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Headed in the right direction; State Farm reorganization well underway

The Pantagraph (Bloomington, IL)

BLOOMINGTON -- During the past 2 1/2 years, State Farm Insurance Cos. has spent a lot of time in front of the mirror.

Initially, the reflection that stared back looked bloated -- a Fortune 500 company that doubled its Twin City work force in the 1990s, added too many policyholders too fast and invested heavily in what at least one watchdog group considered a risky portfolio.

Sluggish, it couldn't dodge the one-two punch of higher operating costs and the pummeling of Wall Street that greeted the industry and a host of other businesses at the turn of the millennium.

Shortly before reporting a staggering $5 billion loss for 2001, State Farm began to reorganize.

Today, the 81-year-old firm founded by a Merna farmer is leaner and profitable -- earning $1.4 billion in its property/casualty division at the end of the third quarter of 2003. By contrast, the division had been a recent money drain, with a shortfall of $2.7 billion in 2002 and a whopping $5.8 billion in 2001.

"Obviously, we're headed in the right direction," said State Farm spokesman Dick Luedke.

But at what price?

The toll includes job losses, including nearly 1,000 fewer employees in the Twin Cities, higher premiums and stricter underwriting.

Trading regions for zones

"Your average consumer has seen the cost of auto and homeowners insurance rise. It (also) means insurance companies have been more selective about the risks they underwrite," said Bob Hartwig, an economist with New York's Insurance Information Institute, speaking of the 2003 industry-wide recovery that parallels State Farm's.

"All the heavy lifting has been done through pricing and underwriting."

For State Farm, the heavy lifting began in August 2001. Two-thirds through a year that would be remembered for its record-setting financial losses, the insurance giant announced it would reorganize its 25 U.S. and Canadian regions into 13 zones.

At the time, Chairman and Chief Executive Officer Ed Rust said the changes would be "transparent to customers" but would help "hold down the cost of insurance for State Farm policyholders."

Illinois joined Indiana and Michigan to become the Great Lakes Zone. At the time, State Farm's Bloomington work force totaled 14,877.

But that was about to change.

State Farm also told the community the mutual company's propensity for seemingly endless job growth was about to come to a dead stop.

Although its Twin City work force ballooned from 7,060 in 1991 to the 14,877 a decade later, technology would now allow the firm to add policyholders without adding employees, it said. The result was predictions of a local no-growth phase in the coming decade.

Belt-tightening all over

But so far the reality is more than no growth. It is lost growth.

By November, Twin City State Farm jobs numbered 13,909 -- a drop of about 6.5 percent. But companywide, the dip was more dramatic -- the firm went from 80,136 employees in August 2001 to 72,779 in November -- an overall drop of about 9 percent. The losses have been achieved through attrition and an early retirement program.

Profits and premium hikes

The latter is among the largest influences in State Farm's recovery.

Nationwide, State Farm auto insurance rates were hiked an average of 10.5 percent in 2002, while homeowners rates nearly doubled that, to 18.9 percent. Those average increases dipped during the first nine months of 2003; homeowners' rates were hiked an average of 9.8 percent, while auto rates saw an average 5 percent increase.

In Illinois, for example, residents with homeowners insurance through State Farm Fire & Casualty saw a pair of double-digit hikes in their base premiums last year -- one averaging 14.9 percent, the second averaging 16.9 percent. That was followed by an average 5.4 percent increase this past summer.

A fourth "discount decrease" effectively generated an additional 1.6 percent average rate increase this fall. The move was accomplished by lowering deductible discounts, said spokesman Joe Johnson. For example, a policy with a $500 deductible that once received a 9 percent premium discount might now receive 6 percent.

The result is an Illinois resident paying $500 annually for homeowners insurance at the beginning of 2002 could now pay about $719 -- a hike of nearly 44 percent.

"One of the reasons we lost $5 billion in 2001 is because our rates were inadequate," said Luedke. "We were collecting less in premiums than we were paying in claims and expenses."

