USF&G Corporation
Eleven-Year Summary of Selected Financial Data
Years Ended December 31
(dollars in millions
except per share data) 1994* 1993* 1992* 1991*
Consolidated Results
Premiums earned $ 2,508 $ 2,521 $ 2,683 $ 3,213
Revenues 3,310 3,323 3,712 4,202
Income (loss) from continuing
operations before cumulative effect
of adopting new accounting standards 237 130 36 (145)
Income (loss) from discontinued operations - - (7) (32)
Cumulative effect of adopting new
accounting standards - 38 - -
Net income (loss) 237 168 29 (177)
Per Share Results
Income (loss) from continuing
operations before cumulative effect
of adopting new accounting standards $ 2.00 $ .90 $ (.14) $ (2.06)
Income (loss) from discontinued operations - - (.08) (.36)
Cumulative effect of adopting new
accounting standards - .42 - -
Net income (loss) 2.00 1.32 (.22) (2.42)
Book value 9.96 11.33 8.66 9.30
Investment Results
Net investment income $ 749 $ 753 $ 820 $ 880
Realized gains (losses) 5 6 148 38
Change in unrealized gains (losses) (338) 220 (18) 37
Financial Position
Assets $ 13,980 $14,481 $13,242 $14,555
Investments 10,561 11,474 11,417 12,216
Corporate debt 586 574 574 617
Real estate and other debt 42 53 54 73
Shareholders' equity 1,441 1,556 1,300 1,346
Common Stock
Market high $ 16 1/8 $19 5/8 $ 15 $12 1/2
Market low 11 11/16 11 1/8 7 1/8 5 5/8
Market close 13 5/8 14 3/4 12 3/8 7 1/4
Cash dividends declared .20 .20 .20 .20
Common shares outstanding 104,810,794 91,418,372 89,985,083 88,566,897
Property/Casualty Insurance
Premiums earned $ 2,356 $ 2,392 $ 2,579 $ 3,044
Net income (loss) 498 285 194 (41)
Statutory premiums written 2,389 2,502 2,475 3,064
Statutory loss ratio 73.1 75.3 81.8 84.0
Statutory expense ratio 34.8 33.5 34.8 33.1
Statutory combined ratio 107.9 108.8 116.6 117.1
Life Insurance
Sales $ 286 $ 205 $ 155 $ 280
Premium income 152 129 104 169
Net income (loss) 12 10 (5) 31
Noninsurance Operations
Revenues $ 90 $ 5 $ 17 $ 38
Net loss (273) (126) (160) (167)
* Amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria
Financial Corporation.
1990* 1989* 1988* 1987* 1986* 1985* 1984*
$ 3,535 $ 3,713 $ 3,801 $ 3,888 $ 3,622 $ 3,031 $ 2,275
4,191 4,653 4,559 4,500 4,314 3,589 2,630
(433) 148 251 263 276 (109) (64)
(136) (31) (20) 2 (2) 1 -
- - - - - - -
(569) 119 247 279 295 (108) (64)
$ (5.10) $ 1.52 $ 2.87 $ 3.36 $ 4.04 $ (1.79) $ (1.16)
(1.55) (.35) (.24) .03 (.03) .02 -
- - - - - - -
(6.65) 1.18 2.82 3.57 4.32 (1.77) (1.16)
11.65 20.61 22.29 19.29 19.90 18.62 18.74
$ 930 $ 912 $ 796 $ 699 $ 619 $ 392 $ 369
(354) (36) (92) (133) 53 150 (23)
(30) 32 185 (282) (105) 118 (10)
$13,951 $13,576 $12,342 $10,171 $ 8,943 $ 7,676 $ 6,105
11,259 10,911 9,787 7,901 6,831 5,692 4,146
659 543 448 407 348 197 146
129 92 44 24 5 3 4
1,227 2,011 2,058 1,727 1,579 1,217 1,048
$30 3/8 $ 34 $34 3/8 $48 3/4 $46 3/4 $41 1/2 $30 7/8
7 28 1/4 28 1/2 26 1/4 36 1/4 25 5/8 17 5/8
7 1/2 29 28 1/2 28 3/8 39 3/4 39 27 1/2
2.44 2.80 2.64 2.48 2.32 2.20 2.08
88,157,862 87,864,146 83,320,477 79,193,184 69,319,067 65,371,755 55,923,452
$ 3,349 $ 3,548 $ 3,623 $ 3,754 $ 3,542 $ 2,964 $ 2,217
(192) 200 318 331 309 (116) (69)
3,651 3,717 3,903 3,854 3,701 3,152 2,320
81.8 76.4 73.0 73.2 79.1 90.7 90.5
32.9 32.8 31.2 30.1 29.1 30.0 31.4
114.7 109.2 104.2 103.3 108.2 120.7 121.9
$ 1,054 $ 960 $ 1,077 $ 278 $ 83 $ 119 $ 80
186 165 178 133 79 67 58
(16) 31 14 37 20 27 18
$ 22 $ 84 $ 114 $ 112 $ 8 $ 41 $ 33
(361) (112) (85) (88) (86) (23) (13)
USF&G Corporation
Consolidated Statement of Operations
Years Ended December 31
(dollars in millions except per share data) 1994* 1993* 1992*
Revenues
Premiums earned $2,508 $2,521 $2,683
Net investment income 749 753 820
Other 48 43 61
Revenues before net realized gains 3,305 3,317 3,564
Net realized gains on investments 5 6 148
Total revenues 3,310 3,323 3,712
Expenses
Losses, loss expenses and policy benefits 2,132 2,200 2,497
Underwriting, acquisition and
operating expenses 1,001 979 1,087
Interest expense 37 41 41
Restructuring charges - - 51
Facilities exit costs 183 - -
Total expenses 3,353 3,220 3,676
Income (loss) from continuing operations
before income taxes and cumulative effect
of adopting new accounting standards (43) 103 36
Provision for income taxes (benefit) (280) (27) -
Income from continuing operations before
cumulative effect of adopting new
accounting standards 237 130 36
Loss from discontinued operations - - (7)
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 90 -
Postretirement benefits - (52) -
Net income $ 237 $ 168 $ 29
Preferred stock dividend requirements 46 48 48
Net income (loss) available to
common stock $ 191 $ 120 $ (19)
Primary Earnings Per Common Share
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 Earnings Per Common Share
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)
Weighted average common shares outstanding:
Primary 95,796,671 90,566,398 89,235,158
Fully diluted 127,807,799 118,850,091 89,235,158
* Amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria
Financial Corporation (See Note 1.11).
See Notes to Consolidated Financial Statements.
USF&G Corporation
Consolidated Statement of Financial Position
At December 31
(dollars in millions except per share data) 1994* 1993* 1992*
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market,
1994, $4,284; 1993, $4,807; 1992, $7,300) $ 4,659 $ 4,672 $ 7,228
Available for sale, at market** (cost, 1994,
$4,265; 1993, $4,753; market, 1992, $2,076) 4,081 4,976 2,033
Common stocks, at market (cost, 1994, $53;
1993, $80; 1992, $163) 46 66 125
Preferred stocks, at market (cost, 1994, $26;
1993, $23; 1992, $24) 26 23 29
Short-term investments 450 335 532
Mortgage loans 349 302 186
Real estate 662 685 818
Other invested assets 288 415 466
Total investments 10,561 11,474 11,417
Cash 69 18 26
Accounts, notes and other receivables 741 691 748
Reinsurance receivables 554 573 -
Servicing carrier receivables 706 719 -
Deferred policy acquisition costs 504 444 472
Other assets 845 562 579
Total assets $13,980 $14,481 $13,242
Liabilities
Unpaid losses, loss expenses and policy benefits $ 9,962 $10,343 $ 9,460
Unearned premiums 968 950 797
Corporate debt 586 574 574
Real estate and other debt 42 53 54
Other liabilities 981 1,005 1,057
Total liabilities 12,539 12,925 11,942
Shareholders' Equity
Preferred stock, par value $50.00 (12,000,000
shares authorized; shares issued, 1994,
6,627,896; 1993, 9,099,910; 1992, 9,100,000) 331 455 455
Common stock, par value $2.50 (240,000,000 shares
authorized; shares issued, 1994, 104,810,794;
1993, 91,418,372; 1992, 89,985,083) 262 228 225
Paid-in capital 1,104 986 971
Net unrealized gains (losses) on investments
and foreign currency (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 $13,980 $14,481 $13,242
* Amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria
Financial Corporation (See Note 1.11).
** 1992 amounts are at amortized cost (See Note 1.3).
See Notes to Consolidated Financial Statements.
USF&G Corporation
Consolidated Statement of Cash Flows
Years Ended December 31
(in millions) 1994* 1993* 1992*
Operating Activities
Direct premiums collected $ 2,029 $ 2,117 $ 2,367
Net investment income collected 750 774 844
Direct losses, loss expenses and
policy benefits paid (1,884) (1,922) (2,134)
Net reinsurance activity 22 (113) (112)
Underwriting and operating expenses paid (789) (774) (842)
Interest paid 31 41 42
Income taxes paid (12) (5) (10)
Other items, net (7) (14) (39)
Net cash provided from continuing operations 140 104 116
Net cash used in discontinued operations - - (2)
Net cash provided from operating activities 140 104 114
Investing Activities
Net sales and maturities of short-term investments (115) 200 58
Purchases of fixed maturities held to maturity (400) (1,912) (6,945)
Sales of fixed maturities held to maturity 65 462 1,116
Maturities/repayments of fixed maturities held
to maturity 348 942 327
Purchases of fixed maturities available for sale (351) (1,257) (499)
Sales of fixed maturities available for sale 345 1,270 4,812
Repayments of fixed maturities available for sale 480 316 778
Purchases of equities and other investments (434) (256) (439)
Sales, maturities and repayments of equities and
other investments 482 399 842
Sales of subsidiaries - - 17
Purchases of property and equipment (33) (29) (12)
Disposals of property and equipment 4 4 7
Net investing activities of discontinued operations - - 2
Net cash provided from investing activities 391 139 64
Financing Activities
Deposits for universal life and investment contracts 246 168 164
Withdrawals of universal life and investment
contracts (664) (364) (289)
Net short-term borrowings (repayments) (167) (3) 2
Long-term borrowings 270 - -
Repayments of long-term borrowings (124) (3) (53)
Issuances of common stock 38 17 3
Redemptions of preferred stock (13) - -
Cash dividends paid to shareholders (66) (66) (66)
Net cash used in financing activities (480) (251) (239)
Increase (decrease) in cash 51 (8) (61)
Cash at beginning of year 18 26 87
Cash at end of year $ 69 $ 18 $ 26
* Amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria
Financial Corporation (See Note 1.11).
