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- We're committed to advancing academic education in entrepreneurialism. Additionally, we'd like to thank our media partners, Wisconsin Public Television and their University Place crew for taping our lecture today. I am very pleased to introduce our guest today, Dave Anderson, chairman and chief executive officer of the American Family group of companies. Dave joined American Family in 1975 as budget director. In 1996 he was elected vice president of the company's information systems division. And in that role he repositioned the division to be more flexible and responsive to business needs, placing a strong emphasis on customer focus. He assumed the position of president and chief operating officer in 1999 and served in that role for seven years before being elected chairman and chief executive officer in 2007. Dave is a UW Badger. He attended the University of Wisconsin-Madison earning a bachelor's degree in finance and marketing, and also an MBA in finance. 

On a personal level, I would really like to add that Dave is a terrific steward to our community. I had the privilege of serving on his campaign cabinet when he chaired the United Way campaign just a few years ago. And it really was a pleasure working under your leadership. So with that I have asked Dave to talk about entrepreneurialism and how one infuses that spirit in a mature organization. Thank you, Dave Anderson. 
- Thank you. 
(APPLAUSE)
 Does the university have rules on cell phones? Because I'm going to let you leave them on, turn the ringer up. But with one proviso, if it goes off during my talk, we need a $100 check to United Way. 

That's what we have at work. If anyone's cell phone goes off, they write a check for $100 to United Way. Now what happens is, like Monica is next to Jared there, she will call Jared a couple times, and cost him a couple hundred bucks if his phone goes off. So they soon learn to turn their phones off during any kind of meeting. How many of you have American Family Insurance? There we got one back there. No one else? How many of you have insurance? There we go. How many of you know the difference between what a mutual insurance company is and a stock or investor owned insurance company? 

No one's venturing a guess? As a mutual company, the policyholders own the company. So from management standpoint, there's great clarity. If you are a manager of an investor owned organization, you're constantly having to balance the needs of the owners with the needs of the customers. In a mutual organization, those two people are exactly the same. And it gives clarity and that will become important as we talk about the mission and values of American Family. Most of you think of entrepreneurship with much smaller organizations. You think about how you start a organization, you want to innovate, you want to entrepreneurship. But almost every large economic organization, if you take it back far enough, started with an entrepreneur and an idea of innovation. American Family, and if we could have just delayed this until October 3rd, started October 3, 1927. 

And was based on two ideas. Our founder, Herman Wittwer, worked as an independent agent for another insurance company and he realized that the Wisconsin farmers were being charged a full year for their auto insurance. But he also realized, because of his local knowledge because he lived here, that during the winter our infrastructure in 1927 in Wisconsin was not very mature. We had thaw, freeze, thaw, freeze. Which would create ruts in those county highways. And most of the farmers did not use their automobiles in 1927 during the winter. They would put their cars up on blocks for the winter. Herman realized this and using this knowledge he was able to price that risk a lot lower than the eastern insurance companies. He had an innovative idea for a selection that people who did not use their cars were less risky and he could under-price them. Really what it was based on, the innovation, was based on the concept of imperfect information flow. 

And we'll come back to that. But he had another idea. He knew his neighbors. He lived with them. He could decide who was a good risk and who was a poor risk. In the east coast those people had no idea who we were or what we did. So Herman not only had an innovative idea that risk could be measured by how often you use your car, he also felt he would be better underwriter, he could risk selection, because he knew who his neighbors were. So in 1927, October, this is on 108 East Main over Brittenbock's shoe store, he started a two-room, one-closet company and he called it Farmers Mutual. His third idea was that if he thought, if he knew good farmers and they were good risks he figured out that those farmers would know good farmers who were good risks. So every time a farmer bought a policy from Herman, he would appoint that farmer an independent agent for American Family. 

It was actually sort of like a Tupperware party. Or a pyramid scheme. So every time you bought an insurance policy you could go out and sell other policies. What happened, but the innovative thing happened there is that American Family ended up with agents in places no one else would have an agent. We have agents in Plymouth, Wisconsin, and Sheboygan and Glenbeulah because those were where the farmers lived. Other organizations with a different kind of distribution system did not have that kind of location. Most of American Family was built on those two ideas. One, that local knowledge, imperfect information that we had, would made us a better underwriting company. And two, we had a distribution system that was unique in that it was places no one else basically had a distribution system. Those agents multiplied. 

As you can see over the years American Family has branched out from Wisconsin. We now have over 4000 agents located in 18 states. Most of it in the upper Midwest. And recently in the last 10 years we've expanded out to the west coast. And next year we'll write in Georgia. We started in 1927 with almost 7000 in assets and revenues of $7,000. Over the years this has continued to increase. And we ended '06 with almost $7 billion in revenue and $15 billion in assets. There were other innovations during the course of this 81 years. But then the 21st century hits. 