'Insurers investment follies'

But a consumer watchdog group also took State Farm and other insurance companies to task for what it deemed increasingly risky corporate investments.

The Foundation for Taxpayer and Consumer Rights criticized the companies for their "investment follies" during the stock market boom of the late 1990s. Rather than investing more conservatively, insurance companies opted for increasingly risky portfolios during the bull market, said the California-based group.

The consequences were painful when the market turned sour. State Farm Mutual Auto's major losses totaled more than $127 million in 2001 and $157 million the following year, according to the report, which draws its data from statements filed with the California Department of Insurance. Competitor Allstate's major losses were $114 million during the same two-year period, the report said.

"The 15 to 30 percent rate hikes common to many insurance consumers these days are not attributable to the reported rise in claim costs, as insurers argue, but are due to the significant investment losses sustained by insurers in recent months," the report said.

Luedke disagreed. He said the primary factor in determining rates is the cost of claims, with expenses second and investments a distant third.

He noted, for example, the combined $74.2 million in Enron and WorldCom losses were just a "small, tiny piece" that represented only one-quarter of 1 percent of the company's invested assets.

Those investments, he continued, also allowed rates to remain lower during times when the market was healthy.

"The milk that is spilled, is spilled, so to speak," he said of the company's recent losses. "We're just trying to make sure we don't spill any more milk."
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Company's progress

August 2001 - State Farm Insurance Cos. announces a major reorganization, combining 25 regions in the United States and Canada into 13 zones. Illinois is placed in the Great Lakes Zone.

The company says it expects virtually zero-growth in its Twin City work force of 14,877; by contrast it doubled the number of local employees in the previous decade.

2002 -- State Farm begins "Best Choice" initiative. Goal is to reduce expenses while providing quality customer service. As part of that, departments dealing directly with customers are limited to expense increases of 4 percent; those that do not are limited to 2 percent.

January 2002 -- State Farm Fire & Casualty increases rates for Illinois homeowners insurance an average of 14.9 percent. Company is largest insurer of homes in the state, insuring about one of every three homes. Similar rate increases are filed in other states.

March 2002 -- Company announces $5 billion loss in 2001. Underwriting losses in the property/casualty division were $9.3 billion, the highest in the company's history, with overall losses at $5.8 billion. The company's net worth is $38.1 billion.

May 2002 -- Standard & Poor's downgrades State Farm's financial and credit rating from AAA to AA-plus. The drop is caused by the firm's $5 billion loss in 2001.

July 2002 -- State Farm Fire & Casualty increases rates for Illinois homeowners insurance an average of 16.9 percent.

August 2002 -- State Farm Insurance Cos. restricts the number of new homeowners policies in Illinois. Earlier in the summer, the company placed a moratorium on new homeowners policies in 17 states and restricted sales in six others.

November 2002 -- State Farm Insurance Cos. announces a companywide early-retirement program for employees 55 years and older.

November 2002 -- Standard & Poor's downgrades the financial and credit rating for all State Farm's companies from AA-plus to AA. The firm cited "continuing heavy -- though much improved -- operating losses."

December 2002 -- State Farm Insurance Cos. lifts restriction on new homeowners policies in Illinois.

March 2003 -- State Farm announces losses had dropped to $1.6 billion in 2002, although that excludes an additional $1.2 billion in investment losses. Underwriting losses in the property/casualty division dropped to $6 billion, with overall losses at $2.7 billion. The company's net worth is $31.8 billion.

May 2003 -- State Farm Insurance Cos. announces a $500 million profit for the first quarter of 2003.

July 2003 -- State Farm Fire & Casualty increases rates for Illinois homeowners' insurance an average of 5.4 percent.

November 2003 -- State Farm Fire & Casualty increases Illinois homeowners' rates 1.6 percent by decreasing certain policy discounts.

December 2003 -- To reduce expenses, State Farm announces the Great Lakes Zone will consolidate in the next two years, resulting in the closing of an operations center in Marshall, Mich.