UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 1994 1-8233
USF&G CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-1220567
(State of incorporation) (IRS employer identification no.)
100 Light Street, Baltimore, Maryland 21202
(Address of principal executive offices and zip code)
(410) 547-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve (12)
months, and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
Common Stock, Par Value $2.50; 85,404,975 shares outstanding
as of July 29, 1994.
USF&G Corporation
Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statement of Financial Position 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 8
Independent Auditor's Review Report 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 25
Item 4. Submission of Matters to a Vote of Shareholders 25
Item 6. Exhibits and Reports on Form 8-K 25
Exhibit 4 - Instruments Defining the Rights of Security
Holders Including Indentures 25
Exhibit 11 - Computation of Earnings Per Share 26
Exhibit 12 - Computation of Ratio of Consolidated Earnings
to Fixed Charges and Preferred Stock Dividends 27
Exhibit 15 - Letter Regarding Unaudited Interim Financial
Information 28
SIGNATURE 29
2
USF&G Corporation
Condensed Consolidated Statement of Financial Position
At June 30 At December 31
(dollars in millions except share data) 1994 1993
Assets Unaudited
Investments:
Fixed maturities:
Held to maturity, at amortized cost
(market, 1994, $4,470;1993, $4,796) $ 4,714 $ 4,661
Available for sale, at market
(cost, 1994, $4,329; 1993,$4,681) 4,254 4,903
Common stocks, at market
(cost, 1994, $85; 1993, $98) 75 87
Preferred stocks, at market
(cost, 1994, $65; 1993, $48) 65 48
Short-term investments 325 322
Mortgage loans 329 302
Real estate 722 685
Other invested assets 374 369
Total investments 10,858 11,377
Cash 83 17
Accounts, notes, and other receivables 695 656
Reinsurance receivables 625 573
Servicing carrier receivables 684 719
Deferred policy acquisition costs 478 435
Other assets 579 558
Total assets $14,002 $14,335
Liabilities
Unpaid losses, loss expenses, and policy
benefits $10,177 $10,302
Unearned premiums 942 917
Corporate debt 581 574
Real estate and other debt 53 44
Other liabilities 937 987
Total liabilities 12,690 12,824
Shareholders' Equity
Preferred stock, par value $50.00
(12,000,000 shares authorized;
shares issued, 1994 and 1993, 9,099,910) 455 455
Common stock, par value $2.50
(240,000,000 shares authorized;
shares issued, 1994, 85,375,814; 1993, 85,009,482) 213 212
Paid-in capital 965 963
Net unrealized gains (losses) on investments (75) 192
Net unrealized losses on foreign currency - (2)
Minimum pension liability (85) (85)
Retained earnings (deficit) (161) (224)
Total shareholders' equity 1,312 1,511
Total liabilities and shareholders' equity $14,002 $14,335
See Notes to Condensed Consolidated Financial Statements.
3
USF&G Corporation
Condensed Consolidated Statement of Operations (Unaudited)
Three Months Ended June 30
(dollars in millions except per share data) 1994 1993
Revenues
Premiums earned
(net of premiums ceded, 1994, $117; 1993,
$112) $ 589 $ 620
Net investment income 191 189
Other 10 11
Revenues before realized gains 790 820
Realized gains on investments 1 -
Total revenues 791 820
Expenses
Losses, loss expenses, and policy benefits
(net of losses ceded, 1994, $68; 1993, $10) 523 537
Underwriting, acquisition, and operating expenses 223 247
Interest expense 7 11
Total expenses 753 795
Pretax income before cumulative effect of
adopting new accounting standards 38 25
Provision for income taxes (benefit) (35) -
Income before cumulative effect of adopting
new accounting standards 73 25
Income (loss) from cumulative effect of adopting
new accounting standards:
Income taxes - -
Postretirement benefits - -
Net income $ 73 $ 25
Preferred stock dividend requirements 12 12
Net income available to common stock $ 61 $ 13
Primary Earnings Per Common Share
Income before cumulative effect of adopting
new accounting standards $ .72 $ .15
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - -
Postretirement benefits - -
Net income $ .72 $ .15
Full Diluted Earnings Per Common Share
Income before cumulative effect of adopting
new accounting standards $ .59 $ .15
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - -
Postretirement benefits - -
Net income $ .59 $ .15
Weighted average common shares
outstanding (000s):
Primary 85,320 84,695
Fully diluted 119,879 84,695
Dividends declared per common share $ .05 $ .05
See Notes to Condensed Consolidated Financial Statements.
4
USF&G Corporation
Condensed Consolidated Statement of Operations (Unaudited)
Six Months Ended June 30
(dollars in millions except per share data) 1994 1993
Revenues
Premiums earned (net of premiums ceded,
1994, $244; 1993, $246) $ 1,159 $ 1,294
Net investment income 374 381
Other 18 19
Revenues before realized gains 1,551 1,694
Realized gains on investments 6 1
Total revenues 1,557 1,695
Expenses
Losses, loss expenses, and policy benefits
(net of losses ceded, 1994, $131; 1993, $74) 1,032 1,127
Underwriting, acquisition, and
operating expenses 447 499
Interest expense 16 21
Total expenses 1,495 1,647
Pretax income before cumulative effect
of adopting new accounting standards 62 48
Provision for income taxes (benefit) (34) -
Income before cumulative effect of adopting
new accounting standards 96 48
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 90
Postretirement benefits - (52)
Net income $ 96 $ 86
Preferred stock dividend requirements 24 24
Net income available to common stock $ 72 $ 62
Primary Earnings Per Common Share
Income before cumulative effect of
adopting new accounting standards $ .85 $ .28
Income (loss) from cumulative effect
of adopting new accounting standards:
Income taxes - 1.06
Postretirement benefits - (.61)
Net income $ .85 $ .73
Full Diluted Earnings Per Common Share
Income before cumulative effect of
adopting new accounting standards $ .77 $ .35
Income (loss) from cumulative effect
of adopting new accounting standards:
Income taxes - .80
Postretirement benefits - (.46)
Net income $ .77 $ .69
Weighted average common shares
outstanding (000s):
Primary 85,226 84,619
Fully diluted 117,406 113,036
Dividends declared per common share $ .10 $ .10
See Notes to Condensed Consolidated Financial Statements.
