CORPORATE FOCUS—Quake Effects Finally Past, Insurer Begins to Rebound

0



Summary


Business:

Auto, home & personal insurance


Headquarters:

Woodland Hills


CEO:

Bruce W. Marlow


Market Cap:

$1.56 billion Dividend Yield: 1.8 %


Total Liabilities:

$640.3 million P/E Ratio: 104.7


Long-Term Debt:

none

The Northridge earthquake shook L.A. to its core on Jan. 17, 1994, and for one company the aftershocks are only now subsiding.

21st Century Insurance Group was nearly bankrupt after shelling out $1.1 billion in claims, only to survive when giant American International Group Inc. bailed it out with a $236 million infusion, later taking control of the company.

Then, last summer, the Woodland Hills-based insurer was hit by new legislation spawned by the scandal involving former Insurance Commissioner Chuck Quackenbush. It allows policyholders who feel their earthquake claims were handled unfairly to reopen the claims process.

That state law choked off a tenuous stock rally, plunging the company’s share price from a 52-week high of $21.56 last June to less than $16. Declining profits did the rest, driving the stock down to a 52-week low of $13.13 in December.

But today, more than seven years after one of the costliest natural disasters in U.S. history, 21st Century and its stock finally may be ready to put the Northridge temblor behind it.

The company reported earnings growth in the first quarter of the year, and with industry premiums on an up cycle in the auto and homeowner lines, analysts expect net income to continue to rise through 2002. That has lifted the stock over $18 a share.

Moreover, the company has positioned itself to resume the kind of growth that once made it one of the local glamour stocks, backed with AIG’s very deep pockets. Still, with the New York-based insurer in control it’s questionable whether the stock can reach its pre-Northridge heights of nearly $35; institutions wanting AIG stock can simply invest in the parent company itself.

“It’s a good company. It has competitive rates. It’s efficient,” said Gary Ransom, an analyst with Hartford, Conn.-based Conning & Co., who rates the stock only “neutral.” But with AIG holding a 60 percent stake, institutional investors tend to lose interest.”

After two successive quarters of falling earnings, the company reported net income of $4.9 million (6 cents per diluted share) for the first quarter ended March 31, up from $3.7 million (4 cents per diluted share) in the like year-earlier quarter. First quarter gross written premiums were $236.9 million vs. $233.9 million in the first quarter of 2000.

Moreover, the average projected year-end earnings by the five analysts who cover the company are 45 cents per share this year, and 65 cents in 2002, in line with company pronouncements that it’s about to enter a growth phase.

“We continue to believe that 21st Century is making all the right moves to create shareholder long term value,” writes Benna Sullivan, an analyst with Dowling & Partners Securities Inc., a Hartford, Conn. based insurance securities firm. The firm rates 21st Century only a “hold.”

The company has been trying to grow aggressively since 1998 when AIG acquired a majority of 21st Century’s stock and AIG Chairman Maurice “Hank” Greenberg signaled he wanted to see the insurer expand beyond its existing markets.

It already had expanded into the Arizona market in 1996, but in 1998 it stretched far beyond its Southern California roots, moving into the Nevada, Oregon and Washington markets. Last year, Chief Executive Bruce Marlow was selected to direct that growth, only to be hit with reopened earthquake claims.

However, the company says it has weathered the new law well, with policy holders seeking to reopen only 1.5 percent of its 46,421 claims, essentially making it a non-issue. “The reaction of the stock market was largely to the threat,” said spokesman Ric Hill. “But our point of view was that we did a tremendous job, and had very little litigation from the original claims.”

The company recently spent $100 million to upgrade its information technology systems, leaving it with a Web site that allows customers to buy policies on-line and even chat with customer service reps all in keeping with its direct sales model that eliminates agents.

After pulling out of the home market following the earthquake, 21st Century was given permission in 1999 to write new policies, and has worked out an agreement in which St. Paul Companies Inc. actually writes the earthquake insurance. Now, it’s mulling other expansion opportunities in order to meet AIG’s growth imperative.

“We could do motorcycles or boats. We can look at condos, townhomes. We could look at life. It’s something that is possible,” Hill said.

No posts to display