Ahead of a decision from California’s insurance commissioner on a State Farm General request for emergency rate increases, company executives and representatives of a consumer group pled their opposing cases in letters to Commissioner Ricardo Lara.
News outlets in California reported earlier this week that Commissioner Lara is leaning toward a solution that would have State Farm Mutual Automobile Insurance Company, the parent company of State Farm General, shoulder more of the burden of the California homeowners company’s financial struggles. (See, for example, “California insurance chief says he’s near ‘solution’ on State Farm rate hike – Daily News“)
While such reports have not been confirmed by Carrier Management, State Farm executives addressed the possibility in a March 11 letter to the commissioner and at a hearing on Feb. 26.
Reiterating in-person remarks at the hearing from Keesha-Lu Mitra, State Farm General’s senior vice president and general counsel, the letter from Mitra, Dan Krause, president and chief executive officer of State Farm General, and Mark Schwamberger, vice president and treasurer, said that “the State Farm Mutual Board is comprised of all external, independent directors except for the State Farm Mutual CEO” and that “their fiduciary duties require them to exercise reasonable care, judgment, and diligence [around] what is in State Farm Mutual’s best interest as an entity and its policyholder group as a whole.”
With State Farm Mutual’s policyholders spanning 50 states, “[i]t 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,” the letter said.
Still, the letter said that “an emergency rate approval would be a positive sign in support of a request from SFG [State Farm General] to the State Farm Mutual Board of Directors for financial assistance.”
More directly, at the hearing, Lara sought clarification: Would an approval “help you potentially make a successful request to the parent company for additional support?”
Krause, who said he would be the person officially tasked with making such a request, replied: “It would allow a positive sign that would show that this is a market that we can compete, generate a return in, and stay in—and give us a chance for consideration for the parent company. Yes.”
The idea of greater parental support beyond the reinsurance State Farm Mutual already extends to State Farm General seems to have originated with representatives of Consumer Watchdog, serving as intervenor representing the interests of the public, empowered by a decades-old law, Proposition 103. Several past announcements from Consumer Watchdog refer to the possibility, including a Feb. 26 media statement in which the consumer group’s executive director, Carmen Balber, said, “State Farm’s affiliate in Texas was supported by SFMAIC [State Farm Mutual Auto Insurance Company] following hurricane and other catastrophe losses. There has been no explanation as to why State Farm would treat California homeowners less fairly than Texas homeowners.”
The State Farm General executives respond to that in their March 11 letter.
“That example is actually instructive, as the rating environment there has in fact allowed that particular surplus note to be entirely repaid, with interest. Without realistic prospects for an affiliate to be able to stand on its own, parental support would merely temporarily mask whatever is contributing to its financial distress and the affiliate would before too long revert to where SFG is today,” the letter concludes.
Earlier portions of the letter address what State Farm describes as “the intervenor’s ongoing mischaracterizations and misunderstandings,” which the executives said they felt “compelled to correct.”
The intervenors “propound an alternate reality where property insurers are making enormous profits in California but are inexplicably pulling back from the market,” the letter says.
Among the Consumer Watchdog beliefs that State Farm execs and consumer representatives have been debating in dueling letters to Commissioner Lara is the idea that the reinsurance deals between the parent company and the California subsidiary are benefitting the parent to the detriment of California policyholders. As evidence of this, Consumer Watchdog added up reinsurance premiums paid to the parent and subtracted losses recovered for the years 2015-2024, tallying a $3 billion difference. Consumer Watchdog has also noted that State Farm General sent $1 billion in wildfire subrogation recoveries from 2017 and 2018 to the parent company as part of its reinsurance agreements—another sign of a bad deal for the California company.
“The fact that SFG paid more for reinsurance over an arbitrary time period than it received back in recoveries isn’t evidence of a ‘bad deal’ any more than is a homeowner paying for insurance even in years their house didn’t burn down—because no one can know in advance when it will. Otherwise, no one would buy insurance at all,” State Farm executives wrote in their letter to Commissioner Lara this week, going on to note the coverage of infrequent severe events in a marker of catastrophe reinsurance.
The letter also notes that premiums paid by the California company to the parent for reinsurance over the decade provided an average of $4.0 billion in annual coverage—and $8.8 billion in the most recent treaty year. “Based on market insights from our reinsurance broker, placing this much coverage with third-party reinsurers would be at a rate significantly higher than that charged by State Farm Mutual, if it could be placed at all under today’s difficult reinsurance market conditions in which many reinsurers are viewing CA wildfire as too volatile to allocate more capacity to the peril,” they wrote.
“It is because of reinsurance that SFG hasn’t already been forced to massively reduce its book of business,” the State Farm executives wrote to counter the intervenor’s assertions. “And it is because of reinsurance that SFG still has a chance to retain much of that business, assuming an emergency rate is approved.”
Later, the letter says, “Writing new policies doesn’t make any sense at this time. Having blamed SFG’s problems on growing too much without securing sufficient rate increases, the intervenor suggests the remedy is more of the same. 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.”
The letter is brief in dealing with more recent problems that Consumer Watchdog brought to Commissioner Lara’s attention—a video circulating on social media featuring a former executive offering a simplified view of the California ratemaking process to a citizen reporter working on behalf of O’Keefe Media Group, among other statements.
In the undercover video, Haden Kirkpatrick, the former vice president of Innovation at State Farm, responds to the O’Keefe Media Group reporter who observes that carriers have “pulled out of the California fire.”
“It seems like it’s all, I don’t know, orchestrated,” the reporter said, prompting Kirkpatrick to give a view of the give-and-take of the ratemaking process. “It kind of is, but not in the way that you would think,” he says. “Property prices in California appreciate more than 7 percent per year,” he says, likely alluding to the fact that intervenors are involved in the rate review process when carriers file for increases above 6.9 percent and informing the reporter that insurance is highly regulated in the state. Recognizing that the carrier will be short of funds if something happens, “we’ll go to the Department of Insurance and say we’re overexposed here, you have to let us catch up our rating… The Insurance Commissioner is an elected position in California. He’ll say ‘nah.’ And we’ll say, ‘OK, then we are going to cancel these policies.’”
Consumer Watchdog Litigation Director Will Pletcher said Kirkpatrick’s remarks “strongly suggest that policy cancellations are being wielded as a strategic bargaining tool rather than as a necessary response to financial risk.”
Continued Pletcher: “This contradicts the impression State Farm sought to convey at the [Feb. 26] meeting—that it would remain in the market if rate relief were granted, and calls into question the transparency and good faith of State Farm’s dealings with both regulators and policyholders.”
Responding to Consumer Watchdog’s interpretation of Kirkpatrick’s remarks from the hidden camera video, State Farm characterized them as “unofficial comments [made] in a personal setting from an individual no longer associated with any State Farm company.”
“This person was never an officer of SFG, never supervised any officers of SFG and was never involved in or had any responsibility for business decisions relating to SFG or its California operations, including anything to do with our pending rate requests or exposure reduction measures,” the March 11 letter from State Farm General executives to Lara states.
“SFG’s actions and communications 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.”
(Editor’s Note: As vice president of Strategy, Innovation & Venture Capital, Kirkpatrick directed strategic initiatives to future-proof the organization against disruptive threats, working on advanced tech R&D, new product and service development, and the deployment of a $200 million corporate venture capital fund. Among other projects, he spearheaded State Farm’s smart home telematics program, which he wrote about for Carrier Management in the article “The State Farm Vision: Ecosystem Capabilities for the Insurer of the Future“)
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