From the Los Angeles Times, March 14:
California Insurance Commissioner Ricardo Lara “provisionally” granted State Farm General’s request for an emergency 22% hike in its homeowners insurance rate Friday — but it won’t take effect pending a formal hearing scheduled for next month.
Lara made his decision after first turning down the request outright in February, saying the insurer had failed to provide sufficient evidence that it needed the increase immediately, as well as hikes of 38% for rental dwellings and 15% for renters and condo owners. However, he had given the insurer an opportunity to provide more evidence to justify the request.
In making his decision on Friday, he called on State Farm to halt any pending nonrenewals of customers statewide and for the insurer’s parent company to provide its California insurer an infusion of $500 million to stabilize its capital position.
“The role of insurance commissioner involves balancing a stable and sustainable insurance market that serves consumers with effective oversight. To ensure long-term choices for Californians, I had to make an unprecedented decision in the short term,” he said in a statement.
“State Farm claims it is committed to its California customers and aims to restore financial stability. I expect both State Farm and its parent company to meet their responsibilities and not shift the burden entirely onto their customers. The facts will be revealed in an open, transparent hearing.”
The hearing is scheduled for April 8 before an administrative law judge, who will make a proposed decision that the commissioner can accept, reject or revise.
“It’s time for certainty in the California insurance market for our customers. The provisional nature of today’s decision does not improve that certainty but it’s a step in the right direction,” State Farm said.
State Farm has faced years of losses and huge damage claims after the Jan. 7 fires in Pacific Palisades, Altadena and other Los Angeles County communities.
As of March 11, State Farm General and its parent, State Farm Mutual Automobile Insurance Co., which insures autos in California, have received more than 12,000 fire and auto claims related to the Jan. 7 fires and have paid more than $2.2 billion to customers.
State Farm General has estimated it will pay out $7.9 billion for the Palisades, Eaton and other L.A. County fires. However, its net losses from the fires will be closer to $600 million after reinsurance payments, which largely will come from its parent company. Reinsurance is bought by insurers from other insurers to protect themselves from catastrophic events.
Those gross losses are larger than what other insurers have so far reported.
The company said it has the funds to pay all its Jan. 7 claims but noted that it already experienced $2.8 billion in losses over the last decade due to wildfires and other costs. That reduced its surplus by some $5 billion. Surplus is the amount of money an insurer has set aside to pay for unexpected claims after running through its reserves, reinsurance and other funds.
Last month, S&P Global put State Farm General’s AA financial rating on a negative watch, citing its “weak underwriting performance over the past five years” and “potential earnings pressure in 2025, largely from the recent California wildfires.”...
....MUCH MORE
Regarding that "weak underwriting performance", February 3:
The paragraph of this letter that jumps off the page is:
Insurance will cost more for customers in California going forward because the risk is greater in California. Immediate emergency interim approval of additional rate is essential to more closely align cost and risk and enable State Farm General to rebuild capital. We must appropriately match price to risk. That is foundational to how insurance works. Higher risks should pay more for insurance than lower risks. Over the last 9 years, the lack of alignment between price and risk means that for every $1.00 collected in premium, State Farm General paid $1.26, resulting in over $5 billion in cumulative underwriting losses.A combined ratio of 126% over the course of nine years is borderline fraudulent.
When they realized they had a problem eight years ago the thing to do was: Stop writing insurance.
And seven years ago, and six years ago and...
They teach you that in the junior actuary class....
Also related:
February 25 - February 25 - California Wildfires: "State Farm vs California showdown: Here are the huge stakes"
February 26 - Insurance: "State Farm pegs LA wildfire loss at $7.6bn, with $212m retained after reinsurance"
I would say the purchase of reinsurance looks quite prudent in hindsight.
And makes State Farm's pitch for a 22% rate hike harder to justify.
