SUBJECT TO COMPLETION, DATED FEBRUARY 14, 1994
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 4, 1994
$220,000,000
[USF&G LOGO] USF&G CORPORATION
ZERO COUPON CONVERTIBLE SUBORDINATED NOTES DUE 2009
------------------------
The Notes are being issued at an Issue Price of $ per $1,000
principal amount at maturity, which represents an original issue discount
("OID") of % from the principal amount at maturity thereof. There will be no
periodic payments of interest. The Notes will mature on March , 2009. The
Issue Price of each Note represents a yield to maturity of % per annum
(computed on a semi-annual bond equivalent basis) calculated from March ,
1994. The Notes will be subordinated to all existing and future Senior Debt of
the Corporation and effectively subordinated to all existing and future
liabilities of the Corporation's subsidiaries. As of December 31, 1993,
outstanding Senior Debt of the Corporation was approximately $950 million. In
addition, as of such date, the Corporation's subsidiaries had total liabilities
of approximately $11.9 billion (including estimated liabilities for insurance
claims). See "Capitalization" and "Description of Notes--Subordination of
Notes."
Each Note will be convertible at the option of the Holder at any time on or
prior to maturity, unless previously redeemed or otherwise purchased by the
Corporation, into Common Stock of the Corporation, $2.50 par value, at a
Conversion Rate of shares per Note (representing an effective initial
conversion price per share of $ , based on the Issue Price of $ per
Note). The Conversion Rate will not be adjusted for accrued OID, but will be
subject to adjustment upon the occurrence of certain events affecting the Common
Stock. Upon conversion, the Holder will not receive any cash payment
representing accrued OID; such accrued OID will be deemed paid by the Common
Stock received on conversion. See "Description of Notes--Conversion Rights." On
February 11, 1994, the last reported sale price of the Common Stock on the New
York Stock Exchange was $15.00 per share.
The Notes will be purchased by the Corporation, at the option of the Holder,
as of March , 1999 and March , 2004 for a Purchase Price per Note of
$ and $ (Issue Price plus accrued OID through each Purchase Date),
respectively, representing a yield per annum to the Holder on each such date of
% (computed on a semi-annual bond equivalent basis). The Corporation, at its
option, may elect to pay the Purchase Price on any particular Purchase Date in
cash or shares of Common Stock at the market value at that time, or any
combination thereof. See "Description of Notes-- Purchase of Notes at the Option
of the Holder." In addition, as of 35 business days after the occurrence of any
Change in Control of the Corporation occurring on or prior to March , 1999,
the Notes will be purchased for cash by the Corporation, at the option of the
Holder, for a Change in Control Purchase Price equal to the Issue Price plus
accrued OID through the date set for such purchase. If a Change in Control
occurs there can be no assurance that the Corporation will have available funds
sufficient to pay the Change in Control Purchase Price for all of the Notes that
might be delivered by Holders. See "Description of Notes--Change in Control
Permits Purchase of Notes at the Option of the Holder" and "Investment
Considerations--Change in Control."
The Notes are not redeemable by the Corporation prior to March , 1999. At
any time on and after that date, the Notes are redeemable for cash at the option
of the Corporation, in whole or in part, at Redemption Prices equal to the Issue
Price plus accrued OID through the date of redemption. See "Description of
Notes--Redemption of Notes at the Option of the Corporation."
For a discussion of certain United States federal income tax consequences
for Holders of Notes, see "Certain United States Federal Tax Considerations."
See "Investment Considerations" for a discussion of certain factors relevant
to an investment in the Notes.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS TO WHICH IT RELATES.
ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
<TABLE><CAPTION>
PRINCIPAL AMOUNT INITIAL PUBLIC UNDERWRITING PROCEEDS TO
AT MATURITY OFFERING PRICE DISCOUNT(1) CORPORATION(2)
----------------------- ----------------------- ----------------------- ------------------
<S> <C> <C> <C> <C>
Per Note............................ 100% % % %
Total(3)............................ $220,000,000 $ $ $
</TABLE>
- ---------------
(1) The Corporation has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933.
(2) Before deducting estimated expenses of $ payable by the
Corporation.
(3) The Corporation has granted the Underwriters an option for 30 days to
purchase up to an additional $25,000,000 aggregate principal amount at
maturity of Notes at the initial public offering price, less the
underwriting discount, solely to cover over-allotments. If the option is
exercised in full, the total principal amount at maturity, initial public
offering price, underwriting discount and proceeds to the Corporation will
be $245,000,000, $ , $ and $ , respectively.
See "Underwriting."
------------------------
The Notes are offered severally by the Underwriters, as specified herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the Notes will be
made, in book-entry form only, through the facilities of The Depository Trust
Corporation, on or about March , 1994.
GOLDMAN, SACHS & CO. KIDDER, PEABODY & CO.
INCORPORATED
------------------------
The date of this Prospectus Supplement is February , 1994.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY OR OF THE COMMON STOCK, OR BOTH, AT LEVELS ABOVE THOSE WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NEW YORK STOCK EXCHANGE, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
FOR NORTH CAROLINA RESIDENTS: THE COMMISSIONER OF INSURANCE OF THE STATE OF
NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR HAS THE
COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to those documents identified in the accompanying Prospectus,
the Corporation's Current Report on Form 8-K dated February 14, 1994 (containing
the Corporation's consolidated financial statements for the year ended December
31, 1993, together with the report thereon of Ernst & Young, independent
auditors) is incorporated herein by reference.
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in the Prospectus, this Prospectus Supplement
and the consolidated financial statements, including the notes thereto,
incorporated herein by reference. See "Glossary of Terms" for definitions of
certain terms used in this Prospectus Supplement. Unless indicated otherwise,
(i) the information contained in this Prospectus Supplement assumes the
Underwriters' over-allotment option is not exercised and (ii) all financial data
have been prepared using generally accepted accounting principles ("GAAP").
THE CORPORATION
USF&G Corporation ("USF&G" or the "Corporation") is a holding company
engaged primarily in the insurance business. United States Fidelity and Guaranty
Company ("USF&G Company"), its principal subsidiary, was founded in 1896 and is
the twenty-first largest property/casualty insurer in the United States, based
on net premiums written for the year ended December 31, 1992. USF&G Company
markets commercial and personal insurance products, concentrating on targeted
market segments, through a distribution network of approximately 3,900
independent agents. USF&G's life insurance subsidiary, Fidelity and Guaranty
Life Insurance Company ("F&G Life"), markets life insurance and annuity products
through a network of wholesalers, brokers and specialty marketing organizations.
The Corporation's premiums earned totaled approximately $2.5 billion for the
year ended December 31, 1993.
RESTRUCTURING AND STRATEGY
USF&G has undergone a significant restructuring since the appointment of
Norman P. Blake, Jr. as Chairman, President and Chief Executive Officer in
November 1990. This restructuring included (i) divesting non-strategic
businesses, (ii) strengthening the capital base, investment portfolio and
reserve position, (iii) withdrawing from unattractive state markets and product
lines to improve underwriting results, (iv) installing a new management team,
and (v) reducing costs and increasing productivity. As a result, USF&G's
financial condition and profitability have improved significantly over the past
three years.
