Fitch Ratings commented today that its ratings on 21st Century Insurance Group (21st Century) remain on Rating Watch Positive.
Fitch placed 21st Century’s ratings on Rating Watch Positive in January 2007 following the company’s majority-shareholder American International Group, Inc.’s (AIG) announcement on January 24 of a proposal to acquire shares of 21st Century that it does not currently own.
The Positive Rating Watch indicates that 21st Century’s ratings are likely to be upgraded if AIG successfully completes its proposal. Fitch currently rates AIG’s Insurer Financial Strength (IFS) ‘AA+’ and Issuer Default Rating (IDR) ‘AA’. The Rating Watch will ultimately be resolved upon the proposal’s outcome. If the unsolicited offer is not accepted by the public shareholders, 21st Century’s ratings would be affirmed.
Fitch’s ratings of 21st Century continue to reflect the company’s strong competitive position in the California auto insurance market, good underwriting results, low-cost direct distribution platform, and strong balance sheet. Partially offsetting these positives is the smaller size of the company relative to its national competitors, the company’s mono-line product offering, and concentrated geographic focus in the competitive California auto insurance market.
21st Century’s largest market share is in California where it ranks among the state’s 10 largest writers of personal auto insurance. The company is expanding its personal auto business to other states where it sees opportunity for profitable growth as part of its multi-year national expansion strategy. Fitch believes the company’s prudent use of technology, advertising, and low-cost distribution allow it to enter new states efficiently and effectively. In 2006, 89% of the company’s direct premiums written derived from California-based policyholders, down from 94% in 2005.
For the first quarter of 2007, 21st Century reported a Combined Ratio of 95.3%, versus 94.7% in 2006, reflecting an increasingly competitive climate in California and increased expenses related to the company’s growth. Fitch believes that the company’s good underwriting results are due in part to strict underwriting controls, including a high level of detailed pricing segmentation outside of California. 21st Century’s expense ratio continues to be lower than peers’ despite its increased advertising expenditures due to its direct distribution platform and growing economies of scale as the company expands. Additionally, market conditions have been relatively stable, with claims frequency remaining steady and severity trending slightly upward.
21st Century Insurance has a strong balance sheet with limited investment and reinsurance-related risk. The company invests primarily in investment-grade, fixed-income investments, and its reinsurance recoverable is small relative to the company’s surplus and is due from highly rated companies, including subsidiaries of AIG. Operating leverage is comparable to that of other highly rated personal auto writers.
The following ratings remain on Rating Watch Positive:
21st Century Insurance Group
–Issuer Default Rating ‘A-‘;
–$100 million senior notes 5.9% due 2013 ‘BBB+’.
21st Century Insurance Company
21st Century Casualty Company
21st Century Insurance Company of the Southwest
–Insurer financial strength ‘A+’.