UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 1997 1-8233
USF&G CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-1220567
(State of Incorporation) (IRS Employer Identification No.)
6225 Smith Avenue, Baltimore, Maryland 21209
(Address of principal executive offices) (zip code)
Telephone: 410-547-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months and (2) has been subject to such filing
requirements for the past 90 days. Yes x No __
The number of shares outstanding of the issuer's common stock as of August 12,
1997:
Common Stock, Par Value $2.50; 110,923,001 shares outstanding.
USF&G CORPORATION Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statement of Financial Position 3
Condensed Consolidated Statement of Operations 4
Condensed Consolidated Statement of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 8
Report of Independent Auditors 11
Item 2. Management's Discussion and Analysis of Financial
Conditions and Results of Operations 12
PART II OTHER INFORMATION
Item 2. Changes in Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K: 23
Exhibit 4 - Instruments Defining the Rights of
Security Holders, Including Indentures 23
Exhibit 10 - Material Contracts 23
Exhibit 11 - Computation of Earnings per Share 24
Exhibit 12 - Computation of Ratio of Consolidated
Earnings to Fixed Charges, Distributions on
Capital Securities and Preferred Stock Dividends 25
Exhibit 15 - Letter Regarding Unaudited Interim
Financial Information 26
SIGNATURE 27
USF&G CORPORATION Condensed Consolidated Statement of Financial Position
(Unaudited)
At June 30 At December 31
(dollars in millions except per share data) 1997 1996
---------------------------------
Assets
Investments:
Fixed maturities:
Available for sale, at market (cost, 1997, $8,233; 1996, $8,066) $ 8,330 $ 8,164
Common and preferred stocks, at market (cost, 1997, $17; 1996, $16) 13 16
Short-term investments 469 535
Mortgage loans 489 406
Real estate 410 554
Other invested assets 528 401
---------------------------------
Total investments 10,239 10,076
---------------------------------
Cash 74 73
Accounts, notes and other receivables 946 763
Reinsurance receivables 1,514 1,576
Servicing carrier receivables 680 661
Deferred policy acquisition costs 471 456
Other assets 832 802
---------------------------------
Total assets $14,756 $14,407
---------------------------------
Liabilities
Unpaid losses, loss expenses and policy benefits $ 9,774 $ 9,584
Unearned premiums 1,160 1,113
Corporate debt 539 477
Real estate and other debt 5 5
Other liabilities 1,326 1,159
---------------------------------
Total liabilities 12,804 12,338
---------------------------------
USF&G-obligated mandatorily redeemable preferred capital
securities of subsidiary trusts holding solely junior
subordinated deferrable interest debentures of USF&G 200 100
---------------------------------
Shareholders' Equity
Preferred stock, par value $50.00 (12,000,000 shares authorized;
shares issued, 1997,--; 1996, 3,999,910) -- 200
Common stock, par value $2.50 (240,000,000 shares authorized;
shares issued, 1997, 110,691,498; 1996, 114,240,489) 277 286
Paid-in capital 1,014 1,091
Net unrealized gains on investments and foreign currency 54 62
Retained earnings 407 330
---------------------------------
Total shareholders' equity 1,752 1,969
---------------------------------
Total liabilities, capital securities and shareholders' equity $ 14,756 $14,407
---------------------------------
See Notes to Condensed Consolidated Financial Statements.
USF&G CORPORATION Condensed Consolidated Statement of Operations (Unaudited)
Three Months Ended June 30
(dollars in millions except per share data) 1997 1996
-----------------------------------
Revenues
Premiums earned $691 $674
Net investment income 172 181
Other 5 2
-----------------------------------
Revenues before net realized gains 868 857
Net realized gains on investments 4 1
-----------------------------------
Total revenues 872 858
-----------------------------------
Expenses
Losses, loss expenses and policy benefits 555 536
Underwriting, acquisition and operating expenses 239 257
Interest expense 8 10
Facilities exit costs/(sublease income) -- (12)
-----------------------------------
Total expenses 802 791
-----------------------------------
Income from operations before income taxes and distributions
on capital securities 70 67
Provision for income taxes 20 --
Distributions on USF&G-obligated mandatorily redeemable
preferred capital securities of subsidiary trusts holding
solely junior subordinated deferrable interest debentures
of USF&G, net of tax 3 --
-----------------------------------
Net income $ 47 $ 67
-----------------------------------
Preferred stock dividend requirements -- 5
-----------------------------------
Net income available to common stock $ 47 $ 62
-----------------------------------
Primary Earnings Per Share $.42 $.52
-----------------------------------
Fully Diluted Earnings Per Share .40 .50
-----------------------------------
Weighted-average shares outstanding (000s):
Primary 113,994 119,190
Fully diluted 120,199 128,978
-----------------------------------
Dividends declared per common share $.07 $ .05
-----------------------------------
See Notes to Condensed Consolidated Financial Statements.
USF&G CORPORATION Condensed Consolidated Statement of Operations(Unaudited)
Six Months Ended June 30
(dollars in millions except per share data) 1997 1996
-----------------------------------
Revenues
Premiums earned $1,360 $1,341
Net investment income 344 361
Other 9 11
-----------------------------------
Revenues before net realized gains 1,713 1,713
Net realized gains on investments 4 12
-----------------------------------
Total revenues 1,717 1,725
-----------------------------------
Expenses
Losses, loss expenses and policy benefits 1,071 1,079
Underwriting, acquisition and operating expenses 491 516
Interest expense 17 20
Facilities exit costs/(sublease income) -- (14)
-----------------------------------
Total expenses 1,579 1,601
-----------------------------------
Income from operations before income taxes and distributions
on capital securities 138 124
Provision for income taxes 41 --
Distributions on USF&G-obligated mandatorily redeemable
preferred capital securities of subsidiary trusts holding
solely junior subordinated deferrable interest debentures
of USF&G, net of tax 5 --
-----------------------------------
Net income $ 92 $ 124
-----------------------------------
Preferred stock dividend requirements 2 10
------------------------------------
Net income available to common stock $ 90 $ 114
-----------------------------------
Primary Earnings Per Share $ .79 $ .95
-----------------------------------
Fully Diluted Earnings Per Share .76 .91
-----------------------------------
Weighted-average shares outstanding (000s):
Primary 115,566 119,411
Fully diluted 121,374 129,709
-----------------------------------
Dividends declared per common share $ .12 $ .10
-----------------------------------
See Notes to Condensed Consolidated Financial Statements.
USF&G CORPORATION Condensed Consolidated Statement of Cash Flows(Unaudited)
Three Months Ended June 30
(in millions) 1997 1996
----------------------------------
Operating Activities
Direct premiums collected $519 $533
Net investment income collected 176 190
Direct losses, loss expenses and policy benefits paid (374) (438)
Net reinsurance activity (79) (34)
Underwriting and operating expenses paid (162) (142)
Interest paid (14) (16)
Income taxes paid (2) (3)
Other items, net 5 5
----------------------------------
Net cash provided from operating activities 69 95
----------------------------------
Investing Activities
Net (purchases), sales and maturities of short-term investments 42 (26)
Purchases of fixed maturities available for sale (517) (200)
Sales of fixed maturities available for sale 203 93
Maturities/repayments of fixed maturities available for sale 129 192
Purchases of other investments (53) (100)
Sales, maturities and repayments of other investments 168 61
Purchases of property and equipment (21) (17)
Sales of property and equipment 2 --
----------------------------------
Net cash provided from (used in) investing activities (47) 3
----------------------------------
Financing Activities
Deposits for universal life and investment contracts 134 89
Withdrawals of universal life and investment contracts (58) (245)
Net borrowings of short-term debt 57 24
Repayments of long-term borrowings -- (11)
Issuances of common stock 6 3
Repurchases of common stock (67) (26)
Redemptions of preferred stock (100) --
Cash dividends paid to shareholders (7) (11)
Distributions on capital securities (4) --
----------------------------------
Net cash provided from (used in) financing activities (39) (177)
----------------------------------
(Decrease) Increase in cash (17) (79)
Cash at beginning of period 91 120
----------------------------------
Cash at end of period $ 74 $ 41
----------------------------------
Noncash Transactions
Coinsurance of broker SPDA block:
Surrender activity $(34) $ --
----------------------------------
See Notes to Condensed Consolidated Financial Statements.
