2 Insurers Hope to Avoid Being Casualties of Ballot Initiatives

Depending on how California votes today, the state’s auto insurance industry could start undergoing major reform. And at least two local insurers, 20th Century Industries in Woodland Hills and Mercury General Corp. in Los Angeles, are bracing for the worst.

On the election ballot are four initiatives that would change the way auto insurance is priced, regulated and sold in California, where auto-insurance premiums have soared in recent years. A fifth measure would limit lawyers’ fees, which insurers say would help control their costs and allow for lower rates.

Of the group, Proposition 103 is the one the insurance companies fear most because it would immediately force a minimum 20% cut in premiums.

Both 20th Century and Mercury General collect premiums of more than $400 million a year from auto insurance. Although each company sells other lines of property/casualty insurance, auto policies account for more than 90% of their business, and they write auto insurance only in California. So if Proposition 103 passes, they can’t hope to offset a decline in revenue with added auto business from other states.

Another local company, Zenith National Insurance in Woodland Hills, also insures just California drivers, but auto insurance accounts for only 15% of its business.

Stocks Attractive

Nevertheless, some analysts are urging clients to buy the companies’ stocks, because the fear and confusion over the initiatives have pushed the stocks lower in recent months.

“I don’t think it’s going to come down to these companies actually going out of business,” said Steve MacNamara of the brokerage firm Bateman Eichler, Hill Richards.

Proposition 103, among other things, calls for an immediate 20% rollback in premiums for insurance written or renewed after today, and the rates would be cut from their levels of a year ago. The new, lower rates would stay in effect until Nov. 8, 1989, after which they could be changed only after approval by the state insurance commissioner.

Moreover, insurers would be required to give “good drivers” an additional 20% price cut, beginning next Nov. 8.

Because 20th Century insures only good drivers, the additional 20% good-driver discount mandated by Proposition 103 would hit across 20th Century’s entire business.

As a result, 20th Century’s stock price has skidded this year. The stock, which closed Monday at $15.25 a share in over-the-counter trading, remains near its 3-year low of $14.75 a share. Mercury’s stock has been more stable; it closed Monday at $13.125, down from $13.875 on Jan. 1.

Although the stocks could slump further in the next few days if Proposition 103 wins, the drop might be minor because investors have heard the debate over the initiatives for the past year, said Gerald S. Haims, an analyst with Seidler Amdec Securities.

“Nobody has had their heads in the sand about this,” Haims said.

Insurers and even some state regulators have argued that if Proposition 103 passes it could severely damage the insurance industry by cutting premiums but not cutting rising costs of insurance, such as spiraling medical costs and injury awards in court. Mercury claims it will go broke in about 15 months if Proposition 103 passes.

But one of the measure’s proponents, Harvey Rosenfield, chairman of the group backing Proposition 103, noted that the initiative has a provision allowing insurers to maintain their current rates if they can prove to the state insurance commissioner, “by opening their books in a public hearing, that they’re about to go bankrupt” under the proposition.

Mercury filed such a request 3 weeks ago. Insurance Commissioner Roxani M. Gillespie said Mercury had to wait until after the election, but she has suggested she might exempt many companies from the rollbacks.

Keith Parker, Mercury’s chief financial officer, said that if Proposition 103 passes, “we’ll have our filing ready Wednesday morning.”

Mercury is looking at other contingency plans. Its independent agents have held talks with Mercury about possibly cutting their commissions--which average about 17% of a customer’s premium--to help Mercury absorb the rate rollbacks, Parker said. He declined to say how much of a cut was contemplated.

20th Century can’t look to independent agents to save money. Founded in 1958 by Louis W. Foster, who remains chairman, 20th Century has always eschewed agents and sold insurance directly via the telephone and the mail to cut costs.

Lobbying for 104

Foster and other 20th Century executives declined to comment on other contingency plans they are considering. But the company, like most other insurers, has heavily lobbied its customers to defeat Proposition 103 and approve Proposition 104, the insurance industry’s proposal for “no-fault” insurance in California. As Foster said in a recent letter to his customers, “We, as well as you, are faced with a problem.”

But even if Proposition 103 passes, analysts said there’s no certainty the measure will become law in its current form, and that’s why they are not predicting doom for 20th Century, Mercury and other insurers.

If Proposition 103 passes, the insurers are expected to immediately challenge the constitutionality of it in court. Mercury already has vowed to do so, and said it would “seek a prompt ruling that the rate rollback not be implemented” until its case is heard.

There’s also the prospect that more than one of the insurance initiatives will pass by gaining the necessary majority vote.

Resolving Conflicts

What happens then? The proposition that gets the most votes is supposed to cancel out any other successful initiative that has conflicting provisions. Those parts of other propositions that don’t conflict with the biggest vote-getter are also supposed to become law.

However, the question of which provisions conflict could end up in court. Analyst Haims said the vote could become so confusing that “ultimately this is going to result in a legislative compromise.”

Some investors seem to have already made their bets that all will be resolved and business will continue. Consider Warren Buffett, the renowned Omaha stock picker who turned $100,000 he raised at age 25 into a $2-billion fortune. One of Buffett’s insurance companies, National Indemnity Co., bought a 3.2% stake in 20th Century early this year and still held it as of June 30, according to the latest records available.

Does that mean Buffett sees 20th Century surviving the insurance initiatives without too much trouble? He won’t comment, but his interest in the stock leads analysts to wonder if he, or someone else, is looking at 20th Century as a potential takeover target.

Analyst Haims said he is sure there are potential suitors watching to see whether the companies indeed face serious financial trouble because of the initiatives. In the case of 20th Century, Haims said, the company has “a very strong franchise that can’t really be duplicated,” and the company currently is underpriced.