5
USF&G Corporation
Condensed Consolidated Statement of Cash Flows (Unaudited)
Three Months Ended June 30
(dollars in millions) 1994 1993
Operating Activities
Net income $ 73 $ 25
Adjustments to reconcile net income to net cash provided
from (used in) operating activities:
Cumulative effect of adopting new accounting standards - -
Realized gains on investments (1) -
Change in insurance liabilities 22 4
Change in deferred policy acquisition costs (23) 6
Change in receivables (6) (22)
Change in other liabilities (53) (35)
Change in other assets (46) (20)
Other items, net 11 3
Net cash provided from (used in) operating activities (23) (39)
Investing Activities
Net (purchases) sales and maturities of short-term investments 15 (15)
Purchases of fixed maturities held to maturity (154) (320)
Sales of fixed maturities held to maturity 37 78
Maturities/repayments of fixed maturities held to maturity 92 229
Purchases of fixed maturities available for sale (68) (165)
Sales of fixed maturities available for sale 167 203
Repayments of fixed maturities available for sale 105 94
Purchases of equities and other investments (140) (31)
Sales, maturities, or repayments of equities and other investments 95 34
Purchases of property and equipment (7) (4)
Disposals of property and equipment 1 1
Net cash provided from investing activities 143 104
Financing Activities
Deposits for universal life and investment contracts 56 35
Withdrawals of universal life and investment contracts (113) (71)
Net short-term borrowings (repayments) (160) -
Long-term borrowings 148 -
Repayments of long-term borrowings - -
Issuances of common stock 2 2
Cash dividends paid to shareholders (17) (17)
Net cash used in financing activities (84) (51)
Increase in cash 36 14
Cash at beginning of period 47 13
Cash at end of period $ 83 $ 27
See Notes to Condensed Consolidated Financial Statements.
6
USF&G Corporation
Condensed Consolidated Statement of Cash Flows (Unaudited)
Six Months Ended June 30
(dollars in millions) 1994 1993
Operating Activities
Net income $ 96 $ 86
Adjustments to reconcile net income to net
cash provided from (used in) operating activities:
Cumulative effect of adopting new accounting standards - (38)
Realized gains on investments (6) (1)
Change in insurance liabilities 61 41
Change in deferred policy acquisition costs (43) 6
Change in receivables (68) (6)
Change in other liabilities (77) 15
Change in other assets (6) (35)
Other items, net 27 12
Net cash provided from (used in) operating activities (16) 80
Investing Activities
Net (purchases) sales and maturities of
short-term investments (4) 255
Purchases of fixed maturities held to maturity (351) (1,561)
Sales of fixed maturities held to maturity 50 124
Maturities/repayments of fixed maturities held
to maturity 251 437
Purchases of fixed maturities available for sale (117) (165)
Sales of fixed maturities available for sale 184 843
Repayments of fixed maturities available for sale 287 122
Purchases of equities and other investments (253) (72)
Sales, maturities, or repayments of equities and
other investments 245 108
Purchases of property and equipment (14) (8)
Disposals of property and equipment 4 1
Net cash provided from investing activities 282 84
Financing Activities
Deposits for universal life and investment contracts 106 70
Withdrawals of universal life and investment contracts (266) (202)
Net short-term borrowings (repayments) (160) -
Long-term borrowings 270 -
Repayments of long-term borrowings (121) -
Issuances of common stock 4 3
Cash dividends paid to shareholders (33) (33)
Net cash used in financing activities (200) (162)
Increase in cash 66 2
Cash at beginning of period 17 25
Cash at end of period $ 83 $ 27
See Notes to Condensed Consolidated Financial Statements.
7
USF&G Corporation
Notes to Condensed Consolidated Financial Statements
1. Basis of Accounting
The condensed 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 1993
amounts have been reclassified to conform to the 1994 presentation.
The interim financial statements in this report should be read in
conjunction with the consolidated financial statements and notes thereto
in USF&G's Annual Report to Shareholders for the year ended
December 31, 1993. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements contain the
necessary adjustments, all of which are of a normal recurring nature
for interim period reporting purposes, for a fair presentation of
results for the interim periods.
2. Review by Independent Auditors
USFG's independent auditors, Ernst & Young LLP, have performed a
review of the condensed consolidated financial statements in this
Form 10-Q as to the three and six month periods ended June 30, 1994,
and 1993. Their limited review in accordance with standards established
by the American Institute of Certified Public Accountants did not
constitute an audit. Accordingly, they do not express an opinion on
this information.
3. Earnings Per Common Share
Primary earnings per common share are based on income, after
deduction of preferred stock dividends, and the weighted average
number of common shares outstanding during the periods. Common stock
equivalents were not included as they were insignificant. Fully
diluted earnings per common share assume the conversion of
all securities whose contingent issuance would have a dilutive
effect on earnings. Refer to the computation in Exhibit 11.
4. Ratio of Consolidated Earnings to Fixed Charges
For purposes of computing the ratio of consolidated earnings
to fixed charges and preferred stock dividends, earnings consist
of income before considering income taxes, the cumulative effect
of adopting new accounting standards, and fixed charges. Fixed
charges consist of interest, that portion of rentals that is
deemed to be an appropriate interest factor, and preferred
stock dividend requirements. Refer to the computation in
Exhibit 12.
5. Unrealized Gains (Losses) on Investments
At June 30, 1994, gross unrealized gains and gross unrealized
losses pertaining to equity securities totaled $2 million and
$12 million, respectively. In addition, gross unrealized gains
and gross unrealized losses on limited partnerships included in
other investments totaled $7 million and $1 million, respectively.
At June 30, 1994, there were gross unrealized gains of $2 million
and gross unrealized losses of $77 million pertaining to
fixed maturities available for sale. There were also $4 million
of gross unrealized gains relating to a deferred policy acquisition
cost adjustment. The change in net unrealized gains (losses) on
investments amounted to a loss of $267 million during the six
months ended June 30, 1994, compared with a gain of $28 million
during the six months ended June 30, 1993.
6. Proceeds From Sales of Fixed Maturity Investments
Proceeds on sales of fixed maturities held to maturity were
$50 million for the six months ended June 30, 1994. Gross gains
and gross losses of less than $1 million were realized on those sales.
During the six month period ended June 30, 1993, proceeds from sales
of fixed maturities held to maturity were $124 million. Gross gains
of $5 million and gross losses of $5 million were realized on sales
in 1993. Proceeds from sales of fixed maturities available for sale
were $184 million for the six months ended June 30, 1994, compared
with $843 million for the same period in 1993. Gross gains and gross
losses of $1 million were realized on 1994 sales. Gross gains of $39
million and gross losses of $2 million were realized on sales in 1993.
7. Legal Contingencies
7.1.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 and
regulatory litigation 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, such litigation and the litigation
described below 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.
7.2.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 National
Council on Compensation Insurance ("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.
7.3.Texas Workers Compensation Litigation
On April 18, 1994, Mi-De-Pizza, Inc. and ten other Texas insureds filed
an amended class action in the District Court of Dallas County, Texas
against the NCCI and all insurance companies and certain insurance
brokers that wrote workers compensation insurance in Texas during the
period 1987 to 1991. The case, which was subsequently consolidated with
another case to which USF&G was not a party and is now captioned
WEATHERFORD ROOFING COMPANY, ET AL. V. EMPLOYERS NATIONAL INSURANCE
COMPANY, ET AL., alleges that the defendants utilized rates and
forms that had the effect of charging premium rates in excess of the
rates approved by law. The plaintiffs are pursuing their claims under
various legal theories, including breach of contract, fraud, civil
conspiracy, violation of the Texas Insurance Code and the Texas
Business and Commerce Code. USF&G believes that it has meritorious
defenses and has determined to defend the action vigorously.