USF&G CORPORATION Condensed Consolidated Statement of Cash Flows(Unaudited)
Six Months Ended June 30
(in millions) 1997 1996
----------------------------------
Operating Activities
Direct premiums collected $1,038 $1,052
Net investment income collected 336 364
Direct losses, loss expenses and policy benefits paid (773) (858)
Net reinsurance activity (105) (23)
Underwriting and operating expenses paid (398) (358)
Interest paid (15) (21)
Income taxes paid (4) (3)
Other items, net (2) (4)
----------------------------------
Net cash provided from operating activities 77 149
----------------------------------
Investing Activities
Net (purchases), sales and maturities of short-term investments 65 (102)
Purchases of fixed maturities available for sale (1,163) (419)
Sales of fixed maturities available for sale 765 145
Maturities/repayments of fixed maturities available for sale 270 452
Purchases of other investments (137) (147)
Sales, maturities and repayments of other investments 194 150
Purchase of subsidiary (25) --
Purchases of property and equipment (51) (26)
Sales of property and equipment 5 2
----------------------------------
Net cash provided from (used in) investing activities (77) 55
----------------------------------
Financing Activities
Deposits for universal life and investment contracts 262 167
Withdrawals of universal life and investment contracts (106) (401)
Net borrowings of short-term debt 57 29
Repayments of long-term borrowings -- (32)
Issuance of capital securities 99 --
Issuances of common stock 12 3
Repurchases of common stock (102) (26)
Redemptions of preferred stock (200) --
Cash dividends paid to shareholders (17) (22)
Distributions on capital securities (4) --
----------------------------------
Net cash provided from (used in) financing activities 1 (282)
----------------------------------
(Decrease) Increase in cash 1 (78)
Cash at beginning of period 73 119
----------------------------------
Cash at end of period $ 74 $ 41
----------------------------------
Noncash Transactions
Coinsurance of broker SPDA block:
Surrender activity $ (89) $ --
----------------------------------
See Notes to Condensed Consolidated Financial Statements.
USF&G CORPORATION Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 BASIS OF ACCOUNTING
The condensed consolidated financial statements are prepared
in accordance with generally accepted accounting principles ("GAAP"). These
statements include the accounts of USF&G Corporation and its subsidiaries
(collectively, "USF&G"). Intercompany transactions are eliminated in
consolidation. Certain 1996 amounts have been reclassified to conform to the
1997 presentation. The interim financial statements in this report should be
read in conjunction with the consolidated financial statements and notes thereto
in USF&G's 1996 Annual Report to Shareholders. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements contain the
necessary adjustments, all of which are of a normal recurring nature for interim
period reporting purposes, for a fair presentation of results for the interim
periods.
NOTE 2 REVIEW OF INDEPENDENT AUDITORS
USF&G's independent auditors, Ernst & Young LLP, have performed a review of the
condensed consolidated financial statements in this Form 10-Q as to the three-
and six-month periods ended June 30, 1997 and 1996. Their limited review in
accordance with standards established by the American Institute of Certified
Public Accountants did not constitute an audit. Accordingly, they do not express
an opinion on this information.
NOTE 3 EARNINGS PER SHARE ("EPS")
Primary earnings per share are based on income, after deduction of preferred
stock dividends, and the weighted-average number of common shares and common
stock equivalents outstanding during the periods. Fully diluted earnings per
share assume the conversion of all securities whose contingent issuance would
have a dilutive effect on earnings. Refer to the computation in Exhibit 11.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which
simplifies the standards for computing EPS. SFAS No. 128 replaces primary EPS
with basic EPS, which excludes common stock equivalents, and requires disclosure
of diluted EPS on the face of the income statement for all entities, such as
USF&G, with complex capital structures. SFAS No. 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods; however, earlier application is not permitted. The calculation of
earnings per share in accordance with SFAS No. 128 would not have had, and in
the future is not expected to have, a material effect on USF&G's EPS
computations or related disclosures.
NOTE 4 RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES
For purposes of computing the ratio of consolidated earnings to fixed charges,
distributions on capital securities and preferred stock dividends, earnings
consist of income before considering income taxes and fixed charges. Fixed
charges consist of interest and that portion of rentals that is deemed to be an
appropriate interest factor. Refer to the computation in Exhibit 12.
NOTE 5 SUPPLEMENTAL CASH FLOW INFORMATION
The Condensed 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:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1997 1996 1997 1996
-------------------------------------
Net income $ 47 $ 67 $ 92 $124
Adjustments to reconcile net income to net
cash provided from operating activities:
Realized gains on investments (4) (1) (4) (12)
Depreciation expense 11 7 19 14
Facilities exit costs/(sublease income) -- (12) -- (14)
Provision for taxes 20 -- 41 --
Distributions on capital securities 3 -- 5 --
Change in insurance liabilities 136 100 157 131
Change in deferred policy
acquisition costs (2) (17) (16) 1
Change in receivables (133) (75) (176) (127)
Change in other liabilities (55) (31) (79) 33
Change in other assets 27 56 26 2
Other items, net 19 1 12 (3)
-------------------------------------
Net cash provided from operating
activities $ 69 $ 95 $ 77 $149
-------------------------------------
NOTE 6 UNREALIZED GAINS (LOSSES) ON INVESTMENTS
At June 30, 1997, gross unrealized gains and gross unrealized losses pertaining
to investments in common and preferred stocks totaled $2 million and $5 million,
respectively. In addition, gross unrealized gains and gross unrealized losses on
limited partnerships, foreign currency and other investments totaled $12 million
and $3 million, respectively. At June 30, 1997, there were gross unrealized
gains of $141 million and gross unrealized losses of $44 million pertaining to
fixed maturities available for sale. There were also $20 million of gross
unrealized losses relating to a deferred policy acquisition costs ("DPAC")
adjustment. This DPAC adjustment was made to reflect assumptions about the
effect of potential asset sales of fixed maturities available for sale on future
DPAC amortization. The change in net unrealized gains (losses) on investments
and foreign currency amounted to a decrease of $8 million during the six months
ended June 30, 1997, compared with a decrease of $296 million during the six
months ended June 30, 1996.
NOTE 7 PROCEEDS FROM SALES OF FIXED MATURITY INVESTMENTS
Proceeds from sales of fixed maturities available for sale during the six months
ended June 30, 1997, were $765 million compared with $145 million for the same
period of 1996. Gross gains and gross losses of $11 million and $16 million,
respectively, were realized on 1997 sales. Gross gains and gross losses of
$5 million and $8 million, respectively, were realized on such sales in 1996.
NOTE 8 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
insurers, they defend third-party claims brought against their insureds, as well
as defend themselves against first-party and coverage claims. Additional
information regarding contingencies that may arise from insurance regulatory
matters and regulatory litigation matters may be found in Section 8, "Legal
Contingencies and Regulation", of Management's Discussion and Analysis of
Financial Condition and Results of Operations in USF&G's 1996 Annual Report to
Shareholders.
In the opinion of management, such contingencies and the contingencies described
below are 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.
8.1. Workers' compensation litigation
A series of class actions have been filed against the National Council on
Compensation Insurance ("NCCI"), the insurance companies which served as
servicing carriers in various states, and the National Workers' Compensation
Reinsurance Pool ("NWCRP"). The complaints generally allege that the defendants
conspired to fix servicing carrier fees at unreasonably high and noncompetitive
levels thereby allegedly causing inflated deficits in the voluntary market,
excessive expansion of the residual market and excessive contraction of the
voluntary market. The plaintiffs generally seek unspecified compensatory and
punitive damages and in some cases civil penalties, treble damages under state
antitrust laws, and temporary and permanent injunctive relief. Plaintiffs'
counsel in these cases have, from time to time, indicated that similar cases may
be filed in other states. USF&G believes that it has meritorious defenses to
each of the class actions and has determined to defend the actions vigorously.
Each of the currently pending cases is described below.
North Carolina: On November 24, 1993, N.C. Steel, Inc., and six other North
Carolina employers filed a class action captioned N.C. Steel, Inc., et al., v.
National Council on Compensation Insurance, et al., in the General Court of
Justice, Superior Court Division, Wake County, North Carolina against the NCCI,
North Carolina Rate Bureau, USF&G and eleven other insurance companies which
served as servicing carriers for the North Carolina involuntary workers'
compensation market. On January 20, 1994, the plaintiffs filed an amended
complaint seeking to certify a class of all employers who purchased workers'
compensation insurance in the State of North Carolina after November 24, 1989.
On February 14, 1995, the trial court granted the defendants' motion to dismiss
the complaint. The plaintiffs appealed, and on July 16, 1996, the North Carolina
Court of Appeals affirmed the dismissal of the plaintiffs' first claim for
relief, which is premised on alleged excessive rates, but reversed the trial
court's decision to dismiss the plaintiffs' second claim for relief, which is
premised on employers allegedly being improperly shifted from the voluntary
market to the assigned risk market as a result of stricter underwriting caused
by high residual market burdens. The parties are awaiting the decision of the
North Carolina Supreme Court following a hearing of both issues on
March 18, 1997.
South Carolina: On August 22, 1994, the Attorney General of the State of South
Carolina filed a suit captioned State of South Carolina, County of Greenville,
et al., v. National Council on Compensation Insurance, et al., in the County of
Greenville, South Carolina against the NCCI, the NWCRP, USF&G and seven other
insurance companies which served as servicing carriers for the South Carolina
involuntary workers' compensation market. The Attorney General alleges that the
conspiracy occurred for an unspecified period of time prior to January 1994.
Discovery is underway in the case. On August 6, 1997, the trial court denied
motions for summary judgment which had been filed by each party.