See supplemental cash flow information at Note 1.12.
See Notes to Consolidated Financial Statements.
USF&G Corporation
Consolidated Statement of Shareholders' Equity
Years Ended December 31
(dollars in millions except per share data) 1994* 1993* 1992*
Preferred Stock
Balance at beginning of year $ 455 $ 455 $ 455
Par value of shares issued:
Series C shares converted to common shares (111) - -
Series C shares redeemed (13) - -
Balance at end of year 331 455 455
Common Stock
Balance at beginning of year 228 225 221
Par value of shares issued 11 3 4
Par value of shares issued for conversion of Series C shares 23 - -
Balance at end of year 262 228 225
Paid-In Capital
Balance at beginning of year 986 971 967
Excess of proceeds over par value of shares issued 32 15 4
Excess of proceeds over par value of Series C shares converted 86 - -
Balance at end of year 1,104 986 971
Net Unrealized Gains (Losses) on Investments
and Foreign Currency
Balance at beginning of year 191 (29) (11)
Net change in unrealized gains (losses) (338) 220 (18)
Balance at end of year (147) 191 (29)
Minimum Pension Liability
Balance at beginning of year (85) - -
Change in unfunded accumulated benefits 22 (85) -
Balance at end of year (63) (85) -
Retained Earnings (Deficit)
Balance at beginning of year (219) (322) (286)
Net income 237 168 29
Common stock dividends declared (per share,
1994, 1993, and 1992, $.20) (18) (17) (17)
Preferred stock dividends declared (per share, 1994, 1993,
and 1992, Series A, $4.10, Series B, $10.25, Series C, $5.00) (46) (48) (48)
Balance at end of year (46) (219) (322)
Total shareholders' equity $1,441 $1,556 $1,300
* Amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria
Financial Corporation (See Note 1.11).
See Notes to Consolidated Financial Statements.
USF&G Corporation
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
1.1. Basis of presentation
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP"). These statements include the accounts
of USF&G Corporation and its subsidiaries ("USF&G," or "the Corporation").
Intercompany transactions are eliminated in consolidation. Certain prior year
amounts have been reclassified to conform to the 1994 presentation. See also
Note 1.11 regarding restatements for mergers consummated in the second quarter
of 1995.
1.2. Permitted statutory accounting practices
Reporting practices for insurance subsidiaries prescribed or permitted by state
regulatory authorities (statutory accounting) differ from GAAP. Statutory
amounts for USF&G's insurance operations follow. (Note: For comparability,
amounts are restated to include Discover Re and Victoria (See Note 1.11).
However, restatement of prior periods for business combinations is not
prescribed by statutory accounting.)
Years Ended December 31
(in millions) 1994 1993 1992
Statutory Net Income:
Property/casualty insurance $ 170 $ 202 $ 216
Reinsurance subsidiaries and affiliates 3 1 1
Life insurance 30 5 23
At December 31
(in millions) 1994 1993 1992
Statutory Surplus:
Property/casualty insurance* $1,621 $1,577 $1,498
Reinsurance subsidiaries and affiliates 211 147 152
Life insurance 326 316 310
*This amount includes the surplus of the life insurance subsidiary
and certain reinsurance subsidiaries and affiliates.
USF&G's primary insurance subsidiaries, United States Fidelity and Guaranty
Company ("USF&G Company") and Fidelity and Guaranty Life Insurance Company
("F&G Life"), are domiciled in the State of Maryland and prepare their
statutory financial statements in accordance with accounting practices
prescribed or permitted by the Maryland Insurance Administration. Prescribed
statutory accounting practices include state laws, regulations and general
administrative rules issued by the State of Maryland as well as a variety of
publications and manuals of the National Association of Insurance Commissioners
("NAIC"). Permitted statutory accounting practices encompass all accounting
practices not so prescribed.
Property/Casualty Insurance: USF&G Company received written approval from the
Maryland Insurance Administration to extend the required disposal period for
real property acquired as security for loans or other obligations. Under the
current Maryland Insurance Code, these assets are required to be disposed of
within five years from the date of acquisition. The Maryland Insurance
Administration extended this time period for certain properties up to no later
than December 31, 1997. As of December 31, 1994, this permitted transaction
increased statutory surplus by $19 million over what it would have been
had prescribed accounting practices been followed.
Life Insurance: F&G Life has received permission from the Maryland Insurance
Administration to reduce non-admitted assets by the associated asset valuation
reserve subcomponent ending balance. As of December 31, 1994, this permitted
accounting practice had the effect of increasing statutory surplus by $15
million over what it would have been had prescribed accounting practices been
followed.
Since Maryland does not specifically prescribe by law or regulation reserves
for universal life policies or group annuities, F&G Life follows reserving
practices which are permitted by the State of Maryland. These practices are as
follows:
Universal Life: For older generation universal life ("UL") policies, the full
account value is held as a reserve. For newer generation universal life
policies, reserves are held based on a calculation according to the NAIC UL
Model Regulation, which has been adopted by many states. The reserves
calculated according to the NAIC UL Model Regulation equal the account value at
the end of the surrender charge period which varies from 8 to 15 years.
Group Annuities: Many of the group annuities are used to fund qualified
pension and/or profit sharing plans. For these annuities, the funds are not
allocated to individual participants. The full account value is held as the
reserve for these annuities. For the group annuities where the funds and/or
benefits are allocated to the individual certificate holder, reserves are
calculated according to the laws prescribed for individual annuities.
1.3. Investments
Fixed Maturities: USF&G classifies fixed maturities as "held to maturity" if
it has both the positive intent and ability to hold the securities until
maturity or near enough to maturity such that interest rate risk is
substantially eliminated as a pricing factor. Fixed maturities held to maturity
are carried at amortized cost. Changes in the market values of these
investments are generally not recognized in the financial statements. Specific
write-downs are taken when an impairment is deemed other than temporary.
Fixed maturities that are bought and held principally for the purpose of
selling them in the near term are classified as "trading securities." USF&G
has no securities classified as trading securities.
Fixed maturities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." These securities are held
for an indefinite period of time and may be sold in response to changes in
interest rates and the yield curve, prepayment risk, liquidity needs, or other
factors. Effective December 31, 1993, upon the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," available for sale fixed maturities
are carried at market value, with unrealized gains and losses recorded as a
separate component of shareholders' equity. Unrealized gains or losses on fixed
maturities available for sale are offset by an adjustment to life insurance
deferred policy acquisition costs which is made on a proforma basis as if the
unrealized gains or losses on those assets which match certain life insurance
liabilities were realized. At December 31, 1992, before adoption of SFAS No.
115, fixed maturities available for sale were carried at the lower of aggregate
amortized cost or market value. Market value exceeded amortized cost at
December 31, 1992; therefore, there were no unrealized losses reported in
shareholders' equity.
Equity Securities and Options: Investments in common and preferred stocks are
carried at market value with the resulting unrealized gains or losses reported
directly in shareholders' equity. In 1992 premiums received on options written
were recorded as liabilities. The premiums paid on options purchased were
recorded as assets. Outstanding option positions were carried at market value,
and the resulting unrealized gains or losses were reported directly in
shareholders' equity. There were no outstanding options at December 31, 1994
and 1993.
Securities Lending: USF&G participates in a securities lending program where
certain securities from its portfolio are loaned to other institutions for
short periods of time. A fee is paid to USF&G by the borrower. Collateral that
exceeds the market value of the loaned securities is invested by the lending
agent to represent USF&G's interest. USF&G's interest in securities lending is
reported in other invested assets. USF&G's invested assets and other
liabilities include $6 million, $141 million and $206 million at December 31,
1994, 1993 and 1992, respectively, related to its interest in the securities
lending program.
Mortgage Loans and Real Estate: Mortgage loans are carried at unpaid principal
balances. Real estate investments are reported at cost adjusted for equity
participation. Real estate acquired through foreclosure or deed-in-lieu of
foreclosure is initially recorded at estimated market value. Valuation
allowances are provided for probable impairments in estimated net realizable
value based on periodic evaluations. Specific write-downs are taken when an
impairment is deemed other than temporary.
Interest and Dividend Income: Interest on fixed maturity investments is
recorded as income when earned and is adjusted for any amortization of purchase
premium or discount. Dividends on equity securities are recorded as income on
ex-dividend dates.
Realized Gains and Losses: Realized gains and losses on the sale of
investments are determined based on specific cost. Realized losses are also
recorded when an investment's net realizable value is below cost and the
decline is considered other than temporary.
1.4. Recognition of premium revenues
Property/Casualty Insurance: Property/casualty insurance premiums are earned
principally on a pro rata basis over the lives of the policies and include
accruals for ultimate premium revenue anticipated under auditable and
retrospectively rated policies. Unearned premiums represent the portion of
premiums written applicable to the unexpired terms of policies in force.
Unearned premiums also include estimated and unbilled premium adjustments.
Life Insurance: Premiums on life insurance policies with fixed and guaranteed
premiums and benefits, and premiums on annuities with significant life
contingencies are recognized when due. Universal life policies and annuity
contracts are issued on both a single premium and recurring premium basis.
Revenues for these contracts consist of policy charges assessed against benefit
account balances during the period for the cost of insurance, policy
administration and surrenders.
1.5. Unpaid losses, loss expenses and policy benefits
Property/Casualty Insurance: The liability for unpaid property/casualty
insurance losses and loss expenses is based on an evaluation of reported losses
and on estimates of incurred but unreported losses. The reserve liabilities are
determined using adjusters' individual case estimates and statistical
projections. The liability was reported net of estimated salvage and
subrogation recoverables of $116 million, $139 million and $138 million at
December 31, 1994, 1993 and 1992, respectively. Adjustments to the liability
based on subsequent developments or other changes in the estimate are reflected
in results of operations in the period in which such adjustments become known.
