SCHEDULE 14A INFORMATION
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Section240.14a-12
USF&G CORPORATION
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(Name of Registrant as Specified In Its Charter)
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[LOGO]
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of USF&G Corporation will be held at the
Sheraton Baltimore North, 903 Dulaney Valley Road, Towson, Maryland, on
Wednesday, May 21, 1997, at 9:00 a.m. for the following purposes:
1. To elect a Board of Directors for the ensuing year.
2. To consider and act upon the Proposal to adopt the Stock Incentive Plan
of 1997, as recommended by the Board of Directors.
3. To consider and act upon such other business as may properly come before
the meeting.
If you do not expect to attend the meeting, you are requested to sign, date
and promptly return the enclosed proxy.
By Order of the Board of Directors
JOHN F. HOFFEN, JR.
SECRETARY
Baltimore, Maryland
March 31, 1997
USF&G Corporation, 6225 Smith Avenue, Baltimore, Maryland 21209
TABLE OF CONTENTS
PAGE
-----------
Election of Directors..................................................................................... 2
Stock Ownership of Certain Beneficial Owners, Directors and Management.................................... 5
Board and Board Committee Meetings........................................................................ 7
Compensation of Executive Officers and Directors.......................................................... 8
Summary Compensation Table.............................................................................. 8
Stock Option Grants in 1996............................................................................. 9
Aggregate Option Exercises in 1996 and Year-End Values.................................................. 10
Long-Term Incentive Awards in 1996...................................................................... 10
Pension Plans........................................................................................... 11
Employment Agreements; Special Severance Arrangements................................................... 12
Directors' Fees......................................................................................... 12
Compensation Committee Report............................................................................. 13
Compensation Philosophy................................................................................. 13
Compensation Program.................................................................................... 13
Compensation of Chief Executive Officer................................................................. 15
Stock Performance Graph................................................................................... 18
Proposal to Adopt Stock Incentive Plan of 1997............................................................ 19
Other Information......................................................................................... 23
Certain Business Relationships.......................................................................... 23
Audit Committee and Independent Public Accountants...................................................... 24
Filings Under Section 16(a)............................................................................. 24
Shareholder Proposals for the 1998 Annual Meeting....................................................... 24
Other Matters........................................................................................... 24
Exhibit A--Stock Incentive Plan of 1997................................................................... A-1
USF&G CORPORATION
6225 SMITH AVENUE
BALTIMORE, MARYLAND 21209
PROXY STATEMENT
ANNUAL MEETING OF SHAREHOLDERS--MAY 21, 1997
This Proxy Statement and the accompanying Notice of Annual Meeting of
Shareholders and proxy card are being furnished to shareholders of USF&G
Corporation (the "Corporation") in connection with the solicitation by the Board
of Directors of proxies to be voted at the Annual Meeting of Shareholders. These
proxy materials are being furnished on or about March 31, 1997 to all
shareholders of record as of March 14, 1997.
The following matters will be presented to the Corporation's shareholders at
the Annual Meeting: (1) the election of the Board of Directors for the ensuing
year, and (2) a proposal to adopt the Stock Incentive Plan of 1997. Directors
are elected by a plurality of the votes cast with a quorum present. Approval of
proposal (2) requires the affirmative vote of a majority of the votes cast with
a quorum present. Only holders of record of shares of Common Stock on March 14,
1997 will be entitled to vote at the meeting, and each share will have one vote.
At the close of business on March 14, 1997, there were 113,142,763 shares of the
Common Stock of the Corporation outstanding and entitled to vote at the meeting.
Abstentions and broker non-votes do not affect the plurality vote required for
the election of directors or the majority vote required for approval of the
proposal.
The expense of printing and mailing proxy materials will be borne by the
Corporation. The solicitation of proxies will generally be by mail and by
directors, officers and employees of the Corporation. In addition, the
Corporation has retained Georgeson & Co., Inc. ("Georgeson") to assist in the
solicitation of proxies. Georgeson will receive a fee of approximately $12,000
and will be reimbursed for expenses incurred in connection with its services. In
some instances, solicitations may be made by telephone or facsimile, the costs
of which will be borne by the Corporation. The Corporation may also reimburse
brokers, custodians, nominees and other fiduciaries for reasonable out-of-pocket
and clerical expenses in forwarding proxy materials to their principals.
A shareholder who has given a proxy has the power to revoke the proxy at any
time before it is exercised. Such right of revocation is not limited by or
subject to compliance with any formal procedure.
It is the practice of the Corporation to take reasonable steps to ensure
that shareholders are afforded privacy in the proxy voting process. Proxies are
tabulated by third parties who may not disclose the votes of individual
shareholders to any officer, director or employee of the Corporation. This
policy is waived with respect to shareholders who provide written comments or
questions with their proxies or in the event of a proxy contest where
non-management groups have access to voting results.
ELECTION OF DIRECTORS
Thirteen (13) directors are to be elected. Unless contrary instructions are
given, it is intended that the votes represented by the proxies will be cast for
the election of the persons listed below as directors. All of the proposed
nominees are currently directors of the Corporation, and all of the proposed
nominees other than Mr. Duberstein were elected at the last meeting of
shareholders. Mr. Duberstein was elected by the Board to serve as a director at
a regular meeting in September, 1996. Directors will be elected for a term of
one year or until their successors are chosen and qualified.
The table below presents information concerning persons to be nominated for
election as directors of the Corporation, including their current membership on
committees of the Board of Directors of the Corporation, time served as a
director of the Corporation (or its predecessor), principal occupations or
affiliations during the last five years, and certain other directorships held.
H. FURLONG BALDWIN
Member-Executive, Finance, and Nominating Committees. Director since 1968.
Chairman of the Board and Chief Executive Officer of Mercantile Bankshares
Corporation. Mr. Baldwin, age 65, is also a director of Mercantile Bankshares
Corporation, GRC International, Inc., Baltimore Gas & Electric Company and
Conrail, Inc.
MICHAEL J. BIRCK
Member-Audit and Compensation Committees. Director since 1993.
President and Chief Executive Officer of Tellabs, Inc., a designer and
manufacturer of voice and data equipment. Mr. Birck, age 59, is also a director
of Tellabs, Inc., Molex, Inc. and Illinois Tool Works, Inc.
NORMAN P. BLAKE, JR.
Member-Executive Committee. Director since 1990.
Chairman of the Board, President and Chief Executive Officer of the
Corporation and of United States Fidelity and Guaranty Company ("USF&G
Company"), the Corporation's principal subsidiary; formerly Chairman of the
Board and Chief Executive Officer of Heller International Corporation, a
commercial finance corporation; formerly Executive Vice President of General
Electric Credit Corporation (1981-1984). Mr. Blake, age 55, is also a director
of Enron Corporation and Owens Corning.
GEORGE L. BUNTING, JR.
Member-Executive, Compensation, and Nominating Committees. Director since
1978.
President and Chief Executive Officer of Bunting Management Group, a private
financial management company; formerly Chairman of the Board and Chief Executive
Officer of Noxell Corporation, a consumer products manufacturer. Mr. Bunting,
age 56, is also a director of Crown Central Petroleum Corporation, Guilford
Pharmaceuticals, Inc., Mercantile Bankshares Corporation and PHH Corporation.
ROBERT E. DAVIS
Member-Audit, Compensation, and Nominating Committees. Director since 1990.
Managing Director of Axess Corporation, a manufacturer of quality control
instrumentation, and specialty polymers. Mr. Davis, age 65, is also a director
of H&R Block, Inc. and Rheometric Scientific, Inc.
2
KENNETH M. DUBERSTEIN
Director since 1996.
Mr. Duberstein is Chairman and Chief Executive Officer of The Duberstein
Group, a strategic advisory and consulting firm; formerly Chief of Staff to
President Ronald Reagan; formerly Assistant to the President for Legislative
Affairs; formerly Deputy Under Secretary of the Department of Labor. Mr.
Duberstein, age 52, is also a director of McDonnell Douglas Corporation and
Cinergy Corporation.
DALE F. FREY
Member-Executive, Audit, and Finance Committees. Director since 1991.
Formerly Vice President of General Electric Company and Chairman of the
Board and President of General Electric Investment Corporation and GE Investment
Management Incorporated. Mr. Frey, age 64, is also a director of Praxair, Inc.,
DoubleTree Hotel Corporation, First American Financial Corporation, Rhone
Poulenc Rorer, Inc. and Beacon Properties Corporation.
ROBERT E. GREGORY, JR.
Member-Executive, Audit, and Compensation Committees. Director since 1988.
Mr. Gregory, age 54, is Chairman and Chief Executive Officer of London Fog
Corporation, an apparel manufacturer; formerly Chairman and Chief Executive
Officer of The Gitano Group, Inc., an apparel marketer; formerly President of VF
Corporation, an apparel manufacturer and distributor.
ROBERT J. HURST
Member-Executive and Nominating Committees. Director since 1988.
Mr. Hurst is Vice Chairman, Executive Committee member, and head of the
Investment Banking Division at Goldman, Sachs & Co., an investment banking firm.
Mr. Hurst, age 51, is also a director of VF Corporation.
WILBUR G. LEWELLEN
Member-Compensation and Finance Committees. Director since 1992.
Dr. Lewellen, age 59, is the Herman C. Krannert Distinguished Professor of
Management at the Graduate School of Management at Purdue University.
LARRY P. SCRIGGINS
Member-Finance and Nominating Committees. Director since 1979.
Mr. Scriggins, age 60, is a partner and member of the Executive Committee of
the law firm of Piper & Marbury L.L.P.
ANNE MARIE WHITTEMORE
Member-Finance and Nominating Committees. Director since 1993.
Ms. Whittemore is a partner in the law firm of McGuire, Woods, Battle &
Boothe, L.L.P. Ms. Whittemore, age 51, is also a director of Albemarle
Corporation, Owens & Minor, Inc., James River Corporation of Virginia and T.
Rowe Price Associates, Inc.
3
R. JAMES WOOLSEY
Member-Audit and Finance Committees. Director since 1995.
Mr. Woolsey is a partner of the law firm of Shea & Gardner; formerly
Director of Central Intelligence; formerly Ambassador and U.S. Representative to
the Negotiation on Conventional Armed Forces in Europe, Vienna, Austria. Mr.
Woolsey, age 55, is also a director of Sun Healthcare Group, Inc. and Yurie
Systems, Inc.
