Good morning. State Farm CEO John Farney is trying to transform the future of the country’s largest auto and home insurer while dealing with the realities of today. The 104-year-old mutual insurer just launched its “Next Gen Good Neighbor” offering, an AI-powered tool that makes it easier for customers to file claims. State Farm has had a banner year on some fronts. At the same time, it’s facing legal action from California regulators over charges that it mishandled claims from the L.A. wildfires last year. Farney says climate change and regulatory challenges have made the state a tough place to operate. I spoke with Farney about leading change in this environment.

On making money: State Farm posted record results in 2025 and announced a $5 billion dividend to auto policyholders—its largest ever. But it also raised homeowner rates in California, where it insures more than a million homes and paid out more than $5.7 billion in claims from the wildfires. The economics are tough. “Our company that provides homeowners insurance in California was worth $4 billion in 2017 and it’s worth a lot less than that now,” he told me. “We have to make choices, because our number one thing is to keep the promises that we make to customers.”

On the climate reckoning: The industry’s risk models haven’t kept pace with reality. “Used to be a tornado would be an isolated event, going to one town and helping them rebuild,” Farney said. “Now there’s a spawn of tornadoes that hit 10 different sites the same night.” His prescription: match price to individual risk and insist on competitive markets. “If there are markets where regulators have an impact on the ability of insurance companies to compete, we don’t think customers win.”

On the power of AI: Farney announced a “Human + Digital” initiative this week, including a partnership with OpenAI and new AI tools to speed up claims and sharpen underwriting. (Here’s his blog post with more.) “We don’t want to just be the 1971 company that Barry Manilow wrote about … We want to be a next-generation good neighbor that’s powered by technology and AI and a culture of speed,” he said. “And our message isn’t, ‘We need half of you.’ Our message is, we think these are powerful tools to position State Farm for another decades-long type of success. We want the right combination of people for the moments that matter most and great technology so customers can do things on their own terms.”

Contact CEO Daily via Diane Brady at diane.brady@fortune.com

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