Earthquake-battered 20th Century Insurance Group says it must triple its earthquake insurance rates for most of its 75,000 customers if it wants to stay in that line of business and survive.
The Woodland Hills-based insurer--which has had nearly two-thirds of its statutory surplus wiped out by an estimated $600 million in claims from the Northridge earthquake--told state regulators Wednesday that without the requested increases, the next big quake will leave it bankrupt.
20th Century is the fourth-largest writer of earthquake policies in Southern California, but unlike its major competitors, its risk is not evenly spread statewide. Its homeowners and earthquake insurance business is overwhelmingly concentrated in the San Fernando Valley, location of the worst destruction from the Jan. 17 quake.
In some ZIP codes, 90% of 20th Century customers filed claims from the Northridge quake, despite the 10% deductible, company President Jim Curley testified Wednesday morning in a public hearing on the rate hikes at the state Insurance Department's Los Angeles offices.
A representative of an insurance agents trade group told regulators that two large insurers--Chubb Group and TIG Insurance Co.--have already sharply curtailed their writings of California homeowners and earthquake insurance, and he said he expects more to follow.
"The availability of homeowners insurance is drying up," said Stephen L. Young of the Independent Insurance Agents and Brokers of California. Young said he expects a wave of non-renewal notices by August or September.
No other carriers have yet applied for earthquake insurance rate hikes, but several witnesses at the hearing said more should be expected.
Financial analyst Mike Ericksen said 20th Century, as a low-cost provider, keeps competitors' rates down.
"If it weren't for 20th Century's pressure . . . I don't think rates would be this low today," he said.
Two 20th Century policyholders complained about problems they have had with the company and said the proposed increases would make coverage unaffordable.
20th Century is seeking earthquake rate hikes averaging 172% statewide for conventional homes and 400% for condominiums. But for the 80% of its customers who live in areas considered at high risk for earthquakes--most of Los Angeles--the increase would be more like 200%, Curley said.
The annual premium would rise to about $900 from the current level of $300 for $150,000 worth of coverage on a wood-frame house. In outlying areas, the rate would double to $600, Curley said.
The firm also seeks a 21.8% increase in homeowners rates. 20th Century has written homeowners and earthquake insurance since 1982, without a rate increase.
An Insurance Department spokesman said a ruling will be made within a week and a half. Insurance Commissioner John Garamendi has authority to issue an interim rate increase on the earthquake rates, pending an evidentiary hearing that has been requested. Because no hearing has been requested on the homeowners rate hike, he has the power to accept or reject it outright or negotiate a compromise increase.
"It is absolutely imperative that we get virtually everything we've asked for," Curley said.
He said he hopes to have a preliminary decision on the request before the May 24 annual meeting of the insurer's parent company, 20th Century Industries.
Curley expects to hear from angry shareholders, who have seen the company's stock wither from $27.125 a share on the day of the quake to $14.875 on Wednesday, down 87.5 cents in trading on the New York Stock Exchange. Total market capitalization has slid to $765 million from $1.4 billion when the quake struck.
Shareholders will want to know why 20th Century--a profitable auto insurance writer throughout its 36-year history--sells homeowners and earthquake insurance at all, when those lines provide only 10% of its revenue and nearly 100% of its headaches.
This week, 20th Century was forced to restate its first-quarter results to a loss of $340 million, or $6.61 a share, from an earlier figure of $256.1 million, or $4.98 a share. The restatement was necessitated by the company's realization that likely claims losses from the earthquake had ballooned to $600 million from $475 million predicted less than a month ago.
The alternative to a rate increase is withdrawing from the homeowners and earthquake insurance business entirely, Curley said. California law requires firms that write homeowners policies to also offer earthquake coverage, so it would be illegal to exit earthquake alone.
Curley estimated that if the increases are granted, half the company's current earthquake policyholders would drop their coverage or seek it elsewhere.
20th Century representatives did not offer a strong rationale for staying in the homeowners and earthquake lines. Senior Vice President Rick Dinon came closest, when he said that as a Valley-based company with most of its customers as neighbors, 20th Century is reluctant to abandon the business.
Anticipating staying in the earthquake insurance business, 20th Century has lined up $500 million worth of reinsurance as a cushion against another serious earthquake. If the firm can secure the coverage, it would be the largest single purchase of earthquake reinsurance in history.
The premium for the coverage would be about $65 million a year, or nearly three times as much as the $22 million the company collects in annual earthquake insurance premiums. The rate increase would boost premium receipts to barely more than the cost of the reinsurance coverage, Curley said.
Larger carriers such as State Farm and Allstate self-insure to a greater degree. 20th Century, under the deal it hopes to negotiate, would be responsible for the first $60 million of losses in an earthquake, with reinsurers picking up the next $500 million.
Two major financial rating agencies, A.M. Best Co. and Standard & Poor's, have 20th Century's ratings under review with further downgrades contemplated. Best has already lowered the company's rating two notches, to A- (excellent) from A+ (superior). Standard & Poor's has dropped its rating from AA (excellent) to BBB+ (adequate).
A Best spokeswoman said the firm is awaiting Garamendi's decision on the rate hikes before taking additional action on ratings.