Agents of Change.

Farmers Insurance Group has changed the way it sells, expanded into 12 states and re-engineered its claims process. The forces behind the new thrust include its CEO and 2 book about cheese.

Farmers Insurance Chairman of the Board, President and Chief Executive Officer Martin D. Feinstein is energized as he shows off a toy mouse and a greeting card illustrated with a picture of cheese that he keeps in his office. The objects, which contrast with the elegant silver-and gold-framed personal photos and awards ensconced in a formal bookcase adjoining his wood-inlaid desk, are symbols to Feinstein that his message of change is being accepted by the insurer's 15,000 exclusive agents.

The gifts came from Farmers' employees and agents responding to the 26 speeches Feinstein gave during a grueling 13-top tour in July and August, and to copies of the bestseller Who Moved My Cheese? that he sent to 10,000 Farmers employees. "The Way Forward" tour spread the word of change to the company's

agents throughout eight states. The message was straightforward: With banks and dot-coms selling insurance, it's time for the agents to evolve from sellers of auto and homeowners insurance into "trusted advisers" who are also licensed to sell financial products.

"The road trip was a leap of faith. I didn't know what to expect, but I had to go," Feinstein said. "If I expected the agents to accept the change, they had to hear it from me." His vision for Farmers, the third-largest property/casualty insurer in the United States, is to be not just a provider of insurance but to be all things to the customer. Farmers wants to restore its policyholders' lives to order after a loss, to take away worries and to help families fund their children's education and plan for retirement. To do this, Farmers is focusing on event marketing--providing products for every stage in policyholders' lives to keep them as clients for a lifetime.

"What really provides a strategic advantage is the customers' experience," Feinstein said. "At the end of the day, the experience they are paying for is 'God forbid something happens, I want someone to be there."' To that end, Farmers is taking the following steps:

* stocking its shelves with new technology to give agents more time to sell;

* creating new claims processes to restore order to policyholders' lives;

* adding products by buying mobile home and recreational insurance giant Foremost;

* expanding eastward with independent agents; and

* re-engineering personal-lines underwriting to fit the price to the customer.

Spreading the Ward

During the 26 presentations, which he interspersed with his regular biweekly trips to Switzerland to the home office of corporate parent Zurich Financial Services Group, Feinstein talked to 12,000 Farmers agents. As he undertook the crusade to lead the company into its next phase, his weapons were technological and literary

In his talks to the agents, Feinstein and his staff demonstrated Farmers newest technological creation--the Agency Dashboard. The new marketing tool, created in just nine months and costing more than $7 million, represents Farmers commitment to its agents. The Agency Dashboard was designed to streamline office tasks so agents could spend more time selling. Interspersed in his speech were references to the parable Who Moved My Cheese? that were used to illustrate the need to accept change.

Feinstein's wife, Naomi, recommended the book to him. After reading it, he recognized how the simple story about mice and "little people" could relate the inevitability of change and how to deal with it to his employees. Feinstein immediately ordered 10,000 copies and distributed them to agents and district managers with a personal note. To the uninitiated, the story might sound trite. But Feinstein uses the story, the Agency Dashboard and his presence to rally the support of the exclusive agents that he needs to complete the transformation of Farmers from home and auto insurers to a global financial-services leader.

Feinstein received thousands of letters from employees sharing what the book meant to them. Feinstein had those responses published in an 82-page book, Old Cheese, New cheese, Farmers Employees and District Managers Savor the Adventure of Change. The employees' letters express how they feel about the changes Farmers is going through. One wrote: "I felt this spoke directly to me as a longtime Farmers employee. There has definitely been a period of denial that the company was changing so swiftly and radically. I am working to convey that message that we must all work smarter and look at things through new eyes."

A Moment in Time

In the rarefied world of the top five property/casualty CEOs, Feinstein is an anomaly. He isn't related to his predecessor like Ed Rust Jr. of State Farm and Peter Lewis of Progressive. He's also been with the company for 31 years, unlike Edward M. Liddy, who joined Allstate in 1994, and Dimon McFerson, who joined Nationwide in 1979.

