UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K/A
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File Number
December 31, 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) (zip code)
Telephone: 410-547-3000
Securities registered pursuant to Section 12(b) of the Act:
$4.10 Series A Convertible Exchangeable Preferred Stock, Par Value $50
Registered-New York Stock Exchange
Registered-Pacific Stock Exchange
$5.00 Series C Cumulative Convertible Preferred Stock, Par Value $50
Registered-New York Stock Exchange
Registered-Pacific Stock Exchange
Preferred Share Purchase Rights
Registered-New York Stock Exchange
Registered-Pacific Stock Exchange
Common Stock, Par Value $2.50
Registered-New York Stock Exchange
Registered-Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 28, 1995, was $1,416,793,672.
Voting stock held by any persons who may be deemed to be affiliates under Rule
405 would be immaterial.
The number of shares outstanding of the issuer's common stock as of March 28,
1995:
Common Stock, Par Value $2.50; 101,199,548 shares outstanding.
Documents Incorporated by Reference:
Portions of the 1994 Annual Report to Shareholders (Restated) are incorporated
by reference into Parts I and II.
Portions of the definitive proxy statement for the Annual Meeting held on
May 17, 1995, are incorporated by reference into Part III.
Exhibit Index is on page 15.
USF&G Corporation
Index
Part I
Item 1. Description of Business
1.1. General 1
1.2. Business Segments 1
1.3. Distribution Systems 5
1.4. Competition 6
1.5. Investments 6
1.6. Property/Casualty Loss Reserves 7
1.7. Life Benefit Reserves 10
1.8. Geographical Distribution 11
1.9. Executive Officers of the Registrant 11
Item 2. Business Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
Part III
Item 10. Executive Officers and Directors of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners
and Management 14
Item 13. Certain Relationships and Related Transactions 14
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 15
USF&G Corporation
Part I
Item 1. Description of Business
1.1. General
USF&G Corporation (the "Corporation") is a holding corporation organized in 1981
as a Maryland corporation. United States Fidelity and Guaranty Company ("USF&G
Company"), organized in 1896 under Maryland law, is the predecessor registrant
of the Corporation. The term "Corporation" as used in the Form 10-K/A refers to
the Corporation and all of its subsidiaries. As of December 31, 1994, the
Corporation had approximately 6,300 employees.
USF&G Corporation's Form 10-K for the year ended December 31, 1994 is hereby
amended to reflect mergers with Discover Re Managers, Inc. ("Discover Re"), and
Victoria Financial Corporation ("Victoria"), which were completed during the
second quarter of 1995. Restatement of prior periods is provided due to the
application of the pooling-of-interests method of accounting.
The Corporation, through its subsidiaries, is primarily engaged in the business
of insurance. Property/casualty insurance is its primary business. USF&G
Company, the Corporation's largest subsidiary, is the 24th largest
property/casualty insurer among over 2,400 insurers in the United States based
on 1993 statutory net premiums written. Life insurance and annuity products are
sold by Fidelity and Guaranty Life Insurance Company ("F&G Life"). Noninsurance
operations are composed of the parent company, asset management, and management
consulting services.
1.2. Business segments
Financial information about the Corporation's business segments is set forth in
Note 14 of the Notes to Consolidated Financial Statements in the Corporation's
1994 Annual Report to Shareholders (Restated) and incorporated herein by
reference. A description of the Corporation's principal business segments begins
with the Property/Casualty Insurance Segment on page 1, and continues with the
Life Insurance Segment on page 4, and Parent and Noninsurance Operations on page
5 of this Form 10-K/A.
1.2a. Property/casualty insurance segment
Selected financial data for the property/casualty insurance segment are as
follows:
(dollars in millions) 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
Operating Results:
Premiums earned $2,356 $2,392 $2,579 $3,044 $3,349 $3,548 $3,623 $3,754 $3,542 $2,964
Losses and loss
expenses 1,744 1,805 2,120 2,562 2,776 2,743 2,654 2,738 2,767 2,623
Underwriting
expenses 814 816 887 1,001 1,096 1,142 1,134 1,112 1,051 921
Underwriting loss $ (202) $ (229) $ (428) $ (519) $ (523) $ (337) $ (165) $ (96) $ (276) $ (580)
Net investment income $ 429 $ 437 $ 478 $ 501 $ 577 $ 624 $ 622 $ 607 $ 565 $ 348
Net income (loss) 498 285 194 (41) (192) 200 318 331 309 (116)
Financial Position:
Investments $6,440 $7,012 $7,019 $7,648 $7,021 $7,496 $7,428 $6,658 $6,033 $5,001
Assets 9,487 9,710 8,362 9,422 9,008 9,468 9,310 8,496 7,781 6,779
Unpaid losses and loss
expenses* 6,158 6,370 5,565 5,716 5,636 5,467 5,260 4,777 4,113 3,521
Operating Ratios-GAAP:
Loss ratio 74.0 75.4 82.2 84.2 82.9 77.3 73.2 72.9 78.1 88.5
Expense ratio 34.9 34.2 34.5 32.9 32.7 32.2 31.3 29.6 29.7 31.1
Combined ratio 108.9 109.6 116.7 117.1 115.6 109.5 104.5 102.5 107.8 119.6
Statutory Data:**
Premiums written $2,389 $2,502 $2,475 $3,064 $3,651 $3,717 $3,903 $3,854 $3,701 $3,152
Policyholders' surplus
(USF&G Company) 1,621 1,577 1,498 1,432 1,359 1,423 1,400 1,246 1,241 913
Operating Ratios-Statutory:
Loss ratio 73.1 75.3 81.8 84.0 81.8 76.4 73.0 73.2 79.1 90.7
Expense ratio 34.8 33.5 34.8 33.1 32.9 32.8 31.2 30.1 29.1 30.0
Combined ratio 107.9 108.8 116.6 117.1 114.7 109.2 104.2 103.3 108.2 120.7
Policyholders'
dividend ratio .3 .3 .3 .5 .5 .6 .6 .9 .8 1.0
*USF&G adopted SFAS No. 113 in 1993 which requires the effects of reinsurance
activity to be reported on a gross basis. Prior to 1993 information presented
for the property/casualty insurance segment is net of applicable reinsurance
amounts.
**For comparability, statutory amounts are restated for Discover Re and
Victoria; however, restatement of prior periods for business combinations is not
prescribed by statutory accounting.
USF&G Company currently underwrites most forms of property/casualty insurance.
USF&G Company's property/casualty business is grouped into four business
categories: commercial, personal, reinsurance, and fidelity/surety. In 1994,
the property/casualty segment accounted for 84 percent of the Corporation's
total revenues and 68 percent of its total assets.
USF&G Company reinsures portions of its policy risks with other insurance
companies or underwriters and remains contingently liable under these contracts
(ceded reinsurance). In addition, it assumes policy risks from other insurance
companies and through participation in pools and associations (assumed
reinsurance). (Refer to the Assumed Reinsurance Category discussion on page 3 of
this Form 10-K/A.)
Ceded reinsurance allows USF&G Company 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
Company pays (cedes) an amount to the reinsurer who agrees to reimburse USF&G
Company for a specified portion of any claims paid on business under the
reinsured contracts. Reinsurance gives USF&G Company 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 Company's ceding
reinsurance agreements are generally structured on a treaty basis whereby
all risks meeting a certain criteria are automatically reinsured.
USF&G Company may also use supplemental facultative reinsurance based on an
underwriter's evaluation of characteristics of a specific insured risk. The
following table summarizes the approximate extent of the Company's reinsurance
coverages.
Coverage
Risk Type Percentage Retention Coverage
Property Cat Program (a) 95% $75 million $140 million
Property Per Risk (b) 100 Variable 50 million
Fidelity 100 2 million 13 million
Surety (c) 100 5 million 30 million
Workers' Compensation (d) 100 1 million 525 million
Commercial Umbrella 100 15 million 5 million
(a) Second Event Coverage purchased lowers retention to $50 million for second
catastrophe.
(b) Retention of individual property losses are $1 million, but can be increased
to $4 million subject to underwriting criteria.
(c) Represents limits at December 31, 1994. Fourth layer canceled for 1995,
reducing limit to $25 million.
(d) Represents limits at December 31, 1994. Accident and Health Workers'
Compensation Catastrophe Coverage canceled for 1995, reducing limit to $425
million.
Commercial Category: Commercial coverages provide protection related to
property loss, liability claims and workers' compensation benefits to businesses
and other institutions. This type of insurance protects against loss from damage
to the insured's covered properties and protects against legal liability for
injuries to other persons or damage to their property arising from the insured's
business operations. Workers' compensation provides benefits to employees, as
mandated by state laws, for employment-related accidents, injuries or illnesses.
