Alex. Brown gives insurer a 'buy' recommendation

USF&G'S RATINGS IMPROVE AS IT WINS OVER ANALYSTS

May 19, 1992|By David Conn | David Conn,Staff Writer

USF&G Corp. has started to win over the investment analyst community as another brokerage house has upgraded its rating of the Baltimore-based insurance holding company's stock.

Alex. Brown & Sons Inc., citing management's "significant progress in restructuring this troubled insurer," raised its recommendation this month to "buy" from "hold" on the company's common stock and issued a "strong buy" rating on USF&G's cumulative convertible preferred stock series C.

Alex. Brown analyst Ellen Barzilai said her company had been working on the new rating for some time.

But other analysts said an April 8 meeting that USF&G Chairman Norman P. Blake Jr. held with numerous analysts helped change some opinions of the company, which reported an operating profit of $4 million in the first quarter. The company lost 9 cents a share, however, after paying dividends on preferred stock.

"As Norm Blake's strategy has produced results, analysts who were predominantly in the sell mode have been coming around," said analyst Michael A. Lewis of Dean Witter Reynolds.

His company upgraded USF&G to "neutral" from "sell" a year ago, and Mr. Lewis said he is still waiting to see whether prices in the property-casualty insurance industry will turn upward any time soon.

Alex. Brown cited four key elements that contributed to its new rating:

* An 18-month-old restructuring program that has raised equity, lowered debt, cut expenses, trimmed unprofitable product lines and improved the parent corporation's cash flow by more than $400 million a year.

* Strong earnings potential. Alex. Brown predicts USF&G earnings of $4 a share by 1995, assuming a moderate upturn in the property-casualty industry starting next year. The investment firm expects USF&G to break even this year, followed by income of 50 cents a share in 1993 and $2.25 a share the next year.

* A stock valuation that foresees USF&G, which trades as "FG" on the New York Stock Exchange, selling for $24 to $28 a share by 1995.

The preferred stock should sell for $100 to $116 a share, and its dividend represents an annual yield of 8.3 percent, according to Alex. Brown.

* Management, whose "accomplishments to date have been impressive," according to the May 5 report.

The report also noted favorably that "a majority of the long-term benefit accruing to USF&G's management team is tied to stock options rather than current cash compensation."

Not all of USF&G's analysts were convinced by Mr. Blake's presentation last month, however. Smith, Barney analyst Ronald Frank, for instance, has retained the "avoid" rating on the company, one notch better than "sell."

"History teaches me that it takes a lot more than a year to turn around a troubled insurer," he said.

But enough investors apparently have seen USF&G as an attractive investment to boost its stock price. The price of the common shares has risen 45 percent since the beginning of the year. USF&G shares closed yesterday at $10.875 a share, up 25 cents from Friday's close.

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