Retructuring pays off at USF&G

October 27, 1994|By David Conn | David Conn,Sun Staff Writer

At USF&G Corp.'s annual meeting in May, Chairman and Chief Executive Norman P. Blake Jr. outlined the company's challenge after a painful three-year restructuring: to leverage the skills of a leaner, better-trained work force and produce a higher rate of growth.

"The mettle of our organization will surely be tested," he said.

Yesterday, the test results continued to come in: The Baltimore-based insurer's operating profits were more than twice as high in the third quarter as a year ago.

The rise in net income was even higher. Profits rose 270 percent in the quarter to $74 million, including a $37 million income tax benefit, from $20 million a year ago, which included a $2 million tax benefit.

After paying preferred stock dividends, per-share earnings rose to 72 cents a share, compared with 10 cents in same period a year ago.

Before the tax benefit, earnings in the latest quarter were $38 million, or 30 cents a share, about five cents higher than analysts' average estimate. USF&G still has about $375 million in tax benefits left, which should last another 10 quarters.

Revenues during the quarter rose to $811 million, 7.4 percent higher than $755 million a year ago.

The company's stock gained 62.5 cents yesterday, to close at $14.125 a share. Still, USF&G has languished on Wall Street for months, along with many other insurers. That's largely because of lingering doubts about the industry's ability to grow, especially in the face of an insurance cycle that refuses to reverse itself and allow companies to raise prices.

"You do need some good years to offset the down years," said Alex. Brown analyst Ira H. Malis. "And we've had quite a few of them."

Mr. Blake said he recognizes the hurdles that block USF&G's forward march, even though its hardest days are behind it.

Losses of $569 million in 1990 and $176 million in 1991 were followed by a $28 million profit the next year, and a gain of $165 million in 1993. After the layoffs -- almost 5,000 in all since 1990 -- and other cost-cutting measures, only so much progress can be expected until prices firm, Mr. Blake said in an interview.

"One advantage that USF&G has as a turnaround candidate is that a large part of the problems they had in the past were in nonproperty/casualty operations," said Lehman Brothers analyst Michael Smith. Some companies had troubled underwriting operations, while USF&G's property/casualty business was less of a problem than its money-losing noncore businesses, he said, most of which were jettisoned.

Looking ahead, the insurance cycle "certainly will reflect how fast we can grow, because candidly right now with marketing soft, you really don't want to grow that well because you might have to do it on a price [cutting] basis, and that erodes your margins," Mr. Blake said.

The company's margins have shown significant improvement lately as measured by the loss ratio, which shows how much money is paid in claims per each dollar of premiums. In the latest quarter, the loss ratio fell to 71.2, the lowest level in 13 years.

"Their loss ratio is coming down quite well as the proportion of bad business is coming off the books," said Mr. Malis.

That's partly because of a retreat from states that demand a large participation in involuntary insurance pools, which provide coverage for the highest-risk customers. Also, USF&G has shifted its business toward more profitable specialty lines of business.

For instance, revenues from the company's fidelity and surety business were up 16 percent in the quarter, compared with a year ago. And its F&G Re subsidiary, which writes reinsurance, or insurance for insurers, saw a 62 percent increase in net written premiums during the quarter.

Those specialty lines of business account for about 22 percent of all sales and "quite a bit more" than that proportion of profits, Mr. Blake said without elaborating.

Even the company's life insurance subsidiary is showing signs of strength. Although still a source of less than 5 percent of total profits, new business at F&G Life was up 85 percent in the quarter.

In its core property and casualty business, the company has decided to focus on mid-sized commercial lines customers, which account for about 50 percent of USF&G's premiums. It hopes to combine the service-driven focus of small regional insurers with the proprietary skills and products that specialty insurers offer.

USF&G Corp.

Baltimore ... ... ... ... Ticker ... ... ... ... Yesterday's

... ... ... ... .. .. ... Symbol ... ... ... ... Cls. ... Chg.

... ... ... ... .. .. ... FG ... ... ... ... ... 14 1/8 .. .. + 5/8

Period ended

Sept. 30, 1994 ... ... ... 3rd qtr. ... ... ... Year ago ... ... Chg.

Revenue ... ... .. ... ... $811,000 ... ... ... $755,000 ... ... +7.4%

Net Income ... ... ... ... $74,000* ... ... ... $20,000* ... ... +270%

Primary EPS .. ... ... ... $0.72** .. .. .. ... $0.10** .. .. .. +620%

... ... ... ... 9 mos. ... ... ... ... Year ago ... ... ... Chg.

Revenue ... ... $2,368,000 ... ... ... $2,450,000 ... .. .. -3.3%

Net Income .. .. $170,000* ... ... ... $68,000* ... ... ... +60.4%

Primary EPS ... $1.56** ... .. ... ... $0.83** .. .. .. ... +88.0%

Figures in thousands (except per share data.)

* Earnings include tax and/or accounting benefits of $37 million in the third quarter and $71 million in the first nine months of 1994, compared with $2 million in the third quarter and $40 million in first nine months of last year.

** Per-share earnings are based on income after deducting preferred stock dividends.

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