0:00

Sandra, can you

0:02

tell me about your

0:04

house in LA? What

0:06

words would you use

0:09

to describe it?

0:11

I raised four children

0:13

there. It was homey.

0:16

It had a view

0:18

of the ocean. It

0:20

had, you know, a deck

0:23

on top. It was home.

0:25

You know, it was home.

0:28

And the house she's talking

0:30

about was in the Pacific

0:32

Palisades neighborhood in Los Angeles.

0:34

You must have so many, but

0:37

do you have a favorite memory

0:39

of the place? You know, it's

0:41

just so hard to say. It's

0:43

having, when the kids would have

0:46

friends over, that was pretty special,

0:48

but they would do that. And

0:50

then also, like, we had, we

0:52

had, um, French windows that opened up

0:55

and I had a fountain because I

0:57

love the sound of water and

0:59

that's a very strong memory for

1:01

me. Sandra and her family lived

1:03

in that house for 38 years

1:05

and the whole time the

1:07

property was covered by California's

1:10

biggest insurer, state farm, that

1:12

was until last year. And then

1:14

in August I think it was

1:16

we got a letter from them

1:18

saying that you were being dropped.

1:20

And we were going to be

1:23

dropped November 25th was the date.

1:25

November 25th, just six

1:27

weeks before fires devastated

1:30

LA, and burned down

1:32

Sandra's home. Thousands of

1:35

California homeowners have been

1:37

dropped by state farm in

1:39

the past few months. Many

1:41

of them, like Sandra, live

1:44

in areas affected by the

1:46

fires. People should know what

1:48

state farm did. Because we are,

1:50

you know, many people in our area

1:53

have State Farm and we trusted them.

1:55

State Farm's decision forced many

1:57

homeowners to enroll in an

2:00

already... stretched insurance program

2:02

back by the state

2:04

and it put even

2:07

more pressure on California's

2:10

broken insurance market. Welcome

2:12

to the journal, our

2:15

show about money, business,

2:17

and power. I'm Jessica

2:20

Mendoza. It's Wednesday, February

2:22

19th. and California's home

2:25

insurance crisis. Do you

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all-one, all-one, all-to-to-one Did

4:15

you have any challenges when it

4:17

came to ensuring your home? Oh

4:19

no! The house is a very

4:21

homey kind of town. Everybody uses

4:23

the services of the town. And

4:25

there was a stay farm agent

4:28

and someone told us, yeah, I

4:30

think our realtor when we brought

4:32

the house said contact him and

4:34

I did and we set it

4:36

up with him. And they had

4:38

all, they had our cars and

4:41

I had the house and he

4:43

never had a problem, wasn't super

4:45

expensive. They were very responsive. For

4:47

years, Sandra was happy on State

4:49

Farm. She knew her agent by

4:51

name, plus State Farm kept Sandra's

4:54

policy inexpensive for decades. Was the

4:56

risk of fire something you thought

4:58

about very much living in the

5:00

Palisades? You know, we were on

5:02

a hill, it's true, but there

5:04

was never a fire there. And

5:07

when they would say you'd need

5:09

to evacuate, it would never be

5:11

because of our area, really. It

5:13

would be, you know, the next

5:15

city would be Malibu. State Farm

5:17

is so we never felt a

5:20

personal risk. State Farm is the

5:22

biggest home in auto insurer in

5:24

the country with more than 90

5:26

million customers. Its California subsidiary has

5:28

the largest market share of any

5:30

insurer in the state covering a

5:33

million home policies. And part of

5:35

why State Farm is so dominant

5:37

is that it has expanded in

5:39

the state while other companies have

5:41

retreated. So other companies like all

5:43

state travelers were pulling back from

5:46

there. They were looking at very

5:48

rapidly rising inflation, they were looking

5:50

at much higher catastrophe risks, and

5:52

the insurers just looked at it

5:54

all around and said, this isn't

5:56

working for us. That's our colleague

5:59

Gene Eaglesham. But State Farm after

6:01

the pandemic... kept on selling in

6:03

these high-risk regions, and we talked

6:05

to lots of independent insurance agents,

6:08

rival agents, and they

6:10

all said they were incredibly

6:12

surprised to see that State

6:14

Farm would agree to ensure

6:17

very high-risk properties. In other words,

6:19

inexplicably, State Farm was

6:21

there. Like a good neighbor, State

6:24

Farm is there. But it turned

6:26

out State Farm couldn't afford

6:28

to be there. Through her reporting,

6:30

Jean found that while the

6:32

company was aggressively selling policies

6:35

at low rates, internally red

6:37

flags were waving. The company was

6:39

taking on too much risk, and

6:41

they needed to dramatically raise their

6:43

rates, but they couldn't. In

6:45

California, insurance companies can only

6:48

increase rates with the approval

6:50

of state regulators. And certainly

6:53

in 2021, 2022, We found

6:55

State Farm's own internal indications

6:57

were that they should have been

6:59

asking for very big rate increases

7:01

to match the kind of risks that

7:04

they were adding up. So they should

7:06

have been asking for 20, 30 percent

7:08

or more, but they kept asking

7:10

for 6.9 percent. A 6.9 percent

7:12

rate increase was the most

7:14

that State Farm could ask

7:17

for without risking a public

7:19

hearing from the California insurance

7:21

regulators. So you had this old

7:23

system where State Farm, they're

7:25

increasing risks, they're putting very

7:28

low rate increases, and they're

7:30

taking a new business that's

7:32

really, effectively they're not charging

7:35

enough for. State Farm says that its

7:37

rate requests were made to match price

7:39

to risk. It added that over

7:42

the past decade in California,

7:44

the company has tried to

7:46

quote, responsibly limit overexposure in

7:48

high-risk areas. So... Why did State

7:51

Farm stay so aggressive in

7:53

California, knowing that it was

7:55

costing their subsidiary like that? It's

7:58

really not clear why they were so...