Kansas: On October 7, 1996, a Kansas employer filed a class action captioned
Amundson & Associates Art Studies, Ltd., et al., v. National Council on
Compensation Insurance, et al., in the District Court of Wyndotte County, Kansas
against the NCCI and the insurance companies which acted as servicing carriers
for the Kansas involuntary workers' compensation market. The defendants removed
the case to the United States District Court for the District of Kansas and the
plaintiff has filed a motion to remand the case to the state court. No discovery
has yet occurred.
Tennessee: On December 31, 1996, four Tennessee employers filed a class action
captioned Jo Ann Forman, Inc., et al., v. National Council on Compensation
Insurance, et al., in the Chancery Court of Marion County, Tennessee against the
NCCI, NWCRP and the insurance companies which acted as servicing carriers for
the Tennessee involuntary workers' compensation market. The defendants have
filed a motion to dismiss the case and are awaiting the decision of the trial
court following a hearing on July 14, 1997. No discovery has yet occurred.
Missouri: On February 20, 1997, six Missouri employers filed a class action
captioned Atlas Reserve Temporaries, Inc., et al., v. Vanliner Insurance Co.,
et al., in the Circuit Court of Cole County, Missouri against the NCCI, USF&G
and other insurance companies which acted as servicing carriers for the Missouri
involuntary workers' compensation market. The defendants have filed a motion to
dismiss the case. No discovery has yet occurred.
8.2. Regulation
USF&G's insurance subsidiaries are subject to extensive regulatory oversight in
the jurisdictions where they do business. From time to time, the insurance
regulatory framework has been the subject of increased scrutiny. At any one time
there may be numerous initiatives within state legislatures or state insurance
departments to alter and, in many cases, increase state authority to regulate
insurance companies and their businesses. It is not possible to predict the
future impact of increasing regulation on USF&G's operations.
NOTE 9 SUBSEQUENT EVENTS
9.1. Capital Securities
On July 8, 1997, USF&G Capital III ("Capital III"), a business trust wholly
owned by USF&G, issued $100 million (100,000 shares) of 8.312% Capital
Securities, Series C ("Series C Securities"). Payments on the Series C
Securities are guaranteed by USF&G on a subordinated basis, but only to the
extent Capital III has funds available to make such payments. This guarantee,
considered together with the terms of debentures issued by USF&G (described
below) and an agreement for USF&G to pay other expenses and liabilities of
Capital III, constitutes a full and unconditional subordinated guarantee by
USF&G of Capital III's obligations under the Series C Securities.
Capital III used the proceeds from the Series C Securities issuance to purchase
$100 million principal amount of 8.312% Junior Subordinated Debentures issued by
USF&G ("Series C Debentures"). The Series C Debentures rank junior and
subordinate in right of payment to certain other indebtedness of USF&G, and
mature on July 1, 2046.
Interest payments on the Series C Debentures are deferrable, at USF&G's option,
at any time for up to five years at a time, provided there has not been an event
of default. In the event USF&G elects to defer interest payments on the Series C
Debentures, payments of distributions on the Series C Securities will likewise
be deferred. Interest and distributions continue to accrue during any payment
deferral period.
The Series C Debentures are redeemable under certain circumstances related to
tax events at a price of $1,000 per debenture plus any accrued and unpaid
interest and a "make whole" payment. Proceeds from any redemptions of the Series
C Debentures will be used to redeem a like amount of the Series C Securities.
Additionally, USF&G has the right, under certain circumstances related to tax
events, to shorten the maturity of the Series C Debentures to a date no earlier
than April 8, 2012, in which case the stated maturity of the Series C Securities
will likewise be affected.
The sole assets of Capital III are the Series C Debentures. Capital III does not
have operations independent of the aforementioned relationship with USF&G and
the holders of the capital securities. In the event USF&G exercises its right to
defer interest payments on the Series C Debentures, it will be prohibited from
making payments with respect to any capital debt or securities which rank equal
or junior in right of payment to the Series C Debentures, including cash
dividends on its common or preferred stock. In no case may the deferral of
payments described above extend beyond the stated maturity dates of the
respective securities.
9.2. Business Combination
On August 8, 1997, USF&G announced that it had entered into a definitive
agreement to acquire Titan Holdings, Inc. ("Titan"). Titan, which is
headquartered in San Antonio, Texas, primarily operates two specialty
property/casualty operations: Titan Auto, which writes nonstandard automobile
insurance; and Titan Public Entity, which insures small-to-medium sized towns
and counties. Titan reported total assets of $405 million at June 30, 1997, and
written premium of $199 million for the twelve-month period ended June 30, 1997,
with 65 percent of ongoing business written by Titan Auto and 35 percent by
Titan Public Entity.
USF&G will pay $11.60 in cash plus 0.46516 share of common stock for each Titan
share, for a total of $23.20 per Titan share, based on a USF&G share valuation
of $24.94, which was the value used in USF&G's initial offer to Titan. This
consideration is subject to adjustment pursuant to a collar arrangement. At the
$23.20 valuation, the aggregate transaction value is $234 million plus
assumption of debt.
The Corporation expects to finance the cash portion of the consideration payable
to Titan shareholders from internal resources or existing credit facilities. The
transaction is expected to close in the fourth quarter of 1997.
USF&G CORPORATION Report of Independent Auditors
Board of Directors
USF&G Corporation
We have reviewed the accompanying condensed consolidated statement of financial
position of USF&G Corporation as of June 30, 1997 and the related condensed
consolidated statements of operations and cash flows for the three- and
six-month periods ended June 30, 1997 and 1996. These financial statements are
the responsibility of the company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of USF&G Corporation
as of December 31, 1996, and the related consolidated statements of operations,
shareholders' equity, and cash flows for the year then ended (not presented
herein) and, in our report dated February 21, 1997, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated statement of
financial position as of December 31, 1996, is fairly stated in all material
respects in relation to the consolidated statement of financial position from
which it has been derived.
ERNST & YOUNG LLP
Baltimore, Maryland
August 8, 1997
USF&G CORPORATION Management's Discussion and Analysis of Financial Condition
and Results of Operations
This section provides an assessment of financial results and material changes in
financial position for USF&G Corporation and its subsidiaries (collectively,
"USF&G" or the "Corporation") and explains the results of operations for the
quarter and six months ended June 30, 1997. The analysis focuses on the
performance of USF&G's strategic businesses and its investment portfolio. This
discussion updates the "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the 1996 Annual Report to Shareholders
and should be read in conjunction therewith. The results of operations for the
quarter and six months ended June 30, 1997 are compared with those for the same
period of 1996 unless otherwise noted. Financial position at June 30, 1997 is
compared with December 31, 1996.
In connection with, and because it desires to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995,
USF&G cautions readers regarding certain forward-looking statements in the
following discussion and elsewhere in this Form 10-Q and in any other statement
made by, or on the behalf of, USF&G, whether or not in future filings with the
Securities and Exchange Commission. Forward-looking statements are statements
not based on historical information and which relate to future operations,
strategies, financial results or other developments. Forward-looking statements
are necessarily based upon estimates and assumptions that are inherently subject
to significant business, economic and competitive uncertainties and
contingencies, many of which are beyond USF&G's control and many of which, with
respect to future business decisions, are subject to change. These uncertainties
and contingencies can affect actual results and could cause actual results to
differ materially from those expressed in any forward-looking statements made
by, or on behalf of, USF&G. USF&G disclaims any obligation to update
forward-looking information.
Note: Certain prior-year amounts have been reclassified to conform to the 1997
presentation. A glossary of certain terms used in the discussion can be found in
Section 8; the terms are italicized the first time they appear in the text.
Index
1. Consolidated Results 12
2. Strategic Overview 13
3. Results of Operations 13
4. Reserves and Surplus 16
5. Investments 17
6. Financial Condition 20
7. Liquidity 20
8. Glossary of Terms 21
1. CONSOLIDATED RESULTS
The table below shows the major components of net income.
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1997 1996 1997 1996
---------------------------------------
Property/casualty insurance $ 77 $ 59 $156 $111
Life insurance 15 12 29 23
Parent and noninsurance (26) (17) (51) (36)
---------------------------------------
Income from operations before net
realized gains, facilities exit
(costs)/sublease income, income
taxes and distributions on capital
securities 66 54 134 98
Net realized gains on investments 4 1 4 12
Facilities exit (costs)/sublease income -- 12 -- 14
Provision for income taxes (20) -- (41) --
Distributions on capital securities,
net of tax (3) -- (5) --
---------------------------------------
Net income $ 47 $ 67 $ 92 $124
---------------------------------------
Property/casualty segment income for the second quarter and six months ended
June 30, 1997 increased $18 million and $45 million, respectively, when compared
with the same periods of 1996. The increase is related primarily to improved
underwriting results, including decreased catastrophe losses, incurred during
the period, as well as changes in the allocation of corporate nonunderwriting
expenses. Life insurance segment results increased $3 million and $6 million,
respectively, for the second quarter and six months ended June 30, 1997 due to
the combined effects of increased annuity sales, improved investment spreads on
annuity and universal life products, and lower per-unit operating expenses. The
loss from parent and noninsurance operations increased during the second quarter
and first six months of 1997 when compared with the same periods of 1996 due
primarily to changes in the allocation of corporate nonunderwriting expenses,
which had no effect on consolidated net income.