And what happens? And why every organization must continue to innovate. Where Herman and all the underwriters that followed have had local information, we were able to leverage the concept of imperfect information into an underwriting decisions. In the 21st century with your laptops, your cell phones, cable TV, satellite TV. Those east coast insurance companies and our competitors know more about you than Herman Wittwer would seeing you on the street or meeting you at the bowling alley. So the flow of information has moved from being imperfect to being absolute. To being ubiquitous. We know what books to buy, we know what your credit rating is, we know how many car accidents you've had. We know what bills you're paying, what bills you're not paying. How you spend your money. 

And by we I'm talking about the database industry. They know everything. So no longer can we select risks based on our local knowledge, who we bowled with. We like every other company are moving from what I'll call a risk selection company where initially we would say no you're too risky we're not going to write you or yes we would. To a risk pricing industry where we'll basically write anyone but we will differentiate their risk based on the price. If you lived in Plymouth where I did and you look for an insurance agent even now, you Googled it, you'd find there is approximately six insurance agents located in Plymouth. Not very many storefronts to compare prices. If you decided you could buy over the Internet and you'd Google insurance agent, those six expand to 9.5 million storefronts. If you decided you don't need an agent, but you're willing to buy it online or direct and you would Google just insurance, our six storefronts in Plymouth, Wisconsin, had now expanded to 656 million. This whole innovative idea that we had a distribution system and no one could duplicate because we have farmers located in a small community along with this flow of information, as you can see, has disappeared. 

We've gone from six possible people to buy insurance from if you lived in Plymouth, does anyone know where Plymouth is? Not very big is it? Do you know where Glenbeulah is? That's even smaller. My dad was from Glenbeulah and he always told us that he was a valedictorian of his high school class. And after he passed on my brothers and I put together his old bit and found out that he wasn't quite right. He actually was just a salutatorian but then we found out his high school class had five people in it and two of them were his cousins. So anyways our competitive advantages have disappeared. No similar than a lot of, lot of other organizations. Encyclopedia Britannica is the one that I often use because they had a sales force that was their backbone. 

And what happened was that they decided that they would not change their business model and that they would stay with their salespeople. And now today the product is almost gone or is given away free on the Internet. The concept were although they had a great entrepreneurship, a great innovative advantage with their research and the brand name by not recreating themselves, they went out of existence. So in addition the technology or the 21st century has also changed our customer's expectations. It used to be that our insurance agent could work for nine to five and maybe would take Thursday afternoons off. And that would be fine. People would expect to do insurance, buy insurance policies or settle claims during work hours. That's no longer true. All of us are busy. We want total convenience. 

So the concept of an insurance agent being there just 40 hours a week doesn't necessarily work for everyone. So we want 24/7 service whether that's for reporting a claim or for buying or adding coverages or whatever. One of my heroes in addition to my dad, of course, is Peter Drucker. How many have you had read Peter Drucker? I should assign this book to you. 1973 Peter Drucker's Management Principles. He passed on in 2006. But before he died he was interviewed by either Forbes or Fortune and they were asking him what would he consider the most important traits for leaders? And the reporter was expecting that Peter would do sort of like a David Letterman Top 10 list and give him 10 traits for being a leader. But Peter surprised him and said, I can summarize leadership with one word and that word is courage. 

It takes courage to trailblaze change in an industry. It takes courage to continuously redefine the business the company is in. Whether one is at the helm of the company or a self-managed knowledge worker, it takes courage to do what is right such as turning away from temptation for quick short-term profit. And I guess all of us are well aware today what impact that has had on our financial markets. At the expense of investments in long-term, it takes courage to trailblaze in an industry. It takes courage to face reality and get out of any product line or businesses that you wouldn't get into if you are not in business today. What he is saying, you can interpret it, it takes a leader needs to redefine and re-innovate, be an entrepreneur every day. $16 billion in assets or $6000 in assets. You got to constantly be redefining your industry. Winds of change are blowing and we've got to continue to change. 

We move from our two-story to our current complex out on American Parkway. It isn't that we've won with two ideas and now we have to re-innovate, we have as an organization part of the reason we've lasted 81 years is that we constantly have innovations. In 1955 all of those part-time farmers, and we had some full-time agents we were probably split 50/50, but if you were an agent you could also sell other insurance companies. In 1955 we made a decision as an organization to use just exclusive agents. Which forced people to make a decision that they either had to sell American Family or not. Get out of business. And only American Family. And we went basically to full-time agents and we did keep some part-timers around if they agreed at that time to become full-time within a set period of time. Significant choice. When we made this decision and there were probably 320 to 400 mutual insurance companies in Wisconsin. 

Most of those were fire mutuals, a neighborhood or town would get together, the town of Middleton let's say, and everyone would form a fire insurance company reinsuring each other basically as a mutual. And they would sell that usually through independent agents. And the real difference is if you have insurance with an independent agent, you're more apt to say I have insurance with the -- agency and if I would ask you who your insurance company was you're more apt to say well I don't know Terry takes care of that, he keeps changing depending on what the best rate is. If you have American Family Insurance you are more apt to say I have insurance with American Family and the odds are you might not know who your agent was. So there's a completely different relationship if you have an exclusive agent verses an independent agent that might change you from company to company. In 1958 we broadened our product lines, we started a life insurance company. So not only did we offer, at that time, auto and home but we also offered life and later we enlarged that to include commercial lines of business insurance. In 1963 a major change, we changed from Farmers Mutual to American Family Insurance. American Family Mutual. Significant point, we still had a lot of farmers as our policyholders and a lot of farmers on our board of directors. 