He is as surprised as anyone that he's the CEO of Farmers. "Did I expect to be CEO when I began my career here? Absolutely not. I think that's one of the most wonderful things about Farmers. There aren't that many companies in the United States today where you can start as a trainee and work your way up through an organization," he said.

Feinstein also admits to having a little luck in landing the top spot at Farmers. The company's prior CEO, Leo E. Denlea Jr., was retiring and needed to name a successor. I was allowed to think how I was going to get to this next stage. It isn't about having a wonderful business plan as much as understanding how do you educate, motivate and mobilize employees. If you can't do these three things, it doesn't matter how smart you are," Feinstein said.

Feinstein's personality and drive are palpable and well-suited for the radical changes under way Feinstein's work ethic is legendary. "He's the first one to turn the lights on in the morning and the last one to turn them off at night. His personality is infused throughout the company. He's not a figurehead," said Cecilia Claudio, senior vice president and chief information officer.

Stephen Leaman, president of Farmers Personal Lines, agrees: "Marty works more than any human being I've ever seen. In terms of example setting, it's extraordinary for the rest of us."

Keitha Schofield, executive vice president of Support Services, describes Feinstein as having a million ideas a minute. Feinstein attributes that description to his ability to think on different levels, which he learned during his "claims upbringing."

"When I was taught to look at car damage, I learned how to see beyond a dented fender. My job was to look behind the fender at what is damaged. So, you begin to think in a sort of third dimension when looking at everything," said Feinstein, who started work at Farmers in 1969 in the claims department.

Family Ties

Twelve senior staff members report directly to Feinstein. Their areas of responsibility include support services, field operations, financial, information and corporate communications. "As peers we argue fiercely," Claudio said. "We're all perfectionists--all type A's; but after arguing like crazy we'll ask each other out for a drink."

Three of that group--Claudio, Schofield and Leaman--are relative newcomers. Claudio came to the CIO position in 1998 from the health-care field--Anthem Blue Cross/Blue Shield and Harvard Pilgrim Health--in addition to Xerox Corp. and The Gap. "I came to work here because Marty is dynamic, hard-working and a visionary. When I met him, I was literally like a moth drawn to a light. His bar is very high and very challenging," Claudio said. Schofield came to Farmers five years ago from Continental Airlines, where she was vice president of the technology division, Leaman's journey to Farmers sprang out of the merger with Zurich Financial Services in 1998, where he was president and CEO of Zurich Personal Insurance.

The culture at Farmers is described as everything from challenging to tough love, but the description always includes the term "family." Executive team members tell stories about support from the company during crucial times in their lives and how employees pulled together through the company's hard times--dealing with the Northridge earthquake in 1994 that cost the company $1.9 billion in losses and the tornadoes in Oklahoma this spring. The family concept extends to sponsoring a "Family Expo" at the Convention Center in Los Angeles in early August. More than 1,500 employees and their families came for a demonstration of the Agency Dashboard, presentations by physical fitness companies and discussions about topics such as what parents should know about the Internet. "We had food, balloons...It was like a fair," Schofield said.

Feinstein laughed before giving his take on the culture of the company he has been part of most of his life, because pinpointing it is difficult. "There are pieces of it we are leaving behind as we go," he said. Farmers is shedding what Feinstein calls the "entitlement mentality." When he took over as president and CEO in 1997, he made it clear to the company's top executives that change was on its way. Many opted for early retirement, saying they couldn't keep up with the fast pace of the company "I eliminate executives who are just executing. I want people who can do things because they believe in it," Feinstein said.

The remaining employees, however, are rewarded with a profit-sharing program that's been in place for 52 years, and every employee gets the same percentage. "It's an equitable way of saying if we make a profit as a team, we all share in the profit," Feinstein said. Farmers also believes in communicating with its 18,000 employees, which involves more road trips because 80% work off site at service centers or are agents. Every November, members of the executive team hold strategic management conferences around the United States, spending a week in each city to discuss the company's past, present and future goals. "It's a big investment for a corporation that operates in as many states as we do. But we're trying to integrate within the organization a feeling that you're empowered when you're informed and you're being included," Feinstein said.

