(COVER)
ANNUAL REPORT
1993
USF&G Corporation
USF&G's new logo, an open door with light
shining through it, represents the energy that is USF&G today
and the clarity, openness, and customer orientation that we
bring to the insurance process. It symbolizes our commitment to
providing superior market-specific products and value-added
services to our agents and our customers. As a totally
revitalized and refocused insurance enterprise, it is
appropriate for USF&G and its people to now be seen in a
different "light."
Our new identity reflects the exhilaration of having
accomplished an arduous repositioning process. We are proud to
celebrate the company we are today.
USF&G Corporation, with assets of $14.3 billion, is composed of
property/casualty and life insurance subsidiaries. The principal
subsidiary is United States Fidelity and Guaranty Company, one
of the nation's largest property/casualty insurers, founded in
1896. Life insurance products and annuities are written through
Fidelity and Guaranty Life Insurance Company, founded in 1959.
USF&G provides a wide variety of quality commercial, personal,
fidelity/surety, life, and reinsurance products targeted to meet
the diverse insurance needs of its customers.
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Contents
Financial Highlights 3
Chairman's Letter 5
Discussion of Operations 11
Interview with Management 25
Product Line Overview 28
Investments 30
Capitalization 32
Index to Financial Information 33
Directors and Committees of the Board 83
Executive Management Committee 84
Officers 85
Regional and Branch Offices 86
Shareholders' Information 88
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Financial Highlights
For the Years Ended December 31
(dollars in millions except per share data) 1993 1992 1991
CONSOLIDATED RESULTS
Revenues $ 3,249 $ 3,660 $ 4,172
Premiums earned 2,456 2,637 3,187
Net investment income 749 817 877
Realized gains on investments 6 148 38
Restructuring charges - (51) (60)
Income (loss) from continuing operations before cumulative
effect of adopting new accounting standards 127 35 (144)
Loss from discontinued operations - (7) (32)
Cumulative effect of adopting new accounting standards 38 - -
Net income (loss) 165 28 (176)
RESULTS PER COMMON SHARE
Income (loss) from continuing operations before cumulative
effect of adopting new accounting standards $ .93 $ (.16) $ (2.15)
Loss from discontinued operations - (.08) (.38)
Cumulative effect of adopting new accounting standards .45 - -
Net income (loss) $ 1.38 $ (.24) $ (2.53)
Dividends declared $ .20 $ .20 $ .20
At December 31
1993 1992 1991
CONSOLIDATED FINANCIAL POSITION
Assets $ 14,335 $ 13,134 $ 14,486
Debt 618 616 677
Shareholders' equity 1,511 1,270 1,323
Debt-to-equity 41% 49% 51%
Book value per share $ 11.66 $ 8.87 $ 9.53
Market price per share 143/4 123/8 71/4
Common shares outstanding 85,009,482 84,512,758 84,273,327
GRAPH Revenues (in billions)
GRAPH Net Income (in millions except per share data)
GRAPH Balance Sheet Leverage/Liquidity (dollars in billions)
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PHOTO (caption)
Chairman, President, and
Chief Executive Officer
Norman P. Blake, Jr.
4
Chairman's Letter
The year 1993 constituted the culmination of the restructuring
efforts to "fix the foundation" of USF&G since my arrival in
November 1990. As illustrated in the chart below, the
restructuring and rebuilding of our company involves a
three-phase process. The earnings dynamic is depicted as we
progress through each stage of development. We are sharply
focused on winning in the insurance business and, accordingly,
have divested unrelated businesses which constituted a diffusion
of resources and a drag on earnings. A strong management team
and a highly talented cadre of professionals have been
assembled. Well defined market and product line operating
strategies have been developed and are being implemented to best
leverage our newly established competitive strengths. Our 1993
earnings performance is a reflection of our sharp business focus
and new competitiveness.
1993 Performance
We earned $165 million of net income in 1993,
compared with $28 million in 1992. On a per common share basis
after payment of preferred dividends, we earned $1.38 in 1993
compared with a loss of $.24 in 1992. The primary driver of this
improvement was the growth in consolidated operating income.
Earnings were further enhanced by a net benefit of $66 million
as a result of the adoption of new accounting standards as well
as related tax benefits. USF&G defines operating income as
income from continuing operations before income taxes, realized
gains, and the cumulative effect of adopting new accounting
standards. Consolidated operating income in 1993 was $93
million, which compared quite favorably with a $113 million
operating loss in 1992. The property/casualty company is the
primary earnings driver of USF&G Corporation. It earned $182
million in operating income in 1993, representing a dramatic
improvement over a loss of $3 million in 1992. The 1992 results
were adversely affected by $80 million of net losses
attributable to Hurricane Andrew as well as $46 million in
restructuring charges.
The fundamental factor responsible for the increase in
property/casualty operating income was the substantial
improvement in underwriting results. The 1993 statutory loss
ratio was 75.4, which was 6.6 points lower than the 82.0 loss
ratio in 1992. Even excluding the losses attributable to
Hurricane Andrew, the loss ratio was lowered by 3.6 points from
an adjusted 1992 loss ratio of 79.0. This improvement was
achieved as a result of
GRAPH (caption)
USF&G is now entering the "Build with Vision" phase of its restructuring
and rebuilding process.
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effective product/market mix management,
improved agency relationships, and better risk management (loss
control engineering, underwriting, and claim administration).
This achievement is even more significant considering we also
maintained our strong loss reserve position. Principally as a
result of improvement in our loss ratio, our combined ratio
improved from 116.9 in 1992 to 109.1 in 1993.
Other factors favorably influencing earnings growth have been
the substantial lowering of structural costs as well as
increased employee productivity. Since the outset of 1991, we
have reduced the workforce by 48 percent and general and
administrative expenses by 31 percent. Employee productivity, as
measured by revenues per employee, has increased by 37 percent.
We anticipate that the current level of employment will remain
approximately the same for the foreseeable future. Going
forward, emphasis will be given to changing the composition of
our cost structure to achieve greater operating leverage.
Efforts will continue to lower fixed costs while improving
productivity through higher levels of automation. This will
allow us to benefit from higher levels of business without a
proportional increase in costs.
Financial Strength
The significant progress made in 1993 is also reflected in the
strengthening of our consolidated balance sheet. Overall asset
quality, financial leverage, and liquidity have substantially
improved. Our $11.4 billion investment portfolio has been
conservatively managed. Investment-grade fixed-income securities
were 79 percent of total invested assets, compared with 76
percent in 1992, while more volatile assets such as equities,
high-yield bonds, and real estate were maintained in the
aggregate at 15 percent of total invested assets. Real estate
reserves were maintained at $108 million, despite a 28 percent
reduction in nonperforming real estate investments. Currently
real estate reserves are 10 percent of the total portfolio,
which represents a 43 percent coverage of nonperforming real
estate investments. We believe that this is one of the strongest
real estate reserve positions in the industry.
Our property/casualty company has the highest level of statutory
surplus in its history, which is well above risk-based capital
standards established by the National Association of Insurance
Commissioners ("NAIC"). USF&G Company's ratio of loss reserves
to earned premium was raised from 2.2 in 1992 to 2.4 in
GRAPH Operating Income (in millions) (caption)
The increase in operating income is due to improved underwriting performance
in the property/casualty company.
GRAPH Property/Casualty Statutory Combined Ratio (caption)
The improved ratios result from effective product/market mix management
and improved underwriting and claim settlement practices.
6
1993. We have also substantially lowered the corporation's financial
leverage as measured by the improvement in the debt-to-equity
ratio from 49 percent in 1992 to 41 percent in 1993. Liquidity
has significantly improved as well, and is reflected by the
increase in the fixed charge coverage ratio from 0.8 in 1992 to
1.4 in 1993. Fixed charge coverage is the ratio of earnings to
fixed charges and preferred stock dividends.
Competitiveness
In addition to the substantial improvement in
earnings power and financial strength, USF&G's overall
competitiveness has been enhanced. The skills and competencies
of our organization and management have been significantly
elevated. This was accomplished by intense internal training and
recruiting. The number of training programs and participation
has tripled since 1990. The infusion of external managerial
talent into the organization is equally impressive. Since 1991,
60 percent of all officer-level employees are new to the
company. Each new member of our management team has a proven
track record and has the recognized expertise to be an effective
knowledge leader and change agent. The organization structure
has been transformed as well. Five regional operations have been
established to facilitate the change process as well as to
provide value-added coaching to improve the market
competitiveness of each of our branch operations. Product line
and market segment business units have been formed with
dedicated, highly talented management teams to implement
discrete business strategies. Each branch, region, product, and
market segment business unit has profit and loss responsibility
linked to compensation.
In my opinion, our newly assembled management team is one of the
strongest in the industry. We now have the skills and leadership
capabilities to build a great company that achieves
distinctiveness in the quality of its products and services. We
have enriched our agency plant by focusing on and appointing
high quality agents and terminating unprofitable ones. We have
formed agency advisory councils in each of our branch and
regional locations to enhance our relationships with our agency
force and to ensure our responsiveness to meeting the needs of
our customers. We have developed and implemented expert
underwriting and claims management systems, as well as
significantly upgraded our risk management capabilities. We have been
GRAPH General & Administrative Expenses (in millions) (caption)
A 31% decrease in general and administrative expenses since 1990
favorably influenced earnings.
GRAPH Consolidated Employment & Productivity (in thousands)
(caption) Employment levels decreased by 48% since 1990 contributing
to a 37% improvement in productivity.
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intensely involved in developing highly competitive, if not
superior, products and services in all of our product areas. We
are now a highly energized and committed company ready to "build
with vision" and to focus on profitable growth in 1994 and
beyond.
New Identity
Our new logo on the cover of this report announces
our entry into a new era in the history of USF&G. It symbolizes
the emergence of our new culture and commitment to core values
which fuels the creative energies of our people to achieve
greatness. Our former logo has served us well, representing past
accomplishments with distinction and giving honor to those so
instrumental in providing us a proud heritage from which to
build. Yet, with the dramatic transformation of our company and
the newness and diversity of our workforce, it is important to
provide an identification that conveys the meaning of our
culture and unites our organization to achieve a common purpose
of becoming the best. Our new logo accomplishes this objective.
There are two distinctive aspects of our new identity: the open
door, and the light shining through the door. The open door has
direct implications for all of our constituencies.
To our employees, the open door suggests openness, opportunity,
and a boundaryless organization. The only constraint to both
individual and company growth and progress is our own potential
and willingness to strive to achieve. It implies a commitment to
diversity of employment and to providing a work environment and
training opportunities conducive to personal growth and
development. It implies that the basis for advancement in our
high-performance culture is individual performance and adherence
to our core values.
To our agents, the open door means an accessibility and ease of
doing business. It suggests directness and honesty in our
business dealings. It signifies an invitation to our agents to
participate with us as business partners and to provide our
shared customers with the most competitive products and services
available.
To our customers, the open door conveys our responsiveness to
their needs. It means we strive to better understand their needs
and, by doing so, we design, develop, and deliver competitively
superior products and services that are worthy of their
confidence. It implies that we stand ready to serve them when
they need us.
GRAPH Investment Portfolio (dollars in billions) (caption)
Improved asset quality is evidenced by an increase in investment-grade
fixed-income securities.
GRAPH Real Estate Portfolio (dollars in billions) (caption)
Nonperforming real estate investments have decreased while reserve
coverage has steadily improved.
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To our shareholders, the open door demonstrates our direct
accountability to the investor to be deserving of the confidence
they have placed in us.
Core Values
The light shining through the door symbolizes the
energy of our people. We are strongly committed to assimilating
our core values into our culture. Employee performance
appraisals incorporate an assessment of an individual's
demonstration of core values and technical abilities. Employee
recognition programs have been developed to identify exemplary
employees who demonstrate these values. It is expected that the
leaders of our company manifest these core values and serve as
effective role models.
Five core values constitute the foundation of our culture:
o Customer First: putting the customer's interests at the
forefront of our actions.
o Integrity: treating people honestly, fairly, and respectfully.
o Professionalism: having the commitment and dedication to
being the best at what we do.
o Innovation: thinking of ways of doing things better by doing
them differently and having the courage to overcome the
resistance to change.
o Teamwork: trusting in one another and
working together as a better way of achieving our common
objectives.
As a company, the people of USF&G are committed to these core
values and creating a culture that both empowers and enables us
to make a difference and, in so doing, gain a sense of ownership
in what we do. We have a cadre of highly competent and committed
employees striving to make our vision reality. I invite you to
review the following sections of this report to gain a further
understanding of the energies and capabilities of our people in
their pursuit of building a company of excellence. I thank you
on behalf of all the employees for the confidence you have
placed in us. Please be assured of our continuing commitment to
making USF&G worthy of your investment.
NORMAN P. BLAKE, JR.
Norman P. Blake, Jr.
Chairman, President, and
Chief Executive Officer
March 4, 1994
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PHOTO (caption)
USF&G's commercial insurance business offers its products and
services through a teamwork approach. Here Randall C. Brusewitz,
CFO-Northern Wire Corporation, Merrill, Wisconsin (foreground
right), meets with Peter R. Moncher, USF&G senior loss control
consultant. Joining them are (left to right), Robert F.
McIntyre, account executive-Frank Haack & Associates; Dewey
Plamann, general manager-Northern Wire; William R. Haack,
president-Frank Haack & Associates; and Mary Kraus, USF&G claim
representative.
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Commercial Lines
PHOTO (caption)
Commercial Lines Team
Left to right, Glenn Anderson. Seated, Ben
Griffin; Kim Rich. Standing, Peter Bothwell; Bob Mueller; Steve
Lilienthal; and Bob Lamendola.
The commercial insurance business is vital to the financial well
being of American business. At USF&G, it accounts for over
one-half of our total property/casualty ("P/C") premium revenue.
Our vision for USF&G's commercial insurance operation is to
become so superior at what we do-providing insurance products
and related services-that knowledgeable independent agents and
customers will actively seek USF&G.
USF&G is becoming a premier commercial insurer by dedicating
itself to being customer- focused and delivering superior
products and services through a teamwork approach that truly
benefits customers. This dedication is the foundation upon which
we are building our long-term business strategy to achieve
profitable growth.
Customer focus means creating a formula for success that is
uniquely meaningful for each of our targeted customer segments.
Since our book of business encompasses three distinct
customer/market segments (middle market commercial P/C, small
business commercial P/C, and fidelity/surety), customer focus
means organizing and approaching these markets as three distinct
businesses.
Our teamwork approach to these markets requires highly-talented
teams of underwriting, loss control, claim, and marketing
personnel working closely with our agents to attract,
underwrite, service, and retain our accounts.
This team concept
also applies to the development of superior coverages, pricing,
and service programs for our targeted customers.
Customer focus and teamwork make all of our important
constituents winners. Commercial insurance customers win because
we research their needs and develop customer-tailored products
and services to meet those needs. Our agents win as we provide
them with more competitive products and marketing support. USF&G
employees win by becoming more productive in serving target
market customers as a result of intensified training programs.
USF&G shareholders win as earnings grow because we are serving
customer needs in a more focused and disciplined fashion.
Middle Market Commercial
USF&G's targeted middle market
commercial P/C segment consists of medium to large businesses
that generate annual premium ranging from $25,000 to $1 million
or more. Nationwide, approximately one million businesses make
up this $50 billion market. Its size and diversity offers USF&G
tremendous opportunities to specialize and grow. Middle market
premiums account for approximately 79 percent of our total
commercial premium, excluding fidelity/surety, but less than 31
percent of our accounts. The most important element in this
business is understanding the risks and pricing them
individually. The game is won or lost based on loss containment
from the company's perspective and on product differentiation
and superior service levels from the customers' perspective. Our
strategy is to become a superior underwriter and provider of
targeted, value-added products and services for our middle
market customers.
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PHOTO (caption)
USF&G's fidelity/surety operations have been among the leaders
of the bonding industry since our founding in 1896. This road
and bridge interchange project in Norton, Virginia, is bonded
out of our Charleston, West Virginia, branch office. Meeting at
the construction site to discuss the progress of the project are
(left to right), Tony Stanchina, president-Friedlander Company;
Frank Oliver, USF&G bond manager; and John Conkwright, VP
operations-Vecellio and Grogan of Beckley, West Virginia.
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During 1993, we made major progress in implementing our middle
market strategy. The company created three business units to
lead our efforts in penetrating the manufacturing, contracting,
and service industries. In the field, 30 commercial lines middle
market underwriting departments now focus exclusively on
penetrating the middle market in their territories. We launched
extensive sales efforts with close to 3,900 USF&G agents to
stimulate new middle market production, led by our
corporate-wide "Operation Play Ball" campaign. We made
substantial investments in technical training and in new product
development, including the introduction of our new "Five Star
Restaurant Program," our "Precision Design Program for
Manufacturers" and our soon-to-be-released "Blueprint Program
for Contractors." The combination of these efforts enabled us to
gain momentum in targeted middle market production in 1993 and
laid a firm foundation for future success.
Small Business Commercial
USF&G's targeted small business
commercial P/C market consists of over five million small
businesses nationwide that generate average annual premiums of
$5,000. While many companies are moving away from this market
due to the lower premiums and high processing costs per
transaction, USF&G is tackling this opportunity head on. Our
strategy is designed to earn USF&G a leading role in this $30
billion market. Small commercial business represents about 21
percent of our commercial premium, excluding fidelity/surety,
yet almost 69 percent of our accounts. The most important
elements for success in this business are to: (1) lower per unit
transaction costs for the agent and USF&G, (2) reduce the cost
of complexity by offering standardized product packages, and (3)
improve the quality of service in terms of timeliness and
reliability. Five regional processing hubs, staffed with
underwriting and administrative specialists, are now in
operation, eliminating much of the burden of backroom processing
previously placed on our branches. Further enhancements in work
flow processing and quality of service are receiving the highest
priority to facilitate an improvement in the ease of doing
business with our agents.
During 1993, our small business commercial market segment made
substantial progress in increasing productivity and reducing
both its operating costs and expense ratio.
Fidelity/Surety
Our fidelity/surety business provides bonding
products and services to thousands of construction contractors,
commercial businesses, financial institutions, and individual
customers. Fidelity/surety continues to produce excellent
financial results indicative of strong underwriting skills.
Accomplishments in 1993 included strengthening our
customer/market focus to help us grow, centralizing and
upgrading our claim operations, and reducing expenses by
incorporating more technology in processing business. Our main
focus in 1993 was to set the base for continued profitable
growth. We plan to capitalize upon those efforts in 1994.
USF&G's commercial lines operation is energized and has
assembled the best people in the business who are building some
of the most competitive products and services. We are determined
to win in our chosen target markets.
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PHOTO (caption)
With USF&G's ActionPlus, our customers are only a telephone call
away from emergency roadside services. Loretta Karkoff of
Naperville, Illinois (driver), tells Keith Rademacher, P.A.R.
Insurance Services, and Kathleen Pagnano, USF&G Claim manager,
how pleased she is with the service ActionPlus provided to her
family.
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Personal Lines
PHOTO (caption)
Personal Lines Team
Left to right,
Dick Potter, Paul DiFrancesco, Earnie Hines, and Eileen Auen.
Personal lines insurance products, including auto, property,
watercraft, and umbrella liability coverages, comprise a $112
billion industry. Since the early 1980s, personal insurance has
continued its growth at an annual rate approaching nine percent.
About $40 billion of the total personal lines market is sold
through the independent agency system. Customers choose this
channel to assure appropriate product counseling and review of
their coverages, as well as the highest service levels.
Given the size and growth potential of this industry segment and
USF&G's superior agency franchise, the company is making
significant strategic investments to increase its share of
business in key markets. The strategy for increasing profitable
penetration of existing-and new-agencies includes focused agency
and consumer target marketing, dedicated local sales presence,
expanded product and service portfolios, and enhanced technology
in critical customer service applications.
Focused Target Marketing
To optimize USF&G's presence in markets
which represent the highest profit potential, we work with our
agency partners to target and attract key customer segments by
providing the proper combination of coverage, service, and price.
Dedicated Sales Presence
To fully understand our markets and
support our agents, USF&G has chosen to increase its local,
dedicated sales presence by placing account specialists in key
markets. Account specialists combine local presence and market
knowledge with national product development and marketing
capabilities.
Expanded Products and Services
As customers' needs change, so do
the products and services USF&G offers. Our new Personal Excess
Product protects our customers' assets in these very litigious
times. USF&G's watercraft program has been redesigned to reflect
the increased value and use of pleasure craft today, and our
ActionPlus program puts our claim representatives a phone call
away, 24 hours a day, 365 days a year.
Enhanced Technology
The integration of technology with business
strategy is even more critical in today's information era.
Whether through automated underwriting techniques or through
agency interface which will link our business partners with our
processing systems, USF&G is committed to creatively leveraging
technology to find better solutions for agents and customers
alike.
Personal lines' 1993 financial results have demonstrated the
success of our prior and current initiatives. The most critical
element behind our strategy is the teamwork among the agency,
branch, and home office. With this team now in place, USF&G
intends to continue increasing its share of this dynamic
industry.
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PHOTO (caption)
USF&G focuses clearly on its customers, making our 30
full-service branches our most important operations. At City Hall
in Meridian, Mississippi, (left to right) the Honorable John
Robert Smith, mayor, meets with Bill Allison, 44-year USF&G
veteran and current consultant; Bruce Martin, Meyer & Rosenbaum,
and Andy Everett, president of our new subsidiary, USF&G
Insurance Company of Mississippi, to express appreciation for
providing superior service in meeting the city's insurance needs.
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Field Operations
PHOTO (caption)
Field Operations
Team Left to right,
Gary Dunton. Seated, Ken May, Southwest region; Paul Beil,
Midwest region. Standing, Jim Lewis, Northeast region;
Lee Buck, West region; and Andy Everett, USF&G of Mississippi.
The function of USF&G's Field Operations Department is to bring
the product line strategies to life. 1993 was a year of major
change for USF&G and nowhere was it more evident than in our
field offices.
We are dedicated to having the industry's most professional
people located near our customers and agents. Our 30
full-service branches are essentially local businesses where the
quality of our employees is our most critical success factor.
During the last two years, we upgraded our field personnel
dramatically. Nearly 70 percent of all field managers are new to
their positions and 30 percent of all underwriting technical
employees are new to USF&G. We are now staffed with
knowledgeable, experienced professionals who know their local
markets.
Our branch professionals are empowered to handle most business
at the local level. Through technical and specialized
underwriting, loss control, claim, and marketing training
programs (some of the industry's most extensive), we are
building a knowledge-based organization committed to customer
satisfaction and profitability.
We have organized our branch offices around discrete
customer/market segments. Each branch has profit and loss
responsibility and contains commercial, fidelity/surety, and
personal lines teams. These teams are led by our branch vice
presidents. Our branches are managed by five regional offices
with strong management responsible for territorial strategy
development, resource allocation, and plan execution. Being
close to our markets gives us the flexibility to respond to
market changes, the capacity for superior customer and agent
service, and more complete and local underwriting knowledge.
USF&G's product departments have begun to deliver
state-of-the-art insurance programs to our field operations for
rollout. As a result, our competitiveness in local markets is
improving substantially.
Most importantly, we have significantly strengthened what was
already considered one of the best distribution networks in the
industry-our independent agents. Through the efforts of our
field marketing development managers, our average premium per
current agency is up substantially over 1992. We have created a
strong local, regional, and national agency council network that
allows us to tap the expertise of our agents in developing
market opportunities.
We are an organization on a mission-partnership for profitable
growth and partnership with our product departments and our
agents to meet our customers' needs and to grow profitably.
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PHOTO (caption)
When fire destroyed a building at the Monroeville
Industrial Park owned by Samdoz in Pittsburgh, USF&G provided
immediate claim service to meet our customer's needs. Here (left
to right), Charles Murray, USF&G general adjuster; Ken Moir,
Kenco Agency; Domenic Dozzi, VP-Samdoz; and Jim Soeder, USF&G
property claim specialist, examine blueprints at the scene of
the fire.
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Claim
PHOTO (caption)
Claim Team
Left to right,
Ken Cihiy. Seated, Tom Salinsky; Jack Hayes.
Standing, Chuck Stapleton; and Tom Trezise.
The claim function is responsible for delivering the value for
which the customer paid. Claim service is frequently the only
measurement of that value.
In 1993, USF&G's Claim Department completed its restructuring,
developed operating strategies, and committed to providing high
standards of service to all of its constituents. The department
defined three roles that add value to USF&G's insurance
operations: (1) managing loss costs, (2) adding claim expertise
to product development, and (3) utilizing high-quality claim
service as a competitive advantage.
The claim function has the primary financial responsibility for
managing loss costs. We consider the entire cost of settling
claims, that is, the actual loss payments as well as the cost of
adjusting the losses. In some areas of the settlement process,
we have dramatically repositioned our efforts. For example,
instead of focusing on reducing legal costs associated with
liability claims, we focused on controlling the loss payments
themselves. This has necessitated hiring attorneys with superior
legal expertise and extensive trial experience. As we
anticipated, claim payments have been reduced and overall legal
costs have decreased as well.
We have also integrated the claim function into the continuum of
product development. This process involved forging alliances
with the home office product line operations and our field
personnel. Throughout the complete life cycle of our products,
our claim people are now involved in product development,
helping to tailor coverages to suit customer needs, risk
selection, and marketing to target customers.
We have begun to utilize USF&G's claim services as a competitive
advantage. The quality of the settlement process is recognized
as a key determinant in both writing and retaining accounts. In
1993, we hired a vendor to assess the base level of our
performance by surveying our agents and customers. Approximately
75 percent of our agents and customers were "very" or
"extremely" satisfied with our claim service. To capitalize on
opportunities to further improve, however, we plan to sample our
customers on a regular basis and to build in a call-back
mechanism to address specific issues. We believe that by
externally evaluating the professionalism of our claim team,
employees' knowledge of specific claim areas, and the quality of
the settlement process, we can build the claim function around
our customers' expectations-not our own yardstick.
USF&G is clearly demonstrating through its energized,
professional claim team that it is a customer-driven insurer,
respectful of protecting company assets.
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PHOTO (caption)
By recognizing opportunity and reacting quickly, F&G Re has
underwritten reinsurance in many diverse areas including
satellite launches. Maura Dyer, underwriter-INTEC; Dwight Evans,
SVP-F&G Re, and Doug Morrison, VP-F&G Re stand before a model of
an Atlas rocket and listen as former astronaut Rick Hauck,
president and CEO-INTEC, describes how the rocket is launched
into space.
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F&G Re
PHOTO (caption)
F&G Re Team
Left to right,
Paul Ingrey. Seated, Wayne Paglieri; John Berger.
Standing, Dwight Evans; Roland Jackson;
Alan Willemsen; and Dave Skurnick.
The year 1993 marks the tenth year
that F&G Re has underwritten reinsurance on behalf of USF&G in
such diverse areas as satellites, offshore oil rigs,
catastrophe, and financial reinsurance. Our objective has always
been to recognize opportunity early and to react quickly. We
have consistently achieved this objective because we operate in
a marketplace that is global and relatively free of regulation,
and because we are able to move in and out of markets rapidly.
While our premium can fluctuate widely from one year to the
next, we have always met our goal of earning an underwriting
profit. In 1993, we had written premium of $403 million at a
combined ratio of 91.9, producing an underwriting profit of $32
million.
In our decade of operation, we have written reinsurance premiums
of $3.4 billion at an average combined ratio of 94.6. Our
combined ratio of 93.5 over the past 5 years is the best in the
property/casualty reinsurance industry.
F&G Re has truly arrived on the international scene. In 1992,
our international business totaled $19 million. In 1993, our
international business increased to $50 million. We also opened
a liaison office in London last year to better access and
service European business. We hope to see our international
business double in 1994.
We see increasing challenges as we move into our second decade.
One of the basic laws of economics states that the perception of
excess profits will attract capital. This has happened in the
property catastrophe ("CAT") market. Over $4 billion of new
capital has been raised for Bermuda-based CAT reinsurance
companies. Because the property CAT market has been an important
part of our premium and profit, this new competition will make
this market more difficult for us in 1994 and 1995.
We have been recognized as innovators in the financial
reinsurance arena. Recent accounting changes, when coupled with
the new Bermuda capacity on the traditional side are reducing
the demand for these products. Our challenge in 1994 and 1995 is
to identify the need for and to create the next generation of
nontraditional products.
In 1994, we will again strive to achieve well above-average
results in our industry. It is impossible to predict where and
when our next significant opportunities will occur. Our staff of
49 people acts as a highly trained team seeking situations of
excess demand or inadequate supply. We will strive to be the
first to recognize an opportunity and the first to pursue it.
21
PHOTO (caption)
A key element of F&G Life's new product mix is the Tax-Sheltered
Annuity (TSA) product that provides retirement income for school
teachers and employees of other nonprofit organizations. At
California State University, Long Beach, Dr. Carol Kellett,
director of The Urban Family Initiative, expresses her
satisfaction with the purchase of an F&G Life TSA. Shown with
Carol (left to right) are Donald G. Schlesinger,
CLU-representative of R.W. Durham & Company; Wally Durham,
president-R.W. Durham & Company; and Doug Barone, assistant
secretary-distribution manager, F&G Life.
22
PHOTO (caption)
Life Insurance Team
Left to right, Ihor Hron; Peter McGlinchy;
Gene Gaines; and Harry Stout.
F&G Life
F&G Life's operations are guided by USF&G's core values of
customer first, integrity, professionalism, innovation, and
teamwork. F&G Life has several additional precepts which govern
its specific operations. These precepts are: (1) positioning the
company as a provider of life insurance products for independent
distributors that have specific expertise in niche markets, (2)
having a unique understanding and responsiveness to the markets
we serve, (3) using technology to be a low-cost producer of
products, (4) establishing F&G Life as an industry leading
provider of service to its agents and policyholders, and (5)
building a portfolio of products that will provide USF&G with
consistent profitability.