Selected data for the commercial category are as follows:
(dollars in millions) 1994 1993 1992
Automobile:
Premiums written $ 376 $ 391 $ 413
Statutory combined ratio 86.6 86.9 96.5
General Liability:
Premiums written $ 352 $ 365 $ 366
Statutory combined ratio 133.3 118.9 137.6
Property:
Premiums written $ 329 $ 326 $ 315
Statutory combined ratio 111.8 100.0 115.6
Workers' Compensation:
Premiums written $ 142 $ 165 $ 261
Statutory combined ratio 151.6 232.2 150.0
Total Commercial:
Premiums written $1,199 $1,247 $1,355
Underwriting loss* (186) (223) (343)
Percent of total premiums written 50% 50% 54%
GAAP Underwriting Ratios:
Loss ratio 78.1 83.0 87.8
Expense ratio 37.5 35.3 35.4
Combined ratio 115.6 118.3 123.2
Statutory Underwriting Ratios:
Loss ratio 78.1 83.0 86.9
Expense ratio 36.2 34.4 36.3
Combined ratio 114.3 117.4 123.2
*Reported in accordance with Generally Accepted Accounting Principles ("GAAP")
Personal Category: Personal coverages for automobile and homeowners insurance
include aspects of property loss and liability risks. Automobile policies cover
liability to third-parties for bodily injury and property damage, and cover
physical damage to the insured's own vehicle resulting from collision and
various other perils. Homeowners policies protect against loss of dwellings and
contents arising from a variety of perils, as well as liability arising from
ownership or occupancy. Selected data for the personal category are as follows:
(dollars in millions) 1994 1993 1992
Automobile:
Premiums written $402 $493 $512
Statutory combined ratio 99.6 99.9 103.5
Homeowners:
Premiums written $124 $139 $169
Statutory combined ratio 150.2 115.4 143.0
Other Property:
Premiums written $ 38 $ 26 $ 45
Statutory combined ratio 105.2 131.4 110.0
Total Personal:
Premiums written $564 $658 $726
Underwriting loss* (60) (28) (110)
Percent of total premiums written 24% 26% 29%
GAAP Underwriting Ratios:
Loss ratio 74.2 70.6 80.9
Expense ratio 36.3 33.5 33.1
Combined ratio 110.5 104.1 114.0
Statutory Underwriting Ratios:
Loss ratio 74.2 70.7 80.0
Expense ratio 36.8 33.7 33.2
Combined ratio 111.0 104.4 113.2
*Reported in accordance with GAAP
Assumed Reinsurance Category: USF&G Company operates a separate reinsurance
division which underwrites treaty reinsurance and is composed of various wholly-
owned subsidiaries. The lead company in this group, F&G Re, Inc., acts as the
reinsurance underwriting manager and solicits and services assumed
reinsurance for USF&G Company. F&G Re, Inc., writes reinsurance in North America
and in specific foreign countries (mainly in Western Europe and Japan).
Reinsurance prices and conditions are not normally subject to the same state
regulation applicable to the primary insurance market because reinsurers
contract solely with other insurance companies. Selected data for the
reinsurance category are as follows:
(dollars in millions)
1994 1993 1992
Premiums written $415 $403 $243
Underwriting gain* 40 32 20
Percent of total premiums written 17% 16% 10%
GAAP Underwriting Ratios:
Loss ratio 73.2 66.7 75.0
Expense ratio 16.5 22.6 12.1
Combined ratio 89.9 89.3 87.1
Statutory Underwriting Ratios:
Loss ratio 67.9 67.3 76.9
Expense ratio 22.7 24.6 17.0
Combined ratio 90.6 91.9 93.9
*Reported in accordance with GAAP
Fidelity/Surety Category: Fidelity bonds indemnify employers against the
dishonesty or default of employees in their employment. These types of bonds are
written for mercantile businesses, financial institutions, and public officials.
Surety bonds guarantee the performance of a principal who undertakes
contractual or statutory obligations, and indemnify third-party obligees for
damages caused by the principal's failure to perform. Selected data for the
fidelity/surety category are as follows:
(dollars in millions) 1994 1993 1992
Fidelity:
Premiums written $ 21 $ 19 $ 18
Statutory combined ratio 74.5 108.8 75.8
Surety:
Premiums written $113 $102 $ 91
Statutory combined ratio 93.8 105.8 100.1
Total Fidelity/Surety:
Premiums written $134 $121 $109
Underwriting gain (loss)* 6 (8) 6
Percent of total premiums written 6% 5% 4%
GAAP Underwriting Ratios:
Loss ratio 36.7 50.2 32.3
Expense ratio 57.9 56.6 62.6
Combined ratio 94.6 106.8 94.9
Statutory Underwriting Ratios:
Loss ratio 36.7 50.2 32.0
Expense ratio 54.2 56.0 64.0
Combined ratio 90.9 106.2 96.0
*Reported in accordance with GAAP
Discover Re: Discover Re provides insurance, reinsurance and related services
to the alternative risk transfer ("ART") market, primarily in the
municipalities, transportation, education and retail sectors. The ART market
represents approximately 30 percent of the commercial insurance market.
This merger facilitates USF&G's access to the ART market and, management
believes, provides increased growth potential by augmenting certain of the
existing core commercial lines operations. Selected data for Discover Re are as
follows:
(dollars in millions) 1994 1993 1992
Premiums written $ 27 $ 20 $ 12
Underwriting loss* - (1) -
Percent of total premiums written 1% 1% 1%
GAAP Underwriting Ratios:
Loss ratio 76.2 76.2 80.0
Expense ratio 23.8 26.7 30.3
Combined ratio 100.0 102.9 110.3
Statutory Underwriting Ratios:
Loss ratio 76.2 76.2 80.0
Expense ratio 22.6 23.9 28.4
Combined ratio 98.8 100.1 108.4
*Reported in accordance with GAAP
Victoria: Victoria is an insurance holding company which specializes in
nonstandard personal lines auto coverage. Management believes that this merger
will allow USF&G to enhance premium retention and grow the personal lines
business through an expanded product portfolio. Selected data for Victoria are
as follows:
(dollars in millions) 1994 1993 1992
Premiums written $ 50 $ 53 $ 43
Underwriting loss* (2) (1) (1)
Percent of total premiums written 2% 2% 2%
GAAP Underwriting Ratios:
Loss ratio 69.1 70.1 69.1
Expense ratio 31.2 28.5 30.1
Combined ratio 100.3 98.6 99.2
Statutory Underwriting Ratios:
Loss ratio 69.1 70.1 69.1
Expense ratio 32.2 28.2 30.3
Combined ratio 101.3 98.3 99.4
*Reported in accordance with GAAP
1.2b. Life insurance segment
The life insurance segment ("F&G Life") sells many forms of annuity and life
insurance products. In 1994, F&G Life segment accounted for 14 percent of the
Corporation's total revenues and 33 percent of its total assets. Selected
financial data for the life insurance segment are as follows:
(dollars in millions) 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
Operating Results:
Premium income $ 152 $ 129 $ 104 $ 169 $ 186 $ 165 $ 178 $ 133 $ 79 $ 67
Net investment income 317 321 349 370 348 273 159 88 67 50
Net income (loss) 12 10 (5) 31 (16) 31 14 37 20 27
Life Insurance Sales:
Annuities $ 274 $ 199 $ 144 $ 266 $ 1,032 $ 934 $ 962 $ 221 $ 67 $ 104
Permanent 9 4 9 12 17 20 106 51 10 9
Term and group 3 2 2 2 5 6 9 6 6 6
Total $ 286 $ 205 $ 155 $ 280 $ 1,054 $ 960 $ 1,077 $ 278 $ 83 $ 119
Financial Position:
Investments $ 4,202 $ 4,540 $ 4,512 $ 4,672 $ 4,308 $ 3,372 $ 2,240 $ 1,086 $ 707 $ 535
Assets 4,575 4,848 4,856 5,012 4,721 3,645 2,471 1,194 784 607
Policy benefit reserves 3,804 3,973 3,896 3,773 3,924 2,838 1,875 795 501 402
Statutory surplus 326 316 310 283 254 245 169 107 82 56
Life Insurance in Force:
Permanent $ 6,348 $ 6,733 $ 6,769 $ 6,937 $ 7,014 $ 6,038 $ 4,930 $ 3,979 $ 3,035 $ 2,228
Term 5,467 5,347 5,549 5,854 6,463 6,438 6,603 6,579 6,648 6,338
Group 27 30 42 586 4,373 4,605 4,058 2,834 2,687 2,737
Total $11,842 $12,110 $12,360 $13,377 $17,850 $17,081 $15,591 $13,392 $12,370 $11,303
F&G Life Products: Life insurance and annuity sales (premiums and deposits) by
product type are as follows:
(in millions) 1994 1993 1992
Structured settlement annuities $ 88 $ 66 $ 37
Single premium deferred annuities 82 44 33
Tax-sheltered annuities 63 35 -
Other annuities 41 54 74
Life insurance 12 6 11
Total $286 $205 $155
Single premium deferred annuities ("SPDAs") offer the owner the option of
receiving a lump sum distribution at a future date or a series of fixed payments
over a specified period. Tax-sheltered annuity ("TSA") products, which provide
retirement income, are a type of deferred annuity. Other annuities consist
of single premium immediate annuities ("SPIAs"), which provide for payments that
begin within one year after the sale and continue over a fixed period or an
individual's lifetime. Structured settlements are immediate annuities
principally sold through the property/casualty company in settlement of
insurance claims.
Other insurance products include recurring and single premium universal life and
term insurance that generally provide a fixed benefit upon the death of the
insured. These products were sold on an individual and group basis. However, F&G
Life sold its group life business in 1991. Universal life 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.