The Corporation's By-Laws also provide for the appointment of one or more
advisory directors. Advisory directors are appointed by the Board of Directors
and serve at the pleasure of the Board. They may attend meetings of the Board as
determined by the Board or its Chairman, but sit solely in an advisory capacity
and have no voting or other authority or responsibilities of directors. Mr. Clay
Jackson, who is Chairman of USF&G Company's National Agency Council, was
appointed as an advisory director in December 1996. Mr. Jackson is a principal
with the insurance agency of Cooper, Love & Jackson Insurance Agency, Inc., in
Nashville, Tennessee.
4
STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS,
DIRECTORS AND MANAGEMENT
The following table shows the number of shares of the Corporation's Common
Stock beneficially owned by (i) each person known to the Corporation to
beneficially own more than 5% of the outstanding Common Stock, (ii) each
director, (iii) each executive named in the Summary Compensation Table shown
below under the caption "Compensation of Executive Officers and Directors," and
(iv) all Directors and Executive Officers as a group. None of the beneficial
holdings of Common Stock listed below represents in excess of 1% of the total
issued and outstanding shares, except for the shares beneficially owned by
Putnam Investments, Inc., which shares represent 9.4% of the total issued and
outstanding shares. In addition, the Directors and Executive Officers as a group
own 1.5% of the total issued and outstanding shares. The information set forth
below has been calculated as of March 1, 1997. The number of shares beneficially
owned is determined under rules of the Securities and Exchange Commission (the
"SEC") and the information is not necessarily indicative of beneficial ownership
for any other purpose. Under such rules, beneficial ownership includes any
shares as to which the person has the sole or shared voting or investment power
and also any shares which the person has the right to acquire within 60 days
through the exercise of any stock option or other right. Unless otherwise
indicated, each person has sole investment and voting power (or shares such
powers with his or her spouse) with respect to the shares set forth in the
following table:
AMOUNT AND NATURE OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP
- -------------------------------------------------------------------- ----------------------
Putnam Investments, Inc............................................. 10,656,198(a)
One Post Office Square
Boston, MA 02109
Glenn W. Anderson................................................... 55,587(b)
H. Furlong Baldwin.................................................. 8,000(c)(d)
Michael J. Birck.................................................... 7,000(d)
Norman P. Blake, Jr................................................. 806,502(e)
George L. Bunting, Jr............................................... 15,900(d)
Robert E. Davis..................................................... 500(d)
Kenneth M. Duberstein............................................... 1,000(d)
Gary C. Dunton...................................................... 113,067(f)
Dale F. Frey........................................................ 6,776(g)
Robert E. Gregory, Jr............................................... 5,000(d)
Dan L. Hale......................................................... 208,188(h)
Robert J. Hurst..................................................... 9,324(d)(i)
Wilbur G. Lewellen.................................................. 5,800(d)
Larry P. Scriggins.................................................. 2,221(d)
John C. Sweeney..................................................... 59,079(j)
Anne Marie Whittemore............................................... 500(d)
R. James Woolsey.................................................... 250(d)
All Directors and Executive Officers as a Group (25 persons)........ 1,685,302(k)
5
NOTES
(a) As disclosed in a Schedule 13G filed with the SEC on January 31, 1997.
(b) Includes 42,333 shares subject to outstanding stock options which are
exercisable within 60 days, and 11,119 shares to be issued within 60 days
under the Long-Term Incentive Program.
(c) Excludes shares held in various fiduciary capacities by the trust department
of Mercantile Safe-Deposit and Trust Company, a wholly-owned subsidiary of
Mercantile Bankshares Corporation, of which Mr. Baldwin is a director and
executive officer.
(d) Under the 1993 Stock Plan for Non-Employee Directors, non-employee directors
receive a portion of their annual retainer fees and certain retirement
benefits in the form of Common Stock units or shares of Common Stock of the
Corporation. The shareholdings listed in the table do not include the
following fully vested Common Stock units: Mr. Baldwin, 25,278; Mr. Birck,
7,878; Mr. Bunting, 14,783; Mr. Davis, 12,883; Mr. Duberstein, 875; Mr.
Gregory, 9,140; Mr. Hurst, 15,825; Mr. Lewellen, 3,992; Mr. Scriggins,
22,895; Ms. Whittemore, 4,396; and Mr. Woolsey, 1,300.
(e) Includes 55,815 shares directly owned, 700,018 shares subject to outstanding
stock options which are exercisable within 60 days, 5,050 shares owned by
children of Mr. Blake, and 45,619 shares to be issued within 60 days under
the Long-Term Incentive Program.
(f) Includes 90,000 shares subject to outstanding stock options which are
exercisable within 60 days and 14,567 shares to be issued within 60 days
under the Long-Term Incentive Program.
(g) Excludes shares acquired by Trustees of General Electric Pension Trust and
other entities advised by affiliates of General Electric Company pursuant to
the Stock Purchase Agreement dated June 3, 1991. This purchase agreement
provides that so long as GE Investment Private Placement Partners I, Limited
Partnership (the "GE Partnership") is the beneficial owner of any shares of
Common Stock issued upon conversion of the Series B Preferred Stock, the
Corporation will nominate and recommend as a candidate for election to the
Board of Directors a person designated by the general partner of the GE
Partnership who is reasonably acceptable to the then current Board of
Directors of the Corporation. If the GE Partnership is no longer the
beneficial owner of any such shares, then upon the expiration of the term of
the director who had been so designated, this right to designate a nominee
will be held by 50% or more of the shares held by certain designated
holders. Mr. Frey was designated to serve as a director by the general
partner of the GE Partnership pursuant to these provisions.
(h) Includes 183,413 shares subject to outstanding stock options which are
exercisable within 60 days, and 17,775 shares to be issued within 60 days
under the Long-Term Incentive Program.
(i) Includes 3,324 shares beneficially owned in a charitable trust.
(j) Includes 48,400 shares subject to outstanding stock options which are
exercisable within 60 days, and 8,879 shares to be issued within 60 days
under the Long-Term Incentive Program.
(k) Subject to the Notes set forth above. Includes 1,368,744 shares subject to
outstanding stock options which are exercisable within 60 days and 159,321
shares to be issued within 60 days under the Long-Term Incentive Program.
Excludes a total of 119,245 fully vested Common Stock units held by
directors pursuant to the 1993 Stock Plan for Non-Employee Directors.
6
BOARD AND BOARD COMMITTEE MEETINGS
The Board of Directors held seven meetings in 1996. Each director attended
at least 75% of the aggregate number of 1996 meetings of the Board and of the
Committees on which he or she served which were held during the period in which
he or she was a director. The Board of Directors has established an Audit
Committee, Finance Committee, Executive Committee, Nominating Committee and
Compensation Committee.
The Audit Committee assists the directors in fulfilling their
responsibilities to shareholders and others relating to the corporate accounting
and financial reporting practices of the Corporation and the quality and
integrity of the financial reports of the Corporation. The Audit Committee
recommends the selection of independent accountants, reviews the independent
accountants' and internal auditors' assessments of the adequacy of the
Corporation's internal control system, reviews the scope and results of the
internal and external audit process, and performs other functions consistent
with its responsibilities. The Audit Committee met five times in 1996.
The Finance Committee assists the directors in fulfilling their
responsibilities relating to the financial activities of the Corporation. The
Finance Committee reviews financial and investment policies, capital structure,
financial aspects of acquisitions and divestitures, and such other fiscal
matters as may be appropriate. The Finance Committee met four times in 1996.
The Executive Committee is responsible for exercising the authority of the
Board of Directors, to the extent permitted by law, in the intervals between
meetings of the Board when an emergency issue or scheduling makes it difficult
to convene all directors. The Executive Committee met eight times in 1996.
The Nominating Committee identifies and presents qualified persons for
election or re-election to the Board of Directors. It advises the Board on
director-related matters such as number, composition, compensation, committee
assignments, and other related areas assigned by the Board or its Chairman. The
Nominating Committee also reviews succession plans for executive officers. The
Nominating Committee will consider nominees for election to the Board of
Directors suggested by shareholders. Recommendations by shareholders should be
forwarded to the Secretary of the Corporation and should identify the nominee by
name and provide pertinent information concerning his or her background and
experience. The Nominating Committee met four times in 1996.
The Compensation Committee reviews and determines the salaries for executive
and other senior officers, reviews various incentive compensation plans and
determines the terms under which and to whom stock options are granted,
including the number of shares and the option price to be paid. The Compensation
Committee is also responsible for reviewing significant personnel compensation
policies and benefit programs. The Compensation Committee met five times in
1996.
7
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
SUMMARY COMPENSATION TABLE
The following table reflects the compensation for the year 1996 of the Chief
Executive Officer and the four highest paid persons who were executive officers
at the end of 1996.
LONG-TERM COMPENSATION
-----------------------------------------
NUMBER OF
SECURITIES
ANNUAL COMPENSATION UNDERLYING
NAME AND PRINCIPAL ----------------------------------------------- OPTIONS LTIP ALL OTHER
POSITION YEAR SALARY BONUS OTHER(B) GRANTED PAYOUTS(C) COMPENSATION(D)
- ------------------------------ --------- ---------- ------------ ---------- ----------- ---------- ----------------
Norman P. Blake, Jr........... 1996 $ 858,815 $ 1,100,000 $ 16,901 252,900 $ 998,144 $ 153,223
President and Chief 1995 805,769 1,499,983(a) 13,970 125,000 -- 154,358
Executive Officer USF&G 1994 755,770 1,138,592(a) -- 115,855 -- 145,530
Corporation
Dan L. Hale................... 1996 414,287 287,000 8,100 49,500 388,917 44,860
Executive Vice President 1995 395,034 479,359(a) 10,065 35,000 -- 42,446
Chief Financial Officer 1994 375,692 376,496(a) -- 33,000 -- 40,299
USF&G Corporation
John C. Sweeney............... 1996 394,486 250,000 -- 22,300 194,273 40,221
Senior Vice President 1995 367,769 357,789(a) -- 29,700 -- 37,394
Chief Investment Officer 1994 285,000 151,300 -- 18,500 -- 29,230
USF&G Corporation
Gary C. Dunton................ 1996 374,560 241,000 14,631 44,900 318,726 29,186
President--Family and 1995 354,033 429,785(a) 7,727 30,000 -- 27,880
Business Insurance 1994 328,328 168,100 137,650(e) 30,000 -- 25,826
Group
USF&G Company
Glenn W. Anderson............. 1996 318,175 197,600 12,437 41,300 243,284 28,343
President--Commercial 1995 296,230 313,501(a) 7,877 25,000 -- 27,326
Insurance Group USF&G 1994 264,712 127,700 -- 24,000 -- 24,102
Company
- -------------------
NOTES
(a) Includes cash payments earned for 1995 under the Corporation's Long Term
Cash Incentive Plan of $499,983, $210,759, $118,789, $189,785, and $123,901,
respectively, for Messrs. Blake, Hale, Sweeney, Dunton and Anderson, and
$427,882 and $188,696, respectively, for Messrs. Blake and Hale for 1994.
