USF&G agrees to buy reinsurance company

January 13, 1995|By David Conn | David Conn,Sun Staff Writer

USF&G Corp. yesterday took steps to expand its reach into specialty insurance markets by announcing its second acquisition in as many months.

The Baltimore-based company has agreed to buy a reinsurance company, Discover Re Managers Inc., in Farmington, Conn. The deal, to be paid in USF&G stock and options, is worth about $78.5 million, the companies said.

"This positions us in the fastest-growing segment of the domestic property/casualty market and allows us to bring certain product expertise that we have at USF&G that we can flow through Discover Re," said Norman P. Blake Jr., chairman and chief executive officer of USF&G.

Discover, which has 45 employees, will keep its name and remain a separate operation in Farmington.

Started in 1990, the company is in a part of the insurance market called alternative risk transfer (ART), which involves providing coverage to large commercial customers who are able to self-insure most of their risk. ART represents about 30 percent of the commercial insurance market and has been growing at a 10 percent clip annually during the past decade, the two companies said.

Discover insures a certain amount of risk above the customer's self-insurance and collects fees to find other insurers and reinsurers to take on even higher dollar amounts. Its clients are in the municipal, transportation, education and retail sectors.

Last year, the company wrote more than $75 million in premiums, of which it laid off about $50 million to other insurers. The company estimates profits at $3.7 million in 1994, up from $1.6 million in 1993 and about $500,000 the year before.

"From a return on equity standpoint, Discover is more profitable than USF&G," Mr. Blake said.

Aside from acquiring a new source of profits, the merger brings another specialty business to USF&G's fold. Last month, the company announced a deal to acquire Victoria Financial Corp., a small Cleveland provider of nonstandard auto insurance, or coverage for hard-to-insure drivers.

That deal, for about $55 million in stock, was the company's first announced acquisition since March 1989, the year USF&G's financial troubles started to emerge. Since then, Mr. Blake has led the company through a painful restructuring that restored the company to profitability, starting in 1993.

"USF&G is doing the same thing they're doing with Victoria," said Ira L. Zuckerman, a vice president with the SBS Financial Group in Westport, Conn. With a stock that has traded at a higher multiple to estimated earnings than many of its peers, the company can afford to make small acquisitions by paying with stock, Mr. Zuckerman said.

USF&G's stock fell 12.5 cents yesterday, to close at $14.25 a share.

Mr. Blake said Discover fits USF&G's acquisition criteria: It has a return on equity above 15 percent and profits from underwriting, and the deal won't dilute USF&G's 1995 earnings and should add to earnings in 1996 and beyond.

Both deals are expected to close by the second quarter of this year.

For Discover, the merger represents a chance to grow in areas where it lacks expertise, according to co-founder George Estes, including some areas of workers compensation and property insurance.

Like his partner, Scott Doyle, Mr. Estes came from General Re, a large Connecticut-based reinsurance company.

Discover was started with $22 million in capital from investors "Citicorp, John Hancock and Allstate, to name a few," Mr. Doyle said.

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