American International Group Inc., the nation's largest commercial insurer, unveiled a $216-million rescue package Tuesday for 20th Century Industries that would simultaneously bolster 20th Century's earthquake-depleted capital and give AIG a platform for expanding into the auto insurance business nationally.
The deal means that Woodland Hills-based 20th Century's survival is no longer in question, analysts said, but its independence is a thing of the past.
If the transaction is completed, New York City-based AIG will control up to 43% of 20th Century's stock, by far the largest single block. AIG would also get two seats on 20th Century's 11-member board.
The two companies said they will also form a strategic alliance to sell auto insurance nationwide, using as a model the low-cost, direct-marketing approach that 20th Century pioneered in California.
It is unclear what the deal means for 20th Century's management and employees. Richard Dinon, a 20th Century vice president, said he expects few changes, because AIG recognizes that 20th Century keeps expenses low and is profitable in auto insurance.
With more than two-thirds of its surplus, or cushion against losses, wiped out by an estimated $815 million in losses from the Jan. 17 Northridge earthquake, 20th Century had few alternatives other than to seek a partner with deep pockets.
As one of the world's most profitable insurers, AIG qualifies. Led by its aggressive and outspoken chairman, Maurice R. (Hank) Greenberg, AIG operates in 130 countries and had $113 billion in assets as of June 30.
"The rescue package came at a critical time" for 20th Century, said John H. Snyder, senior vice president of the insurance rating firm of A.M. Best Co. "We were ready to substantially reduce their rating again."
Instead, A.M. Best placed 20th Century's two insurance units, 20th Century Insurance Co. and 21st Century Casualty Co., on review "with positive implications," meaning that their B- (adequate) ratings for claims-paying ability will probably be upgraded.
Rival Standard & Poor's also placed its CCC (extremely vulnerable) rating of 20th Century on review for likely upgrade.
Investors welcomed the news, driving 20th Century's stock to $11.125, up $1.75, or 19%, in heavy trading Tuesday on the New York Stock Exchange. AIG shares eased 12.5 cents to $89.875.
Here is how the deal works: AIG would pay 20th Century $200 million for a new issue of 9% cumulative convertible preferred stock. The stock can be converted at any time at AIG's option into 20th Century common stock at a price of $11.33 a share--up to 17.7 million shares.
AIG would pay another $16 million for warrants to purchase 16 million additional shares of 20th Century common stock at $13.50 apiece. AIG also agreed to provide another $70 million in standby capital and reinsurance if needed.
There is also a so-called lockup provision: If the deal collapses, AIG would have the right to purchase 15% of 20th Century's stock at a price of $11.33 a share.
If AIG were to convert all of the preferred stock (including dividends) and exercise all of the warrants, its stake could be as high as 43%, A.M. Best's Snyder said.
Twentieth Century directors, including the family of company founder and Chairman Louis W. Foster, currently hold the largest voting block, about 25% of the stock. Their stake would dwindle to 15% if AIG exercised all its options.
Neil H. Ashley, 20th Century chief executive, said in a statement: "Sometimes good things come out of adversity, and that's how I view this opportunity with AIG. Not only is the capital availability needed, the opportunity to apply our personal-lines expertise over a broader geographic area is an exciting development."
AIG had earlier targeted domestic auto insurance and other "personal lines" as an area for expansion, "and this investment in 20th Century is a further step in that direction," chairman Greenberg said in a statement.
The transaction is subject to approval by the California Insurance Department, which was briefed on the proposed deal last week by 20th Century representatives. The regulators had ordered 20th Century to present a plan for boosting its surplus to one-third of its annual premiums.
"We're pleased that they have submitted a plan and will give it a close review," Insurance Department spokeswoman Elena Stern said Tuesday.
Insurance Commissioner John Garamendi granted 20th Century a 6% rate hike Sept. 14, part of which was meant to rebuild surplus. The increase will be scaled back to 3% when the surplus reaches one-third of premiums.
After the infusion from AIG, 20th Century's surplus would be about one-fourth of premiums, estimated John A. Hall, an analyst for Northington Partners in Avon, Conn. "That's still a little high, but it's certainly a lot better than a month ago," he said.
Besides earthquake losses, 20th Century also faces a $119-million liability in the form of Proposition 103 rebates ordered last month by the California Supreme Court. Expecting to win its challenge to the implementation of the 1988 insurance rollback initiative, 20th Century had set aside only $50 million in reserves for possible rebates.