Insurance commissioner ‘provisionally’ grants State Farm’s 22% rate hike
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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.
State Farm, the largest home insurer in California, continues to seek approval of a 22% emergency rate hike even as it faces complaints over its handling of insurance claims.
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.”
State Farm sought the emergency increase because a rate hike request made in June 2024 for a 30% increase to its homeowner rates, as well as increases for condo owners and renters, has yet to be resolved. It has pledged to return with interest any payments made by its policyholders under the emergency rates if they exceed what the company is ultimately granted.
Insurance Commissioner Ricardo Lara on Friday rejected State Farm General’s request for an emergency 22% home insurance rate hike due to the Los Angeles fires unless the insurer can provide more evidence it is warranted.
A second hearing will be held by June 1 on State Farm’s original June 2024 rate hike request.
Lara held an informal meeting with company executives on Feb. 26 to give them an opportunity to provide more evidence in support of the emergency rate hike, during which representatives of Los Angeles advocacy group Consumer Watchdog strongly opposed the increase.
State Farm Chief Financial Officer Mark Schwamberger said during the meeting that should the insurer not get the rate hike, it “may have to take actions that we otherwise don’t want to do.”
Schwamberger said that “climate change” and the severity of wildfires in the state had led to new “economic realities.”
State Farm announced in March of last year that it would not renew 72,000 home, apartment and other property policies, citing wildfire risks and other concerns. That followed its decision in May 2023 to stop writing new business, homeowners, and other personal property and casualty insurance, though its parent continues to sell personal auto policies.
Shortly after the fires, the insurer announced it would offer renewals to all Los Angeles County residential customers it had intended last year to drop.
During a meeting with State Farm this week, Lara asked for the $500-million capital infusion, noting State Farm Mutual had bailed out its Texas subsidiary State Farm Lloyd’s with $1.2 billion and $642 million in loans between 2000 and 2010.
State Farm General Chief Executive Dan Krause said that the parent was ready to provide at least $250 million, which he said would “position State Farm General well for the short term and creates the opportunity to seek additional capital as the full rate review is completed,” according to a meeting transcript.
This week, the company also sent Lara a letter responding to arguments raised by Consumer Watchdog, which doubts the insurer is in imminent financial trouble after what it said were rate increases it received totaling 52.1% since May 2014.
The group had argued that a hike in premiums granted through anything but a formal rate hearing would set a “dangerous precedent” and violate Proposition 103, the 1988 initiative authored by its founder that regulates the state’s insurance market. Consumer Watchdog has called on State Farm Mutual to instead shore up the subsidiary’s capital position.
State Farm Group, led by State Farm General’s parent company, was given a superior financial rating in December by rating agency AM Best and last month released its 2024 financial results. State Farm Mutual’s net worth, or surplus, rose last year nearly 8% to $145.2 billion due to investment returns that exceeded underwriting losses.
“It’s a victory for consumers that State Farm will have to make its case in a public hearing before a judge, and the judge will decide if a rate hike is justified,” Consumer Watchdog Executive Director Carmen Balber said in a statement.
In its letter this week, State Farm reiterated comments it made in the Feb. 26 meeting that any financial assistance from State Farm Mutual was dependent on receiving the emergency rate hike.
Haden Kirkpatrick, a top State Farm executive, said he was fired after being recorded in an undercover video making disparaging remarks about Pacific Palisades homeowners.
It also discounted comments made by Haden Kirkpatrick, its executive in charge of innovation and venture capital. He was recorded in an undercover video posted on social media last week saying State Farm General “kind of” orchestrated its rate hikes. The insurer said the executive, who has since been fired, “was never involved in or had any responsibility for business decisions.”
Despite any increase it might receive, State Farm said in its letter it could not resume writing new policies because it is “struggling” to maintain surplus above statutorily required levels.
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