Shaken to Its Foundation : 20th Century Quake Losses Raise Questions on Its Future
The shocking $256-million loss posted Wednesday by consistently profitable 20th Century Industries has sparked concern about how the big insurer will rebound from the Northridge earthquake.
For policyholders worried about the Woodland Hills-based company’s ability to pay claims, the word from the insurance rating agency A.M. Best Co. is that 20th Century’s financial strength rating will surely drop, but its solvency does not appear threatened.
The company’s stock--already weak for the last month--plunged another 14% in trading Thursday, and an influential analyst downgraded its investment quality. The stock dropped $2.50 to $16 a share on the New York Stock Exchange.
“When you collect $98 million in (earthquake insurance) premiums over 10 years and lose four times that in half a minute, that’s not a good business,” Gerald Lewinsohn of Merrill Lynch Global Securities Research said.
Lewinsohn, who Thursday lowered his assessment of the company’s long-term earnings potential to “below average,” said 20th Century might consider dropping out of residential insurance. That sector provides only 10% of the company’s premiums, while auto insurance generates the rest.
20th Century, founded in 1956 by Louis W. Foster, who is still its chairman, is California’s eighth-largest property casualty insurer.
Richard A. Dinon, senior vice president and chief spokesman for 20th Century, deflected questions about whether the company might abandon homeowners insurance, saying the first objective is to finish handling the claims that have poured in from the magnitude 6.8 earthquake that hit Jan. 17.
As of April 18, 20th Century said it had received 31,000 homeowner and condominium claims and 9,000 automobile claims related to the quake.
The latest estimate of gross earthquake claims costs is $475 million. Based on that figure, minus adjustments for taxes and reinsurance payments, 20th Century took a $269.5-million charge against first-quarter earnings, which produced the massive loss announced Wednesday.
Rival Allstate Corp. on Thursday announced a net loss of $275.2 million for the first quarter, the second-worst quarterly loss in the company’s history, based on estimated gross earthquake costs of $950 million.
Like virtually every insurer hit by the quake, Allstate and 20th Century were forced to revise their loss estimates sharply upward.
A.M. Best estimates that total insured damage could reach $6.4 billion. The figure does not include damage to uninsured public property or losses that fall below earthquake insurance deductibles. Federal officials have estimated total damage at $15 billion.
John H. Snyder, senior vice president at A.M. Best, said the agency is reviewing its ratings of 20th Century and six other insurers affected by the quake. 20th Century currently carries an A+ rating from A.M. Best, the second-highest rating. Snyder said the rating is “going to be coming down--it’s a question of how far.”
Rival rating agency Standard & Poor’s dropped 20th Century’s rating Tuesday, the day before the loss was announced, and is considering a further reduction.
The company’s statutory reserves--or cushion against claims losses--dropped 42% because of Wednesday’s loss, from $582 million to $335 million.
Snyder added, however, that if the earthquake losses do not suddenly spiral upward from here, the company should certainly get through the crisis.
“No one should try to jump the gun on this,” he said. “I don’t see (the rating) being adjusted to the point where it’s a solvency concern.”
That sentiment was echoed by Norma Garcia, staff attorney for Consumers Union in San Francisco, who said major insurers such as 20th Century generally have adequate reserves and that the quake should not undermine policyholders’ confidence in their ability to collect on claims.
Garcia also noted that in the event of an insurance insolvency, policyholders would have their claims paid by the California Insurance Guaranty Assn.
A Bad Quarter for 20th Century
After logging consistent profits since 1986, 20th Century Industries this week reported a $256.1-million loss, the result of a flood of insurance claims from the Northridge earthquake. Investors reacted by driving the already weak stock down another 14%.
Net income (or loss) by quarter, in millions: 1st quarter, 1994: -$256.1
Monthly stock price: Thursday: $16.00, down $2.50
EARTHQUAKE COSTS
Insurance companies’ estimates for earthquake costs have been leapfrogging since the January quake, and further increases are expected. Here are the latest gross claim estimates for the four insurers most affected: State Farm: $1 billion Allstate: $950 million Farmers: $600-$800 million 20th Century: $475 million
Sources: Bloomberg Business News; Tradeline