F&G Life is maturing after the initial turbulence of
organizational change resulting from the implementation of its
new strategic plan in 1992. All elements of our company were
radically revised including our distribution channels, product
offerings, pricing strategy, administration, and processing
systems. As we follow our distribution-driven strategy, we will
continue to focus on niche markets, identify the best
distributors in these markets, and develop partnerships with
them.
Our sales efforts are divided among three major areas:
tax-sheltered annuities ("TSAs"), structured settlements, and
agency/brokerage business. TSAs are distributed through a
strategic alliance with a nationally recognized broker.
Structured settlements are marketed principally to USF&G
insureds. The agency/ brokerage segment, through which
traditional life insurance products and annuities are
distributed, is managed and supported by F&G Life operations.
USF&G's P/C independent agency system remains one of the primary
foundation blocks in the agency/ brokerage segment.
Going forward, emphasis is being given to balancing the growth
of single premium deferred annuity ("SPDA") business with
increasingly higher levels of more profitable TSA and structured
settlement business. In addition, a variety of product and
market development initiatives are underway to continue to
broaden the scope of the business and to provide a basis of
creating further avenues for growth. We are positioning to
migrate to new distribution niches and channels such as
financial institutions and externally generated structured
settlement annuities. As we develop diversified annuity products
to meet the needs of a growing base of annuity purchasers due to
increased life expectancy, we will also focus on growing the
mortality product lines within our distribution networks.
With a much lower cost structure, a more profitable array of
products, and a rebalanced distribution system, F&G Life will be
positioned for improved profitability.
23
PHOTO (caption)
Executive Management Committee.
Front row (left to right), Norm Blake, chairman, president and
CEO; Amy Marks, SVP-Human Resources; Dan Hale, EVP and CFO; Gary
Dunton, EVP-Field Operations. Second row (left to right), Glenn
Anderson, EVP-Commercial Lines; John MacColl, SVP-General
Counsel; Paul Ingrey, president-F&G Re; Dick Potter,
SVP-Personal Lines. Third row (left to right), Ken Cihiy,
SVP-Claims; Andy Stern, SVP-Strategic Planning/ Corporate
Marketing; John Sweeney, SVP-Investments; Tom Lewis,
SVP-Information Services; Bob Lamendola, SVP-Fidelity/Surety. Top
row, Ihor Hron, president-F&G Life.
24
Interview with
Management
PHOTO (caption)
Finance Team
Left to right, Dan Hale. Seated, John Sweeney and Frank Bossle.
Standing, Tom Bradley; Rich Campagna; and Jim Stangroom.
Has the restructuring of USF&G been completed?
Yes, we have completed a series of critical initiatives that
have essentially brought closure to this three-year process.
We have (1) divested noninsurance operations, (2) strengthened
the balance sheet, (3) improved investment portfolio quality,
(4) lowered structural costs, (5) improved the profit characteristics
of our underlying book of business through aggressive product/market mix
management, (6) significantly upgraded management as well as the
overall skill base of the organization, (7) upgraded information
systems effectiveness, and (8) re-engineered our work flow
processes. Recently, we have developed and are in the process of
implementing well-defined product/market segment operating
strategies to gain competitive differentiation. The people of
USF&G have a new corporate culture and a commitment to core
values as a unifying force bringing the organization together to
support common objectives.
What are your top priorities for 1994?
Our goals for 1994 are built upon the strong foundation achieved through the
repositioning initiatives mentioned above. In 1994, we will
strive to: (1) continue to improve underwriting performance
through enhanced risk management and reduction of exposure to
catastrophes, (2) grow profitably through effective execution of
our newly developed product/market strategies and programs by
leveraging our greatly enhanced competitive capabilities, (3)
restructure debt/capital to improve financial leverage and
liquidity, (4) further upgrade systems capabilities to better
support business strategies and to gain a competitive advantage,
and (5) continue to build a high-performance culture through
reinforcement of our core values and development of our human
resources.
How will you grow premium?
The question should perhaps more appropriately be re-phrased to ask
how we will grow premium profitably at this point in the insurance cycle.
We believe that the key to profitable growth in this business lies in
developing segmentation strategies that enable carriers to deliver
additional value to agents and customers as a result of having a
better understanding of their needs. Being closer to customers
and having a more in-depth understanding of the coverages they
need allows us to more appropriately underwrite risks. This is
the only way to be sure we are adequately pricing to cover
exposures.
To focus appropriately on target middle market segments, we have
organized around key manufacturers, contractors, and services
sub-markets and have developed a number of tailored products and
services designed to meet the unique coverage needs of these
important sub-markets. For example, in the manufacturing
segment, we have developed a program with proprietary pricing
and coverages for plastics, fabricated metal, food processing,
paper products, furniture, and apparel businesses.
25
A number of other new products are on the drawing board for
introduction in 1994 and beyond. We understand that effective
implementation of these programs separates the winners from the
losers. Execution in the field requires additional specialized
training and careful coordination. Several of our new tailored
products have taken more than a year to develop and deliver to
our highly skilled underwriting teams.
Intense focus on local market expertise is as critical as our
product initiatives. We have dramatically increased both
resources and capabilities at the branch level to ensure that we
provide the best field delivery of our products. The
branch-specific marketing and sales strategies being implemented
in 1994 were developed by USF&G personnel who are experts in
their markets' needs and opportunities. Valuable relationships
with our agents allow us to function like a local company with
national "muscle."
Continued focus, innovative product and service development, and
effective field execution will enable USF&G to grow profitably
in the years to come, regardless of the timing of cycle turns.
When do you anticipate the cycle turning?
It is beginning to look as though this turn in the cycle will be very
different from those in the recent past. In 1993, rates hardened in the
catastrophe reinsurance market, the property segment of personal
lines, and in selected commercial lines. Price increases in the
bulk of commercial lines products, however, have lagged
appreciably. At best, the cycle is turning on a phased basis.
Before we can expect to see a more significant hardening of
prices, primary carriers will have to be convinced that they
have insufficient capacity or surplus and that future net
investment income will be inadequate to generate acceptable
levels of profitability. Significant increases in industry
surplus during 1993 may have prolonged the current phase of the
cycle. We believe that additional pressure for increased rate
adequacy should come from lower interest rates combined with the
effect on equity and surplus due to the implementation of the
NAIC's risk-based capital requirements, Statement of Financial
Accounting Standards ("SFAS") No. 115, which requires
marking-to-market a portion of fixed-income investments, and the
recognition of potentially significant reserve needs by carriers
with substantial environmental exposures.
Could you please describe the vision underlying your new
corporate logo?
Our new logo embodies our core values: customer
first, integrity, professionalism, innovation, and teamwork.
These values drive our identity and solidify our sense of
partnership with our agents and customers. The open door with
the light radiating from behind it symbolizes the emergence of a
new culture based on open and honest two-way communications,
boundless opportunities, and the commitment to having our core
values guide all our relationships with agents and insureds.
Could you please explain your regionalization strategy?
Our regionalization strategy was designed to bring greater focus to
winning in the local market. It is the responsibility of a given
region to assist in the development and adequate resourcing of
branch-specific operating plans. Moreover, regions are staffed
with highly skilled technical coaches who work closely with the
branches in the successful execution of their marketing game
plans.
As we have discussed elsewhere, our branches are the most
critical link to success in our markets. The regional structure
allows each branch to be empowered and enabled to win in its
market place-and to be accountable for its results.
Does USF&G need additional capital in order to ensure financial
flexibility in the coming year?
Our P/C statutory surplus
position at year-end 1993 is the highest it has ever been in the
company's history, and we do not feel that we would need to
raise capital in order to grow our lines of business in the
event of a hardening insurance market.
While we have taken great strides to strengthen the integrity of
our balance sheet, we still plan to address both debt and
capital restructuring plans for 1994 and beyond. In March 1994,
we issued $245 million face amount of 15-year zero coupon
convertible subordinated notes. Proceeds totaling $122 million
will be used to retire existing higher-rate debt, resulting in
annual interest savings of approximately $5 million and
increased cash flow of approximately $11 million.
What types of growth opportunities currently exist for USF&G in
the reinsurance arena?
F&G Re had a banner year in 1993 with
premium volume up over 65 percent and an underwriting profit of
over $30 million. Today's sophisticated reinsurance buyers are
demanding higher quality, more technologically advanced and
innovative carriers to service their needs, and that is what F&G
Re has to offer. It is also no secret that property reinsurance
rates are up, particularly in the catastrophe market, and
opportunities exist for talented players to expand
internationally under very profitable circumstances.
26
Could you please address your life insurance segment's prospects
for growth and profitability?
Over the course of 1992 and 1993,
we strategically transformed F&G Life from essentially a
provider of single premium deferred annuities into a wholesaler
of high value-added products that is better able to capitalize
on the changing demographics of the population. Our new product
offerings, including tax-sheltered annuities, are designed to
offer our customers greater flexibility while improving profit
potential for F&G Life. We have also implemented aggressive cost
controls and have diversified our sales through new distribution
channels. In the structured settlements arena, we have improved
our ability to cross-sell our services to both our internal P/C
clients as well as external customers. All of these efforts are
expected to increase sales and profitability.
What impact will newly introduced accounting rules and
regulations, coupled with NAIC risk based capital ("RBC")
requirements, have on the balance sheets of many insurance
companies?
The new accounting rules impact four categories: (1)
balance sheet valuations, (2) income taxes, (3) employee benefit
plans, and (4) reinsurance. Accounting changes relating to each
of these were adopted by USF&G in 1993. One of the most
significant changes for USF&G and all insurance companies going
forward is the requirement to mark-to-market fixed-income
securities which are classified as available for sale. Insurers'
reported shareholders' equity will become more volatile as the
market values of their investment portfolios decrease as
interest rates rise, and increase as interest rates fall.
While there is general agreement on the necessity for
improvement to the current system of minimum surplus
requirements, it is probably too early to tell how RBC
guidelines will play out. Perhaps they will accelerate the
consolidation within the property/casualty industry among those
companies with low capitalization levels. USF&G has adjusted
capital well above NAIC risk-based capital standards and
supports regulatory efforts to protect the solvency of the
industry.
How does USF&G's personal lines business plan to compete with
the large direct writers?
First of all, we believe that there
continues to be a large segment of consumers who choose to
purchase their personal insurance from independent agents
because of the personalized service and the choice of multiple
carriers. We also recognize that product pricing is critical. In
1993 and going forward, we are addressing both the pricing and
the service issues with product development, increased
efficiencies through enhanced technology, and the appropriate
consumer marketing support for our products. Our efforts are
directed at enabling independent agents to provide superior
service at competitive prices.
In view of the uncertainty concerning the industry's potential
total environmental exposure, how comfortable are you with
USF&G's reserve adequacy?
Fortunately, USF&G has not
historically insured types of businesses with significant
environmental exposures. Generally, we have not provided
liability coverage for large companies engaged in chemical, oil
and gas, asbestos, or hazardous waste activities. Our typical
exposure in this area relates to clean-up costs for accidental
spills involving transportation vehicles. We have a dedicated
environmental claim unit which is responsible for monitoring
potential environmental liabilities, evaluating all incurred
environmental losses, and establishing appropriate case
reserves. In addition, these case reserves are supplemented by
bulk reserves to provide further coverage. We are very
comfortable that this adequately covers our exposure in this
area.
Moreover, independent external actuaries with nationally
prominent firms evaluate the adequacy of our total reserves each
year. At the end of 1993, they opined that our reserves not only
continued to be adequate, but also that our reserve position had
been strengthened over the past three years.
Do you believe that new regulations regarding healthcare reform
will negatively impact USF&G's ability to profitably write
workers compensation business?
The current state-based workers
compensation systems would most likely be endangered by the
provision in the healthcare plan calling for the medical portion
of the workers compensation claims to be assumed by the new
mechanism for healthcare delivery. This affects our ability, as
an insurer, to manage the indemnity portion of the claims.
However, we believe that our highly skilled management team,
coupled with our customer-focused teams dedicated to writing
essentially monoline business, will continue to initiate
strategies allowing us to write new business in markets which
have the most potential for adequate returns.
27
PRODUCT LINE OVERVIEW
PROPERTY/CASUALTY INSURANCE
Commercial Lines
o 51% of P/C Premiums Written
Middle Market
Products - General, umbrella liability
- Primary, excess, and highly
protected risk (HPR) property
- Inland marine, crime, boiler
- Commercial auto
- Workers compensation
Target Markets Mid-to large-sized businesses:
- Manufacturers, technology
industries
- Contractors
- Transportation
- Financial/educational institutions
- Hospitality
- Real estate holdings
1993 Accomplishments - Built national middle market
organization
- Implemented growth strategies for
target markets
- Launched "Five Star Restaurant
Program" and "Precision Design
Program for Manufacturers"
1994 Strategic Initiatives - Launch "Blueprint Program for
Contractors"
- Continue development of
proprietary programs for target
markets (financial institutions,
technology industries, etc.)
Small Business
Products - Businessowners policies
- Property and inland marine
- General, umbrella liability
- Commercial auto
- Workers compensation
Target Markets Small businesses:
- Service
- Retail
- Wholesale
- Contracting
- Finance/insurance/real estate
1993 Accomplishments - Consolidated processing into five
regional centers
- Achieved significant expense
reductions by streamlining
underwriting and processing
activities
1994 Strategic Initiatives - Increase sales support/service
levels to agencies
- Develop comprehensive small
businessowners program
GRAPH Combined Ratio (Total Commercial Lines segment)
28
Personal Lines
Products o 27% of P/C Premiums Written
- Auto
- Property
- Watercraft
- Personal excess
Target Markets Individuals/families insuring:
- Homes
- Condominiums
- Automobiles
- Personal articles
1993 Accomplishments - Introduced ActionPlus roadside
program to all auto customers
- Established preferred agent
program to improve service
- Implemented USF&G Plus
competitive auto/homeowners
product
1994 Strategic Initiatives - Enhance critical customer
service/processing applications
- Launch new personal excess and
watercraft programs
- Increase sales from key producers
GRAPH Combined Ratio
Fidelity/Surety
o 5% of P/C Premiums Written
Products - Surety bonds
- Judicial, public official,
miscellaneous bonds
- Financial institution bonds
- Mercantile fidelity bonds
Target Markets - Contractors
- Commercial and community
financial institutions
- Credit unions
- Commercial businesses
1993 Accomplishments - Implemented agency/customer
contact program
- Launched fidelity product for credit
unions
1994 Strategic Initiatives - Expand into other North American
markets
- Identify new markets and develop
products to serve financial
institutions
GRAPH Combined Ratio
F&G Re
o 17% of P/C Premiums Written
Products Treaty reinsurance:
- Risk (traditional)
- Financial
Target Markets Broker market:
- U.S. companies
- Foreign companies
1993 Accomplishments - Increased written premium by 66%
- Increased international premium
by 165%
- Achieved combined ratio of 91.9
- Opened U.K. liaison office and
enhanced global presence
1994 Strategic Initiatives - Identify and respond to market
opportunities with high service
standards/emphasize development
of new financial reinsurance
products
- Increase international business
GRAPH Combined Ratio
LIFE INSURANCE
% of life sales listed below
Products o Structured settlements (39%)
o Tax-sheltered annuities (21%)
o Single-premium deferred
annuities (26%)
o Other annuities (10%)
o Term and universal life (4%)
Target Markets - Individuals above age 55, retirees
- Teachers (K through grade 12)
- Structured settlement candidates
- Individuals requiring income flow
1993 Accomplishments - Achieved balanced, controlled
premium growth
- Implemented new systems
- Expanded products to meet
distribution partners' needs
- Enhanced profitability of new and
existing product lines
- Implemented conservation program
for SPDA business
1994 Strategic Initiatives - Continue controlled, profitable new
business growth
- Expand products to better meet
distributor needs
- Identify new underserved markets
- Maximize profitability of in-force
business
- Continue cost reduction initiatives
GRAPH Strategic Surplus* to Assets (footnote) *Strategic surplus
is the sum of statutory surplus and mandated Asset Valuation Reserve.
29
Investments
Stimulated by the recognition that inflation was
under control and with the help of an accommodating Federal
Reserve interest rates fell during 1993 to levels not seen in
decades. Short-term rates fell 300 basis points and 30-year
Treasury bonds posted a 20-year low of 5.78 percent in October.
This bull market in bonds produced lower reinvestment rates
which contributed to the decline in our portfolio yield from 7.3
percent in 1992 to 6.7 percent in the fourth quarter of 1993.
Consequently, net investment income declined from $817 million
in 1992 to $749 million in 1993.
However, our portfolio yield and net investment income would
have declined even further without several portfolio
re-positioning actions initiated during the latter part of 1992.
A substantially upgraded asset-liability management process was
developed and implemented which highlighted re-positioning
opportunities that helped increase year-end 1993 unrealized
gains on the fixed-income portfolio to $357 million from $114
million at December 31, 1992.
Our new product line oriented asset-liability management process
drives our investment strategy. To accommodate this
asset-liability management process, we successfully converted to
a state-of-the-art, computer-based investment accounting and
portfolio management system. All assets are now segmented by
line of business, allowing us to manage our investment strategy
to meet individual product line liability payouts. Using
sophisticated asset-liability computer models, capital markets
are analyzed and optimal portfolios are derived to maximize the
profitability of each line of business.
The revised asset allocation mix, based on efficient frontier
analysis for individual product line portfolio segmentation,
indicated that we should substantially reduce exposure to
mortgage-backed securities and increase our commitment to
intermediate and longer-term investment-grade noncallable
corporate bonds. As a result, mortgage-backed bonds were reduced
from $3.8 billion, or 34 percent of invested assets, at year-end
1992 to $2.4 billion, or 22 percent of invested assets, at
year-end 1993. By resisting the potentially higher, though more
volatile, yield of mortgage-backed securities, we were rewarded
with higher total return and a portfolio more oriented toward
stable sources of investment income.
In the future, we will use this new asset-liability management
technology to deploy cash flow and manage portfolio turnover to
navigate each portfolio toward its optimal liability-driven
asset mix.
GRAPH Asset Allocation (caption)
As mortgage-backed securities declined to 22% of invested assets,
investment-grade corporates increased to 55%.
30
Beginning in 1994, portfolio management will undergo dramatic
changes at all insurance companies as a result of a new
Statement of Financial Accounting Standard, SFAS No. 115.
Historically, insurance companies have reported almost all of
their fixed-income holdings at amortized cost. The justification
for not marking the securities to market was that they would be
held to maturity, therefore, any loss in value over the life of
the bond would be temporary and there was no need to adjust the
values on the balance sheet. SFAS No. 115 requires a significant
deviation from this approach for GAAP accounting. Only
securities where there is the positive intent to hold to
maturity may be carried at amortized cost. The balance of the
portfolio must be reported at fair market value. The major
provisions of SFAS No. 115 are as follows: Effective January 1,
1994, all debt securities must be classified into one of the
following categories.
o Held to Maturity ("HTM") Securities may only be classified as
HTM if the company has the positive intent and the ability to
hold them to maturity. A security cannot be classified as HTM if
it might be sold for traditional portfolio management reasons
such as a need for corporate liquidity, asset-liability
management, changes in the availability and terms of alternative
instruments, changes in prepayment characteristics, or changes
in foreign currency risk. For example, catastrophes might create
a need for corporate liquidity, but under SFAS No. 115,
securities in the HTM account should not be sold to generate
those funds. An inappropriate level of activity in this account
may result in a company losing its ability to classify some or
all of its holdings as HTM. Sales are allowed for credit
deterioration.
o Trading Securities acquired with the intent for
quick resale are held in a trading account. They are carried at
fair market value, and unrealized gains and losses flow through
the income statement.
o Available for Sale ("AFS") All other
securities are designated Available for Sale. The bonds are
reported at fair market value, and hence, fluctuations will
affect shareholders' equity. At the time of sale, the realized
gain or loss is reflected in earnings.
SFAS No. 115 presents a challenge to investment professionals to
manage their portfolios within the constraints imposed by this
standard. During the fourth quarter, we analyzed our
fixed-income portfolio to determine the allocation between HTM
and AFS. The 1993 AFS portfolio represents 43 percent of
invested assets and 50 percent of fixed-income securities. The
unrealized gain on the AFS portfolio was $222 million, which
increased shareholders' equity by the same amount.
Our investment processes have been modified to accommodate and
monitor the effects of these accounting changes. Going forward,
our asset-liability process will continue to be fine tuned in
accordance with the strategic objective of maximizing investment
income and total return.
GRAPH Fixed-Income Securities (in billions) (caption)
The level of securities available for sale will affect book value
as associated unrealized gains (losses) will be carried in
shareholders' equity.
GRAPH Interest Rates (caption)
Investment results have been impacted by the declining interest
rate environment.
31
Capitalization
USF&G's capitalization increased $243 million
during 1993, principally through growth in shareholders' equity,
and totaled $2.1 billion at year end. As a result, leverage, as
measured by the debt-to-equity ratio, was reduced from 49
percent in 1992 to 41 percent in 1993. Total capitalization for
the years ended December 31 was as follows:
(dollars in millions) 1993 1992 1991
Corporate debt $ 574 $ 574 $ 617
Real estate and other 44 42 60
Total debt 618 616 677
Preferred equity 520 520 520
Common equity 991 750 803
Shareholders' equity 1,511 1,270 1,323
Total capitalization $2,129 $1,886 $2,000
Debt-to-equity 41% 49% 51%
Debt-to-total capitalization 29 33 34
Debt USF&G's corporate debt balance was unchanged during 1993.
Real estate debt increased by $2 million during 1993 due to $5
million of additional debt from a change in percentage ownership
of a real estate limited partnership, offset by a $3 million
repayment of debt by the P/C segment. USF&G maintained a
revolving credit facility totaling $700 million during 1993, and
had $375 million in related borrowings outstanding at December
31, 1993. The current facility matures on March 20, 1995.
Medium-term notes totaling $20 million mature on May 9 and 10,
1994.
Outstanding Stock At December 31, 1993, USF&G had outstanding a
total of $520 million in convertible preferred stock, issued in
three series. It also had outstanding 85 million shares of
common stock with a book value of $11.66 per share. Quarterly
dividends of $.05 per share were paid on the common stock during
1993.
Capital Strategy Subject to capital market conditions, USF&G
plans to refinance up to approximately $600 million of debt over
the next two years. In 1994 and early 1995, the $375 million
balance of the $700 million credit facility will be funded with
securities that better meet USF&G's capital requirements. Prior
to the expiration of the existing credit facility, a reduced
credit facility will be negotiated to meet the needs of USF&G as
determined at that time. Where opportunities exist, current debt
will be refinanced at lower rates over longer maturities. As
part of this strategy, in March 1994, USF&G issued $245 million
face amount of 15-year zero coupon convertible subordinated
notes. Proceeds from this offering, totaling $122 million, will
be used to retire existing, higher-rate debt, resulting in
annual interest savings of approximately $5 million, and
increased cash flow of approximately $11 million.
Depending upon the market value of USF&G's common stock,
management may also convert the $190 million of Preferred C
Stock to common equity during 1994 through conversion or a cash
redemption. The $130 million of Preferred B stock is redeemable
at various dates beginning in 1994, subject to stipulations
related to the market value of the common stock.
Policyholders' Surplus Policyholders' surplus ("surplus"),
defined as the excess of assets over liabilities based on
statutory accounting principles, is an important measure of
financial strength. At December 31, 1993, USF&G's P/C subsidiary
reported surplus of $1.5 billion which includes the life
insurance statutory surplus of $316 million. The National
Association of Insurance Commissioners has developed new RBC
standards. RBC is a formula-driven calculation of required
levels of surplus, which considers the risks inherent in the
nature and quality of assets held and types of business written.
These standards will be applied at year-end 1994 for P/C
companies and at year-end 1993 for life insurance companies.
Based on company calculations, the surplus of both the P/C and
life insurance subsidiaries exceeded levels at which any
regulatory attention would be indicated.
32
USF&G Corporation
Management's Responsibility for Financial Reporting
Financial Statements
Management is responsible for the financial statements and other
information presented in this annual report. The financial statements
are prepared in conformity with generally accepted accounting principles.
Informed judgments and estimates are used to measure transactions not
concluded by year-end.
Internal Controls
Management is also responsible for the system of internal control. The
system of internal control encompasses the organizational structure,
selection and training of personnel, communication and enforcement of
policies and procedures, and an ongoing internal audit program. The
internal controls are designed to provide reasonable assurance that
financial records are reliable for preparing financial statements,
that transactions are completed as authorized, and that assets are
safeguarded. Management and USF&G's internal auditors regularly review
these controls and assess their adequacy and effectiveness.
Audit Committee
The Board of Directors maintains an audit committee of directors who
are not employees of USF&G. The committee meets regularly with
management, internal auditors, and independent auditors to review
internal control and financial reporting matters. Both the internal
and independent auditors have full and free access to the audit committee.
Independent Auditors
USF&G engages Ernst & Young to conduct independent audits of the
financial statements in accordance with generally accepted auditing
standards. Their audits include reviews and tests of internal controls,
transactions, and other information they consider necessary to express
an opinion on the financial statements.
NORMAN P. BLAKE, JR. DAN L. HALE
Norman P. Blake, Jr. Dan L. Hale
Chairman, President, and Executive Vice President
Chief Executive Officer and Chief Financial Officer
February 11, 1994
INDEX TO FINANCIAL INFORMATION
Management's Responsibility for Financial Reporting 33
Management's Discussion and Analysis of
Financial Condition and Results of Operations 34
Eleven-Year Summary of Selected Financial Data 56
Consolidated Statement of Operations 58
Consolidated Statement of Financial Position 59
Consolidated Statement of Cash Flows 60
Consolidated Statement of Shareholders' Equity 61
Notes to Consolidated Financial Statements 62
Report of Independent Auditors 82
33
USF&G Corporation
Management's Discussion and Analysis of Financial Condition and Results
of Operations
This section provides management's assessment of financial
results and material changes in financial position for USF&G
Corporation and its subsidiaries ("USF&G") and discusses the
results of operations for the 1993 year. The analysis focuses on
the performance of USF&G's business segments and its investment
portfolio. (Note: A glossary of certain terms used in this
discussion can be found at the end of this section. The terms
are italicized the first time they appear in the text.)
INDEX
1. Consolidated Results 34
2. Property/Casualty Insurance Operations 36
3. Life Insurance Operations 42
4. Parent and Noninsurance Operations 44
5. Investments 45
6. Financial Condition 50
7. Liquidity 50
8. Regulation 51
9. Income Taxes 53
10. Glossary of Terms 55
1. Consolidated Results
1.1. SUMMARY OF NET INCOME
The table below shows the major components of net income (loss).
(in millions) 1993 1992 1991
Income (loss) from continuing operations before
income taxes, realized gains, and cumulative
effect of adopting new accounting standards $ 93 $(113) $(179)
Realized gains on investments, net 6 148 38
Loss from discontinued operations - (7) (32)
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes 90 - -
Postretirement benefits (52) - -
Income tax (expense) benefit 28 - (3)
Net income (loss) $165 $ 28 $(176)
The major factor contributing to the $137 million increase in
net income from 1992 to 1993 was a $200 million improvement in
property/casualty insurance UNDERWRITING RESULTS (refer to
Section 2.2 in this Analysis). Net realized gains on
investments declined by $142 million in 1993 compared with 1992
(refer to Section 5.2 in this Analysis) due to a high level of
gains in 1992 realized primarily to enhance capital and surplus
and to offset the effect of Hurricane Andrew (refer to Section
2.4 in this Analysis). Net income in 1993 also was favorably
impacted by $38 million due to the net effect of the adoption
of certain new accounting standards (refer to Section 1.2 of
this Analysis). Income tax benefits of $28 million were
recognized in 1993 primarily as a result of reducing the
valuation allowance on net deferred tax assets (refer to Section
9 in this Analysis). The improvement in net income from 1991 to
1992 was also driven primarily by improved property/casualty
insurance underwriting results, as well as the increase in
realized gains in 1992.
The table below shows the components of the changes in income
from continuing operations before income taxes, realized gains,
and the cumulative effect of adopting new accounting standards
by major business segment.
(in millions) 1993 1992 1991
Property/Casualty insurance $182 $ (3) $ (84)
Life insurance (6) (4) 5
Parent and noninsurance (83) (106) (109)
Eliminations - - 9
Income (loss) from continuing operations before
income taxes, realized gains, and cumulative
effect of adopting new accounting standards $ 93 $(113) $(179)
The $185 million improvement in the property/casualty insurance
segment from 1992 to 1993 occurred as a result of a $72 million
reduction in CATASTROPHE LOSSES and an improvement of $128
million in underwriting results excluding catastrophes due
primarily to product/market mix management and cost containment
strategies (refer to Section 2.2 in this Analysis). These
improvements were partially offset by a $42 million reduction
in investment income. The life insurance segment's decline of $2
million from 1992 to 1993 primarily resulted from declining
investment yields and related declining margins on
interest-sensitive products (refer to Section 3.2 in this
Analysis). The results for parent and noninsurance operations
improved $23 million from 1992 to 1993 primarily due to savings
resulting from the fourth quarter 1992 restructuring of the oil
and gas investment (refer to Section 4 in this Analysis).
Improvement in income from 1991 to 1992 was driven primarily by
improved property/casualty results, especially in commercial
lines. Income comparisons are also affected by restructuring
charges of $51 million in 1992 and $60 million in 1991. There
were no restructuring charges in 1993 (refer to Section 1.3 in
this Analysis).