Go West

The idea for Farmers came from fatherly advice given to a World War I veteran. Farmers founder John C. Tyler followed in the footsteps of his father, who founded Redfield Mutual Insurance Co. in 1899. Along with another World War I vet, Thomas E. Leavey, Tyler formed Farmers Automobile Inter-Insurance Exchange in 1928. The fledging company was organized as a reciprocal, a rarity in business arrangements. A reciprocal consists of insurance exchanges that share risks equally The business of the exchanges is conducted by an attorney. "From a practical standpoint, there is no difference between a reciprocal and a mutual" said Karen Epermanis, a professor of insurance at the University of Hartford.

Farmers' property/casualty business is underwritten by 24 insurers, which are managed by Farmers Group Inc. These insurers include three reciprocal exchanges--Farmers Insurance Exchange, Fire Insurance Exchange and Truck Insurance Exchange. The group's insurers also include 18 stock companies that are wholly owned by one or more of the reciprocals, as well as two mutual companies and a reinsurer, Farmers Reinsurance Co. All of the companies, except for Farmers' life company, come under the umbrella of one or more of the exchanges. The company is divided into five strategic business units: personal lines, Farmers specialty, business, life and financial services.

The heart of Farmers' business is centered in the West and Southwest. Its top five states for property/casualty direct premium last year were California (30%), Texas (16.8%), Colorado (5.3%), Arizona (5%) and Washington (4.9%). Its personal-lines business represents 88% of the group's net premiums. Auto and homeowners represent 68% and 20% of the group's premiums, respectively. The remaining 12% comes from commercial lines. Farmers' largest commercial product is commercial multiperil, which represents 58% of 1998 commercial net writings, followed by workers' compensation (26%) and commercial auto (16%).

Farmers isn't scurrying to take over State Farm's or Allstate's top slots in sales of personal auto and homeowners. "I don't set a numerical goal anymore, because you can make stupid mistakes. You could be No. 1 tomorrow if you throw enough money at it. We'd rather be a dominant player in the market," Feinstein said.

Farmers is closer to slipping to No. 4 than to making headway into the No. 2 spot in private-passenger auto and homeowners. In the auto segment, No. 1 State Farm Group owns 18.9% of the market, more than three times Farmers' share, while No. 2 Allstate has a 12.2% share. Farmers is in single digits with 5.7%, and No. 4 Progressive has 4.8%. It's the same story in homeowners with State Farm way out in front with 22.6% of market share, Allstate with 11.5%, Farmers with 6.9% and Nationwide Group at 4.5%.

Unlike its giant property/casualty counterpart, Farmers New World Life Insurance Co. is ranked No. 45 in insurance policies in force in 1999 by A.M. Best. The life subsidiary is based in Mercer Island, Wash., and offers individual life and annuity products to support Farmers' strategy to offer financial solutions to its customers. At year end 1999, Farmers New World Life had total assets under management of $1.7 billion and nearly 1.2 million individual life policies in force. Last year Farmers began offering long-term-care products and entered the structured settlement market.

According to A.M. Best's report on the company, Farmers' profitability is driven by its core personal auto book, cost efficient exclusive agency force and broad offering of products and services, which result in high business retention. Farmers' challenges, however, include intense competitive conditions in personal lines in most of its operating territories; the ability to maintain an adequate level of profitability in commercial lines, and the potential, especially in Texas and California, for low-severity high-frequency catastrophe losses.

Becoming Global

By the time U.K-based B.A.T Industries purchased Farmers in 1988, both founding fathers had died. When B.A.T Industries merged its financial-services operations with Switzerland-based Zurich Insurance Cos., forming Zurich Financial Services Group, the combined company had grown to $11 billion in net premiums written.

The Zurich Financial Services Group concentrates its activities in five business segments: nonlife, life, reinsurance, Farmers Management Services and asset management. Based in Zurich, Switzerland, its three key markets are the United States, the United Kingdom and Switzerland. It has offices in more than 60 countries, reaching more than 35 million customers and employing 68,000 people. Based on consolidated figures for 1999, the group achieved gross premiums of $48 billion. In 1999, 47% of Zurich Financial Services Group's gross premiums were generated in the United States, with Farmers Insurance Group accounting for 54% of these revenues.