Universal life products, which represent all the permanent life insurance sales
in 1992 through 1994, and have been the majority of permanent life insurance
sales since 1988, also include a cash value component that is credited with
interest at competitive rates. The interest rates are applied to premiums
for one year from receipt; new rates are declared quarterly on recurring premium
policies and semi-monthly on single premium policies. Universal life cash values
are charged for the cost of life insurance coverage and for administrative
expenses. Additional information on F&G Life's products is discussed on page 22
of Management's Discussion and Analysis of Financial Condition and Results of
Operations.
1.2c. Parent and noninsurance operations
Selected financial data for the parent company and noninsurance operations are
as follows:
(in millions) 1994 1993 1992
Revenues before realized gains:
Management consulting $ 32 $ 32 $ 30
Oil and gas - - 19
Other noninsurance investments 24 10 4
Parent 20 8 14
Total revenues before realized gains $ 76 $ 50 $ 67
Parent company expenses:
Interest expense $ (34) $ (37) $ (35)
Unallocated expense, net (48) (35) (34)
Noninsurance gains (losses):
Management consulting 1 (2) (4)
Oil and gas - - (18)
Other noninsurance investments 2 (9) (13)
Facilities exit costs (211) - -
Realized gains (losses) on investments 14 (45) (50)
Restructuring charges - - (2)
Loss from discontinued operations - - (7)
Other 3 2 3
Total parent/noninsurance net loss $(273) $(126) $(160)
The parent company performs corporate functions including managing the capital
requirements of the Corporation and its subsidiaries. The noninsurance
operations include management consulting services, asset management services,
and discontinued operations. As a result of restructuring, there were no oil and
gas operating losses in 1994 and 1993. During 1992, the investment in oil and
gas properties was merged with another oil and gas exploration and production
company. Discontinued operations included certain investment management,
leasing, marketing, and travel services, and other noninsurance operations.
During 1994, the Corporation committed to a plan to consolidate its home office
operations in Baltimore, Maryland at its Mount Washington facility. The parent
company recognized facilities exit costs of $211 million representing the
present value of the rent and other operating expenses to be incurred under the
lease on the Corporation's principal office building from the time USF&G vacates
the building through the expiration of the lease in 2009. (Refer to Note 6 of
the Notes to Consolidated Financial Statements in the Corporation's 1994 Annual
Report to Shareholders (Restated).)
1.3. Distribution systems
The Corporation's subsidiaries market a full range of property/casualty
insurance and life insurance products.
Property/Casualty Insurance: USF&G Company's products have been sold
exclusively by independent agents since its founding in 1896. Independent agents
generally represent multiple insurance companies. USF&G Company's products are
sold through approximately 3,800 independent agencies in the United States on a
commission basis.
As of December 31, 1994, USF&G Company maintained 5 regional offices and 30
branch offices to service its independent agents and policyholders. The regional
offices are located in the Northeast, Southeast, Midwest, and Western areas, and
in Mississippi. The branch offices are located throughout the United States.
These offices support the administration of underwriting standards, the delivery
of policies, and the supervision of the Company's claim offices. In the first
quarter of 1995, the Company eliminated the Midwest regional office and
consolidated its business into the other regional offices. This measure was
taken to save expenses as well as increase efficiency of operations.
Life Insurance: F&G Life's sales by distribution system are as
follows:
(in millions) 1994 1993 1992
Direct-structured settlements $ 88 $ 66 $ 37
Property/casualty brokerage 48 49 67
National brokerage 46 14 -
National wholesaler 71 39 -
Other 33 37 51
Total $286 $205 $155
Structured settlements are annuities sold predominantly through the
property/casualty company in settlement of certain of its insurance claims. Tax-
sheltered annuities are sold through a national wholesale distribution network
primarily to teachers. SPDAs are sold primarily through independent agents and
insurance brokers. Prior to 1992, most SPDAs were sold through securities
brokerage firms (New York Stock Exchange member firms and other financial
institutions).
1.4. Competition
Property/Casualty Insurance: The property/casualty insurance industry is highly
competitive with about 2,400 companies nationwide. These insurers are not only
stock companies, but also mutual companies and other underwriting organizations.
USF&G Company ranked 24th in the industry, based on 1993 statutory net premiums
written and 23rd based on 1993 statutory policyholders' surplus. USF&G Company
competes with other property/casualty insurance companies whose products are
distributed through national, regional and local independent agencies, direct
sales and brokers. Consumers may also use self-insurance, which includes captive
insurance subsidiaries.
Pricing is a primary means of competition in the property/casualty industry. The
industry is currently in a period of significant price competition, which
adversely affects USF&G Company's profitability. Availability and quality of
products, quality and speed of service (including claims service),
financial strength, distribution systems and technical expertise are also
important elements of competition. In personal and other lines offered by USF&G
Company, significant price competition is experienced from direct-writing
companies that do not use independent agents and generally have lower policy
acquisition costs.
Life Insurance: The Corporation's life insurance subsidiaries operate in a
competitive environment, with approximately 1,300 companies in the industry
including stock and mutual companies. F&G Life ranked 86th in the United States
based on 1993 statutory assets and 97th based on 1993 statutory capital and
surplus.
In the life insurance industry, interest crediting rates, policy features,
financial stability and service quality are important competitive factors. F&G
Life's products compete not only with those offered by other life insurance
companies, but also with other income accumulation-oriented products offered by
other financial institutions. F&G Life has experienced considerable
competitive pressure in recent periods as a result of its relatively lower
credit ratings. Competitive pressures for agency business also have intensified
in recent years because of an increase in the variety of products available in
the market and efforts of competitors to expand their market shares.
Premium Rates: Most states have laws requiring that rate schedules and other
information be filed with a regulatory authority for substantially all property,
casualty, and surety lines. Some states permit insurers to use rates without
prior regulatory approval whereas other states prohibit implementation
of new rates without such approval. The authority may disapprove a filing if it
finds that the rates are inadequate, excessive, or unfairly discriminatory.
Rates are not necessarily uniform for all insurers. In states that require prior
approval of rates, regulators usually require the submission of historical
data to justify rate increases and, accordingly, there is often a time lag
between identifying the need for rate increases and securing such increases. The
effect of this lag is particularly severe in times of rising claims and
inflation. Rates for life insurance are generally not regulated.
1.5. Investments
Investing the net cash flows from operations is a major aspect of the
property/casualty and life insurance businesses. The components of the
Corporation's investment portfolio and investment performance are discussed on
pages 24 through 29, 46 through 48, 51 and 52 of the 1994 Annual Report
to Shareholders (Restated), which pages are incorporated herein by reference.
1.6. Property/casualty loss reserves
1.6a. General
The reserve liabilities for property/casualty losses and loss expenses represent
estimates of the ultimate net cost of all unpaid losses and loss adjustment
expenses incurred through December 31 of each year. The reserves are determined
using adjusters' individual case estimates and actuarially based statistical
projections.
USF&G Company's estimates of losses for reported claims are established
judgmentally on an individual case basis. Such estimates are based on a claim
adjuster's particular expertise with the type of risk involved and knowledge of
circumstances surrounding the individual claims. These estimates are reviewed
on a regular basis and updated as additional facts become known.
The reserves derived from statistical projections are subject to the effects of
trends in claim severity and frequency. Statistical projections are employed in
three specific areas: 1) to calculate bulk reserves for incurred but not
reported ("IBNR") losses and provide for development of case basis loss
reserves; 2) to calculate allocated loss expense reserves; and 3) to calculate
unallocated loss expense reserves.
IBNR and Case Development Reserves: USF&G Company's estimates of IBNR and case
development reserves are derived from analyses of historical patterns of
development of paid and reported losses by accident year for each line of
business. The loss projection procedures used in this analysis contain explicit
provisions for quantifying the effect of inflation on loss payments expected to
be made in the future. This process relies on the basic assumption that past
experience adjusted for the effect of current developments and likely trends is
an appropriate basis for predicting future events.
Loss Expense: USF&G Company's estimates of unpaid loss expenses are based on
analyses of the long-term relationship of projected ultimate loss expense to
projected ultimate losses for each line of business. By using incurred losses as
a base, inflation assumptions applicable to loss reserves apply equally to
allocated expense reserves.
Unallocated Loss Expense: Unallocated loss expense reserves are based on
historical relationships of paid unallocated expenses to paid losses. As with
allocated loss expenses, the inflation assumptions applicable to loss reserves
are presumed to apply equally to unallocated expense reserves.
The process of estimating the liability for unpaid losses and loss expenses is
inherently judgmental. The process is influenced by factors which are subject to
significant variation. Possible sources of variation include changing rates
of inflation (particularly medical cost inflation) as well as changes in other
economic conditions, the legal system and internal claims settlement practices,
among other variables. In many cases, significant periods of time may lapse
between the occurrence of an insured event, the reporting of a claim to
USF&G Company and USF&G Company's final settlement of the claim. More than 46
percent of USF&G Company's loss and loss expense reserves are provided for
claims which have been incurred but not reported and for future development on
reported claims. While USF&G Company reports a single amount as the estimate
for unpaid loss and loss expenses as of each valuation date, the
reported reserves should be considered the best estimate from a range of
possible outcomes. It is unlikely that future losses and loss expenses will
develop exactly as projected and may in fact vary significantly from
projections. These estimates are continually reviewed and updated as experience
develops and new information becomes known. Any resulting adjustments are
reflected in current operating results.