And they were very reluctant to give up that concept of Farmers Mutual. But as you know, as you can imagine the populace was becoming much more urbane, moving out of the small towns into cities such as Madison and Milwaukee, Chicago. And we needed to appeal, to reinvent ourselves somewhat to also appeal to them. In 1990 this whole concept of appealing, mirroring your customers was contained in our diversity programs. And we came out with a statement saying that we need our agency force and our employ force to mirror the complexion and the makeup of our customer base. So in states such as Arizona we have a third of our agents are Hispanic. In all our new states to try to maintain a 50/50 ratio between male and female agents. In our established states it's very, very difficult like in Wisconsin I think we're 75 male yet and 25 female. But all the hiring of agents basically has to be at the 50/50 ratio, if not higher. And the whole concept is that in order to give value to our customers, we have to mirror them and understand their needs. 

But how now do we differentiate ourselves from all those other insurance companies? We've lost our competitive advantage that we built the company on, the imperfect flow of information and the concept of a distribution center that can't be matched. So in 1999 when I was named president, we started on a new strategic plan and we identified that as we actually were looking seriously at demutualizing the organization and going to an investor based organization. Thinking during that time that would give us a lot more flexibility in meeting the needs of our policyholders. After our research was done, we decided that we would stay with the mutual because that concept that a mutual has the advantage of its owners and its customers being the same person. And we decided then if we look at a mutual insurance company, our purpose was to increase the value to our owners which in that respect was to increase the value to our policyholders. It was not necessarily to maximize the profits of a pension fund who might own us but to maximize the value that you, as a customer, would get from us. We did that, we decided to do that by what we do best and that is to be in touch with our community. In the year 2006 we changed our mission vision to be the most trusted and valued service driven insurance company. This was a significant and we're going through a significant change because it changes the whole metrics of our economic organization from someone who might want to maximize your return on investment or have a maximum growth rate to a company that wants to maximize the value to its owners. 

In that case, to our customers, to our policyholders. And it's very, very hard though for us to identify how to do that in our claims organization where we have approximately 4000 claims people. When this first came out, they said they could do this easily. What they would do would be just to make sure that Monica got enough on her claim that she was satisfied. The problem was we have 8 to 9 million policyholders and satisfying Monica wouldn't be enough especially if we overpaid because then the rest of you in this room would be paying too much for insurance. So the whole concept is that we have to balance what we pay on claims and we come up with saying we want to pay the fair amount. To maximize this, we change our whole metrics on how we measure agents; prior to this, agents were rewarded for production. For new business production. In fact, our whole compensation system for an agent was based on how much new business they would write. In fact, if you started we would give you a salary, we called it advanced compensation program and we would withhold, keep back, all the renewals. 

So when a policy you wrote renewed, you wouldn't get any money. We hold that back because we'd given it to you in advance. Well the behaviors that we generated with this program were simply agents would do, they would spend all their time selling because that's how they got more money and they'd spend very, very little time servicing. Because when that policy renewed the American Family would keep that money. Then after five years, after they were off the advanced compensation program all the sudden we'd be telling that agent oh, by the way now you have to hire staff to service these thousand policies you've written. And we had a lot of agents fail in that fifth and sixth year once they got off the salaried type program because they never learned during the program to be a business owner it takes a lot more dimensions than to be a salesperson. We were teaching them how to sell, but we weren't teaching them how to run a business. How to service, how to hire staff. How to rent your own office. So we've changed that completely around in this last five years and really are stressing the whole concept of customer value. 

When we presented this, one of the more surprising questions I got was from people saying well what if this whole idea of maximizing customer value doesn't work? What are going to do next? And I took it put me back a little bit because I wasn't quite sure where they were going with this idea of what if maximizing customer value doesn't work. And I realized that what they were referring to was that they thought customer, improving customer service was a strategy that would give us even more growth or more profit. And we constantly have to explain that, in fact, customer value is a valid end result in itself. Improving customer satisfaction or being the most trusted or having the highest customer satisfaction in the insurance industry is an end result. Profit and growth are just givens, intake. It's like saying you need to breathe in order to live, but you would never go around saying you need to maximize the number of breaths you take. Profit is not an end result of an organization, it is a test though of its validity because if you're not making a profit you will soon go out of business. You have to return enough money to pay for the capital you use. 

So in our organization we never talk about maximizing our profit. We always talk about maximizing customer value and we talk about achieving a sufficient profit to pay for the capital that we used to run our business. And we have about 6 billion in capital. So to pay the market for that is significant. And the same with growth. If you set up an organization and your mission was to grow, ultimately you will have to fail. You take any size organization and you grow it at 10% a year and at some point 40, 50 years down you will own, you will have to have all of the GNP of the United States in order to keep going. Just try doubling something every seven years, in about 30 doublings you own the world. So growth in itself cannot be an end result. But it can be a necessary condition. 