7.4.South Carolina Workers Compensation Litigation
The Attorney General of the State of South Carolina has, pursuant
to a statutory provision requiring formal notice prior to filing of a
suit, given notice that he intends to file suit in the County of
Greenville, South Carolina on behalf of South Carolina employers that
have allegedly been damaged as a result of alleged unfair and deceptive
trade practices. Specifically, the Attorney General alleges that the
NCCI, National Workers' Compensation Reinsurance Pool, USF&G and
seven other insurance companies which served as servicing carriers
for the South Carolina involuntary workers compensation market,
conspired to fix servicing carrier fees at unreasonably high and
noncompetitive levels in violation of the South Carolina Uniform
Trade Practices Act, allegedly causing inflated deficits in the
involuntary market and an excessive expansion of the residual
market. The Attorney General alleges that the conspiracy occurred
for an unspecified period of time prior to January 1994. The Attorney
General has indicated that he intends to pursue recovery on behalf
of all South Carolina employers who have suffered an ascertainable
loss as a result of such alleged conduct, civil penalties of $5,000
for each willful violation, and temporary and permanent injunctive
relief. USF&G believes that it has meritorious defenses and has
determined to defend the action vigorously.
9
USF&G Corporation
Report of Independent Auditors
Board of Directors
USF&G Corporation
We have reviewed the accompanying condensed consolidated statement of
financial position of USF&G Corporation as of June 30, 1994, and the
related condensed consolidated statements of operations and cash flows
for the three-month and six-month periods ended June 30, 1994 and 1993.
These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data, and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted in accordance with generally accepted auditing
standards, which will be performed for the full year with the objective
of expressing an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial
statements referred to above for them to be in conformity with generally
accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of USF&G
Corporation as of December 31, 1993, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year then ended
(not presented herein) and, in our report dated February 11, 1994, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated statement of financial position as of December 31, 1993, is
fairly stated, in all material respects, in relation to the consolidated
statement of financial position from which it has been derived.
Baltimore, Maryland
August 12, 1994
10
USF&G Corporation
Management's Discussion and Analysis of Financial Condition and Results
of Operations
This section provides an assessment of financial results and
material changes in financial position for USF&G Corporation and
its subsidiaries ("USF&G") and explains the results of
operations for the second quarter and six month periods ended
June 30, 1994. The analysis focuses on the performance of
USF&G's business segments and its investment portfolio. This
discussion updates the -Management's Discussion and Analysis' in
the 1993 Annual Report to Shareholders and should be read in
conjunction therewith. The results of operations for the second
quarter and six months ended June 30, 1994, are compared with
those for the same period of 1993, unless otherwise noted.
Financial position at June 30, 1994, will be compared with
December 31, 1993. (Note: A glossary of certain terms used in
this discussion can be found at the end of this section. The
terms are CAPITALIZED the first time they appear in the text.)
Index to Financial Information
1. Consolidated Results 11
2. Property/Casualty Insurance Operations 12
3. Life Insurance Operations 15
4. Parent and Noninsurance Operations 16
5. Investments 16
6. Financial Condition 19
7. Liquidity 20
8. Regulation 21
9. Glossary of Terms 24
1. Consolidated Results
The table below shows the major components of net income.
Three Months Ended
Six Months Ended
June 30 June 30
(in millions) 1994 1993 1994 1993
Pretax income before realized gains
and cumulative effect of adopting
new accounting standards $ 37 $ 25 $ 56 $ 47
Realized gains on investments, net 1 - 6 1
Income tax (benefit) expense (35) - (34) -
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - - - 90
Postretirement benefits - - - (52)
Net income $ 73 $ 25 $ 96 $ 86
The table below shows the components of pretax income before
realized gains and cumulative effect of adopting new accounting
standards by major business segment.
Three Months Ended
Six Months Ended
June 30 June 30
(in millions) 1994 1993 1994 1993
Property/casualty insurance $ 53 $ 43 $ 86 $ 83
Life insurance 4 - 8 -
Parent and noninsurance (20) (18) (38) (36)
Pretax income before realized gains
and cumulative effect of adopting
new accounting standards $ 37 $ 25 $ 56 $ 47
Net income for the second quarter and six months ended June 30,
1994, was favorably affected by continued improvement in
property/casualty UNDERWRITING RESULTS and a $35 million income
tax benefit. The income tax benefit was recognized as a result
of reducing the valuation allowance on net deferred tax assets
related to SFAS No.109. Management reviews the valuation
allowance on a quarterly basis. Based on the recent history of
quarterly profits, management believes it is more likely than
not that the company will generate sufficient future taxable
income to utilize a larger portion of the deferred tax asset.
As of June 30, 1994, USF&G's tax-effected net deferred tax asset
(net of deferred tax liabilities) was $584 million. The net
deferred tax asset is reduced by a valuation allowance of $426
million. The valuation allowance will be released as a component
of income when management's ongoing review of current evidence
indicates that it is more likely than not that the deferred tax
asset will be utilized.
Net income for the first half of 1993 included the impact of the
adoption of two new Statements of Financial Accounting Standards
("SFAS"). Pretax income before these accounting changes and
realized gains and losses for the property/casualty insurance
segment increased $10 million and $3 million for the quarter and
six months ended June 30, 1994, respectively, due primarily to
improved underwriting results. The life insurance segment's $4
million and $8 million improvement for the quarter and six month
period resulted mainly from the combined effects of higher
product sales and improved profit margins.
11
2. Property/Casualty Insurance Operations
Property/casualty insurance operations, the principal business
segment, accounted for 84 percent of USF&G's revenues in the
first half of 1994 compared with 86 percent in the first half of
1993. Financial results for this segment were as follows:
Three Months Ended
Six Months Ended
June 30 June 30
(in millions) 1994 1993 1994 1993
Premiums earned* $ 558 $ 594 $1,091 $1,242
Losses and loss expenses incurred (431) (448) (839) (948)
Underwriting expenses (178) (203) (365) (419)
Net underwriting loss (51) (57) (113) (125)
Net investment income 111 108 211 218
Other revenues and expenses, net (7) (8) (12) (10)
Pretax income before realized
gains and the cumulative effect
of adopting new accounting
standards $ 53 $ 43 $ 86 $ 83
*See Glossary of Terms
Improved underwriting results were the primary reason for the
increase in pretax income before realized gains and the
cumulative effect of adopting new accounting standards in the
second quarter and first six months of 1994 when compared with
the same periods of 1993. Underwriting results improved despite
lower premiums earned. This improvement is attributed to
management's efforts over the last several years to improve the
overall quality of the book of business and to control expenses.
2.1. PREMIUMS EARNED
Premiums earned totaled $558 million and $1.1 billion for the
second quarter and first half of 1994, respectively, compared
with $594 and $1.2 billion for the same period 1993. The tables
below show the major components of premiums earned and PREMIUMS
WRITTEN.
