The Founder from Merna
George Mecherle, 1939: “Things do not happen - they are brought about by careful planning, diligence, application and direction.”
Ralph Waldo Emerson, Essay on Self-Reliance: “An institution is the lengthened shadow of one man."
In 1951 Warren Buffett, still a grad student at Columbia, went to visit the offices of the Government Employees’ Insurance Company. The young Buffett was so excited about what he saw there that he came home and wrote a piece called The Security I Like Best.
In 1976, Berkshire Hathaway acquired 33% of GEICO for $46m. By 1995, Berkshire’s stake had increased to 51% due to stock buy-backs, and Buffett took the decision to pay a further $2.3bn for remaining 49%.
By any metric, Buffett’s investment in GEICO has been a resounding success. Berkshire don’t provide a valuation for the GEICO operating segment, but in 2022, they wrote $39.1bn of gross premiums. I can’t be bothered to do a proper calculation here, but comparing to Allstate and Progressive, two public competitors, implies something like a $30-50bn valuation - not bad!
And yet in his 2000 letter to shareholders, he lamented that it was lagging behind a juggernaut of American capitalism: State Farm, now a $131bn company. In Buffett’s words:
“State Farm is one of America’s greatest business stories. I’ve urged that the company be studied at business schools because it has achieved fabulous success while following a path that in many ways defies the dogma of those institutions…
State Farm was launched in 1922, by a 45-year-old, semi-retired Illinois farmer, to compete with long-established insurers - haughty institutions in New York, Philadelphia and Hartford - that possessed overwhelming advantages in capital, reputation, and distribution. Because State Farm is a mutual company, its board members and managers could not be owners, and it had no access to capital markets during its years of fast growth. Similarly, the business never had the stock options or lavish salaries that many people think vital if an American enterprise is to attract able managers and thrive.In the end, however, State Farm eclipsed all its competitors. In fact, by 1999 the company had amassed a tangible net worth exceeding that of all but four American businesses. If you want to read how this happened, get a copy of The Farmer from Merna.”
I got my hands on a second-hand copy, and I want to highlight two themes from the book:
First is the character of George Mecherle: his extraordinary resolve and ambition. But I think State Farm’s early history presents a fascinating case study of go-to-market strategy, showing how new entrants can intelligently exploit market conditions to win.
Let’s dive in.
The winter of 1918 was bitterly cold, and George Mecherle had had enough. He decided to lease out his 480-acre farm in Illinois, and move his family to Delray Beach, just north of Miami, to soak up some Florida sun. But his wife Mae’s health disagreed with the heat, and the Mecherles moved back north - but not back to the farm. Instead, they settled in the college town of Normal, next to Bloomington.
Mecherle was a great talker - and so he became a salesperson, for the Union Automobile Indemnity Association of Bloomington. But while he was good at selling car insurance, he fiercely disagreed with his employers on the details of their operations. In 1921, he quit his job.
I’ll let Karl Schriftgiesser, Mecherle’s official biographer, tell you what happened next:
“All this time his subconscious mind had been dwelling upon a return to the insurance business. Wherever he went, he found the farmer complaining about the difficulties he encountered in acquiring adequate automobile insurance at a rate he could afford. But he realized he knew nothing about the insurance business. His experience in that line had not allowed him even to scratch the surface of the complex technicalities involved, and certainly his association with the Old Town Farm Mutual had taught him next to nothing. But still the theme, vague as it was, kept running through his mind. Without his really knowing what to do about it, the idea of an insurance business - a business that would draw upon his Midwestern background, his years as a farmer, his understanding of the farmer's mind and his needs - kept nagging him.”
Here’s the first bit of GTM:
Mecherle saw that farmers in Illinois couldn’t buy cheap and reliable auto insurance. There were plenty of people selling auto insurance - hell, he used to work for one of them - but none of them were doing a good job.
He liked the model of the mutual insurance company, but saw that while it had gained traction in fire and casualty, there weren’t any good auto insurance mutuals in Bloomington. As such, Mecherle decided to found an auto mutual - transplanting a good business model into a new context, competing on price and integrity. He then backed out the idea by borrowing some numbers from a friend, Chester G. Starr.
