By Megan Fan Munce, SAN FRANCISCO CHRONICLE
https://www.sfchronicle.com/california-wildfires/article/state-farm-insurance-financial-20137020.php
State Farm General, already facing financial peril before the Los Angeles wildfires, has asked state insurance regulators to approve an immediate price hike to prevent “a dire situation” for both its policyholders and the entire California market.
On Monday, the company sent a letter to the California Department of Insurance asking for an immediate interim rate increase — including an average 22% hike for homeowners, 15% for condo owners and 38% for rental dwellings — as it faces the most costly natural disaster in company history. A Chronicle analysis of company data found State Farm insures more homes in the neighborhoods in and around the fire perimeters than any other insurer.
“We are requesting that you take emergency action to help protect California’s fragile insurance market,” the letter, signed by several State Farm General executives, read.
State Farm General’s preliminary financial results show its policyholder surplus was just $1.04 billion at the end of 2024 — down from $4 billion in 2016, according to the company. As of Feb. 1, the company has paid more than $1 billion in claims related to the Los Angeles wildfires. It expects that number to quickly rise once debris removal and rebuilding begin.
On top of that, State Farm signaled concerns that its losses could become even higher if the California FAIR Plan, the state’s insurer of last resort, runs out of money to pay wildfire claims and is forced to turn to private insurers to make up the difference.
Insurance companies purchase their own insurance, known as reinsurance, to tap into following large catastrophes like wildfires. State Farm General, a California-only subsidiary, purchases the majority of its reinsurance from its parent company, State Farm Mutual Automobile Insurance Company. The company said it expects to recover billions through reinsurance — but even so, anticipates its losses to severely impact its financial state.
State Farm General is both the largest home insurer and the largest insurer overall in California, collecting $20 of every $100 of home insurance premiums paid in California and insuring an estimated 15% of homes in the state, according to data from the company and the Department of Insurance. State Farm Automobile is similarly the largest insurance company in the U.S.
It’s been six months since State Farm General told regulators it needed an unprecedented 30% rate hike to prevent a potential insolvency — a move that would spark immediate chaos in the California homeowner’s insurance market. That 30% rate hike request is still pending.
But Monday’s letter asks for the department to approve an emergency rate hike slightly lower than State Farm’s original request on a much faster timeline rather than wait for the full 30%.
In exchange, State Farm said it would agree to provide refunds to policyholders if regulators eventually concluded the emergency rate hike was too high. But in its letter, company executives wrote that they anticipated losses from the Los Angeles fires would support its need for increased prices.
“In many ways, they’re just asking for an answer on something that’s been pending for months,” said David Russell, professor of insurance at CSU Northridge.
Under Proposition 103, a ballot measure approved in 1988, state regulators must review any rate changes before they go into effect to make sure they are not excessive, inadequate or discriminatory. Prop 103 also gives consumer groups the right to request a hearing from a judge for requested rate hikes of 7% of above, which can extend the time it takes for such hikes to be approved.
“There is simply too much at stake for SFG’s customers and the broader market if any rate increase has to wait on a full hearing or other resolution in the normal course,” State Farm wrote in its letter.
No provision of Prop 103 offers a process for emergency approval, according to Carmen Balber, executive director of the consumer advocacy group Consumer Watchdog. But in the past, the department has agreed to fast-track filings at the request of a company, she said.
Before that could happen, Balber called for State Farm to submit the financial data justifying its need for increased rate rather than asking the department to approve first and potentially order refunds later.
Her group has been critical of State Farm in the past, accusing the insurer of using its reinsurance agreement with its parent company to funnel money out of California. State Farm calls this allegation a myth, saying its reinsurance agreements are all subject to regulatory oversight for fairness.
Balber said consumers should be skeptical of attempts to use the shock and tragedy of the Los Angeles wildfires to justify extraordinary rate hikes.
Interviewed on Jan. 25, Insurance Commissioner Ricardo Lara said his department would be keeping a close eye on State Farm and all other insurers following the wildfires. He acknowledged that the department needed to work on approving rate applications faster, but said his department would maintain thorough checks and balances to maintain fair and nondiscriminatory rates.
“To protect millions of California consumers and the integrity of our residential property insurance market, the Department will respond with urgency and transparency to recommend a course of action for Commissioner Lara,” department spokesperson Gabriel Sanchez said in a statement following State Farm’s announcement.
Sanchez added that State Farm continues to collect premiums statewide to bolster its finances.
State Farm has not offered new policies in California for over a year. It is also in the process of non-renewing tens of thousands of customers statewide, though it committed to renewing all policies in Los Angeles County following the fires.
State Farm General was downgraded to a B rating last March by AM Best, an insurance credit rating agency.
Such a rating would typically make the company’s customers ineligible for federally backed mortgages through Freddie Mac, but State Farm has a qualifying AA rating from another agency — Standard & Poor’s.
However, State Farm warned its losses from the fire could lead to more financial downgrades.
Experts expect that the Los Angeles wildfires will be the most costly natural disaster in California history, and potentially one of the most costly natural disasters in the entire country. Verisk, an insurance data analytics company, estimates insured losses from the Palisades and Eaton fires to be $28 billion-$35 billion.
State Farm is asking for the emergency rate hike, if approved, to take effect May 1. Even if it were approved, policyholders would be charged the increased rates at the date of their annual renewal, as opposed to on May 1 itself.
“State Farm has served the customers of California for nearly 100 years and our intention is to continue serving them for many more,” State Farm wrote in its letter.
But the letter also cited a need for action to preserve coverage for all Californians. “Your immediate approval of SFG’s interim rate request is an indispensable and critical first step to eventually restoring the company’s financial strength, potentially preserving coverage for millions of SFG’s remaining customers, and working toward a more sustainable insurance environment in California,” the company wrote.