Pursuant to the USF&G Executive Deferred Bonus Payment Plan, a participant
may elect to defer all or a portion of the annual cash bonus or payments
under the Long Term Cash Incentive Plan, with interest credited on such
deferred amounts based on a composite five-year U.S. Treasury rate plus one
percent (1%). The Long-Term Cash Incentive Plan was replaced with the
stock-based Long-Term Incentive Program (the "LTIP"). Payments under the
LTIP are reported under the column entitled "LTIP Payouts".
(b) Includes tax reimbursements related to the taxable income reported for the
executive in cases where the spouse accompanied the executive on a business
trip.
(c) Beginning with the three-year cycle which started January 1, 1994, the
Corporation initiated the Long-Term Incentive Program, which is a stock
based plan approved by shareholders under which payments are based upon
three-year cumulative operating income targets established at the beginning
of each
8
cycle. The payments reported in this column are the dollar value of the
stock awards as of December 31, 1996 to be distributed for the three year
performance cycle covering 1994-1996.
(d) Includes matching contributions made by the Corporation during 1996 to the
Corporation's Capital Accumulation Plan (a 401(k) plan) of $2,942 for Mr.
Blake, and $4,750 for each of Messrs. Hale, Sweeney, Dunton and Anderson.
Also includes premiums paid for split dollar life insurance policies for
Messrs. Blake, Hale, Sweeney, Dunton and Anderson, which in 1996 were
$150,281, $40,110, $35,471, $24,436 and $23,593, respectively.
(e) Award of 9,454 shares of restricted stock to reimburse Mr. Dunton for the
tax cost of his relocation. The value of this award was determined by
multiplying the number of shares granted by the closing price of the
Corporation's Common Stock on the date of grant. These shares became fully
vested in 1995. None of the other named executive officers have been granted
or hold shares of restricted stock.
STOCK OPTION GRANTS IN 1996
The following table provides information on option grants in 1996 to the
named executive officers.
NUMBER OF % OF
SECURITIES TOTAL
UNDERLYING OPTIONS EXERCISE
OPTIONS GRANTED TO OR BASE GRANT DATE
GRANTED IN EMPLOYEES IN PRICE PRESENT
NAME 1996(A) FISCAL YEAR PER SHARE EXPIRATION DATE VALUE(B)
- ---------------------------------------- ----------- ------------- ----------- --------------- ---------------
Norman P. Blake, Jr..................... 252,900 7.5114% $ 14.56 03/09/06 $ 1,335,300
Dan L. Hale............................. 49,500 1.4702 14.56 03/09/06 261,400
John C. Sweeney......................... 22,300 .6623 14.56 03/09/06 117,800
Gary C. Dunton.......................... 44,900 1.3335 14.56 03/09/06 237,100
Glenn W. Anderson....................... 41,300 1.2266 14.56 03/09/06 218,100
- ----------------
NOTES
(a) Options are exercisable for shares of the Corporation's Common Stock.
One-third of the options are exercisable after one year, two-thirds are
exercisable after two years, and all of the granted options are exercisable
after three years. All options vest immediately if any person acquires 30%
or more of the outstanding shares, if the Corporation's shareholders approve
a merger, consolidation or sale of substantially all of the Corporation's
assets, or if any shares are acquired pursuant to a tender offer (so-called
"fundamental changes"). All of the options granted were non-qualified
options and were granted at exercise prices equal to the fair market value
of the Corporation's Common Stock on the date of grant.
(b) Based on the Black-Scholes option pricing model assuming expected volatility
equal to one-year average volatility of .2496, expected dividend yield equal
to average three-year dividend yield of 1.24%, risk free interest rate of
6.36%, and an expected option term of seven years. The actual value, if any,
an executive may realize will depend upon the excess of the stock price over
the exercise price on the date the option is exercised; accordingly, there
is no assurance that the executive will realize the values set forth above.
9
AGGREGATE OPTION EXERCISES IN 1996 AND YEAR-END VALUES
The following table provides information on option exercises in 1996 by the
named executive officers and the value of such officers' unexercised options.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT 12/31/96 OPTIONS AT 12/31/96(B)
-------------------------- ---------------------------
NAME (A) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------------------------------- ----------- ------------- ------------ -------------
Norman P. Blake, Jr...................................... 661,399 674,856 $ 6,540,315 $ 4,330,044
Dan L. Hale.............................................. 172,411 83,836 1,663,144 553,524
John C. Sweeney.......................................... 42,233 48,267 317,139 324,571
Gary C. Dunton........................................... 67,498 87,402 448,862 557,906
Glenn W. Anderson........................................ 34,333 65,967 239,514 433,851
- ----------------
NOTES
(a) None of the named officers exercised any options during 1996.
(b) The value of in-the-money options was determined by taking the difference
between $20.88 per share, which was the closing price of the Common Stock on
the last business day of the year, and the exercise price of each option.
LONG-TERM INCENTIVE AWARDS IN 1996
PERFORMANCE
PERIOD ESTIMATED FUTURE PAYMENT(A)
UNTIL -----------------------------------
NAME PAYOUT THRESHOLD TARGET MAXIMUM
- ------------------------------------------------------------------- ----------- ----------- --------- -----------
Norman P. Blake, Jr................................................ 3 Years 15,003 30,006 56,261
Dan L. Hale........................................................ 3 Years 6,833 13,666 25,624
John C. Sweeney.................................................... 3 Years 6,235 12,740 23,888
Gary C. Dunton..................................................... 3 Years 6,182 12,363 23,181
Glenn W. Anderson.................................................. 3 Years 5,151 10,302 19,310
- ----------------
NOTE
(a) Number of share units awarded depends upon adjusted three-year cumulative
operating income for the period 1996-1998, and may be zero if the minimum
target is not reached, or, if such threshold is reached, between the
threshold and maximum shown. Each share unit is the equivalent of one share
of USF&G Corporation Common Stock.
The Long-Term Incentive Program ("LTIP") was established in 1994 by the
Compensation Committee of the Board of Directors and approved by the
shareholders and provides for granting of performance awards that are payable in
the Corporation's Common Stock. Awards are payable based upon performance goals
established by the Compensation Committee at the beginning of each successive
and overlapping three-year performance period. Performance goals consist of an
adjusted three-year cumulative net income target. The actual award is determined
at the end of each three-year cycle based upon actual corporate performance. If
actual performance falls below 85% of the targeted performance, then no awards
will be paid out for that three-year cycle. The maximum award may be paid if
actual performance equals or exceeds 115% of the three-year target performance.
Participants will only receive the designated units, which are payable in shares
of the Corporation's Common Stock, at the end of the three-year cycle. The
actual award received at the end of the three-year cycle may be reduced, but not
increased, for the participants listed in the table, due to individual
performance, business unit performance, or overall corporate performance.
10
PENSION PLANS
The Corporation has a non-contributory, defined benefit pension plan which
provides employees of the Corporation and designated subsidiaries with
retirement benefits beginning at the normal retirement age of 65. The
Corporation also maintains a supplemental retirement plan for senior executives
which provides benefits that would otherwise be paid to them under the pension
plan but for certain limitations imposed by the Internal Revenue Code. The
following table shows the estimated benefits that would be payable at normal
retirement age under the pension plan and the supplemental retirement plan if an
individual had the specified years of service with the Corporation or designated
subsidiaries and levels of average compensation covered by the plans.
ESTIMATED ANNUAL BENEFIT FOR YEARS OF SERVICE INDICATED
AVERAGE ----------------------------------------------------------
COMPENSATION 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- --------------------- ---------- ---------- ---------- ---------- ----------
$150,000............ $ 32,000 $ 43,000 $ 53,000 $ 64,000 $ 74,000
175,000............ 38,000 50,000 63,000 75,000 87,000
200,000............ 43,000 58,000 72,000 86,000 101,000
225,000............ 49,000 65,000 81,000 97,000 114,000
250,000............ 55,000 73,000 91,000 109,000 127,000
300,000............ 66,000 88,000 109,000 131,000 153,000
350,000............ 77,000 103,000 128,000 154,000 179,000
400,000............ 88,000 118,000 147,000 176,000 206,000
450,000............ 100,000 133,000 166,000 199,000 232,000
500,000............ 111,000 148,000 184,000 221,000 258,000
600,000............ 133,000 178,000 222,000 266,000 311,000
700,000............ 156,000 208,000 259,000 311,000 363,000
800,000............ 178,000 238,000 297,000 356,000 416,000
Compensation for purposes of computing benefits under these plans is
generally an employee's base salary, plus commissions, overtime and annual
incentive bonuses paid during an employee's service with the Corporation and its
designated subsidiaries. Benefits are computed on the basis of a straight life
annuity and are not subject to any deduction or offset for Social Security or
other benefits. Mr. Blake is effectively covered under a separate plan described
below. For purposes of calculating average annual compensation under these
plans, 1996 compensation is as reported under the "Annual Compensation-- Salary"
and "Bonus" columns in the Summary Compensation Table, except that payments
under the Long Term Cash Incentive Plan reported under the "Bonus" column for
1994 and 1995 are excluded. Accordingly, 1996 compensation for calculating
benefits for Messrs. Hale, Sweeney, Dunton and Anderson is $701,287, $644,486,
$615,560 and $515,775, respectively. The estimated credited years of service for
each of such individuals is as follows: Mr. Hale, six years; Mr. Sweeney, four
years; Mr. Dunton, four years; and Mr. Anderson, four years.
A supplemental retirement contract with Mr. Blake provides a retirement
benefit which, when combined with benefits from the Corporation's pension plan
and his prior employer's pension plan, equals a life annuity beginning at age 65
of 60% of his highest consecutive three years average annual covered
compensation. Prior to November 26, 1993, covered compensation was equal to his
salary plus annual incentive bonus. Although Mr. Blake voluntarily agreed to
waive a substantial portion of his base salary payable after that date as
described under "Employment Agreements; Special Severance Arrangements" below,
salary for purposes of the supplemental retirement contract will be determined
without regard to that waiver. The Long Term Cash Incentive Plan and the LTIP
are excluded for purposes of calculating pension benefits. Estimated annual
retirement benefits payable to Mr. Blake at age 65 would be $1,384,973 based
upon 1996 covered compensation of $2,308,288 and $1,661,967 if average annual
covered compensation increased to $2,769,945.