USF&G has adopted a niche market segmentation strategy designed to produce
attractive returns in select market segments within the property/casualty and
life insurance industries. In the Corporation's property/casualty lines of
business, USF&G is pursuing a hybrid strategy of regionalization and product
specialization. Regional offices were established to improve distribution
effectiveness and better manage a restructured branch network. In addition,
product specialization is being pursued through market segmentation and the
establishment of business units focused on specific product lines. Management
continues to focus on the development of strict underwriting and loss control
guidelines, risk management and expense control. In the life insurance business,
USF&G is focusing on products with higher returns and more predictable
persistency, such as annuities to insureds in settlement of property/casualty
liability claims and tax sheltered annuities.
S-3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
NOTES........................................ $220,000,000 aggregate principal amount at maturity of Zero Coupon
Convertible Subordinated Notes due March , 2009 (the "Notes").
USF&G has granted the Underwriters an option for 30 days to
purchase up to $25,000,000 additional principal amount at maturity
of Notes, solely to cover over-allotments, if any.
ORIGINAL ISSUE DISCOUNT...................... The Notes are being issued at an issue price (the "Issue Price")
of $ per $1,000 principal amount at maturity of Notes,
which represents an original issue discount ("OID") of % from
the principal amount payable at maturity. Holders will generally
be taxed on such OID as it accrues (and thus prior to the receipt
of any payments attributable thereto). See "Description of Notes"
and "Certain United States Federal Tax Considerations--U.S.
Holders--Original Issue Discount."
YIELD TO MATURITY OF NOTES................... The yield to maturity will be % per annum (computed on a
semi-annual bond equivalent basis) calculated from March , 1994.
There will be no periodic interest payments on the Notes.
CONVERSION RIGHTS............................ Each Note will be convertible, at the option of the Holder, at any
time on or prior to maturity, unless previously redeemed or
otherwise purchased by the Corporation, into common stock, $2.50
par value, of the Corporation (the "Common Stock") at a conversion
rate (the "Conversion Rate") of shares per Note
(representing an effective initial conversion price per share of
$ , based on the Issue Price of $ per
Note). The Conversion Rate will not be adjusted for accrued OID,
but will be subject to adjustment upon the occurrence of certain
events affecting the Common Stock. Upon conversion, the Holder
will not receive any cash payment representing accrued OID; such
accrued OID will be deemed paid by the Common Stock received on
conversion. See "Description of Notes--Conversion Rights."
SUBORDINATION................................ The Notes will be subordinated in right of payment to the prior
payment in full of all existing and future Senior Debt (as defined
in the accompanying Prospectus) of the Corporation. The
Corporation is a holding company and the Notes will also be
effectively subordinated to all existing and future liabilities of
the Corporation's subsidiaries. As of December 31, 1993,
outstanding Senior Debt of the Corporation was approximately $950
million, which amount includes approximately $245 million of
Intercompany Debt. In addition, as of such date, the Corporation's
subsidiaries had total liabilities of approximately $11.9 billion
(including estimated liabilities for insurance claims) to which
the Notes will be effectively subordinated. The Subordinated
Indenture contains no limitation on the amount of additional
indebtedness, including Senior Debt, that may be incurred by the
Corporation and its subsidiaries, except that not more than $250
million of Intercompany Debt may qualify as Senior Debt. See
"Capitalization" and "Description of Notes--Subordination of
Notes."
OPTIONAL REDEMPTION.......................... The Notes will not be redeemable by the Corporation prior to March
, 1999. At any time on and after that
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
date, the Notes are redeemable for cash at the option of the
Corporation, in whole or in part, at Redemption Prices equal to
the Issue Price plus accrued OID through the date of redemption.
See "Description of Notes-- Redemption of Notes at the Option of
the Corporation."
PURCHASE AT THE OPTION OF
THE HOLDER................................. The Corporation will purchase any Note, at the option of the
Holder, as of March , 1999 and March , 2004 (each a "Purchase
Date") for a Purchase Price per Note of $ and
$ (representing the Issue Price plus accrued OID
through such Purchase Date), respectively, representing a %
yield per annum to the Holder upon each such date (computed on a
semi-annual bond equivalent basis). Subject to certain exceptions,
the Corporation, at its option, may elect to pay the Purchase
Price on any such Purchase Date in cash or shares of Common Stock
at the market value at that time, or any combination thereof. In
addition, as of 35 business days after the occurrence of a Change
in Control of the Corporation occurring on or prior to March ,
1999, the Corporation will purchase for cash any Note, at the
option of the Holder, for a Change in Control Purchase Price equal
to the Issue Price plus accrued OID through the Change in Control
Purchase Date. See "Description of Notes--Purchase of Notes at the
Option of the Holder" and "--Change in Control Permits Purchase of
Notes at the Option of the Holder" for a summary of these
provisions and the definition of "Change in Control."
SINKING FUND................................. None.
USE OF PROCEEDS.............................. The net proceeds to the Corporation from the sale of the Notes
will be used to redeem the $99,000,000 outstanding principal
amount of the Corporation's 8 7/8% Notes due 1996 and to retire
other existing indebtedness of the Corporation. See "Use of
Proceeds."
</TABLE>
S-5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary financial information has been derived from the
consolidated financial statements of the Corporation, which have been audited by
Ernst & Young, independent auditors. The summary financial information should be
read in conjunction with the consolidated financial statements, related notes
and other financial information incorporated herein by reference.
