Farmers Group Shedding Part of Stodgy Image : While Fighting Suitor, Insurer Raises Profile and Plans Expansions
At Farmers Group’s Mid-Wilshire headquarters, the dark paneling and mustard-colored carpet in the executive offices look like an unfashionable holdover from the mid-1960s. And officials have taken a lot of good-natured ribbing about the company’s huge collection of aging metal desks.
“Eighteen months ago, we painted those desks brown. About 28 1/2 years from now, we might paint them again and we might even change the color,” quipped Leo E. Denlea Jr., chairman and chief executive of the nation’s third-largest auto and home insurer.
Farmers could qualify for a version of the old joke about actuaries--they don’t have enough personality to become accountants. In an industry that has never ranked high on the corporate charisma scale, Farmers has excelled at being quiet, conservative and no-nonsense. But a lot of people on Wall Street are suddenly getting excited about it.
The 60-year-old company is the target of a $4.2-billion takeover bid by BAT Industries, the British conglomerate that has been searching for a way to enter the U.S. financial services market.
Farmers has rejected the $60-per-share offer as inadequate and has rebuffed requests by BAT officials to negotiate the terms, including price. A hostile takeover would be difficult to pull off, analysts contend, given Farmers’ complicated business structure and the many regulatory approvals required to close such a deal.
Amid the takeover battle, Farmers is planning changes. The company is expanding into new territory, starting with the Southeast, and intends to heighten its profile with increased advertising.
Farmers was founded in 1928 by salesman John C. Tyler and lawyer Thomas E. Leavey to undercut competitors’ auto insurance rates to Southern California farmers and ranchers, who were thought to be a better risk than city dwellers. Farmers blossomed into what is now a multibillion-dollar firm that also markets home, commercial and life insurance.
Wall Street analysts are generally high on Farmers, pointing to an intricate structure that shields the company from the notorious cycles of the insurance business and its force of agents who handle nothing but Farmers policies.
“The company just rolls along in its quiet way and has built up a fabulous business,” said Michael Morrissey, chairman of Firemark Consultants, a research and consulting firm.
Indeed, Farmers has enjoyed steady increases in net income since the 1950s. It earned $268.3 million last year, up 26% from the year before. Farmers remains a major force in auto and home insurance even though it operates in only 26 Western states.
Insure Each Other
Farmers’ setup is such that the firm doesn’t even consider itself an insurance company in the conventional sense. “We do not write insurance, we have no policyholders, we write no claims,” said Charles L. Schultz, Farmers senior vice president of finance. “What we are is a combination of a management company and an insurance holding company.”
Under that setup, Farmers does not own its affiliated property and casualty insurance companies and does not take on any of the risk of the insurance policies they sell. Instead, those insurance companies are actually owned by the policyholders who agree to insure each other, an arrangement known as a “reciprocal exchange.” Farmers manages the three exchanges for a fee.
Farmers is also distinctive for marketing its products through a force of 15,000 direct agents who work for a salary and sell only Farmers products. Most insurance companies sell through independent agents who handle policies from many different firms for a commission.
Said Denlea: “It’s a more efficient way of selling personalized insurance” at a lower cost.
In fact, controlling expenses is an obsession at Farmers.
Many employees who don’t deal with customers don’t get to have telephones on their desks. Those who do have phones are subject to checks of their monthly logs of calls for improper use. The executive dining room is open for only one hour each day, and the cuisine served at the one long communal table is something less than haute.
Salaries are relatively low, but performance is rewarded by a profit-sharing plan that can provide an annual check for as much as 15% of an employee’s pay. Employees are handed their checks on Profit-Sharing Day, a half work day in March when, as one ex-employee described it, “everybody dresses up funny and acts goofy. It’s a very family feeling company still,” even though descendants of the founders are not involved in the management. That feeling is reinforced by Farmers’ no layoff policy.
“We have never sought a high image in the community. We thought doing business was what it was all about,” Denlea said. “Our image is low, and our thriftiness is obvious.”
Farmers gets mixed reviews on its service.