"Farmers accounts for approximately 23% of Zurich's worldwide premiums, is a dominant personal-lines insurer with a strong brand name in one of Zurich's key markets and provides the overall organization with cross-marketing opportunities and best practices expertise in many operational areas," said W. Dolson Smith, an A.M. Best property/casualty analyst. "Farmers' affiliation with Zurich has facilitated its expansion in the eastern United States over the past two years, improved its insurance product density and enhanced its strategy of providing a diverse mix of financial products and services," Smith said.

Farmers is into its second year of doing business in 12 eastern states it inherited from Maryland Casualty Co., which was part of Zurich. The challenge was to set up shop as quickly as possible in those states and start writing business. Farmers opted to use Maryland Casualty's network of independent agents rather than develop exclusive agents in states like Maryland, Pennsylvania and New York, because it allowed the company to get premium on the books faster, Feinstein said.

Farmers Group Inc. pays 60% of its dividends to Zurich every quarter. Zurich has challenged Farmers to double the number of products sold to existing policyholders, triple the number of customers and reduce expenses by 10 points in the next three to five years. "That's what we are focused on, talking about and getting the right strategies in place [for]," Claudio said.

Being associated with a global heavy hitter has its benefits for Farmers, also. Farmers can go to Zurich when it needs expertise in an area like financial services, rather than hiring an outside consultant. In turn, Zurich recently sent one of its most promising executives, who was in charge of business in France and Switzerland, to the United States to educate him about U.S. marketing strategies. Fein stein also participates in the quarterly meetings in Zurich, where the company's international leaders are exposed to programs on critical thinking, entrepreneurship and innovation. "Stand-alone businesses in the United States can't get to do that. They don't get to sit and meet people from the United Kingdom, Germany, Portugal and Italy. These people have different business experiences they can share. That's one of the values that we get from a people and cultural standpoint," Feinstein said.

The Environment

Farmers' headquarters building, which was built in just 10 months in 1937, is located on busy Wilshire Boulevard, which slices through Los Angeles. Located just a few miles from the heart of the downtown area, Farmers' building is set next to the wealthy neighborhood of Hancock Park, home to film star Melanie Griffith, and it is also near the famous La Brea tar pits.

The Farmers campus occupies about four city blocks, including the original main building and two adjunct buildings built in the early '80s. The original building took its hits over the years, surviving damage from the Watts riots of the '60s and the Northridge earthquake. After the earthquake, "we were displaced for about two days. Everything fell out of my bookcases and was on the floor. There was a big crack running up a wall on the second floor. It's a good thing the earthquake hit in the early morning when no one was at work," said Jeffrey Beyer, vice president of Farmers corporate communications.

The main building's streamlined art deco architecture, set off by rows of four-story-high palm trees, evokes the 1930s feel of Los Angeles. But inside, the word is utilitarian, with seven floors of ubiquitous cubicles, interrupted only by the executive suite decorated in dark cherry wood.

Rallying the Troops

Feinstein and his executive staff have dressed like Elvis or appeared in military garb to sing, "I don't know, but I've been told, Farmers agents are made of gold," at agents conferences to get the message to the agents. The message is simple: if banks and financial portals on the Internet are going to sell insurance you need to be prepared.

Stephen J. Feely, a senior vice president and chief marketing officer, is in charge of the re-engineering of Farmers' 15,000 exclusive agents, to get them ready to meet the demands of better-informed customers. "We're transitioning from what we call product peddlers to trusted advisers. That's the way to sell insurance in the future," he said. Feely knows his "troops" are at a crossroads, but he believes that Farmers is giving them the weapons to be successful. "We're becoming a different company than we were a year or two years ago," he said.

Feely has many challenges: overseeing 3,000 agents working to achieve their National Association of Securities Dealers licenses this year so they can sell annuities; dealing with an aging agency staff, and making sure the agents receive and use the new Agency Dashboard tool. But the soft-spoken Feely is unflinching in his belief in the path Farmers has chosen for its agents. "For those who want to continue to peddle auto insurance and don't want to reach out to their clients and work with them on a daily basis--they are in trouble," he said. But he acknowledges that his troops are nervous because of the threat of the independent-agent and direct-selling channels.

