Insurers face a new year full of legislative changes.

Garamendi's second year continues in cost-cutting mode

Property/casualty insurers expect the recession to catch up with them in 1992, while life insurers are breathing a sigh of relief that negative publicity about insurers' investments appears to be on the wane.

Profits are expected to decline for property/casualty insurers in 1992. The industry has been in a downward cycle since 1987, and some analysts wonder whether it may bottom out this year and then stage a dramatic rally as it did in 1985.

Prices actually accelerated faster than costs in 1991, leading to post-tax industry returns which actually exceeded 1990's by 29 percent, and that trend is expected to end in 1992, when costs are expected to rise faster than premiums and reduce net income, said Sean Mooney, senior vice president and economist with the Insurance Information Institute of New York.

The operating return on equity for all stock property/casualty insurers is expected to fall to less than 5 percent this year from 7 percent in 1991, said A. Michael Frinquelli, an analyst at New York-based stock brokerage Salomon Bros.

The challenge for multi-line insurers -- such as Los Angeles' Farmers Insurance Group, State Farm Group of Calabasas and Transamerica Insurance Group of Woodland Hills -- remains how to increase specialization and garner higher profits than are available in the highly competitive general market, said Gerald Lewinsohn, a stock analyst with Merrill Lynch Research of New York.

Automobile insurers in the state also hope for passage of no-fault legislation, which would reduce court-awarded tort damages by requiring insurance companies to pay for their own drivers' claims regardless of who caused an accident.

Three bills are under consideration in the state legislature to help contain soaring insurance costs and provide low-cost insurance for low-income drivers. Only one, SB 941, authored by Sen. Pat Johnston, D-Stockton, is no-fault.

Another bill, authored by Assembly Speaker Willie Brown, D-San Francisco, calls for mandatory arbitration of smaller claims and a low-income insurance policy, and a similar bill was introduced by Sen. Bill Lockyer, D-Hayward.

Although rejected by voters in a 1988 initiative and by lawmakers in 1991, a no-fault measure appears to have a greater chance of approval than in the past. There is a growing realization that cutting litigation costs is vital to reform the system, and state Insurance Commissioner John Garamendi in 1991 changed positions and joined Gov. Pete Wilson in backing no-fault.

A no-fault ballot initiative also has been threatened by Assemblyman Ross Johnson, R-La Habra, and Sen. Frank Hill, R-Whittier.

If some form of no-fault or cost control is the 1992 sugar pill for the industry, the bitter medicine will be the continuing efforts of Commissioner Garamendi to get auto insurance companies to refund $2.5 billion to California drivers, under his interpretation of Proposition 103.

Garamendi has refused to allow insurers to alter their rates until they pay their refunds and is tacking a 10 percent per year fee on the refund tabs that insurers owe.

Only a few mutual insurers have agreed to provide refunds, while most appear poised to fight the regulation in a series of administrative hearings or through lawsuits which contend that the refunds violate the insurers' rights to a fair rate of return.

Of even greater concern to insurance companies than whether they need to pay the rollbacks is Garamendi's vow to establish maximum profit levels for individual companies under the mandate of Proposition 103. The formula to determine the levels is still being written and hearings are expected.

Many insurers already resent the get-tough stance of Garamendi, who took office last year as the state's first elected commissioner. And he will be even more powerful in 1992. A law passed in 1991 will allow Garamendi to remove insurance company officers, directors, employees and other insiders, as well as insurance brokers, if they commit "unsafe and unsound acts."

"That's a pretty extraordinary power for the commissioner to have," noted one legislative consultant who requested anonymity.

Also confronting the industry this year is the high rate of fraudulent claims in California. Mooney said he feels optimistic the problem will be addressed by insurers setting up special anti-fraud units, greater police awareness of the problem and increased coordination and training in dealing with the problem.

