NEW YORK -- As the financial performance of Baltimore-based USF&G Corp. eroded in recent years, its management tended to make the kind of maddeningly optimistic comments that irked many financial analysts and primed less-skeptical investors for a shareholder suit (filed in November and still outstanding).
Now, as the insurer's new senior management takes an opposite approach, announcing extensive write-offs and forecasting a tough year ahead, the question arises whether the sudden rush of candor presages better days or will be the final blow to the confidence of those USF&G needs to ensure its survival.
Many on Wall Street don't even want to guess. "It's a no-win situation," was a common refrain at a number of firms that have essentially ceased covering the company.
Insurers are structured around two functions: underwriting and investment. Both take a while to show results, and USF&G's past performance -- particularly its $569 million loss last year -- undermined any broad confidence. Hard results are needed, but because of the extensive moves the company has recently taken to restructure, benchmark ratios will get worse before they get better and, for comparative purposes, will be meaningless for now. That makes the company hard to recommend.
Still, analysts aren't willing to write USF&G off either. As a result, the profusion of sell recommendations that emerged last fall have disappeared. After all, USF&G has managed to survive industry cycles for almost a century and recently named a new chief executive, Norman Blake Jr., who has won laudatory early reviews. "The impression in the financial community is he is doing what needs to be done," said Robert Branche, an analyst with Branche Research.
An optimistic sign of the company's prospects was its ability to sell $190 million in preferred stock the week before last. That share issuance followed a private placement of $130 million.
Much of the enthusiasm for the offerings can be attributed to the sweet terms. Investors received a 10 percent yield (a little higher in the private offering), plus the right to convert to common stock at about $12 a share. Only four years ago, the stock peaked at $48.875. It closed at $9.625 Friday.
"As long as [USF&G] doesn't go bankrupt," it's a good deal, said Gordon Croft of Leominster Inc., a money management firm in Baltimore, "and I don't think it is going bankrupt."
Mr. Croft notes, however, that he tends to take unpopular points of view. During last fall and early this spring, when the share price was falling, he was accumulating hundreds of thousands of shares of USF&G common stock. "Nobody wanted it, so I bought some," he explained.
The market remains tepid. Since the offering, the preferred stock has risen a bit, but the common has declined almost as much, suggesting some investors may merely be reshuffling their holdings.
The fresh cash from the offering will add about one-third to the company's capital base, offsetting losses on real estate, "junk" bonds and other investments, as well as reassuring potentially jittery ratings agencies about USF&G's ability to pay claims. Equally important, it should bolster the confidence of the independent agents who sell USF&G policies but can easily offer competitors' products instead.
Maintaining credibility with these agents, as well as with lower-level company employees, may now be Mr. Blake's key challenge as the company engages on a sharp contraction. Between 1986 and 1990, USF&G continued to add people to its core property and casualty business even as revenues declined. By the end of last year, that strategy was no longer feasible. Mounting losses, compounded by problems in an unsuccessful diversification and investment program, forced the company to change course.
Mr. Blake, hired in November, unveiled a program to shrink employment by 25 percent. Early this year 1,900 people -- many of them at headquarters -- were dismissed. Another 1,100 layoffs will occur over the next year, but Baltimore took most of its hit in the first wave.
Eighteen out of 54 branch offices are in the process of being closed, and activities in two states, Texas and Louisiana, are shut down after an audit showed they accounted for $625 million in losses over the past decade. The company has been similarly tough on agents elsewhere who have consistently delivered unprofitable business. Some 230 out of 5,100 have been shed.
"To put it in context, until this year, USF&G has never had a reduction in force, so you can imagine there is some shock and disorientation, and one could reasonably expect a loss of momentum, and it has occurred in some instances," Mr. Blake said.
"My biggest concern is that we don't lose good people in the company and that we retain loyal agents."
Whether that loyalty still exists is unknown. "We won't know [the] answer to that until we see renewals" on policies," Mr. Blake said. "It's a little early in the game to be conclusive, but so far I'm encouraged."