Wall Street Sees Harm in Prop. 103 : Rating Firms Say Some Insurers Will Suffer Dire Effects

The furor over Proposition 103 heated up Friday as a major Wall Street rating service warned that insurers would face dire financial consequences under the initiative, while two key legislators threatened fines against insurers withdrawing from the state.

Standard & Poor’s Corp., a well-respected New York firm that rates the financial soundness of major corporations, said Friday that implementation of Proposition 103’s mandated 20% rate rollbacks could damage several major insurers’ financial strength and lead to downgrading of their credit ratings.

“While specific outcomes will differ, passage of the proposition puts many insurance ratings at risk,” S&P; said. “If the proposition survives the legal challenges, a number of ratings are likely to be lowered.”

Crisis of Availability

S&P; added that withdrawal by some companies that do a large share of their business in California “would likely precipitate an unprecedented availability crisis.”

The proposition affects not only auto insurance but also homeowner, business and other forms of property-casualty coverage.

State Sen. David Roberti (D-Los Angeles), the Senate president pro tem, and state Sen. Alan Robbins (D-Van Nuys), chairman of the Senate’s insurance committee, on Friday threatened insurers leaving the state with legislation calling for huge fines. Robbins said the fines--which he described as the price of quitting business in the state--should amount to “25% to 50% of the total annual premiums” of offending companies.

“If they’re retaliating against the voters, we’ve got to retaliate against them,” Roberti said.

Subpoenas Possible

Both lawmakers told a news conference they are asking chief executives of seven companies that have announced plans to withdraw from the state either fully or partially to appear at a special legislative hearing next Friday in Los Angeles. If the executives do not agree to appear voluntarily, the legislators said, subpoenas would be issued.

However, George Tye, spokesman for the Assn. of California Insurance Companies, the industry’s chief lobbying arm, said any precipitous action such as fines “only serves to exacerbate a very sensitive situation. To threaten severe punishment to companies who are simply trying to maintain their ability to pay their customers’ losses is not productive. We intend to work with the Legislature to resolve these issues to the benefit of California consumers.”

The developments came as consumers and insurance agents continued to cope with confusion over renewals of existing policies and shortages of new insurance. More than 40 insurers--mostly firms with smaller shares of the California market--have suspended writing new policies here. Additionally, at least nine firms--including Travelers and Fireman’s Fund--have withdrawn or plan to withdraw fully or partially from the state’s auto insurance market, the nation’s largest.

Industry officials, meanwhile, kept watch on the state Supreme Court, which now holds the key role in determining the fate of Proposition 103. The high court Thursday stayed implementation of the proposition until justices could decide whether to consider the measure’s constitutionality.

Friday’s developments also accentuated the key issue facing all consumers and regulators affected by Proposition 103: whether insurers are financially justified in withdrawing from the state or refusing to write new policies because of Proposition 103.

The answer to this debate may not be fully resolved until companies open their books as part of efforts to seek exemptions from rate rollbacks. More financial information is also likely to emerge if the state Insurance Department sues firms withdrawing from the state on grounds that Proposition 103 prohibits insurers from denying renewals to existing customers.

Consumer advocates reiterated Friday that insurers are trying to punish the voters and are using the suspensions as a political ploy.

Called Blackmail

“The insurance industry is attempting to orchestrate a panic in the insurance marketplace in order to unduly influence the courts and buy protection from the Legislature,” said Harvey Rosenfield, chairman of the Proposition 103 campaign. “This is nothing less than blackmail and extortion, the same strategy the industry has used in other states to fight reforms.”

Rosenfield added that “insurance company executives have not offered to cut their multimillion-dollar salaries one cent. They have not offered to sell any of their limousines or corporate aircraft or economize in any way whatsoever. They’re essentially saying, ‘Either you let us rape the public at will, or we’ll pick up our marbles and not play.’ ”

But the Assn. of California Insurance Companies on Friday issued a legal document claiming that Proposition 103’s mandatory rate reductions and rollbacks would result in the industry losing almost $4 billion a year, even when investment income is included.

The group also cited earlier estimates by state Insurance Commissioner Roxani Gillespie that 75 companies--accounting for about 20% of the property-casualty insurance market in California--would experience severe financial distress within two years, with nearly half becoming insolvent.

Consumer advocate Ralph Nader, chief backer of Proposition 103, on Friday did not dispute the industry’s $4-billion loss estimate but said that insurers “have been making record profits year after year in California” and that the initiative would compensate for “all these years of overcharging.”