Starr gave Mecherle some numbers from the Farmer’s Automobile Insurance Association of Tazewell, IL, where he worked as an advisor. They showed that over 617 policies, in a six-month period, there was an average of $2.31 per car of losses and expenses. As Mecherle wrote, “that can be doubled and tripled and then will be lower than anything that is offered in the way of a real sound insurance company.”
And now Mecherle’s character comes to the fore:
Once Mecherle had settled on his plan, his next step was to find a lawyer - and he wanted the best one in the Midwest. In October 1921, George Mecherle went to Chicago, and visited the office of one Herman Ekern. But according to Schriftgiesser, Ekern was not impressed:
“He pointed out, one by one, the flaws he immediately saw in the proposition and did his best to discourage Mr. Mecherle's enthuiasm for this particular scheme. He was impressed by Mr. Mecherle's manner, his stubborn conviction that he was right, his obvious honesty, and his overall conception of the desperate need for "an honest insurance company". There is no question but that George Mecherle was shocked by this realistic reception and that he was, as he later told many friends, 'pretty damned mad' when he left the law office on South LaSalle Street.
He may have been mad, but he was not convinced that he was as wrong as Ekern had implied.”
A few days later, Mecherle wrote Ekern a letter - a letter which contained a “revealing combination of shrewdness and naivete, injured pride and dogged determination, and plain, old-fashioned bluff."
“I am satisfied that my idea is right, and more than ever convinced that the plan under which you would expect me to operate ... is wrong…
It will be necessary to sell this business on a low-cost basis and in no other way, which the figures from Mr Starr's organisation prove can be done…
If this organisation resulted in a failure it would reflect on me in a manner which would be very distasteful and would be the last thing I would wish to happen in case this matter is continued. I feel that this project is too good and means too much to every car owner in the State of Illinois to abandon it without an attempt at organisation.”
Ekern was still not persuaded. He told Mecherle exactly how foolish he was being.
“If things went well you probably would repay yourself what you put in and possibly get back a little something at some time in the future for the time and effort you put in without any compensation. It has not been my idea that you wanted to do this, and it is not my idea that it is necessary to do it, and I want to be very frank in stating that the figures you submit rather confirm my views than otherwise.”
However, Herman Ekern was not an investor; he was a lawyer who would still get paid if his client lost money; and so, foolish though the endeavour might be, he agreed to provide his services.
Some of my readers, at this point, might know how Mecherle felt. And yet he persevered. A fortnight later, he wrote back to accept Ekern’s offer:
“I am still confident that this proposition is right and still feel that I am able to put it over in good shape. I have not lost confidence in myself or in my proposition.”
But Mecherle still had some convincing to do. In January 1922 - just three months after he first wrote to Ekern - he presented his business plan to the annual conference of thee Illinois State Association of Mutual Insurers. After a decent reception, he was left only with the job of securing a $25,000 deposit.
Mecherle visited his banker in Bloomington. And Mecherle’s banker wanted nothing to do with him:
“How do you expect to build an insurance company in these difficult and highly competitive times in Bloomington where we have just had one of the biggest failures in the country? Why, you do not know anything about the business.”
The banker was right: George Mecherle didn’t know anything about the insurance business. But, in a manner reminiscent of 20-something founders in Silicon Valley today, he was ignorant enough to give it a go anyway. So Mecherle marched down the road to the other bank in Bloomington, pulled a manager into a meeting, and told him how things were going to be:
“I've never had an account here. I've never cashed a check here, as far as I know. I've never tried to borrow your money. But I'm going to start a little business in this town, and by golly, you're going to lend me the money I need to get started.”
GTM
The State Farm Mutual Automobile Insurance Company was launched in June 1922 with an innovative business model.
Since Mecherle believed that the strength of a mutual insurance company depended on the character of its policyholders, he strictly limited those policyholders to “members of Farm Bureaus, Farm Mutual Insurance Companies, their immediate families and those eligible for membership in such organisations.” This helped him avoid adverse selection.