<TABLE><CAPTION>
]YEARS ENDED DECEMBER 31,
-----------------------------------------------------
1993 1992 1991 1990 1989
--------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS:
<S> <C> <C> <C> <C> <C>
Premiums Earned................................................ $ 2,456 $ 2,637 $ 3,187 $ 3,516 $ 3,697
Net Investment Income.......................................... 749 817 877 929 911
Realized Gains and Other....................................... 44 206 108 (274) 28
--------- --------- --------- --------- ---------
Total Revenues............................................... 3,249 3,660 4,172 4,171 4,636
Total Expenses(1).............................................. 3,150 3,625 4,313 4,602 4,479
Income (Loss) from Continuing Operations before Income Taxes,
Realized Gains (Losses), and Cumulative Effect of Adopting
New Accounting Standards......................................... 93 (113) (179) (77) 193
Net Income (Loss).............................................. 165 28 (176) (569) 119
Net Income (Loss) Available to Common Shareholders............. 117 (20) (213) (585) 103
PER SHARE DATA:
Income (Loss) from Continuing Operations before Income Taxes,
Realized Gains (Losses), and Cumulative Effect of Adopting
New Accounting Standards......................................... $ 0.53 $ (1.91) $ (2.57) $ (1.11) $ 2.12
Net Income (Loss)(2)......................................... 1.38 (0.24) (2.53) (6.99) 1.24
CONSOLIDATED STATEMENT OF FINANCIAL POSITION:
Total Investments.............................................. $ 11,377 $ 11,346 $ 12,167 $ 11,221 $ 10,894
Total Assets................................................... 14,335 13,134 14,486 13,902 13,551
Corporate Debt................................................. 574 574 617 659 543
Real Estate and Other Debt..................................... 44 42 60 120 87
Shareholders' Equity........................................... 1,511 1,270 1,323 1,205 2,007
Book Value Per Share........................................... $ 11.66 $ 8.87 $ 9.53 $ 11.97 $ 21.60
OTHER OPERATING DATA:
Total Employees................................................ 6,500 7,400 9,100 12,500 12,600
Independent Agents............................................. 3,900 4,200 4,600 5,300 5,300
PROPERTY/CASUALTY INSURANCE:
Premiums Earned................................................ $ 2,327 $ 2,533 $ 3,018 $ 3,330 $ 3,532
Income (Loss) from Continuing Operations before Income Taxes,
Realized Gains (Losses), and Cumulative Effect of Adopting
New Accounting Standards......................................... 182 (3) (84) 23 261
Statutory Premiums Written..................................... 2,429 2,420 3,032 3,631 3,698
Statutory Loss Ratio........................................... 75.4 82.0 84.1 81.9 76.5
Statutory Expense Ratio........................................ 33.7 34.9 33.1 32.9 32.8
Statutory Combined Ratio....................................... 109.1 116.9 117.2 114.8 109.3
Statutory Premiums to Surplus.................................. 1.4 1.5 2.1 2.4 2.3
LIFE INSURANCE:
Sales.......................................................... $ 168 $ 104 $ 209 $ 994 $ 898
Premiums....................................................... 129 104 169 186 165
Income (Loss) from Continuing Operations before Income Taxes,
Realized Gains (Losses), and Cumulative Effect of Adopting
New Accounting Standards......................................... (6) (4) 5 45 35
NONINSURANCE AND PARENT OPERATIONS:
Revenues....................................................... $ 5 $ 17 $ 38 $ 22 $ 84
Loss from Continuing Operations before Realized Gains (Losses)
on Investments................................................... (83) (106) (109) (157) (114)
</TABLE>
- ---------------
(1) Includes restructuring charges of $51 million in 1992, $60 million in 1991
and $34 million in 1990.
(2) In 1993, fully-diluted net income per share was $1.32. In other years shown,
there was no difference between primary and fully-diluted net income (loss)
per share.
S-6
<PAGE>
INVESTMENT CONSIDERATIONS
Prospective investors should consider carefully, in addition to the other
information in this Prospectus Supplement and the Prospectus, the following
factors before purchasing the Notes offered hereby.
SENIOR MANAGEMENT AND ORGANIZATIONAL RESTRUCTURING
The Corporation has effected significant management changes beginning with
the selection of Norman P. Blake, Jr., as Chairman, President and Chief
Executive Officer in November 1990. Many of the Corporation's senior officers
were hired under the direction of Mr. Blake after he joined USF&G. The loss by
the Corporation of the services of Mr. Blake or key members of his management
team could have a material adverse effect on the future prospects of the
Corporation.
In the past three years, Mr. Blake and his management team have effected a
major restructuring of the Corporation's operations, including withdrawing from
certain markets and states, revising USF&G's products and marketing strategy and
reducing its field force and the number of independent agents authorized to
represent it. See "The Corporation." Management believes that these actions have
placed USF&G in a stronger competitive position, but there can be no assurance
that the Corporation will achieve its strategic objectives, that its
relationships with agents will be maintained or that further improvement in
results from operations will be realized.
ADEQUACY OF PROPERTY/CASUALTY LOSS RESERVES
USF&G Company maintains loss reserves to cover its estimated ultimate
liability for losses and loss adjustment expenses with respect to reported
claims and claims incurred but not yet reported. Reserves do not represent an
exact calculation of liabilities, but rather are estimates of what USF&G Company
expects the ultimate settlement and administration of claims will cost based on
facts and circumstances then known, estimates of future trends in claims
frequency and severity, judgments regarding judicial theories of liability
(which include punitive damages), and other factors. The inherent uncertainties
of estimating insurance reserves are generally greater for liability coverages
(particularly workers compensation, environmental and product liability) than
for property coverages, due to the longer period of time (the "tail") that
elapses before a definitive determination of ultimate loss can be made. These
estimating uncertainties are particularly significant for common circumstance
claims, which include environmental, product liability, other long term
exposures such as asbestos and other types of exposures where multiple claims
relate to a similar cause of loss.
USF&G Company regularly reviews its reserving techniques, overall reserve
position and reinsurance arrangements. In light of present facts and current
legal interpretations, management believes that adequate provision has been made
for loss reserves. However, establishment of appropriate reserves is an
inherently uncertain process, and there can be no assurance that ultimate losses
will not exceed USF&G Company's loss reserves and have a material adverse effect
on USF&G Company's results of operations or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Property/Casualty Insurance Operations--Losses Incurred and Loss
Reserves."
CATASTROPHES
Property/casualty insurers are subject to claims arising out of
catastrophes, which may have a significant impact on their results of operations
and financial condition. USF&G Company has experienced, and can be expected in
the future to experience, material catastrophe losses. Catastrophes can be
caused by various events including hurricanes, windstorms, earthquakes, floods,
hail, winter storms, explosions, fires and civil disorders, and the incidence
and severity of
S-7
<PAGE>
catastrophes are inherently unpredictable. The extent of losses from a
catastrophe is a function of both the total amount of insured exposure in the
area affected by the event and the severity of the event. Many catastrophes are
restricted to relatively small geographical areas; however, earthquakes,
hurricanes and other storms, in particular, may produce significant damage in
large, heavily populated areas. Applicable accounting principles do not permit
an insurer to establish reserves for catastrophes or other losses before they
actually occur.
USF&G Company seeks to reduce its catastrophe exposure through risk
selection and the purchase of reinsurance. While USF&G Company attempts to limit
its exposure to acceptable levels, it is possible that a catastrophic event or
multiple catastrophic events could produce losses which result in a material
adverse effect on USF&G Company's results of operations or financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Property/Casualty Insurance Operations--Catastrophe Losses."
REINSURANCE CONSIDERATIONS
Reinsurance is used to limit the amount of risk retained under policies
written. The availability and cost of reinsurance are subject to prevailing
market conditions, both in terms of price and available capacity, which can
affect the Corporation's business volume and profitability. USF&G also is
subject to credit risk with respect to its ability to recover amounts due from
its reinsurers, since the ceding of risk to its reinsurers does not relieve the
Corporation of liability to its insureds. There can be no assurance that USF&G's
reinsurance programs will effectively limit the Corporation's overall exposure
for policy claims. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Property/Casualty Insurance
Operations--Ceded Reinsurance."
