20th Century Pushed Into the Spotlight : Wall Street Taking Note of State’s No. 6 Auto Insurer
It would seem that Louis W. Foster would have nothing to worry about now that he has built 20th Century Industries into the sixth-largest California auto insurer.
Back in 1958 Foster started out with a one-room office, a secretary and $273,000 he raised from investors. Today he is chairman of a company with 1,200 employees, an 11-story headquarters in Woodland Hills and a stock value that tops $550 million. Over the past five years, 20th Century has enjoyed the fastest growth rate of any major insurance company in America.
But in the modern business world, where companies are traded like baseball cards, trying to preserve a thriving business is often just as hard as building it.
20th Century’s stock is just developing an appeal among major Wall Street investors, and takeover sharks often travel in their company. Analysts say the company can expect to become a takeover target by the end of the decade.
Foster is hardly a fan of “this merger crud.” He vows, “I’m going to try as best I can to keep this company an independent.”
Bargain Basement
It was back in the 1950s when Foster, who put in 20 years as an insurance agent, had the brainstorm of selling auto insurance direct by using mailing lists. What he saved on insurance agents’ commissions he could offer in bargain-basement auto insurance.
Almost three decades later, the company has such a loyal following that 95% of its policyholders renew, and 85% of its new business comes via customer referrals. As a result, the company has not done any advertising for two years. “Word of mouth is the best type of advertising,” Foster said.
“At this point the company is a machine that is running on its own power,” said Gerald Haims, an analyst with Bateman Eichler, Hill Richards in Los Angeles.
For the 1986 fiscal year, Haims expects 20th Century to post record earnings of $35.3 million, or $1.38 a share, on $405 million in premiums. That’s up from profits of $13.7 million, or 63 cents a share, on $291 million in premiums the year before.
The company does business only in California, but with 80% of its sales coming from Southern California, analysts say there is plenty of room to grow in other parts of the state.
Less certain is just who will manage that growth.
Foster, who is a vigorous 73, appointed G. Robert Thompson as president to run the company’s day-to-day operations in 1983. But the company had its first underwriting losses in 1983, 1984 and 1985, totaling $23.7 million, although it was still profitable overall, thanks to its investment income.
Most insurance companies these days lose money on their insurance business, but earn enough in outside investments to make up for it. For 20th Century, however, this was unacceptable. Last summer Foster demoted Thompson and named Neil Ashley, who put in 25 years with Allstate Insurance, as president.
Although 20th Century is showing an underwriting profit again, Ashley is 63 and the question is whether there is a capable manager to succeed him. Foster admitted that it is likely the company will have to bring in an outside executive within two or three years.
Then there is the paradox that 20th Century’s growth makes it ever riper for a takeover.
Last spring, 20th Century needed to beef up its reserves against future insurance losses, so it had a stock offering, underwritten by Merrill Lynch and Bateman, Eichler, which raised $65 million.
Market Dinosaur
Until then, 20th Century was the Wall Street equivalent of a dinosaur--its stock traded over the counter via pink sheets. While most major stocks are traded electronically, with up-to-date quotes and instant trades possible on computer terminals, information on 20th Century’s stock price was printed each day and delivered to brokerage firms.
Trading via pink sheets makes fast or large volume trades all but impossible. As a result, big institutional investors, such as pension funds and brokerage houses, shy away from such stocks.
Foster, though, realized that there were many longtime investors in his company--every $1 invested in 20th Century in 1958 is now worth about $1,400. And, as a concession to growth, he grudgingly agreed last spring to list 20th Century’s stock over the computerized NASDAQ system. “The last person I wanted to get into my company was institutions,” Foster said.
Institutions Are Buying
But that’s what he has. Last March, only 2% of 20th Century’s stock was owned by institutions. By Sept. 30, the figure was up to 12%, according to CDA Investment Technologies of Silver Spring, Md.
Institutions routinely hold 50% of the stock of major insurance companies. Now that institutions have picked up 20th Century’s scent, analysts expect them to keep buying up more shares.
T. Rowe Price, a major investment house based in Baltimore, bought up 350,000 shares of 20th Century stock. “The company has a unique, low-cost niche in auto insurance. But when it was on the pink sheets, it was difficult to own,” said David Warnock, a portfolio manager with T. Rowe Price’s New Horizons Fund.
