State Farm Insurance Companies. Agenda State Farm Overview State Farm Investment Department State Farm Fixed Income.

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    16-Dec-2015

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  • Slide 1
  • State Farm Insurance Companies
  • Slide 2
  • Agenda State Farm Overview State Farm Investment Department State Farm Fixed Income
  • Slide 3
  • State Farm Overview
  • Slide 4
  • Company Evolution George J. Mecherle Auto Health Life Fire SF Bank & Mutual Funds
  • Slide 5
  • About State Farm State Farms mission is to: help people manage the risks of everyday life, recover from the unexpected, and realize their dreams.
  • Slide 6
  • State Farm Data 23 Affiliated Companies 16,900 Agents 68,000 Employees 76.2 Million Policies & Accounts $ 59.2 Billion Revenue (12/31/05) $159.7 Billion in Assets (12/31/05) $ 50.2 Billion Net Worth (12/31/05) Ranked #22 within Fortune 500 Ranked #1 in Illinois
  • Slide 7
  • Industry Positions #1 U.S. Auto insurer since 1942 17.7% Market Share at end of 2005 Over 40 million Auto policies #1 U.S. Home insurer since 1964 22.2% Market Share at end of 2005 Over 25 million Fire policies SF Bank $12.2 billion in total assets (12/2005) Top 5% of banks nationwide Mutual Funds $2.8 billion in assets (12/2005)
  • Slide 8
  • State Farm Investment Department
  • Slide 9
  • Investment Department Invested Assets* ($ Billions) Cash & equivalentxxx Bondsxxx Stocksxxx Mortgages & Real Estatexxx Total$ xxx * (12/31/2006)
  • Slide 10
  • Why does State Farm have an Investment Department? Amount of float the business generates Premiums Reserves Cost of the float Claims Operating expenses Long-term outlook for both these factors Write more policies
  • Slide 11
  • Property/Casualty Company Change in Adjusted Surplus Underwriting Losses including Policyholders Dividends (25.0) % Stock Portfolio Appreciation 30.0 % Net Investment Income 55.0 % Other (3.0) % Net Increase to Surplus 57.0 % Example: XYZ Property Casualty Company (5-year period)
  • Slide 12
  • Structure Investment Policy to Withstand Worse Case Scenario Major underwriting losses Discovery of gross underestimation of cost of unpaid claims Collapse in stock and long-term bond prices
  • Slide 13
  • Insurance Company Financial Adequacy Ratios Premiums / surplus tests adequacy of capital to prolonged poor underwriting results Loss reserves / surplus tests potential for estimation error relative to capital Equities / surplus tests potential for stock market declines to reduce capital
  • Slide 14
  • State Farms Top 10 Catastrophe Pay-outs (Auto & Fire Combined)
  • Slide 15
  • Investment Department Goals Support insurance & financial service operations Invest long-term
  • Slide 16
  • Support Insurance and Financial Service Operations State Farm Companies are first and foremost insurance companies with growing financial service operations Make investment decisions for investment reasons first
  • Slide 17
  • Long Term Investing Long-term investors have earned higher returns over the years from equity investments versus any other asset class Equities: Goal: Maximize shareholder value Return: Potentially unlimited Fixed Income: Goal: Capital preservation Return: Generally limited to coupon or yield
  • Slide 18
  • Risk vs. Return, 1926 2005 (nominal returns) Asset Class Compound Return % Holding Period Simple AverageMaxMinRange Small Company Stocks 12.6 5 10 20 13.7 14.2 14.7 45.9 30.4 21.1 -27.5 -5.7 5.7 73.4 36.1 15.4 Large Company Stocks 10.4 5 10 20 10.5 11.2 11.4 28.6 20.0 17.9 -12.5 -0.9 3.1 41.0 21.0 14.8 Long-Term Corporate Bonds 5.9 5 10 20 6.0 5.9 5.5 22.5 16.3 12.1 -2.2 1.0 1.3 24.7 15.3 10.8 Long-Term Government Bonds 5.5 5 10 20 5.5 5.4 5.1 21.6 15.6 12.1 -2.1 -0.1 0.7 23.8 15.6 11.4 Treasury Bills3.7 5 10 20 3.8 3.9 4.0 11.1 9.2 7.7 0.1 0.4 11.0 9.0 7.3 Consumer Price Index 3.0 5 10 20 3.2 3.5 3.8 10.1 8.7 6.4 -5.4 -2.6 0.1 15.5 11.2 6.3 Data Source: Stocks, Bonds, Bills and Inflation 2006 Yearbook, Ibbotson Associates, Inc., Chicago, Illinois