1.2. NEW ACCOUNTING STANDARDS
Net income for 1993 included the effect of the implementation of two
Statements of Financial Accounting Standards ("SFAS") which resulted
in a net increase of $38 million. SFAS No. 109, "Accounting for Income
Taxes," increased net income by $90 million as a result of the recogni-
tion of net deferred tax assets (refer to Section 9 in this Analysis).
This increase was partially offset by a $52 million charge to net income
for SFAS No. 106, "Employer's Accounting for Postretirement Benefits
Other Than Pensions," as a result of the accrual of a liability for the
cost of healthcare, life insurance, and other retiree benefits.
USF&G adopted two additional accounting standards which had no
effect on net income. SFAS No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts,"
increased assets by $1.2 billion with a corresponding increase
in liabilities at December 31, 1993, compared with December 31,
1992. This standard requires reinsurance receivables and prepaid
reinsurance premiums to be reported separately as assets instead
of the previous practice of netting such receivables against
the related loss and unearned premium liabilities. This standard
also establishes the conditions required for a contract to be
accounted for as reinsurance and prescribes income recognition
and reporting standards for those contracts. SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity
Securities," increased the book value of fixed maturities
portfolio classified as "available for sale" and shareholders'
equity by $222 million as a result of unrealized gains in this
portfolio. SFAS No. 115 requires securities classified as
available for sale to be reported at market value with
unrealized gains and losses reported as a component of
shareholders' equity. In addition, the adjustment to the book
value of fixed maturities required by SFAS No. 115 resulted in a
related $30 million decrease in shareholders' equity for life
insurance deferred policy acquisition costs.
1.3. STATUS OF RESTRUCTURING
In 1990, USF&G initiated a broad restructuring program.
Restructuring initiatives began in the fourth quarter of 1990
with charges of $34 million. Net income reflects provisions of
$60 million of restructuring charges in 1991 and $51 million in
1992. There were no restructuring charges in 1993.
Since 1990, USF&G has implemented programs to reduce the cost
structure of the organization by consolidating branch offices,
establishing a regional structure, reducing staff levels, and
eliminating certain advertising and promotional expenses. In
addition, USF&G has implemented plans to dispose of nonstrategic
businesses which resulted in losses from discontinued operations
of $7 million, $32 million, and $136 million in 1992, 1991, and
1990, respectively. The implementation of these restructuring
and cost containment initiatives and the disposition of
discontinued operations have been substantially completed.
General and administrative expenses (which do not include
commissions, premium taxes and claim expenses) have declined by
31 percent from $635 million in 1990 to $437 million in 1993.
Staffing levels have declined by 48 percent from approximately
12,500 employees at December 31, 1990, to approximately 6,500
employees at December 31, 1993.
In 1991, USF&G continued to implement programs to reduce
operating expenses. The additional $60 million of restructuring
charges incurred in 1991 were both a revision to the original
estimates and an expansion of the restructuring program during
the year. The costs were related to additional staff reductions
and branch consolidations and to the disposition of a subsidiary
that developed and marketed computer software to insurance
agencies.
In 1992, the property/casualty segment began to implement a
regionalization strategy to form separate strategic product and
market business units in order to improve marketing and
underwriting operations. The related establishment of regional
offices and further staff reductions resulted in $46 million of
additional restructuring charges. Implementation of these
restructuring strategies is expected to be completed in 1994.
Restructuring charges of $2 million were incurred in 1992,
related to the restructuring of an oil and gas investment. The
life insurance segment incurred restructuring costs of $3
million in 1992 to implement a plan to rebalance distribution
channels and centralize processing activities. The life
insurance and oil and gas investment restructuring actions were
essentially completed in 1992.
2. Property/Casualty Insurance Operations
Property/casualty insurance operations accounted for 85 percent
of USF&G's revenues in 1993 and 67 percent of its assets at December 31,
1993. Financial results for this segment are as follows:
(in millions) 1993 1992 1991
Premiums earned $2,327 $2,533 $3,018
Losses and loss expenses incurred (1,758) (2,088) (2,545)
Underwriting expenses (796) (872) (988)
Net underwriting loss (227) (427) (515)
Net investment income 433 475 498
Restructuring charges - (46) (52)
Other revenues and expenses (24) (5) (15)
Income (loss) before income taxes, realized
gains, and the cumulative effect of adopting
new accounting standards $ 182 $ (3) $ (84)
Income (loss) before income taxes, realized gains, and the
cumulative effect of adopting new accounting standards
significantly improved in 1993 primarily due to improved
underwriting results (refer to Section 2.2 of this Analysis).
Net investment income declined primarily due to the lower
interest rate environment in 1993 (refer to Section 5.1 of this
Analysis). Restructuring charges relating to staff reductions
and other cost containment programs affected results in 1991 and
1992. The fluctuations in other revenues and expenses primarily
reflect the decision to eliminate certain policyholders'
dividends in 1992 and the reversal in that year of previously
accrued but unpaid dividends.
2.1. PREMIUMS EARNED
PREMIUMS EARNED totaled $2.3 billion in 1993, compared with $2.5
billion in 1992 and $3.0 billion in 1991. The table below shows the
major components of premiums earned and PREMIUMS WRITTEN.
1993 1992 1991
Premiums Premiums Premiums Premiums Premiums Premiums
(in millions) Earned Written Earned Written Earned Written
Branch office voluntary
production $1,825 $1,847 $2,172 $1,986 $2,625 $2,523
Voluntary pools and
associations 45 46 41 44 50 51
Involuntary pools and
associations 152 133 163 147 247 247
Assumed Reinsurance 305 403 157 243 96 211
Total $2,327 $2,429 $2,533 $2,420 $3,018 $3,032
Premiums earned declined 8 percent from 1992 to 1993 and 16
percent from 1991 to 1992 primarily as a result of planned
management actions to reduce premium production in unprofitable
markets and product lines. The decline in premiums earned of 16
percent from 1991 to 1992 was primarily due to the effects of
USF&G's exiting personal lines markets in nine states since
1991, eliminating writing new voluntary workers compensation in
11 states, and reducing exposure to other unprofitable markets.
Such actions, combined with adherence to strict underwriting
standards, led to further declines in premium volume during
1993, but are designed to continue to improve underwriting
results over time. The decrease in premiums has slowed as
strategies are implemented to grow business in targeted areas.
The significant increase in assumed reinsurance premiums in 1993
is due to the strong demand for reinsurance and the higher
premium rates available as a result of the record high
catastrophes in 1992 which led to a reinsurance capacity
shortage in 1993. However, with the formation of several new
reinsurance companies in 1993, capacity has been added to the
reinsurance market, which is expected to generate competitive
pressure in 1994.
The table below shows premiums earned and the statutory LOSS
RATIOS by lines of property/casualty insurance.
1993 1992 1991
Premiums Statutory Premiums Statutory Premiums Statutory
(dollars in millions) Earned % Loss Ratio Earned % Loss Ratio Earned % Loss Ratio
COMMERCIAL LINES
Auto $ 399 17% 55.2 $ 442 18% 64.5 $ 531 18% 75.0
General Liability 351 15 80.9 388 15 99.2 487 16 91.1
Property 321 14 60.4 332 13 69.5 370 12 67.1
Workers Compensation 152 7 212.3 318 13 121.0 497 16 128.5
Total Commercial Lines 1,223 53 83.6 1,480 59 86.9 1,885 62 91.6
FIDELITY/SURETY
Fidelity 18 1 56.1 19 1 24.6 21 1 45.2
Surety 100 4 49.5 92 3 33.5 96 3 41.6
Total Fidelity/Surety 118 5 50.5 111 4 32.0 117 4 42.3
PERSONAL LINES
Auto 504 22 70.8 551 22 73.6 658 22 79.6
Homeowners 149 6 73.8 184 7 102.2 207 7 87.0
Property 28 1 66.0 50 2 67.9 55 2 58.4
Total Personal Lines 681 29 71.2 785 31 80.0 920 31 80.0
ASSUMED REINSURANCE
Finite Risk 169 7 70.1 74 3 78.9 32 1 76.1
Traditional Risk 136 6 62.1 83 3 72.8 64 2 17.6
Total Assumed Reinsurance 305 13 67.3 157 6 76.9 96 3 59.1
Total $2,327 100% 75.4 $2,533 100% 82.0 $3,018 100% 84.1
The above table illustrates the changes in premium mix from 1991
to 1993. Management's focus on reducing exposure to less
profitable lines of insurance has been a key factor in the
improved underwriting results. The most dramatic example is the
workers compensation line which has a cumulative three-year
statutory loss ratio of 139.1 and represented 16 percent of
total property/casualty premiums earned in 1991 but only 7
percent in 1993.
2.2. UNDERWRITING RESULTS
Underwriting results generally represent premiums earned less
incurred losses, loss adjustment expenses, and underwriting
expenses. Property/casualty insurance companies typically have
underwriting losses that are offset by investment income.
Underwriting gains (losses) by major business category are as
follows:
(in millions) 1993 1992 1991
Commercial $(223) $(343) $(455)
Fidelity/surety (8) 6 11
Personal (28) (110) (97)
Assumed reinsurance 32 20 26
Net underwriting losses $(227) $(427) $(515)
Voluntary $(176) $(390) $(375)
Involuntary (51) (37) (140)
Net underwriting losses $(227) $(427) $(515)
Consolidated property/casualty GAAP and statutory underwriting
ratios are as follows:
1993 1992 1991
GAAP UNDERWRITING RATIOS:
Loss ratio* 75.6 82.4 84.3
Expense ratio* 34.2 34.4 32.7
Combined ratio 109.8 116.8 117.0
STATUTORY UNDERWRITING RATIOS:
Loss ratio 75.4 82.0 84.1
Expense ratio 33.7 34.9 33.1
Combined ratio 109.1 116.9 117.2
<FN>
*See Glossary of Terms
Underwriting results in 1993 improved by $200 million and $288
million over 1992 and 1991, respectively. The improvements over
1992 and 1991 resulted from lower incurred losses from
catastrophes (refer to Section 2.4 of this Analysis), as well as
management's actions to improve product/market mix, apply
stricter underwriting standards, and improve claims practices.
Excluding catastrophe losses from Hurricane Andrew, which
occurred in 1992, the statutory loss ratio improved 3.6 points
from 1992 to 1993 and 5.1 points from 1991 to 1992. Hurricane
Andrew contributed approximately 3.0 points to the statutory
loss ratio in 1992. Underwriting results in the voluntary
business for 1993 improved $214 million over 1992 and $199
million over 1991. Underwriting losses from INVOLUNTARY BUSINESS
in 1993 were $14 million more than 1992 but were $89 million
less than 1991. The improved overall trend in 1993 and 1992 over
1991 reflects management's actions to reduce exposure to
involuntary business in states with substantial involuntary
market burdens. The increase in involuntary underwriting losses
in 1993 over 1992 is primarily due to an assessment of loss
reserves from involuntary workers compensation insurance pools.
Underwriting results showed improvement despite continuing
competitive pressures, the inflationary claims environment, and
the adverse impact of involuntary markets. Competitive pressures
continue to depress underwriting results, especially in the
pricing of commercial lines products. Competitive pressures
include the historic cyclicality of the property/casualty
insurance industry pricing environment. These cycles are
evidenced by extended periods of overcapacity that adversely
affect premium rates, followed by periods of undercapacity
resulting in rising rates. The industry has experienced an
intense period of price competition since 1987, during which
companies have been unable to charge rates sufficient to offset
rising claim costs. Some industry analysts are beginning to
point to factors such as high catastrophe losses, low interest
rates, and reduced reinsurance capacity as indications that the
underwriting cycle has started to improve. Other analysts
believe that excess surplus capacity still exists in the
industry and that pricing pressure will continue. USF&G is
unable to predict whether or when the property/casualty
insurance cycle will improve but is continuing to manage to
long term objectives that include continued underwriting
improvements without reliance on a significant cycle turn.
Commercial Lines
Commercial lines products include property, auto, inland marine,
workers compensation, and general and umbrella liability coverage
for businesses. The commercial lines business has two distinct
market segments-middle market and small business. USF&G has
further defined the middle market into three strategic business
units: service businesses, contractors, and manufacturers to
better service customers and become more cost efficient.
The following table shows the components of underwriting results
for commercial lines:
(in millions) 1993 1992 1991
Premiums written $ 1,239 $ 1,355 $1,780
Premiums earned $ 1,223 $ 1,480 $ 1,885
Losses (1,014) (1,299) (1,728)
Expenses (432) (524) (612)
Net underwriting losses $ (223) $ (343) $ (455)
Voluntary $ (187) $ (316) $ (341)
Involuntary (36) (27) (114)
Net underwriting losses $ (223) $ (343) $ (455)
GAAP and statutory underwriting ratios are as follows:
1993 1992 1991
GAAP UNDERWRITING RATIOS:
Loss ratio 83.0 87.8 91.7
Expense ratio 35.3 35.4 32.5
Combined ratio 118.3 123.2 124.2
STATUTORY UNDERWRITING RATIOS:
Loss ratio 83.6 86.9 91.6
Expense ratio 34.7 36.3 33.4
Combined ratio 118.3 123.2 125.0
Underwriting results in the commercial lines category improved
$120 million over 1992 and $232 million over 1991. This
improvement is primarily the result of the change in the mix of
business, as well as the application of stricter underwriting
standards and lower catastrophe losses.
In commercial lines, the mix of the least profitable line of
business, workers compensation, is decreasing, and the mix of
the two most profitable lines of business, auto and property,
is increasing. Workers compensation represented 12 percent of
premiums earned in commercial lines in 1993, compared with 21
percent in 1992 and 26 percent in 1991, with a cumulative three
year statutory loss ratio in this line of 139.1. Commercial
auto, with a statutory loss ratio of 55.2 in 1993, increased
from 28 percent of commercial lines premiums earned in 1991 to
33 percent in 1993. Commercial property, with a statutory loss
ratio of 60.4 in 1993, increased from 20 percent of commercial
lines premiums earned in 1991 to 26 percent in 1993.
The involuntary business losses were $9 million more in 1993
than in 1992, but were $78 million less than 1991. The improved
involuntary results in 1992 and 1993 compared with 1991 result
primarily from management actions to reduce workers
compensation premiums which led to reduced participation in the
involuntary workers compensation pools. In addition, involuntary
underwriting losses in 1991 were adversely affected by a $20
million involuntary pool assessment related to special reserve
increases from the National Workers Compensation Reinsurance
Pool ("NWCRP").
The statutory loss ratio improved 3.3 points in 1993 from 1992
and 8.0 points in 1993 from 1991. Contributing to this
significant improvement over 1992 were losses incurred from
Hurricane Andrew which were approximately 1.6 points of the
commercial lines 1992 statutory loss ratio. Excluding Hurricane
Andrew, USF&G is still experiencing an improved loss ratio
trend, which management believes is evidence of the positive
effects of the strategies implemented to improve underwriting
results.
Although premiums in the commercial lines business have declined
since 1990, the 9 percent decline in premiums written in 1993
from 1992 was less than the 24 percent and 18 percent declines
in 1992 and 1991, respectively. Excluding workers compensation,
the declines in premiums written are 2 percent, 17 percent, and
14 percent in 1993, 1992, and 1991, respectively. State exits
and other initiatives which began in 1990 to reduce exposure to
unprofitable markets were essentially completed in 1993. During
1994, commercial lines initiatives will focus on penetrating
target markets and implementing new products and services with
the objective of premium growth.
Fidelity/Surety
The fidelity/surety segment provides contract bonds, financial
institution bonds, judicial bonds, and fidelity/surety bonds to
commercial businesses, banks, credit unions, and construction companies.
The following table shows the components of underwriting results
for fidelity/surety:
(in millions) 1993 1992 1991
Premiums written $120 $109 $116
Premiums earned $118 $111 $117
Losses (59) (36) (41)
Expenses (67) (69) (65)
Net underwriting gains (losses) $ (8) $ 6 $ 11
Voluntary $ (8) $ 6 $ 11
Involuntary - - -
Net underwriting gains (losses) $ (8) $ 6 $ 11
GAAP and statutory underwriting ratios are as follows:
1993 1992 1991
GAAP UNDERWRITING RATIOS:
Loss ratio 50.2 32.3 35.5
Expense ratio 56.6 62.6 55.5
Combined ratio 106.8 94.9 91.0
STATUTORY UNDERWRITING RATIOS:
Loss ratio 50.5 32.0 42.3
Expense ratio 56.4 64.0 56.3
Combined ratio 106.9 96.0 98.6
Fidelity/surety experienced a decline in underwriting results in
1993 due to increased losses. Premiums earned increased
approximately 6 percent over 1992 and were consistent with 1991.
The increased premiums in 1993 from 1992 related to market
expansion strategies. Losses, however, increased $23 million or
64 percent over 1992, primarily as a result of unfavorable loss
development on a limited number of prior years' claims.
Underwriting expenses have remained generally consistent.
Personal Lines
Personal lines products include auto, homeowners, watercraft
and personal excess insurance for individuals and families.
The following table shows the components of underwriting
results for the personal lines category:
(in millions) 1993 1992 1991
Premiums written $ 653 $ 726 $ 925
Premiums earned $ 681 $ 785 $ 920
Losses (481) (635) (736)
Expenses (228) (260) (281)
Net underwriting losses $ (28) $(110) $ (97)
Voluntary $ (13) $(100) $ (71)
Involuntary (15) (10) (26)
Net underwriting losses $ (28) $(110) $ (97)
GAAP and statutory underwriting ratios are as follows:
1993 1992 1991
GAAP UNDERWRITING RATIOS:
Loss ratio 70.6 80.9 80.0
Expense ratio 33.5 33.1 30.5
Combined ratio 104.1 114.0 110.5
STATUTORY UNDERWRITING RATIOS:
Loss ratio 71.2 80.0 80.0
Expense ratio 33.9 33.2 30.4
Combined ratio 105.1 113.2 110.4
Management strategies to reduce exposure in unprofitable markets
and lines of business improved the underwriting results of the
personal lines segment. Strategies that have contributed to the
improvement include reunderwriting the auto book of business,
applying stricter underwriting standards and reducing exposure
in high risk catastrophe areas.
Despite premiums earned decreasing $104 million in 1993 compared
with 1992 and $239 million compared with 1991, underwriting
results improved $82 million in 1993 over 1992 and $69 million
over 1991. The statutory loss ratio improved 8.8 points from
1992 to 1993 (a 3.0 point improvement excluding Hurricane Andrew
in 1992) which management believes is evidence of the positive
effects of strategies implemented to improve underwriting
results.
Underwriting losses from involuntary markets increased $5
million in 1993 compared with 1992, but have improved $11
million compared with 1991. The increase in 1993 losses is due
to unfavorable development on prior years claims and costs
associated with third party administrators managing the
assigned risk involuntary business. The substantially improved
involuntary underwriting results in 1993 and 1992 compared with
1991 was a result of USF&G's strategy, initiated in 1990, to
withdraw from unprofitable markets in order to reduce adverse
loss exposure. Although personal lines premiums have declined
since 1990, the 10 percent decline in premiums written in 1993
was less than the 21 percent in 1992. The premium decreases
primarily resulted from planned management actions to exit
specific states and other unprofitable markets, and to reduce
writings in high risk catastrophe areas. Net premium declines in
1993 also reflect the higher cost of ceded reinsurance. During
1994, personal lines initiatives are expected to result in
growth in selected target markets; however, continued
management of unprofitable markets and high ceded reinsurance
costs is expected to offset premium growth in these selected
markets.
Assumed Reinsurance
Reinsurance products are managed by F&G Re and marketed through
national and international reinsurance brokers. The reinsurance
segment has historically produced underwriting gains.
The following table shows the components of underwriting results
for assumed reinsurance lines:
(in millions) 1993 1992 1991
Premiums written $ 403 $ 243 $ 211
Premiums earned $ 305 $ 157 $ 96
Losses (204) (118) (40)
Expenses (69) (19) (30)
Net underwriting gains $ 32 $ 20 $ 26
Finite risk $ 9 $ 14 $ 7
Traditional risk 23 6 19
Net underwriting gains $ 32 $ 20 $ 26
GAAP and statutory underwriting ratios are as follows:
1993 1992 1991
GAAP UNDERWRITING RATIOS:
Loss ratio 66.7 75.0 40.9
Expense ratio 22.6 12.1 31.5
Combined ratio 89.3 87.1 72.4
STATUTORY UNDERWRITING RATIOS:
Loss ratio 67.3 76.9 59.1
Expense ratio 24.6 17.0 29.9
Combined ratio 91.9 93.9 89.0
During 1993, underwriting results in this category were affected
by increased premiums due to the strong demand for reinsurance
caused primarily by the shrinking capacity in the international
property catastrophe market. New accounting requirements as a
result of the issuance of SFAS No. 113 and EITF 93-6 are
expected to cause a substantial reduction in the demand for
finite risk reinsurance.
2.3. LOSSES INCURRED AND LOSS RESERVES
Losses and loss adjustment expenses incurred totaled $1.8 billion
in 1993, compared with $2.1 billion and $2.5 billion in 1992
and 1991, respectively. The reduction is due primarily to lower
catastrophe losses, lower premium volume, and actions taken to
better manage claims and claim costs and reduce exposures in
undesirable markets.
Reserves for unpaid losses and loss expenses totaled $6.3
billion at December 31, 1993, compared with $5.5 billion and
$5.7 billion at the end of 1992 and 1991, respectively. The
impact of adopting SFAS No. 113 increased reserves by $1.2
billion. This new accounting standard eliminated the previous
practice of reporting assets and liabilities net of the effect
of reinsurance. Excluding the effects of SFAS No. 113, reserves
in 1993 declined 7 percent from 1992 and 10 percent from 1991.
This compares to the 8 percent and 23 percent declines in
premiums earned in 1993 compared with 1992 and 1991,
respectively. Reserve levels have also been reduced as a result
of reduced claim activity. The number of outstanding claims at
December 31, 1993, declined by 12 percent compared with year-end
1992. The number of new claims reported (excluding catastrophe
claims) declined 23 percent from 1991 to 1993.
Catastrophes and individually large claims (claims in excess of
$1 million), net of reinsurance, accounted for $245 million,
$268 million, and $302 million of incurred losses in 1993, 1992,
and 1991, respectively (refer to Section 2.4 of this Analysis).
Net of reinsurance, individually large claims and related
claims accounted for $177 million of incurred losses in 1993 and
$128 million and $229 million in 1992 and 1991, respectively.
USF&G seeks to limit its exposure to catastrophe and
individually large claims through the purchase of reinsurance
(refer to Section 2.5 of this Analysis).
USF&G also categorizes environmental, product liability, other
long term exposures such as asbestos and other types of
exposures where multiple claims relate to a similar cause of
loss (excluding catastrophes) as "common circumstance claims."
Total common circumstance claims paid (including loss adjustment
expenses) for the period 1985 through 1993 were $343 million.
Case reserves (exclusive of bulk reserves) outstanding for such
claims were $214 million, $171 million, and $127 million at
December 31, 1993, 1992, and 1991, respectively. USF&G's most
significant common circumstance claim exposures include
negligent construction, environmental, and asbestos claims.
The table below sets forth selected information for each of these
three categories:
Total Claims Paid
from 1985-1993 Case Reserves at
(in millions) (includes LAE) December 31, 1993
Negligent construction $ 78 $ 74
Environmental 125 61
Asbestos 81 45
At December 31, 1993, USF&G had 1,200 active files relating to
environmental matters, including 76 coverage disputes. The
number of claims under each file may vary significantly. In
1993, approximately 35 percent of paid environmental claims
related to matters under which a USF&G insured was a potentially
responsible party ("PRP") under the Comprehensive Environmental
Response, Compensation, and Liability Act, commonly referred to
as "Superfund", but many of these PRPs were only peripherally
involved. Management does not believe that USF&G has material
exposure to environmental or asbestos matters in excess of
reserves or relative to other large property/casualty insurers
because USF&G's customer base generally does not include large
manufacturing companies, which tend to incur most of the known
environmental and product liability exposures. Many of USF&G's
environmental claims relate to small industrial or
transportation accidents which individually are unlikely to
involve material exposures. In addition, USF&G has recently
consolidated handling of common circumstance claims into a
specialized unit designed to more effectively manage such claim
exposures.
The above discussion regarding common circumstance claims
relates solely to USF&G's direct business and does not include
exposures assumed through F&G Re or otherwise. Management does
not believe that assumed business which includes common
circumstance claims involves exposures materially in excess of
established reserves.
The level of loss reserves for both current and prior years'
claims is continually monitored and adjusted for changing
economic, social, judicial, and legislative conditions.
Management believes that loss reserves are adequate, but
establishing appropriate reserves, particularly with respect to
environmental or other long term exposure claims which are the
subject of evolving legislative and judicial theories of
liability, is highly judgmental and an inherently uncertain
process.
2.4. CATASTROPHE LOSSES
Gross catastrophe losses totaled $81 million in 1993, compared
with $292 million in 1992. These losses, net of losses ceded to
reinsurers, were $68 million in 1993 compared with $140 million
in 1992. Gross and net catastrophe losses totaled $73 million in
1991 as no losses were ceded. Catastrophe losses, net of reinsurance,
represented 3 percent of premiums earned for the year ended
December 31, 1993, compared with 6 percent and 2 percent for 1992
and 1991, respectively. Catastrophe losses in 1993 included $27 million
from the East Coast blizzard in March. The 1992 losses, the
highest in USF&G's history, were primarily from Hurricane Andrew
in Florida and hailstorms and tornadoes in Kansas and Oklahoma.
The industry as a whole experienced record catastrophe losses in
1992 of approximately $23 billion, over five times the level of
industry losses in 1991 of $4 billion. The catastrophe losses in
1991, the third highest in USF&G's history, resulted from a
series of storms and tornadoes in the South and Midwest,
Hurricane Bob, and the California fires.
2.5. CEDED REINSURANCE
USF&G reinsures portions of its policy risks with other insurance
companies or underwriters. Reinsurance allows USF&G to obtain
indemnification against losses associated with insurance contracts
it has written by entering into a reinsurance contract with another
insurance enterprise (the reinsurer). USF&G pays (cedes) an amount to the
reinsurer who agrees to reimburse USF&G for a specified portion
of any claims paid on business under the reinsured contracts.
Reinsurance gives USF&G the ability to write certain individually
large risks or groups of risks, and control its exposure to losses
by ceding a portion of such large risks. USF&G's ceding reinsurance
agreements are generally structured on a treaty basis whereby all
risks meeting a certain criteria are automatically reinsured. Shrinking
capacity in the reinsurance market and the high catastrophe losses
in recent years have increased prices and reduced the availability of
catastrophe reinsurance. Property catastrophe reinsurance costs
were $30 million in 1993, compared with $26 million and $21 million
in 1992 and 1991, respectively. USF&G's property catastrophe loss
retention levels have increased from $23 million in 1992 to
approximately $50 million in 1993 at greater cost.
2.6. CAPACITY
A key measure of both strength and growth capacity for property/
casualty insurers is the ratio of premiums written to statutory
POLICYHOLDERS' SURPLUS. At year-end 1993, USF&G's premium-to-surplus
ratio was 1.4:1, slightly higher than the industry average of 1.3:1,
and represents an improvement over 1992's ratio of 1.5:1. Insurance
regulators generally accept a ceiling for this ratio of 3.0:1;
therefore, at its current ratio, USF&G has the capacity to grow by
writing new business.
3. Life Insurance Operations
Life insurance operations represented 14 percent of USF&G's revenues
in 1993 and 34 percent of its assets at December 31, 1993. F&G Life's
financial results are as follows:
(in millions) 1993 1992 1991
Premiums $ 129 $ 104 $ 169
Net investment income 321 349 370
Policy benefits (395) (377) (437)
Underwriting and operating expenses (61) (77) (94)
Other revenues and expenses - - (1)
Restructuring charges - (3) (2)
Income (loss) before income taxes,
realized gains, and the cumulative
effect of adopting new accounting standards $ (6) $ (4) $ 5
Income (loss) comparisons were affected by increased sales and
lower operating expenses offset by lower investment income in
1993. In 1992, F&G Life repositioned itself to become more
competitive and service oriented. The repositioning resulted in
a broadened product mix and a balanced distribution system. The
revised market strategies, new distribution channels, and
enhanced customer service are the major factors of the increase
in sales in 1993 (refer to Section 3.2 in this Analysis). In
addition, strategic repositioning and management actions to
reduce costs contributed to a 29 percent decline in operating
expenses in 1993 compared with 1992.
3.1. PRODUCTS
F&G Life issues annuity and life insurance products. F&G Life's
principal products are structured settlements, deferred annuities
(including tax sheltered annuities), and other annuity products.
Structured settlements are immediate annuities principally sold to the
property/casualty company in settlement of insurance claims.
Deferred annuity products accumulate cash values to which
interest is credited. In 1993, deferred annuities were credited
with interest rates that ranged between 9.0 and 4.5 percent,
depending upon the year of issue and interest guarantee
duration. The majority of deferred annuities in force were
issued with initial interest guarantees from one to six years,
with most written between 1988 and 1990 with a six year interest
guarantee. The deferred annuities also include provisions for
charges if the annuitant chooses to surrender the policy (see
Section 3.3 of this Analysis). After the interest guarantee
expires, the interest crediting rates can be adjusted annually
on a policy's anniversary date. Deferred annuity products are
sold through independent agents, insurance brokers, and
national wholesale distributors. F&G Life's tax sheltered
annuity products ("TSAs") are deferred annuities that provide
retirement income. Tax sheltered annuities are sold through a
national wholesale distribution network primarily to teachers.
Other annuities sold by F&G Life primarily consist of single
premium immediate annuities ("SPIAs"). SPIAs provide a fixed
stream of payments over a fixed period of time or over an
individual's lifetime.
