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State Farm

State Farm : advertising & marketing profile

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State Farm is America's biggest home and auto insurance group, now with a foothold in general financial services. The mutual company covers approximately one out of every five cars in the US, and close to the same percentage of homes. In the fiercely competitive personal insurance market, State Farm has for many years attempted to differentiate itself from its rivals through a "good neighbor" policy, leaning heavily on its heritage of fair dealing and promoting a spirit of trust between the company and its customers. However, three consecutive years of underwriting losses finally forced it to raise premiums in late 2010 and 2011. That could happen again after a huge rise in payouts in 2016.

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Competitors

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Brands & Activities

State Farm is the umbrella for a group of separate but interlinked mutual companies offering different forms of insurance and other financial services in different parts of the United States. Although it offers life and home insurance as well, it is best-known for auto insurance, and has been the market leader in that sector ever since 1942. It is America's biggest property & casualty insurer by far, with total written premiums in 2016 of $62.2bn, almost twice the figure reported by #2 insurer Geico/Berkshire Hathaway. Private passenger auto insurance accounted for written premiums of $39.2bn, equivalent to 18.3% market share. Homeowners contributed written premiums of $17.6bn, or 19.3%, more than the next two insurers combined.

State Farm also offers life and health insurance (with a place among the top ten US companies in that sector), casualty cover for individuals, and a variety of corporate insurance products and services. At the end of 2016, State Farm managed a combined total of around 81m policies, just over half of them - 45m in all - for auto insurance. Another 27m are for home & fire insurance, and 8m for life insurance. Traditionally State Farm tends to appeal to an older market than fast-growing newcomers such as Geico or Progressive, and its customers tend to be among the most loyal in the industry. Many have never moved to another insurer. However, growth in the number of new policies has been comparatively slow since 2002, at around 2% per year, reflecting the intensely competitive market.

As a result, the company has added on additional services to deliver growth. Launched in 1999, State Farm Bank has developed into a major lender, servicing around 2m accounts with loans totalling over $10bn, mainly for vehicle or home purchases, as well as 600,000 savings accounts. The group also operates its own mutual funds division, and markets health insurance products on behalf of third-party companies Assurant Health and Humana Insurance, as well as life assurance on behalf of Phoenix Life.

The group has around 1,000 claims offices spread across North America, but otherwise depends on a network of around 18,000 self-employed sales agents. Although by far the majority of its business is located in the US, the group also operates in parts of Canada. It remains a mutual association, jointly owned by its members, and has long prided itself on a "good neighbour" policy of offering insurance coverage at a fair price, coupled with fair claim settlement. For years it has promoted its services under the slogan "Like a good neighbour, State Farm is there". Since 2011 though this approach has been gradually phased out in favour of other strategies emphasising the company's commitment to excellent customer service, not least the "Magic Jingle", with which your insurance agent can be summoned instantaneously from his office. A separate and equally strong new campaign launched in 2013 featuring basketball star Chris Paul (and his supposed twin) to demonstrate the power of a "great assist". The group has become a major sponsor of sports and entertainment events, and became the insurance sponsor for Major League Baseball in 2007. During 2016, it forged a partnership with Live Nation to sponsor a series of smaller music festivals.

Financials

The insurance company made a net underwriting loss in 2005 because of payouts in its property & casualty division resulting from Katrina and other hurricanes. As a result, there were no dividend payouts to members, but the group also resisted the temptation to raise premiums. Further losses were incurred over the following years as a result of high catastrophe claims as well as investment losses in the 2008/09 recession. There was a recovery in 2010, with total revenues rising almost 3% to $63.2bn. However, higher than anticipated payouts led to a third consecutive year of underwriting losses, which rose almost 50% to $3.1bn. These were offset by sharp gains in investments, resulting in net income of $1.8bn. The continuing underwriting losses finally prompted State Farm to raise premiums during 2011, a fact that was greeted by some resistance from customers, but put the group back into profit for a couple of years.

For 2016, total revenue, including premium revenue, investment income and capital gains, edged up 0.5% to $76.1bn. However, a massive $7bn loss on auto insurance as well as underwriting losses in several other areas reduced net income from over $6bn in 2015 to just $400m. The group was only protected from reporting a net loss by investment income, and big capital gains in Net worth rose 6% to $87.6bn.

Background

State Farm was established in 1922 by George J Mecherle, an Illinois farmer who took up a new career in the city of Bloomington as an insurance salesman after his wife fell ill. Mecherle noticed that farmers were unfairly penalized on their auto insurance premiums to subsidize losses incurred by higher-risk city-based drivers. He decided to set up his own mutual insurance company in order to pass on lower premiums to local farmers. The business did well, and State Farm opened its first branch office, in California in 1928. The company moved into life insurance in 1929, followed by fire & casualty in 1935. Under George Mecherle, and subsequently his son Raymond, State Farm had grown to be the nation's largest auto insurer by 1942, a positioned it has held ever since.

Management control passed to company lawyer Adlai Rust in the 1950s. His son Edward ran the company for the next 25 years, establishing State Farm as the #1 in home as well as auto insurance in 1965. By 1990, State Farm was widely admired as one of America's most successful and well-trusted institutions. However the following decade did not go well for the company, as it battled a number of lawsuits over misleading sales practices, misconduct, and inadequate auto repairs. The latter case, a class-action suit, alone cost the company $1.2bn in punitive damages. Subsequently the group suffered record losses as a result of hurricane damage, the 9/11 attacks and tumbling stock markets. It has made a steady recovery since 2002.

Despite its huge size - around 70,000 employees - State Farm has a reputation for operating more like a family business than a large conglomerate. Most managers have worked there for years, and long-serving chairman-CEO Ed Rust was the third generation of his family to run the company, succeeding his father and grandfather. He finally stepped down as CEO in 2015, to be succeeded by Michael Tipsord.

Last full revision 26th April 2017


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