By Bill Alpert

California approved a 22% rate increase by State Farm General Insurance, its largest home insurer, on Friday in response to the devastating wildfires that swept Los Angeles in January.

The insurer is the California unit of the big State Farm Mutual Automobile Insurance. It grew rapidly in recent years to cover 2.8 million homeowners, with more than 20% of California's market.

California's insurance commissioner, Ricardo Lara, said his approval was conditioned on State Farm justifying its need for the increase by bringing data to a public hearing on April 8. He also called on the insurer to pursue a $500 million capital infusion from its parent, and asked it to stop its efforts to shrink exposure by not renewing some customer policies.

"I expect both State Farm and its parent company to meet their responsibilities and not shift the burden entirely onto their customers, " Lara said in his announcement. "Currently, too many Californians live in fear of having their insurance policies non-renewed."

State Farm was guardedly pleased with Lara's move.

"It's time for certainty in the California insurance market for our customers. The provisional nature of today's decision doesn't improve that certainty but it's a step in the right direction," said State Farm, on its website. "We are moving forward with implementing this provisionally approved rate and will continue to work with the California Department of Insurance for a sustainable future for the California insurance market."

State Farm's California insurance business was troubled long before January's wildfires. It had $5.6 billion in insurance losses from 2016 to 2024. That shrank its "surplus capital" -- after its reserves for claims -- from $4 billion to $1 billion.

As Barron's reported Thursday, the company grew its California home insurance business fast in recent years, but was slow in seeking premiums that would to cover the state's rising costs and climate risks. Regulatory filings showed the insurer repeatedly underestimated the reserves it would need to cover underwriting losses. Yet even as the California unit's capital dwindled, parent company State Farm Mutual refused to put more money in the California business.

Lara has been dealing with a yearslong crisis in the state's home insurance market, as some insurers pulled out of California in frustration over rate regulation and increasing climate risk. Others that remained, including State Farm and Allstate Corp., stopped taking on new customers.

Dwindling availability of commercial policies swelled the number of homeowners needing coverage from the thinly-capitalized state-sponsored insurance pool, known as the FAIR Plan.

Lara introduced insurance reforms at the end of 2024, but that was just a week before fires touched off more than $40 billion in catastrophe losses for the insurers. January's fires exhausted the FAIR Plan's coffers.

In seeking its emergency 22% rate hike, State Farm said its California unit faces insolvency and threatened to pull out of the state.

That left Lara with little choice but to approve State Farm's rate request.

"It is evident that other California insurers are unable to absorb State Farm's existing customers, which poses a significant risk of these customers ending up on the FAIR Plan," Lara said Friday.

Write to Bill Alpert at william.alpert@barrons.com

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March 14, 2025 17:58 ET (21:58 GMT)

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