“Farmers’ name comes up time and time again” when consumers call to complain about how their insurance claims have been handled, said Steven Miller, executive director of the Insurance Consumer Action Network in Los Angeles. While acknowledging that a large company generates more complaints than a small firm, “I have to tell you I don’t hear about State Farm or Allstate,” he said.
On the other hand, a California Department of Insurance study of auto insurance complaints that it received in 1986 found that Farmers was one of the better performers in the state. Of 25 companies listed, Farmers ranked seventh-lowest in complaints per 1,000 vehicles insured, while State Farm was fourth and Allstate was eighth. Farmers is fighting lawsuits over a unit it established in 1981 to investigate fraud. Lawsuits charged that the unit had run amok--among other things, it allegedly focused its investigations on blacks--and an internal company investigation uncovered what it called “serious improprieties.” One suit filed by the former head of the unit contends that he was forced out in 1985 after the unit began investigating alleged internal irregularities in Farmers’ own operations.
Hot Political Topic
Farmers also was sued in 1986 by the American Assn. of Retired Persons, which claimed that the company was illegally discriminating against older workers by freezing pension benefits at age 65 and prohibiting older workers from participating in the profit-sharing plan.
The company declined to comment on the details of the suits but said it is “vigorously” defending itself.
The insurance industry picture in general isn’t as rosy as Farmers’ financial results suggest. The industry says competition and legal judgments have hurt profits at the same time consumers are saying that rates are too high. Insurance has become a hot political topic, with at least five initiatives that would lower rates working their way toward the ballot in California.
Farmers’ property and casualty insurance affiliates had an improved year in 1987, but they still recorded their seventh consecutive underwriting loss.
Even so, most of Farmers’ insurance companies were given an A rating last year by the A. M. Best insurance-rating company, with the exception of Farmers New World Life and Ohio State Life, which both got the top A+ rating. About half of the nation’s 1,800 property and casualty firms ranked below A, and only the top 18% of the 1,550 life insurance companies got the A+ rating, he said. Best ranks insurers on the basis of their financial strength.
“Farmers, by BAT standards, probably is under-utilizing the assets that they have,” said one analyst who asked not to be identified. “My theory is it’s very easy for management and directors with this kind of structure and this kind of record to get extraordinarily comfortable. As the saying goes: if it’s not broke, don’t fix it.”
BAT’s U.S. subsidiary, Batus, is taking its time in its quest for Farmers. Batus, which made its offer in mid-January, has served notice that it intends to present a non-binding resolution at Farmers’ May 20 annual meeting. That proposal will call on Farmers’ board to enter into negotiations with Batus, whose holdings include Saks Fifth Ave., Marshall Field’s department stores, Breuners furniture stores and Brown & Williamson Tobacco.
Batus has said it will pursue the takeover with state insurance regulators--nine states must approve for a merger to take place--and Farmers is expected to fight the effort vigorously.
A hostile takeover could be further complicated by Farmers’ intricate relationships with its insurance reciprocal exchanges, which would not be automatically transferred to a new owner and might be difficult to reproduce, analysts said. “Most of the assets of the Farmers organization are not owned by Farmers Group, which hopefully is something Batus understands,” Schultz said.
Denlea joined Farmers in 1981 as vice president of corporate and financial planning to provide an outside perspective to a company where many executives have worked for 20, 30 or more years. He’s now directing some changes at the tradition-bound concern.
Early last year, Farmers cut its rates in auto and home insurance, which state surveys showed were often the second- or third-highest in many markets, so that they were more in line with other carriers. “They were a little on the high side when we set the rates in early 1987, but since then we’ve become competitive because our competitors have been taking the increases that we knew they would have to take,” Denlea said.
Farmers has targeted the Southeastern states for expansion and will soon enter Tennessee for the first time, he said.
Farmers also is introducing some new products and working to raise its visibility. The company in 1987 tested some television advertising for the first time in several years. A redesign of the company’s logo, which features a stylized setting sun, is also under way.
“By golly, we’re working on a musical jingle,” Denlea said, promising that the changes will be “nothing dramatic.”
The company also plans to become more politically involved, particularly with the several insurance initiatives being drafted, Denlea said.
“Our biggest challenge is to educate consumers as to what insurance companies are and what they do,” he said, adding, “Insurance companies are not folk heroes.”