11
Pursuant to Mr. Dunton's employment agreement, the Corporation has agreed to
purchase an annuity which would provide him with a retirement benefit of $20,000
per year if he does not vest in the Corporation's defined benefit pension plan.
This obligation will terminate at the time of vesting.
EMPLOYMENT AGREEMENTS; SPECIAL SEVERANCE ARRANGEMENTS
The Corporation entered into a five-year employment agreement with Mr. Blake
in November 1990. In November 1993, the Corporation and Mr. Blake entered into a
second employment agreement which extended the term of Mr. Blake's employment
until November 1998. At the same time, Mr. Blake agreed to waive salary in
excess of $750,000 and $800,000, respectively, for 1994 and 1995 in connection
with an overall shift from fixed compensation to compensation tied to the
Corporation's performance as measured by its stock price. The new employment
agreement continues the effect of the base salary waiver and provides for base
salary of $850,000 in 1996, which is the first year of the new term, and
$900,000 and $950,000, respectively, in the second and final years. In the event
Mr. Blake's employment is terminated by the Corporation for reasons other than
serious cause, he is nevertheless entitled to be paid his base salary for the
remainder of the extended term and receive benefits under all incentive, profit
sharing, certain bonus and other executive and employee benefit plans.
Provisions concerning health and other insurance and similar benefits as well as
non-competition arrangements are included in both the initial and the new
employment contracts. All other benefits, including bonuses, stock option
grants, insurance and retirement benefits, will be determined in accordance with
the Corporation's regular programs and policies but will be based on the base
salary he would have received without regard to the waiver ("salary of record").
The salary of record for 1996 was $1,208,288.
In February 1997, the Board of Directors approved severance arrangements
covering Messrs. Blake, Hale, Sweeney, Dunton and Anderson and other executive
officers in the event of a "change in control." The Corporation also approved
separate arrangements for other senior officers in the event of involuntary
separation following a change in control. The arrangements for executive
officers provide for payments of between 1.5 and 3 times of the prior year's
total compensation. The purpose of these arrangements is to promote stability
and management continuity. The payments are made if the executive is terminated
without cause or if he or she resigns following a material diminution in duties
or reduction in compensation, in each case within two (2) years following a
change in control, or if the executive elects to leave within a sixty (60) day
window period beginning on the first anniversary of the change in control. For
certain executives, these arrangements also provide for continuation of medical
benefits for up to three (3) years or until subsequently employed by another
employer and protect against the assessment of certain excise taxes.
Participation in these arrangements is conditioned on the affected executive
officers agreeing at the time of a change in control to continue their
employment for not less than one year. Severance benefits payable under any of
these arrangements are in lieu of any severance which would otherwise be
payable.
DIRECTORS' FEES
Directors who are not officers of the Corporation or its affiliates
("Directors") are paid $800 per committee meeting attended and $1,000 for
attending board meetings. The annual retainer has been established as follows:
directors of the Corporation, $23,000; Chairperson of the Audit Committee,
$7,500; Chairperson of the Compensation, Nominating and Finance Committees,
$5,000 each; other members of the Audit, Finance, Nominating and Compensation
Committees, $3,000; and any member of the Executive Committee not serving as a
Chairperson of any other committee, $3,000.
Under the 1993 Stock Plan for Non-Employee Directors (the "Stock Plan"),
directors receive shares of Common Stock in lieu of one-half of the regular
$23,000 retainer. The number of shares credited per year is the lesser of 1,000
or the number of shares equal to $23,500 divided by the fair market value of the
Corporation's Common Stock on the award date. Directors may elect to defer
receipt of these shares, in which event the shares will be credited to the
director's account as stock units which are payable in shares at a later date.
Directors may also elect to defer receipt of the remaining portion of the cash
retainer and,
12
as a result of amendments adopted in 1996, meeting fees. Deferral amounts are
credited to the director's account as stock units based on the fair market value
of the Corporation's Common Stock on the date the deferred amounts would have
otherwise been paid. The amendment also permitted directors to make a one-time
election to transfer amounts previously deferred under the cash deferred plan
into stock units based on the fair market value of the Corporation's Common
Stock on the transfer date.
The Stock Plan also provides a retirement benefit payable to directors in
stock. The retirement benefit vests incrementally over ten years and the number
of shares payable upon retirement after full vesting is equal to $50,000 divided
by the fair market value of the stock on the date the director is first elected
to the Board. Directors who elected to waive their right to participate in a
prior retirement arrangement will instead receive upon retirement a number of
shares valued at the actuarial equivalent of the benefit otherwise payable under
the prior arrangement.
Under the proposed Stock Incentive Plan of 1997 discussed elsewhere in this
Proxy Statement, directors are eligible to receive stock option grants. On March
13, 1997 the Board granted 3,000 stock options to each director, subject to
shareholder approval of the Stock Incentive Plan of 1997. The exercise price was
$22.50, the fair market value of the Common Stock on that date. The stock
options vest ratably over three years and the term is ten years.
The above description of amounts payable to directors does not apply to the
Corporation's advisory director, who is a non-voting advisor to the Board. The
advisory director is paid a fee of $1,000 for each meeting of the Board
attended, but no retainer fee.
COMPENSATION COMMITTEE REPORT
COMPENSATION PHILOSOPHY
It is the philosophy of the Corporation to link executive compensation to
sustained improvements in corporate performance and increases in shareholder
value as measured by the Corporation's stock price. The following objectives
have been adopted by the Compensation Committee as guidelines for compensation
decisions:
Provide a competitive total compensation package that enables the
Corporation to attract and retain the key executive talent needed to
accomplish its corporate goals.
Integrate compensation programs with the Corporation's annual and
long-term business objectives and strategy, and focus executive behavior on
the fulfillment of those objectives.
Provide variable compensation opportunities that are directly linked
with the performance of the Corporation and that align executive
remuneration with the interests of the shareholders.
In addition, the Compensation Committee also considers the impact of Section
162(m) of the Internal Revenue Code of 1986 (the "Code"), which in certain
circumstances disallows compensation deductions in excess of $1,000,000. This
disallowance provision does not apply to performance-based compensation,
commissions, and certain other forms of compensation. The Compensation Committee
has determined that the Corporation's incentive compensation plans should
comply, to the extent practicable, with the Code's requirements for
performance-based compensation to ensure that the Corporation will be entitled
to full deductibility of all compensation paid under those plans.
COMPENSATION PROGRAM
The Compensation Committee is responsible for reviewing the Corporation's
compensation program to ensure that pay levels and incentive opportunities are
competitive and reflect the performance of the Corporation. The components of
the compensation program for executives are described below.
BASE SALARY. The factors considered in determining the appropriate
salary are level of responsibility, prior experience and accomplishments,
and the relative importance of the job in terms of
13
achieving corporate objectives. Each executive's salary is reviewed
annually. Adjustments may be recommended based upon individual performance,
inflationary and competitive factors, and overall corporate results.
ANNUAL INCENTIVE COMPENSATION. Cash bonuses are paid annually based
upon individual performance and relevant corporate performance measures,
including operating income, and loss and expense ratios for the
property/casualty insurance segment. These performance measures vary
depending upon the executive and the related line of business. Bonuses are
paid relative to the Corporation's performance as compared to certain
performance targets established by the Compensation Committee at the
beginning of the year. Target awards are established for each position as a
percentage of base salary, and performance is assessed at the end of the
year. For the executives named in the Summary Compensation Table, operating
income was the principal corporate performance measure used to determine
bonus amounts. In addition, the named executives responsible for
property/casualty business units are also evaluated on additional
performance targets such as the combined ratio for the business unit for
which they are responsible. The Compensation Committee has established
targets of 35% of base salary for possible bonus amounts for senior vice
presidents and 40% of base salary for possible bonus amounts for executive
vice presidents. These amounts are subject to adjustment depending upon
actual corporate performance relative to the targets established at the
beginning of the year and on individual performance measured against certain
objectives tailored to the individual at the beginning of the year. The
Committee awarded bonuses at the high end of the target ranges based on
their evaluation of the achievement of performance goals, achievement of
important strategic initiatives and individual performance for the named
executive officers. The Committee also took into consideration the fact that
shortfalls in operating income and loss ratio targets resulted principally
from the unusual level of catastrophe losses experienced by the
property/casualty business in 1996.
STOCK OPTIONS. Stock options granted under the Corporation's stock
incentive plans for executive officers, all of which have previously been
approved by shareholders (or, in the case of options granted under the Stock
Incentive Plan of 1997, are subject to shareholder approval as described
elsewhere in this Proxy Statement), provide incentive to executives by
giving them a strong economic interest in maximizing stock price
appreciation, thereby better aligning their interests with the Corporation's
shareholders. Accordingly, each executive's total compensation is highly
dependent upon stock performance. Option exercise prices are set at 100% of
fair market value on the date of grant and the options expire after 10
years. The annual options granted by the Committee vest over a period of
three years in order to encourage management continuity and better tie
compensation to long-term stock value. Executives are generally granted
stock options annually. The value of stock options granted to executive
officers is fixed at a percentage of salary. The value of the options is
established by using the Black-Scholes option valuation model, using the
assumptions specified in the footnotes to the table in this Proxy Statement
entitled "Stock Option Grants in 1996". This percentage is between 25% and
35% of salary for senior vice presidents and 50% of salary for executive
vice presidents. These percentages are subject to adjustment to as low as
zero or as high as 160% of the target, depending upon the executive's prior
year's performance and potential for future contribution. The stock option
grants made in 1996 were within these target ranges.
LONG-TERM INCENTIVE PLANS. Beginning with the three-year cycle starting
in 1994, and each three-year cycle beginning on each year thereafter, awards
are made annually under the Long-Term Incentive Program ("LTIP") which was
approved by shareholders in 1994. The LTIP ties compensation to three-year
cumulative operating income targets established at the beginning of each
cycle. Compensation payable under the new LTIP is payable only at the end of
each three-year cycle and then payable in shares of Common Stock. A target
amount to be paid to each participant is established as a percentage of the
participant's salary. The targeted value is based on the then current value
of the Common Stock; accordingly, the ultimate value of the award varies
directly with the
14
market price for such shares. For the senior executives named in the Summary
Compensation Table, other than the Chief Executive Officer, the targets
range from 35% to 50% of salary. The LTIP grants made in 1996 were within
these target ranges.
