State Farm Credit Rating Slashed on $8.6 Billion LA Fire Loss
Written by Chriss W. Street
State Farm, the world’s largest property and casualty insurer, had its ‘AA' Ratings placed on “CreditWatch Negative for a multi-notch downgrade by Standard & Poors (S&P), due to a weakening capital position due to $8.6 billion in LA wildfireslosses.
The 103 year-old State Farm Guaranty Insurance Co. (SFGI) is estimated to have suffered a $7.6 billion property damage loss from the Los Angeles fires and another $1 billion loss associated with its share of the insolvency of California’s state-run Fair Plan.
The S&P report highlights that with 77% of SFGI’s $12 billion of annual insurance premiums at its California subsidiary were homeowner policies, the California Insurance Commissioner’s politically-motivated regulatory restrictions made it impossible for SFGI to raise homeowner premiums to justify insuring the risks from the latest wildfires.
SFGI over the past five years reported an average combined ratio of claims paid was 115.5% over premiums received. As a result, SFGI's risk-based reserves to pay claims was more than cut in half, from 501% in 2021 to 228% at year-end.
State Farm to avoid insolvency, refused last March to renew about 30,000 California homeowner property insurance policies. State Farm also exited its entire 42,000 commercial apartmentinsurance policy portfolio by the end of 2024. The move forced many canceled homeowners to get insurance policies from thestate-run Fair Plan.
State Farm has already paid out $1.75 billion on the 9,500 claims filed from the LA wildfires. SFGI estimates that pay-outs of about $7.6 billion, minus the $7.4 billion of reinsurance the company purchased, will cause a modest net loss of $212 million.
Despite reserve declines of $300 million in 2023, $400 million in 2024, and $212 million from the LA fires, SFGI would still have had a sustainable $800 million reserve. But State of California just informed State Farm that the company will be liable for another $1 billion assessment associated with the massive losses from the state-run Fair Plan.
S&P’s State Farm CreditWatch report warns ominously: “We remain deeply worried about State Farm General’s financial position, as pricing risks accurately in California remains challenging. As outlined in our emergency interim rate filing on February 3, immediate rate increases are essential to stabilizing State Farm General’s finances and preventing a potential rating downgrade. S&P’s ‘CreditWatch – Negative’ designation today underscores the urgency of this need.”
The 103-year-old company grew to be the world’s largest property and casualty insurer based on customer’s confidence in its ability to pay claims. Given that an S&P multi-notch credit downgrade would destroy customer confidence in their ability to pay claims, State Farm must raise new capital or terminate writing insurance policies in California.