Premiums Earned
Premiums Written
Three Months Ended
Three Months Ended
June 30 June 30
(in millions) 1994 1993 1994 1993
Branch office voluntary production:
Direct $475 $483 $511 $480
Ceded reinsurance (37) (21) (52) (21)
Net branch office voluntary 438 462 459 459
Voluntary pools and associations 11 10 8 10
Involuntary pools and associations* 9 46 10 38
Other premium adjustments - (4) - (4)
Total primary* 458 514 477 503
Assumed reinsurance:
Finite risk 51 37 46 49
Traditional risk 49 43 46 39
Total assumed 100 80 92 88
Total $558 $594 $569 $591
Premiums Earned
Premiums Written
Six Months Ended
Six Months Ended
June 30 June 30
(in millions) 1994 1993 1994 1993
Branch office voluntary production:
Direct $ 942 $ 971 $ 983 $ 976
Ceded reinsurance (73) (40) (88) (40)
Net branch office voluntary 869 931 895 936
Voluntary pools and associations 24 21 21 22
Involuntary pools and associations* 36 94 36 80
Other premium adjustments (1) (7) (10) (8)
Total primary* 928 1,039 942 1,030
Assumed reinsurance:
Finite risk 74 141 84 182
Traditional risk 89 62 93 66
Total assumed 163 203 177 248
Total $1,091 $1,242 $1,119 $1,278
* See Glossary of Terms
Premiums earned for the quarter ended June 30, 1994, decreased
$36 million compared with the same period in 1993. Premiums
earned for the six months ended June 30, 1994, decreased $151
million. The reduction in earned premium is related in part to
increased ceded reinsurance costs on contracts entered into
after Hurricane Andrew. In addition, a decrease in premiums from
involuntary pools and associations is due to reduced
participation in such pools as a result of management actions to
reduce premium production in unprofitable markets and product
lines. The first half of 1994 was also affected by reduced
premiums from assumed finite risk reinsurance. The market demand
for finite risk reinsurance was diminished by the effects of
accounting changes under SFAS No. 113 and EITF 93-6 which were
first required in 1993.
Branch office direct voluntary premiums written increased $32
million and $8 million for the quarter and six months ended June
30, 1994, when compared with the same periods of 1993. Premiums
from new business increased 29 percent in the second quarter
1994 and retention ratios for both Commercial and Personal Lines
improved.
The tables below show premiums earned and the statutory LOSS
RATIOS by lines of property/casualty insurance.
Three Months Ended Three
Months Ended
June 30, 1994
June 30, 1993
Premiums Statutory Premiums
Statutory
(dollars in millions) Earned Loss Ratio Earned Loss Ratio
Commercial lines $285 80.7 $293 79.2
Fidelity/Surety 30 32.9 29 71.8
Personal lines 143 74.8 192 73.8
Total primary 458 75.8 514 76.7
Assumed reinsurance 100 62.4 80 71.8
Total $558 73.5 $594 76.0
12
Six Months Ended
Six Months Ended
June 30, 1994
June 30, 1993
Premiums Statutory Premiums
Statutory
(dollars in millions) Earned Loss Ratio Earned Loss Ratio
Commercial lines $ 585 77.7 $ 611 83.4
Fidelity/Surety 58 30.7 55 50.6
Personal lines 285 86.5 373 75.9
Total primary 928 77.4 1,039 78.9
Assumed reinsurance 163 60.9 203 65.3
Total $1,091 75.0 $1,242 76.3
The significant increase in the Personal Lines statutory loss ratio for
the first six months is primarily due to the high level of first
quarter catastrophes and other weather related losses not
classified as catastrophes. The year-to-date Commercial Lines
loss ratio was also negatively affected by weather related
losses, however, this was offset by improved core underwriting
performance and favorable results from reinsurance pools.
2.2. UNDERWRITING RESULTS
Underwriting results generally represent premiums earned less
incurred losses, loss adjustment expenses ("LAE"), and
underwriting expenses. Property/casualty insurance companies
often have underwriting losses that are offset by investment
income.
Underwriting gains (losses) by major business category are as
follows:
Three Months Ended
Six Months Ended
June 30 June 30
(in millions) 1994 1993 1994 1993
Commercial $(51) $ (45) $ (82) $(111)
Fidelity/Surety 5 (9) 9 (6)
Personal (14) (11) (59) (27)
Total primary (60) (65) (132) (144)
Assumed reinsurance 9 8 19 19
Net underwriting losses $(51) $ (57) $(113) $(125)
Voluntary $(53) $ (50) $(112) $ (98)
Involuntary 2 (7) (1) (27)
Net underwriting losses $(51) $ (57) $(113) $(125)
Consolidated property/casualty GAAP and statutory underwriting
ratios are as follows:
Three Months Ended
Six Months Ended
June 30 June 30
1994 1993
1994 1993
GAAP underwriting ratios:
Loss ratio* 77.2 75.2 76.8 76.3
Expense ratio* 32.0 34.5 33.5 33.8
Combined ratio 109.2 109.7 110.3 110.1
Statutory underwriting ratios:
Loss ratio 73.5 76.0 75.0 76.3
Expense ratio 35.6 34.1 35.0 33.9
Combined ratio 109.1 110.1 110.0 110.2
*See Glossary of Terms
Underwriting results improved by $6 million in the second
quarter 1994 when compared with the same period of 1993
primarily due to improved Fidelity/Surety results. Personal and
Commercial Lines underwriting results declined for the second
quarter 1994 due to the combined effects of higher reinsurance
costs, lower servicing carrier revenues, and several large
losses which were only partially offset by lower CATASTROPHE
LOSSES. For the first six months of 1994 over the same period
1993, Personal Lines results were affected by higher reinsurance
costs and higher than normal first quarter weather related
losses not designated as catastrophes. The improved underwriting
results from Commercial Lines for the first six months of 1994
are a result of the overall improvement in the quality and mix
of business and reduction of exposures to involuntary pools and
associations.
Underwriting results in the second quarter and first half of
1994 included $10 million and $50 million, respectively, of net
catastrophe losses compared with $25 million and $54 million in
the same periods of 1993. Gross catastrophe losses were $10
million and $49 million in the second quarter and first half of
1994, respectfully, compared with $27 million and $62 million in
the same periods of 1993. The catastrophe losses in the first
half of 1994 were primarily related to severe winter snow and
ice storms and the Los Angeles earthquake. Approximately half of
the catastrophes in the first six months of 1993 were from the
March east coast blizzard. Excluding catastrophe losses, the
statutory loss ratio for the first half of 1994 improved 1.7
points when compared with first half 1993.
Underwriting results showed improvement despite continuing
competitive pressures, the inflationary claims environment, and
the adverse impact of involuntary markets. Competitive pressures
continue to effect 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 have been 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 the industry generally has 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, as the result of capital
infusions and other factors, 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 pursue long
term objectives that include continued underwriting improvements
without reliance on a significant cycle turn.
