NEW YORK -- USF&G is among five major property and casualty insurers at risk if there is a severe economic downturn, Public Citizen, a Washington-based consumer interest lobby, said in a extensive report on the industry issued yesterday.
"These companies are not on the edge of insolvency, but we believe there are troubling business practices they are engaging in, and that could put them at risk," said the study's author, Caroline Smith DeWaal.
Moreover, the report asserts that the overall insurance "regulation is so flawed as to raise questions about public confidence in the industry." Insolvencies have risen since the mid-1980s, and many state guaranty associations have insufficient funds to pay off policy holders if even one of the major underwriters collapsed. Given a major default, the report suggested a government bailout may be required.
Besides Baltimore-based USF&G, the other insurers named by Public Citizen are Aetna, AIG, Hartford and Liberty Mutual. All released statements yesterday lambasting the study.
The report graded each company on six characteristics and specifically faulted USF&G for displaying three characteristics that are "most indicative of long-term financial ill health." These include a steady decline in the amount of surplus available to cover claims, high losses in relation to available surplus and wide swings in annual underwriting volume. Of shorter-term concern, the report added, was USF&G's large holdings of "junk" bonds.
A portfolio of almost $1 billion worth of the low-rated, high-yielding bonds were acquired by USF&G during the latter part of the 1980s, according to company filings with the Securities and Exchange Commission. That equates to about half of the company's overall net worth. Recently, the company acknowledged the market value of these securities has declined about 9 percent.
Public Citizen's standard was triggered by any insurer that held an excess of 15 percent of its surplus in junk. According to its tabulations, USF&G held 18.4 percent.
In a prepared statement released late yesterday, USF&G Chairman Jack Moseley called the Public Citizen report "irresponsible in the worst extreme."
The company did not respond directly to any of the points in the study. Instead, Mr. Moseley said that in 1989, USF&G passed all early warning financial ratio tests of the National Association of Insurance Commissioners and continues to maintain higher marks from all the primary ratings agencies. "These tests," he asserted, "as opposed to the tests used by Public Citizen are the traditional benchmarks utilized to evaluate insurance company solvency."
Public Citizen faulted the criteria used by the association.
The data used by Public Citizen data extend only through 1988, but its disturbing conclusions echo fears that have become evident on Wall Street in recent months as share prices for many of these companies, including USF&G, have crumbled under declining operating profits and depreciating investments.
For even an at-risk insurer to default on premiums, Ms. DeWaal said a number of circumstances would have to coincide: reductions in premium volumes, increases in claims, and investments either not making the money anticipated or actually declining in value.
"Another Hurricane Hugo and an earthquake when investments are bad and you could see a problem," she said.
Defaults increased dramatically in 1984, from an average of four a year to an average of 17.
Among these have been two major insurers in California and one in Massachusetts. "Insolvencies among insurance companies are approaching levels that threaten the states' ability to protect consumers," the report said.
Commenting on the report, Paul Wish, spokesman for industry rating agency A.M. Best, said the methodology Public Citizen used to rate individual companies was "simplistic." Under Best's criteria, which used 86 financial ratios instead of six, all the firms named by Public Citizen received high marks.
"Without a defined economic calamity together with natural catastrophes, it seems unlikely that any of the top 20 insurers, let alone the entire industry, will be wiped out," Mr. Wish said. "It's highly unlikely there is a wipe-out in the cards, under any foreseeable circumstance."