RATINGS
Ratings have become an increasingly important factor in establishing the
competitive position of insurance companies. Ratings organizations review the
financial performance and condition of insurers, including that of the
Corporation and its insurance subsidiaries. Both USF&G and its insurance
subsidiaries have ratings below those of most of their major competitors. Any
reductions in the Corporation's senior debt ratings could adversely impact the
Corporation's financial flexibility by limiting the Corporation's access to
capital or increasing its borrowing costs. Any reductions in F&G Life's
insurance ratings could result in its products being less attractive to
consumers and the acceleration of policy surrenders. Further, insurance ratings
are important to certain consumers of property/casualty coverages, particularly
in USF&G Company's fidelity/surety and reinsurance operations.
The Corporation's senior debt ratings currently are Ba2, BB+ and BBB from
Moody's Investors Service, Inc. ("Moody's"), Standard & Poor's Corporation
("Standard & Poor's") and Duff & Phelps Credit Rating Company ("Duff & Phelps"),
respectively. USF&G Company currently maintains insurance ratings of Baa2, BBB+
and A from Moody's, Standard & Poor's and Duff & Phelps, respectively, and an A-
rating from A.M. Best Company Inc. ("A.M. Best"). F&G Life maintains insurance
ratings of Baa3, BBB+ and A from Moody's, Standard & Poor's and Duff & Phelps,
respectively, and A-from A.M. Best. It is a major objective of management to
achieve ratings upgrades. Although Standard & Poor's indicated in April 1993
that the Corporation and its insurance subsidiaries have a positive ratings
outlook, there can be no assurance that any ratings upgrades will be achieved.
REAL ESTATE INVESTMENTS
The Corporation's investment portfolio consists primarily of investment
grade debt securities. However, as of December 31, 1993, $793 million was
invested in equity real estate and $302 million
S-8
<PAGE>
was invested in commercial mortgages, together aggregating 9% of the investment
portfolio, net of reserves. Real estate values have generally fallen within the
last several years and restructurings and foreclosures of mortgages have
increased substantially in recent periods. In addition, real estate equity and
mortgage investments are generally less liquid and carry a greater risk of
significant investment losses than do investment grade fixed-income securities.
At December 31, 1993, the aggregate amount of non-performing real estate
investments (mortgage loans and real estate investments that are not performing
in accordance with their contractual terms, or are performing significantly
below expectations) was $249 million, representing 2.2% of the Corporation's
total investments. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Investments--Real Estate."
The real estate market remains depressed. Although USF&G anticipates
selling real estate in an orderly fashion as and when market conditions permit,
if the Corporation were required to dispose of a significant portion of its real
estate in the near term, it is likely that it would recover amounts
substantially less than the related carrying values. The current value of the
Corporation's commercial mortgage loans also has been adversely affected by
depressed real estate market conditions. There can be no assurance whether or
when the markets for real estate assets will recover, or that the recent
investment performance of these assets will not persist or worsen.
The Corporation had real estate reserves totaling $108 million at each of
December 31, 1993 and 1992. The establishment of appropriate reserves requires
numerous forecasts and the exercise of a significant degree of judgment, and is
inherently a subjective process. Although the Corporation has significantly
increased real estate reserves from previous periods and believes its reserves
are adequate in light of its current plans for the portfolio, no assurance can
be given that substantial additional reserves will not be required in the
future.
CYCLICALITY OF THE PROPERTY/CASUALTY INSURANCE INDUSTRY
Historically, the property/casualty insurance industry has been cyclical,
generally characterized by extended periods of overcapacity that adversely
affect premium rates, followed by periods of undercapacity resulting in higher
rates. The industry has been in a protracted downturn in recent years, due
primarily to premium rate competition, which has adversely affected underwriting
results. Premium rate levels are affected by the availability of insurance
coverage which is generally affected by the level of surplus in the industry.
Increases in surplus have generally been accompanied by increased price
competition among property/casualty insurers. The industry's profitability can
be affected significantly by volatile and unpredictable developments, including
catastrophes, interest rate fluctuations and other changes in the investment
environment which affect market prices of and income from insurance company
investments, inflationary pressures that affect the size of losses and judicial
decisions affecting insurers' liabilities. The demand for property/casualty
insurance can also vary significantly, generally rising as the overall level of
economic activity increases and falling as such activity decreases. Many of the
factors which have resulted in the current downturn in the property/casualty
insurance industry continue, and USF&G cannot predict if or when the general
market conditions for the property/casualty industry will improve. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Property/Casualty Insurance Operations."
HOLDING COMPANY STRUCTURE; DIVIDEND RESTRICTIONS
The Corporation is a holding company whose principal asset is the stock of
USF&G Company. USF&G Company, in turn, owns the stock of F&G Life and the
Corporation's other principal subsidiaries. Since the Corporation is a holding
company, its rights and the rights of its creditors, including the Holders of
the Notes, to participate in the assets of any subsidiary upon the latter's
liquidation or recapitalization generally will be subject to the prior claims of
the subsidiary's creditors (including, in the case of an insurance subsidiary,
its policyholders). In addition, there are
S-9
<PAGE>
certain regulatory limitations on the payment of dividends and on loans and
other transfers of funds to the Corporation by its subsidiaries.
Because the operations of the Corporation are conducted through its
subsidiaries, the Corporation is dependent on dividends from its subsidiaries to
meet its obligations for payment of interest and principal on outstanding debt
obligations, dividends to stockholders and corporate expenses. Approval of the
Maryland Insurance Commissioner is required for dividend payments from a
Maryland insurance subsidiary to its holding company during a twelve month
period in excess of 10% of the subsidiary's statutory policyholders' surplus as
of the prior calendar year end. In addition, notice of any dividend must be
given to the Maryland Insurance Commissioner prior to payment, and the
Commissioner has the right to prevent payment of such dividend if it is
determined that such payment could impair the insurer's financial condition.
During 1994, approximately $154 million in dividends are available for payment
to the Corporation from its insurance subsidiaries without prior approval from
the Maryland Insurance Commissioner. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity."
From time to time, the National Association of Insurance Commissioners
("NAIC") and various state insurance regulators have considered, and may in the
future consider, proposals to further restrict dividend payments that may be
made by an insurance company without regulatory approval. If the ability of the
Corporation's subsidiaries to pay dividends or make other payments to the
Corporation is materially restricted by regulatory requirements, it could affect
the Corporation's ability to pay dividends and/or service its debt. No assurance
can be given that there will not be any further regulatory action restricting
the ability of the Corporation's subsidiaries to pay dividends.
REGULATION
The Corporation's insurance subsidiaries are subject to extensive
regulation and supervision in the states and other jurisdictions in which they
do business. This regulatory oversight includes, for example, matters relating
to: licensing and examination, rate setting, trade practices, policy forms,
restrictions on underwriting standards, cancellation and nonrenewal of insurance
policies, withdrawal from a market, claims practices and mandated participation
in involuntary pools and guaranty funds. The insurance laws of these states and
other jurisdictions also regulate the nature and amount of permitted
investments, reserve adequacy, insurer solvency and transactions between
affiliates. Such regulation and supervision are primarily for the benefit and
protection of policyholders and are not for the benefit of investors.
