Before the Northridge earthquake, 20th Century Insurance was the Wal-Mart of the auto insurance business in California. Its rock-bottom prices were an industry benchmark.
Things have changed.
Since the January 1994 quake, 20th Century has lost about 97,000 auto policies--or 9% of its car insurance business.
That's because as the Woodland Hills insurer exited the homeowners business, it left behind some angry homeowners with quake claims and others with trouble finding new quake insurance. As a result, some policyholders protested and took their car policies with them.
20th Century also jacked up its car insurance prices about 10% to help build up enough capital to stay in business and gradually lost its luster as the best buy for drivers with good records.
The company's problems created an opening for longtime rival Mercury General in Los Angeles, which last year cut its new car policy insurance rates 15% to 20%. Mercury General started running aggressive comparison price ads showing they were cheaper than 20th Century, Allstate, Farmers and other big rivals, and picked up 81,000 car policies in just 15 months.
Those ads peeved William Mellick, chief executive at 20th Century, because they were the same kind of low-cost, comparison-price ads his company used to run. Mercury General's ads also slipped in a dig at 20th Century's sagging bond ratings, as it tried to survive $1 billion in quake-related damage claims.
Now Mellick, a 17-year veteran of 20th Century, has plotted a strategy to retrieve that lost car business.
This spring, 20th Century cut its average auto policy rates by 5.5%, and Mellick hopes more cuts will follow.
The goal: "Go after market share," Mellick said, and "get back into double-digit growth rates" in auto policies each year, just as 20th Century did before the Northridge quake almost toppled the company.
Turmoil at 20th Century certainly "benefited Mercury as a lot of disgruntled 20th Century homeowners policyholders left," said Blair Sanford, insurance analyst with Hoefer & Arnett in San Francisco. But he thinks 20th Century can pick up speed in a hurry now that it has cut prices.
"With a competitive rate and some active marketing," Sanford said, 20th Century can grow its auto volume by 15% a year by chipping away business from State Farm, Farmers, Allstate and the two major auto clubs, which collectively control about 70% of the California auto insurance market.
When a low-cost insurer such as Mercury General or 20th Century wins over a customer, it will probably keep him or her, Sanford said.
20th Century's balance sheet is looking healthy again--and it's all but bailed out of the homeowners business. (The company's last homeowners policy will lapse in July 1997.) In the first quarter of 1996, 20th Century posted a $25.6-million profit, contrasted with a $1.4-million loss in the same period last year, and Standard & Poor's just boosted its bond rating on 20th Century to BBB+ from B-.
Mellick said 20th Century can afford to cut prices in part because it spends much less on reinsurance--backup catastrophe insurance from Lloyd's of London-types, since it no longer worries about being hammered by quake claims on homeowners policies. All this is helping nudge up 20th Century's stock price. Just before the quake, its stock traded at $27, then sank to $8.75 as doubts spread that the company could survive. On Monday, shares closed on the New York Stock Exchange at $16.75, up 12.5 cents.
The battle to win more market share by lowering prices comes at a time when Consumers Union, the publisher of Consumer Reports magazine, is blasting California's auto insurers for what it characterizes as overcharging consumers by $800 million last year. The group has petitioned the state's insurance commissioner to investigate what it calls excessive profits by the state's biggest car insurers.
Mellick and Mercury Chairman George Joseph are rivals, but they agree on one thing: The Consumers Union survey was too narrow in scope because it only looked at one year's results. In California, 1995 was a good year for the auto insurance business, Mellick said.
"There were no brush fires, no riots, no flooding, no earthquakes."
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A Matter of Policy
20th Century Insurance in Woodland Hills used to be the lowest-cost auto insurer in the state. But after the Northridge earthquake, the company raised its rates to help build up capital to stay in business. This spring the company cut its rates by 5.5% in an attempt to win back lost business. Below are the average auto policy rates in California for a 30-year-old driver with no traffic violations. This survey of some of the state's major insurers was conducted by the California Department of Insurance and does not include any rate cuts for this year.
1995 1994 1993 State Farm $396 $393 $393 CSAA (Calif. State Auto Assn.) 420 405 420 20th Century 498 380 380 AAA 528 626 643 Farmer's 656 673 768 Allstate 794 567 567
Source: California Department of Insurance