Auto Insurer Proceeding With Caution After Prop. 103
20th Century Industries in Woodland Hills, a major auto insurer in California, is taking a go-slow approach toward the rate-slashing initiative passed by the state’s voters.
Like most other insurers with business in California, 20th Century joined the industry’s trade group last week in asking the state Supreme Court to block implementation of the initiative, Proposition 103.
Unlike several other insurers that announced plans to withdraw from the California market or to suspend writing policies until the industry’s lawsuit is resolved, 20th Century--whose only market is California--is for the most part continuing with business as usual.
The measure, among other things, mandates an immediate 20% rollback in auto-insurance premiums and calls for insurers to give “good drivers” an additional 20% price cut, beginning next Nov. 8. 20th Century finds the initiative particularly offensive because the company insures only good drivers. In turn, the company offers some of the lowest rates in the state.
Credit Ratings Face Cuts
All types of insurers could suffer major financial harm if Proposition 103 is upheld, according to a major bond-rating service, Standard & Poor’s Corp. The service warned that if the initiative withstands challenges, S&P; probably will reduce the credit ratings of 19 insurers operating in California, which could force them to pay higher interest rates the next time they sell bonds. But 20th Century was not among the insurers cited by S&P; because it has little long-term debt.
The state Supreme Court last week agreed to temporarily halt enforcement of the measure while the justices decide whether to formally review the industry’s contention that the initiative is unconstitutional. The initiative also applies to homeowners’ insurance and other types of property/casualty coverage.
20th Century, which also provides homeowners’ insurance, has continued to renew existing policies and write new business, albeit at pre-Proposition 103 rates. However, the company also is promising to refund the difference between what its customers are paying, and what they would pay under the initiative, if Proposition 103 survives all challenges and 20th Century is unable to get relief from the state Department of Insurance.
In a notice to its policyholders, 20th Century said it also would pay a “reasonable interest” on the refunds, although it did not specify the interest rate.
All of which shows that 20th Century is “taking a moderate position” in terms of its operations as it tries to fend off Proposition 103 in the courts, 20th Century founder and Chairman Louis W. Foster said last week in announcing the company’s third-quarter financial results.
The results showed 20th Century posted a strong quarter, irrespective of the industry’s contention that writing auto insurance in California usually is unprofitable.
In the 3 months that ended Sept. 30, 20th Century’s net income nearly doubled, to $20 million, or 78 cents a share, from $10.6 million, or 42 cents a share, a year earlier. Total premiums written for the quarter climbed 21% to $150.5 million from $124.8 million.
Gains Posted
The surge in premiums and higher income from 20th Century’s investments contributed to the gains. 20th Century’s net investment income rose to $14.6 million from $11 million a year earlier. But the company also recorded a major turnaround on its basic insurance business, posting an $8.39 million pretax operating profit, against an operating loss of $1.21 million a year ago.
For the first 9 months of 1988, 20th Century’s earnings rose 31% to $43.7 million, or $1.71 a share, from $33.3 million, or $1.30 a share, a year earlier. Total premiums written increased 20% to $437.6 million from $363.8 million.
After the results were announced, 20th Century’s stock--which had taken a beating in the months leading up to the election--rose sharply, gaining $1.875 a share, to $17.625, in over-the-counter trading. (The stock has slipped back somewhat since, closing Monday at $16.375 a share.) But the stock’s gain had less to do with 20th Century’s earnings than with the outcome of the election, analysts said.
Future Optimistic
Sorting out the legality of Proposition 103 will take time, said Gerald S. Haims, an analyst with Seidler Amdec Securities. But investors apparently believe that 20th Century, with only one initiative to deal with, will either get the measure overturned or will get help from the insurance commissioner, he said.
Indeed, a provision of Proposition 103 allows an insurer to seek an exemption from the rate rollbacks if it can prove to the commissioner that the cutbacks would force it into insolvency. 20th Century, among other insurers, has sought just such an exemption.
Haims believes that 20th Century and another California insurer, Mercury General Corp., will be granted exemptions “because they are already two of the lowest-cost providers and it would be counterproductive to pull them out of the marketplace by forcing them into insolvency.”
20th Century kept writing policies despite the passage of Proposition 103 because it is “optimistic that the most difficult provisions or critical provisions--those relating to the rate rollbacks--will be disallowed,” spokesman Rick Dinon said.
But Haims offered another reason. He said 20th Century adopted a business-as-usual stance so as not to offend the state officials that might hold its future profitability in their hands.
20th Century “did not want to do anything which would raise the ire either of the Supreme Court or the insurance commissioner,” he said.