In recent years, the state insurance regulatory framework has come under
increased scrutiny and many state legislatures have considered or enacted laws
that regulate insurance companies and insurance holding company systems.
Further, the NAIC and state insurance regulators are re-examining existing laws
and regulations, specifically focusing on issues relating to insurance company
investments, the solvency of insurance companies and risk-based capital ("RBC")
guidelines. In addition, Congress and certain federal government agencies are
investigating the current condition of the insurance industry to determine
whether federal regulation is warranted. President Clinton also has presented a
proposal to enact a comprehensive national health care system, one component of
which would merge the medical payment system for workers compensation and the
medical payments' component of automobile insurance into a single health care
system. Finally, while current federal income tax law permits the tax-deferred
accumulation of earnings on the premiums paid by an annuity owner and holders of
certain savings oriented life insurance products, no assurance can be given that
future tax laws will continue to allow such tax deferrals. If such deferrals
were not allowed, consumer demand for the affected products would be
substantially reduced. It is not possible to predict the outcome of any of these
matters and there can be no assurance that future legislation and regulation
will not have a material adverse effect on the Corporation. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Regulation."
S-10
<PAGE>
USF&G Company is required by state law to participate in various
involuntary pools principally involving workers compensation and automobile
insurance. From time to time, such pools assess charges on their participants to
reflect claims which have been made against such pools. The Corporation has
withdrawn from certain jurisdictions and has taken steps in other jurisdictions
to reduce its risk to these exposures, although it continues to face potential
assessments, even in states where it has withdrawn, related to its prior
participation in such markets. There can be no assurance that any such charges,
if assessed, will not have a material adverse effect on the Corporation. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Regulation--Involuntary Market Plans" and "--Withdrawal from
Business Lines."
In order to enhance the regulation of insurer solvency, the NAIC has
approved a formula and model law to implement RBC requirements designed to
assess capital adequacy of insurers. These regulations are currently effective
for life insurance companies and will be effective with respect to year end 1994
financial statements for property/casualty companies. Insurers having less
statutory surplus than required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of capital
inadequacy. In addition, it is possible that the comparative RBC levels will
become a relevant competitive factor in the industry. Based on the NAIC formula,
both USF&G Company and F&G Life have statutory surplus at December 31, 1993 in
excess of the RBC Company Action Level (as defined by the NAIC). There can be no
assurance that, in the future, surplus will not fall below the RBC amount that
would initiate regulatory intervention or that the Corporation's subsidiaries
will not be adversely affected by the RBC measurements. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Regulation-- NAIC Proposals."
LEGAL PROCEEDINGS
Various regulatory, governmental and other legal actions are currently
pending involving or affecting the Corporation and specific aspects of its
businesses. Additionally, the Corporation's insurance subsidiaries are
defendants in numerous governmental and legal actions and proceedings of a
character normally incident to their businesses. The aggregate dollar amounts
involved in these regulatory, governmental and other legal proceedings cannot be
determined with certainty. However, in the opinion of management, these
proceedings are not expected to have a material adverse effect on the
Corporation's consolidated financial position, although it is possible that the
Corporation's results of operations in a particular quarterly or annual period
would be materially affected.
COMPETITION
The property/casualty and life insurance businesses are highly competitive.
The Corporation's insurance subsidiaries compete with domestic and foreign
insurers, many of which have significantly greater financial resources than
USF&G Company or F&G Life.
Pricing is a primary means of competition in the property/casualty
industry. The industry is currently in a period of significant price
competition, which adversely affects USF&G Company's profitability. Availability
and quality of products, quality and speed of service (including claims
service), financial strength, distribution systems and technical expertise are
also important elements of competition. In personal and other lines offered by
USF&G Company, significant price competition is experienced from direct-writing
companies that do not use independent agents and generally have lower policy
acquisition costs.
In the life insurance industry, interest crediting rates, policy features,
financial stability and service quality are important competitive factors. F&G
Life's products compete not only with those offered by other life insurance
companies, but also with other income accumulation-oriented products offered by
other financial institutions. F&G Life has experienced considerable competitive
pressure in recent periods as a result of its relatively lower credit ratings.
Competitive pressures
S-11
<PAGE>
for agency business also have intensified in recent years because of an increase
in the variety of products available in the market and efforts of competitors to
expand their market shares.
CHANGE IN CONTROL
If a Change in Control occurs, there can be no assurance that the
Corporation will have available funds sufficient to pay the Change in Control
Purchase Price for all of the Notes that might be delivered by Holders. Further,
unless a waiver or consent was obtained, a Change in Control could give rise to
a requirement to repay other indebtedness of the Corporation and its
subsidiaries, including Senior Debt. The failure by the Corporation to comply
with its Senior Debt obligations in the event of such a Change in Control would
constitute an Event of Default under the Notes. See "Description of
Notes--Change in Control Permits Purchase of Notes at the Option of the Holder."
Any Change in Control would require the prior approval of the Maryland Insurance
Commissioner. See "Description of Capital Stock--Special Statutory Requirements
for Certain Transactions-- Insurance Acquisitions Disclosure and Control Act" in
the accompanying Prospectus.
S-12
<PAGE>
THE CORPORATION
GENERAL. USF&G is a holding company engaged primarily in the insurance
business. USF&G Company, its principal subsidiary, founded in 1896, is the
twenty-first largest property/casualty insurer in the United States, based on
net premiums written for the year ended December 31, 1992. USF&G Company markets
commercial and personal insurance products, concentrating on targeted market
segments, through a distribution network of approximately 3,900 independent
agents. USF&G's life insurance subsidiary, F&G Life, markets life insurance and
annuity products through a network of wholesalers, brokers and specialty
marketing organizations. The Corporation's premiums earned totaled approximately
$2.5 billion for the year ended December 31, 1993.
PROPERTY/CASUALTY INSURANCE. USF&G Company, which accounted for $2.3
billion (or 95%) of USF&G Corporation's 1993 premiums earned, writes both
commercial and personal insurance, as well as certain specialty lines of
insurance. Commercial lines, which accounted for 53% of 1993 property/casualty
premiums earned, includes property, auto, inland marine, workers compensation
and general and umbrella liability coverage for businesses. In commercial lines,
USF&G Company targets small and middle market businesses nationwide through its
independent agency network. USF&G Company provides services to its agents and
customers through 30 branch offices, each of which has service teams providing
policy administration from underwriting through claims processing. Personal
lines, which accounted for 29% of 1993 property/casualty premiums earned,
includes auto, homeowners, watercraft and umbrella insurance for individuals and
families. Personal auto insurance represented 74% of personal lines premiums
earned in 1993. USF&G Company also markets certain specialty insurance lines,
including fidelity/surety insurance and reinsurance products, which accounted
for 5% and 13% of 1993 property/casualty premiums earned, respectively.
The table below shows premiums earned and the statutory loss ratio by lines
of property/casualty insurance.