As of December 31, 1996, USF&G had fully recognized all of its deferred tax
assets. As a result, the Corporation now recognizes income tax expense in its
consolidated statement of operations. The financial statement recognition of tax
expense is not necessarily an appropriate indicator of tax to be paid, however,
as the Corporation still has income tax net operating loss carryforwards
available for both regular and alternative minimum tax purposes.
In December 1996 and January 1997, two business trusts wholly owned by USF&G
issued a total of $200 million of USF&G-obligated mandatorily redeemable
preferred capital securities. Accruals for distributions on these securities,
net of tax, totaled $5 million in the first six months of 1997. Proceeds from
the issuance of the preferred capital securities were used to redeem the $4.10
Series A Convertible Exchangeable Preferred Stock ("Series A Preferred Stock"),
resulting in annual after-tax savings of over $5 million compared with the
dividends on the Series A Preferred Stock.
In July 1997, USF&G Capital III, a business trust wholly owned
by USF&G, issued a total of $100 million of USF&G-obligated mandatorily
redeemable preferred capital securities. Proceeds from this third issuance of
preferred capital securities were used to repay $60 million outstanding at June
30, 1997 against a standby credit facility.
2. STRATEGIC OVERVIEW
In 1996, USF&G completed its realignment into a portfolio of businesses: the
Commercial Insurance Group ("CIG"), the Family and Business Insurance Group
("FBIG"), the Specialty Businesses, and Life Insurance. The realignment
recognizes the groups' distinctly different strategies of growth and
profitability. As individual businesses, each is able to develop its own
distinct products, distribution channels, technology systems and field
structures, and each is currently in its own stage of development, with a common
focus on long-term strategic positioning.
Further information regarding each group's business and strategy may be found in
the Strategic Overview section of Management's Discussion and Analysis of
Financial Condition and Results of Operations in USF&G's 1996 Annual Report to
Shareholders.
3. RESULTS OF OPERATIONS
3.1. Property/casualty insurance
Property/casualty insurance operations, which consist of CIG, FBIG, and the
Specialty Businesses, accounted for 90 percent of USF&G's revenues before net
realized gains in the first six months of 1997 compared with 87 percent in the
same period of 1996, and 70 percent of its assets at June 30, 1997 and December
31, 1996. Financial results for this segment were as follows:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1997 1996 1997 1996
-----------------------------------------
Net premiums written* $640 $684 $1,284 $1,335
Premiums earned* 665 632 1,307 1,268
Net underwriting loss (26) (35) (57) (76)
Income from operations before net
realized gains, facilities exit costs/
sublease income, income taxes and
distributions on capital securities 77 59 156 111
----------------------------------------
*See Glossary of Terms
A significant measurement of a property/casualty company's underwriting
performance is its combined ratio, which is the sum of its loss ratio and
expense ratio. Consolidated property/casualty ratios, calculated based on
statutory accounting practices and generally accepted accounting principles
("GAAP"), were as follows:
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
----------------------------------------
Statutory combined ratio 101.6% 104.5% 102.9% 105.2%
GAAP combined ratio 103.9 105.6 104.3 106.0
----------------------------------------
Income from operations before net realized gains, facilities exit costs/sublease
income, income taxes and distributions on capital securities increased $18
million in the second quarter of 1997 and $45 million in the first six months of
1997 when compared with the same periods of 1996, due primarily to improved
underwriting results and a decrease in other (nonunderwriting) expenses. The
underwriting improvement is primarily attributable to reduced occurrences in
1997 of catastrophe losses and other severe weather related losses. A change in
the approach to corporate allocations, which had no effect on USF&G's
consolidated results, decreased the property/casualty segment's nonunderwriting
expenses by $11 million and $22 million in the second quarter and first half of
1997, respectively.
Gross catastrophe losses totaled $10 million and $19 million in the second
quarter and first six months of 1997, respectively, compared with $19 million
and $55 million in the same periods of 1996, respectively. These losses, net of
ceded reinsurance, were $9 million and $18 million in the second quarter and
first six months of 1997, respectively, compared with $19 million and $54
million in the same periods of 1996, respectively. The high level of catastrophe
losses incurred in the first six months of 1996 was the result of severe winter
storms and floods incurred during the first quarter.
CIG
The following table shows underwriting results for CIG.
Three Months Ended Six Months Ended
June 30 June 30
(dollars in millions) 1997 1996 1997 1996
----------------------------------------
Gross voluntary premiums written $286 $282 $544 $536
Net premiums written 258 260 499 507
Underwriting gain (loss) (25) (16) (45) (12)
GAAP Underwriting Ratios:
Loss ratio 79.8% 74.9% 77.6% 70.3%
Expense ratio 31.2 32.0 32.1 32.2
Combined ratio 111.0 106.9 109.7 102.5
----------------------------------------
Gross voluntary premiums written in excess & surplus lines and specialty
segments combined, represented 45 percent of CIG's gross premiums in the first
six months of 1997 and grew 25 percent in the first six months of 1997 when
compared with the same period of 1996. These increases were largely offset by
declines in the core and defensive segments, as CIG continues to shift its mix
of business toward its typically higher-margin product lines.
In the first quarter of 1996, CIG recorded a $30 million reduction in workers'
compensation reserves as a result of the recognition of the effect on reserve
estimation models of the significant use of structured settlements to close
medical claims. Excluding this one-time reserve adjustment, overall underwriting
results for the first six months of 1997 were generally consistent with 1996. A
trend of deteriorating underwriting losses in the specialty trucking segment is
contributing to the unfavorable second quarter 1997 underwriting loss comparison
with 1996. Management is currently developing an aggressive plan to reduce the
mix and negative profit impact of this line, which had approximately $50 million
of gross premiums written through the first six months of 1997.
FBIG
The following table shows underwriting results for FBIG.
Three Months Ended Six Months Ended
June 30 June 30
(dollars in millions) 1997 1996 1997 1996
----------------------------------------
Gross voluntary premiums written $254 $259 $495 $502
Net premiums written 194 256 422 492
Underwriting loss (18) (34) (42) (91)
GAAP Underwriting Ratios:
Loss ratio 76.7% 76.0% 76.2% 82.0%
Expense ratio 30.7 38.0 32.5 36.7
Combined ratio 107.4 114.0 108.7 118.7
----------------------------------------
FBIG gross voluntary premiums were relatively flat in the second quarter and
first six months of 1997 when compared with the same periods of 1996, primarily
due to intense competition in the personal lines markets, as well as
management's actions to lower the commission rates on most personal lines and
some small commercial business, effective April 1, 1997, which had an adverse
impact on new business writings. The decreases in net premiums written in the
second quarter and first six months of 1997 were primarily the result of a new
personal lines quota share reinsurance treaty (refer to Section 4.2 of this
Analysis).
FBIG incurred most of the catastrophe and other severe weather related losses
which adversely impacted the loss ratio in the first six months of 1996.
Excluding catastrophes, loss ratios for FBIG would have been 74.5 percent and
74.1 percent for the second quarter and first six months of 1997, respectively,
compared with 70.8 percent and 74.6 percent for the respective periods of 1996.
The expense ratio improved 7.3 points and 4.2 points in the second quarter and
first six months of 1997, respectively, when compared with the same periods of
1996. The expense ratio improvement was primarily the result of lower commission
rates and continued expense management, and is expected to continue throughout
1997 as FBIG realizes the operating efficiencies generated by the Centers for
Agency Services and expense savings as a result of the lower commission rates.
Specialty Businesses
USF&G's Specialty Businesses consist of Discover Re Managers, Inc. ("Discover
Re"), which provides insurance, reinsurance and related services to the
alternative risk transfer market, F&G Re, Inc. ("F&G Re"), which manages USF&G's
assumed reinsurance business, and the Surety Group.
Discover Re
The following table shows underwriting results for Discover Re.
Three Months Ended Six Months Ended
June 30 June 30
(dollars in millions) 1997 1996 1997 1996
----------------------------------------
Gross program premium $52 $46 $78 $ 68
Net premiums written 13 6 17 9
Service fees 5 4 8 6
Underwriting gain 2 1 2 1
GAAP Underwriting Ratios:
Loss ratio 66.5% 78.4% 72.1% 78.5%
Expense ratio 10.3 11.6 12.1 13.2
Combined ratio 76.8 90.0 84.2 91.7
----------------------------------------
Discover Re's captive business gross program premiums increased 18 percent and
28 percent in the second quarter and first six months of 1997, respectively,
when compared with the same periods of 1996, resulting in a 15 percent increase
in total gross program premium in both the second quarter and first six months
of 1997. For the six months ended June 30, 1997, captive business represented
51 percent of Discover Re's gross program premium, compared with 46 percent in
the corresponding period of 1996. Management is increasing its focus on captive
business which, despite typically resulting in less retained premium, is
expected to generate significant fee income compared with traditional
alternative risk transfer products.
F&G Re
The following table shows underwriting results for reinsurance assumed through
F&G Re.