Another investor is American Can, a $3-billion financial services and insurance company based in Greenwich, Conn., which recently bought 50,000 shares, according to analyst Haims.
“Yes, they’re an acquisition candidate,” said Haims, who suggests that a larger property and casualty company could make good use of 20th Century’s loyal customer base to market other kinds of policies, such as life insurance.
He also points out that 20th Century’s balance sheet is strong, with virtually no long-term debt and $430 million in tax-free investments. That cash, he said, could trigger a leveraged buy-out, in which a buyer, in effect, uses some of the company’s own money to make the purchase.
The idea of the company changing hands, whether now or in the future, does not sit well with Foster. Growing up in a small Michigan town during the Depression, he explained, encouraged him to buy goods from local merchants. He still thinks of 20th Century as a local merchant.
Sees Harmful Effect
The nationwide wave of takeovers is harmful for the companies and their employees, he believes. “I liked Ralphs better when it was Ralphs,” before the grocery chain was purchased by Federated, he said.
Unlike many companies, 20th Century has no “poison pill” amendments to make a takeover more difficult. Indeed, 20th Century officials do not even know how much of its stock is owned by institutions.
Foster owns 9% of the stock, worth about $53 million. All told, insiders own 26% of the stock. Foster takes comfort in those numbers and thinks the insiders’ holdings are enough to ward off intruders.
Analyst Haims disagrees. “It’s not enough. I’m surprised that Foster hasn’t implemented any (poison pill) program. Sometime within the next two years somebody is going to step in there,” he said.
The company’s stock closed Monday at $22.375, up 12.5 cents.
Management Age a Factor
Portfolio manager David Warnock said another factor might attract outsiders. “Any company with management that age obviously increases the chance of the company being taken over,” he said.
Whatever question there is about the company’s future ownership, there seems little doubt that Foster’s brainstorm will keep paying off: sell insurance direct, sell it cheap and insure only good drivers. “An auto accident per se is controllable. Millions drive without ever being involved in one,” Foster said.
To try and find those drivers, Foster started with a list of telephone company employees. He figured that the phone company was selective, hiring only a small percentage of applicants, and that its workers would make good insurance risks. He also targeted teachers, engineers and scientists as likely cautious drivers.
Three decades later, 20th Century still offers discounts to customers from these professions.
The company’s exact customer profile is closely guarded, as well as being a touchy subject. It is illegal to refuse insurance based on race or employment group. In 1981 the company lost a celebrated suit in Superior Court brought by two black women who argued that it discriminated against them by failing to pay their claims promptly.
A jury awarded the women $3.25 million. The case was appealed and later was settled out of court for an undisclosed sum. Foster denied the company has any racial or ethnic biases.
Rates Compared
A survey last summer by the California Department of Insurance said 20th Century had the lowest or second lowest auto rates in 23 of 37 California markets.
Cheap rates keep those calls coming. The company logs 2,500 calls a day, even though Foster stopped advertising in March, 1985, saving about $300,000 a year.
After a screening process, only 50% of those who apply are offered auto insurance. Membership in this club might be short. Drivers at fault in two serious accidents, the company said, might not be offered insurance again. As Foster put it, “We should not have to be in the reformation business.”
The company does not insure Corvettes, a popular target for car thieves. And until this month, 20th Century would not insure any car that cost more than $33,000. That limit has just been raised to $46,000. The idea is to avoid insuring cars such as Ferraris, and drivers who might do what the cars are made to do--go fast.
Foster jokes that his company car, a Mercedes 560 SEL, would not qualify for 20th Century insurance. For that matter, he said, his Bel-Air home does not qualify for his company’s burgeoning portfolio of homeowners insurance--about $23 million worth--because it is in a high-risk brush-fire area.
One item analysts watch closely in the insurance business is expense ratio, or overhead costs for every $1 in insurance premiums. 20th Century’s expense ratio is a puny 8.4%, an impressive one-third of the industry average.
Foster and Ashley talk confidently of expanding the homeowners insurance business, currently 6% of the company’s total, as well as better tapping auto insurance markets in outlying counties in the state. The growth, Foster said, “Doesn’t stop.”
And he hopes that he or his chosen successors will be the ones who enjoy that growth.
