State Farm Sounds the Alarm in California

Over the last eight months, State Farm General has pleaded its case to the California Department of Insurance (“the Department”) for higher rates while the company’s financial position continued to deteriorate during this timeframe. The Los Angeles wildfires in January of this year provided the company further support for the needed rate increase. It also led the company to describe its financial position as a potential dire situation.

Our actuarial consulting experts weigh in on what’s happening with State Farm General, and what it means for California’s homeowners insurance market.

Commissioner Seeks More Information

Since the proposed rate change is above +6.9% and a consumer group intervened in the State Farm General rate filings, the consumer group can request rate hearings on each filing. While the commissioner cannot approve the rate filings prior to the results of the rate hearings, State Farm General has requested an interim emergency rate increase and stated, “the Department believes … that based upon information currently available, an interim rate increase, subject to refunds with interest pending a final determination by the commissioner of its legality, is appropriate in this instance and would be lawfully issued.”¹

Rather than expeditiously approving the requested interim rate increase, which the commissioner’s own Department recommended, the commissioner thought it would be more prudent to obtain additional information from State Farm before approving the rate increases and ordered a meeting between State Farm, the Department, and Consumer Watchdog, which took place on February 26. The commissioner wanted answers to questions on State Farm’s financial stability, the need for urgent relief, the impact on policyholders, the justification of its claims, and the potential for financial support from the parent company.

It’s important to note the difference between State Farm General (“SF General”) and State Farm Mutual (“SF Mutual”). They are two separate companies operating financially independently of each other. SF General is a stock company owned by SF Mutual that was formed specifically to write California businesses, primarily homeowners and commercial multi-peril. In contrast, State Farm’s auto business in California is written through SF Mutual rather than through SF General.

Why Is Emergency Action Needed?

SF General, the largest homeowners carrier in the state, triggered a regulatory Company Action Level Event last year after failing to meet the NAIC’s Risk-Based Capital ratio requirements. AM Best subsequently downgraded the Financial Strength Rating for SF General to a B in March 2024. These events happened prior to the wildfires, which put further stress on SF General’s financial position. Recently, S&P Global placed its ‘AA’ rating for SF General on credit watch with negative implications.

Currently, SF General has estimated their wildfire losses to be $7.6 billion². Most of the losses will be covered by reinsurance, which is primarily provided by their parent company, SF Mutual, at a rate that is below the market rate, according to information in the company’s rate filing. SF General has the following reinsurance² in place:

• Catastrophe Excess of Loss: $250 million attachment point / $8.92 billion limit effective July 1, 2024 through June 30, 2025 with one reinstatement of coverage limits per year.
• Aggregate Excess of Loss Catastrophe: $375 million attachment point / $600 million limit net of other available reinsurance limit effective July 1, 2024, through June 30, 2025, which is not subject to a reinstatement provision.
• Excess of loss on personal and commercial liability umbrella lines effective October 1, 2024, through September 30, 2025.
• Excess of loss on high-value personal and commercial property risk effective January 1, 2025, through December 31, 2025.

After reinsurance, SF General has estimated their retained losses to be approximately $212 million¹.  Given SF General’s reinsurance limit, an event with losses the size of the Los Angeles wildfires in January was not out of the realm of possibility.  

FAIR Plan Assessment

On top of the wildfire losses, SF General mentioned it “will be required to book its share of FAIR Plan losses on its financial statements, regardless of whether an assessment is issued. SF General’s participation rate for dwelling losses (commercial losses are treated separately) is expected to be around 16%.”³

The FAIR Plan issued an assessment of $1 billion, which may be partially recouped from policyholders over a two-year period to the extent that the insurer was not reimbursed through reinsurance. Depending on the cause of the wildfires and whether a utility company bears any fault, there may also be subrogation recoveries, which could eventually reduce the wildfire losses. SF General has estimated their share of the FAIR Plan losses to be approximately $400 million¹.

Potential Regulatory Oversight Due to Inadequate Surplus

SF General reported their surplus to be $1.04 billion¹ as of year-end 2024, which is a substantial drop from its value of $4.08 billion³ in 2016. Additionally, SF General’s initial estimate of the reduction in surplus due to the wildfires is $400 million¹, which would leave it with approximately $600 million in surplus and an in-force book of business that is inadequately priced based on its rate filings.

