California reconsiders State Farm rate hike as insurer’s losses rise

State Farm’s financial solvency has grown so precarious following the Los Angeles fires that insurance regulators in California and Illinois have held “multiple conversations” about how the property insurer can avoid collapsing.

The insurer’s financial straits were discussed during a meeting Feb. 26 in Oakland between the insurance giant and California Insurance Commission Ricardo Lara.

“Those important conversations continue,” said Keesha-Lu Mitra, State Farm’s general counsel, according to a transcript of the meeting provided by the DOI.

See also: State Farm’s rate hike shot down by California regulator

Underscoring State Farm’s troubles, its losses related to homeowner claims following the Los Angeles County fires grew $300 million in a single day —  from $7.6 billion to $7.9 billion, according to State Farm CFO Mark Schwamberger, who spoke at the meeting.

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

“As we enter the fire season, it’s in jeopardy,” he said. “It’s a very serious situation, and when you think about risk-based capital, we are just falling into further and further regulatory action levels that also might require action from Illinois and others.”

Dan Krause, CEO and president of State Farm, told Lara that it was up to him to request assistance from State Farm’s Bloomington, Ill.-based parent to help keep State Farm financially solvent. “It is a possible request, yes,” he said. “I think, you know, 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.”

That “positive sign” would be Lara approving an emergency interim rate hike, which the company requested Feb. 3.

Schwamberger said that other options might include canceling or not renewing policies in California in order to substantially reduce exposure going forward.

“To the degree you cannot be self-sustaining, and you don’t have viability and the capital to stand behind promises — we’re left with no other alternative,” he said.

After the meeting, Lara told members of the media that he would carefully reconsider State Farm’s request and hoped to make a final decision within two weeks.

The rate increase, if approved, would take effect May 1, 2025.

In January, Lara issued a moratorium on insurance cancellations and non-renewals in areas affected by wildfires.

Spokespersons with the California Department of Insurance and Illinois Department of Insurance were not immediately available to comment on the meeting.

Krause and executives with the property insurer, along with Lara and his inner circle of officials and representatives of Consumer Watchdog, an advocacy group, gathered to discuss an emergency rate hike filed Feb. 3 with the California regulatory agency.

State Farm General requested a 22% emergency rate hike in California to cover losses from the Los Angeles County wildfires and stop its “financial deterioration.” Lara declined the request, and asked that Krause and other company officials to meet with him to answer questions about why higher rates were needed.

In a Feb. 25 letter sent in advance of the meeting to Lara, Krause wrote that reinsurance — a type of insurance on insurance in catastrophic events — would cover a majority of the losses. Reinsurance, State Farm said, would lower its losses to about $612 million.

This includes $212 million in retained losses after reinsurance, and State Farm’s special assessment of $400 million that it must pay into the California Fair Plan, an insurer of last resort.

State Farm General, the largest insurance provider in California and a subsidiary of State Farm Mutual Automobile Insurance Co., said it has received more than 9,500 claims from the Jan. 7-8 fires in Pacific Palisades and Altadena areas. The company said it has paid more than $1.75 billion to customers.

According to the transcript, Schwamberger also cited other worries in the meeting, with a possible downgrade of its credit ratings by “multiple notches,” which would lead to higher borrowing costs.

On Feb. 25, S&P Global placed State Farm General’s AA financial rating on a negative watch, citing the company’s “weakening capital position” as a result of the California wildfires.Related Articles

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