California Insurance Commissioner Ricardo Lara provisionally approved State Farm General’s request for a 22 percent interim rate hike, the California Department of Insurance announced on Friday.

The approval is on the provision that the company can justify the hike with data in a public hearing scheduled for April 8.

Ahead of the decision, company executives and representatives of the consumer group Consumer Watchdog pled their opposing cases in letters to Lara.

Related article: State Farm, Consumer Group Battle Ahead of Commish Decision

Lara in mid-February opted not to approve the rate request from State Farm General, State Farm’s California homeowners insurer, instead calling a meeting with the carrier to get some answers about the carrier’s financial situation.

Read related article, “State Farm Stronger as Underwriting Losses Shrink—But Not in California” for meeting details.

The carrier, the state’s top homeowners insurer, is partly blaming the devastating Los Angeles wildfires for the request. As of Feb. 14, the carrier reported roughly 11,400 total home and auto claims, paying out more than $1.35 billion. The insurance giant pointed to the potential a deteriorating capital position, which could prompt S&P Global Ratings to downgrade the California subsidiary’s financial strength rating, in arguing for the emergency rate relief.

Related article: S&P Puts State Farm General Ratings on CreditWatch

Insurance companies have so far paid out more than $12 billion for losses from the two biggest of the L.A.-area wildfires that swept through the region and destroyed tens of thousands of homes in January.

State Farm’s requested emergency rate increases amount to 21.8 percent for homeowners, 15 percent for renters, 15 percent for condominium and 38 percent for rental dwelling. Despite multiple approved rate changes, State Farm stopped writing new policies in California and non-renewed thousands of existing policies.

State Farm said at the time of its request that the increase is needed to align cost and risk and enable State Farm to rebuild capital. Over the last nine years, the lack of alignment has meant that for every $1 collected in premium, the carrier has spent $1.26, resulting in more than $5 billion in cumulative underwriting losses, according to State Farm

In May 2023, State Farm stopped writing any new policies in California. Several other large carriers made similar moves around that time.

Lara this week also called on State Farm to halt non-renewals and pursue a $500 million capital infusion from its parent company to restore financial stability. He presented this proposal during a meeting with State Farm representatives, the CDI and the intervenor in the matter.

Referring to the requested capital infusion from State Farm Mutual, Commissioner Lara said, “I understand this is a significant request, one that I don’t make lightly either. [But] our consumers are going to have another rate increase, and we need to demonstrate—we need to see that State Farm is willing to also put some skin in the game,” he said, according to a transcript of this week’s informal meeting.

Dan Krause, president and chief executive officer of State Farm General, said that with the rate approval, he believes that State Farm General “could refrain from any additional non-tenant homeowner block renewals for at least one year.”

“That’s something that we would be willing to offer, at least initially,” he said, according to the transcript of a March 11 meeting provided by CDI .

Additionally, Krause reported that the parent company, State Farm Mutual board, has just concluded a meeting as well. “We did receive confirmation that the State Farm Mutual board is willing to consider capital support if our interim rate request is approved,” he stated, adding that his “informed belief” is that the parent will approve a surplus note of at least $250 million.

During the Feb. 26 meeting, State Farm informed the commissioner that while it can cover claims from L.A. wildfires, the disaster has worsened its financial condition.

“To resolve this matter, I am ordering State Farm to respond to questions in an official hearing, promoting transparency and a path forward,” Lara stated. “It is evident that other California insurers are unable to absorb State Farm’s existing customers, which poses a significant risk of these customers ending up on the FAIR Plan—a scenario we all wish to avoid as my Sustainable Insurance Strategy is implemented.”

Consumer Watchdog in a statement in response to the commissioner’s decision noted that it is provisional and not an actual approval.

“The commissioner called a hearing as Consumer Watchdog has been urging since State Farm made its unprecedented request for a $900 million ’emergency’ rate hike,” the statement reads. “It’s a victory for consumers that State Farm will have to make its case in a public hearing before a judge, and the judge will decide if a rate hike is justified. The company has so far failed to back up its request, and unless State Farm proves otherwise the outcome of a hearing should be a rejection.”

For its part, State Farm posted this statement on its website in response to CDI’s announcement:

“It’s time for certainty in the California insurance market for our customers. The provisional nature of today’s decision does not improve that certainty but it’s a step in the right direction.”

“We are moving forward with implementing this provisionally approved rate and will continue to work with the California Department of Insurance for a sustainable future for the California insurance market.”

“State Farm General has worked openly and honestly with all parties in this process. In addition, State Farm General will continue to monitor capacity to support its risks and build sufficient capital for the future.”

Commissioner Lara presented the proposal of a provisional rate increase during an informal meeting on March 11. According to a transcript of that meeting provided by CDI, the provisional nature of the approval means that the State Farm will be required to issue full refunds with interest if it fails to substantiate the validity of its rate.

State Farm is the state’s largest homeowners insurer. Following State Farm, the state’s biggest homeowners insurers are Farmers Insurance Group, Liberty Mutual Insurance Companies, CSAA Insurance Group, Mercury Insurance Group, Allstate Insurance Group, Auto Club Enterprises, USAA Group and Travelers.

This article was previously published on Insurance Journal. Reporter Don Jergler is the West Coast editor of Insurance Journal. Additional reporting by Carrier Management Editor Susanne Sclafane.

Related article detailing the arguments Commissioner Lara had to weigh: State Farm, Consumer Group Battle Ahead of Commish Decision