Insurance company officials, freed by a state Supreme Court ruling from the prospect of mandatory rate rollbacks, said Friday they could adapt to the rest of an insurance initiative passed by voters last fall.

The court's ruling Thursday upheld most of Proposition 103, a consumer-sponsored initiative that gives the state greater control over insurers.But the court rejected parts of the initiative that called for mandatory rollbacks and a one-year freeze of auto, property and liability rates at 20 percent below November 1987 levels.

"A lot of industry fears have been relieved, because it appears the court understands what constitutes a reasonable return" on investment, said Scott Carpenter, spokesman for the Western Insurance Information Service, an industry group.

"We think we can live with it," said State Farm Insurance spokesman Ron Arnold.

Many of the same companies had threatened to quit the lucrative California market after passage of Proposition 103, the farthest-reaching of five insurance-related initiatives on last November's ballot.

State Insurance Commissioner Roxani Gillespie blocked companies from leaving in the immediate aftermath of the referendum, citing Proposition 103's ban on arbitrarily refusing to renew auto insurance policies and a state law requiring a withdrawing insurer to arrange substitute coverage.

Thursday's ruling broadens insurers' exemptions from the proposed rate rollback and appears to allow current rate-setting practices to continue through November, unless the insurance commissioner intervenes.

The conservative court ruled that Proposition 103 was too narrow in excusing insurers from the rollback and freeze only if they could prove a "substantial threat of insolvency."

Constitutional guarantees of property rights require a "fair rate of return," the justices said; in addition, insurers who apply for exemptions from the rollback can continue to set their own rates, subject to a later decision by Gillespie on whether the amounts are more than necessary for a fair return.

Starting in November, any rate increase will need advance approval from the insurance commissioner, who is currently appointed by the governor but under Proposition 103 will become an elected official after 1990.

Although most companies have not yet indicated whether they intend to seek such exemptions, virtually all the insurers are expected to do so.

"We already justify rates in a number of states across the country, and we can do that in California," said Gordon Hamilton of Safeco Insurance Co. of America. "It should be an easy job."

"It should be the end of sky-high, take-it-or-leave-it rate increases," countered Attorney General John Van de Kamp, who opposed Proposition 103 on the ballot but defended it in court. Consumer activists who sponsored the measure promised to monitor Gillespie's enforcement efforts and use their new rights under the law to gain access to insurers' financial records.

Gillespie, an appointee of Gov. George Deukmejian, is a former insurance executive.