Certain liabilities for unpaid losses and loss expenses related to workers'
compensation coverage are discounted to present value. The carrying amount of
such workers' compensation liabilities, net of reinsurance and net of discount,
was $1,598 million, $1,752 million and $1,798 million at December 31, 1994,
1993 and 1992, respectively. Interest rates used to discount these liabilities
generally ranged from 3 percent to 5 percent.
Life Insurance: Ordinary life insurance reserves are computed under the net
level premium method using assumptions for future investment yields, mortality
and withdrawal rates. These assumptions reflect USF&G's experience, modified to
reflect anticipated trends, and provide for possible adverse deviation.
Reserve interest rate assumptions are graded and range from 4.25 percent to
8.25 percent. Universal life and deferred annuity reserves are computed on the
retrospective deposit method, which produces reserves equal to the cash value
of the contracts. Such reserves are not reduced for charges that would be
deducted from the cash value of policies surrendered. Reserves on immediate
annuities with guaranteed payments are computed on the prospective deposit
method, which produces reserves equal to the present value of future benefit
payments.
1.6. Deferred policy acquisition costs
Acquisition costs, consisting of commissions, brokerage, and other expenses
incurred at policy issuance, are generally deferred. Anticipated losses, loss
expenses, policy benefits and remaining costs of servicing the policies are
considered in determining the amount of costs to be deferred. Anticipated
investment income is considered in determining whether a premium deficiency
exists related to short-duration contracts. Amortization of deferred policy
acquisition costs totaled $668 million, $685 million and $747 million for the
years ended December 31, 1994, 1993 and 1992, respectively, and are included in
underwriting, acquisition and operating expenses in the Consolidated Statement
of Operations.
Property/Casualty Insurance: Property/casualty insurance acquisition costs are
amortized over the period that related premiums are earned.
Life Insurance: Life insurance acquisition costs are amortized based on
assumptions consistent with those used for computing policy benefit reserves.
Acquisition costs on ordinary life business are amortized over their assumed
premium paying periods. Universal life and investment annuity acquisition costs
are amortized in proportion to the present value of their estimated gross
profits over the products' assumed durations, which are regularly evaluated and
adjusted as appropriate.
1.7. Property and equipment
Property and equipment is carried at cost less accumulated depreciation. At
December 31, 1994, 1993 and 1992, $189 million, $196 million and $201 million,
respectively, of property and equipment was included in other assets.
Depreciation is computed on the straight-line basis over the estimated useful
lives of the assets. For the years ended December 31, 1994, 1993 and 1992,
depreciation expense of $24 million, $21 million and $25 million, respectively,
is included in underwriting, acquisition and operating expenses.
1.8. Foreign currency translation
The functional currency for USF&G's foreign operations is the applicable local
currency. Foreign currency balance sheet accounts are translated to U.S.
dollars using exchange rates in effect at the balance sheet date. Revenue and
expense accounts are translated using the average exchange rates prevailing
during the year. The unrealized gains or losses, net of applicable deferred
income taxes, resulting from translation are included in shareholders' equity.
Foreign currency gains and losses on transactions denominated in a currency
other than the entity's functional currency are generally recorded in
operations. Such gains and losses may be reduced or effectively eliminated by
certain financial instruments used by USF&G to reduce its foreign exchange
exposure.
1.9. Earnings per common share
Primary earnings per common share are computed by subtracting dividends on
preferred stock from net income and then dividing by the weighted average
common shares outstanding during the period. The effect of common stock
equivalents is excluded from the calculations because their effect is not
material. Fully diluted earnings per common share assume the conversion of all
securities whose contingent issuance would have a dilutive effect on earnings.
1.10. Facilities exit costs
During 1994, USF&G 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. (See Note 6.)
1.11. Business Combinations
On April 13, and May 22, 1995, USF&G consummated mergers with Discover Re
Managers, Inc. ("Discover Re"), and Victoria Financial Corporation
("Victoria"), respectively. In the transactions, USF&G exchanged 5.4 million
shares of common stock, worth approximately $78.5 million, for all of the
outstanding equity of Discover Re, and 3.8 million shares, worth approximately
$59.1 million, for all of the outstanding equity of Victoria. Discover Re
provides insurance, reinsurance and related services to the alternative risk
transfer market. Victoria is an insurance holding company which specializes in
nonstandard personal lines auto coverage.
Both of these business combinations are accounted for as poolings-of-interests.
Accordingly, the financial statements have been restated to reflect the mergers
with Discover Re and Victoria. A reconciliation of the previously separate
enterprises to the restated consolidated results of operations for periods
prior to the mergers is as follows:
USF&G Corporation USF&G Corporation
(in millions) as Previously Reported Discover Re Victoria as Restated
Year Ended December 31, 1994
Revenues
Premiums earned $ 2,435 $ 22 $51 $ 2,508
Net investment income 743 3 3 749
Other 38 5 5 48
Revenues before net realized gains 3,216 30 59 3,305
Realized gains on investments 5 - - 5
Total revenues 3,221 30 59 3,310
Expenses
Losses, loss expenses and
policy benefits 2,079 17 36 2,132
Underwriting, acquisition and
operating expenses 971 9 21 1,001
Interest expense 37 - - 37
Facilities exit costs 183 - - 183
Total expenses 3,270 26 57 3,353
Income (loss) from continuing
operations before income taxes (49) 4 2 (43)
Provision for income taxes (benefit) (281) 1 - (280)
Net income 232 3 2 237
Preferred stock dividend requirements 46 - - 46
Net income available to common stock $ 186 $ 3 $ 2 $ 191
Total assets $13,774 $111 $95 $13,980
Year Ended December 31, 1993
Premiums earned $ 2,456 $ 16 $49 $ 2,521
Net investment income 749 2 2 753
Total revenues 3,249 21 53 3,323
Net income 165 1 2 168
Total assets 14,335 63 83 14,481
Year Ended December 31, 1992
Premiums earned $ 2,637 $ 8 $38 $ 2,683
Net investment income 817 1 2 820
Total revenues 3,660 11 41 3,712
Net income 28 - 1 29
Total assets 13,134 40 68 13,242
1.12. Supplemental cash flow information
The Consolidated Statement of Cash Flows is presented using the "direct
method," which reports major classes of cash receipts and cash payments. A
reconciliation of net income to net cash provided from operating activities is
as follows:
Years Ended December 31
(in millions) 1994 1993 1992
Net income $ 237 $168 $ 29
Adjustments to reconcile net income
to net cash provided from operating activities:
Loss from discontinued operations - - 7
Cumulative effect of adopting new
accounting standards - (38) -
Facilities exit costs 183 - -
Provision for income taxes (benefit) (280) (27) -
Net realized gains on investments (5) (6) (148)
Change in insurance liabilities 72 60 68
Change in deferred policy acquisition costs (60) 28 66
Change in receivables (24) 48 137
Change in other liabilities (29) (55) (71)
Change in other assets 39 (96) (21)
Change in other items, net 7 22 49
Net cash provided from continuing operations 140 104 116
Net cash used in discontinued operations - - (2)
Net cash provided from operating activities $ 140 $104 $ 114
Note 2 Investments
2.1. Components of net investment income
Years Ended December 31
(in millions) 1994 1993 1992
Interest on fixed maturities $674 $725 $742
Equity security dividends 7 9 12
Option income - - 37
Short-term interest 14 9 27
Real estate and mortgage loans 58 41 50
Other investment income and (expenses) (4) (31) (48)
Net investment income $749 $753 $820
2.2. Net realized gains on investments
Years Ended December 31
(in millions) 1994 1993 1992
Gains (Losses) on Sales:
Fixed maturities $ 3 $ 79 $179
Equity securities and options - 5 44
Real estate and other 12 6 16
Net gains on sales 15 90 239
Impairments:
Fixed maturities (1) (10) (20)
Equity securities and options - (8) -
Real estate and other (9) (66) (71)
Total impairments (10) (84) (91)
Net realized gains on investments $ 5 $ 6 $148
2.3. Gross unrealized gains (losses)
At December 31
(in millions) 1994 1993 1992
Unrealized Gains:
Fixed maturities available for sale $ 9 $225 $ -
Deferred policy acquisition costs adjustment 33 - -
Equity securities 2 14 16
Options, foreign currency and other 16 10 5
Gross unrealized gains 60 249 21
Unrealized Losses:
Fixed maturities available for sale (193) (2) -
Deferred policy acquisition costs adjustment - (30) -
Equity securities (8) (23) (48)
Options, foreign currency and other (6) (3) (2)
Gross unrealized losses (207) (58) (50)
Net unrealized gains (losses) $(147) $191 $(29)
2.4. Change in net unrealized gains (losses)
Years Ended December 31
(in millions) 1994 1993 1992
Fixed maturities available for sale $(407) $223 $ -
Deferred policy acquisition costs adjustment 63 (30) -
Equity securities 3 23 (39)
Options, foreign currency and other 3 4 21
Net change $(338) $220 $(18)
2.5. Estimated market values of fixed maturity investments
The increase (decrease) in the difference between cost and market value of
fixed maturity investments for the years ended December 31, 1994, 1993 and
1992, was $(917) million, $243 million and $(259) million, respectively. The
cost and market value of total fixed maturities are as follows:
At December 31, 1994
Gross Unrecognized/
Unrealized Market
(in millions) Cost Gains Losses Value
Fixed maturities held to maturity $4,659 $32 $(407) $4,284
Fixed maturities available for sale 4,265 9 (193) 4,081
Total $8,924 $41 $(600) $8,365
At December 31, 1993
Gross Unrecognized/
Unrealized Market
(in millions) Cost Gains Losses Value
Fixed maturities held to maturity $4,672 $191 $(56) $4,807
Fixed maturities available for sale 4,753 225 (2) 4,976
Total $9,425 $416 $(58) $9,783
At December 31, 1992
Gross
Unrecognized Market
(in millions) Cost Gains Losses Value
Fixed maturities held to maturity $7,228 $171 $ (99) $7,300
Fixed maturities available for sale 2,033 50 (7) 2,076
Total $9,261 $221 $(106) $9,376
The cost and market value of fixed maturities held to maturity
are as follows:
At December 31, 1994
Gross
Unrecognized Market
(in millions) Cost Gains Losses Value
U.S. Government bonds $ 13 $ - $ (2) $ 11
Mortgage/asset-backed securities 1,496 19 (105) 1,410
Corporate bonds 2,637 6 (268) 2,375
High-yield bonds 483 6 (31) 458
Tax-exempt bonds 23 1 (1) 23
Other 7 - - 7
Total $4,659 $32 $(407) $4,284
At December 31, 1993
Gross
Unrecognized Market
(in millions) Cost Gains Losses Value
U.S. Government bonds $ 4 $ - $ (1) $ 3
Mortgage/asset-backed securities 1,669 70 (19) 1,720
Corporate bonds 2,464 79 (30) 2,513
High-yield bonds 505 37 (6) 536
Tax-exempt bonds 24 3 - 27
Other 6 2 - 8
Total $4,672 $191 $(56) $4,807
At December 31, 1992
Gross
Unrecognized Market
(in millions) Cost Gains Losses Value
U.S. Government bonds $ 349 $ 3 $ - $ 352
Mortgage/asset-backed securities 3,536 88 (47) 3,577
Corporate bonds 2,661 48 (40) 2,669
High-yield bonds 511 24 (12) 523
Tax-exempt bonds 62 4 - 66
Other 109 4 - 113
Total $7,228 $171 $(99) $7,300
The cost and market value of fixed maturities available for
sale are as follows:
At December 31, 1994
Gross
Unrealized Market
(in millions) Cost Gains Losses Value
U.S. Government bonds $ 273 $- $ (12) $ 261
Mortgage/asset-backed securities 1,367 3 (57) 1,313
Corporate bonds 2,394 5 (104) 2,295
High-yield bonds 133 - (19) 114
Tax-exempt bonds 98 1 (1) 98
Other - - - -
Total $4,265 $9 $(193) $4,081
At December 31, 1993
Gross
Unrealized Market
(in millions) Cost Gains Losses Value
U.S. Government bonds $ 308 $ 20 $ - $ 328
Mortgage/asset-backed securities 1,898 73 - 1,971
Corporate bonds 2,418 126 - 2,544
High-yield bonds 57 2 (2) 57
Tax-exempt bonds 72 4 - 76
Other - - - -
Total $4,753 $225 $(2) $4,976
At December 31, 1992
Gross
Unrecognized Market
(in millions) Cost Gains Losses Value
U.S. Government bonds $ 209 $ 3 $ - $ 212
Mortgage/asset-backed securities 1,293 40 (4) 1,329
Corporate bonds 461 7 (1) 467
High-yield bonds 11 - (1) 10
Tax-exempt bonds 32 - (1) 31
Other 27 - - 27
Total $2,033 $50 $(7) $2,076
2.6. Stated due dates of fixed maturities
The table below shows the stated due dates of fixed maturities
held to maturity.
