20th Century on Rebound After Settling Quake Claims

Not that he needs reminders of the Northridge earthquake, but every morning William Mellick, chief executive at 20th Century Insurance Co., gets one as he walks into his Woodland Hills office.

Quake repairs are still going on at the headquarters building, plywood covers windows, wires run out of some windows and up to the roof, and yellow caution tapes close off walkways.

But a green building inspection tag on the front door reads, “No Apparent Structural Hazard,” and that finally seems true for 20th Century’s finances as well.

The Northridge quake came closer to toppling 20th Century than any other insurance company, as the firm’s damage claims soared to $990 million. A year ago, with its cash surplus evaporating and its banks closing in, Mellick had no idea if 20th Century could stay in business. “We were financially overwhelmed,” he said.

But a lot can change in a year, and the company’s fortunes have revived.

Last December, American International Group, a big New York insurer, agreed to pump in as much as $432 million in capital in exchange for up to 49% of 20th Century’s stock. The state insurance commissioner agreed to let 20th Century exit the homeowners insurance business, and in January the company settled its Proposition 103 rebate case.

Now, 20th Century is back to the future, concentrating on its rebounding auto insurance business, which it sells directly to customers without agents.

“20th Century is a better business than it was prior to the earthquake. And you don’t have to worry about a blowup from another earthquake,” said Blair Sanford, an insurance analyst with Hoefer & Arnett in San Francisco.

There’s probably not an insurance executive in the state who doesn’t have Jan. 17, 1994, on his or her list of living nightmares because of the Northridge quake, but the date Mellick prefers talking about is July 23. That’s when 20th Century’s last remaining homeowners earthquake insurance policy ran out.

“It was a good day,” Mellick says.

The company still has some conventional, non-quake homeowner insurance policies on its books, but those will be gone by July, 1997.

Getting out of the quake insurance business means that 20th Century no longer has to buy as much expensive reinsurance from firms such as Lloyd’s of London to help cover any catastrophes. A year ago, 20th Century paid $50 million for that reinsurance; this year, the tab should drop to $13 million.

Last year, because of the quake, 20th Century posted a Gargantuan $498-million loss, but in this year’s second quarter the company turned a $14.6-million profit. Some analysts expect the company to earn $45 million this year.

Auto insurance might be dull, but another earthquake won’t topple 20th Century. When the quake struck, about 92% of its insurance premiums came from auto insurance, but of the $990 million in earthquake damage claims that rolled in, only $20 million of the claims were for crumpled cars.

The company still has some earthquake headaches to sort out. Of 46,000 quake claims, nearly 3,000 are still unsettled due to disputes between homeowners and the company over how much damage is to be paid for. A fair number of those disputes will probably end up in court.

At least Mellick can joke about earthquakes now. A year ago, he says, his business card should have read, “Bill Mellick from earthquake-ravaged 20th Century.”

Then in stepped AIG, a highly profitable $11-billion company that sells property, casualty and life insurance and wanted to expand its small auto business. Last December, it closed a deal to became 20th Century’s biggest stockholder and its life preserver.

Despite its financial troubles, several companies were interested in bailing 20th Century out because of its well-known, low-cost auto insurance business. As part of AIG’s deal, it now gets 10% of 20th Century’s insurance premium revenue off the top (and takes on the risk of those policies). And each quarter AIG is paid a cash dividend or additional stock.

Most analysts figure that AIG got into 20th Century at a bargain price. “They got a terrific deal,” Mellick concedes, adding, “the alternative was unacceptable.”

Somewhat to Mellick’s surprise, AIG has basically left 20th Century alone, and did not send in a group of outsiders to run the company. For all its quake problems, 20th Century’s car insurance franchise was in good shape. “I don’t think [AIG] wanted to muck that up,” said John Hall, an analyst with Northington Partners in Avon, Conn.

AIG’s arrival did produce one subtle, yet significant change. Louis Foster, now 82, founded 20th Century. He was its chairman until AIG closed its deal, then he became chairman emeritus.

For years, Foster led the company’s legal battle against paying any auto insurance rebates required as a result of the Proposition 103 initiative that passed in 1988. Although the company was staring at a potential $100-million-plus rebate expenditure, Foster said he would stay in the courts until the very end.

Once Foster retired, 20th Century and new state Insurance Commissioner Chuck Quackenbush worked out a deal in which the company would pay $46 million in Proposition 103 rebates. Foster, Mellick concedes, “would have probably gone to the Supreme Court” to fight on.

Left untouched is the basic marketing concept Foster came up with in 1958: Sell car insurance directly, without agents, at lower prices, and insure those with good driving records. In price surveys for years, 20th Century’s auto rates have been among the lowest.

That may have changed, though, since 20th Century got a 10% rate increase approved last fall and another 3.6% auto insurance hike in June.

“I’d not consider them the lowest cost anymore. But they’re still rather competitive” on price, said analyst Sanford.

One thing Mellick did worry about was how much car insurance business he might lose because of a public relations aftershock from the company’s once-shaky finances and its disputes with policyholders over earthquake claims.

When 20th Century was allowed to let its nearly 80,000 quake insurance policies lapse, that added to a flood hitting the California insurance market. State law requires home insurance companies to also offer the option of quake coverage, so most big insurers are no longer writing any new homeowners policies.

As a result, Mellick thought 20th Century might lose 10% of its auto insurance business. That hasn’t happened. Its auto policy renewal rates are down, but only slightly, to 94.5% from 97%.

On the plus side, the company is picking up new auto business in Sacramento and the Bay Area thanks to a new $4.5-million advertising campaign.

Soon, 20th Century for the first time will start selling auto insurance outside California. Perhaps by year’s end a joint company run by 20th Century and AIG will start selling in Arizona. Mellick figures a lot of Southern Californians have moved to Arizona so 20th Century already has some name recognition. AIG will put up the capital, and 20th Century will handle the marketing and claims end.

Meanwhile, the earthquake slowly fades from Mellick’s daily worry list. On a personal level, Mellick never had any squabbles with his insurance company over earthquake damage claims to his Westlake Village home.

Why? Mellick has lived in California for 30 years, but he’s never had earthquake insurance.

“It was very expensive . . . [and] has a high deductible,” he says. If a major earthquake hit, he figured, “I’d just have to deal with it.”