USF&G shares plunge after profit estimate cut But analyst insists recovery on track

October 01, 1993|By Timothy J. Mullaney | Timothy J. Mullaney,Staff Writer

Shares of USF&G Corp. dropped 12 percent yesterday after a key Wall Street analyst cut his estimates of the company's earnings through 1995, saying lower interest rates have cut investment returns so much the company will be hard-pressed to make its profits grow as fast as once expected.

Steven Gavios of Kidder Peabody & Co. insisted, however, that the setback does not mean derailment of the recovery at the Baltimore insurance giant, which laid off more than 2,000 workers in a sharp restructuring that followed the hiring of Norman P. Blake Jr. as chief executive in November 1990.

"The operating fundamentals at USF&G are excellent," Mr. Gavios said. "I'm very pleased about the restructuring at the company and the prospects for growth."

Nonetheless, the surging bond market means short-term weakness for USF&G, which like other insurers relies on interest payments from bonds as well as insurance premiums to pay claims and make profits. Mr. Gavios now projects the company will earn 50 cents a share this year, down from his earlier estimate of 65 cents; $1.25 a share instead of $1.90 next year; and $2.50 rather than $3.50 in 1995.

Mr. Gavios still recommends buying the stock, which he thinks will rise to $23 a share in 12 to 18 months, down from an earlier estimate of $32.

The report from Mr. Gavios sent USF&G's stock tumbling, on a day when other insurance stocks were also off sharply. The stock closed at $14.375, down $1.875, after trading as low as $13.875.

Mr. Gavios had been the most optimistic of the analysts following USF&G; his new estimates put him nearer the middle of the pack.

USF&G spokeswoman Kerrie Burch-DeLuca said the company was puzzled by the market's reaction to Mr. Gavios' report. She said the company had disclosed the problem with interest-rate returns -- as well as an increase in the cost of reinsurance -- to a meeting of analysts last week in New York.

Reinsurance is created when insurance companies pay other insurance companies to assume part of liability for future claims. Ms. Burch-DeLuca said the price of reinsurance has been rising sharply because of natural disasters, like last year's Hurricane Andrew, but she declined to give details.

"It's proprietary information, because it's germane to the basic cost of our product," she said.

Mr. Gavios said there is little USF&G can do in the short term to move its money into other investments to make up for the shortfall in interest rates for bonds, like 30-year Treasury bonds, whose yield has fallen to 6.02 percent yesterday from 6.67 percent June 30.

But he said overall revenue could be bolstered if insurance companies can raise the price of property and casualty insurance paid by corporations, a part of the business where prices have been under sharp downward pressure for several years.

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