<TABLE><CAPTION>
1993 1992 1991
------------------------------------- ------------------------------------- -----------
Premiums Statutory Premiums Statutory Premiums
Earned % Loss Ratio Earned % Loss Ratio Earned
----------- --------- ------------- ----------- --------- ------------- -----------
(dollars in millions)
COMMERCIAL LINES
<S> <C> <C> <C> <C> <C> <C> <C>
Auto................................ $ 399 17% 55.2 $ 442 18% 64.5 $ 531
General Liability................... 351 15 80.9 388 15 99.2 487
Property............................ 321 14 60.4 332 13 69.5 370
Workers Compensation................ 152 7 212.3 318 13 121.0 497
----------- --------- ------------- ----------- --- ------ -----------
Total Commercial Lines.......... 1,223 53 83.6 1,480 59 86.9 1,885
----------- --------- ------------- ----------- --- ------ -----------
FIDELITY/SURETY
Fidelity............................ 18 1 56.1 19 1 24.6 21
Surety.............................. 100 4 49.5 92 3 33.5 96
----------- --------- ------------- ----------- --- ------ -----------
Total Fidelity/Surety........... 118 5 50.5 111 4 32.0 117
----------- --------- ------------- ----------- --- ------ -----------
PERSONAL LINES
Auto................................ 504 22 70.8 551 22 73.6 658
Homeowners.......................... 149 6 73.8 184 7 102.2 207
Property............................ 28 1 66.0 50 2 67.9 55
----------- --------- ------------- ----------- --- ------ -----------
Total Personal Lines............ 681 29 71.2 785 31 80.0 920
----------- --------- ------------- ----------- --- ------ -----------
ASSUMED REINSURANCE
Finite Risk......................... 169 7 70.1 74 3 78.9 32
Traditional Risk.................... 136 6 62.1 83 3 72.8 64
----------- --------- ------------- ----------- --- ------ -----------
Total Assumed Reinsurance....... 305 13 67.3 157 6 76.9 96
----------- --------- ------------- ----------- --- ------ -----------
Total............................... $ 2,327 100% 75.4 $ 2,533 100% 82.0 $ 3,018
----------- --------- ------------- ----------- --- ------ -----------
----------- --------- ------------- ----------- --- ------ -----------
<CAPTION>
Statutory
% Loss Ratio
--------- -------------
COMMERCIAL LINES
Auto................................ 18% 75.0
General Liability................... 16 91.1
Property............................ 12 67.1
Workers Compensation................ 16 128.5
--- ------
Total Commercial Lines.......... 62 91.6
--- ------
FIDELITY/SURETY
Fidelity............................ 1 45.2
Surety.............................. 3 41.6
--- ------
Total Fidelity/Surety........... 4 42.3
--- ------
PERSONAL LINES
Auto................................ 22 79.6
Homeowners.......................... 7 87.0
Property............................ 2 58.4
--- ------
Total Personal Lines............ 31 80,0
--- ------
ASSUMED REINSURANCE
Finite Risk......................... 1 76.1
Traditional Risk.................... 2 17.6
--- ------
Total Assumed Reinsurance....... 3 59.1
--- ------
Total............................... 100% 84.1
--- ------
--- ------
</TABLE>
S-13
<PAGE>
LIFE INSURANCE. F&G Life offers a variety of annuity and life insurance
products, primarily to individuals nationwide. In 1993, F&G Life accounted for
14% of the Corporation's total revenues (which includes investment income) and
34% of its total assets. F&G Life's principal products include (i) structured
settlements of USF&G Company claims, (ii) single premium deferred annuities sold
through financial institutions, brokers and independent agents, (iii) tax
sheltered annuities ("TSAs") marketed primarily to teachers through a national
wholesale distribution network, and (iv) universal and term life policies sold
through independent agents.
The following table shows life insurance and annuity sales by product type.
<TABLE><CAPTION>
1993 1992 1991
------------------------ -------------------------- --------------------------
Premiums Premiums Premiums %
Earned % Earned % Earned -
------------- --------- --------------- --------- ---------------
(dollars in millions)
PRODUCT TYPE
<S> <C> <C> <C> <C> <C> <C>
Structured settlement
annuities...................... $ 66 39% $ 37 35% $ 71 34%
Single-premium deferred
annuities...................... 44 26 33 32 70 33
Tax-sheltered annuities...... 35 21 -- -- -- --
Other annuities.............. 17 10 23 22 54 26
Life insurance............... 6 4 11 11 14 7
------------------------ -------------------------- --------------------------
Total................... $ 168 100% $ 104 100% $ 209 100%
------------------------ -------------------------- --------------------------
------------------------ -------------------------- --------------------------
</TABLE>
RECENT HISTORY. During the late 1980s, USF&G embarked on a diversification
effort, investing substantial amounts of capital and management attention in
noninsurance related ventures. Many of these ventures proved unsuccessful,
diverting resources from the Corporation's core insurance operations. During the
same period, a significant portion of the Corporation's investment portfolio was
invested in relatively high risk assets (non-investment grade bonds, equity
securities and real estate).
Norman P. Blake, Jr. was appointed Chairman, President and Chief Executive
Officer in November 1990 and immediately began the task of rebuilding USF&G. He
instituted a restructuring strategy that involved the following critical
elements: (i) focusing on core insurance operations while divesting and
liquidating non-strategic businesses; (ii) strengthening the balance sheet
through a combination of improving the capital base, repositioning the
investment portfolio and improving overall reserve strength; (iii) withdrawing
from unattractive state markets and product lines in order to improve
underwriting results; (iv) installing a new management team focused on
repositioning insurance operations; (v) lowering operational and financial
leverage; and (vi) reducing costs and increasing productivity. As a result,
USF&G's financial condition and profitability have significantly improved over
the last three years. Net income totaled $165 million in 1993, compared with $28
million in 1992 and losses of $176 million and $569 million in 1991 and 1990,
respectively.
During the three year period ended December 31, 1993, significant steps
were taken to implement this restructuring strategy. These steps included the
following:
. A new senior management team was recruited, with many positions being
filled by executives with proven track records in the insurance
industry.
. Substantially all of the noninsurance financial services ventures were
discontinued. In total, the Corporation divested or liquidated 13
operating businesses in an effort to concentrate management and
capital resources on core insurance operations and eliminate the
earnings drag associated with nonstrategic operations.
S-14
<PAGE>
. The capital position was improved primarily through the sale of $320
million of convertible preferred stock in mid-1991.
. The investment portfolio was repositioned through the reduction of
relatively high risk investments (non-investment grade bonds, equity
securities and real estate) from 29% of invested assets at December
31, 1990 to 15% at December 31, 1993. In addition, the Corporation
repositioned its assets to better match liabilities and reduce
volatility. At December 31, 1993, 84% of USF&G's investment portfolio
was invested in fixed income securities, 94% of which were investment
grade. The market value of the Corporation's fixed income securities
portfolio was 103.8% of amortized cost at December 31, 1993.