Three Months Ended Six Months Ended
June 30 June 30
(dollars in millions) 1997 1996 1997 1996
----------------------------------------
Net Premiums Written:
Traditional risk $ 59 $ 67 $139 $153
Finite risk 59 53 97 96
----------------------------------------
Total premiums written $118 $120 $236 $249
----------------------------------------
Underwriting gain $ 6 $ 14 $ 14 $ 29
GAAP Underwriting Ratios:
Loss ratio 74.8% 60.4% 70.6% 59.8%
Expense ratio 20.6 27.5 24.1 27.7
Combined ratio 95.4 87.9 94.7 87.5
----------------------------------------
F&G Re's net premiums written decreased $2 million and $13 million in the second
quarter and first six months of 1997, respectively, when compared with the same
periods of 1996 as a result of competitive pressures in the assumed reinsurance
market. Management's adherence to its underwriting discipline has resulted in
the sacrifice of some premium volume in favor of maintaining the profitability
of F&G Re's book of business. The intense pricing competition is expected to
continue throughout 1997. The higher loss ratio for the second quarter and first
half of 1997, compared with the same periods of 1996, was primarily attributable
to large losses on finite risk reinsurance contracts in the second quarter.
Surety
The following table shows underwriting results for the Surety Group.
Three Months Ended Six Months Ended
June 30 June 30
(dollars in millions) 1997 1996 1997 1996
----------------------------------------
Gross voluntary premiums written $65 $46 $125 $87
Net premiums written 57 42 110 78
Underwriting gain (loss) 9 -- 14 (3)
GAAP Underwriting Ratios:
Loss ratio 32.6% 47.0% 34.7% 51.3%
Expense ratio 48.7 52.7 50.2 55.3
Combined ratio 81.3 99.7 84.9 104.6
----------------------------------------
Surety's gross premiums written increased 41 percent and 43 percent in the
second quarter and first six months of 1997, respectively, when compared with
the same periods of 1996, due primarily to growth in domestic contract surety
business in the northeast and western regions, and in international surety
business. International surety business consists primarily of Afianzadora
Insurgentes, S.A. de C.V. ("Afianzadora"), which USF&G acquired in December
1996. Afianzadora represented 16 percent and 20 percent of total Surety gross
premiums written in the second quarter and first six months of 1997,
respectively.
Surety's second quarter and first half 1997 underwriting results and loss ratio
improved when compared with the same periods of 1996, largely due to the
absence, in the 1997 periods, of large contract surety losses which were
incurred in the second quarter and first half of 1996.
3.2. Life insurance
Life insurance operations (F&G Life) represented 10 percent of USF&G's revenues
before net realized gains for the first six months of 1997 compared with 13
percent for the same period of 1996. F&G Life also represented 31 percent of the
assets at June 30, 1997 compared with 29 percent at December 31, 1996.
Financial highlights for F&G Life were as follows:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1997 1996 1997 1996
----------------------------------------
Sales $121 $88 $235 $164
Premiums earned 26 42 53 73
Net investment income 63 73 121 147
Income from operations before net
realized gains, facilities exit costs/
sublease income, income taxes and
distributions on capital securities 15 12 29 23
----------------------------------------
F&G Life's premiums earned declined in the second quarter and first six months
of 1997 when compared with the same periods of 1996 due to a reduction in sales
of life contingent structured settlement annuities. Non-life contingent
contracts are not recognized as premiums earned under GAAP, but are recorded
directly in the balance sheet on a deposit accounting basis. Structured
settlement annuities are sold primarily to the property/casualty segment to
settle insurance claims. The decline in sales of these annuities resulted from a
higher-than-average level of structured settlement annuities which the
property/casualty segment purchased in prior years as part of its efforts to
settle older property/casualty claims. Net investment income declined due to a
lower asset base created by the transfer of approximately $918 million of F&G
Life's fixed maturities to an unaffiliated life insurance company as part of a
coinsurance transaction (refer to the "Policy surrenders" discussion below).
Despite the decrease in premiums earned and net investment income, income for
the quarter and six months ended June 30, 1997 increased when compared with the
same periods of 1996, primarily due to improved spread management on annuity and
universal life products, which yield higher profit margins on F&G Life's book of
business, combined with lower per-unit operating expenses.
Sales
The following table shows life insurance and annuity sales (premiums and
deposits) by distribution system and product type.
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1997 1996 1997 1996
----------------------------------------
Distribution System:
Brokerage $ 79 $44 $153 $ 73
National wholesaler 24 19 48 38
Direct structured settlements 16 21 27 42
Other 2 4 7 11
----------------------------------------
Total $121 $88 $235 $164
----------------------------------------
Product Type:
Single premium deferred annuities $ 74 $39 $144 $ 62
Tax sheltered annuities 23 18 45 38
Structured settlement annuities 16 21 27 42
Other annuities 4 6 11 15
Life insurance 4 4 8 7
----------------------------------------
Total $121 $88 $235 $164
----------------------------------------
Sales increased 43 percent in the first six months of 1997 when compared with
the same period of 1996. The growth in sales of single premium deferred
annuities is primarily due to management's continued marketing emphasis on its
new and existing products and distribution channels. Despite this marketing
emphasis, demand for its products is affected by fluctuating interest rates and
the relative attractiveness of alternative investments, annuity or insurance
products, as well as its credit ratings. As a result, there is no assurance that
the improved sales trend will continue. Total life insurance in force was $10.5
billion at June 30, 1997 and $10.7 billion at December 31, 1996.
Policy surrenders
Deferred annuities and universal life products are subject to surrender. Nearly
all of F&G Life's surrenderable annuity policies allow a refund of the cash
value balance less a surrender charge. The surrender charge varies by product.
F&G Life's current product offerings have surrender charges that decline from
nine percent in the first policy year to zero percent by the tenth policy year.
Such built-in surrender charges provide protection against premature policy
surrender. In August 1996, F&G Life entered into a coinsurance contract with an
unaffiliated life insurance company whereby F&G Life ceded all of its remaining
block of single premium deferred annuities that were originally sold through
stock brokerage firms (the "broker SPDA block"). At the time of the transaction,
the broker SPDA block had a current account value of approximately $964 million.
The transaction removed the broker SPDA block from F&G Life's direct
obligations. As of June 30, 1997, surrender activity under the coinsurance
contract had reduced the broker SPDA block and the related reinsurance
receivable to $683 million.
Policy surrenders totaled $42 million and $81 million for the quarter and six
months ended June 30, 1997, compared with $224 million and $365 million for the
same periods of 1996. Surrender activity has decreased significantly due
primarily to the coinsurance of the broker SPDA block. This reduced level of
surrenders is expected to continue throughout 1997.
4. RESERVES AND SURPLUS
The level of loss reserves for both current and prior years' claims is
continually monitored and adjusted for changing economic, social, judicial and
legislative conditions, as well as for changes in historical trends as
information regarding such conditions and actual claims develops. Management
believes that loss reserves are adequate, but establishing appropriate reserves,
particularly with respect to environmental, asbestos and other long-term
exposure claims, is highly judgmental and an inherently uncertain process. It is
possible that, as conditions change and claims experience develops, additional
reserves may be required in the future. There can be no assurance that such
adjustments will not have a material adverse effect on USF&G's financial
condition or results of operations.
4.1. Mass torts
USF&G categorizes long-term exposures where multiple claims relate to a similar
cause of loss (excluding catastrophes) as "mass torts". Mass tort exposures
include construction defect, environmental and asbestos claims.
Reserves for losses that have been reported and certain legal expenses are
established on the "case basis". Bulk reserves are established, in addition to
the case reserves, to reflect unreported claims and future development on
reported claims. Total case and bulk reserves for these mass torts, net of ceded
reinsurance, comprised approximately nine percent and ten percent of total net
property/casualty reserves for unpaid losses and loss expenses at June 30, 1997
and December 31, 1996, respectively.
The following table sets forth selected information for each of the major
categories of mass torts, net of ceded reinsurance.
Construction
(in millions) Defect Environmental Asbestos
---------------------------------------------
Net reserves at
December 31, 1996 $40 $308 $135
Losses incurred 9 10 (2)
Claims paid (7) (13) (2)
---------------------------------------------
Net reserves at June 30, 1997 $42 $305 $131
---------------------------------------------
Management believes that USF&G's reserve position is adequate relative to its
exposure to mass torts. USF&G's customer base generally has not included large
manufacturing companies, which tend to incur most of the known environmental and
asbestos exposures. Many of USF&G's environmental claims relate to small
industrial or transportation accidents which individually are unlikely to
involve material exposures. In addition, USF&G has traditionally been a primary
coverage carrier, having written relatively little high-level excess coverage;
therefore, liability exposures are generally restricted to primary coverage
limits.
4.2. Reinsurance
In the second quarter of 1997, United States Fidelity and Guaranty Company
("USF&G Company"), the principal property/casualty insurance subsidiary,
realigned its catastrophe reinsurance to reflect the company's strategic
initiatives in FBIG and CIG. USF&G Company secured a 60 percent quota share
treaty for its personal lines residential property business (homeowners and
dwelling/fire policies) which allows USF&G Company to limit its exposure to
historically volatile underwriting losses in these lines. To further protect
against catastrophe losses on the remainder of the FBIG residential property
business, USF&G Company obtained an aggregate excess of loss treaty providing
$15 million of coverage in excess of a $20 million annual aggregate deductible.
