State Farm General estimates LA wildfire losses at $7.6 billion as fears grow over potential S&P downgrade

By Isha Marathe

Feb 26 - (The Insurer) - State Farm General Insurance Company (SFG) has revealed its direct loss estimate for the Los Angeles wildfires stands at $7.6 billion, including reported and unreported claims, as the personal lines giant confirmed it has petitioned for an emergency rate hike in California.

The insurer has paid out $1.75 billion on approximately 9,500 claims filed from the fires, SFG said on Tuesday. Estimates for SFG's retained losses after reinsurance, and for its share of total Fair Plan losses, are approximately $212 million and $400 million, respectively, the insurer said.

SFG is a subsidiary of State Farm Mutual Automobile Insurance that does business exclusively in the state of California.

"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," SFG said.

SFG asked California insurance commissioner Ricardo Lara for a 22% rate hike earlier in February. However, SFG said Lara deemed the insurer's request inadequate. SFG is scheduled to meet Lara for additional discussions about the insurer's rate hike request on Wednesday.

"We remain deeply concerned about the financial position of State Farm General, as it is difficult to match price to risk in California," the insurer declared.

"As we said in our emergency interim rate filing on Feb 3, we need immediate rate increases to help stabilize State Farm General’s financial condition and avoid a potential rating agency downgrade."

SFG's statement came after the California-focused business had its 'AA' financial strength and issuer credit ratings placed on CreditWatch with negative implications by S&P Global Ratings on Tuesday. S&P Global Ratings in its commentary referred to SFG as SFGI.

"Our rating action on SFGI reflects the company's weak underwriting performance over [2019 to 2023], continued underperformance in 2024, and the potential earnings pressure in 2025, largely from the recent California wildfires which lead to deteriorating capital near the regulatory authorized control level," S&P Global Ratings said.

"Our action also reflects our view of uncertainties related to capital support from the State Farm group, which raises concern relating to SFGI's core group status assessment. This action also considers the California Insurance Department's ambiguity around rate approval."

As S&P Global Ratings noted, 77% of SFG's $3.0 billion quarter three year-to-date 2024 direct premium written came from homeowners business.

"This has limited SFGI's ability to achieve rate adequacy due to regulatory restrictions on personal lines. SFGI has been vigilant in taking non-rate actions to manage exposure, particularly to wildfires, but it hasn't been enough to offset the elevated severity and frequency affecting the book," S&P Global Ratings said.

On February 3, SFG said in a letter to Lara that it was seeking interim rate increases effective from May 1, 2025. It intends to raise rates by 22% for non-tenant homeowners, 15% for tenants (renters), 15% for tenants (condo unit owners) and 38% for rental dwelling.

At the time, SFG estimated LA wildfire losses of around $6.58 billion across 7,274 claims.

"What has changed since State Farm’s last rate filings that now requires urgent relief?" Lara asked in response to SFG's petition.

"How would granting this request affect policyholders, especially those who have already faced premium increases and non-renewals? … Has State Farm provided adequate documentation to justify its claims, and is it considering financial support from its parent company?" Lara asked.

On Tuesday, SFG said immediate interim approval is an "indispensable and critical" step to restoring the company’s financial strength, so it can pay for any future claims for the risks it insurers.

"Last year, one rating agency downgraded SFG’s financial strength rating due to its capital position. With further capital deterioration as a result of the wildfires, additional downgrades could follow. If that were to happen, customers with a mortgage might not be able to use SFG insurance on the collateral backing for their mortgage," SFG said.