The policy terms were similarly restrictive; there was a $10 excess, and no cover for ‘stationary object collision’ (SOC). As Schriftgiesser has it:
“It was his firm belief that anyone who hit a stationary object, such as a curb-stone, or a hydrant, or a building, had no right to be driving a car and therefore should not be insured. He could see how anyone might hit a movable object - from another car to a cow crossing the highway - but for anyone to drive his car into something that was fixed solidly to the ground or pavement was beyond his understanding.”
His best innovation, though, was in distribution. State Farm charged $15 for a lifetime membership and $19 annual premiums. George Mecherle sold many of these policies himself, but most of State Farm’s first agents were part-time. Mecherle visited Illinois’ 216 farm mutuals, which offered to their members agricultural insurance (against fire, disease, flooding etc). These mutuals employed full-time staff, and so Mecherle offered these secretaries and officials the chance to sell State Farm auto insurance, in exchange for 50% of the $15 membership fee. Many of these agents would ultimately become full-time State Farm employees.
The competition in auto insurance were the capital stock insurance companies. During the 1920s they were immune from anti-trust laws, and worked together to fix rates. They collected premiums annually, and paid 25% of the commission to the agent. But State Farm premiums were 40% lower than the capital stock insurers, and charged semi-annually. Semiannual billing improved cash flow for farmer policyholders, especially after they’d paid their initial membership fee.
Agents were paid $7.50 for a new policy by State Farm, compared with about $8 by the stock insurers; but since the farm mutual officers weren’t offered jobs by the stock insurers, there wasn’t really competition there anyway. Furthermore, policy issuance and invoicing was done by the central office in Bloomington - not the agents in the field, who were left to focus on selling. Once a State Farm policy was issued, the policy itself didn’t have to be renewed; agents were free to focus on new business.
So Mecherle sold a product with strong unit economics to a tightly-controlled set of customers via an existing, scalable distribution network that could easily be repurposed. Over the next few years, as the business matured, State Farm gradually expanded its product offering and target market.
In 1924, they expanded to Indiana by doing a deal with the Indiana Farm Bureau Federation. The Farm Bureau would keep 86.7% of membership fees, as well as earning 50 cents on each policy renewals. From this, the Farm Bureau Federation would subcontract agents in the field. In 1925, they signed up South Dakota and Missouri too. The market opportunity was massive; after the SD and MI deals, Mecherle found that fewer than 2% of motorists in Minnesota had auto insurance, and none of them had collision insurance.
By 1930, State Farm had sold 44,252 policies in Indiana, and the company’s central workforce grew steadily: Mecherle targeted a ratio of 1000 policies-in-force per employee.
In 1926, State Farm began to admit “the average citizen of normal habits” to be a member, rather than exclusively farmers - and even to offer SOC cover! In a quest for growth, State Farm was loosening the strict profitability criteria of its unit economics, while maintaining their farm-bureau-first GTM strategy.
This came back to bite them in the 1930s. Loss ratios were climbing: in the 1934 AGM, Mecherle blamed it on the higher speeds that cars were able to reach, as well as the increased cost of repairs, but it also seems that they’d lost their focus on the “preferred risk”. Despite a culling unprofitable agents and regions, as well as increasingly rejecting unsuitable applicants, losses remained high for the rest of the 1930s, peaking at 114,500 claims (348 per 1000 policies) for a total of $5.5m.
Character
Mecherle retained a remarkable focus on character; it’s reminiscent of Timpson’s or John Lewis in the UK today, but with the high bar extended beyond employees to customers as well. It’s a rare business that segments their market by morality.
George Mecherle set a personal example. As Schriftgiesser has it:
“He was always the pacemaker. Since he would never ask anyone to tackle a chore he would not undertake to do himself, those who worked for him on the farm or in the office took a certain pride in keeping up with him. Physically inexhaustible, he often did not find the day long enough for all he felt he had to do.”
At the same time, Mecherle pushed for permanence. At the 1938 AGM, he declared that:
“We may be compared in our mode of thinking somewhat to the English companies that have been in existence for years and take an exceptional pride in being able to place in their show-windows
Established in 1840, 1850, etc.
