State Farm General: Writing new California business currently 'doesn’t make sense'

By Chris Munro

March 13 - (The Insurer) - State Farm General Insurance Company (SFG) has told California’s insurance commissioner it cannot justify writing new business in the state given its current surplus levels and uncertainty over emergency rate filing approvals.

The company, which is State Farm Mutual Automobile Insurance Company’s California business, sent a letter to Lara on March 11 following on from a meeting between the carrier and the regulator on February 26.

As previously reported, during that meeting, SFG warned it may have no choice but to continue scaling back its position in California if its emergency rate request is not approved.

SFG made three rate increase applications last June.

After a decline in its policyholders’ surplus due in part to losses from the recent Southern California wildfires, the company then made an emergency application for a 22% rate hike for homeowners policies in the state, along with a 15% rise for tenant coverage and a 38% increase for rental dwellings.

In the meeting last month, SFG said that even if its emergency rate requests are signed off, the carrier may not begin writing new business in the state.

SFG’s letter to Lara earlier this week, jointly signed by SFG president and CEO Dan Krause, its vice president and treasurer Mark Schwamberger and vice president and general counsel Keesha-Lu Mitra, reiterated that stance:

“Since our emergency request, we have been focused on providing you and your staff the information you need to safeguard the public’s interests.

“We strongly believe this is best achieved by emergency approval of an interim rate, which indicates to providers of capital and rating agencies that there is a path for State Farm General and the larger homeowners market toward a sustainable future even in the face of recent catastrophes.”

As well as providing an update to Lara, SFG used the letter to refute some of the claims made by California-based non-profit Consumer Watchdog.

In the letter, the SFG executives said “writing new policies doesn’t make sense at this time”.

“Having blamed SFG’s problems on growing too much without securing sufficient rate increases, the intervenor (Consumer Watchdog) suggests the remedy is more of the same,” the letter states,

“This fails to understand basic economic realities of the business of insurance. Increasing our risk exposure wouldn’t be responsible for an insurer that’s already struggling to maintain statutorily-required levels of surplus for the exposure it already has,” SFG declared.

The carrier said in the letter that any allegation that SFG is seeking to manipulate regulators or the public through its emergency request is “baseless”.

Referencing recent unofficial comments made by a former employee that were shared on social media, SFG said its actions and communications with the regulator “have been grounded in our attempts to be forthright with you and with the public about the economic realities we face and the difficult choices before us”.

In the letter, SFG told the regulator it has “refrained from ‘relitigating’ before you” its disagreements with Consumer Watchdog.

“A public hearing is the place for a full and fair airing of relevant matters prior to a decision on a final rate,” the carrier said.

But SFG said it is “compelled correct the intervenor’s ongoing mischaracterisations and misunderstandings”.

“They propound an alternate reality where property insurers are making enormous profits in California but are inexplicably pulling back from the market.

As we have said for many months, our aim is to create a path forward for SFG, its customers and the California market.

“We had hoped that given this crisis, all parties would work toward a solution, but evidently that is not the intervenor’s goal,” SFG added.

The letter also stated that consideration of parental support depends on emergency rate approval.

"It would be imprudent to ask State Farm Mutual’s Board of Directors to consider injecting capital into a company whose prospects for repayment are grim without emergency rate approval and continuing transformational reforms to the market," it said.

Also in the letter, SFG provided details on how it is using reinsurance to protect its solvency, and in turn support customers.

“It is because of reinsurance that SFG hasn’t already been forced to massively reduce its book of business,” the carrier said.

“And it is because of reinsurance that SFG still has a chance to retain much of that business, assuming an emergency rate is approved.”

The insurer said that just because it has paid out more for reinsurance protection than it has received in recoveries does not make it a “bad deal” any more than a homeowner buying coverage even in years when their house did not burn down “because no one can know in advance when it will”.

“Catastrophe reinsurance, even more than primary insurance, is all about coverage for infrequent but very high severity events,” explained SFG.

SFG’s primary reinsurer is its parent State Farm Mutual. In the letter, the California-focused carrier said that market insights from its reinsurance broker suggest buying as much coverage as it requires from third-party reinsurers rather than its parent “would be at a rate significantly higher than that charged by State Farm Mutual”.

That is if SFG could find enough third-party reinsurers to complete its placement given the challenging trading conditions resulting from many players viewing California as too volatile to allocate further capacity to.