account growth was good. We added about 1.6 million policies and accounts. Our life affiliates broke the application volume record in 2006, amassing more than $108 billion. The record stood for five years, and breaking it is a testament to many employees and agents who are meeting customer needs.

State Farm Bank® also had an impressive year when it comes to vehicle loan production. Yet in auto insurance, where we lead the industry, things didn’t go as well as they could have.

Auto began the year strong, but then trailed off in the second half of 2006.  We gained more than a half million policies in ’06, but we missed our goal.  Much of that shortfall occurred in a handful of states.

As for homeowners, we experienced a slight uptick in overall net written premiums in 2006 and exceeded our growth targets, but there were some areas, away from the coast, where the competitors made headway.

SFJ: What about exposure on the coast?  

JR: We’ve made several changes in our coastal markets, and our approach has been different than some of the major competitors who have made large scale retreats in those markets.  We understand that there are differences in every market, from our current penetration, and concentration of risk to regulatory constraints. So, our decision- making will be tailored to the business and risk environment in each individual market.

MT: Let’s be clear about homeowners.  We want to grow homeowners. It’s a product that helps us grow our auto book, too. But we have to be smart about where we grow. When the competition began pulling back from the coastlines, they did not do so with the intention of forfeiting market share. The battle for homeowners in non-catastrophe areas has intensified.

And to maintain our financial strength, it is critical that we continue to grow responsibly. Quality homeowners business isn’t going to knock on our door. We have to go fight for it. We have the best agents, the best product and the best claims force to service it. If homeowners business is managed well, there are growth opportunities.

SFJ: Competition, especially in auto, continues to increase, and then there’s the added pressure of helping customers do business with State Farm in a way they prefer.  How did State Farm respond to that pressure in 2006?

MD: We continue to provide convenience, flexibility and more options for customers to choose the ways they want to do business with State Farm and State Farm agents. After Hours Quote and Bind, where a customer can get an auto quote after traditional agent office hours, has taken off this year.

At year’s end, 29,000 auto policies were bound through a Quote and Bind representative or later through an agent. What’s even more impressive is the way State Farm agents have responded. By following up with these new customers, agents have been able to cross-market other lines.

“We have plans to expand Customer Access capabilities and to enhance our pricing mechanisms in auto.”
Mike Davidson – Vice Chairman and Chief Agency and Marketing Officer

When you couple those results with the 2.5 million auto quotes completed online, you can see that we’re making the walk-in, call-in, click-in service we’ve talked about for years a reality.  And the hallmark of these expanded access capabilities is still a tie back to a State Farm agent. 

Agents differentiate us in the marketplace by providing service that mono line carriers simply cannot.  We’ve set it up so that even if you get a quote after hours or online, you’re assigned a State Farm agent who will follow up and provide that differentiated service.  

SFJ: Giving a quote is only part of the equation. What about price?

JR: We took the greatest leap forward in pricing with the addition of a new rating variable in 2005 and 2006. Put simply, it helped us better match price to risk. And with more price points available, we were better able to refine our selection, which contributes to profitability. But this first iteration is merely an opening bid.

The marketplace has already reacted to our pricing model. Therefore, we must constantly change, shape and modify our pricing models in both auto and homeowners.

In addition, we’re going to keep taking rate decreases where it makes sense. We did that for auto in 46 jurisdictions in 2006. And for home-
owners, we decreased rates in 30 places. We’ve passed on significant savings to customers who are looking for the best value.

SFJ: Pricing is certainly important for customers, but what about service?

JR: Study after study shows “poor service” is one of the main reasons customers decide to shop around and eventually leave their insurance companies, and our competitors are seeing that fact first hand. They just don’t offer the same personal relationship the State Farm agent provides.

Our claims employees worked hard this year, continuing to handle thousands of Katrina claims and responding to the more than 34,000 claims we receive each day. 

“Quality homeowners business isn’t going to knock on our door. We have to go fight for it.”
Michael Tipsord – Vice Chairman, Treasurer and Chief Financial Officer

SFJ: Expense management has been an important issue over the last several years. With our positive results and desire for growth, are we letting up on expense management?

JR: The answer this year, and in all years to come, is no. Expense management is a never-ending process, and with the increased advertising costs and competition, everyone must be accountable.
We made some gains in this area when we moved from regions to zones. Since that shift, we’re now doing about nine percent more work with roughly 15 percent fewer employees.

When we talk about managing expenses, we don’t mean sacrificing our excellent customer service. We must constantly evaluate what we do, examine our processes, and look to eliminate inefficiencies and wasteful steps. Keep all lines of communication open and share ideas. No matter how efficient we become, there will always be room for improvement.

MT: Managing expenses is one more way to gain a competitive advantage. We just can’t afford to become complacent and lose the hard-fought ground we’ve gained over the last several years.

SFJ: Looking ahead to 2007, what opportunities are there for State Farm to continue its strong performance?

MD: We have plans to expand Customer Access capabilities and to enhance our pricing mechanisms in auto. Internal process improvements, similar to those we achieved in the vehicle loans arena this year, will make it easier for customers and agents to do business with us.  And we’ll drive more customers to State Farm through marketing enhancements. 

You’ll see State Farm when you watch American Idol® or NASCAR® races. You’ll see us sponsoring sporting events like the NCAA March Madness® tournament, the National Football League® and Major League Baseball®, and we’re increasing spending to highlight what we can offer the African-American, Hispanic and youth markets.

Plus, we’ll push ourselves to get even better on the service front. The service our competitors are providing is far better than it used
to be.  

In short, the future is very bright. That’s not to say there’s not hard work that lies ahead. We’re at a critical point in our Company’s history.  To remain the leader in property and casualty and build momentum in financial services, everyone – agents and employees – will have to adapt and adjust more quickly than ever
before. 

“We must constantly evaluate what we do, examine our processes, and look to eliminate inefficiencies and wasteful steps.”
Jim Rutrough – Vice Chairman and Chief Administrative Officer