In this high-tech era, Farmers chose to place all its chips on the agent square at the roulette table of how to sell property/casualty insurance. While competitors are looking at direct channels--Allstate, for example, has a "Good Hands Network" that blends the use of the Internet and toll-free number service with its agent force--Farmers is leveraging its technology for its agency force. "It really came down to deciding our agents are our most valuable resource; our distribution system is the best in the entire industry. Why would you want to move away from that?" Feely said.

Farmers' 15,000 exclusive agents are facing challenges similar to those of their peers at State Farm, Allstate and Progressive. State Farm recently announced that some of its captive agents are being trained to sell traditional bank products, such as home-equity loans, auto loans and leases. This expertise will be used to conduct business with State Farm's Internet bank that debuted in March.

Allstate issued its ultimatum to its captive agents about a year ago. Allstate told agents they would be converted from company-employed insurance agents to independent-contractor status. Progressive's 30,000 independent agents are competing with the No. 4-ranked private-passenger auto insurer's direct channel. In fact, sales through Progressive's direct channels, 1800-AUTO PRO and www.progressive.com, grew 80% in 1999 vs. 8% growth via its independent-agent channel.

Farmers wants 3,000 of its agents to be licensed to sell annuities and mutual funds by year end, but it knows that's not for everyone. "There's a certain segment who will never do it. The average age of our agents is 47. It's an aging agency force," Feely said. But he expects to appoint 1,200 new agents by year end. Farmers' agency appointments increased 38% from 1999, while its competitors' are down 8%, Feely said. The shift of the agent's role to trusted adviser, rather than an auto insurance salesman, also helps with recruiting. "We're attracting a higher-caliber agent," he said, The licensing isn't an easy request to make either; the tests are difficult and the cost is around $1,500. Farmers will reimburse the cost, however, if agents pass the test and meet sales requirements.

Instead of creating direct-selling portals on its Web site (www.farmer.com), Farmers is using its technology to create a tool to help its agents sell through the Agency Dashboard. "The goal of the Agency Dashboard is to give them everything they need to be a virtual wholesaler, to make them agent.com," said Schofield, whose division oversaw the project. The project began in July, and every agent will have it by the end of the year. Programs to manage policy processing are represented by a separate icon on the agent's desktop.

The idea for the Agency Dashboard was generated during an offsite meeting of senior staff in July 1999, in which they investigated how e-business would be applied to agents and the consumer. The staff asked every business unit to loan one of their top people to develop a strategy. A group of 13 employees met for five weeks in September 1999 in the Los Angeles home office to come up with a solution. The group came back with a road map, and the product was unveiled at a meeting of the top 1% of Farmers agents in May.

The Agency Dashboard is available through the Internet via a protected Web site. It contains nine sections that include billing, sales leads, real-time information on policy counts, descriptions of Farmers products and rapid answers to claims questions. "It's the best thing we've ever done. The agents have been waiting for this. It shows that we are on the leading edge and moving forward quickly," Feely said.

The dashboard also can help agents train staff. A new hire can click into a training section--such as policy processing--to learn the procedure. There also are several sections to beef up agents' sales of life and commercial policies. The LifeNet section provides current information on life policies in force, underwriting guidelines and scripts to overcome objections to a sales pitch. Because commercial policies can be complex, the BizNet section makes it easier to sell commercial by generating proposals and quotes.

A Lesson in Diversity

During a meeting last year of the upper echelon of agents--the Presidents Council--an agent suggested that the company raise the level of visibility of its programs to attract minority sales. The reason: The buying power of ethnic communities is estimated at $20 billion, and minorities will make up more than 50% of the U.S. total population by 2050, according to Farmers research. This nudge from the sales force propelled Farmers to create a task force headed by Nancy Tucker, vice president, office of the president, to ensure that the company has its finger on the pulse of the communities and is providing the agency force with the help they need to sell and penetrate the market. "We're not going to make a big splash and say we are writing coverage for this many Hispanics and this many Chinese. We need to be more accessible to these people," Tucker said.

