Allstate, State Farm home insurance exits in California worry lenders

David Odisho/Photographer: David Odisho/Bloom

Lenders aren't downplaying the significance of the exit of two leading homeowners insurers from the California market.

State Farm and Allstate, the first and fourth-largest residential insurers in California, will stop issuing new home insurance policies, the firms recently announced. The industry giants, which will still back existing policies, cite increased construction costs alongside inflation, and exposure to catastrophes as reasons to taper off in the Golden State.

The exits are major events, executives of California-based mortgage companies acknowledged. They also mirror departures by insurers from storm-stricken states Florida and Louisiana, although elevated home prices in those states don't approach the $737,900 average in California, according to Zillow data.

"There's already pressure on affordability for first-time homebuyers," said Jeff Walsh, president of Irvine, California-based loanDepot. "If it's another $100, $200 or $300 a month with homeowners insurance, that's material. So that's a concern."

Insurance hikes would also impact debt-to-income ratios for borrowers, Walsh noted. However, neither prospective borrowers nor loan officers have yet to raise concern about the homeowners insurance market changes, said Dave Wallace, executive vice president, chief financial officer, and mortgage loan originator at Chula Vista, California-based American Mortgage Network. 

"It will take some time for things to filter through," he said. "But I have an expectation that we'll hear from somebody, the borrowers generally will complain to the loan officers, up to management."

State Farm, which stopped issuing policies in California May 27, covers over 2 million homes in the state, according to data from analytics firm S&P Global. Allstate meanwhile covers over 1.2 million homes, according to the data, part of the over 6.6 million residential insurance policies statewide.

Inflation, which the Federal Reserve has tried to tamp down, sent the price of construction materials including wood and labor soaring, impacting insurers. The companies apply for rate increases long before rates are approved by the state and go into effect, and the companies are unable to adjust prices quickly because of California law, a spokesperson for Allstate said.

Wallace and other lenders emphasized that the cost of insurance isn't a main driver of purchase transactions. The Allstate and State Farm exits won't have an immediate impact on the state's housing market, said Shashank Shekhar, CEO and founder of San Jose-based InstaMortgage. 

"But as time progresses, and if there are more (exits), it sets the cat among the pigeons, and more insurance companies start to pull out and insurance premiums become more expensive, then it will start playing in the minds of the buyers," he said.

The domino effect could resemble the battered Florida property insurance market, which has seen seven company insolvencies since early 2022, according to the Insurance Information Institute. Florida touts the nation's largest average premium at $2,165, according to the III; California's average premium of $1,241 is ranked 23rd among all states.

Officials in 10 other states are also attempting to tamp down the cost of insurance mandated by the government through the National Flood Insurance Program, which is utilizing a new methodology. Attorneys general accuse the Federal Emergency Management Agency's Risk Rating 2.0 of sending premiums soaring in a lawsuit filed earlier this month. Lawmakers have also introduced legislation to stabilize NFIP costs.  

California lenders meanwhile wondered aloud who would fill the gap left by the major California insurers. Farmers, Berkshire Hathaway and Liberty Mutual round out the top five insurers in California in 2022, according to the CDI. The state's FAIR Plan, an insurance of last resort, also provides coverage of up to $3 million for single-family homes and up to $20 million for commercial properties including condominium complexes and homeowners associations.

Approximately 115 homeowners insurers remain in the state as of early June, according to the CDI. Insurers last year wrote $12.1 billion in new policies and also reported a 55.17% loss ratio, both increases from figures in 2021.

Mortgage rates still trump insurance costs as an affordability barrier, as the 30-year fixed rate still averages above 6.6% despite a three-week slide. Inventory is the biggest pressure on homeowners, executives said. The number of homes for sale sits at 1.08 million units, the lowest inventory level for May since 1999, according to the National Association of Realtors. 

"It's concerning on a lot of fronts," said Walsh. "And I think overall, its not going to be good for consumers."