Insurer Counts on Beating Back Rebate Order : Prop. 103: 20th Century would owe more than $100 million in refunds--and the amount keeps growing. The Woodland Hills firm has set aside less than half the sum.

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. In 20th Century’s case, Insurance Commissioner John Garamendi has ordered the company to pay rebates totaling $106.5 million.

So what happens to the $106.5 million while 20th Century argues its case?

It’s not sitting in a shoe box at 20th Century’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 of interest, for its Proposition 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 thinks otherwise, of course. But no matter who wins, 20th Century--the state’s sixth-largest auto insurer with roughly 3% of the market--illustrates how some insurers account for Proposition 103 in their financial statements, whether the proposed rebates affect their present profits and how the companies face spiraling interest costs should they eventually lose their fight.

California voters in November, 1988, narrowly passed Proposition 103, which ordered 20% rollbacks in auto and property insurance rates and required any future rate hikes to be approved by an elected commissioner. Most of the proposition’s provisions were upheld by the state Supreme Court in 1989.

The insurers have continued to fight the initiative, claiming among other things that it is an unconstitutional confiscation of their assets. But some of the companies have also been setting aside some cash, based on their estimates of their potential liability, in case they lose.

Then, in October, Garamendi crystallized matters a bit by setting specific rebates for 14 specific insurers, rebates that reflect the companies’ refusal to immediately roll back their rates after Proposition 103 passed. He ordered the 14 companies to rebate 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 the insurers to comply quickly.

One that did last month was the Automobile Club of Southern California, whose 515,000 policyholders received a total of $104.8 million--of which $18.1 million was interest.

In 20th Century’s case, the interest so far has added $20.9 million to the $85.6-million Proposition 103 tab (for the total $106.5 million), and the interest keeps mounting as the company keeps fighting.

20th Century and other insurers keeping Proposition 103 reserves are investing them 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.

Result: They have to occasionally add more cash to their Proposition 103 stockpiles simply to match the interest Garamendi is charging.

The $65-million gap between the rebate Garamendi has ordered and 20th Century’s $41.4-million reserve is wide indeed, but 20th Century thinks 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.

But if 20th Century was to suddenly lose its case and be forced to rebate $100 million or more, the company would 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 said.

Such a charge would also derail the sharp rise in profits 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 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 that’s sold by mail, not through agents.

The company is angry because, among other things, it believes that its efficiency and low rates are being overlooked as Garamendi attempts to impose Proposition 103’s provisions on the company. But Garamendi is unmoved. When 20th Century filed its latest lawsuit last month challenging his authority, Garamendi branded the company “an insurance outlaw.”

As the fight drags on, 20th Century is not using its Proposition 103 reserves to pump up its profits. The company has simply set aside the $41.4 million without adding the cash to its gross revenue. As a result, that money and the interest it’s earning never has a chance to reach 20th Century’s bottom line.

Amwest Insurance Group Inc., a Woodland Hills-based provider of bail bonds and other surety bonds, used the same accounting treatment until September, 1990, when a new state law exempted surety companies from Proposition 103.

Up to that point, Amwest had set aside $838,000 for Proposition 103, which represented 4.6 cents for every $1 of premium revenue Amwest had collected since the initiative had passed, said Robert C. Goodell, Amwest’s chief financial officer.

“Every time a dollar came in the front door, we accounted 95.4 cents of it as a sale and 4.6 cents went straight into an account payable back to our customers,” Goodell said. “It never flowed through the income statement.”

That means that Amwest also never had to take a charge against its earnings to reflect the Proposition 103 reserve. However, after Amwest was exempted, it plowed the reserve back into its financial statements and enjoyed a one-time $797,000 gain in its profit.

Garamendi is due to order other companies’ rebates in the coming months. In the meantime, not all of those companies are reserving for Proposition 103.

One that’s not is Zenith National Insurance Corp., a Woodland Hills-based provider of workers’ compensation, auto and home insurance. Zenith, in recent financial statements, has said “it is impossible to estimate” its potential rebate at this point, and so the company has not set aside one dime for refunds.

Unico American Corp., a much smaller property-casualty insurer in Woodland Hills whose main unit is Crusader Insurance Co., estimated that as of Sept. 30, its rollback liability was about $711,000. It too has not set aside the sum because it expects to be exempted by Garamendi.

Given the money at stake if Garamendi wins, one might wonder why 20th Century and other California insurers haven’t bought reinsurance for Proposition 103. Reinsurance is the coverage insurers buy from other insurance companies for major disasters such as earthquakes so they can lay off part of their risk.

Amwest’s Goodell said that when it comes to Proposition 103, the reason is simple: “Nobody else would have wanted to take that risk.”