To get a handle on what's going on, Tucker created the Diversity Advisory Counsel, made up of district managers and agents from the key markets of Los Angeles, San Francisco, Houston, Chicago and parts of Michigan to serve as a sounding board. Focus groups composed of ethnic agents met in April to evaluate Farmers products in relation to its ethnic markets. Farmers discovered the key to the success of the diversity program was its district managers, because they are in constant communication with the agents. The managers set the tone with the agents and must be sensitive and flexible to the needs of their ethnic constituents. The company is working to make the managers more sensitive to both their ethnic sales force and the diverse cultures they cover. District managers are applying findings--such as that cold calling in the Chinese community is unacceptable and in Hispanic culture the husband is the dominant force in the household. Other initiatives include printing sales brochures in Spanish and Chinese an d sponsoring local ethnic events.

Outsourcing Opportunities

Chief Information Officer Claudio said her mission is to use technology to deliver on Farmers' promise to its customers to fulfill their wishes and dreams. Claudio is overseeing as many as 50 high-profile technology initiatives. "As Farmers is going down its path of transformation, repositioning to new core competencies on the business side, the last thing I want to be is a barrier or bottleneck. I'm always looking ahead to make sure that IT is never the barrier that prevents the business from what it is trying to do," she said.

Claudio seeks out bottlenecks, such as employee shortages and gaps in expertise. Her solutions include using outsourced information technology talent from Indian software and engineering firm Witpro and research from Meta Group, Gardner Group, Cisco and Lucent.

It's also Claudio's job to match the existing technology to ideas from her peers. "They ask me, 'Do you know if technology is available to do these things?' These days there are very few business ideas that cannot be accomplished with existing technology," Claudio said.

When undertaking Farmers' single-largest initiative right now--Operation Restore--Claudio recognized that Farmers was missing some of the core competencies to carry out the project. She opted to bring in the talent because building it internally is expensive and many skills are needed only in the short term.

Operation Restore is Farmers' major claims initiative that is re-engineering Farmers' claims department to enable 24/7 customer service and solutions. "Operation Restore involves changing our whole customer relationship when a customer has a claim from simply paying it to going deeper into the relationship to help them restore their lives," said Frank Soldano, vice president of Farmers claims strategic initiatives and the mastermind behind Operation Restore.

The idea for the $100 million project grew out of an off-site meeting of senior management and a cross-section of Farmers claims employees in 1998. Attendees, like Soldano, were asked where claims handing should be in 10 years. The proposition that arose was so complex that a group was appointed to actually "plan the plan," Soldano said. As part of its deliberations, the group visited Zurich's claims department in an early fact-finding mission. Zurich's program features "care agents" who will contact policyholders within two hours to help solve their loss problems.

After receiving funding from its board of governors, the Farmers team, composed of the best claims professionals and information technology staff, began setting up the program's key approved-vendor component. These are the businesses Farmers claims reps call on for building repair, property repair, emergency lodging, personal-property replacement and rental cars. The vendor program was in place by the end of 1999 and the missing link--the new claims-reporting system--will be linked with the Operation Restore network by December.

Once the network is up and running, customers will be notified through letters and the Farmers magazine for policyholders, Friendly Exchange, to use a toll-free number to call one of the customer-care centers in Oklahoma City and Kansas City to report a claim, instead of calling an agent. The customer representatives are being trained to be decision makers, Soldano said. They will triage claims and decide if they can order a tow truck or rental car or if a claim warrants a claim representative. "The first person the customer talks to begins to advance their claim, whether linking to a vendor partner or settling a simple claim on the spot," Soldano said.

When a policyholder calls in a claim, the customer-service representative enters it into the system. If it's complicated, an adjuster is contacted by a combination pager/cell phone. The adjuster will download the claims information into a laptop; the claims rep reviews the claim and contacts the policyholder. If the policyholder needs a rental car, tow truck or even an emergency water supply due to a burst pipe, the claims representative will order them.

Future Change

Feinstein warns other personal-lines insurers that they will have to meet the challenge of speed and agility. "The characteristic of a successful organization is its agility--the ability to look at something and back up, go over it, under it, around it, but don't keep doing what you're doing." The industry needs to leave behind the old, slow way of making decisions and realize in these "dog years of the Internet world," speed is incredibly important.

"The fast will eat the slow," he said in measured tones.