F&G Life also markets, primarily through independent agents,
universal life ("UL") and term life insurance products. UL
insurance provides a death benefit for the life of the insured
and accumulates cash values to which interest is credited. Term
life insurance provides a fixed death benefit if the insured
dies during the contractual period.
3.2. SALES
The following table shows life insurance and annuity sales
(premiums and deposits) by distribution system and product
type:
(in millions) 1993 1992 1991
DISTRIBUTION SYSTEM
Direct-structured settlement annuities $ 66 $ 37 $ 71
Independent agencies/insurance brokers 60 60 76
National wholesaler-TSA 35 - -
Member firm/financial institutions 7 7 62
Total $168 $104 $209
PRODUCT TYPE
Structured settlement annuities $ 66 $ 37 $ 71
Single premium deferred annuities 44 33 70
Tax-sheltered annuities 35 - -
Other annuities 17 23 54
Life insurance 6 11 14
Total $168 $104 $209
Sales in 1993 were favorably affected by F&G Life's refocus on
its marketing and customer service operations. F&G Life's
restructuring replaced high fixed cost marketing programs with
variable cost distribution channels. New products were designed
to meet the needs of targeted customers and to increase sales
opportunities. Since the implementation of the program in 1992,
1993 sales increased 62 percent when compared with 1992. In its
effort to continue the improvement in sales, F&G Life intends to
expand its existing distribution channels while developing
other specialized marketing networks. F&G Life will develop new
products, in concert with its distribution partners, to meet the
needs of its targeted customers. However, given the expectation
of continued low interest rates into 1994 and other market
forces, there is no assurance that the 1993 improved sales trend
will continue. As market interest rates declined in 1992 and
1993, F&G Life likewise lowered the rates offered on its annuity
and universal life insurance policies to maintain adequate
profit margins. F&G Life's 1992 sales declined by 50 percent
from 1991 levels due to the effect of the low interest rate
environment and the residual effects of USF&G's restructuring
efforts and its credit ratings. Current and projected spreads
between investment income and interest credited to policyholders
have narrowed but remain positive. Total life insurance in force
decreased to $12.1 billion in 1993, compared with $12.4 billion
in 1992 and $13.4 billion in 1991. Since 1991, insurance in
force has been affected by the decline in life insurance sales
and an increase in universal life policy surrenders.
3.3. POLICY SURRENDERS
Deferred annuities and universal life products are subject to
surrender. Nearly all of F&G Life's surrenderable annuity policies
allow for the refund of the cash value less a surrender charge.
Surrender charges provide protection against premature policy
surrender. Surrender activity has also been positively affected by
the lower interest rate environment since most of the surrenderable
annuities have guaranteed crediting rates higher than interest rates
currently available. Deferred annuities, which represent 78 percent of
surrenderable business, include surrender charges for periods ranging
from 5 to 10 years. The majority of business in force was issued with
surrender charges that declined from six percent to zero over six years.
Policy surrenders totaled $211 million in 1993, compared with
$192 million in 1992 and $586 million in 1991. Surrender
activity was significantly reduced from the unusually high level
experienced in 1991 when policyholders reacted to negative
public perception of the life insurance industry in general, and
the annuity business in particular, as well as the uncertainty
at that time about USF&G's restructuring efforts. The total
ACCOUNT VALUE of F&G Life's surrenderable annuities was $2.6
billion at December 31, 1993, and approximately $229 million was
surrenderable at current account value (i.e., without surrender
charges) on that date. The surrender charge period on $2.2
billion of F&G Life's single-premium deferred annuity products
expires within the next four years. The surrender charge period
on $751 million expires during 1994. Management has a
conservation program in place to provide holders of policies
maturing with renewal options in an effort to provide them with
investment alternatives within F&G Life. F&G Life's investments
have been structured to provide sufficient liquidity to fund
withdrawals. Management believes that F&G Life, with a LIQUID
ASSETS TO SURRENDER VALUE of surrenderable business of 126
percent at December 31, 1993, continues to maintain a high
degree of liquidity and has the ability to meet surrender
obligations for the foreseeable future.
3.4. DEFERRED POLICY ACQUISITION COSTS ("DPAC")
Costs to acquire and issue life insurance policies are generally
deferred and amortized in future periods. The recoverability of
these amounts is regularly reviewed. In reviewing the assumptions
used to amortize DPAC, management analyzes expected policy surrender
experience, projected investment spreads, and other criteria.
Policy acquisition costs unfavorably affected results as $8 million,
$10 million, and $9 million of normally deferrable costs were
expensed in 1993, 1992, and 1991, respectively, because sales levels
were not sufficient to support the deferral of such costs. In 1992,
$10 million of previously deferred costs were expensed as a result
of management's evaluation and subsequent changes in the estimates
and assumptions used to amortize these costs. Management considered
policy surrenders that, although significantly reduced from 1991
levels, were still considered above "normal," the expectation of
future investment yields, and the spread between investment
yields and interest credited to policyholders. In 1991, the
above normal levels of policy surrenders resulted in the
expensing of $20 million of previously deferred costs, which
were offset by income from surrender charges of $15 million.
High surrender activity or changes in expected profit margins in
future years could have similar negative effects on future
results.
4. Parent and Noninsurance Operations
Parent company interest and other unallocated expenses and net
losses from noninsurance operations were as follows:
(in millions) 1993 1992 1991
PARENT COMPANY EXPENSES:
Interest expense $(37) $ (35) $ (42)
Unallocated expenses, net (35) (34) (20)
NONINSURANCE LOSSES:
Management consulting (2) (4) (2)
Oil and gas - (18) (17)
Other noninsurance investments (9) (13) (22)
Restructuring charges - (2) (6)
Loss from continuing operations before income
taxes and realized gains $(83) $(106) $(109)
Interest expense in 1993 was generally consistent with 1992;
however, compared with 1991, interest expense was lower due
primarily to declines in outstanding debt and lower rates on
short-term debt. As a result of a restructuring, there were no
oil and gas operating losses in 1993. During 1992, USF&G
incurred $2 million of restructuring charges related to its oil
and gas operations. The result of this restructuring was to
merge the operations with another oil and gas exploration and
production company. In 1993, the successor company issued shares
through an initial public offering, thereby reducing USF&G's
percentage ownership. The improvement in other noninsurance
investments from 1992 to 1993 primarily related to income from
notes received from the sale of an investment management
subsidiary in 1992. Restructuring charges in 1991 related to
revisions to restructuring estimates originally established in
the prior year and the expansion of the restructuring program
during the year.
5. Investments
The table below shows the distribution of USF&G's investment portfolio.
At December 31
1993 1992 1991
Total Investments (in millions) $11,377 $11,346 $12,167
Fixed maturities:
Held to maturity 41% 64% 31%
Available for sale 43 17 44
Total fixed maturities 84 81 75
Common and preferred stocks 1 1 4
Short-term investments 3 5 10
Mortgage loans and real estate 9 9 9
Other invested assets 3 4 2
Total 100% 100% 100%
USF&G's investment mix has been repositioned to increase the
percentage of high quality fixed-income securities in the
portfolio. Long-term fixed maturities comprise 84 percent of
total investments at December 31, 1993, compared with 81
percent and 75 percent at December 31, 1992 and 1991,
respectively. At December 31, 1990, fixed maturities comprised
less than 65 percent of total investments. The general level of
investment in fixed maturities is expected to be maintained
through 1994. The increased proportion of fixed maturities
available for sale at December 31, 1993, compared with prior
periods reflects the implementation of SFAS No. 115.
5.1. NET INVESTMENT INCOME
The following table shows the components of net investment income.
Years Ended December 31
(dollars in millions) 1993 1992 1991
Net investment income from:
Fixed maturities $721 $739 $711
Equity securities 14 12 29
Options - 37 65
Short-term investments 9 27 73
Real estate and mortgage loans 41 50 35
Other, less expenses (36) (48) (36)
Total $749 $817 $877
Average yield 6.7% 7.3% 7.8%
Investment results were significantly affected by declining
interest rates in 1993. The interest rate environment had a
two-pronged effect on net investment income, which decreased 8
percent and 15 percent when compared with 1992 and 1991,
respectively. The reduction in interest rates triggered
prepayments on mortgage-backed securities and refinancing of
debt by long-term borrowers. During 1993, maturities and other
repayments of USF&G's fixed maturity investments totaled $1.3
billion and proceeds from fixed maturities sales totaled $1.7
billion. Proceeds from these sales and repayments of fixed
maturities were reinvested at substantially lower rates. For
1993, net investment income from fixed maturities decreased by
2.4 percent when compared with 1992 and increased by 1.4 percent
when compared with 1991. Average yields on fixed maturities were
7.7 percent, 8.6 percent, and 9.2 percent for the years ended
December 31, 1993, 1992, and 1991, respectively.
While interest rate changes have contributed to declines in
average yields since 1991, another significant factor was the
elimination of option income. Prior to 1993, options were
written on a segment of USF&G's fixed maturity portfolio. In
1993, USF&G elected to eliminate its debt option writing program
and thereby forfeit option income in order to avoid exposing its
fixed maturities to the possibility of being called. Excluding
option income the average yield on invested assets was 7.2
percent in 1991 and 7.0 percent in 1992 compared with 6.7
percent in 1993.
The reduction in net investment income from short-term
investments since 1991 reflects both the effect of lower
interest rates and the reduced level of assets allocated to
short-term investments. The sale of income-producing
properties combined with losses on equity partnerships were the
primary factors in the decline from 1992 to 1993 in real estate
and mortgage loan investment income.
Management does not anticipate a significant increase in
interest rates during 1994. Therefore, it is likely that net
investment income will decline further in 1994 as prepayments
and maturities continue and proceeds are reinvested at
continued low rates.
5.2. REALIZED GAINS (LOSSES)
The components of net realized gains (losses) include the following:
Years Ended December 31
(in millions) 1993 1992 1991
Net gains (losses) from sales:
Fixed maturities $ 79 $179 $157
Equities and options 5 52 (2)
Real estate and mortgage loans 6 (3) (3)
Other - 11 (44)
Total net gains 90 239 108
Provisions for impairment:
Fixed maturities (10) (20) (15)
Equities (8) - (18)
Real estate (51) (43) (29)
Other (15) (28) -
Total provisions (84) (91) (62)
Losses due to portfolio restructuring - - (8)
Net realized gains $ 6 $148 $ 38
To more effectively match the duration of its investments with
its life insurance liabilities, USF&G repositioned a portion of
its fixed maturity investments in 1993. The related sales of
fixed maturities were the primary reason for net gains of $90
million in 1993. Investment sales to offset declines in capital
and statutory surplus caused by catastrophe losses and other
sales as part of USF&G's portfolio repositioning resulted in net
gains of $239 million and $108 million in 1992 and 1991,
respectively. In 1992, USF&G realized $52 million of gains on
equities and reallocated the proceeds to relatively less
volatile fixed maturities.
To reflect impairments in the value of certain of its
investments, USF&G made provisions for impairment of $84 million
in 1993 compared with $91 million in 1992 and $62 million in
1991. Real estate provisions in 1993 primarily related to
specific properties either sold in 1993 or expected to be sold
in the near term. These properties were written down to net
realizable value with corresponding increases to real estate
reserves. Similar real estate provisions were taken in 1992 and
1991 to reflect both changes in circumstances related to
specific properties and general real estate market
deterioration. The recognition of other than temporary
impairments on two equity holdings which were subsequently sold
during 1993 and one investment where USF&G holds a minority
interest were key elements in net realized losses of $3 million
on equities and $15 million on other invested assets in 1993.
5.3. UNREALIZED GAINS (LOSSES)
The components of the changes in unrealized gains (losses) were
as follows:
Years Ended December 31
(in millions) 1993 1992 1991
Equity securities $ 23 $(39) $ 47
Fixed maturities available for sale 222 - -
Deferred policy acquisition cost adjustment (30) - -
Other 8 29 (10)
Total $223 $(10) $ 37
USF&G's adoption of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," favorably impacted
shareholders' equity as market value changes in fixed maturities
available for sale were reflected in unrealized gains on
investments in 1993. Unrealized gains on fixed maturities
classified as "available for sale" were $222 million at December
31, 1993. Prior to adoption of SFAS No. 115, appreciation on
fixed maturities was not included as a component of
shareholders' equity. This was partially offset by a DPAC
adjustment reflecting assumptions about the effect of potential
asset sales on future DPAC amortization should the unrealized
gains on assets matched to certain life insurance liabilities be
realized and the proceeds reinvested at lower rates. Under this
scenario margins on annuity products could potentially be
reduced, leading to an acceleration of DPAC amortization.
Appreciation in the equity portfolio and several stock funds as
well as the partial sale of a foreign equity holding which had
an unrealized loss at December 31, 1992, also contributed to the
favorable change in unrealized gains. A reduction in unrealized
gains of $10 million occurred in 1992 largely due to the
realization of gains on the sale of equities offset by the
elimination of unrealized losses on written options. A general
appreciation in the equity markets resulted in a $47 million
increase in unrealized gains on equity securities in 1991.
5.4. FIXED MATURITY INVESTMENTS
The tables below detail the composition of the fixed maturity portfolio.
At December 31
(dollars in millions) 1993 1992 1991
U. S. Government bonds $ 308 $ 554 $2,613
Corporate investment-grade bonds 4,866 3,103 1,806
Mortgage-backed securities 2,403 3,824 3,174
Asset-backed securities 1,149 995 793
High-yield bonds* 562 522 433
Tax-exempt bonds 48 71 173
Other 6 136 121
Total fixed maturities at amortized cost $9,342 $9,205 $9,113
Total market value of fixed maturities $9,699 $9,319 $9,486
Net unrealized gains $ 357 $ 114 $ 373
Percent market-to-amortized cost 104% 101% 104%
<FN>
* See Glossary of Terms
At December 31
1993 1992 1991
Amortized Market Amortized Market Amortized Market
(in millions) Cost Value Cost Value Cost Value
Fixed maturities:
Held to maturity $4,661 $4,796 $7,218 $7,290 $3,749 $3,880
Available for sale 4,681 4,903 1,987 2,029 5,364 5,606
Total $9,342 $9,699 $9,205 $9,319 $9,113 $9,486
In compliance with SFAS No. 115, USF&G classified 50 percent of
its fixed maturity portfolio as "available for sale." Management
believes that this level of securities available for sale is
adequate for USF&G to meet its operating liquidity needs and
provides the flexibility necessary to respond to changes in the
investment markets. Securities classified as "available for
sale" are carried at market value with unrealized gains and
losses included in shareholders' equity. At December 31, 1993,
unrealized gains were $222 million. Securities classified as
"held to maturity", which are carried at amortized cost, had
unrealized gains of $135 million at December 31, 1993. Prior to
the adoption of SFAS No. 115, gains on fixed maturities were not
recognized in USF&G's financial statements until the gains were
realized at the time of sale. Such unrealized gains on fixed
maturities available for sale were $42 million and $242 million
at December 31, 1992 and 1991, respectively. Unrealized gains
on securities classified as "held to maturity" were $72 million
and $131 million at December 31, 1992 and 1991, respectively.
Declining interest rates, which resulted in rising bond prices,
were responsible for the three percentage point increase from
1992 to 1993 in the fixed maturity portfolio's overall
market-to-amortized cost ratio.
The effect on fixed maturities of falling interest rates was
most evident in the decline in holdings of mortgage-backed
securities during 1993. Investments in mortgage-backed
securities declined 37 percent and 24 percent when compared with
holdings at December 31, 1992 and 1991, respectively, due
primarily to the reallocation of principal prepayments to
corporate investment grade bonds. Declining interest rates in
1993 led to the prepayment of a significant portion of USF&G's
mortgage-backed portfolio. Proceeds from these prepayments,
combined with other sales proceeds, were invested in corporate
investment grade securities to maintain a balance of sufficient
credit quality and overall portfolio yield. While subject to the
prepayment risk experienced during 1993, credit risk related to
mortgage-backed securities is believed to be minimal as 99
percent of such securities at December 31, 1993, have AAA
ratings or are collateralized by obligations of the U. S.
Government or its agencies.
Debt obligations of the U. S. Government and its agencies and
other investment-grade bonds comprised 94 percent of the
portfolio at December 31, 1993, compared with 93 percent at both
December 31, 1992 and 1991. The table below shows the credit
quality of the long-term fixed maturity portfolio as of December
31, 1993.
Percent Market-
Amortized Market to-Amortized
(dollars in millions) Cost Percent Value Cost
U. S. Government and
U. S. Government Agencies $2,351 25% $2,453 104%
AAA 1,808 19 1,866 103
AA 1,305 14 1,342 103
A 2,296 25 2,390 104
BBB 1,020 11 1,055 103
Below BBB 562 6 593 106
Total $9,342 100% $9,699 104%
USF&G's holdings in high-yield bonds comprised six percent of
the total fixed maturity portfolio at December 31, 1993,
compared with five percent of the portfolio at December 31, 1992
and 1991. The high-yield bond market-to-amortized cost ratio has
improved three percentage points and seven percentage points
compared with December 31, 1992 and 1991, respectively. Of the
total high-yield bond portfolio, 69 percent is held by the life
insurance segment, representing 9 percent of the life segment's
total investments. The table below illustrates the credit
quality of the high-yield bond portfolio at December 31, 1993.
Percent Market-
Amortized Market to-Amortized
(dollars in millions) Cost Percent Value Cost
BB $352 63% $369 105%
B 209 37 218 104
CCC and lower 10 2 6 60
Valuation allowance (9) (2) - -
Total $562 100% $593 106%
The information on credit quality in the preceding two tables is
based upon the higher of the rating assigned to each issue of
fixed-income bonds by either Standard & Poor's or Moody's. Where
neither Standard & Poor's nor Moody's has assigned a rating to a
particular fixed maturity issue, classification is based on
1) ratings available from other recognized rating services;
2) ratings assigned by the NAIC; or 3) an internal assessment of
the characteristics of the individual security if no other rating
is available.
At December 31, 1993, USF&G's five largest investments in
high-yield bonds totaled $86 million in book value and had a
market value of $90 million. None of these investments
individually exceeded $28 million. USF&G's largest single
high-yield bond exposure represented 5 percent of the high-yield
portfolio and 0.3 percent of the total fixed maturity portfolio.
5.5. REAL ESTATE
The table below shows the components of USF&G's real estate portfolio.
At December 31
(in millions) 1993 1992 1991
Mortgage loans $ 302 $ 186 $ 291
Equity real estate 793 926 864
Reserves (108) (108) (88)
Total $ 987 $1,004 $1,067
The increased allocation to mortgage loans in 1993 reflects a
strategy of maintaining a generally consistent level of real
estate assets while allocating more funds to traditional
mortgage loans and reducing real estate equity-type investments.
USF&G's real estate investment strategy emphasizes
diversification by geographic region, property type, and stage
of development. The diversification of USF&G's mortgage loan and
real estate portfolio is as follows:
At December 31
1993 1992 1991
GEOGRAPHIC REGION
Pacific/Mountain 33% 33% 31%
Southeast 22 22 23
Mid-Atlantic 19 17 17
Midwest 18 19 20
Southwest 5 6 6
Northeast 3 3 3
TYPE OF PROPERTY
Office 37% 33% 34%
Land 27 28 25
Apartments 19 16 18
Industrial 9 11 11
Retail/other 6 10 8
Timberland/Agriculture 2 2 4
DEVELOPMENT STAGE
Operating property 73% 72% 75%
Land development 16 17 14
Land packaging 11 11 11
Real estate investments are generally appraised at least once
every three years. Appraisals are obtained more frequently under
certain circumstances such as when there are significant
changes in property performance or market conditions. All of
these appraisals are performed by professionally certified
appraisers.
USF&G's five largest real estate investments had a book value of
$322 million at December 31, 1993. The largest single
investment was $89 million, or eight percent of the total real
estate portfolio.
Mortgage loans and real estate investments not performing in
accordance with contractual terms, or performing significantly
below expectation, are categorized as nonperforming.
NONPERFORMING REAL ESTATE investments totaled $249 million at
December 31, 1993, which represented declines of 28 percent and
37 percent, respectively, when compared with December 31, 1992
and 1991. The reduction in nonperforming real estate was driven
by operating improvements in properties warranting
reclassification to performing real estate, the sale of certain
nonperforming real estate properties, and write-downs on
specific properties.
The book value of the components of nonperforming real estate
were as follows:
Book Value At December 31
(dollars in millions) 1993 1992 1991
Loans not current as to interest or principal $ - $ - $ 72
Restructured loans and investments 4 4 21
Real estate held as in-substance foreclosure 14 15 4
Real estate acquired through foreclosure or
deed-in-lieu of foreclosure 121 190 157
Land investments 57 71 60
Nonperforming equity investments 53 66 79
Total nonperforming real estate $249 $346 $393
Real estate reserves $108 $108 $ 88
Reserves/nonperforming real estate 43% 31% 22%
Valuation allowances are established for impairments of
mortgage loans and real estate equity values based on periodic
evaluations of the operating performance of the properties and
their exposure to declines in value. The allowance totaled $108
million, or 10 percent of the entire real estate portfolio, at
both December 31, 1993 and 1992. In 1991, the allowance was $88
million, which represented 8 percent of the total real estate
portfolio. In light of USF&G's current plans with respect to the
portfolio, management believes the allowance at December 31,
1993, adequately reflects the current condition of the
portfolio. Should deterioration occur in the general real estate
market or with respect to individual properties in the future,
additional reserves may be required. Prospectively, efforts
will continue to reduce risk and increase yields in the real
estate portfolio by selling equity real estate when it is
advantageous to do so and reinvesting the proceeds in
medium-term mortgage loans.
6. Financial Condition
6.1. ASSETS
USF&G's assets totaled $14.3 billion at December 31, 1993,
compared with $13.1 billion and $14.5 billion at the end of 1992
and 1991, respectively. The $1.2 billion increase in 1993 is
primarily due to the implementation of SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts" (refer to Section 1.2 in this Analysis).
6.2. DEBT
USF&G's debt totaled $618 million at December 31, 1993, compared
with $616 million and $677 million at December 31, 1992 and 1991,
respectively. The increase in debt from 1992 to 1993 is attributable
to $5 million of additional debt resulting from a change in percentage
ownership of a real estate limited partnership, offset by a $3 million
repayment of industrial revenue bonds by the property/casualty segment.
Real estate debt is project related and generally depends on the
project's cash flow to provide debt service. As a result of
entering into currency swap agreements, there was no effect on
net income from translation of non-U.S. dollar denominated debt.
6.3. SHAREHOLDERS' EQUITY
USF&G's shareholders' equity totaled $1.51 billion at December 31,
1993, $1.27 billion at December 31, 1992, and $1.32 billion at
December 31, 1991. The increase in 1993 was the result of an
increase in unrealized gains on investments primarily related to
the implementation of SFAS No. 115 (refer to Section 1.2 in this
Analysis) which, as a result of recording fixed maturity investments
available for sale at market value, increased shareholders' equity
by $222 million. This was offset by a $30 million adjustment in
unrealized losses related to DPAC (refer to Section 5.3 in this
Analysis). Additionally, net income of $165 million and an increase
of $6 million in paid-in capital due to the exercise of stock options
and the granting of stock awards pursuant to the 1993 Stock Plan
for Non-Employee Directors increased shareholders' equity. These
increases in equity were reduced by an $85 million minimum
pension liability which was recorded due to the declining
interest rate environment in 1993 and a related decrease in the
discount rate assumed to estimate the present value of pension
benefit obligations. Dividends to shareholders reduced equity by
$66 million. Common stock dividends declared in 1993, 1992, and
1991 totaled $17 million per year. Annual preferred stock
dividends declared in 1993 and 1992 totaled $48 million per
year, compared with $37 million in 1991.
6.4. CAPITAL STRATEGY
Subject to capital market conditions, over the next two years
USF&G plans to refinance up to approximately $600 million of debt.
In anticipation of the expiration in 1995 of the short-term bank
credit facility, it is expected that the $375 million balance
outstanding at December 31, 1993 will be refinanced with longer
term debt and that a reduced short-term facility will be
renegotiated. Where opportunities exist, other outstanding debt
may be refinanced at lower interest rates. In addition, depending
upon the market value of its common stock, USF&G plans to call for
redemption the Series C Preferred Stock and a portion of the
Series B Preferred Stock under circumstances which will result
in shares of those series of preferred stock being converted to
common stock.
7. Liquidity
Liquidity is a measure of an entity's ability to secure enough
cash to meet its contractual obligations and operating needs.
USF&G requires cash primarily to pay policyholders' claims and
benefits, debt and dividend obligations, and operating
expenses. USF&G's sources of cash include cash flow from
operations, credit facilities, and sales of marketable
securities and other assets. Management believes that internal
and external sources of cash will continue to exceed USF&G's
short and long-term needs. In January 1994, USF&G filed a shelf
registration statement with the Securities and Exchange
Commission. As of its effective date in February 1994, USF&G had
$647 million in aggregate unissued debt, preferred stock and
common stock (and warrants to purchase debt and equity
securities) registered. These securities may be issued from
time to time, depending on market conditions. This shelf amount
was reduced by $126 million in proceeds received from the March
1994 issuance of zero coupon convertible subordinated notes.
7.1. CASH FLOW FROM OPERATIONS
USF&G had cash flow from continuing operations of $87 million in
1993 and $99 million in 1992, compared with negative cash flow
from continuing operations of $4 million in 1991. The primary factors
contributing to the decrease in cash flow for 1993 in comparison
with 1992 were a decline in premiums and investment income in
the property/casualty segment, offset by a reduction in loss
payments and operating expenses.
7.2. CREDIT FACILITIES
USF&G maintains a $700 million committed credit facility with a
group of foreign and domestic banks. Borrowings outstanding under
the credit facility totaled $375 million at December 31, 1993, 1992,
and 1991. This credit facility expires in 1995. The credit agreement
contains restrictive covenants, defined in the agreement, pertaining to
indebtedness and tangible net worth levels. USF&G was in compliance
with these covenants at December 31, 1993, 1992, and 1991.
7.3. MARKETABLE SECURITIES
USF&G's fixed maturity, equity, and short-term investment portfolios
are liquid and represent substantial sources of cash. Fixed maturities
are classified as "held to maturity" if USF&G has both the ability and
intent to hold the securities until maturity or near maturity. Fixed
maturities that may be sold prior to maturity are classified as
"available for sale." The market value of fixed maturities held to
maturity was $4.8 billion at December 31, 1993, which represents
103 percent of amortized cost. Fixed maturities available for sale
had a market value of $4.9 billion at December 31, 1993, which
represents 105 percent of amortized cost. At year-end, equity
securities, which are reported at market value in the balance sheet,
totaled $135 million. Short-term investments totaled $322 million.
7.4. LIQUIDITY RESTRICTIONS
There are certain restrictions on the payment of dividends by
insurance subsidiaries that may limit USF&G's ability to receive funds
from its insurance subsidiaries. The Maryland Insurance Code requires
the Maryland Insurance Commissioner's prior approval for any dividend
payments during a twelve-month period from a Maryland subsidiary,
such as USF&G Company, to its holding company which exceed 10 percent
of policyholders' surplus as of the prior calendar year end. In
addition, notice of any other dividend must be given to the Maryland
Insurance Commissioner prior to payment, and the Commissioner has
the right to prevent payment of such dividend if it is determined
that such payment could impair the insurer's surplus or financial
condition. USF&G Company's policyholders' surplus at December 31,
1993, totaled $1.5 billion. USF&G's insurance subsidiaries' admitted
assets for statutory purposes included a total of approximately $245
million in receivables from the parent and affiliated companies.
Dividends of approximately $154 million are currently available
for payment to USF&G from USF&G Company during 1994 without prior
regulatory approval. Dividends paid to USF&G totaled $125 million
in 1993 and 1992, compared with $127 million in 1991.
8. Regulation
8.1. GENERAL
USF&G's insurance subsidiaries are subject to extensive regulatory
oversight in the jurisdictions where they do business. This regulatory
structure, which generally operates through state insurance departments,
involves the licensing of insurance companies and agents, limitations
on the nature and amount of certain investments, restrictions on the
amount of single insured risks, approval of policy forms and rates,
limitations on dividends, limitations on the ability to withdraw from
certain lines of business such as personal lines and workers compensation,
and other matters. Recently, there has been increased scrutiny of
the insurance regulatory framework. A number of state legislatures
have considered or enacted legislation that alters and, in many cases,
increases state authority to regulate insurance companies. Proposals
to adopt a federal regulatory framework have also been discussed
recently. It is not possible to predict the future impact of
increasing state or potential federal regulation on USF&G's operations.
8.2. PROPOSITION 103
In November 1988, California voters passed Proposition 103, which
required insurers doing business in that state to rollback
property/ casualty premium prices in effect between November 1988
and November 1989 to 1987 levels, less an additional 20 percent
discount, unless an insurer could establish that such rate levels
threatened its solvency. As a result of a court challenge, the
California Supreme Court ruled in May 1989 that an insurer does
not have to face insolvency in order to qualify for exemption from
the rollback requirements and is entitled to a "fair and reasonable
return." Significant controversy has surrounded the numerous
regulations proposed by the California Insurance Department,
which would be used to determine whether rate rollbacks and premium
refunds are required by insurers. Some of the Insurance Department's
proposals were disapproved by the California Office of Administrative
Law ("OAL"), which is responsible for the review and approval of
such regulations. The most recent regulations proposed by the
Insurance Department have not yet been reviewed by the OAL, pending
a recent court challenge by various insurers to the Department's
authority to issue such regulations. On February 25, 1993, the
trial judge presiding over that court challenge voided substantial
parts of the regulations proposed by the Insurance Department.
