A decision announced Wednesday by State Farm General Insurance Co., the homeowners unit of State Farm Group, to non-renew about 72,000 commercial and personal lines property policies in California raises serious questions about the insurer’s financial health, according to the state’s insurance regulator.

Some 30,000 homeowners, rental dwelling and other property insurance policies, including residential community association and business owners policies, will be non-renewed. State Farm General will also exit the commercial apartment insurance market, non-renewing around 42,000 policies.

Combined, the policies represent just over 2% of State Farm General’s policy count in California.

“This decision was not made lightly and only after careful analysis of State Farm General’s financial health, which continues to be impacted by inflation, catastrophe exposure, reinsurance costs, and the limitations of working within decades-old insurance regulations,” the insurer said in its statement, adding: “It is  necessary to take the action now.”

The California Insurance Department said in a statement that State Farm General’s decision “raises serious questions about its financial situation – questions the company must answer to regulators.”  

“We have been working with State Farm’s home state of Illinois to get a full picture of its financial condition and plan for improvement. We need to be confident in State Farm’s strategy moving forward to live up to its obligations to its California customers,” the CDI said.

The insurer said it takes seriously its responsibility “to maintain adequate claims-paying capacity for our customers and to comply with applicable financial solvency laws.”

The nonrenewals will occur on a rolling basis over the next year, beginning July 3 for homeowners, rental dwelling, residential community association and business owners policies, and from August 20 for commercial apartment policies.

The insurer’s latest pullback follows its decision last year to no longer write new commercial and personal lines property/casualty coverage in the state due to rising catastrophe exposure and a challenging reinsurance market.

State Farm General currently has an A (excellent) financial rating from A.M. Best.

The Oldwick, New Jersey-based rating agency last September revised its outlook on Bloomington, Illinois-based State Farm Mutual Auto Insurance Co. and some subsidiaries, including State Farm General, to negative.

The outlook is “an indication of a potential future direction of the ratings over an intermediate period, generally defined as 36 months,” a Best spokesman said in an email.

State Farm General’s combined ratio deteriorated to 138.1% last year, from 106.8% in 2022, according to Best data.

The CDI last week announced a regulation that would expand the permitted use of catastrophe models to wildfire, terrorism and flood for commercial and homeowners coverage lines. The CDI currently allows the use of catastrophe models for earthquake losses and fire following earthquake.