The debate over workers' compensation is also likely to heat up, with medical and legal costs expected to continue spiraling upwards. Some insurers expect a massive withdrawal from the costly Los Angeles workers' comp market following Garamendi's surprise announcement in December that he would limit workers' comp insurers to a 1.2 percent hike in their minimum rate -- vs. the 11.9 percent rise they had sought.

"Generally, I think the industry will withdraw from unprofitable industries and areas -- which for many workers' comp companies includes all of L.A.," said Stanley Braun, chief executive of Pac Rim Holdings Corp., a small but rapidly expanding workers' compensation insurer based in Encino. He added he believes dividends returned to employers by workers' comp insurers will be reduced.

Perhaps the only good news is that insurers, police and government officials all appear to be gearing for an all-out attack on fraudulent workers' comp claims, a key factor in escalating costs.

On Jan. 1, workers' comp fraud became a felony punishable by imprisonment in state prison for up to five years, the result of a 1991 law by Sen. Robert Presley, D-Riverside, aimed at putting teeth into anti-fraud efforts.

A push for broader reform of the state workers' compensation system is expected in a bill that likely will be authored by Assemblyman Burt Margolin, D-Los Angeles. A 1989 reform bill is deemed a failure by most parties.

Life insurers hope that 1992 will mark a return to stability, after the failures of First Executive Corp. of Los Angeles and Mutual Benefit Life Insurance Co. of Newark, N.J., in 1991 dramatically weakened public confidence in the industry and its investment strategies.

More than 100 bills were passed nationwide last year which strengthened regulations on what risky investments -- such as real estate and junk bonds -- life insurance companies could have in their portfolios, said Gene Grabowski, director of media relations for the American Council of Life Insurance.

"We don't predict 1992 will be as difficult at 1991," he said. Grabowski also noted that after the failures of First Executive and First Capital Holdings, the few remaining large life insurers in California are strong.

Executives at individual companies are also upbeat.

"Life insurance will do better in 1992 than 1991," said Eli Broad, chief executive of West Los Angeles-based Broad Inc. and its SunAmerica Life insurance subsidiaries. "The public perception of the quality of assets should improve and the companies should be modestly more profitable. I think pricing will be more intelligent."

Increasingly, companies like Broad are targeting their efforts to individuals saving for retirement, a group whose 45-to-60-year-old members are expected to increase by 15 million through the 1990s as baby boomers age.

Broad also said his 3-year-old company, which had its best year ever in 1991, would be looking for expansion opportunities in 1992.

The final status of First Executive's major subsidiary, Executive Life Insurance Co., will almost certainly be decided in 1992. Garamendi, who held a bidding war for the $10.1 billion subsidiary throughout last year, chose a $3.55 billion proposal put forward by French investors Altus Finance and Mutuelle Artisanale de France. A state court judge subsequently approved Executive Life's sale to Mutuelle-Altus.

One key question is whether the new Mutuelle-Altus company, to be named Aurora National Life Assurance Co., will simply wind down its obligations to existing policyholders or aggressively compete for new business. A Nov. 9 Mutuelle-Altus statement said that "initially" the company does not plan to compete for new business and will instead concentrate on stabilizing the company.

Also awaiting action are the insurance subsidiaries of Century City-based First Capital Holdings Inc., which was also laden with junk bonds and which had its two main subsidiaries seized by California and Virginia regulators in May 1991.

The fate of its subsidiaries -- First Capital Life Insurance Co., based in San Diego, and Fidelity Bankers Life Insurance Co., based in Richmond, Va. -- is expected to be more easily resolved than First Executive's because First Capital was smaller and had fewer junk bonds.

Also to be resolved this year is the status of the new state residential earthquake relief fund, which was scheduled to become effective in Jan. 1, 1992, and provide homeowners with $15,000 of coverage to take care of the high deductible charged by most insurers on earthquake damage settlements.

Insurance Commissioner Garamendi, however, said the fund would go bankrupt if a large earthquake took place before it has had time to build up resources.

Garamendi is required to implement the fund. But he was also pressing lawmakers to reformulate it into a disaster relief fund instead of one which insures homeowners.