It would seem that Louis W. Foster would have nothing to worry about now that he has built 20th Century Industries into the sixth-largest California auto insurer.
Back in 1958 Foster started out with a one-room office, a secretary and $273,000 he raised from investors. Today he is chairman of a company with 1,200 employees, an 11-story headquarters in Woodland Hills and a stock value that tops $550 million. Over the past five years, 20th Century has enjoyed the fastest growth rate of any major insurance company in America.
But in the modern business world, where companies are traded like baseball cards, trying to preserve a thriving business is often just as hard as building it.
20th Century's stock is just developing an appeal among major Wall Street investors, and takeover sharks often travel in their company. Analysts say the company can expect to become a takeover target by the end of the decade.
Foster is hardly a fan of "this merger crud." He vows, "I'm going to try as best I can to keep this company an independent."
It was back in the 1950s when Foster, who put in 20 years as an insurance agent, had the brainstorm of selling auto insurance direct by using mailing lists. What he saved on insurance agents' commissions he could offer in bargain-basement auto insurance.
Almost three decades later, the company has such a loyal following that 95% of its policyholders renew, and 85% of its new business comes via customer referrals. As a result, the company has not done any advertising for two years. "Word of mouth is the best type of advertising," Foster said.
"At this point the company is a machine that is running on its own power," said Gerald Haims, an analyst with Bateman Eichler, Hill Richards in Los Angeles.
For the 1986 fiscal year, Haims expects 20th Century to post record earnings of $35.3 million, or $1.38 a share, on $405 million in premiums. That's up from profits of $13.7 million, or 63 cents a share, on $291 million in premiums the year before.
The company does business only in California, but with 80% of its sales coming from Southern California, analysts say there is plenty of room to grow in other parts of the state.
Less certain is just who will manage that growth.
Foster, who is a vigorous 73, appointed G. Robert Thompson as president to run the company's day-to-day operations in 1983. But the company had its first underwriting losses in 1983, 1984 and 1985, totaling $23.7 million, although it was still profitable overall, thanks to its investment income.
Most insurance companies these days lose money on their insurance business, but earn enough in outside investments to make up for it. For 20th Century, however, this was unacceptable. Last summer Foster demoted Thompson and named Neil Ashley, who put in 25 years with Allstate Insurance, as president.
Although 20th Century is showing an underwriting profit again, Ashley is 63 and the question is whether there is a capable manager to succeed him. Foster admitted that it is likely the company will have to bring in an outside executive within two or three years.
Then there is the paradox that 20th Century's growth makes it ever riper for a takeover.
Last spring, 20th Century needed to beef up its reserves against future insurance losses, so it had a stock offering, underwritten by Merrill Lynch and Bateman, Eichler, which raised $65 million.
Until then, 20th Century was the Wall Street equivalent of a dinosaur--its stock traded over the counter via pink sheets. While most major stocks are traded electronically, with up-to-date quotes and instant trades possible on computer terminals, information on 20th Century's stock price was printed each day and delivered to brokerage firms.
Trading via pink sheets makes fast or large volume trades all but impossible. As a result, big institutional investors, such as pension funds and brokerage houses, shy away from such stocks.
Foster, though, realized that there were many longtime investors in his company--every $1 invested in 20th Century in 1958 is now worth about $1,400. And, as a concession to growth, he grudgingly agreed last spring to list 20th Century's stock over the computerized NASDAQ system. "The last person I wanted to get into my company was institutions," Foster said.
Institutions Are Buying
But that's what he has. Last March, only 2% of 20th Century's stock was owned by institutions. By Sept. 30, the figure was up to 12%, according to CDA Investment Technologies of Silver Spring, Md.
Institutions routinely hold 50% of the stock of major insurance companies. Now that institutions have picked up 20th Century's scent, analysts expect them to keep buying up more shares.
T. Rowe Price, a major investment house based in Baltimore, bought up 350,000 shares of 20th Century stock. "The company has a unique, low-cost niche in auto insurance. But when it was on the pink sheets, it was difficult to own," said David Warnock, a portfolio manager with T. Rowe Price's New Horizons Fund.