Back at the Epicenter.

On top of everything else, 21st Century's Bruce Marlow must deal with Northridge earthquake claims once more

BRUCE W. Marlow has his hands full. Since assuming the post of president and chief executive of 21st Century Insurance Group in February, Marlow has dealt with rising costs, declining earnings and the possibility that claims dating back to the Northridge earthquake may be reopened.

As is that weren't enough, the recent resignation of Insurance Commissioner Chuck Quackenbush amid allegations of impropriety has cast a critical eye on the insurance industry. It is against that backdrop that Marlow is attempting to change Wall Street's perception of the company from its stodgy, old-school roots into a new-economy business able to attract and hold the attention of investors.

The $870 million company based in Woodland Hills carved a niche for its auto and homeowner insurance business by selling directly to consumers. By eliminating the middlemen (insurance agents), the. company says it is able to operate with lower costs, passing those savings on to its customers.

The strategy served the company well, until recently. As competition has forced auto insurance premiums downward, 21st Century's earnings have suffered dramatically. For the second quarter ended June 30, the company reported net income of just under $5 million (6 cents per diluted share), compared to net income of $32.9 million (38 cents) for the like period a year ago. Revenues rose only slightly to $218 million for the quarter, compared to just under $212 million a year earlier.

The earnings performance continued a downward spiral that began in 1999. On Sept. 14 of this year, 21st Century announced it would cut its dividend payable on Oct. 5 by half, to 8 cents a share, as a result. The company also wants to institute higher auto premiums in California by 6.4 percent, along with other cost-cutting measures.

More threats to the bottom line loom. State legislation that goes into effect next year will give homeowners an additional year to file earthquake-damage claims, potentially opening 21st Century and other insurers to new claims.

Wall Street reacted harshly to the passage of the legislation this summer. On June 30, shares of 21st Century tumbled to $15.75 from a 52-week high of $23 on May 1.

While Marlow keeps one eye focused on boosting the bottom line, the other is turned to the company's online strategy, an element he feels is crucial, not just for boosting profitability, but also for re-establishing 21st Century's reputation on Wall Street.

Question: How will the legislation extending the statute of limitations on earthquake claims affect you?

Answer: Within hours of the earthquake, literally by 7 a.m., people were in the parking lot here, because the building was damaged, issuing checks to pay for their additional living expenses. This is a company that did everything it possibly could, performed in an extraordinary manner to service its customers, lived up to all of its commitments, even though living up to all those commitments basically spent the company out of existence. It spent well more than the equity that was in the company.

This company complied with its contracts, complied with the law. Now somebody's decided, well, those rules, those agreements, those understandings that you've conducted business under are now changed, and we're changing them, not on a going-forward basis, but changing them six years later. It's like watching a sporting event and saying, "We don't like the outcome, so let's play another quarter. Let's add a few more innings onto that baseball game."

Q: Isn't the intent of that bill to make sure that those who feel they didn't get a fair hearing on their claims are able to do that?

A: The basic facts of the Northridge earthquake for 21st Century were that the company had over 46,000 claims. The company paid over $1.1 billion in losses. It's very hard to look at those facts and think that somebody was trying to do anything other than the best job they could for consumers.

If you have 46,000 claims, it's unlikely that all 46,000 of those people are going to be 100 percent satisfied. I don't think it's possible to do anything 46,000 times and have everyone be 100 percent satisfied. At this point in time, we have less than 50 claims outstanding. If there was a real pattern of wrongful behavior, I think we could rely upon the legal system to have taken us to task on that. It hasn't happened. We're going to comply with the law. I think at the end of the day the number of claims will be far smaller than anyone expected.

Q: These issues seem to have affected your stock price, nevertheless. How do you deal with that as a CEO?

A: The stock price for 21st Century dropped in early June, as the issues of the retroactive reopening of earthquake claims came up. That's perceived in general by the stock market as a pretty extraordinary event, and one that creates concern for them, for us and, I think, will be a point of concern for any other company that's California-based. I think, in general, the stock market has always been demanding of steadily improving performance. But I think what's new now is that the market really wants to understand what the vision is for the company. Is there a future?

There's a big divide between Old Economy and New Economy. You can see great names, great companies that some of us grew up with that have now become completely marginalized. Then you have New-Economy companies which seem to have just a terrific future. So as a CEO of a public company, what I need to communicate and what I need to demonstrate in the performance of the company is what the future will be.

Q: What is the future for 2lst Century?

A: The future for 21st Century will be as a consumer-driven organization that serves consumer needs in a highly efficient and attractive manner. 21st Century is a company with a great franchise and a great reputation among consumers. It has a very low-cost operating position, but it has an opportunity, with the development of the Internet, to become a much bigger company. It allows you to shop for insurance and understand what different prices are and do it at your leisure, when you have time to do it.

It's, at most, two to three years that we have to demonstrate that we are not going to be an Old-Economy company that will just be marginalized, but can in fact offer a pretty dynamic product and set of services to our customers. This was the company that was the pioneer in direct response. We can be the pioneer in taking advantage of new media.

Q: What has caused the decline in profitability and how do you hope to reverse that?

A: The reason is fairly straightforward. There was a decision made to cut prices at a time when the basic cost to settle claims was increasing. On a going-forward basis, we need to address both those issues, I've been in the insurance business for 25 years. This is a difficult challenge, but it is something we understand how to do. We're confident we can return this company to a high level of equity and strong pattern of earnings growth.

Q: How much progress have you made so far on delivering your product over the Internet?

A: There's already a Web site available that allows a consumer to do quite a few transactions. You can go to the Web site and get a quote and buy a policy, and it will take you about 20 minutes.

Q: What remains to be done?

A: We want the site to provide more guidance to people, so they understand what their range of choice is. We want the site to handle most of your routine transactions, so if you're changing a car or if you're changing your address, it can comprehensively handle it immediately at the site.

Q: What will it take to implement those features?

A: The issue is, it's a different experience. How you handle a customer when they call on a telephone and what kind of information you provide to them in what sequence is different than when a customer comes in on the Internet, so there is a significant element of tuning that has to go on. We do customer focus groups and we take people and put them in front of a computer and ask them to do something like buy a policy and let them work on our site and let them work on competitors' sites -- and just see which way seems to work the best for them.

Q: You've worked in insurance for many years. What keeps you in this business?

A: It turns out it's actually a fascinating business because it has so many dimensions to it. It has a sales and marketing dimension. It's an intensely competitive business. There's a lot of different ways to sell and market a product. It's a product that has tremendous customer service challenges. We receive 50,000 phone calls a week to provide service. How to make that work is very interesting.

There's also a very big claims component. What's the proper way to handle claims? How do you determine what is a fair claim? How do you make your claims process happen as quickly as possible? How do you make it happen in a way that consumers understand what's being done? These are not very simple questions. They require a lot of judgment and insight.

There's a big investment dimension. People basically pay the premium in advance and the losses get paid later, so there's an element of, what do you do with the money in the middle? There's clearly a lot of public policy, legislative activities, involved with this because we're dealing will basic questions about public safety and the right of people to drive vehicles and protect themselves from loss.

Bruce Marlow

Title: President and Chief Executive

Company: 21st Century Insurance Group

Born: Bethesda, Md., 1949

Education: Bachelor's degree in psychology, University of Pennsylvania; MBA, Harvard University 

Most Admired Persons: Martin Luther King Jr., Ronald Reagan

Personal: Married; one daughter