We grow for basically four reasons. We have that distribution system of our agents out there and if we don't grow, if we don't increase their premiums through them they will go out of business and our distribution system will die. We have 8600 employees. They're not going to work for an organization that is stagnant or is spiraling down. They want opportunities. They want careers. So we have to grow in order to provide them with that kind of opportunity. As a Midwest insurance company, we write a lot of business in hail and wind and storm areas. Although we don't write anything, as you can see, on the coast we have our own storms besides hurricanes. And we need to spread the risk. 

And that spreading of that risk is a lot of the reasons why you saw that we went out to the western states in the last 10 or 15 years. So we grow for those three reasons. We grow for opportunities for our employees, we grow for opportunities for our agents, and we grow so we can spread our risk. And that actually becomes a cheaper way to sell the insurance. The hard thing in my position is to convince people that it isn't as simple as saying all you have to do is maximize customer value or all you have to do is maximize profit or all you have to do is to achieve growth. The reality is you have to hold all three of those things and balance them almost in every situation. It is never obvious which one should rule in a general sense. And it's always obvious in the specific sense. We add to that our fourth and that's building on our people advantage. So those four make up the basic goals of our organization. 

And each one of them is measured have metrics around. Financial strength, we have a lot of the measures you might be familiar with. Rate of return, our expense ratio. Optimize growth, we have, of course, growth goals across our whole 18 states, across the lines that we write in that. And then maximizing customer value I'll enlarge on in a few minutes but we have a relationship with JD Power and Associates which is a marketing research firm that has built up quite a reputation of measuring customer satisfaction. And then we build on our people advantage and we do biannual surveys of our engagement of our agents and our employees. And we do spot surveys in the various divisions if we sense there's a change in attitude or a problem. There's a lot of companies who also want to maximize customer value and the question becomes how can you innovate an idea that everyone else has? The key though to any innovation, to any entrepreneurship is not only the idea, it's the implementation of that idea. Any one and all of us have had great ideas but why is American Family is 16 billion and Middleton Fire Mutual is 700,000? 

The difference becomes in implementation. And the same with customer service driven organizations. It's completely different saying you want to be a customer service driven organization to an organization that implements it with the kind of focus it takes. We're basing our implementation on what I'll call four values that are spread throughout the organization, hopefully. Ease and convenience, helpfulness, fairness and caring. The key to that idea, well we'll come back to these. Is the concept of a business within a business. We can't expect our front-line, whether you're on a billing call center or whether you're claims or whether you're an agent, to have that kind of attitude for the customer that's always positive if when they pick up the phone and they call the IS unit and they want support they're told that support's not available or call back at 9:00 tomorrow or whatever. So we set every service organization within our company whether that is human resources, IS, education, public relations or whatever with a concept that they're business within a business. And they have customers. 

And this whole concept of ease and convenience, caring, etc., applies to them and how they handle their customers as much as it applies to claims and how they handle our ultimate customer, the policyholder. So, for example, in information services they have metrics dealing with their customer satisfaction and that's measured at a quarterly basis and their customers are other employees. But that vice president that's held as much to those metrics as the claims vice president or the call center vice president is held to how the ultimate customer deals with us. So that innovation or that concept that a business within a business applies to everyone that all of us have customers is very powerful. It is very difficult though, for example, in information services to move them from a customer service organization from a dictatorial organization. The best example will be they'll come up and say the guy over in accounting he wants a Macintosh computer and we're really only supporting Windows-based. And we would say, well, why wouldn't you give that person in accounting the Macintosh? If you price it right, if you let them know that you have to go outside for service. And I would say, well, that's just wrong that's not going to be as good as a computer. 

And I said, well, let the person in accounting make that mistake. Let them buy the wrong computer as long as we're pricing it right and we'll hold them accountable for their job. So the hardest thing is to let information services and education and whatever understand that they'll never know as much about accounting or claims as accounting or claims understand. Their best bet is to know all they can about the service they sell and then a broad understanding about the direction accounting, education and the rest of them are going into. As I said, our innovations don't just come once every 81 years. But over the course of the last 10 years we've attempted, we've been working on this customer value situation. At the beginning of the decade in probably 1995 one of our employees came up with the idea, he was in claims and when he worked on the cat crew which is when we would have a tornado or a hailstorm, we would send out additional claims people to help. He noticed that it would always take us a week at best to get set up to settle claims. And maybe even more so if power is gone. Which in most tornadoes that's what happens. 

So they came up with the concept of putting together our first cat trailer and equipping that with a satellite connection and its own generator. So now we could be out to a catastrophe site and within a day be set up settling claims. And I've had the opportunity and we'll see where I'm at a cat site people who are in that situation who've lost their homes are in such shock that the best you can do is to get them a check, get them settled in temporary housing and settle that claim as fast as you can because the uncertainty is just unbelievable. We also now have 24/7 billing and claim service. If you are an insomniac and you're up the middle of the night and you want to worry about your insurance payment, how many of you do that? All right, it's all right. One of our best lines is 24/7 also means we have to work Saturday and Sunday. Everyone pretends that most of that stuff happens at 2:00 in the morning. Most of our calls come in on Saturday and Sunday. We have another program in addition to every business within a business. 

