By Megan Fan Munce, SAN FRANCISCO CHRONICLE
https://www.sfchronicle.com/california/article/insurance-state-farm-finances-19545699.php
California’s insurance crisis, with its drumbeat of rate increases and carriers leaving the state, has been bad.
But a more devastating blow could lie ahead, with potential implications for all property insurance holders in the state: State Farm General, California’s largest insurer by far, has officially signaled it’s worried about going out of business.
Insurance experts say that if the company’s solvency problems worsen, it could create a ripple effect across the entire California home insurance market and, in a worst-case scenario, end up costing homeowners money whether or not they are covered by State Farm.
This week, State Farm filed a request with the California Department of Insurance to raise its rates on homeowners insurance by 30%, renters by 52% and condominium owners by 36%. In that filing, the company made use of a specific regulation only to be used “in order to protect the insurer’s solvency.”
It’s a move that alarmed Insurance Commissioner Ricardo Lara, who said in a statement Thursday that State Farm’s requests “raise serious questions about its financial condition.”
The signal of distress is limited to State Farm’s California arm, known as State Farm General, which does business only in California. It does not suggest imminent problems for the parent company, State Farm Mutual Automobile Insurance Co.
Companies often create single-state subsidiaries in places like California and Florida — states where they’re worried about large financial losses, according to Birny Birnbaum, executive director of the Center for Economic Justice and former chief economist for the Texas Department of Insurance. Doing so means they can separate their financial losses in a specific state from the overall company.
Determining the financial health of an insurance company is a complex process, but one indicator regulators use is the ratio of a company’s available capital compared to its liabilities, Birnbaum said.
In 2023, State Farm General — the California-only subsidiary — reported a net loss of about $880.4 million, according to documents submitted to the Department of Insurance. Its surplus — or its assets minus its liabilities —was about $1.3 billion. The company took in just under $3.6 billion in for home insurance, a category that includes renters and condos.
“State Farm General lost almost $900 million in 2023, which means that their surplus was reduced pretty dramatically,” Birnbaum said. “If you’re losing a billion dollars a year, and you’re starting the year with $1.3 billion, another year of losses like that is going to wipe out two-thirds of your capital and surplus.”
Another common metric is loss ratios. Last year, State Farm reported a loss ratio of 89.61% in California — meaning it paid $89.61 in claims for every $100 it took in in premiums. It was the company’s worst performing year since the devastating wildfires of 2017. Those ratios do not account for the administrative costs of paying out claims, which can be significant.
For consumers, the most approachable way to tell an insurer’s financial strength is to look at its credit rating, Birnbaum said. In March, the credit rating agency AM Best downgraded State Farm General’s financial strength rating from excellent to fair.
Not every insurer in poor financial straits reaches the point of insolvency. David Russell, a professor of insurance at CSU Northridge, said a company that is rapidly losing money may approve a conservator to make decisions to protect its financial state, including by stopping the sale of new policies. State Farm already stopped writing new homeowner policies last May. In March, it also announced it would not renew 30,000 home insurance policies across the state.
Another inevitable step in preventing insolvency is raising rates, according to Carmen Balber, executive director of the consumer advocacy group Consumer Watchdog. Under Proposition 103, a voter initiative passed in 1988, insurance rates cannot be excessive, but they also cannot be inadequate — in other words, companies cannot keep their prices so low that they go out of business.
State Farm’s latest 30% request asks the Department of Insurance to allow the company to increase its rates by more than is typically allowed in order to replenish its surplus.
“Rate changes are driven by increased costs and risk and are necessary for State Farm General to deliver on the promises the company makes every day to its customers. We continue to look for ways to maintain competitive rates and help our customers manage their risk,” a State Farm spokesperson said in a statement.
If an insurer does reach the point where it may not have enough money to pay out all its claims, it would turn to the California Insurance Guarantee Association, a nonprofit that backs up all licensed insurers in the state. CIGA would then determine how much more money was needed and charge that amount to the rest of the insurers in the state based on their market share, according to Russell.
Insolvency and CIGA intervention is rare, Balber said. There’s little precedent for what it would look like if a company the size of State Farm General went underwater. The most recent major example was Merced Property and Casualty Co., which was overwhelmed by claims following the devastating Camp Fire in 2018.
In 2017, Merced insured less than 1% of the homeowners market. State Farm, by contrast, provides home insurance for one in five homes in the state and has been the largest property and casualty insurer in California for years.
It’s not as simple as other companies just pitching in. If State Farm were to suffer massive losses driving it to the point of insolvency — say, from another year of disastrous wildfires — most other insurers would likely already be paying out money for the same disasters, Russell said. Then they’d be saddled with the additional burden of paying money to CIGA. Those costs could then get factored into future rate increases, according to Russell.
One additional option for relief to prevent the company from going insolventwould be for State Farm Mutual, the national parent company, to inject funds back into State Farm General with approval from regulators in Illinois, where both companies are based, Birnbaum said. In February, State Farm Mutual reported it lost $6.3 billion in 2023 but described itself as “financially strong.”
“We’re taking a state-specific approach as we operate,” State Farm Mutual Chief Financial Officer Mark Schwamberger said in a release in February.
Just because State Farm requested rate increases with the specific goal of protecting its solvency does not necessarily mean its solvency is legitimately threatened, Balber noted. The request will go through a thorough layer of review by Department of Insurance regulators, who will determine the validity of State Farm’s request and could turn it down or approve a lower rate hike than requested, she said.
Lara said he would use all of the department’s tools, including potentially calling for a rate hearing. Hearings can be requested by either the department or outside consumer groups and requires the rate increase application to go before an administrative law judge.
“The next steps are really dependent on the Department of Insurance,” said Janet Ruiz, director of strategic communications for the Insurance Information Institute.
Insurance companies have complained for years that long wait times to get new rates approved — made longer in the case of a hearing — have hampered their ability to raise their prices in alignment with increased risk due to climate change. In May, Gov. Gavin Newsom proposed legislation that would require the department to process requests faster. Ruiz noted State Farm’s request could be the first major filing to test that legislation, if lawmakers pass it in time.
The very earliest State Farm’s rate increase could go into effect is 2025. If approved by the Department of Insurance, it would be the company’s largest homeowner insurance rate increase in at least seven years and one of the largest of any major insurer in the past several years.
“There’s a catch up process going on, and in order to get the market functional again, they’re going to have to approve some big increases,” Russell said.