2.3. LOSSES INCURRED AND LOSS RESERVES
Losses and loss adjustment expenses incurred totaled $431
million and $839 for the three months and six months ended June
30, 1994, respectively. This compares favorably with $448
million and $948 million for the same periods in 1993. These
reductions are attributed to lower premium volume and lower
catastrophe losses as well as actions taken by management to
better manage claims and claim costs and reduce exposures
in undesirable markets.
Reserves for unpaid losses and loss expense totaled $6.2 billion at
June 30, 1994, a decrease of $91 million from December 31, 1993,
or only 2 percent, despite the 12 percent reduction in earned premiums
for the first six months of 1994. Pending claims have been reduced by
6 percent and new claims have decreased 9 percent in the first
half of 1994.
USF&G 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." USF&G
does not believe it has material exposure to such claims because
its customer base generally consists of small and medium sized
businesses and does not include large manufacturing companies,
which tend to incur most of the known environmental and product
liability exposure. Reserves for losses that have been reported
and certain legal expenses are established on the "case basis."
Common circumstance claims incurred but not reported ("IBNR")
and related adjustment expenses are included in the calculation
of USF&G's bulk reserves.
Case reserves (exclusive of bulk reserves) outstanding for
common circumstance claims were $210 million at June 30, 1994,
compared with $214 million at December 31, 1993. The primary
reason for the decrease in the case reserves relates to
reinsurance recoverables and payments made during the first six
months of 1994. Case reserves for these claims are approximately
three percent of the total reserves for unpaid losses and loss
expense at both June 30, 1994 and December 31, 1993.
The 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-
1994* Case Reserves at
(in millions) (includes LAE) June 30, 1994
Negligent construction $ 83 $68
Environmental 142 76
Asbestos 86 35
* amount is through the second quarter of 1994.
USF&G continuously evaluates its exposure to environmental and
other long term claims. Significant legal issues, primarily
pertaining to issues of coverage, exist with regard to the
alleged liability of these types of claims. USF&G disputes some
coverage of common circumstance claims of the policyholders and
also assists in defending the insured in underlying litigation.
Management believes reserves established for common circumstance
claims are adequate; however, as the legal cases of such claims
evolve, the related losses and expenses may require adjustment.
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, USF&G+s reinsurance management
subsidiary, or otherwise. Management does not believe that assumed
business, which includes common circumstance claims, involves
exposures materially in excess of established reserves since F&G
Re was not a major writer of reinsurance prior to 1985, the year
the industry adopted policy language intended to exclude
pollution coverage except in specific circumstances.
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.
14
3. Life Insurance Operations
Life insurance operations ("F&G Life") represent 15 percent of
USF&G's total revenues for the first six months of 1994 compared
with 13 percent for the same period of 1993. F&G Life's
financial results were as follows:
Three Months Ended
Six Months Ended
June 30 June 30
(in millions) 1994 1993 1994 1993
Premiums $ 31 $ 26 $ 68 $ 52
Net investment income 81 80 164 162
Other income - 1 - 1
Policy benefits (92) (89) (193) (179)
Underwriting and operating expenses (16) (18) (31) (36)
Pretax income before realized gains
and the cumulative effect of adopting
new accounting standards $ 4 $ - $ 8 $ -
Income for the second quarter and six months ended June 30,
1994, improved when compared with the same periods of 1993 due
primarily to positive sales growth and improved profit margins.
The increase in sales is attributable to the new product
initiatives and refocused distribution channels.
3.1. Sales
The following table shows life insurance and annuity sales
(new annualized premiums and deposits) by distribution
system and product type.
Three Months Ended
Six Months Ended
June 30 June 30
1994
1993 1994 1993 Distribution System
Direct structured settlements $15 $15 $ 35 $25
Independent agencies/insurance brokers 19 12 40 22
National wholesaler 14 5 29 9
Other 10 10 19 22
Total $58 $42 $123 $78
Product Type
Structured settlement annuities $15 $15 $ 35 $25
Single premium deferred annuities 15 5 32 10
Tax sheltered annuities 13 5 25 9
Other annuities 13 15 27 30
Life insurance 2 2 4 4
Total $58 $42 $123 $78
Sales in the second quarter and first six months of 1994
continue to be favorably affected by F&G Life's refocus on its
marketing and customer service operations. Variable cost
distribution channels have replaced high fixed cost marketing
programs. New products recently introduced were designed to meet
the needs of the distributors and increase sales. As a result,
year-to-date sales, led by single premium deferred annuities
("SPDAs"), tax sheltered annuities ("TSAs"), and structured
settlement annuities have increased 38 percent and 58 percent
over the second quarter and first six months of 1993,
respectfully. In its effort to continue the improvement in sales
and profitability, F&G Life intends to continue to concentrate
on the expansion of its existing distribution channels while
also developing other marketing networks. F&G Life is also
continuing the development of selected market products and
modifying current product offerings to meet customer needs.
There is no assurance, however, that the improved sales trend
will continue. During the first six months of 1994, current and
projected spreads between investment income and interest
credited to policyholders improved compared with 1993 levels.
This resulted from lower rates being credited to annuities where
the guaranteed rate period has expired and improved spread
management on new and renewal business. Total life insurance in
force was $12.0 billion at June 30, 1994, compared with $12.1
billion at December 31, 1993.
3.2. Policy surrenders
Deferred annuities and universal life products are subject to
surrender. Nearly all of F&G Life's surrenderable annuity
policies allow a refund of the cash value balance less a
surrender charge. The surrender charge varies by product. Single
premium deferred annuities, which represent 78 percent of
surrenderable business, have surrender charges that decline from
six percent in the first policy year to zero percent in the
seventh and later policy years. Such built-in surrender charges
provide protection against premature policy surrender.
Policy surrenders totaled $86 million and $217 million for the
quarter and six months ended June 30, 1994, respectively. This
compares with $45 million and $95 million for the same periods
of 1993. Surrender activity has increased as a result of
expiring surrender charges, especially on SPDAs, as
policyholders seek other investment alternatives. Management has
in place a conservation program that provides policyholders with
a competitive renewal option within F&G Life once their
surrender charge period has expired. Through June 30, 1994,
approximately 30 percent of these eligible policyholders have
elected this renewal option.
The total ACCOUNT VALUE of F&G Life's deferred annuities is $2.5
billion, with only seven percent surrenderable at current
account value (i.e., without surrender charges). The surrender
charge period on $2.1 billion of F&G Life's single-premium
deferred annuity products expires through the end of 1997. The
surrender charge period on $383 million expires through the
15
remainder of 1994. The experience thus far for $313 million of
SPDAs where the surrender charge period expired in the fourth
quarter of 1993 through the second quarter of 1994 indicates
that up to 50 percent of the expiring block may surrender;
however, in the future, a larger percentage may surrender should
interest rates rise throughout the year. This is likely to
result in decreasing life insurance assets, although, given the
relatively high interest rates credited when these annuities
were issued, overall profit margins may continue to improve as
they surrender or rollover to new products. A potential
improvement in profit margin could be partially offset
by acceleration of the amortization of deferred policy
acquisition costs (see Deferred Policy Acquisition Cost
section). F&G Life, with a LIQUID ASSETS TO SURRENDER VALUE of
surrenderable business of 122 percent at June 30, 1994,
continues to maintain a high degree of liquidity and has the
ability to meet surrender obligations for the foreseeable future.
