California property insurance markets will continue to face price and availability pressures: ALIRT
California property insurance markets will continue to face price and availability pressures: ALIRT

After State Farm General Insurance Company (SFGIC) announced that it will drop more property risks in California starting in mid-2024, ALIRT Insurance Research noted that the state’s homeowners and commercial property insurance markets are likely to continue to face price and availability pressures.

California property insurance markets will continue to face price and availability pressures: ALIRTSFGIC’s recent underwriting includes approximately 30,000 mostly non-commercial risks and 42,000 commercial apartment policies.

This follows the firm’s announcement in May 2023 that it was ceasing new non-auto property and casualty business in California, citing exposure issues and a challenging reinsurance market environment.

Writing in a press release, SFGIC said it is taking these new steps to “ensure its long-term sustainability in California,” factoring in economic inflation, catastrophe exposure, reinsurance costs and regulatory hurdles.

According to ALIRT, the regulatory hurdle factor “raised the head” of the CA Division of Insurance (CDI), which responded in a press statement, noting, “One of our roles as an insurance regulator is to hold insurance companies accountable for their words and deeds. Today’s decision by State Farm General raises serious questions about its financial health — questions that the company must answer to regulators.”

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ALIRT further noted that this new round of market withdrawals comes as a result of CDI’s recently released “Sustainable Insurance Strategy,” which it called the biggest insurance reform since Proposition 103 in 1988.

“CDI may feel, in some ways, betrayed by SFGIC’s announcement, as it has just introduced more insurer-friendly timescales and rate review procedures, as well as changes to regulations around the use of catastrophe modeling in determining the rates,” ALIRT said.

The firm continued, “With this as background, we are sharing with you the latest ALIRT analysis for SFGIC, which is State Farm Group’s specialty property insurer for California.

“With essentially all of SFGIC’s direct premiums being government-sourced (and 88% of those reflecting property risks), this is an excellent indicator of what other property insurers are likely to face in this market.

“SFGIC’s overall ALIRT score fell 13 points in 2023 to well below the composite 40, putting it right on the edge of the historically normal ALIRT range of 39-61. In the previous decade, SFGIC scores ranged between the 50s and 60s.

Meanwhile, ALIRT also noted that despite significant direct premium growth over the past five years, SFGIC posted underwriting losses in four of those five years. The average composite ratio during this period was 114% versus 103% for the ALIRT Personal Lines Composite.

“SFGIC’s underwriting was particularly poor in 2023, with the company reporting a loss ratio of 108% (combined ratio of 138%), reflecting both poor accident year results (combined accident year ratio of 122%), as well as the significant strengthening of the previous year’s reserves of US$470 million, with additions for each of the last 10 accident years,” ALIRT explained.

The firm continued: “This underwriting loss would have been even worse had SFGIC not ceded nearly 20% of its direct written premium to parent State Farm Mutual Auto Insurance Company.

“The resulting large operating loss for the year contributed to a 40% decline in SFGIC’s policyholder surplus as at 12/31/2023.”

“This blow to surplus, combined with the aforementioned strong direct premium growth, resulted in a sharp jump in net premium leverage and a risk-based capital ratio at the end of 2023 of just 114%, almost 1/3 of that of current personal lines composite.

“Readers are reminded that a breach of the Company Action Level (CAL) of 100% in the risk-based capital regime could result in regulators requiring a corrective financial plan, an outcome previously unthinkable for a subsidiary of a major a personal organization such as State Farm.

“Drawing similar conclusions from the ALIRT results of other insurance groups that have limited exposure to the California homeowner insurance market (eg, Farmers, Allstate, USAA, Travelers, Nationwide and Chubb) is more difficult, whereas none of these groups has a single insurer that is so concentrated by state and/or line of business.

“For the time being, however, California’s homeowner and commercial insurance markets are likely to continue to face price and availability pressures.”

“It is our belief, having analyzed the declining ALIRT results for homeowners and commercial multi-risk professionals writing businesses in other geographies, that this problem is not limited to the Golden State.”

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