I did so well as a Farmers Insurance agent that I was promoted to District Manager. I took a struggling district in Fort Wayne, Indiana and turned it into one of the top profit centers in the company. When I arrived, the district was 1.5 million in the red. I turned it into 1.5 million in the black in a very short period of time. A 3 million dollar turn- around, when everywhere else was losing money, was no small feat.
I also turned the agencies I managed into some of the of the most productive in the United States. Production per agent was among the highest in the company when I left Fort Wayne. I also excelled at recruiting and developing new agents and insurance agencies. As a result I was Indiana District Manager of the Year all three years I was on the State. I achieved my quotas so easily that I voluntarily assumed higher quotas so that other managers could have lower ones.
The result, of course, was national recognition. I became a President's Council Manager and hob-nobbed with the CEO and other members of the management team, who often came to me to learn the secrets of my success. I was often invited to speak to and help other managers and agents in the company. I tell you this not to boast, but that you might know how I learned the deepest secrets of the insurance industry.
Insurance is a simple concept based on statistics and probability. For example, .8 -1000 homes will burn to the ground. The insurance company brings together 1000 homeowners to pay an annual premium to cover that one loss. What's left after management fees is called surplus. All insurance premium goes into a Insurer's General Account.
Traditionally, this money was invested in very conservative assets, to increase a company's profit. Warren Buffet destroyed that model with the purchase of GEICO insurance. Instead of just generating the traditional surplus, Buffet decided he could get a better return on investment by throwing the entire General Account into the stock market.
The result was, Buffet was able to offer cheaper car insurance and still outperform his competitors. At least for a few years, until the crashes of 2001, 2002, 2007, 2008, etc. Buffet was able to support those losses with other holdings in other companies and still turn a profit. Farmers wasn't that smart of a company.
British American Tobacco, which bought out Farmers, basically bled the company of its assets. When tobacco litigation began to rear its ugly head, B.A.T. got together with Zurich Insurance and created a new company called Zurich Financial Services. Zurich was the majority stockholder, B.A.T controlled over 40% of the new company's stock and its Board of Directors. This, in effect, shielded it from any attempts to attach Farmers Insurance to any of the tobacco claims winding their way through the courts.
This also appears to have had the effect of increasing Farmers Insurance management fees to pay for the multi-layers of management and offset B.A.T. litigation losses. Farmers was desperate for cash. I remember eating dinner with the Farmers portfolio guru and arguing with him over the NASDAQ. The company had just placed a significant bet on quite a few high-risk .com start-ups.
I told him that it was an irresponsible investment and that .com's were a passing fad that would soon collapse. I also explained that a .com was nothing more than a billboard on the information superhighway. It was unable to generate revenue without actual consumers purchasing its products.
He turned red and left the table.
Farmers was indeed desperate for revenue. Desperation always leads to catastrophic risk. Catastrophic risk always leads to Catastrophic losses. No company can defy gravity for very long.
More in the Next Article.