This is indeed commendable and something which we should endeavor to emulate, as it should be our greatest desire to build for permanency on a sound business policy rather than to attempt too great a volume from this time on…
We have very satisfactory, well-established organizations, and reasonable care and attention to fundamental business principles will enable these organizations to go on indefinitely.”
These particular passages remind me of Robert Moses, the planning official who irreversibly shaped the geography of New York from the 1920s through to the 1960s. His story is told in Robert Caro’s 1200-page tome The Power Broker. In the introduction, Caro sets out the sheer scale of Moses’ influence, which dwarfs even Mecherle’s creation of State Farm:
“With his power, for twenty years prior to the day [in 1954] he strode out of City Hall in triumph (and for an additional fourteen years thereafter), Robert Moses shaped a city and its sprawling suburbs - and, to an extent that would have astonished analysts of urban trends had they measured the implications of his decades of handiwork, influenced the destiny of all the cities of twentieth-century America…
No mayor shaped New York; no mayor - not even La Guardia - left upon its roiling surface more than the faintest of lasting imprints.But Robert Moses shaped New York.”
You can see the similarity in work ethic: for instance, in Chapter 15 Caro describes the way Moses behaved during the late 1920s:
“Moses had always possessed tremendous energy and the ability to discipline it. Now he disciplined it as never before, concentrated it, focused it on his work with a ferocious single-mindedness.
Sloughing off distractions, he set his life into a hard mold... he was not interested in relaxing. Since he left to Mary the paying of bills and the selection of his clothes, even the hiring of barbers to come to his office and cut his hair, his resources of energy were freed for the pursuit of his purposes. His life became an orgy of work...
He had always worked in his car while travelling; now he turned the big Packard limousine into an office. With Howland sitting beside him on the rear seat, three other engineers swiveled around on the jump seats and another two crammed in beside the chauffeur, he held staff meetings in the limousine - while another limousine trailed behind so that when Moses was finished with his men, he could drop them off and they could be driven back to Belmont Lake while he continued on to his destination .The door pockets in the Packard were crammed with yellow legal note pads and sharp-pointed pencils, and he spent his hours alone in the car writing letters and memos that his secretary could type up later.”
At the same time, Moses maintained a sense of mission and history; he built infrastructure projects to last, with ornament, grandeur, and extraordinary ambition. Caro puts it nicely a little later on:
“The rewards Moses offered his men were not only power and money. If they gave him loyalty, he returned it manyfold... And the most valued reward - the thread that bound his men together - was still more intangible. 'We were caught up in his sense of purpose,' [one of his men] explained. 'He made you feel that what you were doing together was tremendously important for the public, for the welfare of people.'”
The difference between Caro and Schriftgiesser, though, is that Caro was not writing a company-sanctioned hagiography; and Caro exposed the darkness in Moses’ character:
“For once Bob Moses came into possession of power, it began to perform its harsh alchemy on his character, altering its contours, eating away at some traits, allowing others to enlarge.”
You’ll have to read the rest of The Power Broker to get a full picture of Moses; but Caro ultimately condemned the product of Moses’ ambition:
“In the evening of Robert Moses' forty-four years of power, New York, so bright with promise forty-four years before, was a city in chaos and despair. His highways and bridges and tunnels were awesome - taken as a whole the most important urban improvement in the history of mankind - but no aspect of those highways and bridges and tunnels was more impressive than the congestion on them. He had built more housing than any public official in history, but the city was starved for housing, more starved, if possible, than when he started building, and the people who lived in that housing hated it - hated it, James Baldwin could write, ‘almost as much as the policemen, and this is saying a great deal.’ He had built great monuments and great parks, but people were afraid to travel or walk around them.”
Perhaps State Farm pales in comparison to the Triborough Bridge; but it’s remarkable that George Mecherle’s impact, at least, was nowhere near as pernicious as Caro makes that of Moses out to be. We might expect the hagiographers to have omitted some darkness in his character; but Mecherle seems, overall, much more a hero than Moses.
