Farmers became industry giant with roots planted deep in L.A.

THE first policy that Los Angeles-based Farmers Insurance underwrote was for a 1925 Cadillac owned by a Santa Ana orange rancher.

It was for six months and cost $45.

That was considered a discount--even in 1928 when there was not yet any requirement to have auto insurance. And it fit perfectly with the business model developed by founders Tom Leavey and John Tyler.

"The simple idea was if they focused their sales force on farmers and ranchers who live in the country and have fewer vehicles and accidents, they could charge them less," said Jeff Beyer, senior vice president and chief communications officer at Farmers Group Inc.

Seventy-seven years later, Farmers sells policies to more than just farmers.

It has grown to 20,000 employees and 17,000 sales agents nationwide, selling automobile, homeowners' and life insurance coverage to individuals and small businesses in 44 states. Nationally, it's the third largest underwriter of auto and homeowners' insurance.

Since its founding, Farmers has been sold twice; it is now owned by Swiss-based Zurich Financial Services, which is the world's second largest commercial property and casualty insurer. But it remains one of the few insurers based in Los Angeles, where the company's main office has been on Wilshire Boulevard since the 1930s.

"You'll find that most of the nation's largest insurance companies are located in the Northeast and upper Midwest," said Robert Hartwig, chief economist of the Insurance Information Institute in New York. "There's a historical reason for that. The Northeast was the first part of the country settled, and those companies expanded as the country expanded westward."

L.A. farmers

In the 1920s, farmers throughout the country had established their own mutual insurance firms and other cooperatives to get cheaper policies, but Leavey and Tyler, who grew up on ranches, had bigger ideas.

After stints in railroad construction in France and a sash-and-door company in Minnesota, Tyler moved to California in 1922 and met Leavey, an auditor-turned-insurance agent who came up with the idea to offer insurance discounted 40 percent.

In 1927, they got a loan from the founder of Bank of America and sold public shares of their new company, called Farmers Automobile Inter-Insurance Exchange, which opened its doors a year later in a two-room office in downtown Los Angeles. They had four employees: the two founders, a sales manager and an office manager.

"John Tyler really put a lot of his energies into the sales side," said Beyer, who recently helped complete a 75-year history of the company. "He did a lot of traveling to recruit agents."

The discount rate was a hit, and in its first decade Farmers expanded its operation several times. Finally, in 1937, the company broke ground on a three-story building on Wilshire Boulevard that it has not left, though it has since added four more floors and two adjoining structures.

By the 1930s, Farmers had begun selling policies for commercial trucking fleets. While Truck Insurance Exchange still exists, it now specializes in property and casualty coverage for small businesses.

A decade later. Farmers added homeowners' policies and purchased a life insurance company near Seattle in 1953. More recently, it ventured into specialized coverage with the purchase of Foremost Insurance Group, a Michigan-based seller of insurance coverage for mobile homes, motorcycles, snowmobiles, boats and other recreational vehicles. The company also opened Farmers Financial Solutions, a new subsidiary in Simi Valley that offers mutual funds and 401 (k) plans to its customers.

New generation

By the 1980s, Farmers' new management, under pressure from shareholders, sold the company in 1988 for $6.2 billion to a British conglomerate called B.A.T. Industries Plc. A decade later, Zurich bought Farmers from B.A.T.

Zurich, a financial services and insurance firm, does not own Farmers' three insurance exchanges, which are Farmers Insurance Exchange, Truck Insurance Exchange and Fire Insurance Exchange (its line of homeowners' coverage). They are technically owned by policyholders. Instead, Zurich owns the holding company, Farmers Group Inc., which manages the exchanges' overhead costs and personnel for a 12 percent fee that is taken off the premiums.

That has meant that even in bad years, when the exchanges are losing money, Farmers can perform well for Zurich. In 2004, it accounted for 26 percent of Zurich's $2.5 billion net income, which increased by almost one-third compared to 2003, according to Stefan Holzberger, an analyst with A.M. Best Co., the insurance industry ratings agency.

"It's a very material component of their profit," he said.

The financial picture has not always been so rosy. Several years ago, insurers were facing economic challenges as their investment portfolios declined amid the stock market bust. And Farmers, like many insurers, faced billions of dollars in underwriting losses in Texas, where claims of mold damage by homeowners skyrocketed.

In 2001, a jury ordered Farmers, the third largest insurer in the state, to pay $32 million to a homeowner who accused the firm of mishandling her claim. The Texas problems followed the 1994 Northridge earthquake, which eventually forced Farmers to pay out $2.2 billion in claims.

Additionally, Farmers became the first of several major insurance firms accused of failing to pay overtime to its claims adjusters under California law. In 2001, a jury awarded $90 million in back pay to 2,400 claims adjusters; the company fought the decision in court. Farmers, which continues to assert that claims adjusters should not be entitled to overtime compensation, agreed last year to settle the dispute by paying $210 million.

For a brief period, there was speculation that Zurich might put the Los Angeles firm on the block. But those rumors have subsided as its performance has turned around recently. "We pride ourselves on being a California-based company, on our heritage of being an L.A.-headquartered company," said Beyer, who noted that the company has had a float for 50 years at the annual Tournament of Roses' Rose Parade in Pasadena. "We feel a part of this community."