1.6b. Discounted loss reserves
The reserves for permanent-total disability benefits and long-term medical care
benefits under workers' compensation insurance are discounted at rates of
interest generally ranging from 3 percent to 5 percent. The carrying amount of
such workers' compensation reserves, net of reinsurance and net of discount, was
$1.60 billion, $1.75 billion, and $1.80 billion at December 31, 1994, 1993, and
1992, respectively. The discount is amortized over the expected lifetimes of the
claimants. Discounted reserves come from three sources: reserves assumed from
the Workers' Compensation Reinsurance Bureau ("WCRB"), reserves assumed from
residual market pools, and reserves for USF&G Company's net retained business.
(in millions) 1994 1993 1992
Estimated discount, January 1 $508 $680 $683
Estimated (reduction) additional discount
accrued (32) (138) 29
Estimated discount amortized (35) (34) (32)
Estimated discount, December 31 $441 $508 $680
The source of the negative discount accrual of $32 million in 1994 results from
an acceleration in the underlying payment pattern of workers' compensation
claims. An increase in the use of structured settlements to resolve claims is
the primary factor affecting the change in the payment stream. The source of
the negative discount accrual of $34 million in 1993 results from the WCRB
commutation and the concurrent reduction in discount rates. Additionally, the
discount was reduced by a redistribution of reserves to states and re-
apportionment on reserves assumed from residual market pools.
1.6c. Roll-forward of liability for loss and loss expenses
The following table reconciles the changes in loss and loss expense reserves for
the years presented:
(in millions) 1994 1993 1992
Net balance at January 1 $5,316 $5,564 $5,716
Related To:
Current year 1,752 1,744 2,042
Prior years (8) 61 78
Total incurred 1,744 1,805 2,120
Paid Related To:
Current year 634 582 698
Prior years 1,284 1,471 1,574
Total paid 1,918 2,053 2,272
Net balance at December 31 5,142 5,316 5,564
Plus reinsurance recoverables 1,016 1,054 1
Total reserve at end of year, gross $6,158 $6,370 $5,565
1.6d. Analysis of loss and loss expense reserve development
The following table shows property/casualty loss reserves net of ceded
reinsurance as recorded in the indicated years, subsequent payments made with
respect to such reserves and re-estimates of such reserves. The top line shows
the estimated liability that was recorded at the end of each of the indicated
years for all current and prior year unpaid losses and loss expenses. The upper
portion of the table shows the cumulative amount subsequently paid in succeeding
years. The lower portion of the table shows re-estimates of the original
recorded reserve as of the end of each successive year. Such re-estimations
result from development of additional facts and circumstances pertaining to
unsettled claims. The bottom line shows the dollar amount of the cumulative
change through 1994 that is attributable to the original recorded reserve for
each prior year. Such change has been reflected in income of subsequent years.
A new table, added in 1994, provides data gross of ceded reinsurance for the
carried reserve at year ends 1993 and 1994 and the development of the year end
1993 reserve. This information immediately follows the Analysis of Net Loss and
Net Loss Expense Reserve Development table.
Analysis of Net Loss and Net Loss Expense Reserve Development*
At December 31
(in millions) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Liability for unpaid losses
and loss expenses $2,817 $3,510 $4,090 $4,744 $5,208 $5,467 $5,636 $5,716 $5,564 $5,316 $5,142
Cumulative paid as of:
One year later 1,027 1,251 1,348 1,374 1,539 1,723 1,654 1,574 1,471 1,284
Two years later 1,659 2,040 2,164 2,258 2,614 2,794 2,746 2,534 2,393 -
Three years later 2,131 2,557 2,778 3,032 3,350 3,593 3,418 3,225 - -
Four years later 2,451 2,971 3,314 3,550 3,939 4,055 3,929 - - -
Five years later 2,708 3,362 3,640 3,992 4,265 4,435 - - - -
Six years later 2,947 3,595 3,864 4,239 4,542 - - - - -
Seven years later 3,112 3,759 4,056 4,456 - - - - - -
Eight years later 3,243 3,918 4,234 - - - - - - -
Nine years later 3,368 4,068 - - - - - - - -
Ten years later 3,497 - - - - - - - - -
Liability re-estimated:
One year later 3,131 3,696 4,209 4,883 5,237 5,679 5,766 5,794 5,625 5,308
Two years later 3,249 3,914 4,444 4,943 5,485 5,800 5,906 5,922 5,644 -
Three years later 3,384 4,168 4,586 5,109 5,566 5,960 6,150 5,974 - -
Four years later 3,563 4,341 4,722 5,287 5,761 6,245 6,216 - - -
Five years later 3,696 4,457 4,917 5,442 6,029 6,331 - - - -
Six years later 3,778 4,631 5,049 5,700 6,125 - - - - -
Seven years later 3,932 4,743 5,279 5,788 - - - - - -
Eight years later 4,039 4,954 5,365 - - - - - - -
Nine years later 4,220 5,032 - - - - - - - -
Ten years later 4,288 - - - - - - - - -
Cumulative (deficiency)
excess (1,471) (1,522) (1,275) (1,044) (917) (864) (580) (258) (80) 8
Analysis of Gross Loss and Gross Loss Expense Reserve Development*
At December 31
(in millions) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Net reserve $ - $ - $ - $ - $ - $ - $ - $ - $ - $5,316 $5,142
Reinsurance recoverables - - - - - - - - - 1,054 1,016
Gross reserve - - - - - - - - - 6,370 6,158
Net re-estimated reserve - - - - - - - - - 5,308
Re-estimated reinsurance
recoverables - - - - - - - - - 1,044
Gross re-estimated reserve - - - - - - - - - 6,352
Gross cumulative excess $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 18
*Certain reserves are recorded on a discounted basis to reflect the value of
timing differences between the recording of reserves and subsequent payment. The
amortization of that discount is included in the reserve deficiencies shown
above.
Conditions and trends that have affected reserve development in the past have
changed and may not necessarily occur in the future. Therefore, care should be
exercised in extrapolating future reserve redundancies or deficiencies from such
development.
The net development table shows a $8 million decrease in the current year on
prior year incurred loss and loss expenses net of ceded reinsurance. Although
the overall development is flat, there are a number of offsetting occurrences.
Adverse development resulted from discount amortization in workers' compensation
and reserve strengthening in general liability for environmental and asbestos
liabilities. The adverse development was offset by favorable development in both
personal and commercial auto liability.
A decrease of $18 million in the current year on prior year incurred loss and
loss expenses gross of ceded reinsurance is shown on the gross development
table. The gross development table shows more favorable development than the net
development table due to favorable development on losses ceded to reinsurers.
Effect of Reserve Re-estimations on Calendar Year Operations
(increase) decrease in reserves
Accident
(in millions) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Year
Accident Years:
1984 & Prior $(314) $(118) $(135) $(179) $(133) $ (82) $(154) $(107) $(181) $ (68) $(1,471)
1985 - (68) (83) (75) (40) (34) (20) (5) (30) (10) (365)
1986 - - 99 19 31 (20) (21) (20) (19) (8) 61
1987 - - - 96 82 (30) 17 (23) (28) (2) 112
1988 - - - - 31 (82) 97 (40) (10) (8) (12)
1989 - - - - - 36 (40) 35 (17) 10 24
1990 - - - - - - (9) 20 41 20 72
1991 - - - - - - - 62 116 14 192
1992 - - - - - - - - 67 33 100
1993 - - - - - - - - - 27 27
Total by calendar
year $(314) $(186) $(119) $(139) $ (29) $(212) $(130) $ (78) $ (61) $ 8 $(1,260)
In the table above all entries are shown net of ceded reinsurance. Each column
total shows reserve re-estimates made in the indicated calendar year for each
accident year. Adverse development on accident years prior to 1986 is primarily
attributable to workers' compensation discount amortization and environmental
and asbestos reserve strengthening. Ongoing review of automobile liability
reserves indicates more favorable projections of ultimate incurred loss than
previously recognized on accident years 1991 and subsequent.
1.6e. Loss portfolio transfers
Also included in the table "Analysis of Net Loss and Net Loss Expense Reserve
Development" are various loss portfolio transfer transactions. These
transactions are reinsurance contracts that do not involve the same type of risk
as traditional reinsurance. In a loss portfolio reinsurance contract, USF&G
Company assumes another insurer's outstanding loss reserves for a price equal to
their discounted value plus a fee. These contracts generally provide for fixed
loss payments at specified future dates. The financial risk involved is whether
the investment income earned on the cash received will cover the discount
associated with the losses assumed. This financial risk is controlled by the
Corporation's asset/liability management techniques, which involve matching the
maturities of the investment portfolio to expected patterns of future claim and
benefit payments.
