Century-National on Rebates

Re “No Shilly-Shallying--Mail the Rebates,” editorial, Feb. 23:

The Times would have us all believe that both the U.S. and California supreme courts have blessed the rollback orders issued by former Insurance Commissioner John Garamendi. This is a gross misrepresentation of the courts. The California Supreme Court in the 20th Century decision said the formulation of the rollback regulations was within the powers of the commissioner, provided they were just and reasonable. To quote the court, “If it is not just and reasonable, it is confiscatory. If it is confiscatory, it is invalid. It is the result reached, not the method employed, which is controlling.”

On Nov. Commissioner Garamendi ordered 42 of the 700 or so companies doing business in California to rebate $2.82 billion. One important fact that has not been reported in The Times is that according to the National Assn. of Insurance Commissioners, insurers in aggregate made only $1.72 billion in California profits on Prop. 103 lines of business in 1989, the rollback year. This $1.72 billion is net, after tax, includes investment income from all sources and represents only a 9.1% average rate of return.

In other words, Garamendi’s rebate formula, which he represented to the California Supreme Court as allowing insurers a 10% return on capital, has as a result of the first 42 rebate orders, demanded that insurers rebate $1 billion more than the total industry income for 1989.

My company received a rollback order even though it earned less than a 10% return in 1989. In fact, my company underwent its regular tri-annual financial examination by the California Department of Insurance (DOI) for the period ended Dec. 21, 1989, in 1990. The statement of income prepared by the DOI showed net income of $2.9 million (a 7.4% rate of return) and surplus as regards policyholders (capital) of $39.3 million. Garamendi computed our refund amount to be $37.8 million (over 13 times the amount the DOI said my company made in 1989 and over 96% of the amount the DOI said Century-National had as policyholders’ surplus at Dec. 31, 1989).

Century-National does not believe it has a rollback liability. We do not believe the Garamendi rollback calculation is constitutionally correct or complies with the California Supreme Court decision in the 20th Century case, inasmuch as it does not allow Century-National a just and reasonable return.

It is our objective, and I believe the objective of most other companies, to get the DOI to issue rollback orders in compliance with the California Supreme Court decision. You should expect any future rollbacks which provide for a just and reasonable return in compliance with the Supreme Court decision to be few, far between and small compared to the $2 billion promised by The Times.

WELDON WILSON, President

Century-National Insurance

North Hollywood