State Farm General Insurance Co. is seeking to significantly raise homeowners insurance rates in California while flagging to regulators that it faces "further surplus deterioration" if rate hikes are not approved.
In filings with the state's Department of Insurance on June 27, the company outlined its reasoning for raising rates for various home lines, including a 30% hike for homeowners renewal policies dated Jan. 1, 2025, and later.
The rate hike request is part of an effort to reverse a downward surplus trend since 2016, which has been impacted by wildfires in 2017 and 2018 and increased liability claim costs in core product lines in 2023.
In a baseline chart included in the filing, State Farm General projected that its homeowners surplus for California would fall below $500 million by 2028 if, among other things, the rate hike is not approved. The insurer projected a surplus exceeding $2.5 billion if the regulator signs off on the request.
"We are [also] filing revised rates to our independent California Renters and Condominium Unitowners policy forms, which results in a rate level change of 41.7% for those policy forms," the company said.
The insurer will submit an application with a "defined future effective date to reduce its rates in at least one line of business" after its financial condition has been restored, according to the filing.
Additional qualifications for a rate reduction are that it will not result in an average premium for that line that is less than the average statewide premium of the industry and that the rate reduction will not reverse State Farm's financial condition, according to the filing.
The insurer is working toward long-term sustainability in California, a representative for State Farm said in a statement to S&P Global. The representative added that rate changes are driven by increased costs and risks.
"We continue to look for ways to maintain competitive rates and help our customers manage their risk," the statement reads. "Rate filings are not final until approved by the California Department of Insurance."
Regulatory scrutiny
State Farm General's latest rate filings raise serious questions about its financial condition, California Insurance Commissioner Ricardo Lara said in a statement following the release of the filings.
"This has the potential to affect millions of California consumers and the integrity of our residential property insurance market," Lara said.
Using authority granted under Prop. 103, Lara said he will investigate State Farm's financial situation, including holding a rate hearing on these applications if necessary.
Lara said the regulator made "tough decisions" in approving major State Farm rate increases to address their financial situation, including a 6.9% hike in January 2023 and another 20% increase in rates for homeowners and condominium policies in December that year.
Lara's office has proposed allowing insurers in California to use forward-looking catastrophe models for underwriting purposes, but only if they increase the amount of business they write in high wildfire-risk areas of the state. The proposal is an effort to encourage insurers to write business in areas deemed riskier, according to comments made at a June 13 workshop.
Policy drop
The lengthy filings additionally detail that State Farm expects its policies in force to continue to drop over the next several years, with an 11.2% drop expected in 2024 before gradually lowering in each subsequent year until reaching a decline of 7.2% in 2028.
The insurer expects a 28.5% underwriting loss in 2024, an improvement from 37.4% in 2023, according to the filings. These losses are expected to be mitigated if the rate hike is approved, falling to a 0.3% loss in 2025 before rising to a 12.7% gain in 2026 and hovering around that same percentage gain in subsequent years.
Amid these same changes, State Farm anticipates a significant jump in direct premiums written, growing from $3.98 billion in 2024 to $5.13 billion in 2025 before dropping in subsequent years to $4.65 billion by 2028, as policies in force decline.