The court held that the Insurance Department's regulations
exceeded the Department's authority by setting rates based upon
an across-the-board formula. The court indicated that rates and
what constitutes a reasonable return would have to be determined
individually for each insurer and that the Department's authority
was to approve or disapprove rates proposed by insurers rather than
setting rates which cannot vary from a prescribed formula. An appeal
is currently pending before the California Supreme Court.
During 1989, less than five percent of USF&G's total premiums
were written in the State of California. USF&G believes that the
returns it received, both during and since the one-year rollback
period, have not exceeded the "fair and reasonable return"
standard. Additionally, based on the long history of events and
the significant uncertainty about the Insurance Department's
regulations, management does not believe it is probable that the
revenue recognized during the rollback period will be subject to
a material refund. Management believes that no premium refund
should be required for any period after November 8, 1988, but
that any rate rollbacks and premium refunds, if ultimately
required, would not have a material adverse effect on USF&G's
financial position.
8.3. MAINE "FRESH START" LITIGATION
In 1987, the State of Maine adopted workers compensation reform
legislation which was intended to rectify historic rate inadequacies
and encourage insurance companies to reenter the Maine voluntary
workers compensation market. This legislation, which was popularly
known as "Fresh Start," required the Maine Superintendent of Insurance
to annually determine whether the premiums collected for policies
written in the involuntary market and related investment income
were adequate on a policy-year basis. The Superintendent was required
to assess a surcharge on policies written in later policy years if it
was determined that rates were inadequate. Assessments were to be
borne by workers compensation policyholders, except that for policy
years beginning in 1989 the Superintendent could require insurance
carriers to absorb up to 50 percent of any deficits if the
Superintendent found that insurance carriers failed to make good
faith efforts to expand the voluntary market and depopulate the
residual market. Insurance carriers which served as servicing
carriers for the involuntary market would be obligated to pay 90
percent of the insurance industry's share. The Maine Fresh Start
statute requires the Superintendent to annually estimate each
year's deficit for seven years before making a final
determination with respect to that year.
In March 1993, the Superintendent affirmed a prior Decision and
Order (known as the "1992 Fresh Start Order") in which he, among
other things, found that there were deficits for the 1988, 1989,
and 1990 policy years, and that insurance carriers had not made
a good faith effort to expand the voluntary market and
consequently were required to bear 50 percent of any deficits
relating to the 1989 and 1990 policy years. The Superintendent
further found that a portion of these deficits were attributable
to servicing carrier inefficiencies and poor investment
practices and ordered that these costs be absorbed by insurance
carriers. Also, in May 1993 the Superintendent found that
insurance carriers would be liable for 50 percent of any
deficits relating to the 1991 policy year (the "1993 Fresh Start
Order"), but indicated that he would make no further
determinations regarding the portions of any deficits
attributable to alleged servicing carrier inefficiencies and
poor investment practices until his authority to make such
determinations was clarified in the various suits involving
prior Fresh Start orders.
USF&G was a servicing carrier for the Maine residual market in
1988, 1989, 1990, and 1991. USF&G withdrew from the Maine
voluntary market and as a servicing carrier effective December
31, 1991. USF&G has joined in an appeal of the 1992 Fresh Start
Order which was filed April 5, 1993, in a case captioned The
Hartford Accident and Indemnity Company, et al., v.
Superintendent of Insurance filed in Superior Court, State of
Maine, Kennebec. In addition to The Hartford Accident and
Indemnity Company and USF&G, the National Council of
Compensation Insurance ("NCCI") and several other insurance
companies which were servicing carriers during this time frame
have instituted similar appeals. These appeals will be heard on
a consolidated basis in a case captioned National Council of
Compensation Insurance, et al., v. Atchinson. USF&G is seeking,
among other things, to have the court set aside the
Superintendent's findings that the industry did not make a good
faith effort to expand the voluntary market and is responsible
for deficiencies resulting from alleged poor servicing and
investments. Similar appeals of the Superintendent's 1993 Fresh
Start Order have been filed by USF&G, the NCCI and several other
servicing carriers in the same court. The appeals of the 1993
Fresh Start Order will be heard on a consolidated basis in a
case captioned The National Council of Compensation Insurance,
et al., v. Atchinson.
Estimates of the potential deficits vary widely and are
continuously revised as loss and claims data matures. If the
Superintendent were to prevail on all issues, then the range of
liability for USF&G, based on the most recent estimates provided
by the Superintendent and the NCCI, respectively, could range
from approximately $12 million to approximately $19 million.
However, USF&G believes that it has meritorious defenses and has
determined to defend the actions vigorously.
8.4. INVOLUNTARY MARKET PLANS
Most states require insurers to provide coverage for less
desirable risks through participation in mandatory programs.
USF&G's participation in assigned risk pools and similar plans,
mandated now or in the future, creates and is expected to create
downward pressure on earnings.
8.5. WITHDRAWAL FROM BUSINESS LINES
Some states have adopted legislation or regulations restricting
or otherwise limiting an insurer's ability to withdraw from certain
lines of business. Such restrictions are most often found in
personal lines and workers compensation insurance. Such restrictions
limit USF&G's ability to manage its exposure to unprofitable lines and
adversely affects earnings to the extent USF&G is required to continue
writing unprofitable business.
8.6. GUARANTY FUNDS
Insurance guaranty fund laws have been adopted in most states to
protect policyholders in case of an insurer's insolvency. Insurers
doing business in those states can be assessed for certain obligations
of insolvent companies to policyholders and claimants. These
assessments, under certain circumstances, can be credited against
future premium taxes. Net of such tax credits, USF&G incurred
$15 million of guaranty fund expense in 1993 and $13 million in 1992.
Financial difficulties of certain insurance companies over the
past several years could result in additional assessments that
would have a negative impact on future earnings. State laws
limit the amount of annual assessments which are based on
percentages (generally two percent) of assessable annual
premiums in the year of insolvency. The amount of these
assessments cannot be reasonably estimated and is not expected
to have a material adverse effect on USF&G's financial position.
8.7. NAIC PROPOSALS
The National Association of Insurance Commissioners ("NAIC") has
proposed several model laws and regulations which are in varying
stages of discussion. The NAIC has adopted model regulations
which establish minimum capitalization requirements based on a
"risk-based capital" formula. One version of this model regulation
is applicable for life insurers with respect to their financial
position as of December 31, 1993. A second version was adopted by
the NAIC in December 1993 for implementation by property/casualty
insurers in 1995 with respect to their financial position as of December
31, 1994. The statutory "risk adjusted" capital of USF&G Company and
F&G Life as of December 31, 1993, were such that no regulatory action
would be required (assuming that the NAIC model regulation applied
to property/casualty insurers in 1993). The NAIC has also proposed
a Model Investment Law which prescribes the investments that are
permissible for property/casualty and life insurers to hold.
Adoption of this model law is targeted for September 1994, at the
earliest. It is not expected that the final adoption of these
regulations by the NAIC will result in any material adverse effect
on USF&G's liquidity or financial position.
8.8. NATIONAL HEALTH CARE
President Clinton has presented a
proposal to enact a comprehensive national health care system.
One component of this proposal would merge the medical payment
system for workers compensation and the medical payments
component of automobile insurance into a single health care
system. Although some form of the Administration's national
health care proposal may be enacted, it is unclear whether any
such legislation will address workers compensation or personal
automobile insurance. Several alternatives currently being
discussed would not have a significant impact on the workers
compensation system, while others could have a significant
effect. The likelihood of passage of any particular form of
legislation cannot be predicted at this time. It is too early to
predict the impact of any such legislation on USF&G.
8.9. SUPERFUND
The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), more commonly known as Superfund, is
currently scheduled to be reauthorized in 1994. Insurance companies,
other businesses, environmental groups and municipalities are
advocating a variety of reform proposals to revise the cleanup and
liability provisions of CERCLA. No reliable prediction can be made
as to the ultimate outcome of the legislative deliberations regarding
the reauthorization of CERCLA or the effect any revisions could
have on USF&G.
8.10. INSURANCE REGULATORY INFORMATION SYSTEM
The NAIC's Insurance Regulatory Information System ("IRIS") ratios
are intended to assist state insurance departments in their review
of the financial condition of insurance companies operating within
their respective states. IRIS specifies eleven industry ratios and
establishes a "usual range" for each ratio. Significant departure
from a number of ratios may lead to inquiries from state insurance
regulators. As of December 31, 1993, USF&G was within the "usual
range" for all IRIS ratios.
9. Income Taxes
Effective January 1, 1993, USF&G changed its method of accounting
for income taxes as required by SFAS No. 109, "Accounting for Income
Taxes." This standard requires recognition of future tax benefits
attributable to net operating loss carry-forwards ("NOLs") and to
deductible temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. A valuation allowance is
required if it is more likely than not that some or all of the
deferred tax asset may not be realized. A $90 million tax benefit
was recorded in income as a cumulative effect of adopting this new
accounting standard. As a result of the enactment of the Omnibus
Budget Reconciliation Act of 1993 which increased the corporate
tax rate to 35 percent, an additional $3 million deferred tax
benefit was recognized.
At December 31, 1993, USF&G has recorded a $119 million net
deferred tax asset, representing that in the opinion of
management it is more likely than not that there will be
sufficient future taxable income to result in the realization of
this benefit. Total deferred tax assets attributable to
deductible temporary differences and NOLs totaled $944 million
and total deferred tax liabilities totaled $343 million.
Significant temporary differences include deferred policy
acquisition costs, loss reserve discounting, and unrealized
gains and losses. USF&G recorded a valuation allowance of $482
million to offset the gross deferred tax assets.
Management believes there will be sufficient taxable income to
absorb all existing NOLs; but, in light of the guidance in the
standard, believes it is appropriate to establish an allowance.
USF&G will evaluate the realizability of the deferred tax asset
periodically and assess the need for a change in the valuation
allowance.
A valuation allowance is established based on an evaluation of
positive and negative evidence as to the likelihood of realizing
some or all of the deferred tax asset. The primary negative
evidence that existed was the cumulative losses resulting from
1991. The positive evidence included 1) the forecast of future
taxable income sufficient to recover some tax benefit within
three to five years; 2) a tax planning strategy identified to
generate future income, if necessary; 3) the return to
profitability in 1992 and 1993; 4) the sources of the losses in
1991, which are not likely to recur given the restructuring
actions taken; and 5) a history of substantial NOLs in prior
years being fully utilized.
Management's determination that it is more likely than not that
a $119 million deferred tax benefit will be realized is based
on the identification of two primary sources of taxable income:
1) forecasted future taxable income generated and 2) a prudent
and feasible tax strategy to generate taxable income to prevent
NOLs from expiring, if necessary. Based on USF&G's history of
prior earnings, particularly for the core insurance business,
and its expectations in the future as a result of restructuring
actions taken to reduce costs and achieve long-term
profitability, management believes ordinary income of the
Corporation will be sufficient to realize at least $103 million
of tax benefit. Management has evaluated forecasted future
income within three to five years and judgmentally discounted
the later years due to the greater uncertainty of forecasting
these later years. Management has identified a specific tax
strategy that would result in the realization of $16 million of
deferred tax assets. Realization of the deferred tax asset is
dependent, in whole or in part, on USF&G's ability to generate
future taxable income from ordinary and recurring operations.
Based on USF&G's evaluation, approximately $340 million of
future taxable income would need to be generated over the tax
carry-forward period to realize the $119 million deferred tax
asset.
USF&G has NOLs of $634 million ($222 million tax-effected at a
35 percent corporate rate), which expire as follows: $38
million in 2001, $191 million in 2005, and $405 million in 2006.
The NOLs available for future utilization were generated
primarily by the noninsurance businesses of USF&G and
nonrecurring charges related to the business restructuring
program. A majority of these noninsurance businesses that caused
a significant drain on prior earnings have been sold, divested,
or liquidated by USF&G. Management believes the results of the
restructuring actions, including the disposal of noninsurance
businesses, will allow USF&G to resume its previous history of
earnings.
Future levels of net income and taxable income from the core
insurance operations are dependent on several factors including
general economic or specific insurance industry conditions and
competitive pressures that may lead to unplanned premium
declines or adversely impact voluntary and involuntary loss
experience. Other factors that could impact future net income
include catastrophe losses, a continued reduction in interest
rates, or a further decline in the real estate market. Because
of the risk factors indicated as well as other factors beyond
the control of management, no assurance can be given that
sufficient taxable income will be generated to utilize the NOLs
or otherwise realize the deferred tax assets. However,
management has considered these factors in reaching its
conclusion that it is more likely than not that there will be
sufficient future taxable income to result in the realization of
the recorded $119 million deferred tax asset.
USF&G's tax returns have not been reviewed by the Internal
Revenue Service ("IRS") since 1989 and the availability of the
NOLs could be challenged by the IRS upon review of returns
through 1992. Management believes, however, that IRS challenges
that would limit the recoverability of $119 million in tax
benefits are unlikely, and adjustments to the tax liability, if
any, for years through 1993 will not have a material adverse
effect on USF&G's financial position.
10. Glossary of Terms
Account value: Deferred annuity cash value available to
policyholders before the assessment of surrender charges.
Catastrophe losses: Property/casualty insurance claim losses
resulting from a sudden calamitous event, such as a severe
storm, are categorized as "catastrophes" when they meet certain
severity and other criteria determined by a national
organization.
EITF: Emerging Issues Task Force of the Financial Accounting
Standards Board.
Expense ratio: The ratio of underwriting expenses to net
premiums written, if determined in accordance with statutory
accounting practices ("SAP"), or the ratio of underwriting
expenses (adjusted by deferred policy acquisition costs) to
earned premiums, if determined in accordance with GAAP.
GAAP: Generally Accepted Accounting Principles.
High-yield bonds: Fixed maturity investments with a credit
rating below the equivalent of Standard & Poor's "BBB." In
addition, nonrated fixed maturities that, in the judgment of
USF&G, have credit characteristics similar to those of a fixed
maturity rated below BBB are considered high-yield bonds.
Involuntary business: Property/casualty insurance companies are
required by state laws to participate in a number of assigned
risk pools, automobile reinsurance facilities, and similar
mandatory plans ("involuntary market plans"). These plans
generally require coverage of less desirable risks, principally
for workers compensation and automobile liability, that do not
meet the companies' normal underwriting standards. As mandated
by legislative authorities, insurers generally participate in
such plans based upon their shares of the total writings of
certain classes of insurance.
Liquid assets to surrender value: Liquid assets (publicly
traded bonds, stocks, cash, and short-term investments) divided
by surrenderable policy liabilities, net of surrender charges.
A measure of an insurance company's ability to meet liquidity
needs in case of annuity surrenders.
Loss ratio: The ratio of incurred losses and loss adjustment
expenses to earned premiums, determined in accordance with SAP
or GAAP, as applicable. The difference between SAP and GAAP
relates to salvage recoverable accruals for GAAP purposes and
deposit accounting for GAAP related to financial reinsurance.
Nonperforming real estate: Mortgage loans and real estate
investments that are not performing in accordance with their
contractual terms or that are performing at an economic level
significantly below expectations. Included in the table of
nonperforming real estate are the following terms:
Deed-in-lieu of foreclosure: Real estate to which title has
been obtained in satisfaction of a mortgage loan receivable in
order to prevent foreclosure proceedings.
In-substance foreclosure: Collateral for a mortgage loan is
in-substance foreclosed when the borrower has little or no
equity in the collateral, does not have the ability to repay the
loan, and has effectively abandoned control of the collateral to
USF&G.
Land investments: Land investments that are held for future
development where, based on current market conditions, returns
are projected to be significantly below original expectations.
Loans not current as to interest and principal: Loans on which
the borrower has failed to meet mortgage obligations.
Nonperforming equity investments: Equity investments with cash
and GAAP return on book value less than five percent, but
excluding land investments.
Restructured loans and investments: Loans and investments whose
terms have been restructured as to interest rates,
participation, and/or maturity date such that returns are
projected to be significantly below original expectations.
Policyholders' surplus: The net assets of an insurer as
reported to regulatory agencies based on accounting practices
prescribed or permitted by the National Association of
Insurance Commissioners and the state of domicile.
Premiums earned: The portion of premiums written applicable to
the expired period of policies, after the assumption and cession
of reinsurance.
Premiums written: Premiums retained by an insurer, after the
assumption and cession of reinsurance.
Underwriting results: Property/casualty pretax operating
results excluding investment results, policyholders' dividends,
and noninsurance activities; generally, premiums earned less
losses and loss expenses incurred and "underwriting" expenses
incurred.
USF&G Corporation
Eleven-Year Summary of Selected Financial Data
(dollars in millions except
per share data) 1993 1992 1991 1990
CONSOLIDATED RESULTS
Premiums earned $ 2,456 $ 2,637 $ 3,187 $ 3,516
Revenues 3,249 3,660 4,172 4,171
Income (loss) from continuing
operations before cumulative
effect of adopting new
accounting standards 127 35 (144) (433)
Income (loss) from
discontinued operations - (7) (32) (136)
Cumulative effect of adopting
new accounting standards 38 - - -
Net income (loss) 165 28 (176) (569)
PER SHARE RESULTS
Income (loss) from continuing
operations before cumulative
effect of adopting new
accounting standards $ .93 $ (.16) $ (2.15) $ (5.37)
Income (loss) from
discontinued operations - (.08) (.38) (1.62)
Cumulative effect of adopting
new accounting standards .45 - - -
Net income (loss) 1.38 (.24) (2.53) (6.99)
Book value 11.66 8.87 9.53 11.97
INVESTMENT RESULTS
Net investment income $ 749 $ 817 $ 877 $ 929
Realized gains (losses) 6 148 38 (354)
Change in unrealized
gains (losses) 223 (10) 37 (30)
FINANCIAL POSITION
Assets $ 14,335 $ 13,134 $ 14,486 $ 13,902
Investments 11,377 11,346 12,167 11,221
Corporate debt 574 574 617 659
Real estate and other debt 44 42 60 120
Shareholders' equity 1,511 1,270 1,323 1,205
COMMON STOCK
Market high $ 19 5/8 $ 15 $ 12 1/2 $ 30 3/8
Market low 11 1/8 7 1/8 5 5/8 7
Market close 14 3/4 12 3/8 7 1/4 7 1/2
Cash dividends declared .20 .20 .20 2.44
Common shares outstanding 85,009,482 84,512,758 84,273,327 83,958,222
PROPERTY/CASUALTY INSURANCE
Premiums earned $ 2,327 $ 2,533 $ 3,018 $ 3,330
Net income (loss) 281 193 (40) (192)
Statutory premiums written 2,429 2,420 3,032 3,631
Statutory loss ratio 75.4 82.0 84.1 81.9
Statutory expense ratio 33.7 34.9 33.1 32.9
Statutory combined ratio 109.1 116.9 117.2 114.8
LIFE INSURANCE
Sales $ 168 $ 104 $ 209 $ 994
Premium income 129 104 169 186
Net income (loss) 10 (5) 31 (16)
NONINSURANCE OPERATIONS
Revenues $ 5 $ 17 $ 38 $ 22
Net loss (126) (160) (167) (361)
1989 1988 1987 1986 1985 1984 1983
CONSOLIDATED RESULTS
Premiums earned $ 3,697 $ 3,791 $ 3,880 $ 3,619 $ 3,029 $ 2,273 $ 1,971
Revenues 4,636 4,548 4,491 4,310 3,587 2,628 2,561
Income (loss) from continuing
operations before cumulative
effect of adopting new
accounting standards 148 251 263 277 (109) (64) 270
Income (loss) from
discontinued operations (31) (20) 2 (2) 1 - -
Cumulative effect of adopting
new accounting standards - - - - - - -
Net income (loss) 119 247 279 296 (108) (64) 270
PER SHARE RESULTS
Income (loss) from continuing
operations before cumulative
effect of adopting new
accounting standards $ 1.58 $ 2.91 $ 3.41 $ 4.14 $ (1.83) $ (1.18) $ 4.76
Income (loss) from
discontinued operations (.37) (.25) .03 (.03) .02 - -
Cumulative effect of adopting
new accounting standards - - - - - - -
Net income (loss) 1.24 2.85 3.63 4.43 (1.81) (1.18) 4.76
Book value 21.60 22.57 19.53 20.19 18.91 19.08 22.61
INVESTMENT RESULTS
Net investment income $ 911 $ 795 $ 699 $ 619 $ 392 $ 369 $ 360
Realized gains (losses) (36) (92) (133) 53 150 (23) 225
Change in unrealized
gains (losses) 32 185 (282) (105) 118 (10) (228)
FINANCIAL POSITION
Assets $ 13,551 $ 12,326 $ 10,158 $ 8,934 $ 7,672 $ 6,099 $ 5,279
Investments 10,894 9,775 7,892 6,824 5,688 4,142 3,871
Corporate debt 543 448 407 348 197 146 67
Real estate and other debt 87 41 22 3 3 3 3
Shareholders' equity 2,007 2,054 1,724 1,576 1,214 1,045 1,223
COMMON STOCK
Market high $ 34 $ 34 3/8 $ 48 3/4 $ 46 3/4 $ 41 1/2 $ 30 7/8 $ 30
Market low 28 1/4 28 1/2 26 1/4 36 1/4 25 5/8 17 5/8 19 3/4
Market close 29 28 1/2 28 3/8 39 3/4 39 27 1/2 27 5/8
Cash dividends declared 2.80 2.64 2.48 2.32 2.20 2.08 1.92
Common shares outstanding 83,664,506 82,155,209 78,027,916 68,153,799 64,206,487 54,758,184 54,109,221
PROPERTY/CASUALTY INSURANCE
Premiums earned $ 3,532 $ 3,613 $ 3,746 $ 3,539 $ 2,962 $ 2,215 $ 1,913
Net income (loss) 200 318 331 310 (116) (69) 259
Statutory premiums written 3,698 3,892 3,845 3,696 3,151 2,318 1,989
Statutory loss ratio 76.5 73.1 73.2 79.1 90.7 90.5 83.1
Statutory expense ratio 32.8 31.1 30.1 29.1 30.0 31.4 32.2
Statutory combined ratio 109.3 104.2 103.3 108.2 120.7 121.9 115.3
LIFE INSURANCE
Sales $ 898 $ 1,045 $ 255 $ 63 $ 103 $ 69 $ 17
Premium income 165 178 133 79 67 58 59
Net income (loss) 31 14 37 20 27 18 12
NONINSURANCE OPERATIONS
Revenues $ 84 $ 114 $ 112 $ 8 $ 41 $ 33 $ 11
Net loss (112) (85) (88) (86) (23) (13) -
USF&G Corporation
Consolidated Statement of Operations
For the Years Ended December 31
(dollars in millions except
per share data) 1993 1992 1991
REVENUES
Premiums earned $ 2,456 $ 2,637 $ 3,187
Net investment income 749 817 877
Other 38 58 70
Revenues before realized gains 3,243 3,512 4,134
Realized gains on investments 6 148 38
Total revenues 3,249 3,660 4,172
EXPENSES
Losses, loss expenses, and
policy benefits 2,153 2,465 2,982
Underwriting, acquisition, and
operating expenses 956 1,069 1,225
Interest expense 41 40 46
Restructuring charges - 51 60
Total expenses 3,150 3,625 4,313
Pretax income (loss) from
continuing operations before
cumulative effect of adopting
new accounting standards 99 35 (141)
Provision for income taxes (benefit) (28) - 3
Income (loss) from continuing
operations before cumulative
effect of adopting new accounting
standards 127 35 (144)
Loss from discontinued operations - (7) (32)
Income (loss) from cumulative
effect of adopting new accounting
standards:
Income taxes (Note 9) 90 - -
Postretirement benefits
(Note 8) (52) - -
Net income (loss) $ 165 $ 28 $ (176)
Preferred stock dividend
requirements 48 48 37
Net income (loss) available
to common stock $ 117 $ (20) $ (213)
PRIMARY EARNINGS PER COMMON SHARE
Income (loss) from continuing
operations before cumulative
effect of adopting new
accounting standards $ .93 $ (.16) $ (2.15)
Loss from discontinued operations - (.08) (.38)
Income from cumulative effect
of adopting new accounting
standards .45 - -
Net income (loss) $ 1.38 $ (.24) $ (2.53)
FULLY DILUTED EARNINGS PER COMMON
SHARE
Income (loss) from continuing
operations before cumulative
effect of adopting new
accounting standards $ .98 $ (.16) $ (2.15)
Loss from discontinued operations - (.08) (.38)
Income from cumulative effect
of adopting new accounting
standards .34 - -
Net income (loss) $ 1.32 $ (.24) $ (2.53)
Weighted average common shares
outstanding:
Primary 84,780,283 84,355,431 84,169,091
Fully Diluted 112,692,855 84,355,431 84,169,091
<FN>
See Notes to Consolidated Financial Statements.
USF&G Corporation
Consolidated Statement of Financial Position
At December 31
(dollars in millions except share data) 1993 1992 1991
ASSETS
Investments:
Fixed maturities:
Held to maturity, at
amortized cost (market,
1993, $4,796; 1992, $7,290;
1991, $3,880) $ 4,661 $ 7,218 $ 3,749
Available for sale, at market*
(cost, 1993, $4,681; market,
1992, $2,029; 1991, $5,606) 4,903 1,987 5,364
Common stocks, at market (cost,
1993, $98; 1992, $179; 1991,
$480) 87 142 487
Preferred stocks, at market
(cost, 1993, $48; 1992,
$24; 1991, $34) 48 29 34
Short-term investments 322 518 1,170
Mortgage loans 302 186 283
Real estate 685 818 784
Other invested assets 369 448 225
Other investments held for sale - - 71
Total investments 11,377 11,346 12,167
Cash 17 25 87
Accounts, notes, and other receivables 656 725 897
Reinsurance receivables 573 - -
Servicing carrier receivables 719 - -
Deferred policy acquisition costs 435 466 534
Other assets 571 588 692
Net assets (liabilities) of discontinued
operations (13) (16) 109
Total assets $14,335 $13,134 $14,486
LIABILITIES
Unpaid losses, loss expenses, and policy
benefits $10,302 $ 9,436 $ 9,477
Unearned premiums 917 770 981
Corporate debt 574 574 617
Real estate and other debt 44 42 60
Other liabilities 987 1,042 2,028
Total liabilities 12,824 11,864 13,163
SHAREHOLDERS' EQUITY
Preferred stock, par value $50.00
(12,000,000 shares authorized;
shares issued, 1993, 9,099,910;
1992 and 1991, 9,100,000) 455 455 455
Common stock, par value $2.50
(240,000,000 shares authorized;
shares issued, 1993, 85,009,482;
1992, 84,512,758; 1991,
84,273,327) 212 211 211
Paid-in capital 963 957 955
Net unrealized gains (losses) on investments 192 (31) (21)
Net unrealized gains (losses) on foreign currency (2) 2 10
Minimum pension liability (85) - -
Retained earnings (deficit) (224) (324) (287)
Total shareholders' equity 1,511 1,270 1,323
Total liabilities and shareholders' equity $14,335 $13,134 $14,486
<FN>
* 1992 and 1991 amounts are at amortized cost (Note 1.2).
See Notes to Consolidated Financial Statements.
USF&G Corporation
Consolidated Statement of Cash Flows
For the Years Ended December 31
(dollars in millions) 1993 1992 1991
OPERATING ACTIVITIES
Net income (loss) $ 165 $ 28 $ (176)
Adjustments to reconcile net income
(loss) to net cash provided by
(used in) operating activities:
Loss from discontinued operations - 7 32
Cumulative effect of adopting new
accounting standards (38) - -
Realized gains on investments (6) (148) (38)
Change in insurance liabilities 36 37 237
Change in deferred policy acquisition costs 31 68 36
Change in receivables 60 149 (147)
Change in other liabilities (56) (74) (2)
Change in other assets (129) (17) 56
Other items, net 24 49 (2)
Net cash provided from (used in) continuing
operations 87 99 (4)
Net cash used in discontinued operations - (2) (10)
Net cash provided from (used in) operating
activities 87 97 (14)
INVESTING ACTIVITIES
Net sales and maturities of short-term
investments 197 61 640
Purchases of fixed maturities held to
maturity (1,912) (6,945) -
Sales of fixed maturities held to maturity 462 1,116 -
Maturities/repayments of fixed maturities
held to maturity 941 323 -
Purchases of fixed maturities available
for sale (1,203) (458) (13,368)
Sales of fixed maturities available for sale 1,252 4,796 11,919
Repayments of fixed maturities available
for sale 308 772 480
Purchases of equities and other investments (255) (438) (481)
Sales, maturities, or repayments of equities
and other investments 398 842 1,206
Sales of subsidiaries - 17 38
Purchases of property and equipment (28) (12) (7)
Disposals of property and equipment 4 7 27
Net investing activities of discontinued
operations - 2 60
Net cash provided from investing activities 164 83 514
FINANCING ACTIVITIES
Deposits for universal life and investment
contracts 168 164 247
Withdrawals of universal life and investment
contracts (364) (289) (689)
Net short-term borrowings (repayments) - (1) (60)
Repayments of long-term borrowings (3) (53) (38)
Repurchases of securities pursuant to put
options - - (124)
Issuances of common stock 6 3 2
Issuances of preferred stock - - 310
Cash dividends paid to shareholders (66) (66) (62)
Net financing activities of discontinued
operations - - (50)
Net cash used in financing activities (259) (242) (464)
Increase (decrease) in cash (8) (62) 36
Cash at beginning of year 25 87 51
Cash at end of year $ 17 $ 25 $ 87
<FN>
See Notes to Consolidated Financial Statements.