. Emphasis was placed on core insurance operations in favorable
regulatory environments. Selected lines of business, predominantly
personal automobile and workers compensation insurance, were
discontinued in states where the regulatory environment provided
little or no opportunity for adequate pricing, or where the
involuntary residual market load undermined the ability to realize an
adequate level of profitability.
. The ratio of debt to total capital was reduced from 39% at December
31, 1990 to 29% at December 31, 1993 and the ratio of
property/casualty net premiums written to surplus was reduced from
2.4x to 1.4x during the same period. This was largely the result of
USF&G's capital raising efforts in 1991, its paring of unprofitable
property/casualty premiums and its return to profitability.
. Operating expenses were reduced significantly, predominantly as a
result of a 48% reduction in staffing levels from 12,500 employees at
December 31, 1990 to 6,500 employees at December 31, 1993. Reductions
were made possible by the discontinuation of substantially all
noninsurance operations and the implementation of programs to improve
operating efficiencies in core insurance operations, including a
reduction in the number of full-service branch offices from 54 to 30.
S-15
<PAGE>
STRATEGY
After effecting a significant repositioning over the last three years,
USF&G's strategy is to earn attractive returns in select market segments within
the property/casualty and life insurance industries. This niche approach has
resulted in the segmentation of the property/casualty and life insurance
businesses and a focus on developing tailored products for customers within
those segments. This strategy is designed to capitalize on USF&G's competitive
strengths, including its distribution network of approximately 3,900 independent
agents, sophisticated underwriting techniques and procedures, improved financial
position, customer driven approach to products and services and long-standing
reputation of the USF&G name. The Corporation's concentration on particular
market segments represents a significant change from historical efforts to be a
broad multi-line company, marketing essentially all products in all markets.
PROPERTY/CASUALTY. USF&G Company is pursuing a hybrid strategy of
regionalization and product specialization. Regional offices have been
established in order to improve distribution effectiveness and better manage the
branch office network. Management believes that by regionalizing its field
operations it will enhance its knowledge of local markets and realize cost
reductions through centralization of processing and more efficient customer
service. Product specialization has resulted in market segmentation and the
establishment of business units focused on product development for these
specific markets. Specialized product line management, coupled with specific
profit and loss responsibility, facilitates product development and focuses
pricing and underwriting standards on the characteristics of particular markets.
USF&G Company's property/casualty business consists of commercial lines,
personal lines, fidelity/surety and reinsurance. In commercial lines USF&G
focuses on middle market and small business segments. The middle market segment,
generally considered to include businesses with more than 20 employees, has been
divided into manufacturing, services and contractor segments, with each further
divided into subsegments with differing product needs. Management believes that
the critical elements of success in the middle market are the development of
value added products and risk management. USF&G Company has developed packaged
products targeted to particular markets, such as the restaurant industry. USF&G
Company has implemented several programs to manage risk, including (i)
developing strict underwriting guidelines and procedures, (ii) hiring
experienced underwriting and claims personnel, (iii) creating specialized
underwriting teams and (iv) developing an integrated claims approach.
The small business segment, generally considered to include businesses with
20 or fewer employees, is generally characterized by lower and less volatile
loss ratios, but higher processing expenses resulting from lower average
revenues per transaction. Management believes that the keys to success in this
market are the centralization and standardization of underwriting and claims
procedures and expense control. To address these issues, USF&G Company has
consolidated processing into regional locations and is in the process of
developing automated underwriting systems and other technological improvements.
Management believes that the key factors for success in personal lines are
risk management, market focus and customer service. As in commercial lines,
management has implemented several risk management programs, including (i)
extensive reunderwriting of existing automobile and homeowners books of
business, (ii) withdrawal from or reduction of exposure in selected states
(where permitted by applicable regulations), particularly in areas where
catastrophe exposures and involuntary market allocations prevent USF&G Company
from achieving adequate rates, and (iii) developing a sophisticated system to
monitor potential losses by geographic area, including procedures that isolate
exposure by zip code. New products also are being introduced to meet specific
market needs and provide value added services to policyholders.
S-16
<PAGE>
The strategy of F&G Re, Inc. ("F&G Re"), the reinsurance management arm of
USF&G Company, is to continue to target profitable business primarily in the
traditional reinsurance market and to monitor the pricing environment for growth
opportunities. F&G Re's current emphasis is on property rather than casualty
reinsurance, with the vast majority of its business written on a treaty basis.
The strategy for the fidelity/surety business is to leverage USF&G Company's
strong historical position in these markets and to improve results through the
development of national account distribution and an integrated customer
approach. Management also expects to leverage the existing agency force to
capture additional fidelity/surety business.
LIFE. F&G Life's strategy is to diversify its product mix while focusing on
products with higher returns and more predictable persistency. Focus is being
placed on increased sales of annuities to insureds in settlement of USF&G
Company claims ("structured settlements") and the marketing of tax sheltered
annuities through a national wholesaler. F&G Life also has eliminated its branch
office distribution system and now distributes products generally through
channels characterized by variable cost structures.
OVERVIEW. Management believes that the strategies being employed in each of
its business lines offer significant opportunities for continued improvement in
profitability and results of operations. Significant progress has been made as
evidenced by the improvement in profitability over the last three years. The
Corporation's withdrawal from particular markets and its product segmentation
strategy has produced a significant decline in premium volume and an
accompanying market share decline. However, during the latter part of 1993,
premiums in USF&G's target markets began to level off and have increased in some
market segments. Management expects to be able to achieve profitable growth by
maintaining a disciplined, customer focused approach to underwriting in its core
commercial and personal lines, and continuing to expand its relatively unique
position in its specialty lines of fidelity/surety and reinsurance and
increasing sales of life insurance and annuity products.
USE OF PROCEEDS
The net proceeds to the Corporation from this offering are expected to be
approximately $ million ($ million if the Underwriters'
over-allotment option is exercised in full). The net proceeds will be used to
redeem the $99,000,000 outstanding principal amount of the Corporation's 8 7/8%
Notes due 1996 and to retire other existing indebtedness of the Corporation.
S-17
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
USF&G's Common Stock is traded on the New York Stock Exchange ("NYSE")
under the trading symbol "FG". The following table sets forth the high and low
sales prices of USF&G's Common Stock on the NYSE Composite Tape and the cash
dividends declared on the Corporation's Common Stock during each quarter
presented.