STOCK INCENTIVE PLAN OF 1997. The Compensation Committee believes that
the use of compensatory stock option grants and stock units and shares
issued under the LTIP help increase shareholder value by directly aligning
management interests with the interests of shareholders. Substantially all
of the shares previously authorized under the Stock Incentive Plan of 1991
have been granted to key employees. Accordingly, included in this Proxy
Statement is a proposal to adopt the Stock Incentive Plan of 1997. As part
of the design of the 1997 plan, a share repurchase feature has been added to
provide a tool to offset dilution to existing shareholder interests. The
Compensation Committee strongly believes that the proposed plan will add
value to the Corporation's Common Stock.
The Compensation Committee attempts to establish base salary levels
consistent with the median base salary for executives in similar positions
within a peer group of approximately thirty major insurance companies. Total
compensation, however, is weighted more heavily toward incentive compensation by
attempting to establish annual bonuses, stock options and long-term compensation
at levels within the top quartile of this peer industry group. The increased
weighting toward incentive and stock-based compensation reinforces the
connection between shareholder interests and executive pay.
COMPENSATION OF CHIEF EXECUTIVE OFFICER
Mr. Blake joined the Corporation on November 27, 1990. The selection by the
Board of Mr. Blake was made in light of the Corporation's circumstances,
requiring significant redirection and restructuring of the Corporation, and in
light of Mr. Blake's experience, record and reputation in the financial services
industry.
Mr. Blake's base salary for 1996 was $858,815. This base salary reflects a
voluntary waiver of a substantial portion of the base salary otherwise payable
under his employment agreement. The waiver occurred in 1993 in exchange for
stock options and other stock-based compensation. Mr. Blake's employment
agreement, including the salary reduction in 1993, is discussed more fully in
this Proxy Statement under the caption "Employment Agreements; Special Severance
Arrangements." In recognition of this waiver and emphasis on stock-based
compensation, other components of compensation, including his annual stock
option awards, continue to be based on the base salary he would have received
without regard to the waiver ("salary of record"). Mr. Blake's salary of record
for these purposes was $1,208,288 for 1996.
For 1996, Mr. Blake received total cash payments of $1,958,815 in salary and
bonus, as well as 45,619 shares of Common Stock under the 1994-1996 cycle of the
LTIP, all as shown in the Summary Compensation Table on page 8. The Committee
considers this level of payment appropriate in view of Mr. Blake's leadership of
the Corporation in terms of earnings growth, balance sheet strength, creation of
shareholder value and improvement in management process.
In 1996, the Committee also granted Mr. Blake 252,900 stock options,
one-third of which will become exercisable in each of 1997, 1998 and 1999.
The Compensation Committee established Mr. Blake's target annual cash bonus
for 1996 at 50% of his salary of record, subject to reduction to as little as
zero or increase to as much as 100% of salary of record. The Compensation
Committee awarded Mr. Blake a cash bonus of $1,100,000 for 1996, representing
approximately 91% of his salary of record. In determining Mr. Blake's 1996
annual bonus, the Compensation Committee reviewed the Corporation's performance
and Mr. Blake's individual performance against a detailed set of performance
objectives which were approved by the Committee in early 1996. These objectives
set forth five principal categories of responsibility, as well as objectives
under each category, as briefly described below:
15
FINANCIAL PERFORMANCE. This responsibility consisted of achieving targeted
financial objectives without compromising the financial integrity or long term
profit performance of the Corporation. Targets were set for consolidated
revenues of $3.5 billion, consolidated operating and net income of $224 million,
net earnings per share (fully diluted) of $1.63 and return on equity on a net
income basis of 12.4%.
STRATEGY AND BUSINESS DEVELOPMENT. This responsibility consisted of
developing and implementing business strategies with the objective of enhancing
shareholder value and the prospects for sustained profitability. Targets related
to, among other things, rationalizing the organizational, field and information
services infrastructure of the property/casualty businesses to improve
efficiencies, accelerating the development of information systems to support
Family and Business Insurance Group ("FBIG") and Claim Reception Center
initiatives, improving the quality of the Corporation's balance sheet,
recommending new strategies to enhance shareholder value, sponsoring the
development of fee income or higher return specialty businesses, exploring the
feasibility of market extensions in Europe and the Far East and developing
alternative distribution approaches and new products for both the
property/casualty and life businesses.
STRATEGIC RESOURCE DEVELOPMENT. This responsibility consisted of developing
critical resources to support overall business strategies, and was divided into
the categories of financial, human and technology resources. Financial resource
targets related to continuing to improve the Corporation's balance sheet in
terms of leverage, liquidity and cost of capital and reducing the life insurance
company's real estate investments and improving its cash flow. Human resources
targets related to specific leadership and skills development issues. Technology
targets included accelerating development of systems to support FBIG and the
Claim Reception Center, implementing new client-server object-based systems to
support identified key markets, continuing implementation of agency interface
systems and completing the outsourcing of administrative and policyholder
service systems for the life insurance company.
ORGANIZATION AND HUMAN RESOURCE DEVELOPMENT. This responsibility consisted
of reviewing the management and organizational structure of the Corporation,
including completing a review of the entire organizational structure, filling
designated key positions, reviewing key compensation plans, upgrading management
development and operational systems and having the Claim Reception Center and
FBIG's Centers for Agency Service in Atlanta, Baltimore and Denver operational
by the third quarter of 1996.
INVESTOR, REGULATORY, AND PUBLIC RELATIONS. This responsibility consisted
of strengthening relationships with constituencies outside of the Corporation,
particularly investor groups, financial analysts and regulators.
The Corporation's actual performance as measured against the targets under
the financial performance responsibility ranged from a negative variance of 16%
of the target, principally as the result of the high level of catastrophe losses
recorded by the property/casualty business in 1996, to 118% of the target.
Evaluations of Mr. Blake's performance of the remaining responsibilities was
less quantitative, but the Compensation Committee determined that Mr. Blake met
or exceeded each of the other targeted objectives. Important achievements
included rationalization of the organizational and field structure by the
creation of the Commercial Insurance Group ("CIG"), formation of FBIG's Centers
for Agency Service and the restructuring of the branch offices as being
dedicated to CIG, the opening of the Claims Reception Center in Tampa, Florida,
and dedication of information systems resources to FBIG and the Claims Reception
Center. The Compensation Committee also noted the significant expansion of
international businesses through: the acquisition of Afianzadora Insurgentes,
S.A. de C.V., Mexico's largest surety company; the expansion of F&G Re Inc.'s
presence in the Lloyd's of London market through the acquisition of Ashley
Palmer Limited; the establishment of a Hong Kong office for reinsurance and
surety; and the establishment of various strategic alliances in the United
Kingdom and elsewhere to enable USF&G Company to write international business.
In addition, new strategic partnerships with distribution channels were
developed relating to property/casualty, specialty and life businesses, new
products were developed and the life company entered into an important
co-insurance agreement for a large block of
16
pre-1991 annuity business which had been sold through broker/dealers. In
addition, the Corporation launched a significant share repurchase program and
improved its balance sheet by calling for redemption the balance of the Series B
Preferred Stock and one-half of its Series A Preferred Stock, issuing $200
million of Capital Securities and significantly reducing its financial leverage,
improving its liquidity and reducing investments in higher risk assets. The
Committee also noted the long-term increase in shareholder value created under
Mr. Blake's leadership as reflected in the Performance Graph on page 18.
Although the Compensation Committee did not assign specific weights to any
of the categories or targeted objectives, it did place greater weight on
financial performance and strategic responsibilities. The Compensation
Committee's review and the basis for determining Mr. Blake's compensation was
not limited to an evaluation of these responsibilities, and the Committee
considered other subjective factors relating to an overall assessment of Mr.
Blake's performance and contribution to the Corporation. The Committee concluded
that Mr. Blake's compensation arrangements are appropriate in light of his
continuing performance as Chief Executive Officer.
COMPENSATION COMMITTEE
George L. Bunting, Jr., Chairman
Michael J. Birck
Robert E. Davis
Robert E. Gregory, Jr
Wilbur G. Lewellen
Henry A. Rosenberg, Jr.
17
STOCK PERFORMANCE GRAPH
The graph below compares cumulative total return of the Corporation's Common
Stock, the Standard & Poor's ("S&P") 500 Index, the Moody's P&C Insurance Group
and the S&P Property Casualty Insurance Index over a five-year period beginning
December 31, 1991. The companies included in Moody's P&C Insurance Group are:
Allstate Corporation, American Financial Group, Chubb Corporation, CNA Financial
Corporation, General Re Corporation, Hartford Steam Boiler Inspection and
Insurance Company, Horace Mann Educators Corporation, Orion Capital Corporation,
Progressive Corporation, and USF&G. The companies included in the S&P Property
Casualty Insurance Index are: Allstate Corporation, Chubb Corporation, General
Re Corporation, SAFECO Corporation, The St. Paul Companies, Inc., and USF&G. In
future years, the Corporation will use the S&P Property Casualty Insurance Index
for purposes of comparing relative stock performance on this graph since in its
opinion the component members of that group are more representative of the
Corporation's peers within the property/casualty industry. Cumulative total
return is calculated assuming reinvestment of dividends. The stock price
performance on this graph is not necessarily indicative of future performance.
COMPARISON OF FIVE-YEAR CUMULATIVE
TOTAL RETURN AMONG USF&G, S&P 500 INDEX,
MOODY'S P&C INSURANCE GROUP AND
S&P PROPERTY CASUALTY INSURANCE INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
USF&G CORPORATION S&P 500 INDEX MOODY'S P/C INSURANCE GROUP S&P P/C INSURANCE INDEX
Dec-91 $100.00 $100.00 $100.00 $100.00
Dec-92 $173.50 $107.60 $114.40 $117.10
Dec-93 $209.40 $118.50 $107.30 $115.00
Dec-94 $195.70 $120.00 $101.70 $129.70
Dec-95 $245.50 $165.10 $150.60 $163.40
Dec-96 $307.30 $203.10 $182.30 $198.50
DEC 91 DEC 92 DEC 93 DEC 94 DEC 95 DEC 96
----------- --------- --------- --------- --------- ---------
USF&G CORPORATION....................................... $ 100 $ 173.5 $ 209.4 $ 195.7 $ 245.5 $ 307.3
S&P 500 INDEX........................................... 100 107.6 118.5 120.0 165.1 203.1
MOODY'S P/C INSURANCE GROUP............................. 100 114.4 107.3 101.7 150.6 182.3
S&P P/C INSURANCE INDEX................................. 100 117.1 115.0 129.7 163.4 198.5
18
PROPOSAL TO ADOPT THE
STOCK INCENTIVE PLAN OF 1997
The Board of Directors proposes that the shareholders of the Corporation
approve the adoption of the Corporation's Stock Incentive Plan of 1997 (the
"Plan"). The following is a fair and complete summary of the Plan as proposed to
be adopted; it is qualified in its entirety by reference to the full text of the
Stock Incentive Plan of 1997, which is attached to this Proxy Statement as
Exhibit A.