Every officer has to spend a week in the field. We call that a wow week. And my week this year was with the catastrophe crew and this is up at Hugo, Minnesota. Where we had a tornado and 24,000 hail claims. As you can see the damage to the roof behind me there. That was a very tragic situation. We had I think $170 million in claims in that one storm. This is the president of our company Jack Salzwedel at a billing call center. He worked three days handling billing complaints actually on the phone. So in addition to the cat trailer and the wow week, one of our major innovations, our entrepreneur ideas was the JD Power Associates award. 

Every one of our agents now their customers are surveyed four times a year, every quarter. We have a response rate of between 60,000 and 70,000 surveys every quarter. And by the time the year is over most of our agents would have had a significant amount of their customers surveyed. 30 to 50 depending on the size of that agency. And each agent then is given a customer satisfaction score. The actual survey we run is about four pages long. It asks every customer questions about that agent, the agency, their experience with claims and billing and how the overall company is. So now we have in addition to that agent's production and qualifying them as a top agent we also qualify them as how they're doing in customer satisfaction. As you can see, when we started this in 2004 we were just a little under 8.5, and this is on a scale of 10, and what we're measuring is the average score of those people that are surveyed and at the end of the second quarter, we had achieved an 8.99 company wide. Now we have a lot, a lot of agents that are approaching nine and a half. 

That they are just tremendous at customer service. We've identified five key components, activities that an agent has to do. One, they have to give you an annual personal insurance review. They have to go over your situation, how many cars do you have? Do you have your homeowners with us? What's your life insurance? Two, before every rate change they should call their customers and explain that a rate change is going through and you're either going to get a higher rate or lower rate and explain why. They need to call within 48 hours of any claim. So if you have a claim on your policy, that agent is supposed to respond back to you even if you reported through our 24 hour claim center that agent should call you back and find out how you're doing, do you understand the process, is there any injuries or anything else we can do for you. They have to have at least three other contacts with their customers throughout the year. 

Even if that's a mailing. Something other than a question concerning their coverage or a claim. Even if it's, we have some agents that send birthday cards out. We have one agent in Colorado who has a deal with the bakery that's next to him, and he sends a card out to every one of his policyholders on their birthday and they can come into the bakery and get a free cookie. And he says the bakery's doing a lot better with the deal than he is. One thing we're changing this year is we have a lot of award contests for our agents, and if you ever really want to get into the business and you want to travel, our agents get to travel. The good ones get to travel all over. There's basically two major contests a year. One is what we call the All-American. And this last year that was in Orlando for three days and next year it's actually going to be in Cancun, Mexico. 

And we'll take 20 to 25 percent of our agents will qualify for that. This is the leaders conference. We want to have this set so that the top 5 percent of our agents qualify for that. And that will be in Rome this year. And the difference will be is that they used to be able to just qualify on points. If you can see over here, now if they have 11,000 points, they need a customer satisfaction of 9.5. But if their customer satisfaction drops to what the average is of the company, 8.99, then they need to sell more, 13,500 points. So what we're trying to do is redefine what a successful agent used to be. I'd be on stage and I shake hands to the top 10 agents every year at this convention and I'd be shaking hands to someone who had no concept of customer service but was a very, very good salesperson. So we're trying to change that around. 

And if we're ever going to be the most trusted our 4000 agents will be the one that makes us there. One of our more interesting, and I don't know if any you have heard of this, the Drive Cam. If you see up by the where the gentleman is adjusting his mirror, there's a camera there. It has a lens that points into the car and another that points out. And it has a recorder, a digital recorder in there and it's constantly recording these activities. But if there is an incident, and I put that with quotes, whether you go around a corner too fast or whether you brake too fast or whether you actually have an accident it stores that and then uploads it through a cell transmission, a wireless Internet, to the parents' computer. And to Drive Cam's computer. The initial Drive Cam was designed more for truckers, for commercial drivers. And we are partnering with the company to impact our teenage driving behavior. We had initially contracted them with 4000 cameras. 

At probably a cost of 800 bucks a camera per year. We thought this would be so successful that we limited it to two states, Minnesota and Wisconsin. And after about a year we had only placed 1600 cameras. There's a real reluctance from parents, and I suppose it's negotiated between the 16 year-old and the parent, to put this in your car. It's sort of an invasion of privacy. But we have tremendous statistics to show that for example, when we put this in a car 60% of the 16 year olds do not use their seatbelts. Within three months of having this in their car and having that reported to their parents, we have 100% compliance with seatbelt use in a car. The concept though, although our agents love it and people who use it like it, it's not economically feasible. We cannot pay $800 for every teenage driver out there when we're selling them insurance that's probably around $1,200 for the year. But yet we pay claims. 