At December 31, 1994
Market
(in millions) Cost Value
In 1995 $ 18 $ 18
1996 through 1999 341 324
2000 through 2004 1,820 1,684
After 2004 984 848
Subtotal 3,163 2,874
Mortgage/asset-backed securities 1,496 1,410
Fixed maturities held to maturity $4,659 $4,284
The table below shows the stated due dates of fixed maturities
available for sale.
At December 31, 1994
Market
(millions) Cost Value
In 1995 $ 153 $ 153
1996 through 1999 1,467 1,418
2000 through 2004 735 702
After 2004 543 495
Subtotal 2,898 2,768
Mortgage/asset-backed securities 1,367 1,313
Fixed maturities available for sale $4,265 $4,081
Expected maturities may differ from stated due dates as
borrowers may have the right to call or prepay obligations.
During 1994, USF&G received proceeds from sales or repayments of
fixed maturities of $1.2 billion. The table below illustrates
the source of 1994 proceeds.
Gross Gross
(in millions) Cost Proceeds Gains Losses
Proceeds From Sales of Fixed Maturities:
Held to maturity $ 65 $ 65 $1 $(1)
Available for sale 347 345 2 (4)
Subtotal 412 410 3 (5)
Proceeds from Maturities/Repayments:
Held to maturity 344 348 5 (1)
Available for sale 479 480 1 -
Subtotal 823 828 6 (1)
Total proceeds $1,235 $1,238 $9 $(6)
Sales in 1994 of fixed maturities classified as held to maturity involved 21
different issuers and were based on evidence of significant deterioration of
the issuers' creditworthiness. The determination of significant credit
deterioration was based upon current developments related specifically to the
issuers. USF&G performed a detailed analysis of the issuers' operating trends,
cash flows and its ability to meet debt service. USF&G's analysts continually
monitor news events, published financial results, rating agency reports and
other related financial information. Sales of fixed maturities under such
circumstances are not inconsistent with their original classifications as held
to maturity. Prior to the adoption of SFAS No. 115 in 1993, proceeds from sales
of fixed maturities held to maturity totaled $462 million with gross gains of
$20 million and gross losses of $12 million and occurred primarily due to
repositioning a portion of the portfolio to more effectively match the duration
of life insurance liabilities. Proceeds from sales of fixed maturities
available for sale were $1.3 billion in 1993 with gross gains of $73 million
and gross losses of $2 million. In 1992, proceeds from sales of fixed
maturities held to maturity totaled $1.1 billion with gross gains of $68
million and gross losses of $9 million. Proceeds from sales of fixed maturities
available for sale were $4.8 billion in 1992 with gross gains of $293 million
and gross losses of $193 million.
2.7. Investment commitments
USF&G has outstanding commitments to provide permanent financing for various
real estate development projects. The funded amounts of these commitments are
collateralized by the real estate projects. At December 31, 1994, unfunded
commitments totaled approximately $7 million, with approximately $3 million of
this expected to be funded in 1995. USF&G has a potential commitment to fund
$12 million under the terms of a participatory note investment if certain
collateralization tests are not met.
2.8. Nonincome-producing investments
Fixed maturities held at December 31, 1994, for which no income was recorded
during 1994, totaled $2 million. In addition, nonperforming real estate,
defined as mortgage loans and real estate investments that are not performing
in accordance with their contractual terms or are performing significantly
below expectations, totaled $208 million at December 31, 1994.
Note 3 Insurance Liabilities
3.1. Property/casualty insurance reserves - unpaid losses and loss
expenses
Activity in the unpaid losses and loss expenses for the property/casualty
segment is summarized as follows:
(in millions) 1994 1993 1992
Total reserve at beginning of year, gross $6,370 $5,565 $5,716
Less reinsurance recoverables 1,054 1 N/A
Net balance at January 1 5,316 5,564 5,716
Incurred 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
Loss and loss expenses recorded in the current period financial statements are
affected by changes in estimates of insured events occurring in prior periods.
Losses incurred in 1994 but related to prior years were a reduction of $8
million, or less than 1 percent of 1994 incurred losses. Losses incurred but
related to prior years were $61 million in 1993, primarily as a result of the
strengthening of the unallocated loss expense reserve for voluntary and
servicing carrier business, and increased by $78 million in 1992 primarily
because of adverse development on reinsurance assumed from underwriting pools
and associations.
Reserves for asbestos-related illnesses and environmental claims cannot be
estimated with traditional loss reserving techniques. Liabilities are
established for known claims (including the cost of litigation) when sufficient
information has been developed to indicate the involvement of a specific
insurance policy, and management can reasonably estimate its liability. In
addition, liabilities have been established to cover additional exposures
on both known and unasserted claims. Estimates of the liabilities are reviewed
and updated continually. Developed case law and adequate claim history do not
exist for such claims, especially because significant uncertainty exists about
the outcome of coverage litigation and whether past claim experience will be
representative of future loss experience.
3.2. Life benefit reserves
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
Net balance 3,798 3,969 3,896
Reinsurance receivable 6 4 -
Total reserve at end of year, gross $3,804 $3,973 $3,896
Note 4 Debt and Credit Arrangements
4.1. Debt outstanding
At December 31
(in millions) 1994 1993 1992
Corporate:
Short-term $215 $395 $375
Long-term:
9.98% and 10.1% Universal Medium-Term Notes due 1994 - - 20
8 7/8% Notes due 1996 - 99 99
5 1/2% Swiss Franc Bonds due 1996 92 80 80
Zero Coupon Convertible Notes due 2009 130 - -
8 3/8% Senior Notes due 2001 149 - -
Total corporate debt 586 574 574
Real Estate and Other:
Short-term 12 18 12
Long-term:
8% Secured Note due 1995 - 11 11
9 3/8% Secured Note due 1994 - - 11
9.96% Secured Notes due through 1999 14 14 15
Other 16 10 5
Total real estate and other debt 42 53 54
Total debt outstanding $628 $627 $628
4.2. Short-term debt
For general corporate purposes, USF&G maintained a committed, standby credit
facility with a group of foreign and domestic banks totaling $400 million at
December 31, 1994. This new facility, which expires in 1997, represents the
renegotiation of a prior credit facility of $700 million which was available at
December 31, 1993. USF&G pays facility fees on the total amount of the
commitments which are based on its long-term debt credit ratings. In order to
minimize facility fees, and due to the reduced borrowings against it, the
Corporation elected to reduce the size of the facility to its current level.
Borrowings against the facilities totaled $215 million at December 31, 1994 and
$375 million at December 31, 1993 and 1992. Interest rates are based on current
market rates. USF&G was in compliance with the covenants contained in these
agreements at December 31, 1994, 1993 and 1992. The most restrictive covenants
require USF&G to maintain a tangible net worth of at least $1.1 billion plus 50
percent of the net income earned during the commitment period and an
indebtedness-to-capital ratio below 55 percent.
In 1994, USF&G also entered into agreements under which a $100 million foreign
currency credit facility and a $100 million letter of credit facility are
available. USF&G pays facility fees on the total amount of each commitment.
There were no borrowings against these facilities at December 31, 1994.
