Post-Quake 20th Century Rethinks Strategy : Insurance: In the face of $325 million in earthquake claims, analysts say the company must expand outside of Los Angeles to reduce its risk.

Facing $325 million in earthquake claims and the loss of one-quarter of its capital and surplus, 20th Century Industries Inc. is likely to change its strategy on homeowners insurance and try to get more business outside of Los Angeles to lessen the financial risk of another big earthquake, analysts say.

Although analysts expect 20th Century to keep selling homeowners insurance, they expect the company to speed up its expansion into Northern California and San Diego as a way to spread its risk over a wider geographic region.

The Woodland Hills company, parent of 20th Century Insurance Co., declined to comment about its post-earthquake strategy. “Some of these issues are tough,” Senior Vice President Rick Dinon said. “That’s why we’re not prepared to talk about them yet.”

20th Century, best known as an auto insurer, a decade ago broadened into home insurance to help the company grow. But even now, its auto business generates more than 10 times the revenue of its homeowners policies, and yet the majority of those $325 million in quake damage claims are from 20th Century’s homeowners policies.

To try to protect itself financially against more big earthquakes, 20th Century said Monday that it has doubled its catastrophe reinsurance coverage to $200 million. Both reinsurance policies will be in effect through the end of June, after which the company will “carefully consider its coverage for the upcoming 12 months,” it said in a release.

Reinsurance is expensive for insurance companies and often limited in its coverage. The earthquake reinsurance policy 20th Century had through Lloyd’s of London for the Northridge earthquake will cover only $75 million of the $325 million in earthquake claims 20th Century faces, and the annual premium for that policy was $13 million, plus a $10-million deductible.

Until the Northridge earthquake, analysts considered 20th Century’s diversification into homeowners insurance a good move, because the company kept its costs low by selling homeowners policies directly to its auto customers and by concentrating in the Los Angeles area--particularly in the San Fernando Valley.

But with the earthquake, that advantage suddenly turned into a liability. Under California law, insurers must offer earthquake coverage with homeowners policies. In the areas hardest hit by the temblor, about 45% of 20th Century’s policyholders had earthquake coverage--a high proportion relative to the industry, said analyst John A. Hall at Northington Partners, an Avon, Conn., insurance industry research firm.

For 20th Century, the earthquake couldn’t have hit in a worse place.

“The issue of concentration has been a big strength for them,” said analyst Vincent J. Dowling Jr. at Paulsen, Dowling Securities, an insurance industry research firm in Boston. “They’ve had critical mass and they get referrals, and this has allowed them to have the lowest expense ratio in the industry. There’s a flip side to that concentration when you’re exposed to earthquakes.”

On the day after the Northridge earthquake, 20th Century Chief Executive Neil H. Ashley said he expected total quake damage claims to come in under $100 million. But as policyholders kept filing claims and damage to homes was found to be more severe than previously thought, the company kept raising its projected quake claims to the current estimate of $325 million. As a result, the company expects a charge of about $161.7 million in the first quarter, and another $8.5 million charge from reinstating its reinsurance.

The charges will wipe out 26% of the company’s capital and surplus, or cushion against claims, which totaled $655 million at the end of 1993.

20th Century’s stock has also taken a hit, losing 40% of its value since hitting $30.88 a share in the fourth quarter. The company’s stock closed at $18.50 a share on Monday.

Analysts now expect the company to suffer an operating loss for all of 1994 of $50 million to $80 million--not including any profits or losses on its outside investments. By contrast, in 1993 20th Century had net income of $112.6 million on $1.1 billion in revenue.

In addition, insurance rating agencies A.M. Best and S&P; CreditWire are both reviewing 20th Century to possibly downgrade the insurer’s stellar rating of its ability to pay claims. Both say that even if they downgrade 20th Century, the company will still have a high rating.

Even before the earthquake, 20th Century was trying to lessen its exposure to catastrophes in the Los Angeles area. In 1993, the company recorded an underwriting loss of $11.6 million on its $81 million in homeowners premiums earned. (It is common for insurers to lose money, or just break even, on their insurance business, but then make a net profit by investing the premiums paid by its customers.) The company’s homeowners business was hurt in 1993, 20th Century said, by $4.6 million in claims from heavy rains early in the year, and additional losses from the Southern California fires last fall.

By contrast, 20th Century last year had a $25.1-million underwriting profit from its auto insurance business on $908 million in premiums earned.

Analysts say that another big question for 20th Century is whether it will get approval to raise its insurance rates. That depends on the outcome of 20th Century’s requests to the California Department of Insurance to raise its auto insurance rates by 9.2%, and to raise its homeowners insurance policies by 21.8%.

Analyst Ira L. Zuckerman at SBS Financial Group, a Westport, Conn., investment firm, doesn’t expect a decision on the rate-increase requests before the fourth quarter.

Though analysts contend that 20th Century is due for rate increases, the company already has a contentious relationship with the insurance department and Insurance Commissioner John Garamendi over Proposition 103, the voter-approved 1988 initiative to roll back auto insurance rates. The company has become the point man in the industry’s battle to avoid paying insurance rebates, and so far in court 20th Century has avoided having to pay any rebates. Garamendi had ordered 20th Century to refund $78 million in premiums, plus interest, but the case is currently before the California Supreme Court, and oral arguments in the case have not been scheduled.

Separately, 20th Century, which has been hunting for a larger headquarters than its site in Warner Center, said it is “seriously considering” moving to Warner Plaza III, a vacant Warner Center tower developed by Voit Cos. However, 20th Century, which in January backed out of a plan to move into the proposed Warner Ridge development nearby, said it is still considering other options.