Shaken by Quake, Other Woes, Insurers Managed a Comeback

By KATE BERRY

Staff Reporter

Some of the state’s largest homeowners insurers nearly lost their shirt 10 years ago, paying out $15.3 billion in claims for the 1994 Northridge earthquake.

But they have largely recovered, and only one major player dropped out of the market completely.

“The insurers are in very good financial condition,” said Jerry Davies, a spokesman for the Personal Insurance Federation of California, an industry trade group.

It has been argued, in fact, that the industry is better off because the state took over responsibility for earthquake insurance coverage. Rates for earthquake insurance have skyrocketed, though, and the number of homeowners who carry it statewide has dropped by half, to 15 percent.

Since the Northridge quake, some companies have encountered other problems, such as the contentious issue of mold in Texas.

The hardest-hit company in the Northridge quake, 21st Century Insurance Group (formerly 20th Century) of Woodland Hills, veered close to bankruptcy in 1994 when it incurred $1.1 billion in losses.

The company was overexposed to homeowners in its own back yard, the San Fernando Valley. Though all the other major insurers returned to the California homeowners market after pulling out temporarily, 21st Century dropped out of the homeowners insurance business entirely.

Ultimately it was saved by a cash infusion from American International Group Inc. It now sells primarily auto insurance in California and four other states. AIG owns a 63 percent stake in 21st Century and controls the company’s board.

For the third quarter ended Sept. 30, 21st Century reported net income of $12.7 million, compared with a loss of $45.2 million in the like year-earlier period. Direct premiums written rose 26 percent, to $324.2 million.

The stock still hasn’t recovered. It trades at $14 a share, compared with $20.67 a share on Jan. 10, 1994.

Another major insurer, Allstate Corp. of Northbrook, Ill., was caught up in fraud allegations following the quake including a whistleblower lawsuit that result in several out-of-court settlements.

Dan Gruber, a plaintiff’s attorney who represents nearly 300 homeowners who are still locked in litigation with several insurers, criticized Allstate for low-balling homeowners.

“Allstate is not engaging in any efforts to resolve the remaining cases,” he said.

Spokeswoman Lisa Wannamaker said: “Allstate continues to work to resolve a small number of claims that remain open.”

In the third quarter, Allstate posted double-digit increases in new premiums written for both auto and homeowners businesses. Profits more than tripled after the company changed its commission structure, to $691 million versus $248 million a year earlier.

Meanwhile, Los Angeles-based Farmers Insurance Group is still trying to recover from a homeowner’s insurance crisis in Texas that was sparked in 2001 when a jury awarded a $32 million bad-faith verdict to a Texas homeowner who had sued over mold claims.

The company then was slapped with a deceptive sales practices lawsuit by the Texas attorney general and agreed to a settlement of $117 million in reduced rates and refunds.

Farmers is a unit of Zurich Financial Services AG, which returned to profitability in the first half of last year.

State Farm, a unit of State Farm Mutual Automobile Insurance Company of Bloomington, Ill., fared well despite paying out a total of $8.7 billion for the combined tragedies of Hurricane Andrew in 1992 and the Northridge quake in 1994. It survived primarily by dipping into a surplus set aside to protect against unforeseen events. It also relied on loans from its parent company to rebuild its finances, said spokesman Bill Sirola.

Recently, State Farm has suffered from a decline in the financial markets in 2002, the latest year for which its figures are available.

Outstanding Balance

More than 1,500 claims remain from the 1994 Northridge earthquake.

Claims Amount Remaining

Insurer Paid Paid (billions) Claims

21st Century Insurance Group 46,000 $1.1 300

Allstate Insurance Group 47,000 1.7 300

Farmers Insurance Group 37,000 2.5 550

State Farm Insurance Cos. 117,000 3.5 400

Sources: Insurance companies; Los Angeles Superior Court civil litigation department