Auto Claims Consign State Farm to Its Largest-Ever Underwriting Loss

Last week, State Farm posted a $13.2 billion underwriting loss for its 2022 property-casualty business, the largest underwriting loss in its 100-year history.

The loss relates primarily to State Farm's auto insurance companies, which—while reporting earned premium of $45.7 billion— incurred claims and loss adjustment expenses of $48.4 billion and other underwriting expenses of $10.8 billion resulted in the captive's highest-ever underwriting loss.

“In 2022, State Farm's auto insurance companies reported record underwriting losses due to rapidly increasing claims severity and significant additions to prior accident year incurred claims," the carrier reported in a media statement.

However, overall losses were expected. Speaking at the Property-Casualty Insurance Joint Industry Forum in December 2022, Michael Tipsord, CEO of State Farm, broke the news that the auto giant would record its highest-ever underwriting loss. “We missed severity badly. We did not anticipate the inflationary pressures," Tipsord said.

The underwriting results reflect significantly higher incurred claims for auto and higher homeowners non-catastrophe incurred claims, as well as another year of catastrophe activity across the country, according to a statement released last week.

With inflation peaking at its highest level in 40 years, auto loss ratios reached 78.4% during the second quarter of 2022.

While State Farm's other p-c lines of business—health, homeowners, commercial multiple peril and reinsurance lines—generated an underwriting profit of $849 million, the multi-billion dollar auto losses dominated results. Auto makes up about 61% of State Farm's insurance business, with the other p-c lines representing just 37%.

In total, the p-c group of companies reported a combined underwriting loss of $13.2 billion on earned premium of $74.3 billion. The 2022 underwriting loss, combined with investment and other income of $4.9 billion, resulted in a p-c pre-tax operating loss of $8.3 billion compared to a $313 million loss reported in 2021 and the $4.5 billion profit reported in 2020.

Meanwhile, the company's two life insurance arms, State Farm Life Insurance Company and State Farm Life and Accident Assurance Company, reported premium income of $6.2 billion, with net income for 2022 at $588 million. Additionally, the life insurance companies paid out nearly $600 million in dividends to policyholders and issued a record $110 billion in new policy volume, bringing the year-end 2022 individual life insurance in-force to $1.1 trillion, according to the statement.

Overall, State Farm's insurance operations—consisting of 13 p-c companies and two life insurers—annual operating results “were not at the level we expect as we consider each affiliate's financial strength and long-term performance," Jon Farney, senior vice president, treasurer and chief financial officer, State Farm, said in a statement.

Total revenue, which includes premium revenue, earned investment income, and realized capital gains and losses, was $89.3 billion for 2022, up 8.6% from $82.2 billion for 2021. In total for 2022, the company reported a net loss of $6.7 billion compared to $1.3 billion of net income in 2021.

Olivia Overman is IA content editor.