4.3. Debt extinguishments
With proceeds from the issuance of the Zero Coupon Convertible Notes issued in
March 1994, USF&G extinguished $99 million principal of the Corporation's 8
7/8% Notes due 1996 and $20 million principal of Medium-Term Notes due 1994.
Proceeds from the issuance of the 8 3/8% Senior Notes in June 1994 were used to
reduce the short-term credit facility borrowings by $147 million. Real estate
debt was reduced by $11 million as the result of prepaying notes due in 1995
and further reduced $11 million as a result of a deed-in-lieu of foreclosure
whereby property in which USF&G had a partnership interest was conveyed back to
the lender. Real estate debt increased by $63 million as a result of the
restructuring of a real estate partnership whereby 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 a
result of this restructuring to $9 million.
4.4. Shelf registrations
In January 1994, USF&G filed a shelf registration statement with the Securities
and Exchange Commission. As of the time this registration statement went into
effect, USF&G had available $647 million of unissued debt, preferred stock,
common stock and warrants to purchase debt and stock. This registration
statement was reduced by $126 million by the issuance of the Zero Coupon
Convertible Notes and $149 million by the issuance of the 8 3/8% Senior Notes.
4.5. Redeemable debt
In 1994 and thereafter, the 5 1/2% Swiss Franc Bonds are redeemable at par plus
accrued interest. The Zero Coupon Convertible Notes are redeemable beginning in
1999 for an amount equal to the original issue price plus amortized original
issue discount.
4.6. Currency swaps
USF&G entered into currency swap agreements in 1989 to hedge its foreign
currency exposure on the SwF120 million 5 1/2% Swiss Franc Bonds. This hedge
was canceled in September 1994 and USF&G received a payment of approximately
$19 million. USF&G then rehedged the repayment of the SwF120 million Swiss
Franc debt and interest payments with forward contracts.
4.7. Interest rate swaps
As of December 31, 1993, USF&G had outstanding an interest rate swap for the
notional amount of $25 million to exchange variable rate debt into a fixed rate
of 9.405%. During 1994, USF&G entered into a new floating-for-fixed-rate swap
to reduce the floating rate exposure created by the prior swap. In conjunction
with the issuance of the 8 3/8% Senior Notes, USF&G entered into two interest
rate swaps with a total notional amount of $150 million which convert the fixed
interest payments from the debt issuance to floating rate debt for the first
three years of the seven year term of the debt.
These agreements involve, to varying degrees, interest rate and credit risk.
The notional amount represents the amount of the underlying debt to which the
swap applies, not future cash requirements. The maximum credit risk related to
the swap agreements is the amount related to periodic settlements, which is not
material at December 31, 1994. USF&G seeks to manage the credit risk through
monitoring procedures and investigation of counterparties to the transactions.
4.8. Interest
Interest expense incurred in the years ended December 31, 1994, 1993 and 1992
was $37 million, $41 million and $41 million, respectively. Interest incurred
and capitalized in 1992 was $8 million. There was no interest capitalized in
1993 or 1994.
4.9. Maturities of long-term debt
Real Estate
(in millions) Corporate and Other
1995 $ - $ 12
1996 92 -
1997 - -
1998 - -
1999 - 24
Note 5 Financial Instruments and Derivatives
Fair value information is based on quoted market prices where available. In
cases where quoted market prices are not available, fair values are based on
internal estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, such as
applicable discount rate and estimated future cash flows. Therefore, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Fair value disclosure requirements exclude
certain financial instruments and all nonfinancial instruments. The fair value
of many insurance related liabilities do not require disclosure. However, in
its strategy of asset/liability matching, USF&G takes into consideration the
future cash requirements of its insurance related liabilities. Had a
presentation of these liabilities been made, due to their long-term nature, the
fair value of insurance related liabilities would have been significantly less
than their carrying value.
5.1. Financial instruments
Cash and Short-Term Investments: The carrying amounts reported in the
Consolidated Statement of Financial Position for these instruments approximate
their fair values.
Fixed Maturity Investments: Fair values for publicly traded fixed maturity
investments are based on quoted market prices. For privately placed fixed
maturities, estimated fair values are derived by discounting expected future
cash flows using a current market rate applicable to the yield, credit quality
and maturity of the investment. At December 31, 1994, the amortized cost,
carrying amounts and fair values of fixed maturity investments were as follows:
Amortized Carrying Fair
(in millions) Cost Amount Value
Publicly traded $8,694 $8,513 $8,147
Private placements 230 227 218
Total fixed maturity investments $8,924 $8,740 $8,365
The preceding table includes fixed maturities available for sale with a market
and carrying value of $4.1 billion and amortized cost of $4.3 billion. Such
investments are reported in the Consolidated Statement of Financial Position at
market value.
Equity Investments: The carrying values of equity securities as reported in
the Consolidated Statement of Financial Position are based on quoted market
prices and reflect their fair values.
Mortgage Loans and Policy Loans: The fair values for mortgage loans and policy
loans are estimated based on discounted cash flow analyses, using interest
rates currently being offered for similar loans to borrowers with similar
credit ratings. Loans with similar characteristics are aggregated for purposes
of the calculations. At December 31, 1994, the carrying amounts and fair values
of investments in mortgage loans and policy loans were as follows:
Carrying Fair
(in millions) Amount Value
Mortgage loans $349 $331
Policy loans 61 55
Other Assets and Other Liabilities: Other invested assets considered financial
instruments include equity interests in minority ownership investments,
interests in limited partnerships and related notes receivable. It is not
practicable to estimate their fair value due to the closely-held nature of
these investments.
Other assets and liabilities considered financial instruments include agents'
balances receivable, prepaid and accrued expenses and other receivables
generally of a short-term nature. It is assumed the carrying value of these
financial instruments approximates their fair value.
Short and Long-Term Debt: The carrying amount of USF&G's short-term borrowings
approximates its fair value. The fair value of long-term debt is based on
market quotes or estimated discounted cash flow analyses, based on USF&G's
current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amounts and estimated fair value of debt instruments
at December 31, 1994 were as follows:
Carrying Fair
(in millions) Amount Value
Corporate:
Short-term $215 $215
Long-term 371 349
Real estate and other 42 44
Total $628 $608
Investment Contracts: Fair values for F&G Life's single premium deferred
annuities, other deferred annuities, single premium immediate annuities and
supplementary contracts are primarily derived by estimating the cost to
extinguish its liabilities under an assumption reinsurance transaction. The
estimated statutory profits the assuming company would realize from the
transaction are discounted at a typical internal rate of return objective. If
such a transaction were to occur, GAAP would require the unamortized balance of
deferred acquisition costs associated with these liabilities be immediately
expensed. The amount of the related unamortized deferred acquisition costs
was approximately $98 million at December 31, 1994. The fair values of the
remaining liabilities under investment contracts are estimated using discounted
cash flow calculations, based on interest rates currently being offered for
like contracts with similar maturities. The carrying amounts and estimated fair
values of F&G Life's liabilities for investment contracts at December 31, 1994
are as follows:
Carrying Fair
(in millions) Amount Value
Single premium deferred annuities $1,870 $1,818
Other deferred annuities 349 319
Single premium immediate annuities
and supplementary contracts 121 116
Funding agreements 1 1
Group annuities 130 124
Total $2,471 $2,378
Off-Balance Sheet Financial Instruments: The fair values of USF&G's unfunded
real estate commitments and its financial commitment on investments are
estimated using discounted cash flow analyses, based on USF&G's current
incremental borrowing rate for similar types of borrowing arrangements. The
estimates of the fair value of USF&G's interest rate swaps were obtained
from the counterparties to the agreement or were derived by discounting the
expected future cash flows. The estimated fair values of USF&G's off-balance
sheet financial instruments at December 31, 1994, are as follows:
Fair
(in millions) Value
Liabilities:
Unfunded real estate commitments $ 6
Commitment on investments 13
Debt-related Derivatives:
Interest rate swaps 7
Currency forwards 2
5.2. Derivatives
USF&G uses derivative instruments to manage foreign exchange and interest rate
risk, reduce borrowing costs and minimize the impact of rate fluctuations on
the settlement of debt and other financial instruments. USF&G is subject to the
risk that the counterparties will fail to perform. However, these risks are
mitigated by the credit quality of the counterparties and the gains and losses
of the underlying instruments. USF&G does not use derivative instruments for
trading purposes.
Foreign Exchange Rate Instruments: The Corporation relies predominantly on
natural hedges to manage foreign exchange rate risk by maintaining offsetting
foreign asset and foreign liability positions wherever possible, without
sacrificing other financing objectives. Foreign exchange derivative instruments
in use as of December 31, 1994 were two currency forward contracts to purchase
Swiss Francs for the principal and interest payment associated with USF&G's
SwF120 million 5 1/2% Swiss Franc Bonds due 1996. The difference between the
spot rate at the initiation of the forward contract and the forward rate is
amortized over the life of the forward contract as foreign currency expense.
Interest Rate Instruments: The Corporation uses interest rate derivatives
selectively to enable it to maintain a certain fixed/floating rate exposure
given the current and projected interest rate environment. The interest rate
environment in 1994 was one in which short-term floating rate obligations
initially provided lower cost financing, but entailed greater interest rate
risk and provided only short duration liquidity. At the outset of 1994, USF&G
had approximately 61 percent floating rate debt ($375 million) and 39 percent
fixed rate debt ($243 million). In June 1994, USF&G issued $150 million of 8
3/8% Senior Notes due 2001, proceeds of which were used to repay a portion of
the floating rate debt. USF&G subsequently entered into two interest rate swaps
with a total notional amount of $150 million in which it pays floating interest
rates and receives a fixed interest rate to maintain an appropriate
fixed/floating rate exposure. At December 31, 1994, USF&G had approximately 59
percent floating rate debt ($364 million) and 41 percent fixed rate debt ($252
million).
Additionally, in 1994, USF&G entered into a $25 million floating-for-fixed-rate
swap to reduce the exposure created by a 1990 fixed-for-floating-rate swap. The
new floating-for-fixed-rate swap has terms similar to the remaining terms of
the 1990 transaction.
Other Instruments: USF&G has issued financial instruments with a maximum
contingent liability of $2 million depending on the market price of USF&G's
common stock at the maturity of the instruments.
