A Publication of WTVP

Edward Rust, Jr., is chairman of the board and CEO of Bloomington-based State Farm Insurance Companies, including State Farm Mutual Automobile Insurance Company, State Farm Fire and Casualty Company, State Farm Life Insurance Company, and other principal State Farm affiliates.

Rust graduated from Illinois Wesleyan University in Bloomington and received both juris doctor and master of business degrees from Southern Methodist University in Dallas, Texas.

He joined State Farm in 1975 at the Dallas regional office, moved to the corporate law department in 1976, became senior attorney-general later that year, and was named assistant vice president in 1978. He was elected vice president in 1981; elected executive vice president, chief operating officer, and a director in 1983; became president and CEO in 1985; and was elected to the additional post of chairman of the board in 1987.

Rust serves on the boards of directors of BITA, the Technology Group for the Financial Services Roundtable; Helmerich and Payne, Inc., Tulsa, Okla.; and McGraw-Hill Companies, Inc., New York.

A leader of the business community’s efforts to improve the quality of education in the United States, he’s the former co-chairman of the Business Coalition for Excellence in Education and served on President Bush’s Transition Advisory Team committee on education.

Tell us about your background, schools attended, family, etc.

I’m a Bloomington native and a product of local public schools. I graduated from Illinois Wesleyan University, later earning a law degree and MBA from Southern Methodist University. My wife, Sally, and I have one adult son who’s in the publishing business out East.

Give an overview of State Farm in Bloomington – its origin, growth, and history of the company, etc.

State Farm was founded in Bloomington in 1922 with a special interest in serving the state’s farmers. The first step beyond Illinois borders was to Indiana in 1925. It began selling insurance to non-farmers in 1926, issuing the first life insurance policy in 1929 and the first homeowners policy in 1935. It’s been the nation’s largest auto insurer for 60 years and the largest insurer of homes for 38 years.

State Farm is also one of the nation’s largest life insurers. We have policyholders in every state and three Canadian provinces. We expanded into broader financial services in 1999 with State Farm Bank, and in 2001 with State Farm Mutual Funds. State Farm is No. 25 on the Fortune 500 list; last year’s revenues totaled $47 billion. The company has nearly 80,000 employees in U.S. and Canada, and about 14,500 of them work in Bloomington-Normal, where we own 13 facilities totaling about 3.6 million square feet.

The corporate headquarters and the Illinois Operations Center are in Bloomington. State Farm also has about 16,500 agents – independent contractors, not State Farm employees – who, in turn, employee their own staffs.

What sets State Farm apart from others in your industry?

Two things set us apart: we’re a mutual insurance company, meaning we’re focused solely on the needs of our customers, which gives us a competitive advantage in terms of price, service, and financial strength. Secondly, we have 16,500 agents throughout the U.S. and Canada, giving us a strong, local, hometown presence reflected by our new advertising theme, “We live where you live,” which supplements our “Like a good neighbor…” theme.

How did the events of Sept. 11 affect State Farm? What’s the status of terrorism insurance policies under consideration in Congress?

Thankfully, no State Farm associates lost their lives September 11. Because we are primarily a “personal lines” insurer, claims coming out of the events were relatively small. Thirty-eight people who died that day had State Farm life insurance policies, and about 200 vehicles destroyed or damaged in the attack were insured by State Farm. Total claims came to about $20 million.

I was proud of how our associates responded with volunteerism, blood donations, and fund raising. Total contributions to the American Red Cross relief fund from our employees, agents, their staff members, and retirees – coupled with company contributions – totaled more than $4 million.

Legislation that would help the economy provide some financial predictability for businesses that could be targets for terrorism passed both the U.S. Senate and House. The two different plans must now be reconciled before legislation can be sent to the White House.

A hot issue in the insurance industry is the use of credit scores in underwriting. Can you explain the controversy and State Farm’s position?

The use of credit information in underwriting is controversial because it’s not intuitive that certain credit characteristics are predictive of whether someone is likely to have insurance claims, and some people automatically (but wrongly) associate credit scoring with income levels.

Our underwriting models, used to assess risk, focus largely on claim history, but also include certain limited credit information. Our models aren’t designed or intended to assess wealth, income, or credit worthiness, but they do help us predict the likelihood of future insurance claims.

What efforts does State Farm make to protect consumer privacy?

We take this issue very seriously. We have a policy against selling information about our customers. We don’t share it with organizations outside State Farm for marketing purposes, and our own customers man even choose not to allow certain personal information to be shared within the State Farm group, without specific authorization by the customer.

What are other major legislative, regulatory, and market factors affecting insurers and policyholders in 2002?

On the legislative front, a marked increase in the volume of class action litigation, particularly at the state level and in certain counties here in Illinois, prompted serious concerns and efforts to enact class action reforms. Forum shopping, in which class action lawyers file their cases in jurisdictions that have a track record for certifying questionable cases, needs to be addressed. Settlements of class action suits frequently include huge attorney fees with individual “class” members receiving very little.

In short, class actions play an important role in today’s society, but significant abuses have arisen and must be addressed.

