March 30 2024 Author’s Note — This version includes substantial revisions from the initial version. The initial post indicated that State Farm’s Homeowners insurance took a downgrade across the US. That is not correct. I have revised this article to reflect that truth. This revision required me to rewrite substantial parts of the article. I apologize for the initial inaccuracies.
On March 6th I wrote a LinkedIn post after State Farm’s financial reports were reported.
“Like a good neighbor, State Farm is asking for a loan, getting a second mortgage on their house, and considering moving to a less expensive neighborhood.
State Farm posted a $14 billion underwriting loss in 2023.”
At that time, I was being sarcastic. Today I’m an alarmist.
State Farm is a behemoth. I thought there was no way they could be in trouble. According to the National Association of Insurance Commissioners 2023 market share report, they are the largest homeowners insurance carrier in the US and hold a nearly 18% market share. They are the largest overall P&C insurer in the US across all lines. They hold a 9.76% market share.
On March 28th, AM Best downgraded State Farm General from “A” to “B”. State Farm General is their Homeowners product in the state of California. It is separate from their Auto product.
I’m of the opinion that this is the biggest insurance news since the AIG bailout, and I can’t understand why the Wall Street Journal isn’t reporting it in the business section on the 29th.
Many banks don’t like to offer loans unless the insurance company has an “A-“ rating or better. In the state of California, State Farm just had their homeowners insurance carrier downgraded below the acceptable threshold.
This isn’t just big news, it’s a seismic shift.
Let me talk through some of the consequences from here:
1. Will other State Farm affiliates have the same problem with AM Best?
State Farm makes the following disclosure on their website:
“The State Farm insurance operations consist of fourteen P-C companies and two life companies, each of which is managed on an individual affiliate level.”
Also:
“Although financial information is presented on a group/line of business basis, State Farm Mutual Automobile Insurance Company and each of its affiliates must meet solvency and regulatory requirements on an individual entity-by-entity basis without regard to the solvency or financial condition of any other affiliated entity.”
Here are AM Best’s notes on the downgrade.
“The Credit Ratings (ratings) reflect State Farm General’s balance sheet strength, which AM Best assesses as weak, as well as its marginal operating performance, neutral business profile and appropriate enterprise risk management (ERM). The ratings also reflect lift, as defined within Best’s Credit Rating Methodology, from its parent, State Farm Mutual Automobile Insurance Company. The rating downgrades reflect continued deterioration in State Farm General’s policyholder surplus at Dec. 31, 2023, which resulted in a corresponding decline in overall risk-adjusted capitalization, as measured by Best’s Capital Adequacy Ratio (BCAR), and weakening balance sheet metrics. A contributing factor to this decline was sharp increases in claim severity affecting the company’s umbrella and commercial multi-peril lines of business. The continuation of the negative outlook on the Long-Term ICR reflects the uncertainty of the company’s ability to stabilize and strengthen its risk-adjusted capitalization given ongoing challenges regarding profitability and internal capital generation, trending adverse reserve development occurring on prior accident years, and the challenging regulatory environment within California’s marketplace that have constrained the ability of State Farm General (as well as its industry peers) to increase premium rates in a timely fashion. While management is taking corrective actions to stabilize its balance sheet strength, these actions will need time to gain positive traction over the intermediate term.”
Let me decode this a little bit. AM Best just said that State Farm General has a weak balance sheet. They gave State Farm the benefit of being associated with its parent company, State Farm Mutual Auto, but it still has poor performance and lacks appropriate risk management.
Everyone is having trouble making money in California. AM Best concedes this.
But is State Farm General the only affiliate that is struggling from a weak balance sheet? Inappropriate risk management?
2. What will banks do with California customers that have State Farm homeowners insurance?
Banks will need to evaluate whether they can accept State Farm as a viable homeowners insurance carrier.
Pause and let that sink in. It sounds crazy. It’s so crazy, let me repeat it.
Banks will need to evaluate whether they can accept State Farm as a viable homeowners insurance carrier.
12% of the US population lives in California. Is it a stretch to think that State Farm has more than 1,000,000 homeowners and renters policies in California? Are banks going to compel these families to move their homeowners insurance?
Are banks going to accept State Farm as a viable insurance carrier for new loans?
3. This will impact consumer’s chance to buy a home across the nation.
Anyone that has followed the insurance marketplace over the last 3 years knows that personal home and auto insurance companies have been getting killed. Straight up murdered.
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The average company is losing $.10 for every $1 of insurance they sell.
Not only is the biggest carrier in the US taking a body blow, but there also isn’t another carrier that can take their place.
People will be unable to buy a home simply because they either can’t afford the insurance, or because it’s not available in their region. This has implications for the real estate market and banks.
4. Which insurance carrier is next?
In 2008, the financial crisis had a viral effect. When there is a sickness in the banking system, it’s not usually limited to one institution.
The underwriting issues State Farm encountered are not unique to their business. Every home and auto insurance carrier has felt the pressures of inflation, catastrophic property claims, and increased litigation costs. Geico is the only personal auto insurance carrier I know about that has managed to be profitable on personal auto insurance.
Which means, State Farm General may not be the last major insurance company to be downgraded. What happens if Allstate, or Nationwide is downgraded?
5. State Farm’s days as the number one insurance carrier in the US are numbered.
According to S&P Global, State Farm currently has $77.59 Billion in P&C premiums. Berkshire Hathaway has $71.84 Billion.
State Farm’s “B” rating on their Home insurance product in California is going to impact their ability to grow.
It’s not just that hundreds of thousands of people will move their home insurance, they’re going to move their auto insurance as well.
I’ve been talking to people about multi-policy discounts for 20 years. I sold home and auto insurance company for a summer job at Bitner Henry. Anyone that has spent time with insurance knows that keeping Home and Auto insurance together is better for profitability, and better for the customer to offer advantageous rates.
State Farm just lost half that equation in 12% of the US market.
As the home and auto go, so will the life and small business insurance.
Berkshire on the other hand, is doing just fine.
6. This is a structural shift for insurance distribution
The Home and Auto insurance marketplace has moved toward a streamlined and commoditized process. State Farm has been a stalwart holdout for the local, hometown agent. Their names are on billboards. They have red brick buildings with red steel roofs that are reminiscent of 1950’s America.
Companies like Progressive and Geico that emphasize independent and online distribution are catching up and will pass them. Other companies will take note.
There will be increasing pressure to move home and auto insurance to be purchased online without a costly agent. It’s the only way to be profitable on these lines of business.
7. There will be a major shift in the insurance workforce
The AM Best downgrade was announced one week after State Farm announced it was cancelling 72,000 homeowners policies in California. More non-renewals will be coming.
I will be shocked if layoffs don’t happen soon. How could they not? They need to increase their surplus. They need to find a way to profitably write insurance. They need to find a way to cut expenses. And they need to do this right away.
The insurance workforce that has depended on the State Farm way of life is going to have to find a new home. People that have made their living selling one captive product will need to learn to be independent agents. Auditors, underwriters, and adjusters will all have to move.
There is going to be a workforce migration.
8. I am deeply saddened for all the lifetime State Farm agents
There is a population of State Farm Agents that spent their lifetime building a book of business. Their life work just had a hatchet taken to it.
No one should be gleeful about this part of the business. They didn’t do anything wrong.
I love to win, but I don’t love to win like this.
Conclusion
The game just changed. I think it changed forever, and I think we have only started to see the consequences.
