Ratings firm takes new look at 20th Century as quake payouts rise.

A.M. Best Co. is reviewing the financial rating of 20th Century Industries Inc. "with negative implications" in the wake of the insurer's new estimate that it will pay out $325 million in earthquake losses -- double what it had previously reckoned, said John Snyder, senior vice president of A.M. Best.

20th Century is the first company to have its rating reviewed as a result of earthquake losses, although there may be more insurers reviewed in the future, Snyder said. He emphasized that although 20th Century may have its rating downgraded, its solvency is not in question.

Insurance companies use ratings from A.M. Best and other rating agencies in their advertising to illustrate their financial strength to policyholders as well as to potential investors, said Rhonda Ruch, spokeswoman for A.M. Best.

A.M. Best began its action of reviewing Woodland Hills-based 20th Century's A-plus rating on March 21, after the insurer announced on March 17 that it would pay out $325 million, wiping out 26 percent of its surplus, Snyder said. The insurer had estimated in early February its losses from the Northridge earthquake would be $160 million.

"It was a significant revision," Snyder said. "It prompted our immediate action."

Snyder said his Oldwick, N.J.-based insurance company rating service may also review "a number" of other insurers' ratings as a result of losses suffered in the Northridge earthquake. A.M. Best will announce the names of those companies in the next few weeks, he said.

Meanwhile, Snyder projected that total insurance company losses from the Jan. 17 Northridge earthquake may top $4 billion because "we have seen a rash of large revisions by large companies."

Previously, Property Claims Services, the insurance industry authority on insurance payouts in national disasters, put the insured loss total from the Northridge quake at $2.5 billion.

That estimate "may well have to be increased," said Jim Welsh, claims consultant for the Rahway, N.J.-based insurance information service.

Welsh said Property Claims Services is "re-surveying" insurance companies on losses from the earthquake and the results should be in hand in the next two weeks. When asked if he thought losses could top $4 billion as projected by A.M. Best, Welsh said, "I can't comment on how accurate that is."

In addition to 20th Century, Bloomington, Ill.-based Allstate Insurance Co. announced last week it increased its estimate of losses from the Northridge earthquake from $350 million to $600 million.

Snyder said he expects State Farm Insurance Group, California's largest insurer which previously figured it would take $600 million in losses from the quake, will also increase its estimate.

He said A.M. Best will not review Allstate's rating as a result of the insurer's increased loss projection. He said Allstate, which -- unlike 20th Century -- writes insurance in many states outside of California, is financially stronger this year than it was last year.

Snyder noted that even with a $325 million loss, 20th Century "will still be very financially sound. The question is if they will have an A-plus superior rating or something less."

Rick Dinon, senior vice president of 20th Century, said that "to the best of my knowledge," A.M. Best was the only insurance rating agency which was reviewing 20th Century's rating. But he added that "it wouldn't surprise me" if other rating agencies would review 20th Century or any other company with a large exposure to earthquake damages.

"We believe that we are still fundamentally very sound and prudently leveraged," Dinon said. "We have no long term debt and we are conservatively invested. We have adequate capital and surplus."

20th Century was reinsured -- in effect, had insurance to cover possible payouts on its insurance policies -- for $75 million of the $325 million loss, according to company statements.

Gerald Lewinsohn, an insurance analyst with New York-based investment firm Merrill Lynch & Co., said the company has two obvious options in dealing with the loss. It may purchase more re-insurance protection than it currently has or it may choose not to renew numerous homeowner's policies, he said.

Lewinsohn also said it was clear from the amount of losses that insurance companies were not charging enough for earthquake coverage and he called for insurers to raise their earthquake premium prices.

Dinon declined to comment on what 20th Century's strategy for dealing with future earthquake losses would be. He said company officials were now "100 percent focused" on paying out on the 29,000 claims from the Northridge earthquake.

Meanwhile, Norris Clark, chief of financial surveillance for the California Department of Insurance, said he doesn't expect any major insurance company will become insolvent as a result of losses suffered from the Northridge quake.

Since the quake, Department of Insurance officials have been monitoring 40 insurers which suffered significant earthquake losses, Clark said.

"We haven't developed anything that would indicate we have some real solvency concerns," he said. But, he added, "much like the Hurricane Andrew situation in Florida, there is a possibility you can lose some company that nobody has ever heard of."

Clark said the department's review of insurers with significant earthquake losses found those 40 companies have combined total losses of $2.7 billion as of last week. He noted that figure was 5.5 percent of the insurers' combined total surplus of $49 billion.

Surplus is used by insurers to pay out claims and is a major indicator of the company's financial health. The volume of insurance policies insurers issue is based on the size of their surplus.

Clark said that in addition to not foreseeing any serious failures of insurers, the department does not expect to issue any formal corrective action orders for insurance companies to correct financial problems as a result of the earthquake.