Loss portfolio transfers have had no impact on reported reserve deficiencies and
no future loss development, either adverse or favorable, is anticipated. Loss
portfolio transfers included in outstanding reserves were as follows:
(in millions)
1994 $ 86
1993 110
1992 123
1991 279
1990 324
1989 397
1988 394
1987 355
1.6f. Structured settlements
Structured settlements represent the settlement of claims through the purchase
of annuities. While they result in accelerated claim payments, structured
settlements generally reduce the ultimate amount of losses paid. Structured
settlements are used primarily in the third-party liability and workers'
compensation lines of business. These types of settlements were not used
extensively on liability lines until 1985. Their use was extended to workers'
compensation claims in 1987. The number of such settlements has grown steadily
and they appear to be having an impact on claim payment patterns. USF&G Company
has developed procedures to ensure that the impact of structured settlements is
given appropriate recognition in estimating ultimate reserve liabilities.
1.6g. Reconciliation of liability for loss and loss expenses from SAP to GAAP
The following table presents the differences between property/casualty insurance
claim reserves reported in accordance with GAAP in the consolidated financial
statements in the 1994 Annual Report to Shareholders (Restated), and the
consolidated annual statement filed with state insurance departments in
accordance with statutory accounting practices ("SAP"):
At December 31
(in millions) 1994 1993 1992
SAP basis property/casualty reserves $4,875 $ 5,001 $5,385
Reserves of foreign subsidiaries (consolidated
for GAAP but not SAP) 267 315 240
Estimated salvage and subrogation recoveries
(primarily on property and surety lines, cash
basis for SAP but accrual basis for GAAP until
1993), plus other material items - - (61)
GAAP basis property/casualty reserves, net 5,142 5,316 5,564
Reinsurance receivable 1,016 1,054 N/A
GAAP basis property/casualty reserves, gross 6,158 6,370 5,564
Reserves of life insurance subsidiaries, net 3,798 3,969 3,896
Reinsurance receivable 6 4 N/A
Reserves of life insurance subsidiaries, gross 3,804 3,973 3,896
Total liability on GAAP basis $9,962 $10,343 $9,460
1.7. Life benefit reserves
Ordinary life insurance future policy benefit reserves are computed under the
net level premium method using assumptions for future investment yields,
mortality, and withdrawal rates. These assumptions reflect F&G Life'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 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 single premium annuities with
guaranteed payments are computed on the prospective deposit method, which
produces reserves equal to the present value of future benefit payments.
The table below shows F&G Life's benefit reserves by policy type.
At December 31
(in millions) 1994 1993 1992
Single Premium Annuities:
Deferred $1,860 $2,138 $2,077
Immediate 867 815 788
Other annuities 492 462 508
Universal life/term/group life 579 554 523
Total, net 3,798 3,969 3,896
Reinsurance receivable 6 4 N/A
Total, gross $3,804 $3,973 $3,896
1.8. Geographical distribution
The risks insured by the Corporation's insurance subsidiaries are geographically
diversified primarily throughout the United States. The Corporation has
established a subsidiary to market fidelity/surety insurance in Canada.
Reinsurance risks are incurred throughout North America and specific foreign
countries (mainly in Western Europe and Japan). The products marketed by
the Corporation's management consulting subsidiary, a part of noninsurance
operations, are distributed throughout the world. Total assets and revenues of
foreign operations are not material. The tables below show the composition of
statutory voluntary direct premiums written for the Corporation's
property/casualty operations and statutory premium income of its life insurance
operations by region for the year ended 1994.
Property/Casualty
Voluntary Direct Premiums Written
Northeast 29%
Southeast 24
Midwest 21
West 18
Mississippi 8
Total 100%
Life Statutory
Premium Income
Northeast 41%
Northwest 21
South 14
Southwest 13
Midwest 11
Total 100%
1.9. Executive officers of the Registrant
Positions and Office with Registrant or
Name Age Significant Subsidiaries
Norman P. Blake, Jr. 53 Chairman of the Board, President, Chief
Executive Officer, and Director
Glenn W. Anderson 42 Executive Vice President-Commercial Lines
Gary C. Dunton 39 Executive Vice President-Field Operations
Dan L. Hale 50 Executive Vice President-Chief Financial Officer
Kenneth E. Cihiy 48 Senior Vice President-Claim
Paul B. Ingrey 55 President-F&G Re, Inc.
Robert J. Lamendola 50 Senior Vice President-Fidelity/Surety
James R. Lewis 46 Senior Vice President-Personal Lines
Thomas K. Lewis, Jr. 42 Senior Vice President-Chief Information Officer
John A. MacColl 46 Senior Vice President-General Counsel and Senior
Vice President-Human Resources
Andrew A. Stern 37 Senior Vice President-Strategic Planning,
Corporate Marketing
Harry N. Stout 42 President-F&G Life
John C. Sweeney 50 Chairman-Falcon Asset Management, Inc., and
Senior Vice President-Chief Investment Officer
All persons in the preceding table are officers of the Registrant except Glenn
W. Anderson, Gary C. Dunton, Kenneth E. Cihiy, Robert J. Lamendola and James R.
Lewis, who are executive officers of United States Fidelity and Guaranty Company
(a wholly owned subsidiary of the Registrant); Paul B. Ingrey who is an
executive officer of F&G Re, Inc.; and Harry N. Stout who is an executive
officer of Fidelity and Guaranty Life Insurance Company.
Mr. Blake was Chairman and Chief Executive Officer of Heller International
Corporation, a world-wide commercial financial services organization, and joined
the Corporation in November 1990. Mr. Anderson was Vice President of Strategic
Target Marketing with Fireman's Fund Insurance Company, a domestic insurance
company, and joined the Corporation in December 1992. Mr. Dunton was Vice
President and Division Manager of Standard Lines with Aetna Life and Casualty
Company and joined the Corporation in December 1992. Mr. Hale was President and
Chief Executive Officer of Chase Manhattan Leasing Company, an international
leasing company, and joined the Corporation in February 1991. Mr. Cihiy was
Resident Vice President of Sacramento Field Operations with Aetna Life and
Casualty Company, an insurance and financial services company, and joined the
Corporation in May 1993. Mr. Ingrey was Resident Vice President and Director of
Prudential Reinsurance Company and joined the Corporation in October 1983. Mr.
Lamendola was Managing Director of Marsh & McLennan, Inc. and joined the
Corporation in June 1992. Mr. James R. Lewis was Senior Vice President and
General Manager of CIGNA and joined the Corporation in October 1992. Mr. Thomas
K. Lewis, Jr. was Vice President and General Manager for Europe, Middle East,
and Africa for Seer Technologies, a joint venture of CS First Boston and IBM,
and joined the Corporation in November 1993. Mr. MacColl was previously a
partner in the Baltimore office of the law firm of Piper & Marbury, and joined
the Corporation in January 1989. Mr. Stern was Partner and Vice President of
Booz Allen & Hamilton, a national business consulting firm, and joined the
Corporation in May 1993. Mr. Stout was Senior Vice President of United Pacific
Life Insurance Company and joined the Corporation in May 1993. Mr. Sweeney was
a Principal and Practice Director with Tillinghast/Towers Perrin, an asset
management and consulting company, and joined the Corporation in November 1992.
Item 2. Business Properties
Real estate owned and used in the regular conduct of business consists of 12
business properties located in various cities throughout the United States. The
Corporation's Mount Washington Center, located in Baltimore, Maryland, is the
principal owned property. This is the headquarters for the life insurance
operations, and the location of the information systems, and training and
development complexes.
In addition, the Corporation leases approximately 120 offices in various cities
in the regular course of business. See Note 6 of Notes to the Consolidated
Financial Statements. The principal leased property is a 40-story home office
building in Baltimore, Maryland, sold in 1984 and leased back by the
Corporation. During 1994, the Corporation committed to a plan to consolidate
its home office operations in Baltimore, Maryland at its Mount Washington
facility. The facilities exit costs of $183 million represent the present value
of the rent and other operating expenses to be incurred under the lease on the
Corporation's principal office building from the time USF&G vacates the
building through the expiration of the lease in 2009. (Refer to Note 6 of the
Notes to Consolidated Financial Statements in the Corporation's 1994 Annual
Report to Shareholders (Restated).)
Item 3. Legal Proceedings
The Corporation'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.
In the opinion of management, such litigation and the litigation described in
Section 8.1 and 8.2 of Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 13 of the Notes to Consolidated
Financial Statements of the 1994 Annual Report to Shareholders (Restated), which
section and Note are herein incorporated by reference, is not expected to have a
material adverse effect on USF&G Corporation'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.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1994.
USF&G Corporation
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market and dividend information for the Corporation's common stock on page 69 of
the 1994 Annual Report to Shareholders (Restated) is incorporated herein by
reference.
Item 6. Selected Financial Data
Selected financial data of the Corporation on pages 36 and 37 of the 1994
Annual Report to Shareholders (Restated) is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis on pages 12 through 35 of the 1994 Annual
Report to Shareholders (Restated) is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Corporation and notes to such
financial statements on pages 38 through 62 of the 1994 Annual Report to
Shareholders (Restated) are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
USF&G Corporation
Part III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the Corporation's executive officers can be found on pages
11 and 12 of this Form 10-K/A. Information regarding the Corporation's directors
is incorporated herein by reference to the Election of Directors section of the
Corporation's definitive proxy statement for its annual meeting of shareholders
which was held May 17, 1995.