So something in that economic model has to change. This is one of those many innovations and entrepreneur ideas that we have that just don't work out. The last thing that we're just doing this year, and this gets back to our people advantage, one of the ways to make people engage is to have them feel and to understand they work for a great company and they're doing a great job. So this year we are participating in the Fortune magazine's top 100 companies. We have to pay to do this. And they send out 400 blind surveys to employees. All we can do is provide them with a list of our 8000 employees and they pick 400 of those. And we also have to submit, and this is the cover of the book we had to submit which details our benefits and what else we're doing. And we'll have the result of that whether we'll be in the top 100 by year end. It's very competitive. 

They have I think 1200 to 1500 companies apply every year to be on that list. And they maybe swing around 10 or 12 change places every year. Now if you don't make it, they send you back an analysis of where in your company, what aspects of your company could be improved to get into that top 100 list. So actually all of our goals in the organization, whether it be a customer satisfaction score of 8.99, or a profit or growth or employee engagement. All of management's pay is somewhat contingent on that. And, in fact, we have a bonus program that goes down to the lowest level in American Family and that are based on these four goals. What really differentiates is the amount you have at risk as you get up in the organization. Like our directors might have 20% of their salary on risk, managers have about 10% on risk and the average employee has about 5% of their salary at risk but you can double that. So if we have, if we max out on all our goals, it's a 10% bonus for the entry-level, it can be up to 40% bonus for directors. So the concept of any innovation is the aligning of the goals and organization. 

In a small organization it is a lot easier to get everyone into the room and discuss with them what direction you're going. An organization the size of American Family where we have 8600 employees, 4000 agents and those agents have another 16 to 20,000 of staff, it is very, very difficult and our whole job is communication of the direction. Herman Wittwer, our initial innovator, entrepreneur, 81 years ago would not recognize the company. We no longer write just to farmers. We no longer underwrite as much as we price. And our distribution system has changed completely to his concept of part-time farmers. We're connected to the community. I have one of the more interesting conversations I had was two weeks ago, I was in Boston at Cambridge. And I was talking to a Harvard Business School professor, Rosabeth Kantor, and she's written a number of books about, her last one was on winning streaks. And I thought this was so cool because she figured out a way to write a business book and yet go to all the sporting events she wanted. 

So she followed the North Carolina women's basketball team and a number of other teams and she was trying to identify what traits are there in a team, in an organization that creates this concept of a winning streak. And then she would study, like there was a football team a Division 3 team in Texas that had lost like 93 football games in a row and she wanted to understand what that culture was. Is there a cultural difference between winners as a team and losers? She came up with four basic ideas. One of them that struck me as interesting was the concept of getting your teammates, your employees to be engaged within the community they live in. Because winning is a habit. And small victories, small givings that make people feel good lend to a winning culture. And that's one of the many reasons why we get involved with a lot of the not-for-profits. Jeanan said I was in United Way, I've been on the Second Harvest board, Jack our president is deeply involved with Habitat for Humanity. We have our educational division mentors a class out of Sun Prairie. 

Big proponents and involvement in the Boys and Girls Club with Dane County and again in the mentorship and of course, our favorite United Way and one of our bigger things was our donation to the University of Wisconsin Children's Hospital. If you haven't had a chance to walk through that, it is quite a facility and I had a meeting today with people from the hospital and they are looking to create what I would call a world class childrens hospital here in Madison, Wisconsin. And a couple slides I threw in here because our agents are the basis of our organization. Even though that concept of their location has disappeared, they now build what we call the relationship. What makes us different between the Geico or Progressive or USAA which are more direct companies is the concept of a relationship that agent builds. So that's a brief 40 minutes of American Family. And Jeanan promised me you guys would have questions. 
- I know they're going to have a bunch of questions for you. Dave, thank you. This is just terrific. 

As we have in the past, I'm going to walk around with the microphone and be available to hand this off to anybody who does have a question. And as we get started with that, I'm going to seed the audience with a question, if you will. You did a great job of describing what I'll call a balanced scorecard and in talking about the philosophy of kind of having a business within a business. I think that probably one of the lessons that I'll take away today and having worked in one myself, is that for mature organizations entrepreneurialism is really about engaging all of those hundreds and thousands potentially of employees or different stakeholders like you have your agents in a common goal, a common mission. Your balanced scorecard kind of being those data points. How you really do that when everybody has a completely different position? Whether they're answering the phone or selling the policy or leading the organization as you are. How do engage people in the fact that this data point is really going to make a difference of how they can individually, positively impact that? 
- I would say the easiest way we do it is through our compensation system. Let's take customer value, customer satisfaction and the JD Power measurement. 

Everyone in our organization has money in the game. If our customer satisfaction, this year we started out a threshold of 8.6, and our maximum was, let's say, nine on that scale. If we achieve more than 8.6, everyone in our organization gets at least a bonus. And I think it's one-fourth of 2.5%, or whenever that is, because we have four measurements. So everyone gets something. If we can achieve nine, they will get one-fourth of 10%, or 2.5%. If you think about that, that's an extra paycheck. They get 26 paychecks a year, every two weeks, and if they can achieve the maximum, actually that would be four because they would achieve it in all four goals. So one way you align everyone, you get everyone to think that customer satisfaction is important to me, is to first make that part of their compensation. Make that part of the reward system. 