USF&G Corporation
Consolidated Statement of Shareholder's Equity
For the Years Ended December 31
(dollars in millions except per share data) 1993 1992 1991
PREFERRED STOCK
Balance at beginning of year $ 455 $ 455 $ 200
Par value of shares issued:
Series B - - 65
Series C - - 190
Balance at end of year 455 455 455
COMMON STOCK
Balance at beginning of year 211 211 210
Par value of shares issued 1 - 1
Balance at end of year 212 211 211
PAID-IN CAPITAL
Balance at beginning of year 957 955 898
Excess of proceeds over par value of
shares issued 6 2 57
Balance at end of year 963 957 955
NET UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Balance at beginning of year (31) (21) (58)
Change in unrealized gains (losses) 223 (10) 37
Balance at end of year 192 (31) (21)
NET UNREALIZED GAINS (LOSSES) ON FOREIGN CURRENCY
Balance at beginning of year 2 10 12
Change in unrealized gains (losses) (4) (8) (2)
Balance at end of year (2) 2 10
MINIMUM PENSION LIABILITY
Balance at beginning of year - - -
Change in unfunded accumulated benefits (85) - -
Balance at end of year (85) - -
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year (324) (287) (57)
Net income (loss) 165 28 (176)
Common stock dividends declared (per share,
1993, 1992, and 1991, $.20) (17) (17) (17)
Preferred stock dividends declared (per share,
1993 and 1992, Series A, $4.10, Series B,
$10.25, Series C, $5.00; 1991, Series A,
$4.10, Series B, $5.75, Series C, $3.05) (48) (48) (37)
Balance at end of year (224) (324) (287)
Total shareholders' equity $1,511 $1,270 $1,323
<FN>
See Notes to Consolidated Financial Statements.
USF&G Corporation
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
1.1. BASIS OF PRESENTATION
The consolidated financial statements are prepared
in accordance with generally accepted accounting principles
("GAAP"). These statements include the accounts of USF&G
Corporation and its subsidiaries ("USF&G"). Intercompany
transactions are eliminated in consolidation. Certain prior year
amounts are reclassified to conform to the 1993 presentation.
Reporting practices for insurance subsidiaries prescribed or
permitted by state regulatory authorities (statutory accounting)
differ from GAAP. Statutory amounts for USF&G's insurance
operations are as follows:
Years Ended December 31
(in millions) 1993 1992 1991
Statutory Net Income (Loss):
Property/casualty insurance $ 199 $ 216 $ (163)
Reinsurance affiliates 1 1 -
Life insurance 5 23 77
At December 31
1993 1992 1991
Statutory Surplus:
Property/casualty insurance* $1,541 $1,467 $1,404
Reinsurance affiliates 147 152 146
Life insurance 316 310 283
<FN>
*This amount includes the surplus of the life insurance subsidiary.
1.2. INVESTMENTS
Fixed Maturities: USF&G classifies fixed maturities as
"held to maturity" if it has both the positive intent and
ability to hold the securities until maturity or near enough
to maturity such that interest rate risk is substantially
eliminated as a pricing factor. Fixed maturities held to
maturity are carried at amortized cost. Changes in the market
values of these investments are generally not recognized in the
financial statements. Valuation allowances are provided for
impairments in estimated net realizable value based on periodic
evaluation. Specific write-downs are taken when an impairment is
deemed other than temporary.
Fixed maturities not classified as either "held to maturity" or
"trading securities" are classified as "available for sale."
These securities are held for an indefinite period of time and
may be sold in response to changes in interest rates and the
yield curve, prepayment risk, liquidity needs, or other factors.
Effective December 31, 1993, upon the initial adoption of a new
accounting standard, SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities," available for sale
fixed maturities are carried at fair value, with unrealized
gains and losses recorded as a separate component of
shareholders' equity. Also effective December 31, 1993, with the
adoption of SFAS No. 115 unrealized gains or losses on fixed
maturities available for sale are offset by an adjustment to
life insurance deferred policy acquisition costs which is made
on a proforma basis as if the unrealized gains on those assets
which match certain life insurance liabilities were realized. At
December 31, 1992 and 1991, before adoption of SFAS No. 115,
fixed maturities available for sale were carried at the lower of
aggregate amortized cost or fair value. Fair value exceeded
amortized cost at December 31, 1992 and 1991; therefore, there
were no unrealized losses reported in shareholders' equity.
Equity Securities and Options: Investments in common and
preferred stocks are carried at market value with the resulting
unrealized gains or losses reported directly in shareholders'
equity. In 1992 and 1991 premiums received on options written
were recorded as liabilities. The premiums paid on options
purchased were recorded as assets. Outstanding option positions
were carried at market value, and the resulting unrealized gains
or losses were reported directly in shareholders' equity. There
were no outstanding options at December 31, 1993.
Securities Lending: USF&G participates in a securities lending
program where certain securities from its portfolio are loaned
to other institutions for short periods of time. A fee is paid
to USF&G by the borrower. Collateral that exceeds the market
value of the loaned securities is invested by the lending agent
to represent USF&G's interest. USF&G's interest in securities
lending is reported in other invested assets at December 31,
1993 and 1992, and in short-term investments at December 31,
1991. USF&G's invested assets and other liabilities include $141
million, $206 million, and $594 million at December 31, 1993,
1992, and 1991, respectively, related to its interest in the
securities lending program.
Mortgage Loans and Real Estate: Mortgage loans are carried at
unpaid principal balances. Real estate investments are reported
at cost adjusted for equity participation. Real estate acquired
through an in-substance foreclosure or deed-in-lieu of
foreclosure is initially recorded at estimated market value.
Valuation allowances are provided for impairments in estimated
net realizable value based on periodic evaluations. Specific
write-downs are taken when an impairment is deemed other than
temporary.
Other Investments Held for Sale: In 1991, investments were
designated as "held for sale" based on USF&G's intent to dispose
of them within a year. These investments included high-risk
investments such as real estate, high-yield bonds, and equity
securities and were carried at the lower of cost or estimated
net realizable value. Such investments were sold during 1992.
Interest and Dividend Income: Interest on fixed-maturity
investments is recorded as income when earned and is adjusted
for any amortization of purchase premium or discount. Dividends
on equity securities are recorded as income on ex-dividend dates.
Option Income: In 1992 and 1991, investment income on covered
call options was recorded when the option positions were closed.
There was no option income in 1993. The amount of investment
income recorded for a covered call option was the time value
component of the premium received. The remainder (the "intrinsic
value") of the premium on the in-the-money options was recorded
as a realized gain when option positions were closed.
Premiums paid for closing purchase transactions on covered call
options reduced investment income if the option was
out-of-the-money when the transaction was closed. If the option
was in-the-money, the time value portion of the premium paid
reduced investment income, and the intrinsic value portion was
recorded as a realized loss.
Realized Gains or Losses: Realized gains and losses on the sale
of investments are determined based on specific cost. Realized
losses are recorded when an investment's net realizable value is
below cost, and the decline is considered other than temporary.
Realized gains and losses also result from changes in investment
valuation allowances.
1.3. RECOGNITION OF PREMIUM REVENUES
Property/Casualty Insurance: Property/casualty insurance premiums
are earned principally on a pro rata basis over the lives of the policies.
Unearned premiums represent the portion of premiums written
applicable to the unexpired terms of policies in force. Unearned
premiums also include estimated and unbilled premium adjustments.
Life Insurance: Premiums on life policies with fixed and
guaranteed premiums and benefits and premiums on annuities with
significant life contingencies are recognized when due.
Universal life policies and annuity contracts are issued on both
a single-premium and recurring-premium basis. Revenues for these
contracts consist of policy charges assessed against benefit
account balances during the period for the cost of insurance,
policy administration, and surrenders.
1.4. UNPAID LOSSES, LOSS EXPENSES, AND POLICY BENEFITS
Property/Casualty Insurance: The liability for unpaid
property/casualty insurance losses and loss adjustment expenses
is based on an evaluation of reported losses and on estimates of
incurred but unreported losses. The reserve liabilities are
determined using adjusters' individual case estimates and
statistical projections. The liability was reported net of
estimated salvage and subrogation recoverables of $139 million,
$138 million, and $162 million at December 31, 1993, 1992, and
1991, respectively. Adjustments to the liability based on
subsequent developments or other changes in the estimate are
reflected in results of operations in the period in which such
adjustments become known.
Certain liabilities for unpaid losses and loss adjustment
expenses related to workers compensation coverage are discounted
to present value. The carrying amount of such workers
compensation liabilities, net of reinsurance and net of
discount, was $1,752 million, $1,798 million, and $1,854 million
at December 31, 1993, 1992, and 1991, respectively. Interest
rates used to discount these liabilities generally ranged from 3
percent to 5 percent.
Life Insurance: Ordinary life insurance reserves are computed
under the net level premium method using assumptions for future
investment yields, mortality, and withdrawal rates. These
assumptions reflect USF&G's experience, modified to reflect
anticipated trends, and provide for possible adverse deviation.
Reserve interest rate assumptions are graded and range from 4.25
percent to 8.25 percent.
Universal life and deferred annuity reserves are computed on the
retrospective deposit method, which produces reserves equal to
the cash value of the contracts. Such reserves are not reduced
for charges that would be deducted from the cash value of
policies surrendered. Reserves on immediate annuities with
guaranteed payments are computed on the prospective deposit
method, which produces reserves equal to the present value of
future benefit payments.
1.5. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs, consisting of commissions, brokerage, and
other expenses incurred at policy issuance, are generally deferred.
Anticipated losses, loss expenses, policy benefits, and remaining costs of
servicing the policies are considered in determining the amount
of costs to be deferred. Anticipated investment income is
considered in determining whether a premium deficiency exists
related to short-duration contracts. Amortization of deferred
policy acquisition costs totaled $673 million, $738 million, and
$886 million, for the years ended December 31, 1993, 1992, and
1991, respectively.
Property/Casualty Insurance: Property/casualty acquisition
costs are amortized over the period that related premiums are
earned.
Life Insurance: Life insurance acquisition costs are amortized
based on assumptions consistent with those used for computing
policy benefit reserves. Acquisition costs on ordinary life
business are amortized over their assumed premium paying
periods. Universal life and investment annuity acquisition costs
are amortized in proportion to the present value of their
estimated gross profits over the products' assumed durations,
which are regularly evaluated and adjusted as appropriate.
1.6. PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated depreciation.
At December 31, 1993, 1992, and 1991, $194 million, $200 million,
and $226 million, respectively, of property and equipment was
included in other assets. Depreciation is computed on the
straight-line basis over the estimated useful lives of the assets.
For the years ended December 31, 1993, 1992, and 1991,
depreciation expense of $21 million, $25 million, and $24 million,
respectively, is included in underwriting, acquisition, and
operating expenses.
1.7. FOREIGN CURRENCY TRANSLATION
The functional currency for USF&G's foreign operations
is the applicable local currency. Foreign currency balance
sheet accounts are translated to U.S. dollars using exchange
rates in effect at the balance sheet date. Revenue and expense
accounts are translated using the average exchange rates
prevailing during the year. The unrealized gains or losses, net
of applicable deferred income taxes, resulting from translation
are included in shareholders' equity.
Foreign currency gains and losses on transactions denominated in
a currency other than the entity's functional currency are
generally recorded in operations. Such gains and losses may be
reduced or effectively eliminated by certain financial
instruments used by USF&G to reduce its foreign exchange
exposure.
1.8. EARNINGS PER COMMON SHARE
Primary earnings per common share are computed by subtracting
dividends on preferred stock from consolidated income and
then dividing by the weighted-average common shares
outstanding during the period. The effect of common stock
equivalents is excluded from the calculations because their
effect is not material. Fully diluted earnings per common
share assume the conversion of all securities whose
contingent issuance would have a dilutive effect on earnings.
1.9. RESTRUCTURING CHARGES AND DISCONTINUED OPERATIONS
Restructuring initiatives began in the fourth quarter of 1990.
Net income reflects provisions of $60 million of restructuring
charges in 1991 and $51 million in 1992. There were no
restructuring charges in 1993. Since 1990, USF&G has implemented
programs to reduce the cost structure of the organization by
consolidating branch offices, establishing a regional structure,
and reducing staff. In addition, USF&G has implemented plans to
dispose of nonstrategic businesses which resulted in losses from
discontinued operations of $7 million and $32 million in 1992
and 1991, respectively. Revenues of the discontinued operations
totaled $5 million, $42 million, and $114 million for the years
ended December 31, 1993, 1992, and 1991, respectively. The net
assets of discontinued operations are carried at estimated net
realizable value.
Other financial data for the discontinued operations are
summarized below.
Years Ended December 31
(in millions) 1993 1992 1991
Results of operations $ - $ - $ (6)
Provision for income taxes - - (1)
- - (7)
Loss on disposal of subsidiaries - (7) (25)
Net loss from discontinued operations $ - $ (7) $(32)
At December 31
1993 1992 1991
ASSETS
Investments $ - $ - $ 11
Accounts and notes receivable 1 2 21
Acquisition-related goodwill 4 5 92
Property and equipment - 1 8
Other assets 1 2 35
Total assets $ 6 $ 10 $167
LIABILITIES
Accrued loss on disposal $ - $ 7 $ 25
Other liabilities 19 19 33
Total liabilities 19 26 58
Net assets (liabilities) $(13) $(16) $109
Note 2 Investments
2.1. COMPONENTS OF NET INVESTMENT INCOME
Years Ended December 31
(in millions) 1993 1992 1991
Interest on fixed maturities $721 $739 $711
Equity security dividends 14 12 29
Option income - 37 65
Short-term interest 9 27 73
Real estate and mortgage loans 41 50 35
Other, and expenses (36) (48) (36)
Net investment income $749 $817 $877
2.2. NET REALIZED GAINS (LOSSES)
Years Ended December 31
(in millions) 1993 1992 1991
GAINS (LOSSES) ON SALES:
Fixed maturities $ 79 $179 $157
Equity securities 5 53 18
Options - (1) (20)
Real estate 6 (3) (3)
Other - 11 (44)
Net gains on sales 90 239 108
PROVISIONS FOR IMPAIRMENT:
Fixed maturities (10) (20) (15)
Equity securities (8) - (18)
Real estate (51) (43) (29)
Other (15) (28) -
Total provisions for impairment (84) (91) (62)
Losses due to portfolio restructuring - - (8)
Net realized gains $ 6 $148 $ 38
2.3. ALLOWANCES FOR IMPAIRMENT IN VALUE
Valuation allowances
for impairment in value of investments, recorded in the
Consolidated Statement of Financial Position as a reduction of
the respective asset category, are as follows:
At December 31
(in millions) 1993 1992 1991
Fixed maturities $ 20 $ 12 $ -
Real estate and mortgage loans 108 108 88
Other 3 5 -
2.4. GROSS UNREALIZED GAINS AND LOSSES
At December 31
(in millions) 1993 1992 1991
UNREALIZED GAINS:
Fixed maturities $224 $ - $ -
Equity securities 14 16 51
Options and other 10 3 9
Gross unrealized gains 248 19 60
UNREALIZED LOSSES:
Fixed maturities (2) - -
Deferred policy acquisition
cost adjustment (30) - -
Equity securities (23) (48) (44)
Options and other (1) (2) (37)
Gross unrealized losses (56) (50) (81)
Unrealized gains (losses), net $192 $(31) $(21)
2.5. CHANGE IN UNREALIZED GAINS (LOSSES)
Years Ended December 31
(in millions) 1993 1992 1991
Fixed maturities $222 $ - $ -
Deferred policy acquisition
cost adjustment (30) - -
Equity securities 23 (39) 47
Options and other 8 29 (10)
Net change $223 $(10) $ 37
2.6. ESTIMATED MARKET VALUES OF FIXED MATURITY INVESTMENTS
The increase (decrease) in the difference between cost and market
value of fixed maturity investments for the years ended December
31, 1993, 1992, and 1991, was $243 million, $(259) million, and
$441 million, respectively. The cost and market value of total
fixed maturities are as follows:
At December 31
1993 1992 1991
Gross
Unrecognized/ Gross Gross
Unrealized Market Unrecognized Market Unrecognized Market
(in millions) Cost Gains Losses Value Cost Gains Losses Value Cost Gains Losses Value
Fixed maturities held to
maturity $4,661 $191 $(56) $4,796 $7,218 $171 $ (99) $7,290 $ 3,749 $173 $(42) $3,880
Fixed maturities available
for sale 4,681 224 (2) 4,903 1,987 49 (7) 2,029 5,364 261 (19) 5,606
Total $9,342 $415 $(58) $9,699 $9,205 $220 $(106) $9,319 $ 9,113 $434 $(61) $9,486
The cost and market value of fixed maturities held to maturity
are as follows:
At December 31
1993 1992 1991
Gross Gross Gross
Unrecognized Market Unrecognized Market Unrecognized Market
(in millions) Cost Gains Losses Value Cost Gains Losses Value Cost Gains Losses Value
U.S. Government bonds $ 4 $ - $ (1) $ 3 $ 348 $ 3 $ - $ 351 $ 561 $ 18 $ - $ 579
Mortgage/asset-backed securities 1,669 70 (19) 1,720 3,535 88 (47) 3,576 1,893 104 (16) 1,981
Corporate bonds 2,463 79 (30) 2,512 2,660 48 (40) 2,668 849 29 (15) 863
High-yield bonds 505 37 (6) 536 511 24 (12) 523 298 7 (6) 299
Tax-exempt bonds 14 3 - 17 55 4 - 59 70 6 (3) 73
Other 6 2 - 8 109 4 - 113 78 9 (2) 85
Total $4,661 $191 $(56) $4,796 $7,218 $171 $ (99) $7,290 $3,749 $173 $(42) $3,880
The cost and market value of fixed maturities available for sale
are as follows:
At December 31
1993 1992 1991
Gross Gross Gross
Unrealized Market Unrecognized Market Unrecognized Market
(in millions) Cost Gains Losses Value Cost Gains Losses Value Cost Gains Losses Value
U.S. Government bonds $ 304 $ 20 $ - $ 324 $ 206 $ 3 $ - $ 209 $2,052 $ 59 $ - $2,111
Mortgage/asset-backed securities 1,883 73 - 1,956 1,284 39 (4) 1,319 2,074 116 - 2,190
Corporate bonds 2,403 126 - 2,529 443 7 (1) 449 957 76 (7) 1,026
High-yield bonds 57 2 (2) 57 11 - (1) 10 135 5 (12) 128
Tax-exempt bonds 34 3 - 37 16 - (1) 15 103 4 - 107
Other - - - - 27 - - 27 43 1 - 44
Total $4,681 $224 $ (2) $4,903 $1,987 $ 49 $ (7) $2,029 $5,364 $261 $(19) $5,606
2.7. STATED DUE DATES OF FIXED MATURITIES
The table below shows the stated due dates of fixed maturities
classified as "held to maturity."
At December 31, 1993
Market
(in millions) Cost Value
In 1994 $ 48 $ 48
1995 through 1998 185 192
1999 through 2003 1,684 1,756
After 2003 1,075 1,080
Subtotal 2,992 3,076
Mortgage/asset-backed securities 1,669 1,720
Fixed maturities held to maturity $4,661 $4,796
The table below shows the stated due dates of fixed maturities
available for sale.
At December 31, 1993
Market
(in millions) Cost Value
In 1994 $ 40 $ 40
1995 through 1998 1,334 1,378
1999 through 2003 850 913
After 2003 574 616
Subtotal 2,798 2,947
Mortgage/asset-backed securities 1,883 1,956
Fixed maturities available for sale $4,681 $4,903
Expected maturities may differ from stated due dates as
borrowers may have the right to call or prepay obligations.
During 1993, USF&G received proceeds from sales or repayments of
fixed maturities of $3.0 billion. The table below illustrates
the source of 1993 proceeds.
Gross Gross
(in millions) Cost Proceeds Gains Losses
PROCEEDS FROM SALES OF FIXED MATURITIES:
Held to maturity $ 454 $ 462 $ 20 $(12)
Available for sale 1,181 1,252 73 (2)
Subtotal 1,635 1,714 93 (14)
PROCEEDS FROM REPAYMENTS:
Held to maturity 946 941 9 (14)
Available for sale 313 308 1 (6)
Subtotal 1,259 1,249 10 (20)
Total proceeds $2,894 $2,963 $103 $(34)
Proceeds from sales of fixed maturities classified as "held to
maturity" occurred primarily due to repositioning a portion of
the portfolio in anticipation of the adoption of SFAS No. 115.
In 1992, proceeds from fixed maturities held to maturity totaled
$119 million with gross gains of $6 million and gross losses of
$36 million. Proceeds from sales of fixed maturities available
for sale were $6 billion in 1992 with gross gains of $355
million and gross losses of $166 million. During 1991, before
fixed maturities were classified as "available for sale,"
proceeds from sales totaled $12 billion with gross gains of $225
million and gross losses of $137 million.
2.8. INVESTMENT COMMITMENTS
USF&G has outstanding commitments to provide permanent financing
for various real estate development projects. The funded amounts
of these commitments are collateralized by the real estate
projects. At December 31, 1993, unfunded commitments totaled
approximately $12 million, and approximately $8 million of this
is expected to be funded in 1994.
USF&G has a potential commitment to purchase $14 million of
preferred shares in an investment unless the investment procures
an alternative source of financing prior to March 31, 1994.
USF&G has a potential commitment to fund $13 million under the
terms of a participatory note investment if certain
collateralization tests are not met.
2.9. NONINCOME-PRODUCING INVESTMENTS
Fixed maturities and other invested assets held at
December 31, 1993, for which no income was recorded during
1993, totaled $4 million and $1 million, respectively.
In addition, nonperforming real estate, defined as
mortgage loans and real estate investments that are not
performing in accordance with their contractual terms or are
performing significantly below expectations, totaled $249
million at December 31, 1993.
Note 3 Debt and Credit Arrangements
3.1. DEBT OUTSTANDING
At December 31
(in millions) 1993 1992 1991
CORPORATE:
Short-term $395 $375 $388
Long-term:
9.98% and 10.1% Universal
Medium-Term notes due 1994 - 20 20
8 7/8% Notes due 1996 99 99 99
5 1/2% Swiss Franc Bonds due 1996 80 80 86
5.35% Swiss Franc Loan due 1993 - - 24
Subtotal 574 574 617
REAL ESTATE AND OTHER:
Short-term 12 3 12
Long-term:
8% Secured note due 1995 11 11 -
9 3/8% Secured note due 1994 - 11 11
12 3/4% Secured note due through 1995 - - 11
9.96% Secured notes due through 1999 14 15 21
Other 7 2 5
Subtotal 44 42 60
Total $618 $616 $677
3.2. SHORT-TERM DEBT
For general corporate purposes, USF&G maintains a committed,
standby credit facility with a group of foreign and domestic
banks totaling $700 million. The facility was entered into
during 1990 and expires in 1995. USF&G pays fixed facility
fees and commitment fees for the unused portion of the
facility based on its long-term debt credit ratings.
Borrowings at December 31, 1993, 1992, and 1991, totaled $375
million. Interest rates are based on current market rates. USF&G
was in compliance with the covenants contained in these
agreements at December 31, 1993, 1992, and 1991. The two most
restrictive covenants, as defined in the agreements, require
USF&G to maintain a tangible net worth of at least $1 billion
and an indebtedness-to-capital ratio below 70 percent.
3.3. SHELF REGISTRATIONS
In January 1994, USF&G filed a shelf registration statement
with the Securities and Exchange Commission. As of the time
this registration statement went effective in February 1994,
USF&G had available $647 million of unissued debt, preferred
stock, common stock, and warrants to purchase debt and stock.
These securities may be sold from time to time with various
terms appropriate to the securities issued to be determined
at the time of issuance.
3.4. REDEEMABLE DEBT
Beginning in 1993, the 8 7/8% Notes are redeemable at par,
plus accrued interest. In 1994 and thereafter, the 5 1/2%
Swiss Franc Bonds are redeemable at par, plus accrued interest.
3.5. CURRENCY SWAPS
USF&G entered into currency swap agreements to hedge its
foreign currency exposure on the 33 million 5.35%
Swiss Franc Loan and the 120 million 5 1/2% Swiss Franc Bonds.
These agreements were in place through the maturity of the
related debt issues. USF&G is subject to the risks that the
counterparties will fail to perform and that the value of the
currency swaps will fluctuate. However, these risks are
mitigated by the credit quality of the counterparties and the
foreign exchange gains or losses on the related debt. USF&G is
exposed to credit losses for periodic settlement of amounts due,
which are not material at December 31, 1993. In December 1992,
USF&G repaid the 33 million Swiss Franc Loan and cancelled the
related currency swap; however, a currency swap agreement is
still in effect on the 5 1/2% Swiss Franc Bonds. As a result of
the currency swaps, debt-related foreign currency translation
had no effect on net income.
3.6. INTEREST RATE SWAPS
USF&G entered into interest rate swaps to exchange variable
commercial paper rates for fixed borrowing costs. Three
interest rate swaps expired during 1993. The remaining
interest rate swap has a fixed rate of 9.405 percent
through 2000 on notional principal of $25 million. This
agreement involves, to varying degrees, interest rate and credit
risk in excess of amounts recognized in the balance sheet. The
notional amount indicates USF&G's involvement but not future
cash requirements. The maximum credit risk related to the
remaining agreement is the amount related to periodic
settlements, which is not material at December 31, 1993. USF&G
controls the credit risk through monitoring procedures and
investigation of counterparties to the transaction.
3.7. INTEREST
Interest paid in the years ended December 31, 1993, 1992, and
1991, was $41 million, $49 million, and $52 million, respectively.
Interest incurred and capitalized in the years ended
December 31, 1992 and 1991, was $8 million. There
was no interest incurred and capitalized in 1993.
3.8. MATURITIES OF LONG-TERM DEBT
Real
Estate
and
(in millions) Corporate Other
1994* $ 20 $11
1995 - 11
1996 179 -
1997 - -
1998 - -
<FN>
*This amount is included with short-term debt in the debt outstanding
table.
Note 4 Fair Value of Financial Instruments
The fair value information presented is based on quoted
market prices where available. In cases where quoted market
prices are not available, fair values are based on internal
estimates using present value or other valuation techniques.
Those techniques are significantly affected by the
assumptions used, such as applicable discount rate and
estimated future cash flows. Therefore, the derived fair value
estimates cannot be substantiated by comparison to independent
markets and in many cases, could not be realized in immediate
settlement of the instrument. Fair value disclosure requirements
exclude certain financial instruments and all nonfinancial
instruments. The fair value of many insurance-related liabilities
do not require disclosure. However, in its strategy of asset/liability
matching, USF&G takes into consideration the future cash requirements
of its insurance-related liabilities. Had a presentation of these
liabilities been made, due to their long-term nature, the fair
value of insurance-related liabilities would have been significantly
less than their carrying value.
Cash and Short-Term Investments: The carrying amounts reported
in the Consolidated Statement of Financial Position for these
instruments approximate their fair values.
Fixed-Maturity Investments: Fair values for publicly-traded
fixed-maturity investments are based on quoted market prices.
For privately placed fixed maturities, estimated fair values,
obtained from independent pricing services, are derived by
discounting expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of
the investment. At December 31, 1993, the amortized cost,
carrying amounts, and fair values of fixed-maturity investments
were as follows:
Amortized Carrying Fair
(in millions) Cost Amount Value
Publicly traded $9,181 $9,401 $9,536
Private placements 161 163 163
Total fixed-maturity investments $9,342 $9,564 $9,699
The preceding table includes fixed maturities available for sale
with a market and carrying value of $4,903 million and amortized
cost of $4,681 million. Such investments are reported in the
Consolidated Statement of Financial Position at market value.
Equity Investments: The carrying values of equity securities as
reported in the Consolidated Statement of Financial Position are
based on quoted market prices and reflect their fair values.
Mortgage Loans and Policy Loans: The fair values for mortgage
loans and policy loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for
similar loans to borrowers with similar credit ratings. Loans
with similar characteristics are aggregated for purposes of the
calculations. At December 31, 1993, the carrying amounts and
fair values of investments in mortgage loans and policy loans
were as follows:
Carrying Fair
(in millions) Amount Value
Mortgage loans $302 $304
Policy loans 55 59
Other Assets and Other Liabilities: Other invested assets
considered financial instruments include equity interests in
minority ownership investments, interests in limited
partnerships and related notes receivable. It is not practicable
to estimate a fair market value due to the closely-held nature
of these investments.
Other assets and liabilities considered financial instruments
include agents' balances receivable, prepaid and accrued
expenses, and other receivables generally of a short-term
nature. It is assumed the carrying value approximates fair
market value.
Short and Long-Term Debt: The carrying amount of USF&G's
short-term borrowings approximates its fair value. The fair
value of long-term debt is estimated using discounted cash flow
analyses, based on USF&G's current incremental borrowing rates
for similar types of borrowing arrangements. The carrying
amounts and estimated fair value of debt instruments at December
31, 1993, were as follows:
Carrying Fair
(in millions) Amount Value
Corporate:
Short-term $395 $395
Long-term 179 179
Real estate 44 46
Other - -
Total $618 $620
Investment Contracts: Fair values for USF&G's single premium
deferred annuities, other deferred annuities, single premium
immediate annuities and supplementary contracts are primarily
derived by estimating the cost to extinguish its liabilities
under an assumption reinsurance transaction. The estimated
statutory profits the assuming company would realize from the
transaction are discounted at a typical internal rate of return
objective. If such a transaction were to occur, GAAP would
require the unamortized balance of deferred acquisition costs
associated with these liabilities be immediately expensed. The
amount of the related unamortized deferred acquisition costs was
approximately $99 million at December 31, 1993. The fair values
of the remaining liabilities under investment contracts are
estimated using discounted cash flow calculations, based on
interest rates currently being offered for like contracts with
similar maturities. The carrying amounts and estimated fair
values of USF&G's liabilities for investment contracts at
December 31, 1993, are as follows:
Carrying Fair
(in millions) Amount Value
Single premium deferred annuities $2,138 $2,104
Other deferred annuities 292 276
Single premium immediate annuities
and supplementary contracts 150 150
Funding agreements 1 1
Group annuities 167 167
Total $2,748 $2,698
Off-Balance Sheet Financial Instruments: The fair values of
USF&G's unfunded real estate commitments and its financial
commitment on investments are estimated using discounted cash
flow analyses, based on USF&G's current incremental borrowing
rate for similar types of borrowing arrangements. The estimate
of the fair value of USF&G's interest rate swaps were obtained
from the counterparties to the agreements and were derived by
discounting the expected future cash flows using the basis point
differential between the current and contracted interest rates.