GENERAL
PURPOSE: The purpose of the Plan is to link executive compensation to
sustained improvement in corporate performance and increases in shareholder
value as measured by the Corporation's stock price.
SHARES AVAILABLE UNDER THE PLAN: The number of shares of Common Stock of
the Corporation issuable under the Plan is 5,000,000 shares plus an amount of
shares equal to the lesser of the number of shares actually repurchased during
the term of the Plan or 10,000,000 shares. In no case will the number of shares
issued under the Plan exceed 15,000,000. During the term of the Plan, no
participant will be eligible to receive awards, in the aggregate, for more than
3,000,000 shares of Common Stock. These limits are subject to adjustment to
reflect certain subsequent stock dividends, split-ups, recapitalizations,
mergers, consolidations, combinations or exchanges of shares and the like. Any
shares subject to an award that expires before it is exercised, surrendered,
canceled, forfeited, or otherwise reacquired under the Plan, will again be
subject to issuance pursuant to future awards under the Plan. As of March 3,
1997, the fair market value of a share of the Corporation's Common Stock,
determined by averaging the high and low sale prices on such date as reported on
the New York Stock Exchange Composite Index, was $22.18 per share.
ADMINISTRATION: The Plan is administered by the Compensation Committee of
the Board of Directors (the "Compensation Committee"). However, the Board of
Directors has responsibility for administering all matters under the Plan
relating to participation by and grants of awards to directors (accordingly, all
references herein to the Compensation Committee with respect to such
participation by or grants of awards to directors are deemed to be references to
the Board of Directors). The Plan gives the Compensation Committee broad
authority to determine the persons to whom, and the time or times at which,
awards will be granted or expire under the Plan, the types of awards to be
granted, the number of shares of Common Stock to be covered by each award, and
all other terms and conditions for awards granted under the Plan. In the event
of changes in the Common Stock of the Corporation by reason of any stock
dividend, split-up, recapitalization, merger, consolidation, business
combination or exchange of shares and the like, the Compensation Committee also
would be given discretion to waive or modify the terms and conditions of
outstanding awards, including cancellation, forfeiture, surrender or other
termination of awards without the consent of holders in order to facilitate a
business combination intended to be treated as a pooling of interests
transaction for accounting purposes under generally accepted accounting
principles. Under these circumstances the Compensation Committee also may
mandate settlement of awards in cash, or in Common Stock or other securities of
the Corporation or of any other entity and, although otherwise prohibited
generally, take any action to increase or decrease the exercise price of any
outstanding stock options.
PARTICIPATION: Officers, other key employees, and directors selected by the
Compensation Committee are eligible to participate in the Plan. As of December
31, 1996, all of the 13 non-employee directors and approximately 261 employees
of the Corporation, including all executive officers, would be eligible to
participate and receive awards under the Plan.
TYPE OF AWARDS
The Plan would allow options, stock appreciation rights, stock awards and
performance awards to be granted. These awards may be granted separately or in
tandem with other awards, or in lieu of other
19
compensation payable to Plan participants either at the election of the
Compensation Committee or, under rules approved by the Compensation Committee,
at the election of the Plan participant.
OPTIONS: The proposed Plan allows the Compensation Committee to grant
either incentive stock options ("qualified options"), which are qualified under
section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
options not intended to qualify under any section of the Code ("non-qualified
options"). However, the Compensation Committee may not authorize the issuance of
more than 7,000,000 shares of Common Stock pursuant to awards of qualified
options. Options may be granted with exercise prices not less than 100% of the
fair market value of the underlying Common Stock on the date of grant. The Plan
gives the Compensation Committee discretion to set the terms of each option,
including the expiration, vesting and exercise dates. The option exercise price
may be paid in cash, by tender of shares of Common Stock, by a combination of
cash and stock or, by any other means the Compensation Committee approves.
STOCK APPRECIATION RIGHTS: The Plan would permit awards of stock
appreciation rights. Stock appreciation rights provide the right to receive a
payment in cash, Common Stock or a combination of both, equal to the difference
between the fair market value of a specified number of shares of Common Stock on
the grant date and the fair market value of such shares on the date of exercise.
STOCK AWARDS: Awards of Common Stock would be permitted with or without
payment of consideration by the participant. The Compensation Committee,
however, may not authorize the issuance of more than 2,000,000 shares of
restricted stock. A stock award may be denominated in shares of Common Stock,
units of Common Stock or stock-equivalent units and may be paid in Common Stock,
in cash or in a combination of Common Stock and cash. All or part of any stock
award may be subject to such other conditions and restrictions which the
Compensation Committee shall specify.
PERFORMANCE AWARDS: The Compensation Committee would be permitted to make
performance awards payable in Common Stock, cash or a combination thereof upon
attainment of one or more performance goals established by the Compensation
Committee. Performance goals may be based upon the Corporation's operating
income or one or more other business criteria selected by the Compensation
Committee that apply to an individual or group of individuals, a business unit
or the Corporation as a whole, over such performance period as the Compensation
Committee may designate.
AWARDS UNDER THE PLAN
It is currently expected that stock options and awards under the Long-Term
Incentive Program (LTIP) will be made pursuant to the Plan.
20
Set forth below is certain information regarding stock option grants and
LTIP awards which were made in 1997, subject to shareholder approval of the
Plan:
STOCK OPTION AND LTIP AWARDS MADE IN 1997
STOCK
OPTIONS(A) LTIP(B)
--------------- ---------
Norman P. Blake, Jr.............................................. 120,100 41,371
President and Chief Executive Officer
Dan L. Hale...................................................... 25,800 16,957
Executive Vice President and Chief Financial Officer
John C. Sweeney.................................................. 24,700 16,223
Senior Vice President and Chief Investment Officer
Gary C. Dunton................................................... 23,400 15,326
President-FBIG, USF&G Company
Glenn W. Anderson................................................ 20,500 13,451
President-CIG, USF&G Company
Executive Officers as a Group.................................... 345,200 185,910
Non-Executive Officers as a Group................................ 803,400 226,423
Directors as a Group............................................. 39,000 --
- ------------------------
NOTES
(a) All options were granted at exercise prices which equaled fair market value
on the date of grant and are subject to vesting requirements.
(b) Assumes that maximum payout is attained.
AMENDMENT AND TERMINATION
The Board of Directors, at any time and from time to time, may amend, modify
or discontinue the Plan or waive any of its provisions, provided that, except in
the event of certain extraordinary business transactions involving the Common
Stock of the Corporation or as otherwise may be required by law, no such
amendment, modification, waiver or discontinuance may revoke or materially
adversely alter the terms of any valid award previously granted under the Plan
without the consent of the holder of that award, nor shall any amendment or
modification increase or decrease the exercise price of any outstanding stock
options granted under the Plan. The Plan terminates automatically on February
26, 2007.
FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the current Federal income tax
treatment of the qualified and non-qualified stock options, stock appreciation
rights, and stock and performance awards which would be authorized to be granted
under the Plan based upon the current provisions of the Code and regulations
promulgated thereunder. The discussion set forth below, insofar as it relates to
the deductibility of any compensation payable under the Plan, is subject to the
paragraph captioned "Disallowance of Deductions" relating to compensation in
excess of $1,000,000 payable to certain executive officers.
QUALIFIED STOCK OPTIONS: Qualified stock options under the Plan are
intended to meet the requirements of section 422 of the Code. No tax
consequences result from the grant of the option. If an option holder acquires
stock upon the exercise, no income will be recognized by the option holder for
ordinary income tax purposes (although the difference between the option
exercise price and the fair market value of the stock subject to the option may
result in alternative minimum tax liability to the option holder) and the
Corporation will be allowed no deduction as a result of such exercise, if the
following conditions are met: (a) at all times during the period beginning with
the date of the granting of the option and ending on the day three months before
the date of such exercise, the option holder is an employee of the Corporation
21
or of a subsidiary; and (b) the option holder makes no disposition of the stock
within two years from the date the option is granted nor within one year after
the stock is transferred to the option holder. The three-month period is
extended to one year in the event of disability and is waived in the event of
death of the employee. In the event of a sale of such stock by the option holder
after compliance with these conditions, any gain realized over the price paid
for the stock ordinarily will be treated as long-term capital gain, and any loss
will be treated as long-term capital loss, in the year of the sale.
If the option holder fails to comply with the employment requirement
discussed above, the tax consequences will be the same as for a non-qualified
stock option discussed below. If the option holder fails to comply with the
holding period requirements discussed above, the option holder will recognize
ordinary income in an amount equal to the lesser of (i) the excess of the fair
market value of the stock on the date the option was exercised over the exercise
price or (ii) the excess of the amount realized upon such disposition over the
exercise price. Any additional gain ordinarily will be recognized by the option
holder as capital gain, either long-term or short-term, depending on the holding
period of the shares. If the option holder is treated as having received
ordinary income because of his or her failure to comply with either condition
above, an equivalent deduction will be allowed to the Corporation in the same
year.
NON-QUALIFIED STOCK OPTIONS: No tax consequences result from the grant of
the option. An option holder who exercises a non-qualified stock option with
cash generally will realize compensation taxable as ordinary income in an amount
equal to the difference between the exercise price and the fair market value of
the shares on the date of exercise, and the Corporation will be entitled to a
deduction from income in the same amount in the fiscal year in which the
exercise occurred. Option holders subject to Section 16 of the Securities
Exchange Act of 1934 may not recognize income until six months after the grant
date if the option is exercised during that period, unless the participant
elects to recognize income in the year the stock is received by making a timely
election under section 83(b) of the Code. The option holder's basis in such
shares will be the fair market value on the date income is realized, and when
the holder disposes of the shares he or she will recognize capital gain or loss,
either long-term or short-term, depending on the holding period of the shares.
STOCK APPRECIATION RIGHTS: The grant of a stock appreciation right will not
result in income tax consequences to the Corporation or to the grantee. A
grantee who exercises a stock appreciation right will realize compensation
taxable as ordinary income in an amount equal to the cash or the fair market
value of the shares received on the date of exercise, and the Corporation will
be entitled to a deduction in the same amount.