Additionally, effective July 1, 1997, USF&G Company expanded its property
catastrophe reinsurance coverage by reducing its retention from $75 million to
$50 million and increasing its reinsurance coverage limit from $175 million to
$250 million, providing USF&G Company protection against catastrophe losses in
lines not covered by FBIG's quota share treaty. A property per risk treaty,
which provides coverage of $97 million in excess of USF&G Company's $3 million
retention limit, and a Surety treaty, which provides coverage of $65 million in
excess of USF&G Company's $5 million retention limit, are also in place.
4.3. Liquidity restrictions
There are certain restrictions on payments of dividends by insurance
subsidiaries that may limit USF&G Corporation's ability to receive funds from
its subsidiaries. Under the Maryland Insurance Code, Maryland insurance
subsidiaries, such as USF&G Company and F&G Life, must provide the Maryland
Insurance Commissioner (the "Commissioner") with not less than thirty days'
prior written notice before payment of an "extraordinary dividend" to its
holding company. "Extraordinary dividends" are dividends which, together with
any dividends paid during the immediately preceding twelve-month period, would
be in excess of ten percent of the subsidiary's statutory policyholders' surplus
as of the prior calendar year end. Extraordinary dividends may not be paid until
either such thirty-day period has expired and the Commissioner has not
disapproved the payment or the Commissioner has approved the payment within such
period. In addition, ten days' prior notice of any other dividend must be given
to the Commissioner prior to payment, and the Commissioner has the right to
prevent payment of such dividend if it is determined that such payment could
impair the insurer's surplus or financial condition.
On September 30, 1996, F&G Life, with the Commissioner's consent, paid
extraordinary dividends to USF&G Corporation. Because any dividends paid during
the immediately preceding twelve-month period are considered when determining
whether future dividends constitute extraordinary dividends, any dividends which
F&G Life would propose to pay in the twelve-month period beginning September 30,
1996 would be deemed extraordinary dividends and subject to the thirty-day
notice period. The application of the thirty-day notice requirement to dividends
of its subsidiaries is not expected to materially affect the liquidity of USF&G
Corporation.
5. INVESTMENTS
USF&G's investment mix continues to reflect a concentration in high-quality
fixed-income securities. Long-term fixed maturities comprised 81 percent of
total investments at June 30, 1997 and December 31, 1996. Total investments have
increased primarily due to an increase in securities lending activity. The
following table shows the distribution of USF&G's investment portfolio.
At June 30 At December 31
(dollars in millions) 1997 1996
----------------------------------------
Total investments $10,239 $10,076
----------------------------------------
Fixed maturities 81% 81%
Common and preferred stocks -- --
Short-term investments 5 5
Mortgage loans and real estate 9 10
Other invested assets 5 4
----------------------------------------
Total 100% 100%
----------------------------------------
5.1. Net investment income The following table shows the
components of net investment income.
Three Months Ended Six Months Ended
June 30 June 30
(dollars in millions) 1997 1996 1997 1996
----------------------------------------
Net investment income from:
Taxable fixed maturities $137 $163 $277 $328
Tax-exempt fixed maturities 10 1 17 1
Common and preferred stocks -- 1 -- 2
Short-term investments 8 4 16 8
Mortgage loans and real estate 17 10 34 20
Other investment income, net of
interest expense on funds held 3 5 7 9
----------------------------------------
Total investment income 175 184 351 368
Investment expenses (3) (3) (7) (7)
----------------------------------------
Net investment income $172 $181 $344 $361
----------------------------------------
Average annualized yields:
Total investments 7.1% 6.9% 7.1% 6.8%
Fixed maturities 7.2 7.3 7.3 7.3
----------------------------------------
Investment income for the six months ended June 30, 1997, decreased $17 million,
or five percent, when compared with the same period of 1996. Income from fixed
maturities declined primarily as a result of the decline in F&G Life's fixed
maturities portfolio due to the transfer of fixed maturities to an unaffiliated
life insurance company under the terms of a coinsurance contract (refer to
Section 3.2 of this Analysis). The increases in interest income from short-term
investments are a result of varying short-term interest rates, increases in the
asset balances, and the inclusion of $2 million and $5 million for the second
quarter and first half of 1997, respectively, related to Afianzadora, which
USF&G acquired in December 1996. Investment income on mortgage loans and real
estate for 1997 reflects the continuing strategy of reducing equity real estate
holdings and reinvesting into commercial mortgage loans collateralized by
income-producing real estate. Other investment income includes $4 million and $5
million in the second quarter of 1997 and 1996, respectively, and $9 million for
the six months ended June 30, 1997 and 1996, of income related to USF&G's share
of earnings from an equity interest in RenaissanceRe Holdings, Ltd.
("RenaissanceRe"), a property reinsurance company in Bermuda. Future income from
the investment in RenaissanceRe is subject to volatility and exposure to
catastrophe losses and other risks inherent in the property/casualty reinsurance
industry.
5.2. Net realized gains on investments
The components of net realized gains include the following:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1997 1996 1997 1996
----------------------------------------
Net Gains (Losses) on Sales:
Fixed maturities $(4) $(2) $(9) $(1)
Mortgage loans and real estate 4 -- 4 4
Other 5 4 10 10
----------------------------------------
Total net gains from sales 5 2 5 13
Impairments (1) (1) (1) (1)
----------------------------------------
Net realized gains on investments $ 4 $ 1 $ 4 $12
----------------------------------------
Realized losses on fixed maturities in 1997 relate to the sale of taxable bonds
in order to reinvest the proceeds in tax-exempt bonds. Realized gains of $4
million on mortgage loans and real estate in the six months ended June 30, 1997
and 1996, are the result of the sale of equity real estate investments. Other
realized gains in 1997 and 1996 primarily relate to USF&G's share of gains from
its equity in certain venture capital-type limited partnerships. Impairments
relate to specific investments and are realized when the decline in fair value
is deemed other than temporary, or when the fair value is significantly less
than book value and it is probable that the investment will be sold before any
recovery in value can occur.
5.3. Unrealized gains (losses)
The components of the changes in unrealized gains (losses) were as follows:
At June 30 At December 31
(in millions) 1997 1996 Change
----------------------------------------
Fixed maturities
available for sale $ 97 $ 98 $(1)
Deferred policy acquisition
costs (20) (19) (1)
Common and preferred stocks (3) -- (3)
Foreign currency and other 9 16 (7)
----------------------------------------
Total unrealized gains
before taxes 83 95 (12)
Deferred tax on net unrealized
gains (29) (33) 4
----------------------------------------
Total unrealized gains,
net of tax $ 54 $ 62 $(8)
----------------------------------------
Fixed maturity investments classified as "available for sale" are recorded at
market value, with the corresponding unrealized gains reported as a component of
shareholders' equity. Fluctuations in the unrealized gains and losses on fixed
maturities are primarily a result of fluctuating interest rates. Unrealized
gains and losses on fixed maturities are offset by related changes in the DPAC,
which reflect assumptions about the effect of potential sales of fixed
maturities available for sale on future amortization of the life insurance
segment's DPAC. The change in unrealized gains on other investments primarily
relates to USF&G's share of unrealized gains from its equity interests in
certain venture capital-type limited partnerships.
5.4. Fixed maturity investments
The table below details the composition of the fixed maturity portfolio.
At June 30 At December 31
(dollars in millions) 1997 % 1996 %
-----------------------------------------
Corporate and other invest-
ment grade bonds $4,259 52% $4,673 58%
Mortgage-backed securities 1,473 18 1,464 18
Asset-backed securities 695 8 731 9
U.S. Government bonds 350 4 334 4
High-yield bonds* 582 7 548 7
Tax-exempt bonds 874 11 316 4
-----------------------------------------
Total fixed maturities at
amortized cost 8,233 100 8,066 100
Total market value of
fixed maturities 8,330 8,164
-----------------------------------------
Net unrealized
gains $ 97 $ 98
-----------------------------------------
Percent market-to-
amortized cost 101% 101%
-----------------------------------------
*See Glossary of Terms
While subject to prepayment risk, credit risk related to USF&G's mortgage-backed
securities portfolio at June 30, 1997 is believed to be minimal since 99 percent
of such securities have "AAA" ratings or are collateralized by obligations of
the U.S. Government or its agencies. The net proceeds from sales, maturities and
prepayments in 1997 were predominately invested in investment-grade taxable and
tax-exempt bonds. Investment-grade bonds, including debt obligations of the U.S.
Government and its agencies, comprised 93 percent of the portfolio at June 30,
1997 and December 31, 1996. The following table shows the credit quality of the
long-term fixed maturity portfolio at June 30, 1997.
