NEW YORK -- As with most large insurers, USF&G has a vast and complex investment portfolio.
The stated value of the portfolio is $11.1 billion, but whether even this sum is substantial, and liquid, enough, given the broad scope of the company's operations, was an important issue last week in the series of events that included a dramatic reduction in the company's dividend and the retirement of its chief executive.
When security analysts attempt as outsiders to assess the financial strength of an insurance company, they are typically less interested in a specific investment than in the general type of investments held by a firm, their perceived risk and their ability to be redeemed easily in the market, as well as the firm's ability to withstand losses.
Thus, the company notes in its third- quarter financial release that of its invested assets, 66 percent is in long-term bonds, 13 percent in stocks, 9 percent in real estate and mortgage loans, and 10 percent in various short-term holdings.
But analysts tend to focus on the ratio of risky assets to the company's equity -- in this case $1 billion in real estate, $943 million in junk bonds and $1.4 billion in stock. All of these categories are considered either risky or illiquid. Offsetting this is the company's equity of $1.6 billion.
The company contends that is sufficient. "For the size we are," said James Flick, USF&G executive vice president and chief financial officer, "there's nothing alarming about that.
"Real estate is not as liquid as bonds, and equities will have some fluctuations," he continued, "but if we have a good asset liability matching program in place, and we do, the fact that some assets aren't as liquid as others should not be a concern. . . . There is an efficient program in place that addresses that and an asset allocation model to minimize exposure overall."
Still, some of the risk and the potential impact of even a small shift in value were evident in the third-quarter numbers. Begin with the largest category of assets -- bonds. It constitutes $7.4 billion of the holdings.
The actual market value of these securities, the company noted, was only about 96 percent of the amount on the balance sheet. That translates to about $300 million less. USF&G contends that since it will hold these securities to maturity, there is no need to assess their value by current market conditions.
The company was also hit by steep losses in its $1.44 billion stock portfolio this year. It has already reduced equity by $240 million to account for losses in shares but has yet to apply those losses to its earnings because of accounting rules.
While the $300 million shortfalls in debt and $240 million shift in the value of its stock holdings are small when compared to the $11.1 billion of all invested assets, they are large when compared to the company's $1.6 billion in equity.
The area that receives the most comment from outsiders is the company's holdings in junk bonds, or the bonds that are rated by the major credit evaluation agencies as less than investment grade.
The company says that at the end of the third quarter, the market value of its $943 million in junk was about 86 percent of the bonds' stated worth. Unlike the shares of large companies, there is no major exchange where these bonds trade and therefore assessing prices is difficult, at best.
Mr. Flick said USF&G's portfolio is evaluated monthly by an appraiser working with the independent fund manager who oversees the junk bond investments. "Admittedly the market is fairly thin on some issues, but I would think the prices would be conservatively stated at 86 percent," Mr. Flick said.
The scope of the company's holdings is only disclosed publicly once a year in a filing with the Maryland Insurance Division. At the end of 1989, USF&G held dozens of junk issues, including many that are little known, and a mixed bag of quite prominent names including American Standard, Burlington Resources, Carter Hawley Hale, Trump Castle, Harcourt Brace Jovanovich, Integrated Resources Inc., Interco, National Gypsum, Saveway Stores, Columbia Savings and Loan, Coastal Corp., Playtex, Revlon, and Coca-Cola Bottling Group.
The other major category in question is real estate. During the first nine months of 1990, USF&G added reserves to cover $18 million worth of losses in this area, just a small number PTC considering the $1 billion size of the portfolio. The company notes only 4 percent of its properties are located in the badly battered Northeast, and 10 percent in the similarly distressed Southwest. Properties are unique, and outsiders have a particularly difficult time assessing real estate claims. Other insurers, notably Travelers Corp., have had huge write-downs in the area.