Item 11. Executive Compensation
See the Compensation of Executive Officers and Directors section of the
Corporation's definitive proxy statement for its Annual Meeting of Shareholders
which was held May 17, 1995, which section is incorporated herein by reference.
To the best of the Corporation's knowledge, there were no late filings under
Section 16(a) of the Securities Exchange Act of 1934.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See the Stock Ownership of Certain Beneficial Owners, Directors and Management
section of the Corporation's definitive proxy statement for its Annual Meeting
of Shareholders which was held May 17, 1995, which section is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
See the Other Information-Certain Business Relationships section of the
Corporation's definitive proxy statement for its Annual Meeting of Shareholders
which was held May 17, 1995, which section is incorporated herein by reference.
USF&G Corporation
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements of USF&G Corporation and its
subsidiaries, included in the Registrant's 1994 Annual Report to Shareholders
(Restated), are incorporated by reference in Item 8:
Consolidated Statement of Operations
Consolidated Statement of Financial Position
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders' Equity
Notes to Consolidated Financial Statements
Report of Independent Auditors
(2) Schedules
The following consolidated financial statement schedules of USF&G
Corporation and its subsidiaries are included in Item 14(d):
Page 20 Schedule I. Summary of Investments-Other than Investments in
Related Parties
21-23 Schedule II. Condensed Financial Information of Registrant
24 Schedule III. Supplementary Insurance Information
25 Schedule IV. Reinsurance
26 Schedule VI. Supplemental Information Concerning Consolidated
Property/Casualty Insurance Operations
All other schedules specified by Article 7 of Regulation S-X are not required
pursuant to the related instructions or are inapplicable and, therefore, have
been omitted.
(3) Exhibits
The following exhibits are included in Item 14:
Page 27 Exhibit 11 Computation of Earnings Per Share
28 Exhibit 12 Computation of Ratio of Consolidated Earnings to
Fixed Charges and Preferred Stock Dividends
A copy of all other exhibits not included with this Form 10-K/A may be obtained
without charge upon written request to the Secretary at the address shown on
page 29 of this Form 10-K/A.
Exhibit 3A
Charter of USF&G Corporation. Incorporated by reference to Exhibit 3A to the
Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 3B
Amended By-laws of USF&G Corporation.
Exhibit 4A
Rights agreement dated as of September 18, 1987, between USF&G Corporation and
First Chicago Trust Company of New York (successor to Morgan Shareholder's
Service Trust Company) including Form of Rights Certificate. Incorporated by
reference to Exhibits 1 and 2 to the Registrant's Form 8-A filed September
30, 1987, File No. 1-8233.
Exhibit 4B
Bond issuance and payment agreement dated November 16, 1987, for Swiss Franc
Public Issue of 5 1/2% Bonds 1988-1996 of Swiss Francs 120,000,000. Incorporated
by reference to Exhibit 4M to the Registrant's Form 10-K for the year ended
December 31, 1987, File No. 1-8233.
Exhibit 4C
Indenture dated January 28, 1994, between USF&G Corporation and Chemical Bank.
Incorporated by reference to Exhibit 4E to the Registrant's Form 10-K for the
year ended December 31, 1993, File No. 1-8233.
Exhibit 4D
Indenture dated January 28, 1994, between USF&G Corporation and Signet Bank.
Exhibit 4E
Form of Note dated March 3, 1994, for Zero Coupon Convertible Subordinated Notes
due 2009. Incorporated by reference to Exhibit 4 to the Registrant's Form 8-K
dated March 3, 1994, File No. 1-8233.
Exhibit 4F
Form of Note dated June 30, 1994, for 8 3/8% Senior Notes due 2001. Incorporated
by reference to Exhibit 4 to the Registrant's Form 8-K dated June 30, 1994,
File No. 1-8233.
Exhibit 4G
Credit Agreement dated as of September 30, 1994, among USF&G Corporation and
Morgan Guaranty Trust Company of New York as agent. Incorporated by reference to
Exhibit 10 to the Registrant's Form 10-Q for the quarter ended September 30,
1994, File No. 1-8233.
Exhibit 4H
Credit Agreement dated as of December 1, 1994, among USF&G Corporation and
Deutsche Bank AG, as agent.
Exhibit 4I
Letter of Credit Agreement dated as of October 25, 1994, among USF&G Corporation
and The Bank of New York, as agent.
Exhibit 10A
1994 Stock Plan For Employees of USF&G.
Exhibit 10B
Stock Option Plan of 1987. Incorporated by reference to Exhibit 4.1 to the
Registrant's Form S-8 dated July 28, 1987, File No. 33-16111.
Exhibit 10C
Employment Agreement dated November 20, 1990, between the Registrant and Norman
P. Blake, Jr. Incorporated by reference to Exhibit 10A to the Registrant's Form
10-K for the year ended December 31, 1990, File No. 1-8233.
Exhibit 10D
USF&G Supplemental Executive Retirement Agreement between the Registrant and
Norman P. Blake, Jr., dated November 20, 1990. Incorporated by reference to
Exhibit 10B to the Registrant's Form 10-K for the year ended December 31, 1990,
File No. 1-8233.
Exhibit 10E
Stock Option Plan of 1990. Incorporated by reference to Exhibit 4 to the
Registrant's Form S-8 Registration Statement as filed December 7, 1990, File No.
33-38113. Certified Copy of the Board Resolution adopted on December 6, 1990,
amending the Stock Option Plan of 1990. Incorporated by reference to Exhibit
10G to the Registrant's Form 10-K for the year ended December 31, 1990, File No.
1-8233.
Exhibit 10F
Description of Management Incentive Plan. Incorporated by reference to Exhibit
10J to the Registrant's Form 10-K for the year ended December 31, 1990, File No.
1-8233.
Exhibit 10G
Description of Long-Term Cash Incentive Compensation Plan. Incorporated by
reference to Exhibit 10K to the Registrant's Form 10-K for the year ended
December 31, 1990, File No. 1-8233.
Exhibit 10H
Stock Incentive Plan of 1991. Incorporated by reference to Exhibit 4(a) to the
Registrant's Form S-8 Registration Statement as filed February 11, 1992, File
No. 33-45664.
Exhibit 10I
Form of Stock Option Agreement used in connection with the Stock Option Plan of
1987, Stock Option Plan of 1990, and Stock Incentive Plan of 1991. Incorporated
by reference to Exhibit 10I to the Registrant's Form 10-K for the year ended
December 31, 1993, File No. 1-8233.
Exhibit 10J
1993 Stock Plan for Non-Employee Directors. Incorporated by reference to
Exhibit 10N to the Registrant's Form 10-K for the year ended December 31, 1992,
File No. 1-8233.
Exhibit 10K
Employment Agreement dated November 10, 1993, between the Registrant and Norman
P. Blake, Jr. Incorporated by reference to Exhibit 10K to the Registrant's Form
10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10L
Stock Option Agreement dated November 10, 1993, between the Registrant and
Norman P. Blake, Jr. Incorporated by reference to Exhibit 10L to the
Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10M
Stock Option Agreement dated November 10, 1993, between the Registrant and
Norman P. Blake, Jr. Incorporated by reference to Exhibit 10M to the
Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10N
Waiver dated November 10, 1993, between the Registrant and Norman P. Blake, Jr.
Incorporated by reference to Exhibit 10N to the Registrant's Form 10-K for the
year ended December 31, 1993, File No. 1-8233.
Exhibit 10O
First Amendment to USF&G Supplemental Executive Retirement Agreement between the
Registrant and Norman P. Blake, Jr. dated November 10, 1993. Incorporated by
reference to Exhibit 10O to the Registrant's Form 10-K for the year ended
December 31, 1993, File No. 1-8233.
Exhibit 10P
Letter dated November 19, 1992, describing Employment Arrangement between the
Registrant and Gary C. Dunton. Incorporated by reference to Exhibit 10K to the
Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10Q
USF&G Supplemental Retirement Plan. Incorporated by reference to Exhibit 10Q to
the Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-
8233.
Exhibit 10R
Amended and Restated Stock Incentive Plan of 1991.
Exhibit 10S
Long-Term Incentive Plan.
Exhibit 11
Computation of earnings per share.
Exhibit 12
Computation of ratio of consolidated earnings to fixed charges and preferred
stock dividends.
Exhibit 13
1994 Annual Report to Shareholders (Restated).
Exhibit 21
Subsidiaries of the Registrant.
Exhibit 23
Consent of Independent Auditors.
Exhibit 28
Information from reports furnished to state insurance regulatory authorities.