Percent
Market-to-
Amortized Market Amortized
(dollars in millions) Cost Percent Value Cost
- ----------------------------------------------------------------
U.S. Government and
U.S. Government
Agencies $1,801 22% $1,821 101%
AAA 1,502 18 1,514 101
AA 1,203 15 1,209 101
A 1,977 24 1,997 101
BBB 1,168 14 1,186 102
BB 226 3 234 103
B 356 4 368 103
CCC and lower -- -- 1 --
-------------------------------------
Total $8,233 100% $8,330 101%
-------------------------------------
The information on credit quality in the preceding table is based upon the
higher of the rating assigned to each issue by either Standard & Poor's or
Moody's. Where neither Standard & Poor's nor Moody's has assigned a rating to a
particular fixed maturity issue, classification is based on 1) ratings available
from other recognized rating services; 2) ratings assigned by the NAIC; or 3) an
internal assessment of the characteristics of the individual security, if no
other rating is available.
High-yield investments generally involve a greater degree of risk than
investment-grade securities. Expected returns should, however, compensate for
the added risk. USF&G attempts to minimize the risks associated with high-yield
investments by limiting the exposure to any one issuer and by closely monitoring
the creditworthiness of such issuers. At June 30, 1997, USF&G's five largest
investments in high-yield bonds totaled $66 million in amortized cost and had a
market value of $65 million. USF&G's largest single high-yield bond exposure
represented five percent of the high-yield portfolio and less than one percent
of the total fixed maturity portfolio.
5.5. Real Estate
The table below shows the components of USF&G's real estate portfolio.
At June 30 At December 31
(in millions) 1997 1996
----------------------------
Mortgage loans $489 $406
Equity real estate 410 554
----------------------------
Total $899 $960
----------------------------
The decrease in the real estate portfolio was primarily due to the sale of
equity real estate, and was offset in part by new mortgage loan originations
which consisted of fixed rate loans collateralized by apartment and office
properties. This activity is consistent with USF&G's continued strategy to
reduce risk and increase yields in the real estate portfolio by selling equity
real estate when it is advantageous to do so and reinvesting the proceeds in
medium-term mortgage loans.
Mortgage loans and real estate are evaluated on a quarterly basis as part of
management's asset quality review process. This process ensures that the
financial and operating aspects of a property's performance are closely
monitored, analyzed and acted upon if appropriate. Although USF&G anticipates
that any sales of real estate will be in an orderly fashion as and when market
conditions permit, if USF&G were required to dispose of a significant portion of
its real estate in the near term, it is likely that it would recover amounts
substantially less than the related carrying values.
6. FINANCIAL CONDITION
USF&G's corporate debt totaled $539 million at June 30, 1997, compared with $477
million at December 31, 1996. The increase is attributable to a $60 million
borrowing against the standby credit facility which was repaid in mid-July 1997
with the proceeds from the Capital Securities, Series C, issued on July 8, 1997
(refer to Note 9, "Subsequent Events", of the Notes to Condensed Consolidated
Financial Statements).
USF&G's shareholders' equity totaled $1.8 billion at June 30, 1997, compared
with $2.0 billion at December 31, 1996.
The decrease is primarily the result of the redemption of $200 million, or the
entire outstanding balance, of the Series A Preferred Stock. Redemptions of the
Series A Preferred Stock were funded by proceeds from the December 1996 and
January 1997 issuances of $200 million of USF&G-obligated mandatorily redeemable
preferred capital securities of subsidiary trusts holding solely junior
subordinated deferrable interest debentures of USF&G.
During 1996, USF&G announced a plan to repurchase up to 13.3 million shares of
the Corporation's common stock and common stock equivalents. As of December 31,
1996, 8.6 million shares had been repurchased. During the quarter ended March
31, 1997, USF&G repurchased 2.3 million shares. The program was completed during
the quarter ending June 30, 1997 with the purchase of another 2.4 million
shares. It is uncertain at this time if, or to what extent, USF&G will expand
the repurchase program beyond those shares already reacquired, except that the
board of directors has authorized repurchases reasonably designed to offset the
impact of share issuances pursuant to director and employee incentive
compensation programs. Management and the Board of Directors will continue to
evaluate share repurchases as an alternative use of excess capital and cash
flow, depending on other investment opportunities.
7. LIQUIDITY
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs. USF&G requires cash primarily to
pay policyholders' claims and benefits, debt and dividend obligations, and
operating expenses. USF&G's sources of cash include cash flow from operations,
credit facilities, marketable securities and sales of other assets. Management
believes that internal and external sources of cash will continue to exceed
USF&G's short-term and long-term operating needs.
7.1. Cash flow
USF&G had cash flow from operations of $69 million and $77 million for the
second quarter and first six months of 1997, respectively, compared with $95
million and $149 million for the same periods of 1996, respectively. This
decrease in cash flow from operations is primarily due to the $45 million and
$82 million reduction in net reinsurance activity in the second quarter and
first six months of 1997, respectively, which resulted primarily from the
personal lines quota share treaty (see Section 4.2 of this Analysis). Net
investment income collected decreased $14 million and $28 million in the second
quarter and first six months of 1997, respectively, largely as a result of the
transfer of approximately $918 million of F&G Life's fixed maturity investments
as part of a coinsurance contract (refer to Section 3.2 of this Analysis).
However, the coinsurance transaction also reduced F&G Life's exposure to cash
outflows for surrender activity. Consequently, deposits and withdrawals of
universal life and investment contracts had net cash inflows of $76 million and
$156 million in the second quarter and first six months of 1997, respectively,
which for GAAP purposes are classified as financing activities, compared with
net cash outflows of $156 million and $234 million in the second quarter and
first six months of 1996, respectively.
7.2. Credit facilities
At June 30, 1997, USF&G maintained a $250 million committed, standby credit
facility with a group of foreign and domestic banks. Borrowings outstanding
under the credit facility totaled $60 million at June 30, 1997. There were no
borrowings against the facility at December 31, 1996. The outstanding balance
was repaid in mid-July 1997 with the proceeds from the Capital Securities,
Series C. The credit agreement contains restrictive covenants pertaining to
indebtedness, tangible net worth, liens and other matters. USF&G was in
compliance with these covenants at June 30, 1997 and December 31, 1996.
In addition, at June 30, 1997, USF&G maintained a $150 million multi-currency
credit facility. There were no borrowings on this credit facility as of June 30,
1997.
8. GLOSSARY OF TERMS
Account value: Deferred annuity cash value available to policyholders before the
assessment of surrender charges.
Catastrophe losses: Property/casualty insurance claim losses resulting from a
sudden calamitous event, such as a severe storm, are categorized as
"catastrophes" when they meet certain severity and other criteria determined by
a national organization.
Expense ratio: The ratio of underwriting expenses to net premiums written, if
determined in accordance with statutory accounting practices ("SAP"), or the
ratio of underwriting expenses (adjusted by deferred policy acquisition costs)
to earned premiums, if determined in accordance with GAAP.
High-yield bonds: Fixed maturity investments with credit ratings below the
equivalent of Standard & Poor's "BBB-". In addition, nonrated fixed maturities
that, in the judgment of USF&G, have credit characteristics similar to those of
a fixed maturity rated below BBB- are considered high-yield bonds.
Investment spreads: The difference between the interest rates earned on invested
assets and the interest rates credited to policyholders.
Loss ratio: The ratio of incurred losses and loss expenses to earned premiums,
determined in accordance with SAP or GAAP.
Net premiums written: Premiums retained by an insurer, after the assumption and
cession of reinsurance.
Policyholders' surplus: The net assets of an insurer as reported to regulatory
agencies based on accounting practices prescribed or permitted by the National
Association of Insurance Commissioners.
Premiums earned: The portion of premiums written applicable to the expired
period of policies.
Reinsurance: For a consideration, an assuming insurer agrees
to indemnify a ceding insurer against all or part of the loss the latter may
sustain under the policy or policies it has issued. The legal rights of the
insured are not affected by the transaction, and the ceding insurer remains
liable to the insured for payment of policy benefits.
Specialty segments: Market segments within CIG which operate separate business
resource platforms individually dedicated to specific specialized businesses
such as financial institutions, technology, governmental entities, large real
estate, Directors & Officers, and specialty trucking.
Structured settlement annuity: An immediate annuity sold to property/casualty
companies to fund the settlement of insurance claims.
Underwriting results: Property/casualty pretax operating results excluding
investment results, policyholders' dividends and noninsurance activities;
generally, premiums earned less losses and loss expenses incurred, and
"underwriting" expenses incurred. It is not unusual for property/casualty
companies to have underwriting losses that are offset by investment income.
Universal life: A life insurance product which provides a death benefit for the
life of the insured and accumulated cash values to which interest is credited.