Wall Street analysts said Friday that the auto insurance business in California has been profitable.

“In the last 15 to 20 years, California has been a very good market for the auto insurance industry,” largely because of its size and relatively unregulated nature, said Udayan Ghose, a leading insurance industry analyst with Shearson Lehman Hutton in New York. Profits have come largely because firms were free to set rates, unlike in such states as New Jersey or Massachusetts, where heavy regulation has prompted many insurers to leave the state while others operate largely at break-even levels or worse, Ghose said.

Claims Exceed Premium Rises

Wall Street analysts and company officials note that profitability of the auto insurance business nationwide has been declining in recent years because costs of litigation and jury awards, medical expenses and fraudulent claims have risen faster than increases in premiums.

Gerald S. Haims, insurance analyst at Seidler Amdec Securities in Los Angeles, contends that 10 years ago, policyholders filed bodily injury claims on 40% of accidents in California, with the average pay-out totaling $1,900. In 1988 thus far, bodily injury claims totaled 72% of all accidents, with the average pay-out close to $8,000.

How profitable the industry remains is subject to numerous interpretations. Consumer advocates note that industry accounting methods can be misleading. Profits can be manipulated downward by using more money to pay off claims from previous years or by increasing reserves to be used against future claims, they say.

J. Robert Hunter, president of the National Insurance Consumer Organization and a former federal insurance regulator, has estimated that industry profits totaled $868 million last year. But some industry officials, such as the Western Insurance Information Service, have claimed that the industry actually lost $77 million last year.

Profitability also varies widely from company to company, with firms having higher market shares here tending to be more profitable than those with smaller shares, analyst Ghose said.

These more profitable firms generally are the ones that so far have announced intentions to stay in the state, analysts noted.

For example, 20th Century Industries, the state’s sixth-largest auto insurer with nearly a 5% market share, has said it will continue to offer new policies, albeit at pre-Proposition 103 rates. It reported Thursday that its profits for the first nine months of 1988 rose 31% to $43.7 million from $33.3 million in the year-ago period. The Woodland Hills-based firm attributed the gain to an increase in premiums and net investment income.

Investments Overcame Loss

California State Automobile Assn., the state’s second-largest insurer with a nearly 10% share, also is offering new policies. It posted a $29.7-million underwriting loss last year, but investment income of $120.8 million more than offset the operating loss, yielding a net profit of $91.1 million.

These and other firms with big market shares cannot afford to leave the state, because they have nowhere else to go and the risk of alienating customers would be too high, at least for now, Ghose said. He noted that California business accounts for virtually all the revenue of such firms as 20th Century, a for-profit firm owned by shareholders, and the California State Automobile Assn., a nonprofit organization providing insurance as a service to members.

On the other hand, almost all of the firms that have suspended sales or withdrawn are for-profit firms that have relatively little market shares and were generally not profitable in auto insurance, so it costs them very little to pull out, Ghose said. These firms also are not as reliant on consumer lines such as auto and homeowners insurance, so a consumer backlash would have a relatively minor effect on their operations.

Travelers, for example, receives only 4% of its premium income from California, and most of that is in worker’s compensation coverage, which is untouched by Proposition 103, Ghose said.

“A company like Travelers would hardly go bankrupt over the California insurance problem,” Ghose said. “They are such a large company . . . it doesn’t mean that much to them; that’s why they are pulling out.”

Analyst Haims of Seidler Amdec noted also that giant national firms such as Travelers would have a hard time competing under Proposition 103 rollbacks. That is because California-based companies with all their business in the state, such as 20th Century and Mercury Casualty, are likely to win a reprieve from rate rollbacks thanks to their ability to show eventual insolvency if forced to cut rates.

Under Proposition 103, companies that can demonstrate eventual insolvency would be allowed to raise rates to offset the mandated 20% rollbacks.

“You would see creation of a two-tiered market,” with 20th Century and Mercury Casualty allowed to operate a profitable levels while others would be forced to operate at a loss, Ghose said. While 20th Century or Mercury would have higher rates, they also would offer new policies. Other firms would likely quit offering new policies, he said.

Size of Stake

In its Friday statement, Standard & Poor’s noted that 19 firms depend on property-casualty insurance in California for 12% or more of their revenue, and thus would be most severely affected by Proposition 103. The list was headed by Woodland Hills-based Zenith National Insurance Group, with 50% of its revenue in California, followed by Farmers Insurance Group at 40.2%.

Times staff writer Kenneth Reich contributed to this story.