3.3. Deferred policy acquisition costs ("DPAC")
Costs to acquire and issue policies are generally deferred and
amortized in future periods in relationship to expected gross
profits. The recoverability of these amounts is regularly
reviewed by management by the monitoring of surrender
experience, projected investment spreads and other criteria. In
the first half of 1994, $12 million of current year expense has
been deferred compared with $4 million in the first half of
1993. The increase in the deferral is due to the higher level of
sales during the first half of 1994 compared with the same
period of 1993. Amortization of the beginning DPAC balance was
$9 million in the first half of 1994 and $11 million in the
first half of 1993. The rate of amortization in future periods
would be accelerated if surrender activity increases and/or
product margins permanently narrow.
4. Parent and Noninsurance Operations
Parent company interest and other unallocated expenses and net
losses from noninsurance operations were as follows:
Three Months Ended
Six Months Ended
June 30 June 30
(in millions) 1994 1993 1994 1993
Parent Company Expenses:
Interest expense $ (7) $(10) $(15) $(19)
Unallocated expense, net (12) (6) (21) (13)
Noninsurance losses:
Management consulting - - - (1)
Other noninsurance investments (1) (2) (2) (3)
Pretax loss from operations before
realized gains $(20) $(18) $(38) $(36)
The results for parent and noninsurance operations for the
second quarter and first half of 1994 remained essentially
unchanged from the same periods of 1993. Unallocated expenses
increased in the second quarter of 1994 primarily due to an
increase in corporate advertising and promotion expenses. This
was offset by lower corporate interest expense for the three
month period ending June 30, 1994. During the second half of
1994, interest expense may increase as the result of higher
short-term interest rates and the refinancing of a portion of
USF&G's short-term credit facility with longer term debt (see
Financial Condition section).
5. Investments
At June 30, 1994, USF&G's investment mix is comparable with
year-end 1993. Long-term fixed maturities comprise 82 percent of
total investments at June 30, 1994, compared with 84 percent at
December 31, 1993. The table below shows the distribution of
USF&G's investment portfolio.
At June 30, 1994
At December 31, 1993
Total Investments (in millions) $10,858 $11,377
Fixed maturities:
Held to maturity 43% 41%
Available for sale 39 43
Total fixed maturities 82 84
Common and preferred stock 2 1
Short-term investments 3 3
Mortgage loans and real estate 10 9
Other invested assets 3 3
Total 100% 100%
5.1. Net Investment Income
The following table shows the components of net investment
income.
Three Months Ended
Six Months Ended
June 30 June 30
(dollars in millions) 1994 1993 1994 1993
Net investment income from:
Fixed maturities $168 $182 $338 $367
Equity securities 7 1 7 2
Short-term investments 4 2 7 5
Real estate and mortgage loans 17 11 34 23
Other, less expenses (5) (7) (12) (16)
Total $191 $189 $374 $381
Average yields (annualized):
Total investments 7.1% 6.7% 6.9% 6.8%
Fixed maturities 7.3 7.7 7.3 7.8
16
Investment income from fixed maturities has continued to be less
than the respective 1993 periods. This decline is a result of
investing cash flows in a declining interest rate environment
during 1993. The increase in investment income from equity
securities for the second quarter is due primarily to USF&G's
share of earnings from an investment in a reinsurance company.
Real estate and mortgage loan investment income increased as a
result of the prepayment of a mortgage loan in the second
quarter and a new loan program whereby USF&G is investing a
greater percentage of capital into mortgage loans versus equity
real estate.
5.2. Realized Gains (Losses)
The components of net realized gains (losses) include the
following:
Three Months Ended
Six Months Ended
June 30 June 30
(in millions) 1994 1993 1994 1993
Net gains (losses) from sales:
Fixed maturities $ 1 $ 18 $ 3 $ 36
Equities 1 (3) - (3)
Real estate and mortgage loans (3) 2 6 2
Other 3 (2) 6 (2)
Total net gains 2 15 15 33
Provisions for impairment:
Fixed maturities (1) (2) (1) (5)
Equities - (7) - (8)
Real estate - - (5) (11)
Other - (6) (3) (8)
Total provisions (1) (15) (9) (32)
Net realized gains $ 1 $ - $ 6 $ 1
The majority of the realized gains from real estate for the
first six months of 1994 is the result of the first quarter sale
of timberland properties. USF&G's portion of realized gains from
investments in limited partnerships accounted for the $6 million
gains in other invested assets for the first half of 1994. The
$33 million of realized gains in the first half of 1993
primarily relates to USF&G's repositioning of a portion of its
fixed maturity investments to more effectively match the
duration of its investments with its life insurance liabilities.
To reflect impairments in the value of certain real estate
investments, USF&G made provisions for impairment of $5 million
in 1994 compared with $11 million in 1993. Real estate
provisions in 1994 primarily related to specific properties
whose recent appraisal values reflected other than temporary
impairments of the investments. Real estate provisions were
taken in 1993 relating to other specific properties. The 1993
provision for impairment on equities related to provisions on
specific equity holdings that were expected to be sold in the
near term and $8 million in reserves or direct write downs
were established related to other than temporary impairments
of other invested assets.
5.3. Unrealized Gains (Losses)
The components of the changes in unrealized gains (losses) were
as follows:
Three Months Ended
Six Months Ended
June 30 June 30
(in millions) 1994 1993 1994 1993
Fixed maturities available for sale $(115) $ - $(297) $ -
Deferred policy acquisition
cost adjustment 17 - 34 -
Equity securities - 11 (3) 20
Other (4) 3 (1) 8
Total $(102) $ 14 $(267) $ 28
USF&G adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," in the fourth quarter of 1993.
Prior to the adoption of SFAS No. 115, unrealized gains (losses)
on fixed maturities were not included as a component of
shareholders' equity. Under SFAS No. 115, unrealized gains
(losses) on fixed maturities are included as a component of
shareholders' equity to the extent such securities are
classified as "available for sale." An environment of rising
interest rates during the first half of 1994 has resulted in a
decrease in the unrealized gain on fixed maturities available
for sale from $222 million at December 31, 1993, to an
unrealized loss of $75 million at June 30, 1994. This was
partially offset by a related change in the DPAC adjustment from
the prior year's unrealized loss of $30 million to an
unrealized gain of $4 million at June 30, 1994. This adjustment
is made to reflect assumptions about the effect of potential
asset sales of fixed maturities available for sale on future
DPAC amortization. The favorable change in unrealized gains in
1993 resulted from appreciation in equities and the sale of a
portion of foreign equities that had an unrealized loss at
year-end 1992.