USF&G CORPORATION Part II. Other Information
ITEM 2. CHANGES IN SECURITIES
(c) On July 8, 1997, USF&G Capital III, a business trust wholly owned by USF&G,
completed the issuance of $100 million of 8.312% Capital Securities, Series C
(the "Capital Securities"). The Capital Securities were offered for sale by
Goldman, Sachs & Co., Merrill Lynch & Co., Lehman Brothers, J.P. Morgan & Co.
and Smith Barney Inc. (the "Initial Purchasers") to qualified institutional
buyers (as defined in Rule 144A under the Securities Act of 1933, as amended
(the "Securities Act") in reliance on Rule 144A and to a limited number of
institutional investors that were accredited investors within the meaning of
Rule 501 (a) under the Securities Act. The offering and sale were conducted
without registration, pursuant to exemption to the registration requirements
under the Securities Act, including Rule 144A and Regulation D. The aggregate
offering price was $100 million. USF&G paid the Initial Purchasers $1 million as
compensation for arranging the investment in the Capital Securities and the
related purchase by USF&G Capital III of Junior Subordinated Debentures issued
by USF&G. (Refer to Note 9, "Subsequent Events", of the Notes to Condensed
Consolidated Financial Statements.)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on May 21, 1997.
(b) The directors nominated were H. Furlong Baldwin, Michael J. Birck,
Norman P. Blake, Jr., George L. Bunting, Jr., Robert E. Davis, Kenneth M.
Duberstein, Dale F. Frey, Robert E. Gregory, Jr., Robert J. Hurst, Wilbur G.
Lewellen, Larry P. Scriggins, Anne M. Whittemore, and R. James Woolsey.
(c) The matters voted on and the number of votes cast were as follows:
(1) Election of Directors
For Withheld
H. Furlong Baldwin 99,427,306 1,609,183
Michael J. Birck 99,451,217 1,585,272
Norman P. Blake, Jr. 99,349,778 1,686,711
George L. Bunting, Jr. 99,436,939 1,599,550
Robert E. Davis 99,352,940 1,683,549
Kenneth M. Duberstein 99,423,541 1,612,948
Dale F. Frey 99,446,483 1,590,006
Robert E. Gregory, Jr. 99,446,355 1,590,134
Robert J. Hurst 98,370,362 2,666,127
Wilbur G. Lewellen 99,452,159 1,584,330
Larry P. Scriggins 98,025,772 3,010,717
Anne M. Whittemore 99,362,677 1,673,812
R. James Woolsey 99,357,620 1,678,869
With regard to the election of directors, there were a total of 1,665,467
abstentions.
(2) Proposal to adopt the Stock Incentive Plan of 1997. Of the shares voted on
the proposal, 59,697,132 shares were voted for the proposal, 24,601,088 were
voted against the proposal, and 1,042,457 shares abstained from voting. The
total broker non-votes were 15,695,812.
ITEM 5. OTHER INFORMATION
On August 8, 1997, USF&G announced that it had entered into a definitive
agreement to acquire Titan Holdings, Inc. ("Titan"). Titan, which is
headquartered in San Antonio, Texas, primarily operates two specialty
property/casualty operations: Titan Auto, which writes nonstandard automobile
insurance; and Titan Public Entity, which insures small-to-medium sized towns
and counties. Titan reported total assets of $405 million at June 30, 1997, and
written premium of $199 million for the twelve-month period ended June 30, 1997,
with 65 percent of ongoing business written by Titan Auto and 35 percent by
Titan Public Entity.
USF&G will pay $11.60 in cash plus 0.46516 share of common stock for each Titan
share, for a total of $23.20 per Titan share, based on a USF&G share valuation
of $24.94, which was the value used in USF&G's initial offer to Titan. This
consideration is subject to adjustment pursuant to a collar arrangement whereby
the price will be adjusted to the extent that the average closing price of
USF&G's common stock during a ten-day trading period ending three trading days
before the effective date of the merger is above $28.68 per share or below
$21.20 per share. There is an additional adjustment to ensure that at all times
50 percent of the total consideration is payable in cash and 50 percent is
payable in stock. At the $23.20 valuation, the aggregate transaction value is
$234 million plus assumption of debt.
In connection with the execution of the merger agreement, Mark E. Watson, Jr.,
Titan's largest shareholder, and related entities entered into a voting
agreement with USF&G covering 2,579,295 Titan shares, or approximately 26
percent of the outstanding shares, whereby the shareholders agreed to vote in
favor of the proposed merger and against any transaction in opposition to or
inconsistent with the proposed merger.
The Corporation expects to finance the cash portion of the consideration payable
to Titan shareholders from internal resources or existing credit facilities. The
transaction is subject to customary closing conditions, including necessary
regulatory approvals and approval by the shareholders of Titan, and is expected
to close in the fourth quarter of 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 4
Documents related to USF&G Capital III:
Amended and Restated Trust Agreement dated as of July 8, 1997
among USF&G Corporation, The Bank Of New York, The Bank Of New
York (Delaware), the Administrators and the Holders.
Junior Subordinated Indenture dated as of July 8, 1997 between
USF&G Corporation and The Bank Of New York.
Guarantee Agreement Between USF&G Corporation and The Bank Of New
York dated as of July 8, 1997.
Form of Global Certificate Evidencing Capital Securities of USF&G
Capital III.
Agreement as to Expenses and Liabilities dated as of July 8, 1997
between USF&G Corporation and USF&G Capital III.
USF&G Corporation 8.312% Deferrable Interest Junior Subordinated
Debenture, $103,093,000.
Exhibit 10A
Material Contracts related to Titan Holdings, Inc.:
Merger Agreement
Voting and Support Agreement
Exhibit 10B
Material Contracts regarding USF&G Executive Severance:
Senior Executive Severance Plan
Key Executive Severance Plan
Exhibit 11
Computation of earnings per share.
Exhibit 12
Computation of ratio of consolidated earnings to fixed charges, distributions on
capital securities and preferred stock dividends.
Exhibit 15
Letter regarding unaudited interim financial information.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the second quarter of 1997.
USF&G CORPORATION Exhibit 11 - Computation of Earnings Per Share (Unaudited)
Six Months Ended June 30
(dollars in millions except per share data) 1997 1996
-----------------------------
Net Income Available to Common Stock
Primary:
Net income $ 92 $124
Less preferred stock dividend requirements (2) (10)
-----------------------------
Net income available to common stock $ 90 $114
-----------------------------
Fully diluted:
Net income $ 92 $124
Less preferred stock dividend requirements (2) (8)
Add interest expense on zero coupon convertible notes 1 2
-----------------------------
Net income available to common stock $ 91 $118
-----------------------------
Weighted-Average Shares Outstanding
Primary:
Common shares 112,076,192 119,411,427
Common stock equivalents 3,490,052 --
-----------------------------
Total primary shares 115,566,244 119,411,427
-----------------------------
Fully diluted:
Common shares 112,076,192 119,411,427
Common stock equivalents 4,116,194 1,636,528
Assumed conversion of preferred stock -- 2,308,106
Assumed conversion of zero coupon convertible notes 5,181,588 6,352,827
-----------------------------
Total fully diluted shares 121,373,974 129,708,888
-----------------------------
Earnings Per Share
Primary $.79 $.95
Fully diluted .76 .91
-----------------------------
USF&G CORPORATION Exhibit 12 - Computation of Ratio of Consolidated Earnings
to Fixed Charges, Distributions on Capital
Securities and Preferred Stock Dividends
(Unaudited)
Six Months Ended June 30
(dollars in millions) 1997 1996
------------------------
Fixed charges
Interest expense $ 17 $ 20
Portion of rents representative of interest 5 7
------------------
Total fixed charges 22 27
Distributions on capital securities 8 --
Preferred stock dividend requirements (A) 3 10
------------------
Combined Fixed Charges, Distributions on Capital Securities
and Preferred Stock Dividends $ 33 $ 37
------------------
Consolidated Earnings Available
Income from operations before income taxes and
distributions on capital securities $138 $124
Adjustment:
Fixed charges 22 27
------------------
Consolidated earnings available for fixed
charges, distributions on capital securities
and preferred stock dividends $160 $151
------------------
Ratio of Consolidated Earnings to Fixed Charges 7.2 5.5
Ratio of Consolidated Earnings to Combined Fixed
Charges, Distributions on Capital Securities
and Preferred Stock Dividends 4.9 4.1
------------------
(A) Preferred stock dividend requirements of $2 million and $10 million in 1997
and 1996, respectively, divided by 100% less the effective income tax rate of
29.2% in 1997 and 0% in 1996.
USF&G CORPORATION Exhibit 15 - Letter Regarding Unaudited Interim Financial
Information
We are aware of the incorporation by reference in the Registration
Statement Numbers 33-20449, 33-9405, 33-33271, 33-21132, 33-51859, 33-65471 and
333-13685 on Form S-3 and Numbers 2-72026, 2-61626, 2-98232, 33-16111, 33-38113,
33-35095, 33-43132, 33-45664, 33-45665, 33-61965, 33-55667, 33-55669, 33-55671,
33-59535, 33-64839 and 333-04359 on Form S-8 of USF&G Corporation, of our report
on the unaudited condensed consolidated interime financial statements of USF&G
Corporation which is in this Quarterly Report (Form 10-Q) for the quarter ended
June 30, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a
part of the registration statements prepared or certified by accountants within
the meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
Baltimore, Maryland
August 8, 1997
USF&G CORPORATION Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
USF&G Corporation
By /s/ DAN L. HALE
Dan L. Hale
Executive Vice President and
Chief Financial Officer
Dated at Baltimore, Maryland
August 8, 1997