Rejection Is Profitable at 20th Century : But Slightly Riskier Clients Get OK as Insurer Seeks to Expand
20th Century Industries is an insurance company that’s lived by one rule for 30 years: Be finicky.
Through its 20th Century Insurance unit, the company has made its reputation as one of the lowest-cost auto insurers by dealing only through mail and telephone orders--it has no agents--and by offering insurance only to Californians with clean driving records. “They’ve got something that many, many other people don’t have,” said Neil H. Ashley, company president.
Half of its applicants are rejected for coverage, and the company simply will not insure high-performance cars such as Corvettes and Porsches, no matter how good their drivers’ records.
Conservative, yes. Successful, yes. The Woodland Hills company, which collected $500 million in premiums last year, has been one of the fastest-growing insurance companies in the nation, with total revenue climbing an average 34% a year since 1982. It now insures nearly 700,000 vehicles.
Profitable Risks
But this year 20th Century became a little less picky. The company now offers auto insurance to drivers whose records aren’t spotless, or what the industry calls “standard risks”--somebody who might have a speeding ticket from the past year or two, or perhaps has never had insurance. That’s a big change from 20th Century’s typical “preferred” drivers. Since January, a new division called 21st Century Casualty has been signing up these formerly unwelcome drivers, and make no mistake, the name of their division isn’t the only thing that separates them from 20th Century’s preferred drivers. The 21st Century drivers also pay 25% to 50% more in premiums.
Why would 20th Century bother taking on riskier customers at all if it could mean paying more claims and lowering profits?
Because those drivers will enable the company to expand without taking on a huge amount of additional risk, Ashley said. Of the applicants rejected for 20th Century coverage, “there are some very, very good risks” that are still profitable to cover at the higher rates they pay, he said in an interview.
A driver who had a recent accident that wasn’t his fault likely could get 20th Century coverage if his record otherwise was clean, but if he caused an accident he probably would be rejected. Yet 21st Century probably would accept that driver if it was just one accident and it didn’t cause serious damage and did not result from the driver being drunk or on drugs.
Vita Marino, an analyst with Firemark Insurance Review, a research group in Morristown, N.J., said the company has another reason for setting up 21st Century besides simple expansion: The November elections in California could cut the auto insurance industry’s rates.
Pressure to Diversify
In response to skyrocketing premiums industrywide, there are four propositions on the fall ballot that would slash insurance rates, some by as much as 20%. Proposition 103, for example, endorsed by consumer activist Ralph Nader, would cut rates an additional 20% for good drivers--which would cover just about all of 20th Century’s business.
Another measure, Proposition 104, which is backed by the insurance industry, also would cut the insurers’ costs by curbing the amount of damage awards that the companies would have to pay.
The upshot is that, depending on which measure passes, 20th Century could face at least a 20% cut in annual premium income because it does all of its business in California, 75% of it in Los Angeles County.
“Which is why diversifying with 21st Century makes sense,” Marino said, referring to the additional income that the new division will generate. “It’s a defensive move on their part.”
Gerald S. Haims, an analyst with the investment firm Seidler Amdec Securities in Los Angeles, said 20th Century isn’t exposing itself to huge losses by opening the new division.
“They’re taking it very slowly” in writing the new business, said Haims, who estimates that 21st Century will account for only $15 million of 20th Century Industries’ $600 million in premium income this year.
Market Uncertainty
It’s not the first time that 20th Century has diversified. In 1982, it started insuring homeowners, but again it was choosy. Its homeowners insurance covers only single-family detached houses costing $50,000 to $400,000 and located in relatively safe places, and 80% of its policyholders have come from 20th Century’s auto insurance ranks.
“We aren’t going to write one that’s going to slide down a hill or lies in the middle of the brush,” said Ashley, 65. The company insures about 90,000 houses, and by year-end it expects to take in roughly $50 million in home insurance premiums, or nearly 10% of its business, Ashley estimated.
Haims and Marino, meanwhile, are not recommending 20th Century’s stock one way or the other because of the uncertainty about which insurance propositions will pass this fall. And if the proposition that does pass is challenged in court, “the uncertainty may continue beyond the November vote and keep a lid on the stock,” Marino said.
The analysts aren’t as concerned that 20th Century posted underwriting losses of $8 million in 1987 and again in first quarter 1988. The losses stemmed from unusual events, including an earthquake last Oct. 1 (the quake cost 20th Century $1.4 million in housing claims) and poor weather in the fourth quarter, which triggered lots of accidents on the roads.
20th Century easily offset the underwriting losses with its investment income. Its net earnings last year totaled $36.3 million, up 14%, and this year’s first-quarter earnings were $7.6 million, down 12% from a year earlier.
The stock has been under pressure for much of the year. It hit a 52-week low of $15.25 a share in mid-May, about half its high of $29.625 last fall. But it has since rebounded a bit since, and the stock closed Monday at $19.375 in national over-the-counter trading.
Very Low Overhead
20th Century, which employs 1,500, was the brainchild of company Chairman Louis W. Foster, 75, who started with a one-room office in 1958. Foster, who still owns 9% of the company, figured that if he insured only good drivers, he’d pay out relatively little in claims.
So he began by insuring teachers, engineers and architects--all of whom are good risks, according to the actuarial statistics that show which groups historically are more or less likely to be in auto accidents. People in those professions still get discounts today.
To keep costs down, Foster eschewed hiring outside agents and sold insurance directly via the telephone and mail. In 1987, despite employing more than 150 phone operators, 20th Century’s overhead costs as a percentage of its annual premiums were 8%, a mere quarter of the average for companies using agents, Haims said.
20th Century also tries to limit its risk not only by refusing to cover certain sports cars, but also by refusing coverage for ultra-expensive cars. The company used to exclude any car costing more than $46,000 but recently raised that to $63,000 “to pick up the Mercedes” business, Ashley said.
20th Century now grows as much by reputation as anything. It hasn’t advertised its auto policies in three years, yet some 4,000 people call the company daily to ask about getting coverage. Why? Word of mouth about its cheap rates. And 90% of its existing customers renew with 20th Century.
“We made underwriting profits for 25 years, and in the last five years we haven’t made an underwriting profit” in auto insurance despite raising rates 18% to 20% a year since 1984, Ashley said. “I know people think that the insurance companies are the ones pushing these costs up for their own greed. It’s not true.”
Firms Should Fight
Instead, Ashley and the insurance industry generally contend that court damage awards for bodily injury claims keep rising so fast that they’re forced to keep lifting prices. 20th Century’s premiums went up another 14.5% in May.
“People know they can claim an injury, and they can go get some treatment and get a lawyer and make themselves some easy money, and they do, every opportunity,” Ashley said. “People are taking advantage of the system, and until we get that out of it, we aren’t going to cure this.
But Ashley blames his industry along with the legal system. Insurance companies have been too anxious to settle lawsuits rather than challenge them, often because trying a case can cost more in legal fees than the settlement.
