20th Century Insurance Rigs a Tight Ship for Industry Squall

Behind his desk on the seventh floor of the 20th Century Insurance office building in Warner Center, President G. Robert Thompson has a picture of a sailboat. Appropriately, it is a tightly rigged boat sailing full tilt through rough waters.

“Yes, the waves look pretty big,” Thompson said with a laugh. “But we’ve got our storm gear together. We’re weathering pretty well.”

As metaphors go, the picture on Thompson’s wall is a fair enough clue to the state of affairs at the Woodland Hills-based insurance company. Long known for its skill at cost-cutting and selective marketing, the fast-growing firm is doing its best to make headway in a generally depressed industry.

A recent study by Best’s Insurance Management Reports, an authoritative source of industry statistics, says 20th Century Insurance is the fastest-growing property and casualty insurance company in the country. Sales in 1984 were up 34% over those in 1983, with a 31% gain reported in the first three months of 1985.

Record Income

In the last decade, the firm has become the sixth-largest automobile insurer in California. Both its assets and its income from premiums have nearly doubled in the past two years, to more than $200 million. Net income was a record high of $12,780,519 in 1984.

At the same time, there are signs of some turbulence: The company posted its first underwriting loss in 25 years during 1984--paying out $103.50 in claims for every $100 it received in premiums. The company posted a net loss of more than $1 million in the first three months of 1985. And rates were increased in February because of increased operating expenses, with a second increase scheduled for August, 1985.

On balance, though optimistic, Thompson acknowledges being worried. Even at an insurance company known for its growth, there is reason to believe that “something’s got to give” before long.

What gives will not be the company, because 20th Century is financially stable. But there is concern among its officials that industry trends pose a formidable challenge for the 27-year-old company.

Rising Costs

Thompson’s point of view is nothing new in the property and casualty end of the insurance business, which lately has been fighting steadily rising costs. In the past several years, the number of claims and the costs of claims have risen faster than the rate of inflation, and often more rapidly than income from premiums.

Triggered by ballooning medical and repair fees and by periodic surges in the number of automobile accidents, the costs began to catch up with the nation’s insurance companies a few years ago.

The twist at 20th Century Insurance, however, is that bad news wasn’t always bad. From the beginning, the company has attempted to undersell its competitors by offering “low-risk” car insurance directly to customers.

Unlike most other insurance firms, the 800-employee company has never employed a sales force, thereby eliminating overhead tied to commissions, salaries and branch offices. Claims and sales are centralized in a gleaming 11-story building in Warner Center. Customers are wooed through a direct-mail network built on closely guarded mailing lists.

Selective About Clients

What’s more, the company has long been known as stubbornly selective in its choice of customers, by virtue of general rules excluding first-time buyers, drivers with an accident in the last three years and owners of expensive cars. Because low-risk drivers have fewer accidents, the company has been able to keep its rates low.

As a result, by its own account, 20th Century has made many of its gains by feeding off the competition. Customers rattled by rate increases have turned to the firm for relief, and these gains have led to what Thompson calls a steady “word-of-mouth” business.

For most of its history, 20th Century has been controlled by Louis J. Foster, a former salesman who set up an insurance cooperative downtown in a 600-square-foot Spring Street office in 1958. As president and later chairman of the company, Foster presided over 25 years of steady sales increases, before handing over control of day-to-day operations to Thompson in 1983.

Foster remains involved in the company as chairman of the board of directors, providing what Thompson describes as “active advice on questions of direction.”

6% of County Market

The company estimates that 20th Century has about 6% of the Los Angeles County automobile insurance market and 20% of the automobile insurance market in the San Fernando Valley.

About 80% of the firm’s business is in Southern California, the industry estimates. The firm does no business outside the state.

As it has grown, 20th Century has drawn mixed reactions from clients and analysts. Although the company boasts of a 95% renewal rating, it lost a highly publicized 1981 court battle with two Los Angeles women who accused the firm of discriminating against minorities. A Superior Court jury awarded the women $3.25 million in damages, a verdict the company appealed.

The case eventually was settled out of court after the company agreed to pay an undisclosed amount to the women.

Aggressive Reputation

Steven Miller, the state field director of Common Cause and the chairman of an umbrella organization of consumer groups that monitor the insurance industry, says 20th Century has earned a reputation as an aggressive, somewhat stingy firm in terms of both its clientele and its treatment of accident claims.

But Jorge Sandoval, a spokesman for the California Department of Insurance, said the state has not received an abnormal number of complaints against the firm. The department does not release complaint statistics.

Officials of 20th Century deny that the company has ever discriminated against minorities, although they concede that the company follows an industrywide practice of increasing premiums in areas with a high rate of claims. Thompson said the company screens its clients on the basis of “subjective” factors, including accident records and prior insurance, but never on the basis of race or income.

On the subject of claims Thompson is vague, but emphatic.

“We are fair,” he said. “We’re not going to roll over and play dead, but I don’t think our record is exceptional in that regard.”

If anything, in fact, Thompson believes the company’s conservative reputation has made it increasingly attractive to potential clients. Although the company declines about half the applications it receives, Thompson says the Woodland Hills office handled a record 1,020 applications in a single day this month.

In the first three months of 1985, sales rose about 30% from last year’s first quarter. Part of the gain was because of a continuing campaign to expand the company’s San Diego market, which Thompson said grew by 35% in 1984. He said the company is planning to undertake a similar expansion campaign in Northern California by the end of 1985.

Inflation in Costs Termed Alarming

At the same time, however, Thompson agrees that these are rough times in the insurance industry. Cost increases have helped bring customers to 20th Century over the years, but the inflation in costs has become alarming, he says.

Those increases were reflected in the company’s posting of an operating loss of $1.3 million during the first quarter of 1985, contrasted with a profit of $585,116 during the first three months of last year.

Like others in his industry, Thompson blames the loss on the increasing frequency and size of claims. In the last year alone, he noted, the average personal-injury claim rose by 26%, from $4,390 to $5,500. Other claims have increased at a similar rate, prompting the company to increase its premiums by 7.9% in February.

The scheduled August increase, Thompson said, will be the largest in the company’s history but will still leave the company’s premiums below average.

Worried About Lawsuits

Thompson also is worried by the increasing number of lawsuits filed in insurance disputes and by the size of damages awarded in some of those cases. Although 20th Century is not involved in a “major” legal dispute, Thompson noted that multimillion-dollar judgments are commonplace these days.

“It’s a general thing, but we have a very litigious-minded society,” he said. “When you drive around and see a bumper sticker that says, ‘Hit me, I need the money,’ you’ve got the psyche outlined pretty well.”

To combat the “external factors” affecting the industry, Thompson advocates legislation controlling the size of punitive damages in civil cases.

Thompson predicts that, with the help of the February rate increase, the company will post a profit in its next quarter. He also predicts that the company will continue expanding its market share in both Northern and Southern California. 20th CENTURY INSURANCE CO. AT A GLANCE 20th Century Insurance Co., based in Woodland Hills, sells policies to low-risk drivers and homeowners and is the sixth-largest insurer of private passenger automobiles in California. The company has 800 employees and 10.9 million shares of common stock outstanding. For fiscal years ended Dec. 31 in millions of dollars REVENUE

‘84 211.0 ’83 159.4 ’82 119.3 ’81 99.9 1980 77.3

NET INCOME

‘84 12.8 ’83 8.5 ’82 10.3 ’81 11.4 1980 8.5