8:00

slow to turn around and stop

8:02

writing new business and pull

8:04

back. I mean, I think

8:06

the company itself would argue

8:08

that they're owned by policyholders,

8:10

not by public shareholders, and

8:12

so they would say we

8:15

like to stay in places

8:17

as long as we can.

8:19

So they would sort of

8:21

portray as a sign of

8:23

their loyalty, if you like,

8:25

to the market. Independent agents

8:27

said to us they don't

8:29

understand at all. what State

8:31

Farm was doing in those

8:33

years. In 2023 State Farm's

8:35

era of expansion came to

8:38

an end with a change

8:40

in leadership. The California subsidiary

8:42

got a new chief executive

8:44

Denise Hardin. She saw the

8:46

risk State Farm was exposed

8:48

to and decided it was

8:50

time to play hardball. Hardin

8:52

went to the California regulators

8:54

asking for a rate increase

8:56

of 28%. It's a shockingly

8:59

high level. in the context

9:01

of the California market. For

9:03

the biggest insurer in that

9:05

market to say we need

9:07

28% just showed how serious

9:09

things were. And then in

9:11

May 2023, State Farm pulled

9:13

back on new home insurance

9:15

policies. The move put more

9:17

pressure on regulators. One former

9:20

insurance commissioner that Gene spoke

9:22

to described the move as

9:24

quote, crossing the Rubicon. State

9:26

Farm just announced it is

9:28

stop selling new home and

9:30

business policies in our state.

9:32

The new policy went into

9:34

effect Saturday. The insurance company

9:36

cited wildfire risks and the

9:38

skyrocketing costs of construction. State

9:40

Farm's announcement was a blow

9:43

to California's insurance market. And

9:45

the regulators were faced with

9:47

a decision. They really had

9:49

to act. So in the

9:51

fall of that year, we

9:53

saw the regulator. essentially say

9:55

I'm going to give the

9:57

insurers pretty much everything on

9:59

their wish list. That wish

10:01

list included approving much bigger

10:04

rate increases for the state's

10:06

insurance companies. The regulators also

10:08

said that state farm could

10:10

raise their rates by 20

10:12

percent. But it still wasn't

10:14

enough for state farm. In

10:16

March 2024, they announced that

10:18

they would not be renewing

10:20

policies for 30,000 homeowners in

10:22

California. Their argument was, we

10:24

just have too much risk

10:27

on our books. We're still

10:29

making a loss on every

10:31

policy we sell. We have

10:33

to take action now. State

10:35

Farm's decision left customers scrambling.

10:37

Just months later, the fires

10:39

hit, and the risk that

10:41

State Farm had unloaded suddenly

10:43

became California's problem. That's next.

10:54

This episode of The Journal is

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brought to you by Global X.

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18:02

quote, the burden is on state farm

18:04

to show why this is needed now.

18:06

State farm has not met its burden.

18:08

State farm has been asked to

18:10

make its case at a meeting next

18:13

week. After the fires, Sandra and

18:15

her husband decided to accelerate

18:17

a plan to retire in

18:19

Hawaii. They'd plan to rent

18:21

out their palisades home. Now,

18:23

they're wondering what to do

18:25

with their burned out lot. You

18:27

know what I hope I never

18:29

go back. Oh, what is that?

18:31

Palaces, again, it's 38 years.

18:33

It's, it, that's, that's

18:35

home, I knew where

18:37

everything was. So many

18:39

things burned down, the

18:41

elementary schools burned down.

18:43

The high school is

18:45

non-functional. This, like, right

18:47

down the street, the

18:49

stores, you know, where

18:51

our kids would go. to

18:54

after school to buy French fries

18:56

and just hang out and be

18:58

bad because they were kids. And

19:00

it's like, it's not there anymore.

19:02

For Sandra, rebuilding her home

19:04

is out of the question.

19:06

One reason for this is

19:08

she isn't confident she'll get

19:10

insurance again. To me, it's

19:12

sort of like, it's a place

19:15

that won't exist anymore.

19:17

A whole town. I can't even

19:19

believe that, but it's a whole

19:21

town. You know, on a whole

19:23

lifestyle. That won't exist anymore.

19:26

That's all for

19:28

today Wednesday February

19:31

19th. The journal

19:34

is a co-production

19:36

of Spotify and

19:39

the Wall Street

19:41

Journal. Additional reporting

19:44

in this episode

19:46

from Susan Pulliam.

19:49

Thanks for listening.

19:51

See tomorrow.