20th Century's comeback: insurer returns to solid footing after 1994 quake.

Bill Mellick still remembers the worst day, the day that began with the beams in his bedroom shaking him awake at 4:31 a.m. on Jan. 17, 1994.

"I knew we were having a major earthquake," recalls Mellick, president and CEO of Woodland Hills-based 20th Century Industries. "I came into the company and there were 150 windows blown out of this building. I got up on the 11th floor and computers were thrown across the room, file cabinets were thrown across the room."

But the damage to 20th Century's headquarters was nothing compared to the devastation to its balance sheet. The insurer, a major writer of homeowners and earthquake policies in the San Fernando Valley, suffered $1 billion in losses, nearly twice the amount of its reserves at the time.

Its seizure by regulators seemed imminent, its failure a foregone conclusion.

But those days are over, and 20th Century is once again basking in relative success. "Today, I feel terrific," says Mellick.

And his high spirits seem warranted.

"I think it is a better business now than it was before the earthquake; they don't have to worry about the earthquake or homeowners' catastrophe risk," said Blair Sanford, an analyst with the investment firm Hoefer & Arnett in San Francisco.

Jeanne Dunleavy, an analyst with credit rating finn A.M. Best, concurred: "Oh, they have come very far." She noted that the company, which prior to the earthquake was known as a "shining star" for its profitability, is posting profit margins almost as high as before the Northridge quake.

Equally impressive, the company's premium-to-surplus ratio, the industry's standard measure for financial stability, was at 1.67 to 1. That number is actually lower, (which means the company is financially stronger now) than it was prior to the earthquake when the ratio was 1.72, Mellick said.

For the second quarter ended June 30, the company reported earnings of $31.9 million (46 cents a share) compared with $14.6 million (18 cents a share) for the like period a year ago.

Analysts have taken note of the turnaround. In July, A.M. Best upgraded 20th Century's financial strength rating from B(vulnerable) to B+ (secure) in July.

"We also put a 'positive outlook' on them," Dunleavy said, which means the company is likely to be upgraded again within the next 24 months.

In May, Standard & Poor's upgraded 20th Century eight levels from B- to BBB+ and removed the insurer from its "CreditWatch."

Analysts' rising confidence is having a corresponding effect on 20th Century's stock price, which plummeted from about $28 a share to $8 a share just after the quake. The stock has rebounded considerably since then, and traded at between $18 and $19 a share last week.

But success hasn't come without some sacrifice - starting with independence. Twentieth Century's savior is American International Group Inc., which pumped in $216 million in late 1994 in exchange for a 42 percent equity stake.

The insurer further bolstered itself by borrowing $175 million from banks.

And then it got a boost from the Department of Insurance, which allowed 20th Century to cancel its earthquake policies on the condition it exit the homeowners' business, as well.

Prior to the quake, 20th Century was regarded as a model for its profitability and efficiency. The company, which was founded by Louis Foster in 1958, had been built on the auto insurance business - and on selling policies directly to consumers.

When the earthquake hit, homeowners' policies only constituted about 10 percent of its total business, But that exposure was sufficient to nearly bankrupt the company.

"They went from being known as a shining star to a national example of poor management risk," Dunleavy said.

But today 20th Century's fortunes are once again rising toward the heavens.

"I would say they are a star - maybe not a shining star, but they are a great company and well on their way to recovery," Dunleavy said.

Twentieth Century is now in the process of non-renewing the last of its homeowners' policies, Mellick said. But it remains the fifth-largest car insurer in the state, in terms of market share.

Analysts generally doubt 20th Century would ever get into the homeowners' business again.

"It would be the politically incorrect thing to do in the near term, since they were granted special permission to exit the market," said one analyst, who asked not to be identified.

But Mellick said the possibility still exists that 20th Century will some day get back into the homeowners' market.

He noted that, with the Legislature approving the California Earthquake Authority, insurers may now write homeowners' policies without the risk of earthquake exposure, as long as they agree to pay a one-time fee. That fee is based on the amount of homeowners' policies the insurer had on the books as of Jan. 1, 1994 (before the Northridge quake).

For 20th Century, the fee would be about $50 million, which Mellick characterized as a price too high to pay.

Mellick said 20th Century's top management is considering asking the CEA for an exception that might make it financially viable for the company to get back into the homeowners' market. "We're looking at (whether) there are other alternative ways that we could still stay in the homeowners' market," he said.