But in addition to that you have to have other recognitions. It can't just wait until year end and then turn around and say, well, you get your reward. So the best example, the most obvious example we have in the claims area where we have those employees, every claim that our claims handle gets a touch-point survey which means we have an outside operation call them up and ask them three questions: how did the claim go, we know who their adjuster was, how did they do, and did the agent communicate. So at the end of every month every claims office has a recognition for the best claims rep for that month based on that customer service value. So those jobs, and we do the same in our billing area, those that are directly in the front line are a lot easier. But we do this similar thing in the IS area and in the education area and whatever. And that is trying to develop additional recognition awards that deal with how they're treating their customer. That and the compensation are the two ways that we try to align and communicate, communicate, communicate. It is unbelievable that by the time I get sick of talking about a message about customer satisfaction that's about the time people are starting to hear it. It takes that much communication. 

We have another rule we have in top management that in communicating it is always that communicator's accountability. So if you end up a conversation with someone and you come back and say, geez, I just don't think they were getting it, that is not the person's fault, that is your fault. You have to figure out a way how you can communicate it better. So the accountability in any communication is with the sender. And not with the receiver. If you consider that, that is a very, very important part. I was really tired of people coming up and saying, you know, three years ago Dave, we gave you that idea and you didn't listen to it. And I say, three years ago you were unpersuasive. What could you have done differently? If you are right to make me hear you. 

You have to accept that accountability for that communication from the sender and not expecting the receiver to have that kind of accountability. 
- One of the examples that you shared too was the Drive Cam. And I was kind of surprised with what the outcome of that was. I presume that every parent insuring their 16 year-old would want it but you said that wasn't the case. 
- No. They're very reluctant. Let's have a show of hands, how many of you would like a Drive Cam in your car? So that every time you put the brakes on too fast and took a corner too fast it would record it and send it to your parents? No one? Even though ultimately you will be a better driver? 

How many of you would what one in their children's car when you get to that point? All right there is an honest guy. How many of you wouldn't? Assume you have a 16 year-old. Would you put this in your car? No cost? And assume I have the facts that I can show you they will be a better driver. They will at least wear their seatbelts. How many would want that in their car? All right, how many wouldn't? 

And why? Invasion? Do you know now that your credit card company knows wherever you go when you buy gas. They can actually chart your total life. That's an invasion of privacy. Every time you buy a book on Amazon, anyone buy books on Amazon.com? They know everything about you. By the books you buy. 
- Just a quick question about it and I wasn't actually intending to go in that direction but, so the technology would feed back information to the parents but obviously through some other centralized resource were people concerned that maybe American Family was going to have this data on them. 
- We sign a release and we do not get that data. 

We can use it to defend you in a car accident if you release it. Most of the data goes to Drive Cam and they will actually do counseling sessions with the teenage driver so it's actually the parent doesn't have to get involved. A Drive Cam supervisor will call you up and say, hey, Dave, I notice you had three incidents. And I actually, in my slides, I had a half-dozen incidents filmed. But the public relations people asked me to take them out because there's so much crying and screaming going on during accidents that it was upsetting to some people. But every time they have a number of situations where teenage drivers were in the winter going too fast and they broke and they went off the road and all those situations the drivers are just totally overwrought. They're crying and it's very interesting though on the response they give afterwards. 
- I'm going to pass the mic in a second but I want to ask, no I'm just going to pass it and then I'll ask that question afterwards. 
- OK. 
- Hi, my name is Brittany. 

I was wondering so with the Drive Cam you're talking about accountability and if somebody doesn't receive your idea then you're obviously not in the proper way to address the issue. Well, with the Drive Cam since it wasn't welcomed in Minnesota and Wisconsin as much as you thought it would be, what are your ideas to further expand it. Our are you just going to cut the project? 
- We would love you to come and help us with that one. Because that is difficult. We are split 50/50 on that at our strategic planning team level. They're so many cases and anecdotally we get these how we save people's lives. There was this young girl who never used her seatbelt. Her mother said, look if you don't use your seatbelt, you're not driving and I'll know from the Drive Cam. She wears her seatbelt and the next day she's in a car accident where she would have died had she not had a seatbelt on. 

There are a half-dozen to a dozen of those anecdotal situations and the question we ask is that 800 bucks a person isn't that worth it, Dave? Can you justify it as a donation to the betterment of the community? And my response to the other side of that coin is maybe there is something better we can do with that 800 where we could save four lives instead of just one. There are concepts that are just don't have the video but give you the feedback that what you did, you were speeding or you were going too fast or whatever. So right now we are exploring two other technologies. We are continuing under our initial contract with Drive Cam, but we're exploring two other technologies that don't involve the actual video taping or recording of the people in the car. It's funny we have great stories. All our officers who have teenagers put the Drive Cam in and our chief financial officer's son put duct tape over it at various times. 
(LAUGHTER)
 He put it over there, and then he'd apologize to his dad. 