The estimated fair values of USF&G's off-balance sheet financial
instruments at December 31, 1993, are as follows:
Fair
(in millions) Value
Unfunded real estate commitments $(11)
Commitment on investments (27)
Interest rate swaps (5)
Note 5 Leases
USF&G occupies office facilities under lease agreements that
expire at various dates through 2009. In addition, data processing,
office, and transportation equipment is leased under agreements
that expire at various dates through 1998.
USF&G's principal office lease involves a 40-story office
building that was sold in 1984 and subsequently leased back.
This lease provides for renewal options and rent increases every
five years and a repurchase option at the end of the lease. The
deferred gain arising from this sale is being amortized over the
noncancelable lease term of 25 years. The unamortized amount of
the deferred gain of $30 million, $31 million, and $33 million
at December 31, 1993, 1992, and 1991, respectively, is included
in other liabilities. For the years ended December 31, 1993,
1992, and 1991, amortization of $2 million is netted with
underwriting, acquisition, and operating expenses.
Most leases contain renewal options that may provide for rent
increases based on prevailing market conditions. Some leases
also may contain purchase options based on fair market values or
contractual values, if greater. All leases are accounted for as
operating leases. Rent expense for the years ended December 31,
1993, 1992, and 1991, was $54 million, $58 million, and $63
million, respectively.
The table opposite shows the future net minimum payments under
noncancelable leases at December 31, 1993.
Home Other
Office Office
(in millions) Building Space Equipment Total
1994 $ 14 $17 $11 $ 42
1995 16 14 7 37
1996 16 12 5 33
1997 17 10 1 28
1998 17 8 - 25
After 1998 269 10 - 279
Total $349 $71 $24 $444
Note 6 Shareholders' Equity
6.1. CLASSES OF STOCK
USF&G is authorized to issue 12 million shares of $50 par
value preferred stock and 240 million shares of $2.50 par
value common stock.
6.2. PREFERRED STOCK
USF&G has 4 million shares of $4.10 Series A Convertible
Exchangeable Preferred Stock, 1.3 million shares of $10.25
Series B Cumulative Convertible Preferred Stock, and
3.8 million shares of $5.00 Series C Cumulative Convertible
Preferred Stock issued and outstanding at December 31, 1993,
1992, and 1991.
Each share of the Series A and Series C preferred stock entitles
the holder to an annual cumulative dividend of $4.10 and $5.00,
respectively, and a liquidation preference of $50 plus accrued
and unpaid dividends. Each share of Series B preferred stock
entitles the holder to an annual cumulative dividend of $10.25
and a liquidation preference of $100 plus accrued and unpaid
dividends.
At December 31, 1993, at the option of the holder, subject to
adjustment under certain conditions, each share of Series A, B,
and C preferred stock is convertible to 1.179, 8.316, and 4.158
shares, respectively, of USF&G's common stock. The Series A
stock is exchangeable in whole at USF&G's option on any dividend
payment date for the corporation's 8.2 percent Convertible
Subordinated Debentures due in 2011 at a rate of $50 principal
amount per share. Series B and Series C stock are not
exchangeable.
The Series A shares are redeemable for cash, in whole or in
part, at USF&G's option at $51.23 per share, plus accrued and
unpaid dividends to the redemption date. The redemption price
declines to $50 per share in 1996. Series B shares are
redeemable for cash, in whole or in part, at USF&G's option
commencing in 1994 at $100 per share and accrued and unpaid
dividends plus a premium of $10.25 per share that declines
ratably to zero per share in 2001. No redemption may be made
prior to 1997 unless the closing price of the common stock
exceeds 150 percent of the Series B conversion price and subject
to certain other conditions. In addition, if a change in control
event should occur, then at the election of each holder of
Series B Preferred Stock, USF&G will issue and sell additional
nonredeemable equity securities and apply the net proceeds
thereof to redeem these Series B shares, but only if and to the
extent any such proceeds are raised. Series C shares are
redeemable for cash, in whole or in part, at USF&G's option
commencing in 1994 at $53.50 per share, plus accrued and unpaid
dividends to the redemption date. The redemption price declines
to $50 per share in 2001.
Holders of the preferred stock are not entitled to vote, except
that they may vote separately with respect to certain matters
including the authorizations of any additional classes of
capital stock that would rank senior to the preferred stock. In
the event that two quarterly dividends for Series B and C
preferred stock or six quarterly dividends for Series A stock
are unpaid, USF&G's Board of Directors will be increased by two,
and holders of preferred stock may elect two directors until all
such dividends in arrears have been paid.
6.3. DIVIDEND RESTRICTIONS
Payment of dividends to USF&G Corporation by its subsidiary
is subject to certain restrictions. The Maryland Insurance
code requires the Maryland Insurance Commissioner's prior
approval for any dividend payments during a twelve month period
from a Maryland subsidiary, such as USF&G Company, to its
holding company which exceeds 10 percent of policyholders'
surplus. At December 31, 1993, $154 million of dividends is
currently available for payment to USF&G Corporation from its
insurance subsidiary during 1994 without restriction. During
1993, $147 million in dividends was available for payment to
USF&G Corporation from its insurance subsidiary without
restriction, of which $125 million of dividends was paid.
6.4. CHANGES IN COMMON STOCK SHARES
Years Ended December 31
1993 1992 1991
Common Stock:
Balance, January 1 84,512,758 84,273,327 83,958,222
Shares issued 496,724 239,431 315,105
Balance, December 31 85,009,482 84,512,758 84,273,327
6.5. SHAREHOLDER RIGHTS PLAN
USF&G has a shareholder rights plan ("the plan") to deter
coercive or unfair takeover tactics and to prevent a potential
purchaser from gaining control of USF&G without offering a fair
price to all of the corporation's shareholders. Under the plan,
each outstanding share of USF&G's common stock has one preferred
share purchase right (a "right") expiring in 1997. Each right
entitles the registered holder to purchase 1/100 of a share of
a new class of junior preferred stock for $140. The rights cannot
be exercised unless certain events occur that might lead to a
concentration in ownership of common shares. At that time, the
rights may be exercised for common stock having a value of twice
the exercise price. Under certain conditions, the rights also
become exercisable into shares of common stock of a purchaser
having a value of twice the exercise price. USF&G will generally
be entitled to redeem the rights, at $.05 per right, any time
before the tenth day after a 20 percent position is acquired.
Note 7 Stock Ownership Plans
7.1. STOCK OPTIONS AND STOCK PURCHASE PLANS
Stock Options: Stock options have been granted to full-time
officers and key employees under four incentive plans:
Long-Term Incentive Plan, Stock Option Plan of 1987, Stock
Option Plan of 1990, and Stock Incentive Plan of 1991.
In addition, the Employee Stock Option Plan of 1992 granted
eligible employees, other than officers and key employees
participating in other stock incentive plans, options to purchase
50 or 100 shares of stock. Options granted under the plans are
based on market quotations at the time of grant. Activity under
the stock option plans is as follows:
Years Ended December 31
1993 1992 1991
Outstanding, January 1 4,473,572 2,816,748 1,820,942
Granted 1,143,282 2,590,295 1,646,152
Exercised (338,940) (26,868) -
Surrendered or cancelled (1,115,690) (906,603) (650,346)
Outstanding, December 31 4,162,224 4,473,572 2,816,748
Expiration dates 1/94-12/2003 1/93-12/2002 4/92-12/2001
Exercise and surrender prices $6.25-30.82 $6.25-30.82 $6.25-34.00
Shares reserved and
available for grant 2,985,959 3,026,179 1,042,046
Stock Purchase Plans: Shares have been offered to employees
under the Employees' Stock Purchase Plans of 1985 and 1990. None
were offered in 1991, 1992, or 1993. The purchase price is 85
percent of the market value of USF&G's common stock on the grant
date or the end of the two-year purchase period, whichever is
less. Activity under the stock purchase plans is as follows:
Years Ended December 31
1993 1992 1991
Outstanding, January 1 - 133,379 585,869
Granted - - -
Shares purchased - (98,882) (125,407)
Cancelled - (34,497) (327,083)
Outstanding, December 31 - - 133,379
Expiration dates - N/A 8/92
Purchase prices - $ 11.16 $5.68-23.23
Shares reserved - N/A 500,000
Accounting Methods: Proceeds from the shares sold under the
stock option and stock purchase plans are credited to common
stock and paid-in capital. USF&G makes no charges to income for
the plans. The number of shares under the plans are adjusted for
any future stock dividends, stock splits, or similar changes.
7.2. DIRECTORS STOCK PLAN
Directors Stock Plan: The Corporation adopted the 1993
Stock Plan for Non-Employee Directors (the "Directors Stock Plan")
on May 12, 1993. Only the Corporation's outside directors are
eligible to participate and participation is mandatory. The
Directors Stock Plan has two components: (i) annual retainer
awards, and (ii) retirement awards. The Directors Stock Plan
authorizes the issuance of up to 300,000 shares of the
Corporation's common stock, par value $2.50 per share.
Activity under the Directors Stock Plan is as follows:
December 31, 1993
Annual
Retirement Retainer
Award Award
Outstanding, January 1 - -
Stock Units Awarded 123,958 11,927
Stock Issued (17,300) (5,000)
Outstanding, December 31 106,658 6,927
Accounting Method: USF&G records an accounting expense equal to
the market value at grant date of the vested stock or stock
units awarded under the Directors Stock Plan. In 1993, $2
million of compensation expense was recognized relating to this
plan. The future accounting expense related to these plans is
expected to be minimal.
Note 8 Retirement Benefits
8.1. RETIREMENT PLANS
USF&G has various noncontributory retirement plans covering
most regular full-time employees of the corporation and its
affiliates. An employee's pension benefit is based on salary,
years of service, and Social Security benefits. USF&G makes
contributions to the pension plans based on amounts
required to be funded under provisions of the Employee
Retirement Income Security Act of 1974. The plans' funded status
and amounts recognized in the consolidated financial statements
are as follows:
At December 31
(dollars in millions) 1993 1992 1991
ACTUARIAL PRESENT VALUE OF:
Accumulated benefit obligation $338 $263 $252
Vested benefits 322 249 241
Plan assets at fair value $297 $265 $237
Projected benefit obligation 351 278 262
Funded status (54) (13) (25)
Unrecognized net loss 123 55 62
Unrecognized prior service cost (benefit) (25) (28) (31)
Unrecognized net asset at January 1 - - (19)
Adjustment for minimum pension liability (85) - -
Net prepaid (accrued) pension cost $(41) $ 14 $(13)
ACTUARIAL ASSUMPTIONS:
Weighted-average discount rate 7.5% 8.75% 8.75%
Average rate of increase in future
compensation levels 5 6 6
Expected long-term rate of return on assets 8.5 9.5 9.5
As a result of the lower interest rate environment, USF&G
decreased the discount rate assumption which caused the
accumulated benefit obligation to increase. In accordance with
SFAS No. 87, USF&G recorded a minimum pension liability for the
underfunded amount, representing the accumulated benefit
obligation in excess of the fair value of the plans' assets,
plus the amount of prepaid pension costs. The minimum pension
liability is reported as a separate reduction to shareholders'
equity.
The assets held by the plans consist primarily of fixed-income
and equity securities. USF&G classifies prepaid pension cost
with other assets and accrued pension cost with other
liabilities in the Consolidated Statement of Financial Position.
The components of net pension expense are as follows:
Years Ended December 31
(in millions) 1993 1992 1991
Service cost $ 4 $ 5 $ 9
Interest cost 25 23 25
Actual return on plan assets (19) (15) (27)
Net amortization and deferral - (10) 5
Net periodic pension expense $ 10 $ 3 $ 12
8.2. POSTRETIREMENT BENEFITS
USF&G sponsors a defined dollar postretirement health care
plan (medical and dental) and noncontributory life insurance
plan covering most regular full-time employees of the corporation
and its affiliates. USF&G's contributions and costs are
determined based on the annual salary and the type of coverage
elected by covered employees. USF&G's contributions to the plan
are a percentage of plan costs based on age and service of
employees at retirement. Additionally, the plan costs are
capped at projected 1995 cost levels, and retiree contributions
are increased for the total medical costs over the projected levels.
Effective January 1, 1993, USF&G adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers" Accounting
for Postretirement Benefits Other Than Pensions." This statement
requires USF&G to accrue a liability for the cost of health
care, life insurance, and other retiree benefits when the
employees' services are rendered.
As permitted under the new rule, the transition obligation of
$52 million at January 1, 1993, was recognized as an immediate
charge to net income by including the cumulative effect of this
accounting change. The effect of adopting the statement increased
1993 net periodic postretirement benefit cost by approximately
$1 million to an annual expense of $5 million. USF&G continues
to fund the health care and life insurance benefit costs
principally on a pay-as-you-go basis.
The plans' combined funded status and amounts recognized in the
consolidated financial statements at December 31, 1993, are as
follows:
(in millions)
Accumulated postretirement benefit obligation:
Retirees $(46)
Fully eligible active plan participants (4)
Other active plan participants (8)
(58)
Plan assets at fair value -
Funded status (58)
Unrecognized net loss 6
Unrecognized transition obligation -
Accrued postretirement benefit cost $(52)
USF&G classifies accrued postretirement benefit cost with other
liabilities in the Consolidated Statement of Financial Position.
The components of the net periodic postretirement benefit cost
for the 1993 year are as follows:
(in millions)
Service cost $1
Interest cost 4
Net periodic postretirement benefit cost $5
The weighted-average annual assumed rate of increase in per
capita cost of covered benefits (i.e., medical trend rate) for
the plans is 10.5 percent for 1994 (13 percent assumed for 1993)
and is assumed to decrease to 5.5 percent in 2002 for
participants age 65 or younger, and 8.0 percent for 1994 (8.75
percent for 1993), decreasing to 5.5 percent for participants
over age 65 and remain at that level thereafter. Increasing the
assumed medical trend rate by one percentage point in each year
would increase the accumulated postretirement benefit obligation
by approximately $4 million and the aggregate of the service and
interest cost components of net periodic postretirement benefit
cost for the year by approximately $0.3 million. The
weighted-average discount rate used in determining the
accumulated postretirement benefit obligation is 7.5 percent at
December 31, 1993.
The pay-as-you-go expenditures for postretirement benefits were
$5 million in 1993, $4 million in 1992, and $3 million in 1991.
The effect of the accounting change discussed above is
summarized as follows:
(in millions) 1993
Cumulative effect of accounting change on
January 1, 1993 $52
Plus postretirement benefit expense 5
Less postretirement cash expenditures (5)
Accrued postretirement benefit cost at
December 31, 1993 $52
As part of USF&G's business restructuring program, special early
retirement benefits were offered to eligible employees during
1991. Included in restructuring charges for 1991 was $3 million
of pension expense related to these special benefits. There
were no similar expenses in 1993 or 1992.
Note 9 Federal Income Taxes
USF&G and its subsidiaries file a consolidated federal
income tax return. The provision for income taxes gives effect
to permanent differences between income before income taxes and
taxable income. Deferred federal income taxes are provided on
temporary differences and net operating loss carry-forwards
(1993) and timing differences (1992 and 1991) between financial
and taxable income.
Effective January 1, 1993, USF&G changed its method of
accounting for income taxes as required by SFAS No. 109,
"Accounting for Income Taxes." Under the standard, a deferred
tax liability is recognized for taxable temporary differences
and a deferred tax asset is recognized for deductible temporary
differences and net operating loss carry-forwards ("NOLs") that
will offset future taxable income. A valuation allowance is
required if, based on the weight of available evidence, it is
more likely than not that some or all of the deferred tax asset
will not be realized. As permitted under the new standard, prior
years' financial statements have not been restated.
SFAS No. 109 requires that deferred income taxes reflect the net
tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The
cumulative effect of adopting SFAS No. 109 as of January 1,
1993, was to increase net income by $90 million. As a result of
the Omnibus Budget Reconciliation Act of 1993 which increased
the corporate rate to 35 percent, an additional $3 million
deferred tax benefit was recognized. At December 31, 1993, the
deferred tax asset of $119 million recorded by USF&G is
supported by a combination of forecasted taxable income and a
tax strategy that USF&G would implement to prevent NOLs from
expiring. A valuation allowance of $482 million has been
recognized to offset the gross deferred tax assets. USF&G had
NOLs of $634 million ($222 million tax-effected at a 35 percent
corporate rate) for income tax purposes that expire in the years
2000 through 2006.
9.1. SIGNIFICANT COMPONENTS OF DEFERRED TAX ASSETS AND
LIABILITIES
(in millions) December 31, 1993
Deferred tax liabilities:
Deferred policy acquisition costs $(140)
Bonds (69)
Minimum pension liability (30)
Other invested assets (44)
Other (60)
Total deferred tax liabilities (343)
Deferred tax assets:
Loss reserves 304
Unearned premium revenue 45
Foreign reinsurance 49
Real estate 30
Future policy benefits 50
Net unrealized gains and losses 88
Other liabilities 113
Other 43
Net operating loss carry-forwards 222
Total deferred tax assets 944
Valuation allowance for deferred tax assets 482
Deferred tax assets, net of valuation allowance 462
Net deferred tax assets $ 119
During the year, the net change in the valuation allowance was
$56 million to reflect the change in the realizability of the
deferred tax asset. In addition, the valuation allowance
increased $15 million due to the tax rate change enacted in 1993.
9.2. COMPONENTS OF PROVISION FOR INCOME TAXES
Years Ended December 31
Liability Method Deferred Method
(in millions) 1993 1992 1991
Current tax (benefit) $ 7 $ 6 $ 4
Deferred tax (benefit) 24 (6) (1)
Adjustment for enacted change
in tax rates (3) - -
Adjustment of the beginning of the
year valuation allowance (56) - -
Provision for income taxes $(28) $ - $ 3
Income taxes paid $ 3 $ 9 $ 1
9.3. TAX EFFECTS OF TIMING DIFFERENCES BETWEEN FINANCIAL AND
TAXABLE INCOME
Years Ended December 31
(in millions) 1992 1991
TAX EFFECT (BENEFIT):
Deferred policy acquisition costs $(15) $ (7)
Unbilled premium adjustments (4) (2)
Adjustment of life policy benefit reserves (1) (5)
Adjustment of property/casualty loss reserves 3 (11)
Adjustment of property/casualty unearned
premium reserves (4) (5)
Deferred realized gains and losses (2) 7
Unrecognized benefit of net losses 19 18
Other, net (2) 4
Provision for deferred income tax (benefit) $ (6) $ (1)
9.4. TAX EFFECTS OF PERMANENT DIFFERENCES BETWEEN FINANCIAL AND
TAXABLE INCOME
Years Ended December 31
Liability Method Deferred Method
(in millions) 1993 1992 1991
Tax at federal rates $ 35 $12 $(48)
TAX EFFECT (BENEFIT):
Adjustment of the beginning of the
year valuation allowance (56) - -
Effect of change in tax rates (3) - -
State and foreign taxes - - 1
Dividend received deduction - (3) (2)
Tax-exempt interest income (2) (3) (7)
Proration adjustment on non-taxable
investment income - 1 1
Adjustment of property/casualty salvage and
subrogation accruals (fresh start) - - (3)
Adjustment of property/casualty
loss reserves (fresh start) - (9) (12)
Alternative minimum tax - - 10
Unrecognized benefit of net loss - 2 63
Other (2) - -
Provision for income taxes $(28) $ - $ 3
9.5. NET OPERATING LOSS CARRY-FORWARDS
At December 31, 1993, USF&G had NOLs remaining for tax return
purposes expiring in years 2000 through 2006. The amount and
timing of recognizing the benefit of these NOLs depends on
future income and limitations imposed by recent tax acts.
The approximate amounts of USF&G's NOLs on a regular tax
basis and an alternative minimum tax ("AMT") basis at
December 31, 1993, were as follows:
(in millions) Tax Return
Regular tax basis $634
AMT basis 389
Note 10 Reinsurance
During 1993, USF&G adopted SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts." This standard requires the effects of
reinsurance activity to be reported on a gross basis.
Reinsurance receivables and prepaid reinsurance premiums are
reported separately as assets, instead of the previous practice
of reporting such receivables net of the related loss and
unearned premium liabilities. The standard also establishes the
conditions required for a contract to be accounted for as
reinsurance and prescribes income recognition and reporting
standards for those contracts. The initial adoption of this
standard had no effect on net income, but increased assets and
liabilities by approximately $1.2 billion at December 31, 1993.
USF&G reinsures portions of its policy risks with other
insurance companies or underwriters. USF&G assumes policy risks
from other insurance companies and through participation in
pools and associations. Reinsurance gives USF&G the ability to
write larger risks and control its exposure to losses from
catastrophes or other events that cause unfavorable underwriting
results. USF&G's ceding reinsurance agreements are generally
structured on a treaty basis whereby all risks meeting a certain
criteria are automatically reinsured. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policy. Reinsurance
contracts do not relieve USF&G from its obligation to
policyholders. Failure of reinsurers to honor their obligation
could result in losses to USF&G. USF&G evaluates the financial
condition of its reinsurers and monitors concentrations of
credit risks arising from similar economic characteristics of
the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies.
At December 31, 1993, reinsurance receivables totaled $573
million. Of this amount, approximately $150 million was
associated with the Workers Compensation Reinsurance Bureau
("WCRB"), a single voluntary reinsurance association of primary
workers compensation insurers formed for the purpose of
providing excess of loss reinsurance to its members. USF&G is a
member of this pool. Each member is required to hold collateral,
for the benefit of all member companies, in the form of
investment-grade securities equaling 115 percent of the member's
share of outstanding receivables of the WCRB. This collateral
requirement mitigates the risk of WCRB becoming insolvent. Risk
of loss is minimal for the remainder of receivables due to
similar pool arrangements with collateral requirements, other
contracts where funds are withheld, or letters of credit
maintained. Credit risk is also diversified among numerous
reinsurers. Additionally, USF&G is active in the involuntary
market as a servicing carrier whereby USF&G processes business
for a pool but takes no direct underwriting risk because it is
directly reimbursed for the cost of processing policies and
settling any related claims. Reinsurance receivables of $719
million associated with this business are separately disclosed
in the Consolidated Statement of Financial Position.
1993 1992
Premiums Losses Unpaid Unearned Premiums Losses Unpaid Unearned
(in millions) Written Earned Incurred Losses Premiums Written Earned Incurred Losses Premiums
Property/Casualty:
Direct $2,345 $2,338 $1,472 $ 5,078 $ 813 $2,472 $2,692 $2,182 $ 5,593 $ 805
Assumed 593 506 83 1,251 104 259 376 385 1,555 98
Gross 2,938 2,844 1,555 6,329 917 2,731 3,068 2,567 7,148 903
Ceded (509) (517) 203 (1,053) (124) (311) (535) (479) (1,608) (133)
Net 2,429 2,327 1,758 5,276 793 2,420 2,533 2,088 5,540 770
Life N/A 129 395 3,973 - N/A 104 377 3,896 -
Total $2,429 $2,456 $2,153 $ 9,249 $ 793 $2,420 $2,637 $2,465 $ 9,436 $ 770
1991
Property/Casualty:
Direct $3,021 $3,127 $2,752 $ 5,607 $1,025
Assumed 573 423 412 1,667 313
Gross 3,594 3,550 3,164 7,274 1,338
Ceded (562) (532) (619) (1,570) (357)
Net 3,032 3,018 2,545 5,704 981
Life N/A 169 437 3,773 -
Total $3,032 $3,187 $2,982 $ 9,477 $ 981
The ceded unpaid losses and assumed unpaid losses for 1993
were reduced $464 million and $267 million, respectively,
from 1992 due to a commutation involving the WCRB. At year
end 1993, WCRB members commuted the lowest layer of reinsurance
for accident years 1980 to 1992. As a result, USF&G was
required to take back all reserves previously ceded into the
layer and return reserves previously assumed.
Included in assumed unpaid losses in the above table are $110
million, $123 million and $279 million related to loss portfolio
transfer agreements at December 31, 1993, 1992, and 1991,
respectively. USF&G has not entered into any such agreements to
cede its unpaid losses.
Note 11 Financial Guarantees
11.1. INSURANCE GUARANTEES
USF&G has underwritten and reinsured financial guarantee bonds for
principal and interest payments or installment notes when due.
The obligations guaranteed were issued by limited partnerships,
municipalities, and commercial enterprises. Assessment is made
of the likelihood of loss in connection with these guarantees,
and at December 31, 1993, 1992, and 1991, the reserve for such
losses was not material. The risk of loss under these guarantees
is diminished through reinsurance agreements and collateral.
As of December 31, 1993, USF&G was contingently liable for par
value amounts totaling less than approximately $600 million on
financial guarantee exposures ceded through reinsurance
agreements with a monoline insurance company in which USF&G
formally had a minority ownership interest. In addition, USF&G
has other financial guarantee obligations where the par value
guaranteed totaled $12 million at December 31, 1993, with
maturities ranging from 1994 to 2007.
11.2. CORPORATE GUARANTEES
USF&G has also guaranteed the
obligations of certain limited partnerships where it has an
equity interest. The risk of loss under these guarantees is
diminished by collateral in the underlying projects. The
guarantees totaled $82 million at December 31, 1993, with
maturities ranging from 1994 to 1999. In addition, USF&G has
line of credit commitments outstanding totaling $61 million and
purchase commitments outstanding of $16 million.
Note 12 Legal Contingencies
12.1. GENERAL
USF&G's insurance subsidiaries are routinely engaged in
litigation in the normal course of their business, including
defending claims for punitive damages. As a liability insurer,
they defend third-party claims brought against their insureds.
As an insurer, they defend themselves against coverage claims.
Additional information regarding contingencies that may arise
from insurance regulatory matters may be found in the Regulation
section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
In the opinion of management the litigation described herein is
not expected to have a material adverse effect on USF&G's
consolidated financial position, although it is possible that
the results of operations in a particular quarter or annual
period would be materially affected by an unfavorable outcome.
12.2. SHAREHOLDER CLASS ACTION SUITS
Twelve class action complaints were filed by certain
shareholders of USF&G in 1990 and 1991. USF&G moved to dismiss
all twelve complaints. The complaints refer to USF&G's public
announcement on November 7, 1990, concerning a reduction in
its dividend and related matters. By an order dated February
11, 1993, the court dismissed eleven of the class action
complaints and on April 23, 1993, the court dismissed the
remaining action. The plaintiffs appealed these rulings and on
January 6, 1994, the Fourth Circuit of Appeals affirmed the
dismissal of all twelve suits. The plaintiffs have not yet indicated
whether they will seek review from the United States Supreme Court.
While the outcome cannot be predicted with certainty, management
believes the lawsuits are without merit and the outcome is unlikely
to have a material adverse effect on USF&G's financial position.
12.3. ARKANSAS SERVICING CARRIER LITIGATION
On September 14, 1993, Interstate Contractors, Inc. and two other Arkansas
corporations filed a class action in the U.S. District Court for
the Eastern District of Arkansas, Little Rock, against the
National Council on Compensation Insurance ("NCCI"), USF&G and
ten other insurance companies which served as servicing carriers
for the Arkansas involuntary workers compensation market. The
case, which is captioned Interstate Contractors, Inc., et al.
v. National Council on Compensation Insurance, et al., alleges
that the defendants failed to provide safety and loss control
services, claim management services, and assistance in moving
insureds from the involuntary market to the voluntary market.
The plaintiffs are pursuing their claims under various legal
theories, including breach of contract, breach of fiduciary
duty, and negligence. The plaintiffs seek unspecified
compensatory damages based on the premiums attributable to
services allegedly not performed and damages allegedly incurred
as a result of the alleged failure to provide such services.
USF&G believes that it has meritorious defenses and has
determined to defend the action vigorously. Management believes
that it is unlikely such claims will have a material adverse
effect on USF&G's financial position.
12.4. NORTH CAROLINA WORKERS COMPENSATION LITIGATION
On November 24, 1993, N.C. Steel, Inc. and six other North Carolina
employers filed a class action in the General Court of Justice,
Superior Court Division, Wake County, North Carolina, against
the NCCI, North Carolina Rate Bureau, USF&G and eleven other
insurance companies which served as servicing carriers for the
North Carolina involuntary workers compensation market. On
January 20, 1994, the plaintiffs filed an amended complaint
seeking to certify a class of all employers who purchased
workers compensation insurance in the State of North Carolina
after November 24, 1989. The amended complaint, which is
captioned N.C. Steel Inc. et al., v. National Council on
Compensation Insurance, et al., alleges that the defendants
conspired to suppress competition with respect to the North
Carolina voluntary and involuntary workers compensation
business, thereby artificially inflating the rates in such
markets and the fees payable to the insurers. The complaint
also alleges that the carriers agreed to improperly deny
qualified companies from acting as servicing carriers,
improperly encouraged agents to place employers in the assigned
risk pool, and improperly promoted inefficient claims handling.