5.4. Fixed Maturity Investments
The tables below detail the composition of the fixed maturity
portfolio.
(dollars in millions) At June 30, 1994 At December 31, 1993
Corporate investment-grade bonds $5,029 55% $4,866 52%
Mortgage-backed securities 2,013 22 2,403 26
Asset-backed securities 1,050 12 1,149 12
U. S. Government bonds 278 3 308 3
High-yield bonds* 619 7 562 6
Tax-exempt bonds 47 1 48 1
Other 7 - 6 -
Total fixed maturities at amortized cost $9,043 100% $9,342 100%
Total market value of fixed maturities $8,724 $9,699
Net unrealized gains (losses) $ (319) $ 357
Percent market-to-amortized cost 96% 104%
* See Glossary of Terms
At June 30, 1994 At
December 31, 1993
Net Net
Amortized Market Unrealized Amortized
Market Unrealized
(in millions) Cost Value (Loss) Cost Value Gain
Fixed maturities:
Held to maturity $4,714 $4,470 $(244) $4,661 $4,796 $135
Available for sale 4,329 4,254 (75) 4,681 4,903 222
Total $9,043 $8,724 $(319) $9,342 $9,699 $357
Increasing interest rates, which resulted in declining bond
prices, were responsible for the eight percentage point decrease
in the fixed maturity portfolio's overall market-to-amortized
cost ratio from December 31, 1993.
Investments in mortgage-backed securities declined 16 percent
when compared with holdings at December 31, 1993, due primarily
to prepayments. While subject to prepayment risk, credit risk
related to USF&G's mortgage-backed securities portfolio at June
30, 1994, is believed to be minimal as 99 percent of such
securities have AAA ratings or are collateralized by obligations
of the U.S. Government or its agencies. Asset-backed securities
declined nine percent since year-end 1993 as a result of sales
and maturities. The proceeds from sales, maturities, and
prepayments are primarily being reinvested into corporate
investment-grade bonds. Debt obligations of the U.S. Government
and its agencies and other investment-grade bonds comprised 93
percent of the portfolio at June 30, 1994 and 94 percent at
December 31, 1993. The table below shows the credit quality of
the long-term fixed maturity portfolio as of June 30, 1994.
Percent Market-
Amortized Market
to-Amortized
(dollars in millions) Cost Percent Value Cost
U.S. Government and
U.S. Government Agencies $2,150 24% $2,089 97%
AAA 1,496 16 1,476 99
AA 1,289 14 1,203 93
A 2,421 27 2,328 96
BBB 1,068 12 1,022 96
Below BBB 619 7 606 98
Total $9,043 100% $8,724 96%
USF&G's holdings in high-yield bonds comprised seven percent of
the total fixed maturity portfolio at June 30, 1994, compared
with six percent at December 31, 1993. Of the total high-yield
bond portfolio, 71 percent is held by the life insurance
segment, representing 10 percent of the F&G Life's total
investments. The table below illustrates the credit quality of
USF&G's high-yield bond portfolio at June 30, 1994.
Percent Market-
Amortized Market
to-Amortized
(dollars in millions) Cost Percent Value Cost
BB $396 64% $382 96%
B 225 36 219 97
CCC and lower 8 1 5 60
Valuation allowance (10) (1) - -
Total $619 100% $606 98%
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 maturities 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 June 30, 1994, USF&G's five largest investments in high-yield
bonds totaled $91 million in amortized cost and had a market
value of $82 million. None of these investments individually
exceeded $30 million. USF&G's largest single high-yield bond
exposure represented five 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.
(dollars in millions) At June 30, 1994 At December 31, 1993
Mortgage loans $ 329 $ 302
Equity real estate 830 793
Reserves (108) (108)
Total $1,051 $ 987
The increase in mortgage loans reflects USF&G's strategy of
maintaining a generally consistent level of real estate assets
while changing the mix to more traditional mortgage loans and
less real estate equity-type investments. This strategy is
designed to reduce risk and increase yields in the real estate
portfolio. While not part of USF&G's continuing strategy,
equity real estate increased in the second quarter as a result
of the restructuring of a real estate partnership where USF&G
has become the controlling general partner.
18
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 at June 30, 1994, is as follows:
Geographic Region Type of Property Development Stage
Pacific/Mountain 33% Office 34% Operating property 75%
Midwest 21 Land 25 Land development 15
Southeast 18 Apartments 22 Land packaging 10
Mid-Atlantic 17 Retail/other 12
Southwest 8 Industrial 7
Northeast 3
Real estate investments are generally appraised at least once
every three years. Appraisals are obtained more frequently under certain
circumstances such as significant changes in property
performance or market conditions. All of these appraisals are
performed by professionally certified appraisers.
At June 30, 1994, USF&G's five largest real estate investments
had a book value of $329 million. The largest single investment
was a land development located in San Diego, California with a
book value of $91 million, or nine 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.
NONPREFORMING REAL ESTATE investments declined six percent at
June 30, 1994, when compared with December 31, 1993. This
decline in nonperforming real estate was a result of the
combination of the sale of a nonperforming real estate property,
write-downs on other specific properties, and the
reclassifications to and from the nonperforming real estate
portfolio.
The book value of the components of nonperforming real estate
are as follows:
(book value in millions) At June 30, 1994 At December 31, 1993
Restructured loans and investments* $ - $ 4
Real estate held as in-substance
foreclosure* - 14
Real estate acquired through foreclosure
or deed-in-lieu of foreclosure* 115 121
Land investments* 62 57
Nonperforming equity investments* 58 53
Total nonperforming real estate $235 $249
Real estate reserves $108 $108
Reserves/nonperforming real estate 46% 43%
*See Glossary of Terms
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 9 percent and 10 percent of the entire real estate
portfolio at June 30, 1994 and December 31, 1993, respectively.
In light of USF&G's current plans with respect to the portfolio,
management believes the allowance at June 30, 1994, 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 $14.0 billion at June 30,1994, compared
with $14.3 billion at December 31, 1993. The $333 million
reduction is primarily due to a $297 million reduction in the
market value of the fixed maturity investments classified as
available for sale.
6.2. Debt
USF&G's debt totaled $634 million at June 30, 1994, compared
with $618 million at December 31, 1993. The increase is mainly
attributable to foreign currency translation adjustments of $9
million from non-U.S. dollar denominated debt. As a result of
entering into offsetting currency swap agreements, there was no
effect on net income from translation of non-U.S. dollar
denominated debt. Also increasing real estate debt is debt
assumed as a result of the restructuring of a real estate
partnership where USF&G became a controlling general partner.
Shortly thereafter, $54 million of this partnership debt was
defeased reducing the amount that would otherwise have been
consolidated as the result of this restructuring. Also affecting
the composition of USF&G's debt was $126 million of zero coupon
convertible subordinated notes issued during the first quarter
with the proceeds used to redeem $119 million of higher interest
bearing medium and long-term notes. USF&G also issued $149 million
8 3/8% Senior Notes due 2001 in the second quarter of 1994, the
proceeds from which were used to repay a portion of the
short-term bank credit facility (see Liquidity section).