Note 6 Leases
USF&G occupies office facilities under lease agreements that expire at various
dates through 2009. In addition, data processing, office and transportation
equipment is leased under agreements that expire at various dates through 1999.
Most leases contain renewal options that may provide for rent increases based
on prevailing market conditions. Some leases also may contain purchase options
based on fair market values or contractual values, if greater. All leases are
accounted for as operating leases. Rent expense for the years ended December
31, 1994, 1993 and 1992 was $63 million, $55 million and $59 million,
respectively. Rent expense in 1994 included a $9 million loss on long-term
subleases.
The table below shows the future minimum payments to be made under
noncancelable leases at December 31, 1994.
Home Other
Office Office Equip-
(in millions) Building Space ment Total
1995 $ 16 $18 $11 $ 45
1996 16 13 6 35
1997 16 11 3 30
1998 16 9 2 27
1999 19 7 - 26
After 1999 250 6 - 256
Total $333 $64 $22 $419
USF&G is also the lessor under various subleases on its office facilities. The
minimum rentals to be received in the future under noncancelable subleases is
$33 million at December 31, 1994.
USF&G's principal office lease involves a 40-story office building ("the
Tower") which the Corporation sold in 1984 and subsequently leased back. During
1994, USF&G developed and committed to a plan to consolidate its Baltimore
headquarters facilities. The plans encompass relocating all USF&G personnel
currently residing at the Tower to the Mount Washington facilities in Baltimore
which USF&G owns. Implementation of the plan began in January 1995. The
relocation of Tower personnel will begin in mid-1995 and is expected to be
completed by the end of 1996. The facilities exit costs of $183 million
recorded in the fourth quarter of 1994 represent the present value of the
acceleration of net expenses, including rent and operating expenses, to be
incurred under the Tower lease from the time USF&G vacates the Tower through
the expiration of the lease in 2009. The lease on the Tower, which provides for
rent increases every five years through its expiration in September 2009, will
not be terminated. USF&G will continue to make rental payments under the lease.
The deferred gain arising from the sale-leaseback was being amortized over the
noncancelable lease term prior to the recognition of the facilities exit costs.
For each of the years ended December 31, 1994, 1993 and 1992, amortization of
approximately $2 million is netted with underwriting, acquisition and operating
expenses. The unamortized amount of the deferred gain of $30 million and $31
million at December 31, 1993 and 1992, respectively, is included in other
liabilities. The unamortized deferred gain of $28 million at December 31, 1994
was recognized upon adoption of the facilities exit plan and is netted against
the lease expenses included in the facilities exit costs.
Note 7 Shareholders' Equity
7.1. Classes of stock
USF&G is authorized to issue 12 million shares of $50 par value preferred stock
and 240 million shares of $2.50 par value common stock.
7.2. Preferred stock
USF&G has 4 million shares of $4.10 Series A Convertible Exchangeable Preferred
Stock ("Series A Preferred Stock"), 1.3 million shares of $10.25 Series B
Cumulative Convertible Preferred Stock ("Series B Preferred Stock"), and 1.3
million shares of $5.00 Series C Cumulative Convertible Preferred Stock
("Series C Preferred Stock") issued and outstanding at December 31, 1994. USF&G
had 4 million shares of Series A Preferred Stock, 1.3 million shares of Series
B Preferred Stock, and 3.8 million shares of Series C Preferred Stock issued
and outstanding at December 31, 1993 and 1992.
During 1994, USF&G called for redemption 2.4 million shares of its Series C
Preferred Stock. The remaining shares were called for redemption effective
February 24, 1995. As a result of these calls, over 93 percent of the Series C
Preferred Stock converted into 14.7 million shares of common stock in
accordance with the terms of the Series C Preferred Stock. Pursuant to
arrangements the Corporation previously entered into with an unaffiliated
financial institution, USF&G sold 716,600 shares of common stock to this
institution to fund a portion of the cash redemptions resulting from these
calls.
Each share of the Series A Preferred Stock entitles the holder to an annual
cumulative dividend of $4.10 and a liquidation preference of $50 plus accrued
and unpaid dividends. Each share of Series B Preferred Stock entitles the
holder to an annual cumulative dividend of $10.25 and a liquidation preference
of $100 plus accrued and unpaid dividends.
At December 31, 1994, at the option of the holder, subject to adjustment under
certain conditions, each share of Series A and Series B Preferred Stock is
convertible to 1.192 and 8.316 shares, respectively, of USF&G's common stock.
The Series A Preferred Stock is exchangeable in whole at USF&G's option on any
dividend payment date for 8.2% Convertible Subordinated Debentures due in 2011
at a rate of $50 principal amount per share. Series B Preferred Stock is not
exchangeable.
Shares of the Series A Preferred Stock are redeemable for cash, in whole or in
part, at USF&G's option at $50.82 per share plus accrued and unpaid dividends
to the redemption date. The redemption price declines to $50 per share in 1996.
One half of the outstanding shares of Series B Preferred Stock are redeemable
for cash, in part, at USF&G's option commencing in 1994 at $100 per share plus
accrued and unpaid dividends and a premium that declines ratably to zero per
share in 2001. The remainder is redeemable beginning in 1995 and 1996. No
redemption may be made prior to 1997 unless the closing price of the common
stock exceeds 150 percent of the Series B Preferred Stock conversion price and
subject to certain other conditions. In addition, if a change in control event
should occur, then at the election of each holder of Series B Preferred Stock,
USF&G will issue and sell additional nonredeemable equity securities and apply
the net proceeds thereof to redeem these shares, but only if and to the extent
any such proceeds are raised.
Holders of the preferred stock are not entitled to vote, except that they may
vote separately with respect to certain matters including the authorizations of
any additional classes of capital stock that would rank senior to the preferred
stock. In the event that six quarterly dividends for Series A Preferred Stock
or two quarterly dividends for Series B Preferred Stock are unpaid, USF&G's
Board of Directors will be increased by two members, and holders of preferred
stock may elect two directors until all such dividends in arrears have been
paid.
7.3. Dividend restrictions
Payment of dividends to USF&G Corporation by its insurance subsidiary is
subject to certain restrictions. The Maryland Insurance Code requires the
Maryland Insurance Commissioner's prior approval for any dividend payments
during a twelve month period from a Maryland insurance subsidiary, such as
USF&G Company, to its holding company which exceeds 10 percent of
policyholders' surplus. 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 of financial condition. At December
31, 1994, $157 million of dividends is currently available for payment to USF&G
Corporation from its insurance subsidiary during 1995 without prior regulatory
approval. At December 31, 1993, $154 million in dividends was available for
payment to USF&G Corporation from its insurance subsidiary without restriction,
of which $125 million of dividends was paid during 1994.
7.4. Changes in common stock shares
Years Ended December 31
1994 1993 1992
Common Stock:
Outstanding, January 1 91,418,372 89,985,083 88,566,897
Shares issued 13,392,422 1,433,289 1,418,186
Outstanding, December 31 104,810,794 91,418,372 89,985,083
USF&G issued 9.9 million shares of common stock during 1994 related to the
conversion of Series C Preferred Stock. Another 5.5 million common stock shares
were issued in February 1995 for the conversion of the remaining Series C
Preferred Stock.
7.5. Shareholder rights plan
USF&G has a shareholder rights plan ("the plan") to deter coercive or unfair
takeover tactics and to prevent a potential purchaser from gaining control of
USF&G without offering a fair price to all of the Corporation's shareholders.
Under the plan, each outstanding share of USF&G's common stock has one
preferred share purchase right (a "right") expiring in 1997. Each right
entitles the registered holder to purchase 1/100 of a share of a new class of
junior preferred stock for $140. The rights cannot be exercised unless certain
events occur that might lead to a concentration in ownership of common shares.
At that time, the rights may be exercised for common stock having a value of
twice the exercise price. Under certain conditions, the rights also become
exercisable into shares of common stock of a purchaser having a value of twice
the exercise price. USF&G will generally be entitled to redeem the rights, at
$.05 per right, any time before the tenth day after a 20 percent position is
acquired.
Note 8 Stock Ownership Plans
8.1. Stock options and stock purchase plans
Stock Options: Stock options have been granted to full-time officers and key
employees under four incentive plans: Long-Term Incentive Plan, Stock Option
Plan of 1987, Stock Option Plan of 1990, and Stock Incentive Plan of 1991. In
addition, the Employee Stock Option Plan of 1992 and the 1994 Stock Plan For
Employees of USF&G granted eligible employees, other than officers and key
employees participating in other stock incentive plans, options to purchase
shares based on market quotations at the time of grant.
Activity under the stock option plans is as follows:
1994 1993 1992
Outstanding, January 1 4,824,136 5,135,484 3,478,660
Granted 2,245,500 1,143,282 2,590,295
Exercised (483,590) (338,940) (26,868)
Surrendered or cancelled (677,595) (1,115,690) (906,603)
Outstanding, December 31 5,908,451 4,824,136 5,135,484
Expiration dates 1/95-12/2004 1/94-12/2003 1/93-12/2002
Exercise and surrender prices $6.25-30.82 $6.25-30.82 $6.25-30.82
Shares reserved and available
for grant 8,106,029 2,324,047 2,364,267
Stock Purchase Plans: Shares had been offered to employees under the
Employees' Stock Purchase Plans of 1985 and 1990. None were offered in 1992,
1993 or 1994. The purchase price was 85 percent of the market value of USF&G's
common stock on the grant date or the end of the two-year purchase period,
whichever was less. Activity under the stock purchase plans is as follows:
1994 1993 1992
Outstanding, January 1 - - 133,379
Granted - - -
Shares purchased - - (98,882)
Cancelled - - (34,497)
Outstanding, December 31 - - -
Expiration dates - - N/A
Purchase prices - - $11.16
Shares reserved - - N/A
Proceeds from the shares sold under the stock option and stock purchase plans
are credited to common stock and paid-in capital. USF&G makes no charges to
income for the plans. The number of shares under the plans are adjusted for any
future stock dividends, stock splits or similar changes.
