USF&G to redeem 950,000 shares of preferred stock

August 30, 1994|By David Conn | David Conn,Sun Staff Writer

In another sign of its improving financial health, USF&G Corp. said yesterday that it will redeem 950,000 shares of high-cost preferred stock that were sold when the insurer was struggling to survive.

The shares represent 25 percent of the company's 3.8 million Series C cumulative convertible preferred stock. The Baltimore-based company raised $190 million when the stock was issued in 1991. Because of the high dividend, investors treat preferred shares more like debt than equity. The Series C shares, priced at $50 when they were sold, carry a 10 percent dividend, or $5 a year per share.

That money, almost $48 million a year in all, is diverted from the company's cash flow, which will become stronger when the shares are redeemed, although some of that money will end up being paid out in common stock dividends. USF&G estimated the redemption will save it $4 million a year.

In the short run, the move could cost between $51 million and $53 million, depending on how many shareholders choose to convert their preferred stock to common, and how many accept payment in cash.

Soon after the stock was issued, in June 1991, Chairman and Chief Executive Officer Norman P. Blake Jr. took over. It was a time when many in the investment community questioned USF&G's survival.

After losses of $569 million in 1990 and $176 million in 1991, the company managed to eke out a $28 million profit the next year. Last year, it reported a profit of $165 million (though $38 million of that was from a one-time accounting change). So far this year USF&G has earned $96 million, although $34 million came from an income tax benefit.

"Given the improvement in the company's overall financial position and its return to profitability, USF&G has chosen to begin retiring a portion of this high-coupon (10 percent) preferred stock," the company said.

USF&G's common stock price also has rebounded a bit, rising to $13.625 from a recent low of $11.875 in April. It has been higher, though. Before the stock market's sharp decline in mid-March, USF&G traded above $15 a share, and last year it reached a high of $19.125 before a general sell-off of insurance stocks.

Still, the company's improved health has allowed it to turn to the capital markets to help retire the high-cost preferred shares.

"It's nice that they can redeem it," said analyst David Seifer, of DLJ Securities in New York. "Here's a company that a few years ago was scrambling to stay alive, and this is just another example that they've done it, and that they're getting

stronger."

Investors who choose to convert will receive 4.158 shares of common for each preferred share. At yesterday's closing price of $13.50 (down 25 cents from Friday's close), each preferred share would be worth $56.13 in common stock.

The other option -- less attractive at the current common stock price -- is to accept the redemption price of $53.50, plus 81 cents a share in accrued dividends, for a total of $54.31 a share. The redemption date is Sept. 28.

To help pay for those redemptions, to the extent necessary, USF&G will issue 4 million shares of common, or 4.7 percent of the total 85.4 million common shares outstanding. Swiss Bank Corp. has agreed to buy a portion of those 4 million shares that are not needed for conversions. USF&G won't say whether it plans to pay for any of the redemptions out of its own cash reserves.

In addition to the remaining 2.85 million shares of Series C outstanding, the company still has 1.3 million shares of 10.25 percent Series B debt outstanding, which was sold privately in 1991 for $100 million; and 4 million shares of 8.2 percent Series A debt, sold for $200 million in 1986.

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