All other exhibits specified by Item 601 of Regulation S-K are not required
pursuant to the related instructions or are inapplicable and, therefore, have
been omitted.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K on October 28, 1994, reporting under Item 5,
Other Events, a press release announcing call of shares of Series C Cumulative
Convertible Preferred Stock. The Registrant filed a Form 8-K on December 21,
1994, reporting under Item 5, Other Events, a press release announcing the
signing of a definitive agreement by which USF&G will acquire all of the
outstanding Victoria Financial Corporation ("Victoria") stock for approximately
$55.3 million of USF&G common stock. The Registrant filed a Form 8-K on January
12, 1995, reporting under Item 5, Other Events, a press release announcing the
signing of a definitive agreement by which USF&G will acquire all of the
outstanding Discover Re equity for approximately $78.5 million of USF&G common
stock and options. The Registrant filed a Form 8-K on January 20, 1995,
reporting under Item 5, Other Events, a press release announcing information as
to fourth quarter earnings expectations in addition to an announcement relating
to plans to consolidate its Baltimore facilities. The Registrant filed a Form 8-
K on January 25, 1995, reporting under Item 5, Other Events, a press release
announcing its call for redemption of all outstanding shares of Series C
Cumulative Convertible Preferred Stock.
USF&G Corporation
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
USF&G CORPORATION
NORMAN P. BLAKE, JR.
Norman P. Blake, Jr.
Chairman of the Board, President, and Chief Executive Officer
Dated at Baltimore, Maryland
October 6, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Principal Executive Officer:
NORMAN P. BLAKE, JR.
Norman P. Blake, Jr.
Chairman of the Board, President, Chief Executive Officer, and
Director
Principal Financial and Accounting Officer:
DAN L. HALE
Dan L. Hale
Executive Vice President and Chief Financial Officer
Dated at Baltimore, Maryland
October 6, 1995
Directors
H. FURLONG BALDWIN
H. Furlong Baldwin
MICHAEL J. BIRCK
Michael J. Birck
GEORGE L. BUNTING, JR.
George L. Bunting, Jr.
ROBERT E. DAVIS
Robert E. Davis
DALE F. FREY
Dale F. Frey
ROBERT E. GREGORY, JR.
Robert E. Gregory, Jr.
ROBERT J. HURST
Robert J. Hurst
WILBUR G. LEWELLEN
Wilbur G. Lewellen
HENRY A. ROSENBERG, JR.
Henry A. Rosenberg, Jr.
LARRY P. SCRIGGINS
Larry P. Scriggins
ANNE MARIE WHITTEMORE
Anne Marie Whittemore
R. JAMES WOOLSEY
R. James Woolsey
USF&G Corporation
Schedule I. Summary of Investments-Other Than Investments in Related Parties
At December 31, 1994*
Amount at which shown
Market in the Statement of
(in millions) Cost Value Financial Position
Fixed Maturities
Bonds:
Held to maturity:
United States Government and government
agencies and authorities $ 1,291 $ 1,211 $ 1,291
States, municipalities, and political
subdivisions 107 102 107
Foreign governments 15 14 15
Public utilities 265 240 265
All other corporate bonds 2,981 2,717 2,981
Total fixed maturities held to
maturity 4,659 4,284 4,659
Available for sale:
United States Government agencies and
authorities 784 752 752
States, municipalities, and political
subdivisions 258 253 253
Foreign governments 108 92 92
Public utilities 143 136 136
All other corporate bonds 2,972 2,848 2,848
Total fixed maturities available
for sale 4,265 4,081 4,081
Total fixed maturities $ 8,924 $ 8,365 $ 8,740
Equity Securities
Common stocks:
Banks, trust, and insurance companies $ 2 $ 1 $ 1
Industrial, miscellaneous, and
all other 51 45 45
Total common stocks 53 46 46
Nonredeemable preferred stocks 26 26 26
Total equity securities $ 79 $ 72 $ 72
Short-term investments 450 450 450
Mortgage loans 349 331 349
Real estate 662 662
Other invested assets 288 288
Total investments $10,752 $10,561
*Amounts have been restated to reflect mergers with Discover Re Managers, Inc.,
and Victoria Financial Corporation.
USF&G Corporation
Schedule II. Condensed Financial Information of Registrant-
Statement of Financial Position (Parent Company)
At December 31
(in millions) 1994 1993 1992
Assets
Cash $ 1 $ 2 $ 10
Investment in subsidiaries, at equity 2,503 2,399 2,127
Due from subsidiaries 131 127 135
Other assets 24 23 34
Total assets $2,659 $2,551 $2,306
Liabilities
Debt (short-term, 1994, $215; 1993,
$395; 1992, $375) $ 586 $ 574 $ 574
Dividends payable to shareholders 14 16 16
Due to subsidiaries 310 322 335
Other liabilities 308 83 81
Total liabilities 1,218 995 1,006
Shareholders' Equity
Preferred stock 331 455 455
Common stock 262 228 225
Paid-in capital 1,104 986 971
Net unrealized gains (losses) on
investments (147) 191 (29)
Minimum pension liability (63) (85) -
Retained earnings (deficit) (46) (219) (322)
Total shareholders' equity 1,441 1,556 1,300
Total liabilities and shareholders'
equity $2,659 $2,551 $2,306
See Note to Condensed Financial Statements.
Statement of Operations (Parent Company)
Years Ended December 31
(in millions) 1994 1993 1992
Revenues
Net investment income:
Dividends from subsidiaries $125 $125 $125
Interest expense on loans from
subsidiaries (8) (6) (7)
Other (1) - -
Other revenues:
From subsidiaries 7 7 9
From others 5 5 22
Total revenues 128 131 149
Expenses
Facilities exit costs 211 - -
Interest expense 34 37 43
Lease expense 30 21 21
Other operating expense 24 19 20
299 77 84
Foreign currency losses - - 1
Total expenses 299 77 85
Income (loss) from continuing operations
before income taxes and equity in earnings
of subsidiaries and cumulative effect of
adopting new accounting standards (171) 54 64
Provision for income taxes - - -
Income (loss) from continuing operations
before equity in earnings of subsidiaries
and cumulative effect of adopting new
accounting standards (171) 54 64
Equity in undistributed earnings of
subsidiaries:
Continuing operations 408 76 (28)
Discontinued operations - - (7)
Income from cumulative effect of adopting
new accounting standards - 38 -
Net income $237 $168 $ 29
See Note to Condensed Financial Statements.
Statement of Cash Flows (Parent Company)
Years Ended December 31
(in millions) 1994 1993 1992
Net Cash Provided From Operating
Activities $ 129 $ 58 $ 71
Investing Activities
Purchases of short-term investments - - (23)
Sales or maturities of short-term
investments - - 23
Other, net (4) (4) (12)
Net cash used in investing activities (4) (4) (12)
Financing Activities
Repayments of short-term borrowings (160) - -
Intercompany advances, net (51) (2) 49
Long-term borrowings 270 - -
Repayments of long-term borrowings (120) - (36)
Issuances of common stock 14 6 3
Redemption of preferred stock (13) - -
Cash dividends paid to shareholders (66) (66) (66)
Net cash provided from (used in)
financing activities (126) (62) (50)
Increase (decrease) in cash (1) (8) 9
Cash at beginning of year 2 10 1
Cash at end of year $ 1 $ 2 $ 10
See Note to Condensed Financial Statements.
Note to Condensed Financial Statements
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of the 1994 Annual
Report to Shareholders (Restated) incorporated herein by reference. Amounts have
been restated to reflect mergers with Discover Re Managers, Inc., and Victoria
Financial Corporation, which were completed during the second quarter of 1995.
Restatement of prior periods is provided due to the application of the pooling-
of-interests method of accounting. Certain amounts have been reclassified to
conform to the 1994 presentation. The parent company's provision for income
taxes is based on the Corporation's consolidated federal income tax allocation
policy.
USF&G Corporation
Schedule III. Supplementary Insurance Information
At December 31* Years Ended December 31*
Deferred Unpaid Other Amortization
policy losses, loss policy- Net Losses, loss of deferred Other
acquisi- expenses, Unearned holders' investment expenses, policy operating
tion & policy premiums funds Premium income & policy acquisition expenses Premiums
(in millions) costs benefits (B) (B) (A) revenue (A) benefits costs (A) written
1994
Property/casualty
insurance:
Commercial $161 $ 3,891 $455 $1,189 $ 929 $354 $ 97 $1,200
Personal 71 471 253 575 427 151 45 565
Reinsurance 9 668 41 395 289 67 27 415
Fidelity/surety 30 54 65 124 46 60 17 134
Discover Re and
Victoria 9 58 37 73 53 15 15 77
Reinsurance
receivable - 1,016 117 - - - - -
Other - - - - - - - (2)
Property/
casualty 280 6,158 968 $ 7 2,356 $432 1,744 647 201 2,389
Life insurance 224 3,804 - 79 152 317 388 21 45 N/A
Total $504 $ 9,962 $968 $86 $2,508 $749 $2,132 $668 $246 $2,389
1993
Property/casualty
insurance:
Commercial $168 $ 4,108 $444 $1,223 $1,014 $359 $ 71 $1,239
Personal 69 553 264 681 481 175 46 653
Reinsurance 6 559 29 305 204 71 28 403
Fidelity/surety 28 56 56 118 59 59 9 120
Discover Re and
Victoria 9 40 33 65 47 12 11 73
Reinsurance
receivable - 1,054 124 - - - - -
Other - - - - - - - 14
Property/
casualty 280 6,370 950 $ 7 2,392 $432 1,805 676 165 2,502
Life insurance 164 3,973 - 67 129 321 395 9 50 N/A
Total $444 $10,343 $950 $74 $2,521 $753 $2,200 $685 $215 $2,502
1992
Property/casualty
insurance:
Commercial $170 $ 4,348 $420 $1,480 $1,299 $426 $ 86 $1,356
Personal 76 626 286 785 635 210 42 727
Reinsurance 3 511 11 157 118 22 25 243
Fidelity/surety 28 55 53 111 36 55 19 109
Discover Re and
Victoria 6 24 27 46 32 9 9 55
Other - - - - - - - (15)
Property/
casualty 283 5,564 797 $ 9 2,579 $471 2,120 722 181 2,475
Life insurance 189 3,896 - 56 104 349 377 25 51 N/A
Total $472 $ 9,460 $797 $65 $2,683 $820 $2,497 $747 $232 $2,475
*Amounts have been restated to reflect mergers with Discover Re Managers, Inc.,
and Victoria Financial Corporation.