STOCK AND PERFORMANCE AWARDS: Stock and performance awards granted under
the Plan and paid in Common Stock, including shares issued under the LTIP, will
constitute ordinary income to the recipient, and a deductible expense to the
Corporation, in the year paid if the stock is then transferable and not subject
to forfeiture restrictions or in the first year in which transfer or forfeiture
restrictions lapse unless the participant elects to recognize income in the year
the stock is received by making a timely election under section 83(b) of the
Code. If such an election is not made, the amount of the taxable income and
corresponding deduction for the Corporation will be equal to the fair market
value of the stock on the date restrictions lapse. The Corporation is also
allowed a deduction for dividends paid to participants (provided they have not
elected to recognize income at the time of the award) on stock while the
restrictions remain in force. Stock awards structured as stock equivalent units
and payable in cash or in Common Stock will be treated for federal income tax
purposes in substantially the same manner as stock appreciation rights.
DISALLOWANCE OF DEDUCTIONS: The Code disallows deductions for publicly held
corporations with respect to compensation in excess of $1,000,000 paid to
certain executive officers. However, compensation payable solely on account of
attainment of one or more performance goals is not subject to this deduction
limitation if the performance goals are objective, pre-established and
determined by a compensation committee comprised solely of two or more outside
directors, the material terms under which the compensation is to be paid are
disclosed to the shareholders and approved by a majority vote, and the
22
compensation committee certifies that the performance goals and other material
terms were in fact satisfied before the compensation is paid. Under this
exception, the deduction limitation does not apply with respect to compensation
otherwise deductible on account of stock options and stock appreciation rights
granted at fair market value under a plan which limits the number of shares that
may be issued to any individual and which is approved by the corporation's
shareholders.
THE AFFIRMATIVE VOTE OF A MAJORITY OF THE VOTES CAST IN PERSON OR BY PROXY
AT THE MEETING WILL BE REQUIRED TO APPROVE ADOPTION OF THE STOCK INCENTIVE PLAN
OF 1997. ABSTENTIONS AND BROKER NON-VOTES DO NOT AFFECT THE MAJORITY VOTE
REQUIRED FOR APPROVAL OF THE PLAN. THE BOARD OF DIRECTORS RECOMMENDS THAT THE
SHAREHOLDERS VOTE FOR ADOPTION OF THE PLAN.
OTHER INFORMATION
CERTAIN BUSINESS RELATIONSHIPS
In the ordinary course of business, USF&G Company has written fidelity,
surety, fire and casualty, liability, or other insurance for certain companies
of which non-employee directors are officers, and surety bonds on projects that
may be financed in whole or in part by loans made by banks of which non-employee
directors are officers. All these writings involve insurance premiums for which
rate filings are made and premium rates are approved as required by applicable
insurance regulations. In addition, the Corporation, in the ordinary course of
business, utilizes bank depository, lending, trustee and other banking services
provided by banks of which non-employee directors may be officers or directors.
Robert J. Hurst, a director of the Corporation, is a partner of Goldman,
Sachs & Co., which performed investment banking services for the Corporation in
1996.
Larry P. Scriggins, a director of the Corporation, is a member of the law
firm of Piper & Marbury L.L.P., which performed legal services for the
Corporation in 1996.
Trustees of General Electric Pension Trust and other entities advised by
affiliates of General Electric Company (hereinafter collectively referred to as
"GE Investments") owned 6.7% of the Corporation's Common Stock as of March 1996,
but as a result of subsequent sales this ownership percentage declined to below
5% according to information filed by GE Investments with the SEC.
During the period in 1996 in which GE Investments owned more than 5% of the
Corporation's Common Stock, subsidiaries of the Corporation provided mortgage
loan origination and administration services to an entity controlled by GE
Investments. Pursuant to these services, a mortgage loan in the amount of $35
million was funded during 1995 by USF&G Company to an entity controlled by GE
Investments. The principal balance of the loan at December 31, 1996 was $35
million. The interest rate is 7.7% compounded annually, with only interest
payments due during the first four years and thereafter principal is amortized
through the remaining three-year term on a 25-year amortization schedule. A
subsidiary of the Corporation and GE Investments have jointly invested in a
Bermuda-based company, Renaissance Holdings Limited ("Renaissance"). Renaissance
is principally engaged in the business of underwriting property/casualty
reinsurance through its wholly owned subsidiary, Renaissance Reinsurance, Ltd.
In addition, GE Investments sold 2,100,800 shares of the Corporation's Common
Stock in several private sales to the Corporation at market prices on the date
of sale.
23
AUDIT COMMITTEE AND INDEPENDENT PUBLIC ACCOUNTANTS
The accounting firm of Ernst & Young LLP has acted as the Corporation's
independent public accountants for the year ended December 31, 1996 and it is
anticipated they will be selected by the Board of Directors to act as such for
1997. Representatives of Ernst & Young LLP are expected to be present at the
shareholders' meeting and will have an opportunity to make a statement if they
desire and to respond to appropriate questions.
FILINGS UNDER SECTION 16(A)
Section 16(a) of the Securities Exchange Act of 1934 requires the
Corporation's directors, executive officers, and holders of more than 10% of the
Corporation's Common Stock to file with the SEC initial reports of ownership and
reports of changes in ownership of Common Stock and other equity securities of
the Corporation. To the best of Corporation's knowledge, all required reports
were timely filed during 1996.
SHAREHOLDER PROPOSALS FOR THE 1998 ANNUAL MEETING
All shareholder proposals intended to be included in the Corporation's proxy
statement with respect to the 1998 Annual Meeting of the Corporation must be
received by the Corporation not later than November 29, 1997 and must otherwise
comply with the rules of the SEC for inclusion in the Corporation's proxy
statement and form of proxy relating to that meeting. In addition, the
Corporation's By-Laws provide that after the 1997 Annual Meeting of
Shareholders, shareholder proposals, excluding proposals which have been
included in the Corporation's proxy statement pursuant to rules of the SEC and
including nominations for directors to the Board, must be timely received by the
Secretary of the Corporation in order to be presented at an annual meeting of
shareholders. In order to be timely, such notice must be received not less than
60 days nor more than 90 days prior to the first anniversary of the prior year's
annual meeting. If the date of the annual meeting is advanced by more than 30
days or delayed by more than 60 days from such anniversary date, then such
notice must be delivered no earlier than 90 days prior to such meeting and not
later than the later of 60 days prior to such meeting or the tenth day following
the first public announcement of the date of such meeting. Such notice must also
meet certain other requirements described in the By-Laws.
OTHER MATTERS
Management knows of no matters to be presented for action at the meeting
other than those described above. However, if any other matters properly come
before the meeting, it is intended that the persons named in the accompanying
form of proxy will vote on such matters in accordance with their judgment of the
best interest of the Corporation.
By Order of the Board of Directors
JOHN F. HOFFEN, JR.
SECRETARY
Baltimore, Maryland
March 31, 1997
24
EXHIBIT A
USF&G CORPORATION
STOCK INCENTIVE PLAN OF 1997
PURPOSE AND TYPES OF AWARDS
The purpose of the USF&G Corporation Stock Incentive Plan of 1997 (the
"Plan") is to provide officers, other key employees and directors (collectively,
"Key Persons") of USF&G Corporation and designated subsidiaries and affiliates
(collectively, the "Corporation") with additional incentives to continue and
increase their efforts with respect to the Corporation and to develop a personal
and active interest in the broader growth and greater financial success of the
Corporation.
The Plan provides for granting Key Persons options, stock appreciation
rights, stock awards and performance awards (collectively, "Awards"). Awards may
be granted separately or in tandem with other Awards, or in lieu of other
compensation or other Awards otherwise payable to a Key Person either at the
election of the Committee or, under rules approved by the Committee from time to
time, at the election of the Key Person.
ARTICLE I -- ADMINISTRATION
(a) The Plan shall be administered by the Compensation Committee (the
"Committee") appointed by the Board of Directors, consisting of not less than
two members, each of whom qualifies as a Non-Employee Director within the
meaning of Rule 16b-3 promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
an Outside Director within the meaning of section 162(m) of the Internal Revenue
Code of 1986, as amended (the "Code"), and the regulations promulgated
thereunder. Notwithstanding the foregoing, the Board of Directors shall be
responsible for administration of all matters under the Plan relating to
participation by and grants of Awards to directors, and all references in the
Plan to the Committee with respect to such participation by or grants of Awards
to directors shall be deemed to be references to the Board of Directors.
(b) Subject to the terms of the Plan, the Committee shall have full and
complete authority in its discretion to grant Awards under the Plan, prescribe
the form and terms of documents evidencing such Awards and establish programs
for granting Awards, and to take all other actions necessary or desirable to
carry out the purpose and intent of the Plan, including, but not limited to, the
authority to determine (i) the Key Persons to whom, and the time or times at
which, Awards shall be granted, (ii) the types of Awards to be granted, (iii)
the number of shares to be covered by each Award, and (iv) all terms and
conditions with respect to each Award.
(c) The Committee shall have full and complete authority to administer and
interpret the Plan and all documents evidencing Awards under the Plan and all
programs providing for Awards, to prescribe, amend and rescind rules and
regulations relating to the Plan, to determine the terms and provisions of the
respective documents evidencing Awards (which documents need not be identical),
to establish various programs for granting Awards under the Plan and to make all
other determinations deemed necessary or desirable for the operation and
administration of the Plan.
(d) The Committee shall have the power to designate which of the present and
future affiliated and subsidiary corporations the Key Persons of which shall be
eligible to participate in the Plan.
(e) The Committee shall have the authority to amend or modify any Award in
any manner not inconsistent with the terms of the Plan, to accelerate the time
in which any Award may be exercised or becomes payable and to waive, reduce or
limit in whole or in part, any restriction or condition with respect to such
Award, including, but not limited to, any restriction or condition with respect
to the vesting or exercisability of any Award, provided that, except as provided
in the next sentence or in Section (c) of
A-1
Article III, no such action may materially adversely affect the terms of any
Award without the consent of the holder of the Award. Notwithstanding anything
in the Plan to the contrary and without the consent of holders of Awards, the
Committee in its sole discretion, may make any modifications to any Awards
including but not limited to cancellation, forfeiture, surrender or other
termination of the Awards in whole or in part regardless of the vested status of
the Award, in order to facilitate any business combination that is authorized by
the Board of Directors to comply with requirements for treatment as a pooling of
interests transaction for accounting purposes under generally accepted
accounting principles.
(f) All determinations made by the Committee shall be final, binding and
conclusive.
ARTICLE II -- PARTICIPATION IN THE PLAN
Participation in the Plan shall be limited to such Key Persons of the
Corporation as shall from time to time be designated by the Committee. At the
discretion of the Committee, an individual may be deemed to be a Key Person as a
result of status or position with the Corporation or as a result of individual
efforts in connection with a specific project.