8.2. Directors stock plan
The Corporation adopted the 1993 Stock Plan for Non-Employee Directors (the
"Directors Stock Plan") on May 12, 1993. Only the Corporation's outside
directors are eligible to participate, and participation is mandatory. The
Directors Stock Plan has two components: (i) annual retainer awards, and (ii)
retirement awards. The Directors Stock Plan authorizes the issuance of up to
300,000 shares of the Corporation's common stock, par value $2.50 per share.
Activity under the Directors Stock Plan is as follows:
1994 1993
Outstanding, January 1 113,585 -
Stock units awarded 17,115 135,885
Stock issued (34,198) (22,300)
Outstanding, December 31 96,502 113,585
USF&G records compensation expense equal to the market value at grant date of
the vested stock or stock units awarded under the Directors Stock Plan. In
1993, $2 million of compensation expense was recognized relating to this plan.
The 1994 compensation expense related to these plans was minimal and is
expected to continue to be so in future years.
Note 9 Retirement Benefits
9.1. Retirement plans
USF&G has noncontributory retirement plans covering most regular full-time
employees of the Corporation and its affiliates. An employee's pension benefit
is based on salary, years of service and Social Security benefits. USF&G makes
contributions to the retirement plans based on amounts required to be funded
under provisions of the Employee Retirement Income Security Act of 1974. The
plans' funded status and amounts recognized in the consolidated financial
statements are as follows:
At December 31
(dollars in millions) 1994 1993 1992
Actuarial Present Value of:
Accumulated benefit obligation $303 $338 $263
Vested benefits 291 322 249
Plan assets at fair value $289 $297 $265
Projected benefit obligation 313 351 278
Funded status (24) (54) (13)
Unrecognized net loss 98 123 55
Unrecognized prior service cost (benefit) (22) (25) (28)
Adjustment for minimum pension liability (63) (85) -
Net prepaid (accrued) pension cost $(11) $(41) $ 14
Actuarial Assumptions:
Weighted average discount rate 8.75% 7.50% 8.75%
Average rate of increase in future
compensation levels 5.0 5.0 6.0
Expected long-term rate of return on assets 8.5 8.5 9.5
As a result of the higher interest rate environment, USF&G increased the
discount rate assumption as of December 31, 1994, which caused the accumulated
benefit obligation to decrease. In accordance with SFAS No. 87, USF&G recorded
a minimum pension liability for the underfunded amount, representing the
accumulated benefit obligation in excess of the fair value of the plans'
assets, plus the amount of prepaid pension costs. The minimum pension liability
is reported as a separate reduction to shareholders' equity.
The assets held by the plan consist primarily of fixed-income and equity
securities. USF&G classifies prepaid pension cost with other assets and accrued
pension cost with other liabilities in the Consolidated Statement of Financial
Position.
The components of net pension expense are as follows:
Years Ended December 31
(in millions) 1994 1993 1992
Service cost $ 6 $ 4 $ 5
Interest cost 26 25 23
Actual return on plan assets 10 (19) (15)
Net amortization and deferral (29) - (10)
Net periodic pension expense $ 13 $ 10 $ 3
9.2. Postretirement benefits
USF&G sponsors a defined dollar postretirement health care plan (medical and
dental) and noncontributory life insurance plan covering most regular
full-time employees of the Corporation and its affiliates. USF&G's
contributions and costs are determined based on the annual salary and the type
of coverage elected by covered employees. USF&G's contributions to the plan are
a percentage of plan costs based on age and service of employees at retirement.
Additionally, the plan costs are capped at projected 1995 cost levels, and
retiree contributions are increased for the total medical costs over the
projected levels.
Effective January 1, 1993, USF&G adopted SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." This statement requires
USF&G to accrue a liability for the cost of health care, life insurance and
other retiree benefits when the employees' services are rendered. As permitted
under the new standard, the transition obligation of $52 million at January 1,
1993 was recognized as an immediate charge to net income by including the
cumulative effect of adopting this accounting standard. USF&G continues to fund
the health care and life insurance benefit costs principally on a pay-as-you-go
basis. The pay-as-you-go expenditures for postretirement benefits were $5
million in 1994 and 1993, and $4 million in 1992.
The plans' combined funded status and amounts recognized in the consolidated
financial statements are as follows:
At December 31
(in millions) 1994 1993
Accumulated Postretirement Benefit Obligation:
Retirees $(45) $(46)
Fully eligible active plan participants (1) (4)
Other active plan participants (6) (8)
(52) (58)
Plan assets at fair value - -
Funded status (52) (58)
Unrecognized net loss (gain) (1) 6
Accrued postretirement benefit cost $(53) $(52)
USF&G classifies accrued postretirement benefit cost with other liabilities in
the Consolidated Statement of Financial Position.
The components of the net periodic postretirement benefit cost are as follows:
Years Ended December 31
(in millions) 1994 1993
Service cost $1 $1
Interest cost 4 4
Net periodic postretirement benefit cost $5 $5
The weighted average annual assumed rate of increase in per capita cost of
covered benefits (i.e., medical trend rate) for the plans is 9.0 percent for
1995 (10.5 percent assumed for 1994) and is assumed to decrease to 5.5 percent
in 2002 for participants age 65 or younger, and 7.75 percent for 1995 (8.0
percent for 1994), decreasing to 5.5 percent for participants over age 65, and
remain at that level thereafter. Increasing the assumed medical trend rate by
one percentage point in each year would increase the accumulated postretirement
benefit obligation by approximately $4 million and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for
the year by approximately $0.4 million. The weighted average discount rate used
in determining the accumulated postretirement benefit obligation was 8.75
percent at December 31, 1994 and 7.5 percent at December 31, 1993.
Note 10 Federal Income Taxes
USF&G Corporation and its subsidiaries file a consolidated federal income tax
return. The provision for income taxes gives effect to permanent differences
between income before income taxes and taxable income. Deferred federal income
taxes are provided on temporary differences and net operating loss carry-
forwards (for 1994 and 1993) and timing differences (for 1992) between
financial and taxable income.
Effective January 1, 1993, USF&G changed its method of accounting for income
taxes as required by SFAS No. 109, "Accounting for Income Taxes." Under the
standard, a deferred tax liability or asset is recognized for the estimated
future tax effects attributable to net operating loss carry-forwards ("NOLs")
and to temporary differences between the tax basis and GAAP basis of an asset
or a liability. A valuation allowance is required if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred
tax asset will not be realized. As permitted under SFAS No. 109, 1992 financial
statements have not been restated.
At December 31, 1994, the net deferred tax asset of $419 million recorded by
USF&G is supported by a combination of forecasted taxable income and a tax
strategy that USF&G would implement to prevent NOLs from expiring. A valuation
allowance of $279 million has been recognized to offset the gross deferred tax
assets.
10.1. Significant components of deferred tax assets and liabilities
At December 31
(in millions) 1994 1993
Deferred Tax Liabilities:
Deferred policy acquisition costs $165 $143
Other invested assets 7 44
Other 4 -
Total deferred tax liabilities 176 187
Deferred Tax Assets:
Facilities exit costs 74 -
Unpaid losses and loss expenses 249 306
Unearned premiums 45 47
Foreign reinsurance 50 49
Real estate 25 30
Future policy benefits 54 50
Net unrealized losses 52 -
Other 62 85
Net operating loss carry-forwards 263 222
Total deferred tax assets 874 789
Valuation allowance for deferred tax assets 279 482
Deferred tax assets, net of valuation allowance 595 307
Net deferred tax assets $419 $120
At December 31, 1994, the net deferred tax asset increased to $419 million,
primarily based on the increasing weight of positive evidence which resulted in
a $203 million net decrease in the valuation allowance. Throughout 1994, the
weight of evidence became increasingly more positive as the core earnings trend
improved each quarter. As 1994 progressed, the negative evidence of cumulative
losses which were caused by 1991 results became increasingly less of a factor.
Given the substantially reduced degree of negative evidence and management's
increased confidence in the sustainability of the improved earnings of the core
insurance segments and, therefore, its enhanced ability to forecast future
taxable income, it became appropriate to reduce the valuation allowance. During
1993, the net decrease in the valuation allowance was $56 million reflecting
the change in the realizability of the deferred tax asset. In addition, the
valuation allowance was increased $15 million in 1993 due to the tax rate
change enacted in that year.
10.2. Components of provision for income taxes (benefits)
Years Ended December 31
Liability Liability Deferred
Method Method Method
(in millions) 1994 1993 1992
Current tax $ 32 $ 40 $ 23
NOL Utilization (22) (31) (16)
Current tax, net of NOL utilization 10 9 7
Deferred tax (benefit) (23) 23 (7)
Adjustment for enacted change in tax rates - (3) -
Adjustment of the beginning of the year
valuation allowance (267) (56) -
Provision for income taxes (benefit) $(280) $(27) $ -
Income taxes paid $ 12 $ 5 $ 10
10.3. Tax effects of timing differences between financial and taxable income
Year Ended December 31
(in millions) 1992
Tax Effect (Benefit):
Deferred policy acquisition costs $(15)
Unbilled premium adjustments (4)
Adjustment of life policy benefit reserves (1)
Adjustment of property/casualty loss reserves 3
Adjustment of property/casualty unearned premium reserves (4)
Deferred realized gains and losses (2)
Unrecognized benefit of net losses 19
Other, net (2)
Provision for income taxes (benefit) $ (6)
10.4. Tax effects of permanent differences
Years Ended December 31
Liability Liability Deferred
Method Method Method
(in millions) 1994 1993 1992
Tax at federal rates $ (16) $ 36 $12
Tax Effect (Benefit):
Adjustment of the beginning of the
year valuation allowance (267) (56) -
Effect of change in tax rates - (3) -
Dividend received deduction - - (3)
Tax-exempt interest income (3) (2) (3)
Proration adjustment on non-taxable
investment income - - 1
Adjustment of property/casualty salvage
and subrogation accruals (fresh start) 6 - -
Adjustment of property/casualty
loss reserves (fresh start) - - (9)
Other - (2) 2
Provision for income taxes (benefit) $(280) $(27) $ -
10.5. Net operating loss carry-forwards
At December 31, 1994, USF&G had NOLs remaining for tax return purposes expiring
in years 2005 and 2006. The amount and timing of recognizing the benefit of
these NOLs depends on future taxable income and limitations imposed by tax
laws. The approximate amounts of USF&G's NOLs on a regular tax basis and an
alternative minimum tax ("AMT") basis at December 31, 1994 were as follows:
(in millions) Tax Return
Regular tax basis $750
AMT basis 553
Note 11 Reinsurance
During 1993, USF&G adopted SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts." This standard
requires the effects of reinsurance activity to be reported on a gross basis.
