For decades, State Farm has been one of the most recognized and trusted insurance brands in the United States. With its ubiquitous advertising and promises of being “like a good neighbor,” it has long cultivated an image of financial strength and stability. However, an article in Claims Journal, State Farm Seeking Interim 22% Rate Hike for Homeowners in Wake of LA Wildfires, caught my attention. What are the true reasons State Farm is asking for an emergency rate increase?
I asked one of our firm’s law librarians, Jennifer Dabbs, to find the letter asking for the increase. She provided me a letter all of you can read from State Farm General Insurance Company (SFG) to California’s Insurance Commissioner, pleading for emergency approval of a rate increase. It raises significant concerns about State Farm. If one of the nation’s largest insurers is struggling so severely in one of its key markets, what does that say about its overall financial health?
Even more troubling, an in-depth look at State Farm’s corporate structure reveals that while the parent company, State Farm Mutual Automobile Insurance Company (State Farm Mutual), continues to grow its net worth, its regional subsidiaries—including SFG—are facing substantial losses and so is its parent company.
State Farm is no longer a single monolithic company. Instead, it operates through a complex network of state-specific subsidiaries, each designed to handle lines of business in different regulatory environments. For example, in three large states that have significant risks of loss, State Farm has set up different subsidiaries:
State Farm General Insurance Company (SFG) is the subsidiary responsible for writing homeowners insurance in California.
State Farm Florida Insurance Company was created to manage risks in Florida, a state notorious for high property insurance losses.
State Farm Lloyds Texas serves a similar role in Texas, allowing the company to operate under a different regulatory framework.
These subsidiaries allow State Farm to shield its primary entity, State Farm Mutual, from certain financial risks and losses incurred by individual state operations. This structure also provides the flexibility to enter or exit markets based on profitability, leaving state-specific subsidiaries to bear the brunt of regulatory challenges and underwriting volatility. It also allows the subsidiaries to pay monies to other State Farm entities as expenses or contributions to capital.
Insurance commissioners should deeply analyze all State Farm management contracts to see what ties the subsidiaries have with the parent company and what ties the managers of State Farm have to the parent and subsidiaries. Similar to other companies, it should ask for executive management agreements and contracts.
The recent request from SFG for an emergency rate hike underscores the fragility of this setup. The letter claims that the California subsidiary has suffered staggering underwriting losses, paying out $1.26 in claims and expenses for every $1.00 collected in premiums over the past nine years. The letter states in part:
“State Farm has served the customers of California for nearly 100 years and our intention is to continue serving them for many more. As the largest insurance group in the state, we appreciate all you and your staff are doing to help consumers navigate the aftermath of last month’s horrific Los Angeles wildfires. Thousands of State Farm agents, agent team members and employees are on the ground and assisting customers virtually in the wake of this tragedy. As of February 1st, State Farm General Insurance Company1 (SFG) has received more than 8,700 claims and has already paid over $1 billion to customers. We know we will ultimately pay out significantly more, as these fires will collectively be the costliest in the history of the company. Although reinsurance will assist us in paying what we owe to customers, the costs of these fires will further deplete capital from SFG. Last year, one rating agency downgraded SFG and, with further capital deterioration as a result of the fires, additional downgrades could follow. If that were to happen, customers with a mortgage might not be able to use State Farm General insurance as collateral backing for their mortgage. With nearly three million policies in force, including more than one million homeowners customers, SFG needs your urgent assistance in the form of emergency interim approval of additional rate to help avert a dire situation for our customers and the insurance market in the state of California.
…
… Further, following the recent wildfires, homeowners non-renewals in Los Angeles County were paused. Any of these homeowner policies which had pended non-renewals in Los Angeles County that were on the books on January 7th will have an option to renew with SFG. The high concentrations of risk covered by SFG in the fire footprint will generate a direct loss many times larger than the company’s pre-event surplus… State Farm Mutual Automobile Insurance Company (‘State Farm Mutual’) as the primary reinsurer. State Farm Mutual provides the majority of SFG’s reinsurance cover. External reinsurer capacity to underwrite significantly greater portions of SFG’s massive risk portfolio at a reasonable price (or possibly, at any price) does not exist.
