California Insurance Commissioner Dave Jones exceeded his statutory authority by considering the investment income of separate State Farm affiliates when he ordered State Farm General Insurance Co. to roll back its homeowners insurance rates retroactively, according to a “minute order” filed by Superior Court Judge Katherine Bacal.

The ruling, handed down in the wake of a March 9 hearing in San Diego on the issues at stake, stems from a December 2014 rate filing by State Farm General, the company’s affiliate for California homeowners business. The company sought to raise rates by 6.9 percent effective July 2015, a request that later was amended to 6.4 percent. In November 2016, Jones ordered the company to undertake a 7.0 percent retroactive rate reduction by providing $100 million in policyholder refunds.

State Farm challenged Jones’ order on grounds that it took into account assets held by other State Farm affiliates and that the statute did not give him authority to order refunds once a rate has been approved. Bacal declined to rule on the second argument. However, she granted the other part of State Farm’s requested writ of mandate, finding that Section 13 of the California Insurance Code only allows the commissioner to consider the investment income of a company seeking a rate change.

In particular, Bacal noted, Jones applied the investment income of the holding company State Farm Mutual Automobile Insurance Co. and the homeowners insurance affiliate State Farm Fire and Casualty Co. While State Farm General operates only in California, State Farm Fire operates in 47 other states. Separate homeowners affiliates operate in Texas and Florida.

“The commissioner’s interpretation that the regulation allows him to use SF Mutual’s group yield instead of State Farm (General)’s investment income based on State Farm’s actual portfolio is inconsistent with the statute,” Bacal wrote.

For his part, Jones asserted that since State Farm Mutual files a consolidated statement that includes State Farm General, it was reasonable to use the yield of the group. Bacal rejected this interpretation, finding no California statute that defines an insurance company as “the company and its affiliates.”

Moreover, she noted, the group’s asset portfolio was not reflective of the company. While bonds comprised nearly all of State Farm General’s investment book, the combined accounts of the nine affiliates Jones considered were roughly 40 percent equities.

The proceedings continue as State Farm looks to overturn the mandated rate rollbacks, which Jones estimates amount to $250 million with interest. Bacal’s ruling does note that, per the Insurance Code, “rates must be approved by the Commissioner prior to their use.”

Image by FabrikaSimf