Martin D. Feinstein

Position: Chairman of the board, president and chief executive officer of Farmers Group Inc.

Born: 1948, Cleveland

Early years: Moved several times in childhood between Cleveland and Los Angeles. Credits his parents, whom he describes as "hard-working folks," with instilling his strong work ethic.

Education California State University at Los Angeles; bachelor of science degree. First member of family to graduate from college.

First job: Claims trainee with Farmers in 1970.

Proudest professional accomplishment: When Farmers board elected him chairman and CEO in 1997.

Most unusual office decoration: Photo of himself dressed as Elvis.

How he relaxes: Because of travel demands, Feinstein spends a lot of his time on airplanes, where be likes to read and daydream.

Family Married to his high school sweetheart, Naomi, for 31 years; two daughters--one is a consultant and the other works at Farmers in the human resources department

Farmers at a Glance

Headquarters: Los Angeles

Chairman, President and Chief Executive Officer: Martin D. Feinstein

Established: 1928 by John C. Tyler and Thomas E. Leavey

Parent company: Zurich Financial Services Group, Zurich, Switzerland. U.K.-based B.A.T. Industries acquired Farmers in 1998. Zurich Financial Services Group was formed in 1998 through the merger of the financial services business of B.A.T. Industries with the Zurich Group.

Ranking: No. 3 auto and homeowners insurance writer in the United States

Rating: A+ by A.M. Best (AMB #00032)

Group members: American Federation Insurance; Civic Property & Casualty; Exact Property & Casualty; Fire Insurance Exchange; Foremost Corp.

Agents: 15,000 exclusive agents; 25,000 independent agents

Number of employees: 18,000

Marketplace: 41 states

Major products: Auto, homeowners, recreational vehicles, mobile homes, commercial insurance, life insurance

Web site: www.farmersinsurance.com

Farmers' S'Wonderful Ad Campaign

Farmers hired cultural anthropologists to uncover what consumers think of insurance companies before creating its current advertising campaign. "After peeling back the onion skin, we discovered the public wants someone to restore their lives to normal," said Jeffrey Beyer, vice president of Farmers corporate communications. The ad campaign implements this finding in two ways--as reverse film footage in its commercials and the slogan "Farmers. Gets you back where you belong."

For example, in one ad a home is burning. The film is reversed and the home is back to normal. "Reverse footage really helped to communicate the message of restoration and also helps to keep people in front of the TV to watch it," Beyer said. Farmers also added a music signature that runs throughout every ad. After eliminating hundreds of songs including the Beatles' "Get Back," Farmers chose George Gershwin's "S'Wonderful."

Beyer knows he is being outspent by his peers. Farmers budgeted $15 million for its ad campaign, while Allstate spent $109 million in 1999. So he is "working hard to make everything work very hard." Beyer is turning to advertising in movie theaters, Internet banners and sponsoring ethnic photo exhibits and PBS specials.

Farmers also is hoping its holiday snowman commercial will become a seasonal classic-like Norelco's Santa on a shaver or Coca-Cola's polar bear ads. Farmers is running the holiday ad every year coupled with holiday specials "until it runs out of gas," Beyer said. While sitting in a Pasadena movie theater last year, Beyer was inspired to bring Farmers' advertising to the big screen. "It's a medium few are using, plays to a captive audience and you have the big screen to show your message," he said. Farmers chose a Laurel & Hardy film clip for its first foray into movie theater advertising that has its initial run through November where it's expected to hit 85 million viewers.

Customer Focus

When Stephen Leaman, president of Farmers Personal Lines, joined the company two years ago, he took a page from former employer Progressive Corp. and added two sections that target customers' needs and focus on market segmentation.

"We don't have an actuarial department here anymore; we don't have an underwriting department. We have a product management department where those skill sets and functions come together," Leaman said.

Farmers Personal Lines views every state as a niche market, taking into account its needs, risks and regulatory differences. "Is the market in San Francisco anything like the market in Austin? It's a different world. A Farmers' California product manager knows nothing but California. He knows about the insurance department issues; he knows about segmentation and Proposition 103 restrictions," Leaman said.

The customer-advocacy segment scouts customer segmentation and advises which affinity groups should be courted for new business. It looks at the advantages of marketing to young Latinos or older Americans, for example.

