With $1.8 billion of assets and growing fast, State Farm Bank, the giant insurer's thrift, is embarking on a marketing campaign to establish its brand even beyond its customer base, but troubles in the parent company's core insurance business could hamper this ambition, analysts are saying.
The thrift, with 14,000 agents in 48 states trained to market auto and home loans, deposit accounts, credit cards, certificates of deposit, and other banking products, is a potentially formidable competitor. Its nationwide rollout has been rapid since it was opened for business in 1999.
"Our original business plan called for us to be operating in only three states at the end of three years," said Stanley Ommen, president of State Farm Bank in Bloomington, Ill., "and now we're in 48 in two and a half years."
Mr. Ommen said executives are "very pleased with the results we've gotten thus far. We're getting a fairly strong endorsement from consumers that this kind of banking concept works in their minds." The thrift's asset growth in recent months appears to bear him out. From $851 million of assets last June 30, State Farm Bank passed the $1 billion mark by Sept. 30 and has more than doubled to its present total. And it is targeting $3 billion by yearend.
A newspaper ad campaign is intended to get its name in the minds of consumers, and training will continue to get agents comfortable with the new product lines. A direct mail campaign targets State Farm policyholders.
But State Farm Insurance Co., the thrift's parent, has just suffered one of its toughest years ever - posting a $5 billion deficit due to underwriting losses and declines in realized capital gains. The loss compares with net income of $400 million in 2000.
State Farm's 2001 loss was due not to claims from the Sept. 11 terrorist attacks but primarily to its core personal lines auto insurance business. The auto operation reported that premiums grew 7% to $25.6 billion, but the unit lost $5.6 billion.
Homeowners insurance also suffered in 2001, with high claims from storms, Texas killer mold, and other hardships. While earned premiums grew 5.7% to $10 billion, the underwriting loss was $3.7 billion.
The company said it intends to raise prices in some states to make the insurance lines more profitable, but will have to file those rate increases with local regulators, which takes time.
Mr. Ommen said tough times at headquarters won't force the company to pull back from the thrift. In fact the poor underwriting results just underscore the need for State Farm to get into new business lines, he said. "We're in this for the long term," he added.
The fast rollout was a response to competitive pressures as more financial institutions of all stripes start to get into the insurance business. "Our biggest reason for changing was, we really felt it was important for us to offer these products from all our agents," Mr. Ommen said. "It's kind of an offensive and a defensive."
Though 93% to 95% of its banking customers are State Farm policyholders, the thrift is actively marketing to people who do not already have a relationship with the insurer, Mr. Ommen said.
He said the thrift's advertising - in major newspapers like The New York Times - is not solely geared toward existing insurance customers but is designed to capitalize on the company's "good neighbor" branding for all consumers. "I'd like to be able to show that the bank was able to attract new customers to State Farm," he said.
This strategy differs from that of the rival insurer Allstate Corp. and its thrift, Allstate Bank, which has focused more narrowly on selling retirement products to existing middle-market customers.
Northbrook, Ill.-based Allstate Bank is substantially smaller than State Farm Bank, with only $79.8 million of assets. Of course, its rollout has been slower - it began operations in six states last fall, then added 27 more and the District of Columbia in early March.
Craig Whitehead, a senior consultant at Milliman USA in Chicago, argued that State Farm's big recent loss puts all its ventures on shakier ground.
But Mr. Ommen contradicted that idea. "The fact of the matter is that it may actually strengthen our resolve of getting into financial services and serving customers in additional ways, rather than just on one line," he said.
Historically, Mr. Whitehead said, State Farm has been a very stable company with good underwriting results. The 2001 loss not only raises a need to change the insurer's pricing but also shows that State Farm is vulnerable to the problems of the insurance industry. "People kind of forget that everybody is liable to these kinds of business risks," he said.
Mr. Whitehead said he doubts that product line diversification without substantial changes in pricing would help the company. He referred jokingly to "what people used to say about Sears - you lose a dollar on every transaction but you make it up on volume."
And though Mr. Whitehead said it is likely that State Farm committed money to the thrift in advance of its poor showing, the parent could pull back from spending more on training and marketing if problems continue in its core business.
However, Mr. Ommen said the thrift is plunging ahead. The goal for 2002, he said, is to encourage agents to make hawking bank products part of their daily routine.
Agents are already showing they are comfortable selling auto loans, which is the No. 1 product on the asset side for the thrift, Mr. Ommen said, and there are two reasons for this.
"One is that we have an awful lot of auto insurance customers now, and secondly, our agents have been referring auto loans to partner banks for a number of years anyway," he said.
State Farm ended these bank relationships last year in an effort to drive business toward the thrift.
Mr. Ommen said the switch to referring customers to State Farm Bank for auto loans has worked well because the agents were already comfortable handling questions about this product and in the habit of making referrals.
On the deposit side, the biggest product is CDs. "It is easier for a bank customer to move a CD from one bank to another than it is to move their primary transaction account," Mr. Ommen said, which explains why CDs and money market accounts are the introductory product for many of the thrift's customers. State Farm Bank had $875.2 million of deposits at Dec. 31, more than triple the $271.4 million a year earlier.
Mr. Ommen said the thrift is building on return business as customers get more comfortable with using an insurer-owned bank. "I think we see that happening now, where customers who do in fact get an auto loan, do come back and get a mortgage loan."
Agents earn varying amounts for successful referrals. "Our compensation structure for the bank was designed to support their insurance business and their insurance compensation; it's not designed to become their primary source of income; it's there to provide additional compensation for those agents," he said.
To succeed with this banking model, Mr. Whitehead said, State Farm must have "a unique value proposition" that encourages customers to move from traditional banks to the insurer-owned thrift - especially if the customers do not already have a relationship with the insurer.
However, he said, the thrift could sell some products - such as the auto loans - by building on existing relationships and habits. He said he is not surprised that auto loans are a key product for the thrift because many people are used to discussing car purchases with their insurance agents.
Carmen Effron, president of the consulting firm C.F. Effron & Co. in Westport, Conn., said that distinctions between different kinds of financial services companies are fading and this will help State Farm reach out to customers with its new products. She pointed out how many companies have stopped using the words "bank" or "insurance company" in their names. Instead, names like PNC Financial, Principal Financial, and Allfirst Financial are becoming common.
"Nobody's a bloody bank anymore, nor do they call themselves a bank anymore," Ms. Effron said. What kind of company is selling the products is becoming less important, she said. "The services, the products, the pricing, that's what's going to make the difference."
Though some people today might balk at banking with an insurance agent, "10 years from now they're not going to know the difference," she predicted.
State Farm has "the law of large numbers" on its side, Ms. Effron said. Its agent distribution force and its customer base are so huge that it can capture large amounts of assets just by getting a small percentage of customers to sign on.
And diversification into banking could protect the company from bad years like 2001, she said.
"Any time you can diversify your revenue streams, your distribution outlets, or your channels for distribution, you've given yourself more leeway to weather the storms and the idiosyncrasies," Ms. Effron said.
Overall, Mr. Ommen said, the thrift's unique model makes it hard to predict what it will look like five years from now. "I don't know that I have really any practical aspirations of what size the bank is going to be down the road some day. No one has really tried to do banking the way that we're doing it," he said. "I can't look at somebody else's track record and see what they've done."