… your immediate approval of SFG’s interim rate request is an indispensable and critical first step to eventually restoring the company’s financial strength, potentially preserving coverage for millions of SFG’s remaining customers, and working toward a more sustainable insurance environment in California.”
While this is concerning, a bigger question looms: Is this problem isolated to SFG, or does it reflect a larger pattern across State Farm’s network? Despite significant underwriting losses, State Farm Mutual’s net worth continues to grow—a perplexing reality that demands closer scrutiny. State Farm policyholders are often viewed in the aggregate, meaning that they also have interests in the policies of auto and life. How do they factor into the overall profitability? State Farm said nothing about that in its letter.
In 2023, State Farm Mutual reported an underwriting loss of $14.1 billion, an increase from its $13.2 billion loss in 2022. The main drivers of these losses were increased auto and homeowners claims, along with severe catastrophe-related payouts. However, despite these massive losses on paper, the company’s net worth still rose from $131.2 billion in 2022 to $134.8 billion in 2023. This growth was largely fueled by investment gains, particularly in the stock market.
This raises an important question: Is State Farm Mutual making money from its core insurance business, or is it merely relying on investment income to offset massive underwriting losses? While investment gains have helped prop up its financial position, this strategy can be volatile and unsustainable in the long run—especially if market conditions change.
State Farm’s use of state-specific subsidiaries, such as SFG in California, has drawn criticism over the years. Some industry experts argue that this corporate structuring is misleading, as it allows the parent company to claim financial strength while its subsidiaries report dire financial conditions.
California’s insurance commissioner should deeply investigate the truth of matters asserted regarding State Farm’s financial position. For instance, Maurice “Hank” Greenberg, former CEO of American International Group (AIG), was associated with entities such as Starr International Company (SICO) and C.V. Starr & Co., which played significant roles in compensating AIG executives. These companies, while separate from AIG, were instrumental in managing compensation programs that benefited AIG’s leadership. Do similar entities exist with State Farm?
SICO, for instance, held substantial shares of AIG stock and administered a deferred compensation program for select AIG employees. This program distributed AIG shares to executives, serving both as a retention tool and a reward mechanism. However, the specifics of these compensation arrangements, including the magnitude of the stock distributions, were not always fully transparent in AIG’s public disclosures. This opacity led to legal disputes, with AIG alleging that SICO, under Greenberg’s direction, had inappropriately diverted shares intended for executive compensation.
By compartmentalizing its business into separate legal entities, State Farm Mutual is able to insulate itself from the regulatory burdens and financial instability of individual state markets. When a subsidiary like SFG experiences financial distress, State Farm Mutual can point to that subsidiary’s balance sheet rather than its own, effectively distancing itself from responsibility. This raises concerns about transparency—particularly for policyholders who believe they are insured by a financially stable entity when, in reality, the subsidiary responsible for their policy may be teetering on the edge of insolvency.
While much of the current discussion centers on California, similar issues have surfaced in other states. In Florida, State Farm Florida has faced major losses due to the state’s severe hurricane risk, while State Farm Lloyds Texas has had to navigate a highly volatile homeowners insurance market.
The central issue is whether State Farm’s corporate structure is designed to weather difficult times—or simply to create the illusion of financial security while shifting liabilities to regional subsidiaries. If the latter is true, it could mean policyholders across the country are at greater risk than they realize or that they are being played regarding improper requests for rate increases.
The bottom line is that State Farm’s reputation as a rock-solid insurer is now under scrutiny. The emergency rate request from SFG in California suggests serious financial instability, while State Farm Mutual’s growing net worth despite massive underwriting losses raises uncomfortable questions about its business model.
Is State Farm still the stable giant it claims to be, or is it simply leveraging a corporate structure that allows it to appear financially strong while its subsidiaries absorb the damage? If California’s troubles are just the tip of the iceberg, State Farm policyholders nationwide may have reason to be concerned.
Thought For The Day
“We’re going to have a fundamental societal reset and that’s going to impact what our customers’ expectations are. The magnitude of that and the permanency of that are questions I do not know the answers to.”
—Michael Tipsord, April 2020 and Former CEO of State Farm Mutual
