By Chris Munro

March 3 - (The Insurer) - State Farm General Insurance Company $(SFG.AU)$ has warned it may have no choice but to continue scaling back its position in California if its emergency rate request is not approved, and even if it is signed off the carrier will not start writing new business in the state.

SFG, which is State Farm Mutual Automobile Insurance Company’s California business, last June made three rate increase applications.

In the wake of SFG’s policyholders’ surplus declining, in part owing to losses sustained from the Southern California wildfires earlier this year, the company has followed those June rate rise requests up with an emergency application for a 22% rate hike for homeowners policies in the state, along with a 15% rise for tenant coverage and a 38% increase for rental dwellings.

During a meeting between California insurance commissioner Ricardo Lara and State Farm executives last week, the insurer’s representatives explained in stark terms why they feel the rate rises are needed.

State Farm Mutual’s CFO Mark Schwamberger said the company’s current estimate for the wildfires is $7.9 billion, an uptick of $300 million from its previous publicly announced loss pick for the event.

SFG will retain $212 million of the loss, with its reinsurers taking another $1 billion.

Parent company State Farm Mutual and one of its affiliates will assume a further $6.7 billion of the loss, Schwamberger explained.

“Our ability to handle the fires is not in question,” said Schwamberger.

“State Farm General, the legal entity, it has the ability to pay its claims and move forward with the fires. However, it's in a dramatically different and weakened position.

“So the ability, prospectively, to continue to stay behind our policies as we enter fire season, it's in jeopardy.”

DECLINING SURPLUS

Aside from the recent wildfire losses, Schwamberger said SFG’s surplus has declined in recent years owing to several other factors, including the “rapid increase of inflation which drove increases in construction and other costs”.

He also highlighted significant increases in the severity of liability claims within its personal and commercial books, along with changing views on wildfire risk based on both actual experience and model updates.

“Then we had an increased need for reinsurance coverage given the increases in exposure, that was driven by inflation, changes in view of risk, and, also, a decrease in surplus.

“So we adjusted our reinsurance program to provide protection for State Farm General. If we had not made those changes, State Farm General could be insolvent right now, and we wouldn't necessarily be sitting here,” the CFO stated.

SFG in May 2023 stopped writing new business and personal lines property and casualty insurance in California. At the time, the company cited “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market” for its decision.

NO NEW BUSINESS

During the meeting last week, Lara asked the SFG executives whether it would begin writing new business in California again if the Golden State’s Department of Insurance did give the green light to the emergency rate requests.

“No, in the short term,” responded Schwamberger.

“The ability to get rate and grow capital takes time, and given our current exposure and where we are, we would not be in a position to fiscally and responsibly start to regrow within the California market just because of this rate in the very near term.

“It just wouldn't be fiscally responsible because we could potentially put ourselves in the situation of being back here in front of you, given the continued change in exposure relative to capital,” the CFO stated.

“These things take time. And we do look forward. We’re here in large part because we want to be in the California market,” he said.

Schwamberger said SFG is looking forward to the reforms introduced last year by Lara as part of his sustainable insurance strategy to take hold.

Those reforms include allowing insurers to incorporate catastrophe models in their rate-making process, along with the impact of reinsurance costs.

“We literally just want to survive to be able to see that day when the reforms are there and we continue to serve the millions of customers in the State of California,” said Schwamberger

“That is absolutely our objective, but we have to be able to get to the other side,” he added.

Asked if getting the rate rises approved would result in SFG halting nonrenewals, Schwamberger said “that’s an appropriate way to think about it”.

The discussion came shortly after SFG had its 'AA' financial strength and issuer credit ratings placed on CreditWatch with negative implications by S&P Global Ratings on Tuesday over concerns about the carrier’s declining surplus.

During the meeting between SFG and the California Department of Insurance, Lara asked whether State Farm Mutual could financially support its Golden State-focused entity.

Dan Krause, senior vice president, Western market area for State Farm Mutual, said it would be up to him to make such a request.

However, he said there “has to be some sort of positive sign that State Farm General would be able to sustain itself from a capital position to support its risk profile”.

“I think that's the purpose of the interim rate request. That would give us that type of a positive sign, both to the rating agencies and to any potential investors including State Farm Mutual,” he said.

“That's the emergency basis of this, because it would help me…building a case to go to the Mutual board to ask for consideration,” Krause stated.

According to a report from the San Francisco Chronicle, following the meeting, Lara told reporters he would respond to SFG’s rate request within two weeks.

The report also quoted Lara as saying he wants to see firmer commitment that State Farm Mutual would support SFG if his department approves the rate increases.

“There was no guarantee,” Lara said. “I want to see some guarantee that they’re going to come, that they’re going to commit to engage. I didn’t get that.”