Editor’s note: A shorter version of this story appeared on the Business page last week. With new details and comments, we are republishing it for our Sunday-only readers.

State Farm General last week was the first property insurer in California to request a 22% emergency rate hike as it looks to cover losses from the Los Angeles County wildfires and stop its “financial deterioration,” the company wrote in a letter filed with the state’s insurance commission.

The state’s largest property insurer and a subsidiary State Farm Mutual Automobile Insurance Co. said it has received more than 8,700 claims from the Jan. 7 fires in Pacific Palisades and Altadena areas. State Farm said it already has paid more than $1 billion to customers.

The company is seeing signs of rapid deterioration of its capital structure, according to the letter sent last Monday to Insurance Commissioner Ricardo Lara by Dan Krause, State Farm’s president and chief executive officer.

Krause wants Lara to take “emergency action” to help protect California’s fragile insurance market by immediately approving interim rate increases on its filings, with rates to become effective May 1. Besides the average 22% rate increase in homeowners’ insurance policies, State Farm requested a 15% hike for renters, 15% for condo owners and 38% for rental dwellings.

“We know we will ultimately pay out more, as those fires will collectively be the costliest in the history of the company,” wrote Krause. The rate increases are needed to help avert a dire situation for more than 2.8 million policies issued by State Farm, including 1 million homeowners, the letter states.

Wildfire costs will further downgrade the company’s debt ratings from Wall Street credit agencies, which are expected if the rate increases aren’t approved, the letter further states.

Insurance Department spokesman Gabriel Sanchez said Monday that State Farm’s latest rate filing raises “serious questions” about the insurer’s financial condition.

“State Farm General continues to collect insurance premiums paid by Californians and pay out claims to its existing customers,” Sanchez said in a statement. “There is no law or regulation that prevents an insurance company from continuing to bill customers for premiums in a wildfire emergency. The commissioner’s moratorium authority only applies to cancellations and non-renewals.”

State Farm’s request will not be an easy one to decide, Sanchez said.

With 9.1% of the California’s property market share in 2023, State Farm wrote more than $8.7 billion worth of premiums, according to the California Department of Insurance.

In May 2023, State Farm stopped writing new business, homeowners, and other property and casualty insurance in the state, with an exception for auto policies.

Breaking the bank

However, Consumer Watchdog — the group behind a 1988 insurance regulatory reform initiative — called State Farm’s 22% rate hike request “outrageous” and accused the company of “trying to line its bank accounts.”

The proposed hike will impact “homeowners in other parts of the state who had no part in this disaster,” said Consumer Watchdog Executive Director Carmen Balber.

“Our biggest concern immediately was that State Farm was requesting this emergency rate increase with no data to back up its request,” Balber said. “The company said that it would provide data in a couple of days to back up what it was asking for. But regardless of what that data showed, the company is still asking for that immediate increase.”

California is in the midst of a regulatory reform designed to stem an exodus of insurers by basing rate hikes on future estimates of damage rather than actual fire losses over past decades.

However, the old insurance rules may soon justify enormous rate hikes because tens of billions of dollars in L.A. County wildfire losses soon will be part of that history.

“If you allow us to include our estimated losses from the Los Angeles fires, that dramatically” affects future insurance rates, said Rex Frazier, president of the Personal Insurance Federation of California. “What State Farm is saying is, ‘Hey, under your rules, with our expected losses from this fire, we can justify a 22% increase.’”

State Farm has promised to reimburse policyholders if a detailed examination of this hike shows it isn’t justified, Frazier said.

As of Thursday, Jan. 30, the L.A. County fires generated 31,210 claims, just under half of which have received $4.2 billion in partial payments so far, the California Department of Insurance reported.

Sounding the alarm

Nearly a year ago, State Farm noted the “swift capital depletion” was “an alarm signaling the grave need for rapid and transformational action,” and “rapid review and approval of currently pending and future rate filings,” according to State Farm’s letter sent Monday to Lara.

In March 2024, the company cited wildfire risks, reconstruction costs and state regulations as to why it would not renew over 72,000 home, apartment, condo and other property policies.

Last June, State Farm requested a 30% rate hike for its homeowners policies, a 36% increase for condo owners and a 52% increase for renters. It is still being reviewed.

Sanchez said that his department plans to respond with “urgency and transparency” to recommend a course of action in order to protect “the integrity” of the state’s residential property insurance market.

Last year’s three rate filings were made under a little known “variance” in rate making formulas that insurance companies can use when they believe their solvency is threatened, Sanchez said.

He said that Lara has the authority to order a rate hearing if an agreement with State Farm can’t be reached. The commission staff plans to make an “urgent formal recommendation” to Lara, he said.

Southern California News Group staff writer Jeff Collins contributed to this report.