  • Slide 19
  • State Farm Fixed Income
  • Slide 20
  • Global Major Markets market value of invested assets StocksBonds Corporate Bonds $ 6.7 trillion
  • Slide 21
  • Stocks, U.S.Bonds, U.S. Corporate Bonds $ 3.1 trillion U.S. Major Markets market value of invested assets
  • Slide 22
  • Major Market Indices $ 13.1 trillion market value Capitalization-weighted Index S&P 500 Index stocks Lehman Aggregate Index bonds 994 issuers 7,158 issues $ 8.8 trillion par outstanding Asset Classes U.S. Government (35.7%) Treasury bonds Agencies Corporate Bonds (23.1%) Mortgage-Backed (35.1%) Asset-Backed (1.2%) Commercial Mortgage-Backed (5.0%) Taxable Municipals (new as of Oct. 1, 2003)
  • Slide 23
  • Bonds* 12/31/2006 U.S. Treasuries Other U.S.-Government-Backed Agencies Mortgage-Backed Securities Asset-Backed Securities Corporate Bonds Canadian Pay Bonds Taxable Municipal Bonds Municipal Bonds (Tax-Advantaged) Community Investments Total * Insurance Company Portfolios
  • Slide 24
  • State Farm Investment Philosophies and Disciplines: Buy and Hold Dollar-Cost Average Portfolio Ladder Duration Target
  • Slide 25
  • Corporate Bonds Private vs. Public Analyzing and investing in corporate bonds Pricing corporate bonds
  • Slide 26
  • Fundamental Credit Analysis Industry Analysis Porters 5 Forces Business Risk Analysis Financial Risk Analysis
  • Slide 27
  • Porters Five Forces of Competition Barriers to Entry Threat of Substitute Products Power of Suppliers Power of Buyers Rivalry among Existing Competitors Source: Michael Porter, Competitive Strategy
  • Slide 28
  • Business Risk Analysis Industry Characteristics Competitive Position Management
  • Slide 29
  • Financial Risk Analysis Financial Characteristics Financial Policy Profitability Capital Structure Cash Flow Protection Financial Flexibility
  • Slide 30
  • Common Financial Ratios EBIT / Interest tests the adequacy of operations to meet interest payments CA / CL tests liquidity Debt / Cap tests leverage (loan to value) Funds from Operations / Debt tests cash flow adequacy to repay debt
  • Slide 31
  • Idiosyncratic Risk Systematic Credit Risk Yield Curve T-Bill Credit Spread Risk-Free Rate { { = Yield Corporate Bond Pricing
  • Slide 32
  • Why cant I find a quote for Duke Energy bonds herein lies the answer:
  • Slide 33
  • Trace Data:
  • Slide 34
  • This is how we keep track of bond prices:
  • Slide 35
  • Example of 10-Year AT&T bond yield: Idiosyncratic Risk Systematic Credit Risk * Yield Curve T-Bill 10-year Credit Spread 10-yr Risk-Free Rate { { = Yield 7.40% 1.70 % 0.70 % 3.00 % 2.00 % 2.40 % 5.00 % * Swap Spreads or Agencies
  • Slide 36
  • Example of 10-Year AT&T bond prices: 6 % coupon 10-year AT&T corporate bond trading at a yield of 7.4% = $90.23 (discount) 8% coupon 10-year AT&T corporate bond trading at a yield of 7.4% = $104.19 (premium) The coupons are different but both bonds trade at the same yield, 7.4%.
  • Slide 37
  • Example of 10-Year AT&T bond bid/ask yields: Bid (yield at which you can sell) Assume 10-Year Treasury is 5.00% 2.45% Yield on Bid Side 7.45% Offer (yield at which you can buy) Assume 10-Year Treasury is 5.00% 2.40% Yield on Offer Side 7.40% Remember from finance class bond prices and yields are inversely related a lower yield means a higher price. Think of bid/ask spread for stocks. You have to buy at a higher price than you can sell. The same holds true for bonds.
  • Slide 38
  • Investing in a New Public Corporate Bond Issue New deal is announced Perform fundamental credit analysis Road shows, Conference calls, Red-herring prospectus Price guidance Determine relative value Submit order Deal goes subject Receive allocation and final spread Price the deal, bill & deliver
  • Slide 39
  • Questions?
  • Slide 40
  • Contact Information State Farm Insurance Human Resources Three State Farm Plaza South, K-1 Bloomington, IL 61791 Need more information? Visit our website! www.statefarm.com E-mail: jobopps.corpsouth@statefarm.com

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