USF&G; assails report calling it 'vulnerable'


NEW YORK -- USF&G; Corp. released yesterday a blistering denunciation of a report by Public Citizen that said the giant Baltimore-based company was among five major insurers "financially vulnerable and potentially at risk in a significant economic downturn unless they correct their troubling business practices."

"This report is a flagrant misuse of information," USF&G; Chairman Jack Moseley said in a memo distributed to all employees. "Through gross misrepresentation of data and inappropriate conclusions, the . . . [report] has caused much confusion at a time when our economy can least afford it."

The report by Public Citizen, a public-interest lobby, was released Monday and immediately generated scathing comments from executives of the companies cited. However, it appeared to strike a chord on Wall Street, where insurers have been out of favor recently.

Of the companies singled out, USF&G;'s stock took the worst pounding after already being drubbed for the previous 12 month. Its share price, above $30 in 1989, tumbled from $16.125 at Friday's close to $11.375 yesterday. The plunge inflated USF&G;'s dividend yield to a stratospheric 25.7 percent.

Among the other insurers with publicly traded stock that the lobby's report cited as vulnerable, Aetna Life & Casualty shares fell 15 percent, ITT (owner of Hartford Fire & Casualty) shares fell 5 percent, and American International Group shares rose 6 percent.

The crux of the Public Citizen report was six tests measuring business stability and solvency. It cited companies that flunked four as being particularly vulnerable.

USF&G; was faulted for large holdings of "junk" bonds (which offer high yields and carry especially high levels of risk), a deteriorating surplus (savings to apply toward a disaster), both in absolute terms and in relation to annual claims, and wide swings in underwriting (evidencing "potential financial instability").

In a point-by-point rebuttal, USF&G; said it failed only two of the six tests. "Not only can't they [Public Citizen] concoct these tests, but they can't calculate right," said Minor Carter, senior vice president for government and industry affairs.

USF&G; said it failed to meet two of Public Citizen's criteria, one because of its large holding of junk bonds and the other because of a low annual surplus-to-loss ratio. In both of those cases, USF&G; attacked the underlying premise Public Citizen used in establishing the criteria.

In the case of junk bonds, USF&G; argued that its portfolio is highly diversified, on the better end of the credit spectrum, unlikely to be liquidated below cost in a forced sale and therefore sound.

Concerning its low surplus-to-loss ratio, which is an indication of the company's cushion against catastrophic claims, USF&G; said Public Citizen neglected to consider reinsurance programs that would offer additional protection. Moreover, the company said it was unfairly penalized because of an "artificial reduction to surplus" in 1988 with the shift of $163 million from the surplus account into another that specifically involves reserves against potential claims.

USF&G;'s response is unlikely to be the end of the current dispute, since it involves complex accounting issues and contentions about the worth of assets and liabilities that are of debatable value.

Public Citizen's president, Joan Claybrook, said USF&G;'s core argument concerning the adequacy of its surplus rests on the "artificial reduction to surplus," which she said is merely double counting.

Moreover, she noted that the federal government has strictly limited the holdings of junk bonds by thrifts, affirming her group's reservations about that sort of investment.

The primary goal of Public Citizen's report, said the USF&G; statement, is to undermine state regulation of insurance. Though the lobby is less emphatic on the point, it indicates that that is one of its goals, asserting that state regulators are "overwhelmed and underfunded." Ratings by state regulators and the major private rating agencies have "not been predictive of failures," Ms. Claybrook said.

Maryland insurance regulators were skeptical of the Public Citizen report.

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