Enough moralising - back to GTM
Mecherle did, however, attempt to generate “a great volume of policies”: not only did State Farm diversify into life and fire insurance policies, but in 1939, George Mecherle announced a new goal. Perhaps inspired by nineteenth-century presidential election slogans, Mecherle issued a call to arms to his agency force. It wasn’t “Tippecanoe and Tyler Too”, "54-40 or fight”, or “We Polked you in '44, We shall Pierce you in '52”. Instead, George Mecherle demanded “A Million or More by '44”.
This was pretty ambitious, since at the time of the announcement State Farm had about 450,000 policies in force. But State Farm analysts thought that in 1939 there were 30 million automobiles on the road in America, 3 million more being produced every year, and only half of them had proper insurance. The market was there, and the target had been set.
To achieve Mecherle’s goal, advertising spend ramped up from $16.25 in 1923 to $202,000 in 1941; with the addition of 7 new geography-focused underwriting departments (all based in the Bloomington HQ), by 1941 they were writing more auto premiums than any mutual or stock company in the US. State Farm made $25m in premiums and memberships in 1941; by contrast, the 9 other mutuals in the top 10 did $68.5m, and all the mutuals put together managed $162.5m.
America’s entry to WW2 in December 1941 was bad news for State Farm. Automobile numbers would fall to 25m, and tires and gas were rationed. In addition, State Farm lost 1600 agents to enlistment or defence factories, and only hired 770 to replace them.
But around this time State Farm built another interesting partnership. Many car purchases were financed by specialised national ‘automobile finance companies’; but in the late 1930s, banks and other local financial institutions started to muscle in on this lending. Being local, they were able to make better assessments of creditworthiness, and attract customers through personal relationships.
Many automobile finance companies had their own insurance carrier, selling car insurance to the drivers whose purchases they financed. But the banks didn't offer car insurance. So by 1942 State Farm had partnered with 2,000 banks to offer State Farm car insurance on any automobile purchased with a bank loan.
In summary, State Farm identified that national providers were bundling the primary service (loans) with an ancillary service (insurance). Local providers were out-competing the national providers for the primary service, but couldn't offer the ancillary service. So State Farm was able to steal market share from another national corporation by engaging in partnerships. They identified a trend in an adjacent industry, and found a way to capitalise on it. State Farm was the first insurance company to engage in this kind of partnership, and it drove their impressive policy growth in the period.
In spite of the tailwinds from marketing spend and regional bank partnerships, State Farm missed their target; at the end of 1943, there were ‘just’ 986,377 policies in force. However, in March 1944 George Mecherle made an announcement - State Farm now had 1,001,519 policies, if not by ‘44, then certainly in ‘44.
Character
The Farmer from Merna was published in 1955, and it tells the story up to George Mecherle’s death in 1951; it’s a hagiography, part of a set of marketing materials put out at the time. We get none of the darkness that Caro found in Moses, and we hear relatively little about Mecherle’s wife Mae. Schriftgiesser doesn’t do enough to tease out the split between Mecherle and his original business partner, Minnie Jones. In this piece, I’ve not attempted to fix the record; I’ve not corroborated the official account with any other sources. Mecherle’s drive and ambition might be reminiscent of Robert Moses, but I am no Robert Caro.
I think you can read this book in much the same way that John Rawls used to read writers from an earlier age; with less interest in the “was” of politics than “ought”. History is used as a foil for one’s own thinking about the present, rather than as something to be recreated and understood on its own terms.
The success of State Farm is undeniable, and Mecherle’s determination is remarkable; true or not, his story has some lessons for us. Here’s one I like. Shortly before his death, George Mecherle was asked for the secret of his success:
“A man has to live and sleep with his business if he wants to make a go of it. You have to take it home with you at night, so you can lie there in the darkness and figure out what you can do to improve it. In fact, you have to become sort of a 'nut' about it, so that you become so enthused that you will bore your friends talking about it. You have to be a one-man crusade.”
And so thirty years after the middle-aged Farmer from Merna bored his friends with his talk of insurance, he still retained his relentless focus; and that, as much as any go-to-market strategy, underpinned the early success of State Farm.