ARTICLE III -- COMMON STOCK SUBJECT TO THE PLAN
(a) The total number of shares of the authorized Common Stock of the
Corporation which may be issued under the Plan pursuant to Awards shall be
5,000,000 shares. In addition to the foregoing, if, during the term of the Plan,
the Corporation repurchases any shares of Common Stock, on the open market or
otherwise, then additional shares of Common Stock may be issued pursuant to
Awards, provided that the number of such additional shares shall not exceed the
lesser of (i) the number of shares repurchased during the term of the Plan, or
(ii) 10,000,000 shares.
(b) In no event shall there be issued under the Plan more than 2,000,000
shares of Common Stock pursuant to restricted stock Awards. The total number of
shares of Common Stock that may be issued under the Plan pursuant to Awards
intended to qualify as incentive stock options under section 422 of the Code
shall not exceed 7,000,000 shares. During the term of the Plan, no Key Person
shall be eligible to receive an Award or Awards for, in the aggregate, more than
3,000,000 shares of Common Stock.
(c) In the event of changes in the Common Stock of the Corporation by reason
of any stock dividend, split-up, recapitalization, merger, consolidation,
business combination or exchange of shares and the like, the Board of Directors
shall, in its discretion and without the consent of the holders of Awards, make
appropriate adjustments to the limitations provided in Sections (a) and (b) of
this Article III, and to the number, kind and the price of shares covered by
Awards granted, and shall, in its discretion, make any other adjustments in
Awards including but not limited to reducing the number of shares subject to
Awards or providing or mandating alternative settlement methods such as
settlement of the Awards in cash or in shares of Common Stock or other
securities of the Corporation or of any other entity or in any other matters
which relate to Awards as the Board of Directors shall, in its sole discretion,
determine to be necessary or appropriate.
(d) If for any reason an Award or a portion of an Award expires or is
terminated, surrendered, canceled, forfeited, paid in cash or reacquired
pursuant to rights reserved upon issuance thereof, then the number of shares of
Common Stock covered by the Award or portion of the Award shall be restored to
the number of shares available for Awards under the Plan pursuant to Section (a)
of this Article III and, to the extent shares of Common Stock have not been
issued pursuant to such Award, to the number of shares specified in Section (b)
of this Article III that may be issued pursuant to Awards intended to qualify as
incentive stock options. If the exercise price or the amount of taxes due with
respect to any Award is paid in shares of Common Stock or by the withholding of
shares of Common Stock issued or issuable in connection with any Award, then the
number of shares received or withheld by the Corporation shall be restored to
the number of shares available for Awards under the Plan pursuant to Section (a)
of this Article III.
A-2
ARTICLE IV -- OPTIONS
(a) The Committee in its discretion may grant options to any Key Person on
such terms and conditions as it shall, in its discretion, deem advisable,
subject to Section (b) of this Article IV. Options granted under the Plan may be
either incentive stock options intended to qualify under section 422 of the
Code, or non-qualified stock options not intended to so qualify, provided,
however, that only employees of the Corporation shall be eligible to receive
incentive stock options.
(b) The option exercise price per share with respect to each option shall be
determined by the Committee from time to time, but in no instance shall such
price be less than the Fair Market Value of a share of the authorized and issued
Common Stock of the Corporation on the date the option is granted. For purposes
of this Plan, Fair Market Value shall be the average of the high and low sales
prices quoted on the New York Stock Exchange composite listing on the date in
question or if there were no quotations on such date, on the next preceding
trading day on which there were such quotations.
ARTICLE V -- STOCK APPRECIATION RIGHTS
(a) The Committee in its discretion may grant stock appreciation rights to
any Key Person on such terms and conditions as it shall, in its discretion, deem
advisable.
(b) A stock appreciation right shall entitle the holder to receive a payment
having an aggregate value equal to the product of (i) the excess of (A) the Fair
Market Value on the exercise date of one share of Common Stock over (B) the Fair
Market Value on the grant date of one share of Common Stock, times (ii) the
number of shares specified by the stock appreciation right, or portion thereof,
which is exercised. Payment by the Corporation of the amount receivable upon any
exercise of a stock appreciation right may be made by the delivery of Common
Stock or cash, or any combination of Common Stock and cash, as determined in the
sole discretion of the Committee. If upon settlement of the exercise of a stock
appreciation right the holder is to receive payment in shares of Common Stock,
the number of shares shall be determined by dividing the amount of such payment
by the Fair Market Value of a share of Common Stock on the exercise date. No
fractional shares shall be used for such payment and the Committee shall
determine whether cash shall be given in lieu of such fractional shares or
whether such fractional shares shall be eliminated.
ARTICLE VI -- STOCK AWARDS
The Committee in its discretion may grant stock awards to any Key Person on
such terms and conditions as it shall, in its discretion, deem advisable,
subject to the limitations on restricted stock set forth in Section (b) of
Article III. A stock award may be denominated in shares of Common Stock or
stock-equivalent units, and may be paid in Common Stock, in cash, or in a
combination of Common Stock and cash.
ARTICLE VII -- PERFORMANCE AWARDS
The Committee in its discretion may make and pay performance awards to any
Key Person on such terms and conditions as it shall, in its discretion, deem
advisable. Performance awards may be payable in Common Stock, cash or a
combination thereof on account of attainment of one or more performance goals
previously established or to be established by the Committee. Performance goals
established by the Committee may be based on the Corporation's operating income
or one or more other business criteria selected by the Committee that apply to
an individual or group of individuals, a business unit or the Corporation as a
whole, over such performance period as the Committee may designate.
A-3
ARTICLE VIII -- AMENDMENT AND DISCLOSURE
The Board of Directors may at any time amend, modify or discontinue the Plan
or waive any of its provisions, provided that, except as provided in Section (e)
of Article I, Section (c) of Article III, or Article IX, that no such amendment,
modification, waiver or discontinuance shall revoke or materially adversely
affect the terms of any valid Award previously granted in accordance with the
Plan without the consent of the holder of the Award. Notwithstanding the
immediately preceding sentence, the Board of Directors and the Committee may not
take any action to increase or decrease the exercise price of any outstanding
options granted under Article IV, except as provided in Section (e) of Article I
and Section (c) of Article III.
ARTICLE IX -- GOVERNMENT REGULATIONS
The obligations of the Corporation to issue any Common Stock under this Plan
shall be subject to all applicable laws, rules and regulations and the obtaining
of all such approvals by governmental agencies as may be deemed necessary or
appropriate by the Committee. The Board of Directors of the Corporation may make
such changes to the Plan and any Awards as may be necessary or appropriate to
comply with the rules and regulations of any governmental authority.
ARTICLE X--LOANS
The Corporation may grant loans or guarantee loans from a third party to
holders of Awards in conjunction with such Awards.
ARTICLE XI -- TRANSFERABILITY OF AWARDS
Except as otherwise determined by the Committee, an Award under the Plan
shall be (i) nontransferable (including by pledge, assignment or otherwise)
other than by will or law of descent and distribution, and (ii) exercisable
during the lifetime of the Key Person to whom it is granted only by the Key
Person or, during the period the Key Person is under a legal disability, by the
Key Person's guardian or legal representative.
ARTICLE XII -- WITHHOLDING TAXES
Holders of Awards shall pay to the Corporation, or make provision
satisfactory to the Committee for payment of, any taxes required by law to be
withheld in respect of Awards under the Plan no later than the date of the event
creating the tax liability. The Corporation may, to the extent permitted by law,
deduct any such tax obligations from any payment of any kind otherwise due to
the holder of an Award.
ARTICLE XIII--APPLICABLE LAW
The validity, interpretation and administration of this Plan and any rules,
regulations, determinations or decisions made hereunder, and the rights of any
and all persons having or claiming to have any interest herein or hereunder,
shall be determined exclusively in accordance with the laws of the State of
Maryland, without regard to the choice of laws provisions thereof, except to the
extent federal law controls.
ARTICLE XIV -- NO EMPLOYMENT CONTRACT IMPLIED
Nothing in this Plan or any Awards granted in connection with this Plan
shall be construed or deemed to create or imply any contract of employment with
any Key Person or create any rights except as specifically provided in writing.
A-4
ARTICLE XV -- EFFECTIVE DATE AND TERM OF PLAN
The effective date of the Plan shall be February 26, 1997, subject to
approval by the affirmative vote of a majority of the votes cast in person or by
proxy, at the Annual Shareholders' Meeting to be held on May 21, 1997, or any
adjournment thereof. The term of the Plan will be ten years, commencing on the
effective date and ending on February 26, 2007, unless sooner terminated by the
Board of Directors.
A-5
USF&G CORPORATION
PROXY
ANNUAL MEETING OF SHAREHOLDERS - MAY 21, 1997
PROXY SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Norman P. Blake, Jr. and John A. MacColl, or
either of them, as proxies, each with power to appoint his substitute, and
hereby authorizes them to represent and to vote, as designated below, all the
shares of Common Stock of USF&G Corporation held of record by the undersigned on
March 14, 1997, at the Annual Meeting of Shareholders to be held on May 21,
1997, or at any adjournment thereof.
Returned proxy forms will be voted: (1) as specified on the matters listed
on the reverse side of this form; (2) in accordance with the Directors'
recommendations where a choice is not specified; and (3) in accordance with the
judgment of the proxies on any other matters that properly come before the
meeting. Your shares will not be voted unless your signed proxy form is returned
by your or you otherwise vote at the meeting.
This proxy when properly executed will be voted in the manner directed
herein. If no direction is made, this proxy will be voted FOR election of
directors and for the proposal to adopt the Stock Incentive Plan of 1997.
USF&G CORPORATION
P.O. BOX 11189
NEW YORK, N.Y. 10203-0139
The Board of Directors recommends a vote FOR election of directors and FOR
Proposal 2.
1. Election of Directors
FOR all nominees / / WITHHOLD AUTHORITY to vote for all nominees listed
below / / *EXCEPTIONS / /
Nominees: 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 Marie Whittemore, R. James Woolsey.
(INSTRUCTIONS: To withhold authority to vote for any individual nominee,
mare the "Exceptions box and write that nominees name in the space
provided below.)
*Exceptions
---------------------------------------------------------------------------
---------------------------------------------------------------------------
2. Proposal to adopt Stock Incentive Plan of 1997
FOR / / AGAINST / / ABSTAIN / /
Change of Address and or Comments Mark Here / /
When signing as attorney,
executor, administrator, trustee
or guardian, give title as such.
If the signor is a corporation,
sign in the corporate name by duly
authorized officer.
Dated: _________________________________________________________________, 1997
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SIGNATURE
Votes MUST be indicated / /
(x) in Black or Blue Ink.
Please sign, date and return the proxy card promptly using the enclosed
envelope.