Another important legislative issue involves legislation designed to protect privacy of medical records and to prevent identity theft and the misuse of Social Security numbers. We generally support such legislation, but we must be careful that the laws and regulations are uniform and national in nature – not different on a state-by-state basis. A variety of rules among the states would make it difficult and inefficient – if not impossible – for large businesses to operate.

What trends in your industry have forced change in your business? How did it change? Was it for the better or worse?

One of the factors that escalated claim costs is mold. In Texas alone last year, we incurred more than $600 million in mold-related claims – many times more than we had the year before. The Insurance Information Institute said Texas mold claims f=rose 560% between 2000 and 2001. Much of this was brought on by a certain level of hysteria in the media, and fanned by trial lawyers and mold “testing services” that have a lot to gain. This problem not only fueled increases in homeowners’ insurance rates, but it’s also having a negative impact on the housing industry.

Last month, State Farm capped its homeowner insurance business in Illinois because 2000 and 2001 were the two most costly years for catastrophe claims. Please explain the circumstances behind that, its effect on business since the announcement, and if there are plans to reverse that decision in the future.

In our business, too much growth in a short period of time isn’t good. Earlier this year, our rate of growth in home insurance significantly exceeded our plans, and we needed to slow things down. We’ll still end the year with about 30,000 more Illinois homes being insured by State Farm than when we started the year. There should be no doubt we plan to continue growing, but the rate of growth must be managed.

What, if any, misperceptions does the community hold regarding your industry in general or company in Bloomington?

People often don’t see the connection between the cost of claims and the cost of insurance. Nobody likes to pay high insurance premiums, but the fact is they’re driven by the number of claims and their costs. Our principal obligation is to be sure that when our policyholders have a claim, there are sufficient resources – people and money – available to pay it. To the extent we as individuals or as a society can hold down claim costs – through good home and auto maintenance, good safety habits, and limiting the extent to which lawsuits drain away part of those premium dollars – we can make insurance more affordable.

How have you marketed your products or services in the past? What, if any, changes have you seen in those efforts recently?

One of our real competitive advantages is our network or State Farm agents. Our new “We Live Where You Live” advertising theme is based in fact. Our agents live in neighborhoods all around the U.S. and parts of Canada. They’re active in their communities and work hard to help people, as we say in our “About State Farm” statement, “manage the risks of everyday life, recover from the unexpected, and realize their dreams.”

Even though individual customers can contact State Farm via the Internet, phone, or by mail, lots of people simply stop by their agent’s office for the kind of personal service and expertise that’s pretty unusual these days.

How does your company recruit and retain employees? Have you seen a change in those efforts in the last decade?

We have a very high retention rate, which I think reflects very well on State Farm and the culture a mutual insurance organization can provide. We traditionally recruited heavily in colleges and universities, but in the past decade, we also found it useful to hire experienced people, largely from outside the insurance industry, as we needed new types of experience and expertise to develop and market our new products – particularly in banking and mutual funds.

Education is important to you. What are your thoughts regarding business’ involvement in the public education system? Government’s responsibility? Parents’ responsibility?

Education is important to all of us. Business also has a critical role to play in public education. In many respects, we’re the ultimate consumers. Business needs to do a better job of defining the skills and competencies needed for people to succeed in the workplace and then work with the education community to assure all students have the opportunities to obtain them. Unfortunately, too few business leaders are personally involved and aren’t helping their own organizations become knowledgeable and involved.

The government must provide the structure and flexibility necessary for schools to meet the needs of their communities. The new federal education legislation (“Leave No Child Behind”) is a critical step in this direction.

Parents need to pay attention and be advocates for quality education for their children and all children. They need to be knowledgeable of the standards and learning objectives and be ready and willing to ask tough questions about achievement or the lack of it. They should expect their children’s knowledge and skills to compare favorably with other schools’ – whether they’re across town or in another part of the world.

How are you and/or State Farm working to improve education?

We’re very active in a number of business-education coalitions that support education reform efforts underway nationally and in the various states. We’re working closely with the U.S. Department of Education to help develop strategies that can assure successful implementation of the new “No Child Left Behind” legislation. This includes sponsoring events at which Education Secretary Rodney Paige had the chance to help inform business, education, and legislative leaders about the new law.

We’ve taken a leading role in gaining business support for service learning – a teaching method that combines service to the community with classroom curriculum – a hands-on approach to mastering subject material that fosters civic responsibility and a better understanding of community needs – and perhaps a life-long commitment to civic participation.

We also do what we can to help our employees, agents, and customers become better consumers of education.

What changes do you plan to make for the future?

There’s nothing specific to discuss, but each change – whether it involves technology, our entry into broader financial service products, or our customers’ needs and expectations – will be made so we can do an even better job of responding to our customers’ needs in a timely and cost-effective manner.

What’s the most challenging aspect of serving as CEO of State Farm? The most rewarding?

Challenges and rewards are pretty much one and the same. It’s the challenge and rewards of maintaining and up-to-date, realistic appraisal or reckoning of what’s going on around us and the implications those developments or changes will have for our business and marketplace, and making sure we’re developing programs and products that will make us responsive to those developments. It’s what we don’t know or are unprepared for that worries me the most. IBI