S&P Puts State Farm General on CreditWatch

Potential downgrades of State Farm’s California homeowners insurer came closer to reality yesterday when S&P Global Ratings put the “AA” financial strength and issuer credit ratings of State Farm General Insurance Co. on CreditWatch with negative implications.

In early February, State Farm General asked the California Department of Insurance to approve an “interim emergency” homeowners insurance rate hike, citing declining capital and a potential downgrade as reasons.

California Insurance Commissioner Ricardo Lara did not approve the emergency interim 22% rate request, instead calling a meeting with the carrier to get some answers about the carrier’s financial situation. That meeting is set to take place on Feb. 26.

In its Feb. 25 announcement of the CreditWatch action, S&P noted that State Farm General’s weak underwriting performance over the years 2019-2023 “led to a significant deterioration of its capital position and regulatory solvency ratios,” followed by “continued underperformance in 2024,” and more earnings pressure this year from the recent California wildfires and possible future events.

“This action also considers the California Insurance Department’s ambiguity around rate approval,” S&P wrote.

Noting that the recent wildfire now puts State Farm General’s capital position near the regulatory authorized control level, S&P said, “This capital deterioration and uncertainty regarding group capital support raises questions about SFGI’s [State Farm General’s] status as a core group member and the associated rating benefits.”

According to S&P, a change to non-core status for State Farm General “could lead to a rating downgrade by multiple notches.”

S&P noted that over the period of underperformance and capital deterioration, the parent company “has not provided any capital support beyond reinsurance agreements.”

Wildfire Claims and Reinsurance

The reinsurance support has cut State Farm General’s wildfire losses down to $212 million from a gross figure of $7.6 billion, the company said in a post to its website yesterday.

“State Farm Mutual Automobile Insurance Company (SFM) serves as the primary reinsurer for SFG [State Farm General] and will assume the majority of losses related to these fires ceded by SFG under its reinsurance contracts.”

The $7.6 billion figure encompasses both reported and not reported claims, the update said, noting that State Farm General has already paid out $1.75 billion on approximately 9,500 January wildfire claims filed to date.

Along with estimates for State Farm General’s retained losses after reinsurance, the company estimates a $400 million share of total FAIR Plan losses.

“Based on these estimates, and after accounting for reinsurance recoveries, tax impacts and partial recoupment of SFG’s allocation of the FAIR Plan’s recent $1 billion assessment, the January fires will reduce SFG’s surplus, which stood at $1.04 billion at the end of 2024 after a decline of over $300 million from year-end 2023, by approximately $400 million,” the update said.

Response to Lara

“The interim rate request is not to pay for the costs of the wildfires. SFG will rely on existing surplus and a robust reinsurance program to pay claims from the wildfires,” State Farm said in the update, which also included a copy of a new Feb. 25 letter to Commissioner Lara responding to some of the questions he has about the rate request and SFG’s financial condition.

State Farm also took the opportunity to point out that while insurance rate increases “can of course be a challenge for policyholders,” it is also true that “paying much higher premiums with the FAIR Plan—for less coverage—isn’t a welcome alternative.”

Referencing a concern raised by Consumer Watchdog that “State Farm’s serious financial situation raises concerns for California’s insurance market and its consumers,” the letter said, “We wish to emphasize that emergency interim rate approval is in the public interest, as it can help stabilize State Farm General’s financial condition and the broader insurance market, not least because of what it signals to providers of capital about the state’s commitment to solving the insurance crisis.”

Among the questions that State Farm starts to answer in the letter is one that asks about State Farm Mutual Auto’s willingness to support State Farm General.

“Other than rate increases, what other plans does State Farm have to address its financial challenges? For example, would State Farm’s parent company, State Farm Mutual Automobile Insurance Company, be willing or able to provide financial support to State Farm [General] as it has in other similar situations?”

In response, the letter puts the spotlight on intervenors who delay the rate approval process and suggested that neither State Farm Mutual nor any other capital provider would be willing to make commitments to the California market.

“A lack of approval for needed rate sends a strong message to SFG about the support it will receive [from regulators] to collect sufficient premiums in the future to protect Californians against the risk of loss to their homes, property and other claims. SFG must be able to prospectively demonstrate its ability to generate sufficient capital to support its risk profile.”

“Without this concrete evidence, it creates a situation and an insurance market where insurers, reinsurers and other capital providers, including State Farm Mutual, are reluctant to invest.”

Addressing the first part of the question, State Farm General executives wrote in the letter, “We would reinforce the point that matching price to risk (i.e., securing adequate rates for the exposure) is a core fundamental SFG must adhere to in order to ensure it has the financial strength to stand behind its promises.”

State Farm General’s financial distress is not just the result of macroeconomic trends such as rising construction cost inflation and litigation, but also the fact that the company’s attempts to raise rates and restrict growth, “in order to keep our risk profile in line with available surplus, were constrained by regulatory considerations and met with limited success,” executives wrote in the latest letter to Commissioner Lara and a prior letter.

“This was due in no small part to intervenors in the rate review process, whose very efforts to delay and decrease needed rate adjustments prevented SFG from maintaining a capital position supportive of its risk profile and impaired its ability to support continued underwriting of California properties,” both letters state.

In California, so-called “intervenors are empowered to represent the interests of the public by a decades-old law, Proposition 103.

S&P in its announcement noted that State Farm General has had pending rate increases since June of 2024. “Given the inherent lag for earned rate to meaningfully materialize, we expect it will take at least 12 months to realize the benefits of these rate increases, if they are approved,” S&P said.