- A lot of the students here are, as I mentioned, going to be working in personal finance and retailing and a variety of other areas where they will be looking at larger organizations, mature organizations to potentially be of service to. What would your recommendation be to them as individuals who are interested in entrepreneurialism? What would you recommend to them about the organizations they would potentially go to work for and how they contest whether or not their entrepreneurial spirit can reside within the mature organization? 
- You know, I think I got to where I, besides being incredibly lucky and being at the right place, because I was always redefining or retesting the boundaries within an organization. When you get into something as old as American Family you constantly run into the comment, well we tried that here or we just don't do it this way etc., I think you have to, going on my accountability for communication, you have to become that much more persuasive in a large organization. You have to pick your battles. And you have to accept accountability for your own actions. One of the great lessons our dad taught my two brothers and I was the accountability aspect for yourself. That if we would come home and say we're failing English because, not that I would ever fail English that was my brother, but if you ever come home and say we're failing English it's because the English teacher isn't any good, he would quickly set us down and let us know that it isn't the English teacher that's failing, you are. 

What are you going to do? What are you going to change to be a success? I'll tell you that same thing. When you're in a large organization and you're going to get frustrated you're going to come back and say they're just not listening to me. Don't make it their problem. Make your problem. What solution can you have. Now it's entirely possible that your goal that you're looking for is not possible. So you should also accept accountability for your successes. Identify those successes which are in your control and how your behavior can make that. 

If you're relying on your success on other people doing things, you're probably going to be out of luck. So I would say accountability, perseverance and understanding what you're trying to do. It can be done. 
- I'm going to ask a last question and unless I see a hand from somebody else who has a question for Dave. You know we're reading. 
- Right over here. 
- Where? Thank you. I'm still going to get my question in because I'm curious. 
- My name is Ely. 

In the beginning, I saw a slide that shows agency locations and the states. Most of the agencies are located in the middle and western states. Is it because not too many customers meet the criteria of your insurance plan or geographical matters, or is it simply the market is too full to enter? 
- Insurance is very interesting in that it is still regulated by the states. So that when we enter a state, we actually have to apply in each state for a license. So it is a major investment for us to go into a state. We have purposely avoided any coastal states in the first 80 years of our existence because of the hurricane. Again we started with the farmers so you get that full Midwest. The concept right now there's a big brouhaha in Washington, other than the financial sector, on whether or not insurance should be federally regulated. If that's the case, then we will have much fewer barriers to enter into those coastal states or whatever. 

And the cost will be a lot less. For right now to write auto insurance in Wisconsin and to take that policy, for example, to Michigan is very, very expensive. Because Michigan has its own rules, its own style of how they want the insurance policy actually to read. And because of the concept of Detroit being so full of minorities, if you write in Michigan, you have to write in every county. You can't go in like we would go in and start building an agency base, like we did let's say in Arizona, where we started in Phoenix and then expanded to Tucson and then expanded up north to Flagstaff. In Michigan, for example, you have to offer that insurance in every zip code starting day one. Now that's not too bad if you use independent agents because you can go out, sign contracts with existing insurance agents in all these communities. But for us, who use exclusive agencies, someone something like Michigan is almost prohibitive, unless they do some federal legislation. So it's sort of a combination of all that. Geographical risk probably is the basic though that we are purposely staying away from Florida, Tennessee, Louisiana and California because of either the earthquake risk or the hurricane risk. 

- I want to close with a question of the headlines actually, Dave, you and I were talking about obviously the financial news of the last several days and certainly how it's hit the insurance industry as well. At this point, what would American Family's chief concern be? What are you watching in terms of the radar screen? And how is that going to impact innovation and entrepreneurial thinking in your organization? 
- Well, you're familiar with another insurance company AIG that ended up being bought out two weeks ago. But AIG, their problem was not necessarily the insurance part of that organization but an investment arm. Now American Family also has a big investment arm. We have $13 billion in invested assets. But the vast majority of our invested assets, 99.9%, 99% are in instruments that are to market every day. There's a market for them. 

So these are tax exempt bonds. These are corporate bonds. Whereas the AIG issues were these credit defaults swaps that were really private investment vehicles that have no market. They were an insurance policy, more or less, on credit holders. And that's why the AIG went from $40 billion to $85 billion overnight. It's when they brought in outside auditors to evaluate what the value was, they have a different perspective than the people who actually sold it. Right now American Family has identified about $175 million of our corporate bonds that are on what we call a credit watch which is under $13 billion, not a very significant amount. But the impact that this is going to have is going to be tremendous. The best example, I have a cousin who is in farming and he called us last weekend wanting to know if American Family would make loans to farmers because he is having a very, very difficult time finding money to buy his corn seed for next year. Because this is the time of year farmers are investing in the next year. 

John Deere dealership that he deals with is not giving credit for the tractors because the commercial paper market is pretty much seized up right now. So the impact is going to be to every one of us, I don't know what the $700 billion bailout is the answer or not but we are in a very, very difficult time. And most of us, it seems, are insulated from it. But every once in a while, my cousin the farmer, those stories come and I think it's just going to get worse. I think though that we will survive it. We will as a company. We're very, very conservative. We don't look at our investments necessarily as an income arm but as a stability arm for our company. 
- Excellent. Thank you, very much. Dave Anderson. 
- You're welcome. 
(APPLAUSE)