As of December 31, 2024, SF General’s authorized control level risk-based capital (where the state commissioner may place the insurer under regulatory control) was $691 million. Given SF General’s latest estimate of its surplus, the company has experienced an authorized control level event and will, at the very least, need to provide its domiciliary state (Illinois) with corrective actions the insurer is taking to improve its financial position. The domiciliary state also has the authority to take regulatory control of the company.

Will State Farm Mutual Provide Financial Assistance?

In SF General’s pending rate filing³, it states the following:

“There are no plans for State Farm General to seek financial support from State Farm Mutual, the parent company of State Farm General. State Farm General is an independent and self‐sustaining legal entity within the State Farm group of companies and is managed to meet solvency requirements on an individual entity basis without regard to the solvency or financial condition of any other affiliated entity.”    

The State Farm brand would take a big hit to the extent SF General were to be taken over by the Department in their domiciliary state due to their financial condition. Additionally, they may lose a portion of their personal and commercial auto book of business written through SF Mutual, which had written premium of $4.87 billion in 2023.

One would think this delivers enough value for SF Mutual to provide financial assistance to SF General, but this does not factor in the difficulty of maintaining price adequacy in California and potential future underwriting losses due to inadequate rates. Right now, at the current rate and surplus level, SF General represents a risky investment for SF Mutual, which may produce negative returns for the parent company. Over the last two years, SF General has had a combined net underwriting loss of $1.655 billion, excluding the Los Angeles wildfires.

Dire situations require immediate action. The interim rate increases provide some help. Ultimately, State Farm General must reduce their market share in California property, which will take several years. If AM Best further downgraded the company, and/or banks stopped accepting them as an insurer on home loans, this would expedite the decrease in the company’s market share – far from an ideal solution. Only time will tell what path SF General takes.

Impact on the California Homeowners Insurance Market

No matter what happens, SF General’s homeowners market share will be decreasing in California. Although it is similar to SF Mutual’s homeowners market share in other states, the California regulatory environment, combined with the state’s exposure to wildfires and the lack of diversification across other lines of business, requires substantially more surplus for SF General to continue insuring approximately 20% of the homeowners market. To mitigate risk, SF General obtains reinsurance primarily from their parent company, which, to their credit, prevented SF General’s insolvency after the Los Angeles wildfires. The company’s financial position puts it in a very risky position for potential insolvency in the future without financial assistance from the parent company and the approval of its pending rate increase filings.

While the commissioner has aggressively pursued changes to improve the homeowners market, such as changing the regulations to allow catastrophe modeling and the net cost of reinsurance in determining the indicated rate level, it remains to be seen whether this will resolve the issues in the homeowners market. According to StateFilings Pulse, the quarterly publication authored by Perr&Knight’s expert actuarial consulting team, the median number of days from filing submission to approval was 294 days in 2024. The Department has plans to drastically reduce the time to approve rate filings, and insurers are eagerly awaiting the full implementation of those plans.

Over the next year, the homeowners market will likely continue to have availability issues with many insurers sitting on the sidelines waiting to see the impact of the changes implemented by the Department. As of September 2024, the FAIR Plan reported annual growth in policies in-force and premium of 28.9% and 58.6%, respectively. More growth can be expected for the FAIR Plan.

While the current situation does not look good, our actuarial consulting experts believe talented individuals at the Department and within the insurance industry will fix the current issues faced by the California homeowners market leading to changes that make the state better equipped to deal with the future.

Contact Perr&Knight today to discuss your actuarial and state filing support needs.

1. State Farm General letter dated February 25, 2025, addressed to Commissioner Lara. ↩︎
2. State Farm General pending rate filing, SERFF Tracking SFMA-134139896, for attachment points and limits, and 2023 annual statement Management’s Discussion and Analysis for effective dates and reinstatement provision. ↩︎
3. State Farm General letter dated February 25, 2025 addressed to Commissioner Lara – Attachment. ↩︎