NEW YORK — First it was the thrifts, then the banks. What next?
The most palpable fear is for the insurance industry. In a market where almost all stocks have fallen, insurers have fallen further.
During the past 12 months, the Standard & Poor's 500 has declined by about one-quarter, the insurance segment by about one-third. In the past month, the disparity has widened as insurers have gone the way of banks. After all, in terms of their investment holdings, insurance companies face the same problems: unforgiving interest rates, declining real estate prices and recalcitrant borrowers.
On the other side of their balance sheets -- their liabilities -- insurance companies have had to compete as intensely for policies as banks and thrifts have had to compete for deposits and funds. The result has been more than enough business bought at a loss.
"There's concern about the industry, its exposure to real estate in particular," said John J. McElroy, principal at 1838 Investment Advisors, a Philadelphia money management firm. "Just look at major buildings in major cities that are in trouble and you discover the insurance companies have major investments."
Add to empty buildings, large slugs of "junk" bonds acquired during the latter half of the past decade and vast portfolios of (now depreciating) equities and the result is, according to several major institutional investors, enough smoke to raise concern, even if there has yet to be any flames.
Insurance executives despise being compared with thrifts and banks and point to several real differences.
Unlike thrifts, for instance, insurance has yet to go through convulsive waves of deregulation, and its regulators have not been shown to be negligent. Structurally, insurance doesn't have banking's problem of matching ephemeral liabilities -- overnight deposits -- with rigid assets -- 30-year mortgages.
And, supporting their obligations, insurance companies (with the exception of life insurers) invariably have far thicker equity cushions -- on average exceeding 33 percent, as opposed to perhaps 5 percent for banks.
That, however, isn't quite as encouraging as it may seem, since the additional capital retained by insurers is meant to buffer occasional surges in claims, not erosion in an investment portfolio.
"There has been a lot of effort made to compare insurance with savings and loans," said Paul Wish, spokesman for the industry's rating agency, A. M. Best Co. "We don't agree."
Fears about health insurers' asset quality, Mr. Wish said, "are overstated," and those for property-casualty insurers "no problem."
Notwithstanding the encouraging words, insurance company stocks bear all the familiar signs of intentional market neglect. A number of well-established insurers offer yields far in excess of the 5 1/2 percent provided by savings accounts, suggesting the market believes any prospect for capital appreciation in these stocks is outweighed by the prospect of capital losses and dividend cuts.
One example of this is Hartford, Conn.-based Aetna Life & Casualty, which currently yields 7.4 percent. Another is Philadelphia's CIGNA Corp., yielding 7.8. Aetna's neighbor, Travelers Corp., yields 12.8. All three have heavy positions in real estate.
But the yields on these pale when compared with Baltimore-based USF&G. A three-year collapse in USF&G's share price, from a 1987 high of $48.75 to $16 7/8 Friday, and a steady increase in its payout have resulted in a current dividend yield of about 17 percent.
"People just don't believe that dividend can continue," said an investment analyst, who, like a number of others commenting on the stock, requested anonymity.
While no payout is set in stone, USF&G comes pretty close to brandishing a chisel. "Certainly we here at USF&G are proud of the long record of dividends we have, and senior management feels strongly that the dividend is important," said company spokesman Paul Schlough.
The problem, however, is that USF&G's earnings didn't cover its dividend last year and, based on even the most optimistic Wall Street earnings forecasts, won't be able to do so this year or next year either.
Mr. Schlough describes the company's cyclical property casualty business as being "at the bottom, and we haven't come out the other side."
Given the bleak earnings, Wall Street casts a jaundiced, if superficial, eye at the company's balance sheet and been turned off. Though the company has provided details of its holdings, many investors seem willing to overlook the nuts and bolts in favor of just two numbers: At the end of June, USF&G had $1.859 billion in shareholder equity and $1.982 billion invested in real estate and "junk" bonds.
"You have $2 billion committed to things that are of concern, and that's more than the equity," sums up an analyst. "The market is saying we don't know what that is worth."