By Bill Alpert

State Farm General Insurance was already in weak financial shape when wildfires swept through Southern California last month. Now, it is threatening to leave the state if California regulators won't let it raise premiums.

That is a problem. As the state's biggest home insurer, with a 20% market share and more than a million homeowner customers, State Farm's departure would leave a big hole in California's insurance market.

"These fires will collectively be the costliest in the history of the company," said State Farm in its Feb. 3 request for a 22% hike in its homeowners' insurance rate "to avert a dire situation for our customers and the insurance market in the state of California."

The state's insurance department advised California insurance Commissioner Ricardo Lara to allow the rate hike on an interim basis, with refunds to homeowners if later hearings proved the rates unjustified.

On Friday, Lara demurred. State Farm stopped writing new California policies in 2023, he noted, and started canceling 30,000 policies last year. Yet the company's financial condition has still deteriorated.

"Other than rate increases, what other plans does State Farm have to address its financial challenges?" Lara asked, in his Feb. 14 response. Lara told the company to bring answers to that question to his office, on Feb. 26.

State Farm posted its unhappy reaction on its website. "While we're positioned to handle all of the claims associated with the most recent wildfires," it said, "State Farm General must seriously consider its options within the California insurance market going forward."

The State Farm rate showdown demonstrates that California is far from fixing its insurance crisis. For years, the rate increases allowed by the state's insurance department didn't keep pace with inflation and climate-related losses. Seven of the state's top dozen insurers stopped or restricted their sales of new policies. That pushed an increasing number of homeowners into the state's last-resort insurance pool, the Fair Access to Insurance Requirements Plan. The FAIR Plan just said it needs a $1 billion cash infusion to cover claims from last month's wildfires.

Insurance Commissioner Lara has tried to speed California's rate reviews. Since the start of the Los Angeles fires, the state approved homeowners' rate increases of 30% for the Allstate Corp., and 12% for Mercury General.

Financial problems plagued State Farm General for years before the recent wildfires. The company is a California affiliate of State Farm Mutual Automobile Insurance, the large mutual insurance company that's owned by its policyholders.

State Farm General says that its surplus capital for paying claims was $1 billion at the end of 2024. That is only half its 2022 level, and a quarter its 2016 level. In the nine years since 2016, the insurer has lost a cumulative $5.3 billion writing insurance, or $1.26 in claims and expenses for every $1 of premium it collected.

In June 2024, the insurance company had asked California for a 30% rate hike, under a state rule created for insurers whose solvency is threatened. It was still awaiting a decision when the January wildfires broke out. In its request for emergency action this month, State Farm said that it has already received more than 8,700 claims from the LA fires and has paid over $1 billion to customers.

"We are very disappointed the Commissioner ignored his department's recommendation to take the critical and necessary step to approve State Farm General's request for interim rate increases associated with our June 2024 filings," said the insurer.

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

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February 18, 2025 15:54 ET (20:54 GMT)

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