USF&G moves no surprise Skeptics criticized strategy for years

November 08, 1990|By Thomas Easton | Thomas Easton,New York Bureau of The Sun

NEW YORK -- For years, skeptics on Wall Street criticized USF&G's strategy, epitomized by the Baltimore insurance giant's dividend, which vastly exceeded profits, lackluster results from underwriting insurance and disappointing efforts to diversify.

As a result, yesterday's slash in the company's dividend and the retirement announcement by its chief executive, who staked his career on its continuance, were almost non-events on Wall Street. Both had been expected.

"When a company does so badly, someone has to stand up and say whoops," said Robert Branche, of Branche Research.

USF&G's shares fell 62.5 cents yesterday, to $11.625, less than half as much as they fell the day before, when the dividend cut was rumored, and an almost irrelevant amount given their plunge from almost $30 early this summer.

The dramatic fall in the stock price had inflated the implied dividend yield to more than 20 percent, about five times the market average. But the dividend, at $2.92 a share on an annual basis, was more than double what the company was expected to earn, prompting most analysts to question whether it could be maintained.

"You have to ask yourself if that's why anyone was holding" the stock, said a major institutional money manager, who was among many interviewed who requested anonymity. "The answer is no, and that's why you see very little reaction in the market today."

But even though yesterday's news was not enough to depress USF&G's stock price further, it is un

likely to improve the company's battered reputation either.

"The dividend cut is a good thing, but it doesn't solve their core problem: to decide what business they are in and then focus on it," Mr. Branche said.

The most important element in this -- a new chief executive who has been hired but not revealed -- is likely to have a decisive impact on investor confidence. One investment manager said the new chief executive's reputation alone could immediately boost the stock $3.

Until the new chief executive is revealed, however, the company's announcement of $75 million in cost-cutting beyond the dividend cut is being viewed skeptically.

"Expense cutting is nice to talk about, and it makes numbers look good, but you have to know what lines to de-emphasize and what lines to emphasize," Mr. Branch said. "These are the things that must be done, not just fire a lot of people."

Several analysts and investment managers speculated that the company could cut tens of millions of dollars in expenses, without affecting revenues or employment, merely by eliminating its image-oriented advertising program.

"It's pretty wide open" for the new chief executive, said Ernest Jacob of Barclays de Zoete Wedd. "Right now we are in a state of suspended animation."

Meanwhile, the company's financial results for the third quarter, reported yesterday, were discouraging. The company lost $15 million, or 22 cents a share, but the reported losses don't fully reflect changes in USF&G's vast investment portfolio. Losses that are not included in its quarterly summary release include

$160 million in equity investments, Edwin Pickett, USF&G senior vice president, said, and unrecognized losses in its fixed-income portfolio soared from $154 million to $280 million.

The market value of USF&G's billion-dollar "junk" bond portfolio declined from 91 percent of its stated worth to 86 percent, Mr. Pickett said, and no money was reserved for layoffs or shifts in operations stemming from the planned cost reductions.

In the company's operating subsidiaries, property and casualty operations were marginally profitable, earning $17 million. Financial-services operations, the focus of intensive investment, lost $5 million, and life insurance earned $15 million.

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