19
6.3. Equity
USF&G's shareholders' equity totaled $1.3 billion at June 30,
1994, compared with $1.5 billion at December 31, 1993. The
decrease is primarily the result of the $297 million decline
in unrealized gains on fixed maturity investments available
for sale reduced by a $34 million change in the related life
insurance segment's DPAC adjustment. This was partially offset
by net income of $96 million less $33 million in common and
preferred stock dividends.
6.4. Capital Strategy.
Subject to capital market conditions, USF&G plans to refinance
up to approximately $300 million of debt over the next several
years. In anticipation of the expiration in March 1995 of the short-term
bank credit facility, it is expected that portions of the $215
million balance outstanding at June 30, 1994, will be refinanced
and the 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 is considering strategies and opportunities
to replace all or a portion of the Series C Preferred Stock with
common stock equity, through redemptions intended to result in shares
of such preferred stock being converted to common stock or otherwise.
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, marketable securities, and sales of other
assets. Management believes that internal and external sources
of cash will continue to exceed USF&G's short-term 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 zero coupon convertible
subordinated notes issued in March 1994 and by $149 million in
proceeds from the 8 3/8% Senior Notes due 2001 issued in June
1994.
7.1. Cash flow from operations
USF&G had negative cash flow from operations of $23 million and
$16 million for the quarter and six month periods ended June 30,
1994, compared with negative cash flow of $39 million and
positive cash flow of $80 for the same periods in 1993. Cash
flow declined for the first half of 1994 primarily due to a
decline in premiums collected in the property/casualty segment
offset by a reduction in paid losses.
7.2. Credit facilities
At June 30, 1994, USF&G maintained a $500 million committed
credit facility with a group of foreign and domestic banks.
Effective July 11, 1994, the credit facility was reduced to $375
million. Borrowings outstanding under the credit facility
totaled $215 million at June 30, 1994 and $375 million at
December 31, 1993. 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 June 30, 1994 and December 31, 1993.
7.3. Marketable securities
USF&G's fixed-income, equity security, and short-term investment
portfolios are liquid and represent substantial sources of cash.
The market value of its fixed-income securities was $8.7 billion
at June 30, 1994, which represents 96 percent of its amortized
cost. At June 30, 1994, equity securities, which are reported at
market value on the balance sheet, totaled $140 million. Short-term
investments totaled $325 million.
7.4. Liquidity restrictions
There are certain restrictions on payment of dividends by
insurance subsidiaries that may limit USF&G's ability to receive
funds from its 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 insurance subsidiary, such as USF&G Company, to its
holding company which exceeds 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. Dividends of
approximately $154 million are available for payment to USF&G
from USF&G Company during 1994 without prior regulatory
approval. Of these available dividends, $62 million was paid
during the six months ended June 30, 1994.
20
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.
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 are
the subject of a 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. The trial court's opinion
was appealed to the California Supreme Court and a decision is
expected by September 30, 1994.
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.
21
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 the Maine Superior
Court. 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. 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. On August 3, 1994, arguments were held
on the appeal and the parties are awaiting a ruling from the
Superior Court.
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 $21 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 $4 million of guaranty fund expense in the first six months of
1994 and $6 million in the same period of 1993.
Financial difficulties of certain insurance companies over the
past several years are expected to 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 and each calendar
year thereafter. 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, and each calendar year thereafter. 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 December 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 coordinate the medical payment system for workers
compensation and the medical payments component of automobile
insurance within a reformed national health care system. The
Administration's bill also provides for a national commission to
study the possible merger of workers compensation and automobile
medical coverage into the reformed health care system. Although
some form of the Administration's national health care proposal
may be enacted, it is unclear whether or to what extent such
legislation will address workers compensation or personal
automobile insurance. No reliable prediction can be made at this
time as to the ultimate outcome of the legislative deliberations
regarding national health care reform or the effect such
legislation may have on USF&G.
22
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 such revisions may 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 June 30, 1994,
USF&G was within the "usual range" for all IRIS ratios calculated
on an interim year basis.
8.11. Taxation of Deferred Annuities
From time to time various proposals have been considered by
Congress, the Office of Management and Budget, and the
Department of the Treasury to include within current taxable
income all or a portion of the interest payments which accrue on
certain deferred annuity products, including some deferred
annuity products sold by F&G Life. Currently, such interest is
not taxed until the time of distribution. All such proposals
have focused exclusively on deferred annuities and have not
included annuities issued in connection with structured
settlements of claims or on tax sheltered annuities. No reliable
prediction can be made at this time as to the outcome of any
such proposals or the effect such proposals may have on F&G Life.
8.12. Federal Antitrust legislation
The House Judiciary Committee has approved a bill providing that
the McCarran-Ferguson Act of 1945 be revised. This act has historically
provided the insurance industry with broad antitrust exemptions.
The current proposal would repeal many of those exemptions,
although "safe harbors" would be preserved for data collection,
loss development, common policy forms, residual market pooling
arrangements and certain other areas essential to the
property/casualty insurance industry. No reliable prediction can
be made at this time as to the outcome of this proposal or the
effect it may have on USF&G.
23
9. 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: GAAP 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 policy 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 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.
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.
Primary insurance: Branch office voluntary and voluntary and
involuntary pool experience, net of ceded 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.
24
USF&G Corporation
Part II. Other Information
Item 1. Legal Proceedings
See Notes 7.3 and 7.4 of the Notes to
Condensed Consolidated Financial Statements, respectively,
regarding the filing of a class action regarding workers
compensation insurance in Texas and a notice received from the
Attorney General of South Carolina regarding alleged unfair and
deceptive trade practices by servicing carriers and others for
the South Carolina workers compensation involuntary markets.
Item 4. Submission of Matters to a Vote of Shareholders
The 1994 annual meeting of shareholders was held May 4, 1994. The
information required in this item was included under Item 4 for
the Form 10-Q filed by the registrant for the quarter ended
March 30, 1994, File No. 1-8233, and such item is incorporated
herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 4.A Form of 8 3/8% Senior Notes due 2001. (Incorporated
by reference to the registrant+s Form 8-K filed on
June 30,
1994, File No. 1-8233.)
Exhibit 11. Computation of Earnings per Share.
Exhibit 12. Computation of Ratio of Earnings to Fixed
Charges and Preferred Stock Dividends.
Exhibit 15. Letter Regarding Unaudited Interim Financial Information.
(b) Reports on Form 8-K.
The registrant filed a Form 8-K on June 30, 1994, reporting
under Item 5, Other Events, certain information related to the
sale of $150,000,000 face amount at maturity of 8 3/8% Senior
Notes due 2001, including as an exhibit the form of the note.
25
USF&G Corporation
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Quarterly Report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
USF&G Corporation
BY DAN L. HALE
Dan L. Hale
Executive Vice President and
Chief Financial Officer
Dated at Baltimore, Maryland
August 12, 1994