N/A - Not applicable to life insurance pursuant to Rule 12-16 of Regulation S-X.
(A) Other policyholders' funds, net investment income, and other operating
expenses are not allocated to property/casualty categories.
(B) Unpaid losses and loss expenses reflect the implementation of SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts," which increased liabilities by $1.2 billion with a corresponding
increase in assets at December 31, 1993. 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.
USF&G Corporation
Schedule IV. Reinsurance
Years Ended December 31*
Ceded to Assumed Percentage of
Gross other from other Net amount
(in millions) amount companies companies amount assumed to net
1994
Life insurance in force $11,683 $1,350 $160 $10,493 1.5%
Premiums earned:
Life insurance $ 155 $ 4 $ - $ 151 -%
Accident/health insurance - - 1 1 98.5
Property/casualty
insurance 2,284 516 588 2,356 25.0
Total $ 2,439 $ 520 $589 $ 2,508 23.5%
1993
Life insurance in force $11,955 $1,404 $155 $10,706 1.4%
Premiums earned:
Life insurance $ 133 $ 5 $ - $ 128 -%
Accident/health insurance - - 1 1 99.1
Property/casualty
insurance 2,390 521 523 2,392 21.9
Total $ 2,523 $ 526 $524 $ 2,521 20.8%
1992
Life insurance in force $12,228 $1,444 $132 $10,916 1.2%
Premiums earned:
Life insurance $ 107 $ 5 $ 1 $ 103 .3%
Accident/health insurance - - 1 1 94.0
Property/casualty
insurance 2,734 539 384 2,579 14.9
Total $ 2,841 $ 544 $386 $ 2,683 14.4%
*Amounts have been restated to reflect mergers with Discover Re Managers, Inc.,
and Victoria Financial Corporation.
USF&G Corporation
Schedule VI. Supplemental Information Concerning Consolidated
Property/Casualty Insurance Operations
At December 31
(in millions) 1994* 1993* 1992*
Deferred policy acquisition costs $ 280 $ 280 $ 283
Reserves for unpaid losses and loss expenses (A) 6,158 6,370 5,564
Discount deducted from reserves (B) 441 508 680
Unearned premiums (A) 968 950 797
(A) Reserves for unpaid claims and claim adjustments reflect the implementation
of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts," which increased liabilities by $1.2 billion with
a corresponding increase in assets at December 31, 1993. 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.
(B) Certain long-term disability payments for workers' compensation are
discounted at rates ranging from 3% to 5%.
Years Ended December 31
(in millions) 1994* 1993* 1992*
Earned premiums $2,356 $2,392 $2,579
Net investment income 432 432 471
Losses and loss expenses incurred related to:
Current year 1,752 1,744 2,042
Prior years (8) 61 78
Amortization of deferred policy acquisition costs 647 676 722
Paid losses and loss expenses 1,918 2,053 2,272
Premiums written 2,389 2,502 2,475
*Amounts have been restated to reflect mergers with Discover Re Managers, Inc.,
and Victoria Financial Corporation.
USF&G Corporation
Exhibit 11 - Computation of Earnings per Share
Years Ended December 31
(dollars in millions except per share data) 1994* 1993* 1992*
Net Income Available to Common Stock
Primary:
Income from continuing operations before cumulative effect of
adopting new accounting standards $ 237 $ 130 $ 36
Less preferred stock dividend requirements (46) (48) (48)
Income (loss) from continuing operations before cumulative effect of
adopting new accounting standards available to common stock 191 82 (12)
Loss from discontinued operations - - (7)
Income from cumulative effect of adopting new accounting standards - 38 -
Net income (loss) available to common stock $ 191 $ 120 $ (19)
Fully diluted:
Income from continuing operations before cumulative effect of
adopting new accounting standards $ 237 $ 130 $ 36
Less preferred stock dividend requirements (16) (16) (48)
Add interest expense on zero coupon bonds 5 - -
Income (loss) from continuing operations before cumulative effect of
adopting new accounting standards available to common stock 226 114 (12)
Loss from discontinued operations - - (7)
Income from cumulative effect of adopting new accounting standards - 38 -
Net income (loss) available to common stock $ 226 $ 152 $(19)
Weighted Average Shares Outstanding
Primary common shares (A) 95,796,671 90,566,398 89,235,158
Fully diluted (B):
Common shares 95,796,671 90,566,398 89,235,158
Assumed conversion of preferred stock 24,950,202 26,611,211 -
Assumed exercise of stock options 1,038,214 1,672,482 -
Assumed conversion of zero coupon bonds 6,022,712 - -
Total fully diluted 127,807,799 118,850,091 89,235,158
Earnings Per Common Share
Primary (A):
Income (loss) from continuing operations before cumulative effect of
adopting new accounting standards $2.00 $ .90 $(.14)
Loss from discontinued operations - - (.08)
Income from cumulative effect of adopting new accounting standards - .42 -
Net income (loss) $2.00 $1.32 $(.22)
Fully diluted (B):
Income (loss) from continuing operations before cumulative effect of
adopting new accounting standards $1.77 $ .96 $(.14)
Loss from discontinued operations - - (.08)
Income from cumulative effect of adopting new accounting standards - .32 -
Net income (loss) $1.77 $1.28 $(.22)
*Amounts have been restated to reflect mergers with Discover Re Managers, Inc.,
and Victoria Financial Corporation.
(A) Shares issuable under stock options (1,021,230 shares in 1994, 1,672,482
shares in 1993, 876,839 shares in 1992) have not been used as common stock
equivalents in the computation of primary earnings per common share presented
on the face of the Consolidated Statement of Operations because the dilutive
effect is not material.
(B) Fully diluted earnings per common share amounts are calculated assuming the
conversion of all securities whose contingent issuance would have a dilutive
effect on earnings. The effect of assuming conversion of the preferred stock
(30,959,211 shares in 1992) is antidilutive and, therefore, the amounts
presented in the Consolidated Statement of Operations for primary and fully
diluted earnings per share are the same. Shares issuable under stock options
(1,151,647 in 1992) have not been used as common stock equivalents because the
dilutive effect is not material.
USF&G Corporation
Exhibit 12 - Computation of Ratio of Consolidated Earnings to Fixed Charges
and Preferred Stock Dividends
Years Ended December 31
(dollars in millions) 1994* 1993* 1992*
Fixed Charges
Interest expense $ 37 $ 41 $ 41
Interest capitalized - - 8
Portion of rents representative of interest (A) 159 27 28
Total fixed charges 196 68 77
Preferred stock dividend requirements (B) 46 48 48
Combined Fixed Charges and Preferred Stock Dividends $242 $116 $125
Consolidated Earnings Available for Fixed Charges and
Preferred Stock Dividends
Income (loss) from continuing operations before
income taxes and cumulative effect of adopting new
accounting standards $(43) $103 $ 36
Adjustments:
Fixed charges 196 68 77
Less interest capitalized during the period - - (8)
Consolidated earnings available for fixed charges
and preferred stock dividends $153 $171 $105
Ratio of Consolidated Earnings to Fixed Charges (C) (D) 0.8 2.5 1.4
Ratio of Consolidated Earnings to Combined Fixed Charges
and Preferred Stock Dividends (C) (D) 0.6 1.5 0.8
* Amounts have been restated to reflect mergers with Discover Re Managers, Inc.,
and Victoria Financial Corporation.
(A) Includes approximately $130 million net present value of rents
representative of interest included in facilities exit costs in 1994.
(B) Preferred stock dividend requirements of $46 million in 1994 and $48 million
in both 1993 and 1992 divided by 100% less the effective income tax rate of 0%
in 1994, 1993, and 1992.
(C) In 1994, the ratio of consolidated earnings before facilities exit costs to
fixed charges was 3.1, and the ratio of consolidated earnings before facilities
exit costs to combined fixed charges and preferred stock dividends was 1.8.
(D) In 1994, earnings were inadequate to cover fixed charges by $43 million and
combined fixed charges and preferred stock dividends by $89 million.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO ANNUAL REPORT ON FORM 10-K/A
USF&G CORPORATION
For the Fiscal Year Ended Commission File Number
December 31, 1994 1-8233
A copy of all other of the Corporation's Exhibits to the 1994 Form 10-K/A
report not included herein may be obtained without charge upon written request
to John F. Hoffen, Jr., Corporate Secretary at the corporate headquarters:
100 Light Street
Baltimore, Maryland 21202