When I was named treasurer, and later chief financial officer, of State Farm Mutual Automobile Insurance Co. in June 2009, I thought I knew what was coming. I've been with State Farm for almost 25 years, working in financial operations for most of that time. But there have been a few surprises. One big one is the amount of time I find myself spending in Washington D.C.
Now, I have nothing against Washington. It's just that, primarily a property/casualty and life insurer, State Farm has historically dealt with state regulators. But all that changed with the passage of the Dodd-Frank Act.
You see, State Farm has a bank (technically, a thrift). Not a huge bank, right at $14.2 billion in assets. We've been in the business of originating auto loans since 1936: first for other institutions and then, starting in 1999, for our own subsidiary. Our over 18,000 agents serve the middle market of America with simple deposit and loan products, and our mutual structure allows us to do so at very competitive prices.
Back in 2009, the country was still reeling from the financial crisis and Congress was responding with a massive overhaul of the financial regulatory system. The fact that another large insurance company was at the heart of the financial crisis—albeit for a business that has absolutely nothing to do with insurance—meant we'd be facing some regulatory changes.
It's been nearly three years since the Dodd-Frank Act was enacted, yet many of the rules and regulations necessary to enable the Act have yet to be written or implemented. In the meantime, financial services companies are tasked with making decisions that impact the success of the business without knowing the rules.
As an example, the insurance industry could suffer from implementation of the Volcker Rule. This rule was included in the Dodd-Frank Act to ensure federally insured depositories did not put their organization at risk by investing in hedge funds or private equity, trading on their own account.
While the Act includes a Volcker rule exemption for insurance companies, the final rule has yet to be implemented and there remains uncertainty, as some regulators appear to have interpreted that exemption in a limited fashion.
Insurance is a completely different business than banking. Banks' liabilities are primarily demand deposits, so it is crucial that assets be of a quality and nature to meet the liquidity depositor's need. Insurance companies' liabilities are unearned premiums and loss reserves. These are predictable and for life Insurance, longer term.
Insurance companies, by our nature, trade on our own account on behalf of our customers. State insurance rules have always recognized that and allowed a variety of investments subject to stringent limits.