20th Century Bets on Rebate Victory : Insurance: Its reserve for Proposition 103-mandated payouts to policyholders falls far short of its share because the company expects to prevail at a Dec. 16 hearing--and pay less.
Like most of California’s big auto insurers, 20th Century Industries Inc. is continuing its legal fight against having to pay customer rebates under Proposition 103, the insurance reform measure.
So what happens to the $106.5 million in rebates that Insurance Commissioner John Garamendi has ordered the company to pay while 20th Century argues its case?
It’s not sitting in a shoe box at the insurer’s Woodland Hills headquarters marked “Prop. 103 refunds.” In fact, the company doesn’t have anywhere near that amount set aside in case it loses its battle. As of Sept. 30, 20th Century had reserved only $34.7 million, plus $6.6 million in interest, for its Prop. 103 liabilities.
The company is convinced that it can win its case against Garamendi--a case that resumes at an Insurance Department hearing Dec. 16--and will pay back far less, if any, of what Garamendi has ordered.
Garamendi believes otherwise, of course. And, if the insurer does not prevail, it will have to scramble to raise the cash and probably incur an enormous charge against earnings.
That prospect is reflected in 20th Century’s stock, which closed at $18.75 a share Monday in New York Stock Exchange composite trading, said Michael Morrissey, chairman of Firemark Insurance Research in Parsippany, N.J. The stock is down from about $21 when Garamendi’s rebate order was made in mid-October, and well below its $25-a-share peak of the past year.
“If the owners of this company thought there was no chance of 20th Century having to cough up the money, the stock wouldn’t have gone down,” he asserted.
Such a charge also would derail the sharp rise in profit that 20th Century has enjoyed lately. In the first nine months of 1991, the company’s net income surged 42% from a year earlier to $83.9 million on $670 million in revenue.
20th Century, founded in 1956 by Louis W. Foster, who at age 78 remains its chairman, is the holding company for 20th Century Insurance, a finicky insurer known for its no-frills, low-rate coverage that’s available only in California, only to good drivers and sold by mail, not through agents.
How 20th Century--the state’s sixth-largest auto insurer, with roughly 3% of the market--has handled the rebate issue illustrates how some insurers account for Prop. 103 in their financial statements and how the companies face spiraling interest costs should they lose their fight.
California voters narrowly passed Prop. 103 in November, 1988, which, among other provisions, ordered 20% rollbacks in auto and property insurance rates.
The insurers have continued to fight the initiative, contending among other things that the measure is an unconstitutional confiscation of their assets, but some nevertheless have been setting aside cash for the potential liability.
Garamendi last October set specific rebates for insurers, reflecting the companies’ refusal to immediately roll back their rates after Prop. 103 passed. He ordered 14 companies to refund a combined $1.5 billion to their policyholders and said 20th Century’s portion was $85.6 million.
Garamendi has also slapped a 10% annual interest cost on the insurers’ rebates, retroactive to May, 1989. The interest is clearly aimed at encouraging insurers to comply quickly. The Automobile Club of Southern California has refunded $104.8 million, including $18.1 million in interest, to its 515,000 policyholders.
In 20th Century’s case, the interest so far has added $20.9 million to its $85.6-million Prop. 103 tab, a sum that rises as the company keeps fighting.
20th Century and other insurers are investing the Prop. 103 reserves to offset at least part of the interest bite levied by Garamendi. But because most of the insurers invest in relatively prudent securities--typically municipal bonds or U.S. Treasury securities--they’re earning well below 10% on their money.
The result: They must occasionally add more cash to the reserves simply to keep up with the interest.
The $65-million gap between the rebate Garamendi has ordered and 20th Century’s $41.4-million reserve is wide indeed, but 20th Century believes that the reserve is sufficient and hasn’t added to it in 18 months (except for the interest).
In fact, 20th Century denies that the $41.4 million even reflects any sort of step-by-step evaluation by the company of how much it might owe on its 1.1 million policies. The sum “is in no way intended to be an admission of a refund amount,” and was arrived at by “a judgment call rather than a calculated process,” said Rick Dinon, a 20th Century senior vice president.
The company is angry because, among other things, it believes its efficiency and low rates are being overlooked as Garamendi attempts to impose Prop. 103’s provisions. But Garamendi is unmoved. When 20th Century filed its latest lawsuit last month challenging his authority, Garamendi branded the company “an insurance outlaw.”