USF&G has acted as a servicing carrier in North Carolina since
1990. The plaintiffs are pursuing their claims under various
legal theories, including violations of the North Carolina
antitrust laws, unlawful conspiracy, breach of fiduciary duty,
breach of implied covenant of good faith and fair dealing,
unfair competition, constructive fraud, and unfair and deceptive
trade practices. The plaintiffs seek unspecified compensatory
damages, punitive damages for the alleged construction fraud,
and treble damages under the North Carolina antitrust laws.
USF&G believes that it has meritorious defenses and has
determined to defend the action vigorously. Management believes
that it is unlikely such claims will have a material adverse
effect on USF&G's financial position.
Note 13 Information on Business Segments
USF&G's principal business segments are property/casualty
insurance and life insurance.
13.1. OPERATIONS
The insurance business is geographically diversified throughout
the United States. Noninsurance operations are located in the
United States, Europe, and other foreign countries. Foreign
operations, in total, are not material. Summarized financial
information for the business segments is as follows:
Years Ended December 31
Income (loss) from Continuing
Revenues Operations Before Income Taxes
(in millions) 1993 1992 1991 1993 1992** 1991**
PROPERTY/CASUALTY INSURANCE
Commercial $1,223 $1,480 $1,885 $(223) $(343) $(455)
Personal 681 785 920 (28) (110) (97)
Reinsurance 305 157 96 32 20 26
Fidelity/surety 118 111 117 (8) 6 11
Property/casualty
categories 2,327 2,533 3,018 (227) (427) (515)
Net investment income* 433 475 498 433 475 498
Realized gains on investments* 31 199 44 31 199 44
Other - 1 3 (24) (51) (67)
Total property/casualty 2,791 3,208 3,563 213 196 (40)
LIFE INSURANCE
Premium income 129 104 169
Net investment income 321 349 370
Realized gains (losses)
on investments 20 (1) 31
Other 1 2 2
Total life 471 454 572 14 (5) 36
NONINSURANCE OPERATIONS and
eliminations (13) (2) 37 (128) (156) (137)
Consolidated $3,249 $3,660 $4,172 $ 99 $ 35 $(141)
<FN>
*Net investment income and realized gains on investments are not
allocated to property/casualty categories.
**Income (loss) from continuing operations before income taxes for 1992 and 1991
includes restructuring charges by segment as follows: Property/casualty, $46 million
and $52 million; Life, $3 million and $2 million; and Noninsurance operations,
$2 million and $6 million, respectively.
13.2. ASSETS
The assets of the insurance operations are primarily investments.
Foreign assets are not material. Assets of the business segments
are as follows:
At December 31
(in millions) 1993 1992 1991
Property/casualty insurance $ 9,565 $ 8,253 $ 9,353
Life insurance 4,848 4,856 5,012
Noninsurance operations and eliminations (78) 25 121
Consolidated $14,335 $13,134 $14,486
Note 14 Interim Financial Data (Unaudited)
Quarter
(in millions except per share data) First Second Third Fourth
SUMMARY QUARTERLY RESULTS:
Revenues 1993 $ 875 $ 820 $ 755 $ 799
1992 941 906 1,011 802
1991 1,084 1,061 991 1,036
Income (loss) from continuing operations 1993 23 25 20 59
before cumulative effect of adopting 1992 4 7 11 13
new accounting standards 1991 (51) (56) (21) (16)
Loss from discontinued operations 1993 - - - -
1992 - (1) (6) -
1991 (4) - (4) (24)
Income (loss) from cumulative effect 1993 38 - - -
of adopting new accounting standards 1992 - - - -
1991 - - - -
Net income (loss) 1993 61 25 20 59
1992 4 6 5 13
1991 (55) (56) (25) (40)
PRIMARY EARNINGS PER COMMON SHARE:*
Income (loss) from continuing operations 1993 $ .13 $ .15 $ .10 $ .55
before cumulative effect of adopting 1992 (.09) (.06) (.02) .01
new accounting standards 1991 (.65) (.77) (.38) (.34)
Loss from discontinued operations 1993 - - - -
1992 - (.01) (.07) -
1991 (.05) - (.06) (.28)
Income (loss) from cumulative effect of 1993 .45 - - -
adopting new accounting standards 1992 - - - -
1991 - - - -
Net income (loss) 1993 .58 .15 .10 .55
1992 (.09) (.07) (.09) .01
1991 (.70) (.77) (.44) (.62)
FULLY DILUTED EARNINGS PER COMMON SHARE:*
Income (loss) from continuing operations 1993 $ .17 $ .15 $ .10 $ .49
before cumulative effect of adopting 1992 (.09) (.06) (.02) .01
new accounting standards 1991 (.65) (.77) (.38) (.34)
Loss from discontinued operations 1993 - - - -
1992 - (.01) (.07) -
1991 (.05) - (.06) (.28)
Income (loss) from cumulative effect of 1993 .34 - - -
adopting new accounting standards 1992 - - - -
1991 - - - -
Net income (loss) 1993 .51 .15 .10 .49
1992 (.09) (.07) (.09) .01
1991 (.70) (.77) (.44) (.62)
<FN>
*The sum of quarterly income (loss) per share amounts may not
equal the full year's amount due to stock issuances during
presented periods.
In the first quarter of 1993, USF&G adopted two new accounting
standards, which resulted in a net benefit of $38 million.
SFAS No. 109, "Accounting for Income Taxes," increased net
income by $90 million. This was partially offset
by a $52 million charge to net income for SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions."
The third quarter 1992 results reflect $142 million in realized
gains on investments, $80 million of catastrophe losses as a
result of Hurricane Andrew, and $51 million of restructuring
charges.
The fourth quarter 1991 loss from discontinued operations
reflects the decision to divest the investment management
operations.
USF&G Corporation
Report of Independent Auditors
Board of Directors
USF&G Corporation
We have audited the accompanying consolidated statement of
financial position of USF&G Corporation as of December 31, 1993,
1992, and 1991, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of USF&G Corporation at December 31, 1993,
1992, and 1991 and the consolidated results of its operations
and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
In 1993, as a result of adopting new accounting standards and as
discussed in Notes 1, 2, 8, and 9 to the consolidated financial
statements, the Corporation changed its methods of accounting
for certain investments in debt and equity securities,
postretirement benefits other than pensions, and income taxes.
ERNST & YOUNG
Baltimore, Maryland
February 11, 1994
USF&G Corporation
Directors and Committees of the Board
DIRECTORS
H. Furlong Baldwin (62)
Chairman of the Board and
Chief Executive Officer
Mercantile Bankshares Corporation
1981*
Michael J. Birck (56)
President and Chief Executive Officer
Tellabs, Inc.
1993*
Norman P. Blake, Jr. (52)
Chairman of the Board, President,
and Chief Executive Officer
USF&G Corporation
1990*
George L. Bunting, Jr. (53)
President and Chief Executive Officer
Bunting Management Group
1981*
Robert E. Davis (62)
Managing Director
Axess Corporation
1990*
Dr. Rhoda M. Dorsey (66)
President
Goucher College
1981*
Dale F. Frey (61)
Chairman of the Board and President
General Electric Investment Corporation
1991*
Robert E. Gregory, Jr. (51)
Chairman of the Board and
Chief Executive Officer
The Gitano Group, Inc.
1988*
Robert J. Hurst (48)
Partner
Goldman, Sachs & Co.
1988*
Dr. Wilbur G. Lewellen (56)
Herman C. Krannert
Distinguished Professor of Management
Graduate School of Management
Purdue University
1992*
Henry A. Rosenberg, Jr. (64)
Chairman of the Board and Chief Executive Officer
Crown Central Petroleum Corporation
1981*
Larry P. Scriggins (57)
Partner
Piper & Marbury
1981*
Anne Marie Whittemore (47)
Partner
McGuire Woods Battle & Boothe
1993*
George S. Wills (57)
President
Wills & Associates, Inc.
1981*
* Date indicates year of original election.
COMMITTEES OF THE BOARD
EXECUTIVE COMMITTEE
Norman P. Blake, Jr.
Chairman
H. Furlong Baldwin
George L. Bunting, Jr.
Dale F. Frey
Robert E. Gregory, Jr.
Robert J. Hurst
FINANCE COMMITTEE
H. Furlong Baldwin Chairman
Dale F. Frey
Wilbur G. Lewellen
Larry P. Scriggins
Anne Marie Whittemore
George S. Wills
AUDIT COMMITTEE
Robert E. Gregory, Jr.
Chairman
Robert E. Davis
Rhoda M. Dorsey
Dale F. Frey
Henry A. Rosenberg, Jr.
COMPENSATION COMMITTEE
George L. Bunting, Jr.
Chairman
Michael J. Birck
Robert E. Davis
Robert E. Gregory, Jr.
Wilbur G. Lewellen
Henry A. Rosenberg, Jr.
NOMINATING COMMITTEE
Robert J. Hurst
Chairman
H. Furlong Baldwin
George L. Bunting, Jr.
Robert E. Davis
Rhoda M. Dorsey
Larry P. Scriggins
USF&G Corporation
Officers
EXECUTIVE MANAGEMENT COMMITTEE
NORMAN P. BLAKE, JR. (52)
Chairman, president, and chief executive officer since 1990
Previously chairman and chief
executive officer, Heller International; executive vice
president-Financing Operations, General Electric Credit
Corporation
B.S.; M.A.-Purdue University
GLENN W. ANDERSON (41)
Executive vice president-Commercial Lines
since 1994 Previously senior vice president-USF&G Commercial
Lines; vice president-Strategic Target Marketing, Fireman's
Fund
B.A.-Stanford University
GARY C. DUNTON (38)
Executive vice president-Field Operations
since 1994 Previously executive vice president-USF&G Commercial
Lines; vice president-Standard Commercial Accounts, Aetna Life
& Casualty
B.S.-Northeastern University; M.B.A.-Harvard University
DAN L. HALE (49)
Executive vice president-chief financial
officer since 1993 Previously executive vice president-USF&G
Diversified Insurance and Investment Operations; president,
Chase Manhattan Leasing Company
B.A.-Yale University
KENNETH E. CIHIY (47)
Senior vice president-Claim since 1993
Previously resident vice president, Aetna Life & Casualty
B.S.-Wilkes University
ROBERT J. LAMENDOLA (49)
Senior vice president-Fidelity/Surety
since 1992 Previously managing director, Marsh & McLennan, Inc.
B.A.-State University College at Buffalo, New York
THOMAS K. LEWIS (41)
Senior vice president and chief information
officer since 1993 Previously vice president-general manager for
Europe, Middle East, and Africa, Seer Technologies, Inc.
B.S.; M.S.-University of New Haven
JOHN A. MACCOLL (45)
Senior vice president-general counsel since 1990
Previously partner, Piper & Marbury
B.A.-Princeton University; LL.B.-Georgetown University
AMY P. MARKS (37)
Senior vice president-Human Resources since 1992
Previously senior vice president-USF&G Strategic Planning
and Business Development; senior engagement manager, McKinsey &
Company
B.A.; M.B.A.-University of Chicago
RICHARD J. POTTER (48)
Senior vice president-Personal Lines
since 1991
Previously senior vice president-USF&G Strategic
Planning; president, Credit Life Insurance Company
B.A.-Brown University; M.B.A.-University of Chicago
ANDREW A. STERN (36)
Senior vice president-Strategic
Planning/Corporate Marketing since 1993
Previously partner and
vice president, Booz Allen & Hamilton, Inc.
B.S.S.C.-Massachusetts Institute of Technology;
M.B.A.-University of Chicago
JOHN C. SWEENEY (49)
Senior vice president-chief investment officer since 1992
Previously principal and practice director,
Towers Perrin Asset Consulting Services
B.S.-St. Joseph's University; M.S.-The College of William & Mary
IHOR W. HRON (51)
President-F&G Life since 1991
Previously senior vice president-F&G Life; national director-Brokerage
Operations, Connecticut General Life Insurance Company
B.S.-Rutgers University
PAUL B. INGREY (54)
President-F&G Re, Inc. since 1983
Previously senior vice president, Prudential Reinsurance Company
B.S.-Colgate University; M.B.A.-College of Insurance
OFFICERS
USF&G INSURANCE
President
Norman P. Blake, Jr.
CLAIM
Senior Vice President
Kenneth E. Cihiy
Vice President
G. Jay Erbe, Jr.
John F. Hayes II
Richard A. Hughes, Jr.
Thomas W. Salinsky
Charles M. Stapleton
Thomas M. Trezise
COMMERCIAL LINES
Executive Vice President
Glenn W. Anderson
Senior Vice President
Ben L. Griffin
Stephen W. Lilienthal
Robert W. Mueller
Kim B. Rich
Vice President
Peter T. Bothwell
Alan K. Crater
Jeff J. Gans
Ronald L. Goldberg
David Kaiser
Steven A. LaShier
Paul C. Martin
Kevin M. Nish
Kenneth R. Solomon
FIDELITY-SURETY
Senior Vice President
Robert J. Lamendola
Vice President
Michael P. Hammond
John A. Huss
David G. Olson
Brent E. Snelgrove
Gary A. Wilson
FIELD OPERATIONS
Executive Vice President
Gary C. Dunton
Regional Vice President
Paul H. Beil
R. Lee Buck
James R. Lewis
Kenneth F. May
Vice President
Richard G. Lambert
Gregory J. Richardson
FINANCE
Executive Vice President
Dan L. Hale
Vice President
Francis X. Bossle
Thomas A. Bradley
Kerrie A. Burch-DeLuca
Richard P. Campagna
Duane M. Danielsen
Diane Olmstead
Gary R. Preysner
Jon B. Savage
Richard H. Snader
James E. Stangroom
Charles R. Werhane
Paul Yates
HUMAN RESOURCES
Senior Vice President
Amy P. Marks
Vice President
Jerome Adams
Edward W. Gold
Kathryn A. Henry
Richard A. Roedel
INFORMATION SERVICES
Senior Vice President
Thomas K. Lewis, Jr.
Vice President
James Hughes
William L. Oakley
Janet T. Turoff
INVESTMENTS
Senior Vice President
John C. Sweeney
Vice President
Salvatore Correnti
Geoffrey C. Getman
Simon A. Mikhailovich
LEGAL
Senior Vice President/
General Counsel
John A. MacColl
Vice President
John A. Andryszak
John D. Corse
Vance C. Gudmundsen
J. Kendall Huber
John M. Lummis
Rosemary Quinn
Personal Lines
Senior Vice President
Richard J. Potter
Vice President Eileen O'Shea Auen
Paul F. DiFrancesco
Earnest E. Hines
STRATEGIC PLANNING/
CORPORATE MARKETING
Senior Vice President
Andrew A. Stern
Vice President
Scott A. Williams
SUBSIDIARY COMPANIES
F&G LIFE
President
Ihor W. Hron
Senior Vice President
Gene F. Gaines
Harry N. Stout
Vice President
Gary L. Burke
Michael A. Loffa
Peter J. McGlinchy
Robert C. Read
Bruce H. Saul
F&G RE
President
Paul B. Ingrey
Executive Vice President
John R. Berger
Senior Vice President
Dwight R. Evans
Roland W. Jackson
Timothy J. Olson
Wayne C. Paglieri
David S. Skurnick
Alan M. Willemsen
Vice President
Paul J. Brauner
Peter A. Dodge
Donald C. Kelly
Edward F. Konikowski
Michael J. O'Brien, Jr.
Charles B. Penruddocke
John F. Rathgeber
John H. Reimer
Rolf Schmidt
Arthur S. Underwood
Vice President/Counsel
Andrew Nosal
USF&G Corporation
Regional and Branch Offices
REGIONAL OFFICES
NORTHEAST REGION
James R. Lewis
5801 Smith Avenue
Baltimore, Maryland 21209
(410) 578-2301
SOUTHEAST REGION
Kenneth F. May
9000 Central Park West
Suite 700
Atlanta, Georgia 30328
(404) 390-5500
MISSISSIPPI REGION
Anthony D. Everett
USF&G Building
143 LeFleur's Square
Jackson, Mississippi 39211
(601) 982-5555
MIDWEST REGION
Paul H. Beil
135 N. Pennsylvania Street
Suite 800
Indianapolis, Indiana 46204
(317) 267-2850
WESTERN REGION
R. Lee Buck
1700 Lincoln Street
Suite 1750
Denver, Colorado 80203
(303) 832-8680
BRANCH OFFICES
CALIFORNIA
Nancy D. Stewart
2290 North First Street
Suite 100
San Jose, California 95131
(408) 435-0650
COLORADO
Anita Devan
370 Seventeenth Street
Suite 2800
Denver, Colorado 80202
(303) 893-1166
CONNECTICUT
Terence J. Welsh
175 Capital Boulevard
Rocky Hill, Connecticut 06067
(203) 563-8011
FLORIDA
M. Lee Patkus
600 N. Westshore Boulevard
Suite 400
Tampa, Florida 33609
(813) 289-4589
GEORGIA
Robert R. Southard
9000 Central Park West
Suite 600
Atlanta, Georgia 30328
(404) 390-5500
ILLINOIS
Hernando Madronero
Corporetum Office Campus
850 Warrenville Road-2nd Floor
Lisle, Illinois 60532
(708) 968-4500
INDIANA
Terry A. Toohey
135 N. Pennsylvania Street
Suite 1000
Indianapolis, Indiana 46204
(317) 267-2700
IOWA
John G. Liska
4200 Corporate Drive
West Des Moines, Iowa 50266
(515) 223-5700
KENTUCKY
R. Paul Feemster
USF&G Building
9911 Shelbyville Road
Suite 200
Louisville, Kentucky 40223
(502) 429-7000
MARYLAND
Gary L. Roth
DPC Expansion-1st Floor
5801 Smith Avenue
Baltimore, Maryland 21209
(410) 578-2000
MICHIGAN
Derrick D. Iseler
1900 West Big Beaver Road
Troy, Michigan 48084
(810) 643-6433
MISSISSIPPI
Anthony D. Everett
143 LeFleur's Square
Jackson, Mississippi 39211
(601) 982-5555
MISSOURI
Jonathan R. Jeschke
7500 College Boulevard
Suite 300
Overland Park, Kansas 66210
(913) 661-9700
L. Bud Roberts
910 North Eleventh Street
St. Louis, Missouri 63101
(314) 241-9190
MONTANA
Glen E. Dye
1625 Eleventh Avenue
Helena, Montana 59601
(406) 442-2270
NEW YORK
William R. Cossari
2500 Westchester Avenue
Purchase, New York 10577
(914) 251-2300
Michael J. Onofrio
5786 Widewaters Parkway
DeWitt, New York 13214
(315) 449-5100
NORTH CAROLINA
Louis R. Snage, Jr.
7415 Pineville-Matthews Road
Suite 300
Charlotte, North Carolina 28226-3267
(704) 544-0400
OHIO
Joseph J. Brossard
4936 Blazer Parkway
P.O. Box 7188
Dublin, Ohio 43017-0788
(614) 793-1500
OKLAHOMA
Larry W. Fitch
3500 Northwest 56th Street
Oklahoma City, Oklahoma 73112
(405) 946-6640
OREGON
Thomas G. Iverson
Five Centerpointe Drive, 3rd Floor
Lake Oswego, Oregon 97035
(503) 684-0880
PENNSYLVANIA
John A. Umberger
930 Harvest Drive
Suite 400
P.O. Box 3007
Blue Bell, Pennsylvania 19422
(215) 540-2700
Leonard H. Allen
3211 North Front Street
Harrisburg, Pennsylvania 17110
(717) 234-7941
Richard W. Ramell
One Mellon Bank Center
500 Grant Street
Pittsburgh, Pennsylvania 15219
(412) 261-2550
TENNESSEE
Stephen A. Nafe
100 Westwood Place
Suite 200
Brentwood, Tennessee 37027
(615) 370-8400
UTAH
Melvin R. Workman
1100 East 6600 South
Salt Lake City, Utah 84121
(801) 269-5656
VIRGINIA
John H. Jennings, Jr.
2819 Parham Road
Richmond, Virginia 23294
(804) 747-0300
WASHINGTON
Suite 300-North Tower
100 West Harrison Plaza
Seattle, Washington 93119
(206) 285-3636
WEST VIRGINIA
Charles W. Kincaid, Jr.
1409 Greenbrier Street
Charleston, West Virginia 25311
(304) 344-1692
WISCONSIN
Robert D. Prunty
2525 North Mayfair Road
Milwaukee, Wisconsin 53226
(414) 476-3600
USF&G Corporation
Shareholders' Information
Corporate Headquarters/Home Office
100 Light Street
Baltimore, Maryland 21202
(410) 547-3000
Annual Meeting
The Annual Meeting of Shareholders will be held
Wednesday, May 4, 1994, at 9:00 a.m. at the Sheraton Inner
Harbor Hotel, 300 South Charles Street, Baltimore, Maryland.
Reports Filed with the Securities and Exchange Commission
A copy
of USF&G Corporation's Annual Report on Form 10-K or Quarterly
Report on Form 10-Q, as filed with the Securities and Exchange
Commission, may be obtained without charge upon request to John
F. Hoffen, Jr., corporate secretary at the corporate
headquarters.
Stock Exchange Listing
Common Stock: USF&G Corporation's Common
Stock (ticker: FG) is listed on the New York Stock Exchange. The
common stock appears in the NYSE Composite Listing as USFG. The
common stock is also listed on the Pacific Stock Exchange, the
London Stock Exchange, and the Stock Exchanges of Basle, Geneva,
and Zurich, Switzerland.
Preferred Stock: USF&G Corporation's $4.10 Series A Convertible
Exchangeable Preferred Stock (ticker: FGpA) and USF&G
Corporation's $5.00 Series C Cumulative Convertible Preferred
Stock (ticker: FGpC) are listed on the New York Stock Exchange.
The preferred stock appears in the NYSE Composite Listing as
USFGpf. The preferred stock is also listed on the Pacific Stock
Exchange.
Transfer Agent/Registrar
First Chicago Trust Company of New York
is transfer agent, registrar, and dividend disbursing agent for
USF&G Corporation's common and preferred stock. Inquiries
regarding stock transfer requirements, dividend payments, the
Dividend Reinvestment and Stock Purchase Plan, or address
changes should be addressed to:
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
Attention: Shareholders' Relations Department
(201) 324-0498
Stock and Dividend Information
The following tabulation
presents 1993 and 1992 data on the sale prices of USF&G
Corporation's common stock on the New York Stock Exchange
Composite Listing by quarter, and the dividends paid per share
of common stock. At February 25, 1994, there were 37,263
shareholders of record and the closing price was $14.25.
Sale Price
High Low Dividends Paid
1993
First quarter $17 5/8 $11 1/8 $.05
Second quarter 19 5/8 15 3/4 .05
Third quarter 19 5/8 13 7/8 .05
Fourth quarter 15 1/4 12 3/8 .05
1992
First quarter $10 1/4 $ 7 1/8 $.05
Second quarter 14 1/4 8 .05
Third quarter 15 10 .05
Fourth quarter 14 1/8 9 7/8 .05
Dividend Reinvestment and Stock Purchase Plan
The plan provides shareholders with a convenient way to invest
cash dividends and to make optional cash investments in additional
shares of USF&G Corporation's common stock without payment of any charges for
brokerage commissions or fees. First Chicago Trust Company of
New York administers the plan and additional information may be
obtained from them by written request.
For Additional Information
Investors and analysts requesting
additional information about USF&G may contact:
Jennifer Macke
Investor Relations Department
(410) 547-3939
Independent Auditors
Ernst & Young
One North Charles Street
Baltimore, Maryland 21201
APPENDIX TO ELECTRONIC FORMAT DOCUMENT
(*List of graphic and image material in 1993 Annual Report)
*Page 3
GRAPH Revenues
(in billions)
1990 $4.171
1991 4.172
1992 3.660
1993 3.249
GRAPH Net Income
(in millions except per share data)
Net Income EPS(Earnings Per Share)
1990 $(569) $ (6.99)
1991 (176) (2.53)
1992 28 (0.24)
1993 165 1.38
GRAPH Balance Sheet Leverage/Liquidity
(dollars in billions)
Fixed charge
Equity Debt-to-equity ratio coverage ratio
1990 $1.205 65 (3.3)
1991 1.323 51 (.5)
1992 1.270 49 .8
1993 1.511 41 1.4
*Page 4 PHOTO desribed in respective page of Annual Report
*Page 5 GRAPH
----------------------------------------------------------------------
| Fix the --> Build with --> Leverage |
| Foundation Vision Leadership |
|---------------------------------------------------------------------|
Profit | Mission | Culture/Core Values | |
(x axis)| Strategy | Market/Customer | |
| Leadership | Orientation | Extend from |
| Competitive Resources | Competitive | positions of |
| | Differentiation | leadership |
| Economic Structure | | |
---------------------------------------------------------------------
(y axis) 1990 1993 1996
(caption) USF&G is now entering the "Build with Vision" phase of its
restructuring and rebuilding process.
(A discussion of the illustration of USF&G's restructuring and rebuilding can
be found in the first paragraph of the Chairman's Letter on page 5 of the
Annual Report.)
*Page 6
GRAPH Operating Income
(in millions)
1990 $ (77)
1991 (179)
1992 (113)
1993 93
(caption) The increase in operating income is due to improved underwriting
performance in the property/casualty company.
GRAPH Property/Casualty Statutory
Combined Ratio
Statutory
Loss Expense combined
ratio ratio ratio
1990 81.9 32.9 114.8
1991 84.1 33.1 117.2
1992 82.0 34.9 116.9
1993 75.4 33.7 109.1
(caption) The improved ratios result from effective product/market mix
management and improved underwriting and claim settlement practices.
*Page 7
GRAPH General & Administrative Expenses
(in millions)
1990 $635
1991 532
1992 465
1993 437
(caption) A 31% decrease in general and administrative expenses since
1990 favorably influenced earnings.
GRAPH Consolidated Employment & Productivity
(in thousands)
Number of Revenue per
employees employee
1990 12.5 $364
1991 9.1 455
1992 7.4 473
1993 6.5 499
(caption) Employment levels decreased by 48% since 1990 contributing
to a 37% improvement in productivity.
*Page 8
GRAPH Investment Portfolio
(dollars in billions)
Investment- Market-
grade fixed- Other to-
income invested amortized
securities assets cost ratio
1990 $4.844 $6.377 99
1991 3.487 8.680 104
1992 2.663 8.683 101
1993 2.375 9.002 104
(caption) Improved asset quality is evidenced by an increase in
investment-grade fixed income securities.
GRAPH Real Estate Portfolio
(dollars in billions)
Total % Reserves to
Real Non- nonperforming
Estate Performing real estate
1990 $1.081 331 21
1991 1.155 393 22
1992 1.112 346 31
1993 1.095 249 43
(caption) Nonperforming real estate investments have decreased while
reserve coverage has steadily improved.
*Page 10 PHOTO desribed in respective page of Annual Report
*Page 11 PHOTO desribed in respective page of Annual Report
*Page 12 PHOTO desribed in respective page of Annual Report
*Page 14 PHOTO desribed in respective page of Annual Report
*Page 15 PHOTO desribed in respective page of Annual Report
*Page 16 PHOTO desribed in respective page of Annual Report
*Page 17 PHOTO desribed in respective page of Annual Report
*Page 18 PHOTO desribed in respective page of Annual Report
*Page 19 PHOTO desribed in respective page of Annual Report
*Page 20 PHOTO desribed in respective page of Annual Report
*Page 21 PHOTO desribed in respective page of Annual Report
*Page 22 PHOTO desribed in respective page of Annual Report
*Page 23 PHOTO desribed in respective page of Annual Report
*Page 24 PHOTO desribed in respective page of Annual Report
*Page 25 PHOTO desribed in respective page of Annual Report
*Page 28
GRAPH Combined Ratio+
Expense Statutory Loss Combined Ratio
1991 33.4 91.6 125.0
1992 36.3 86.9 123.2
1993 34.7 83.6 118.3
(footnote)+Total Commercial Lines segment
*Page 29
GRAPH Personal Lines Combined Ratio
Expense Statutory Loss Combined Ratio
1991 30.4 80.0 110.4
1992 33.2 80.0 113.2
1993 33.9 71.2 105.1
GRAPH Fidelity/Surety Combined Ratio
Expense Statutory Loss Combined Ratio
1991 56.3 42.3 98.6
1992 64.0 32.0 96.0
1993 56.4 50.5 106.9
GRAPH F&G Re Combined Ratio
Expense Statutory Loss Combined Ratio
1991 29.9 59.1 89.0
1992 17.0 76.9 93.9
1993 24.6 67.3 91.9
GRAPH Life Insurance Strategic Surplus+ to Assets
1991 7.8
1992 9.6
1993 9.8
(footnote)+Strategic surplus is the sum of statutory surplus and
mandated Asset Valuation Reserve.
*Page 30
GRAPH Asset Allocation (pie chart)
1992 1993
Equities &
other invested
assets 4% 3%
Real estate 9 9
High-yield 5 5
Short term 5 3
Governments 5 3
Tax-exempt 1 -
Mortgage-backed 35 22
Investment-grade
corporates 38 55
(caption) As mortgage-backed securities declined to 22% of invested
assets, investment-grade corporates increased to 55%.
*Page 31
GRAPH Fixed-Income Securities
(in billions)
Held Available Unrealized
to maturity for sale gains (losses)
1990 $6.982 $ -- $(.068)
1991 3.749 5.364 .373
1992 7.218 1.987 .114
1993 4.661 4.681 .357
(caption) The level of securities available for sale will affect book
value as associated unrealized gains (losses) will be carried in
shareholders' equity.
GRAPH Interest Rates
30 Year Treasuries 3 Month Treasuries
1990 8.3% 6.8%
1991 7.4 4.1
1992 7.4 3.3
1993 6.4 3.1
(caption) Investment results have been impacted by the declining interest
rate environment.