Leaman also is meeting the challenge from Zurich Financial Services Group to double the number of products sold to existing policyholders, triple the number of customers and reduce expenses by 10% by introducing risk-based pricing, which has been implemented in automobile insurance for about 10 months. Leaman believes that there is no risk that is unacceptable--it's just a matter of how you price them. "That means I reject no one. They have whatever they have, and we can price for it," he said.

Right now, Farmers is using a mixture of a credit-rating program and occupational scores to write business more accurately. Using an occupational score, high school teachers would be considered a good risk for auto insurance because they do little driving during the day This is in contrast to an entrepreneurial type who drives more and tends to speed, Leaman said. The pricing method allows Farmers to drill into finer and finer segmentations to get the right price for the customer.

In the future, to get a better handle on mileage driven by policyholders, Farmers is looking into setting up a discounted program with a provider like Jiffy Lube. Policyholders would bring in their cars for an oil change, and Jiffy Lube would report the policyholders' mileage directly to Farmers. "It's important to get there in different ways than we have today," Leaman said.

Leaman also was the driving force behind Farmers' acquisition earlier this year of Foremost, the first and only acquisition made by the Farmers' property/casualty group. The mobile home and recreational vehicle insurer looked like a plum buy because of its excellent financial situation, distribution channel and potential market, With the purchase, Farmers now insures 21% of the mobile home market. That's impressive in the long run, because one out of every four new homes in the United States is a manufactured home. Foremost also had a combined ratio of 88 and $450 million in premium.

But the biggest advantage to the purchase is the unlimited possibilities of a robust distribution channel created by teaming Foremost's 20,000 independent agents with Farmers' agency force. "If we did nothing more than make mobile home coverage available to our agents, we could grow Foremost's business 11% annually," Leaman said.

Reaching Out

Five years ago, Morris Davis' insurance agency in central Los Angeles was in trouble. Even though his market included homes valued from $75,000 to $350,000, he couldn't find homeowners coverage for their owners outside of the state-sponsored bare-bones FAIR plan. "The insurance coverage market dried up because of the riots in a the 1960s, and then the earthquakes came. Insurers withdrew from the area. Everything became Watts to them," Davis said. The Watts riots lasted for six days in 1965 and resulted in a total of $183 million in damages.

Then in 1995, Farmers rolled out homeowners coverage through its FACT Co.--Farmers Action for Communities of Tomorrow-and Davis was in business again. "Now I don't have to say no to anyone," Davis said.

FACT, which caters to homeowners in underserved urban markets, is part of Farmers Insurance Group's strategy to tap the estimated $1 trillion of ethnic purchasing power and to meet the needs of an ever-increasing multicultural population. FACT was established in 1995 after then-Senior Vice President of Marketing Martin Feinstein saw the potential of the ethnic market, FACT President Faye McClure said. She knew the potential in the market from her experience as a Liberty Mutual agent in Los Angeles. McClure attributes the backing away from insuring urban homes to the insurers' unfamiliarity with the market and the industry's historical belief that writing coverage for newer homes brought the most profits. As of August, FACT has issued almost 56,000 homeowners policies in 11 cities nationwide. McClure predicts that it will book more than $34 million in premium by year's end. California is the largest FACT market with 201 agents, 44,000 policies in force and $17 million in premium.

Nationwide Insurance Co. and State Farm also are pumping money into urban community development programs that offer funding for first-time homebuyers or money for rehabilitating a home.

McClure turned to the local independent agents, like Davis, to sell the coverage, rather than Farmers' network of exclusive agents. She reasoned that the local agents are familiar with their neighborhoods and can pinpoint the risks more accurately "I know the houses and properties in my area. I'm not working in the dark," said Davis, whose agency has been in business since 1959. McClure also needed the diverse language skills of a local agent to capture minority business, noting that there are six languages spoken in FACT communities. "What you see in FACT is a diverse work force serving a diverse population; 54% of my agencies are minority owned," McClure said.

McClure also conducts FACT business with minority-owned banks and communication firms. "Not only were we going to write in these areas; we were going to walk the walk and talk the talk and participate in the communities," McClure said.