Reinsurance receivables and prepaid reinsurance premiums are reported
separately as assets, instead of the previous practice of reporting such
receivables net of the related loss and unearned premium liabilities. The
standard also establishes the conditions required for a contract to be
accounted for as reinsurance and prescribes income recognition and reporting
standards for those contracts. The initial adoption of this standard had no
effect on net income, but increased assets and liabilities by approximately
$1.2 billion at December 31, 1993. USF&G reinsures portions of its policy
risks with other insurance companies or underwriters, and assumes policy risks
from other insurance companies and through participation in pools and
associations. Reinsurance gives USF&G the ability to write larger risks and
control its exposure to losses from catastrophes or other events that cause
unfavorable underwriting results. USF&G's ceding reinsurance agreements are
generally structured on a treaty basis whereby all risks meeting a certain
criteria are automatically reinsured. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy. Reinsurance contracts do not relieve USF&G from its
obligation to policyholders. Failure of reinsurers to honor their obligation
could result in losses to USF&G. USF&G evaluates the financial condition of its
reinsurers and monitors concentrations of credit risks arising from similar
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies.
At December 31, 1994 and 1993, reinsurance receivables totaled $554 million and
$573 million, respectively. Of these amounts, approximately $122 million and
$150 million, respectively, were associated with the Workers' Compensation
Reinsurance Bureau ("WCRB"), a single voluntary reinsurance association of
primary workers' compensation insurers formed for the purpose of providing
excess of loss reinsurance to its members. USF&G is a member of this pool. Each
member is required to hold collateral, for the benefit of all member companies,
in the form of investment-grade securities equaling 115 percent of the member's
share of outstanding receivables of the WCRB. This collateral requirement
mitigates the risk of WCRB becoming insolvent. Risk of loss is minimal for the
remainder of receivables due to similar pool arrangements with collateral
requirements, other contracts where funds are withheld, or letters of credit
maintained. Credit risk is also diversified among numerous reinsurers.
Additionally, USF&G is active in the involuntary market as a servicing carrier
whereby USF&G processes business for a pool but takes no direct underwriting
risk because it is directly reimbursed for the cost of processing policies and
settling any related claims. Servicing carrier receivables of $706 million and
$719 million associated with this business are separately disclosed in the
Consolidated Statement of Financial Position at December 31, 1994 and 1993,
respectively.
1994
Premiums Losses Unpaid Unearned
(in millions) Written Earned Incurred Losses Premiums
Property/Casualty:
Direct $2,303 $2,284 $1,660 $4,826 $855
Assumed 594 588 407 1,332 113
Gross 2,897 2,872 2,067 6,158 968
Ceded (508) (516) (323) (1,016) (116)
Net 2,389 2,356 1,744 5,142 852
Life N/A 152 388 3,804 N/A
Total $2,389 $2,508 $2,132 $8,946 $852
1993
Premiums Losses Unpaid Unearned
(in millions) Written Earned Incurred Losses Premiums
Property/Casualty:
Direct $2,400 $2,390 $1,508 $5,100 $836
Assumed 613 523 96 1,270 114
Gross 3,013 2,913 1,604 6,370 950
Ceded (511) (521) 201 (1,054) (124)
Net 2,502 2,392 1,805 5,316 826
Life N/A 129 395 3,973 N/A
Total $2,502 $2,521 $2,200 $9,289 $826
1992
Premiums Losses Unpaid Unearned
(in millions) Written Earned Incurred Losses Premiums
Property/Casualty:
Direct $2,521 $2,734 $2,210 $5,610 $828
Assumed 271 384 391 1,563 104
Gross 2,792 3,118 2,601 7,173 932
Ceded (317) (539) (481) (1,609) (135)
Net 2,475 2,579 2,120 5,564 797
Life N/A 104 377 3,896 N/A
Total $2,475 $2,683 $2,497 $9,460 $797
Included in assumed unpaid losses in the above table are $86 million, $110
million and $123 million related to loss portfolio transfer agreements at
December 31, 1994, 1993 and 1992, respectively. USF&G has not entered into any
such agreements to cede its unpaid losses.
The ceded unpaid losses and assumed unpaid losses for 1993 were reduced $464
million and $267 million, respectively, from 1992 due to a commutation
involving the WCRB. At year end 1993, WCRB members commuted the lowest layer of
reinsurance for accident years 1980 to 1992. As a result, USF&G was required to
take back all reserves previously ceded into the layer and return reserves
previously assumed.
Note 12 Financial Guarantees
12.1. Insurance guarantees
USF&G has underwritten and reinsured financial guarantee bonds for principal
and interest payments or installment notes when due. The obligations
guaranteed were issued by limited partnerships, municipalities and commercial
enterprises. Assessment is made of the likelihood of loss in connection with
these guarantees, and at December 31, 1994, 1993 and 1992, the reserve for such
losses was not material. The risk of loss under these guarantees is diminished
through reinsurance agreements and collateral.
As of December 31, 1994, USF&G was contingently liable for par value amounts
totaling less than $500 million on financial guarantee exposures ceded through
reinsurance agreements with a monoline insurance company in which USF&G
formerly had a minority ownership interest. In addition, USF&G has other
financial guarantee obligations where the par value guaranteed totaled $27
million at December 31, 1994, maturing in 1995.
12.2. Corporate guarantees
USF&G has also guaranteed the obligations of certain limited partnerships where
it has an equity interest. The risk of loss under these guarantees is
diminished by collateral in the underlying projects. The guarantees totaled $13
million at December 31, 1994, with maturities ranging from 1995 to 1999. In
addition, USF&G has line of credit commitments outstanding totaling $55
million.
Note 13 Legal Contingencies
USF&G's insurance subsidiaries are routinely engaged in litigation in the
normal course of their businesses, 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.
13.1. 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 encourage agents to
place employers in the assigned risk pool, and improperly promote 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 constructive fraud and treble damages under the North
Carolina antitrust laws. On February 14, 1995, the trial court granted the
defendant's motion to dismiss the complaint. The plaintiffs have appealed the
trial court's dismissal of the case. USF&G believes that it has meritorious
defenses and has determined to defend the action vigorously.
13.2. 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 recovery of
these alleged excess charges under various legal theories, including breach of
contract, fraud, civil conspiracy and 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.
13.3. South Carolina workers' compensation litigation
On August 22, 1994, the Attorney General of the State of South Carolina filed
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, the 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.
13.4. Alabama workers' compensation litigation
On September 14, 1994, three Alabama employers filed a class action captioned
Four Way Plant Farm, Inc., et al., v. National Council on Compensation
Insurance, et al., in the Circuit Court of Bullock County, Alabama on behalf of
all Alabama employers that have allegedly been damaged as a result of an
alleged conspiracy by the NCCI, the National Workers' Compensation Reinsurance
Pool, USF&G and numerous other insurance companies which served as servicing
carriers for the Alabama involuntary workers' compensation market, to fix
servicing carrier fees at unreasonably high and noncompetitive levels in
violation of Alabama law. The plaintiffs allege that the conspiracy occurred
during the period January 1, 1985 to January 1, 1994, and caused inflated
deficits in the involuntary market and an alleged excessive expansion of the
workers' compensation residual market. The plaintiffs seek unspecified damages
on behalf of each member of the proposed class action. USF&G believes that it
has meritorious defenses and has determined to defend the action vigorously.
Note 14 Information on Business Segments
USF&G's principal business segments are property/casualty insurance and life
insurance.
14.1. Operations
The insurance business is geographically diversified throughout the United
States and Canada. Reinsurance and noninsurance operations are located in the
United States, Europe and various foreign countries. Foreign operations, in
total, are not material. Summarized financial information for the business
segments is as follows:
Years Ended December 31
Income (Loss) from
Continuing Operations
Revenues Before Income Taxes
(in millions) 1994 1993 1992 1994** 1993 1992***
Property/Casualty Insurance:
Commercial $1,189 $1,223 $1,480 $(186) $(223) $(343)
Personal 575 681 785 (60) (28) (110)
Reinsurance 395 305 157 40 32 20
Fidelity/surety 124 118 111 6 (8) 6
Discover Re and Victoria 73 65 46 (2) (2) (1)
Property/casualty categories 2,356 2,392 2,579 (202) (229) (428)
Net investment income* 429 437 478 429 437 478
Net realized gains (losses)
on investments* (9) 31 199 (9) 31 199
Other 10 5 4 1 (22) (52)
Total property/casualty
insurance 2,786 2,865 3,260 219 217 197
Life Insurance:
Premium income 152 129 104
Net investment income 317 321 349
Realized gains (losses)
on investments - 20 (1)
Other 1 1 2
Total life insurance 470 471 454 14 14 (5)
Noninsurance operations
and eliminations 54 (13) (2) (276) (128) (156)
Consolidated total $3,310 $3,323 $3,712 $ (43) $ 103 $ 36
*Net investment income and net realized gains (losses) on investments are not
allocated to property/casualty categories.
**Income (loss) from continuing operations before income taxes for 1994
includes facilities exit costs by segment as follows: Property/casualty, $28
million; and Noninsurance operations, $(211) million.
***Income (loss) from continuing operations before income taxes for 1992
includes restructuring charges by segment as follows: Property/casualty, $46
million; Life, $3 million; and Noninsurance operations, $2 million.
14.2. Assets
The assets of the insurance operations are primarily investments. Foreign
assets are not material. Assets of the business segments are as follows:
At December 31
(in millions) 1994 1993 1992
Property/casualty insurance $ 9,487 $ 9,711 $ 8,361
Life insurance 4,575 4,848 4,856
Noninsurance operations and eliminations (82) (78) 25
Consolidated total $13,980 $14,481 $13,242