<TABLE><CAPTION>
DIVIDENDS
PERIOD HIGH LOW DECLARED
- ----------------------------------------------------------------------------- --------- --------- ---------------
1991
<S> <C> <C> <C>
First Quarter.............................................................. $ 12.13 $ 7.50 $ .05
Second Quarter............................................................. 12.50 8.75 .05
Third Quarter.............................................................. 9.25 6.13 .05
Fourth Quarter............................................................. 8.50 5.63 .05
------
Total................................................................... $ .20
------
------
1992
First Quarter.............................................................. 10.25 7.13 $ .05
Second Quarter............................................................. 14.25 8.00 .05
Third Quarter.............................................................. 15.00 10.00 .05
Fourth Quarter............................................................. 14.13 9.88 .05
------
Total................................................................... $ .20
------
------
1993
First Quarter.............................................................. 17.63 11.13 $ .05
Second Quarter............................................................. 19.63 15.75 .05
Third Quarter.............................................................. 19.63 13.88 .05
Fourth Quarter............................................................. 15.25 12.38 .05
------
Total................................................................... $ .20
------
------
1994
First Quarter (through February 11, 1994).................................. 15.50 13.75
</TABLE>
On February 11, 1994, the closing sale price of the Corporation's Common
Stock on the NYSE was $15.00 per share. There were approximately 37,500
shareholders of record as of January 31, 1994.
The Corporation has paid cash dividends on the Common Stock in every
quarter since it was formed as a holding company in 1981. While the Corporation
intends to continue to pay dividends, the decision to do so is made quarterly by
the Board of Directors and is dependent upon the earnings of the Corporation,
management's assessment of future capital needs and other factors. As a holding
company, the Corporation's ability to pay dividends to its shareholders is
dependent upon dividends from its subsidiaries. The ability of its principal
subsidiary, USF&G Company, to distribute dividends is subject to regulation
under Maryland law. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity."
S-18
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Corporation as of December 31, 1993 and as adjusted to give effect to the
issuance and sale of the Notes offered hereby (assuming no exercise of the
Underwriters' over-allotment option) and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
<TABLE><CAPTION>
DECEMBER 31, 1993
--------------------------
ACTUAL AS ADJUSTED
--------- ---------------
(IN MILLIONS)
SHORT-TERM DEBT:
<S> <C> <C>
Corporate.......................................................................... $ 395 $
Real estate and other.............................................................. 12 12
--------- ---------------
Total short-term debt......................................................... 407
--------- ---------------
LONG-TERM DEBT:
Corporate:
8 7/8% Notes due 1996........................................................... 99 --
5 1/2 % Swiss Franc Bonds due 1996.............................................. 80 80
Zero Coupon Convertible Subordinated Notes due 2009............................. --
--------- ---------------
Subtotal...................................................................... 179
--------- ---------------
Real estate and other:
8% Secured note due 1995........................................................ 11 11
9.96% Secured notes due through 1999............................................ 14 14
Other........................................................................... 7 7
--------- ---------------
Subtotal...................................................................... 32 32
--------- ---------------
Total long-term debt............................................................ 211
--------- ---------------
Total debt(1)................................................................... 618
--------- ---------------
SHAREHOLDERS' EQUITY:
Capital Stock:
Preferred Stock, par value $50.00; 12,000,000 shares authorized $4.10 Series A
Convertible Exchangeable Preferred Stock;
4,000,000 shares issued(2).................................................... 200 200
$10.25 Series B Cumulative Convertible Preferred Stock; 1,300,000 shares
issued(2)................................................................... 65 65
$5.00 Series C Cumulative Convertible Preferred Stock; 3,800,000 shares
issued(2)................................................................... 190 190
Common Stock, par value $2.50; 240,000,000 shares authorized; 85,009,482
issued(3)................................................................... 212 212
Paid-in capital.................................................................... 963 963
Net unrealized gains on investments................................................ 192 192
Net unrealized losses on foreign currency.......................................... (2) (2)
Minimum pension liability.......................................................... (85) (85)
Retained earnings (deficit)..................................................... (224) (224)
--------- ---------------
Total shareholders' equity...................................................... 1,511 1,511
--------- ---------------
Total capitalization............................................................ $ 2,129 $
--------- ---------------
--------- ---------------
</TABLE>
- ---------------
(1) Excludes an aggregate of approximately $245 million of Intercompany Debt,
which is eliminated in consolidation, but which constitutes Senior Debt with
regard to the Notes.
(2) Shares of Series A, B and C Preferred Stock are convertible into 1.179,
8.316 and 4.158 shares, respectively, of Common Stock (effective conversion
prices of $42.40, $12.025 and $12.025, respectively, based on liquidation
value). The Series A Preferred Stock is redeemable at the option of the
Corporation. The Series B Preferred Stock and Series C Preferred Stock will
be redeemable at the option of the Corporation at various dates beginning
June 1994, subject, in the case of the Series B Preferred Stock, to the
market prices of the Common Stock.
(3) Excludes 4,162,224 shares of Common Stock reserved for issuance upon the
exercise of options outstanding on December 31, 1993.
S-19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated statement of
operations and financial position data for the periods indicated. The selected
consolidated statement of operations and financial position data, at or for each
of the years presented below, were derived from the consolidated financial
statements of the Corporation, which were audited by Ernst & Young, independent
auditors. The tables should be read in conjunction with the consolidated
financial statements, related notes and other financial information incorporated
herein by reference.
<TABLE><CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------
1993 1992 1991 1990 1989
------------ ------------ ------------ ------------ ------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF OPERATIONS:
<S> <C> <C> <C> <C> <C>
Premiums Earned........................................... $ 2,456 $ 2,637 $ 3,187 $ 3,516 $ 3,697
Net Investment Income..................................... 749 817 877 929 911
Realized Gains and Other.................................. 44 206 108 (274) 28
------------ ------------ ------------ ------------ ------------
Total Revenues........................................ 3,249 3,660 4,172 4,171 4,636
------------ ------------ ------------ ------------ ------------
Losses, Loss Expenses and Policy Benefits................. 2,153 2,465 2,982 3,188 3,066
Underwriting, Acquisition and Operating Expenses.......... 956 1,069 1,225 1,326 1,371
Interest Expense.......................................... 41 40 46 54 42
Restructuring Charges..................................... -- 51 60 34 --
------------ ------------ ------------ ------------ ------------
Total Expenses........................................ 3,150 3,625 4,313 4,602 4,479
------------ ------------ ------------ ------------ ------------
Pretax Income (Loss) from Continuing Operations before
Cumulative Effect of Adopting New Accounting
Standards................................................... 99 35 (141) (431) 157
Provision for Income Taxes (Benefit)...................... (28) -- 3 2 9
------------ ------------ ------------ ------------ ------------
Income (Loss) from Continuing Operations before Cumulative
Effect of Adopting New Accounting Standards............. 127 35 (144) (433) 148
Loss from Discontinued Operations......................... -- (7) (32) (136) (31)
Cumulative Effect of Adopting New Accounting Standards.... 38 -- -- -- --
Extraordinary Item........................................ -- -- -- -- 2
------------ ------------ ------------ ------------ ------------
Net Income (Loss)......................................... 165 28 (176) (569) 119
Preferred Stock Dividends................................. 48 48 37 16 16
------------ ------------ ------------ ------------ ------------
Net Income (Loss) Available to Common Shareholders........ $ 117 $ (20) $ (213) $ (585) $ 103
------------ ------------ ------------ ------------ ------------
------------ ------------ ------------ ------------ ------------
PER SHARE DATA:
Income (Loss) from Continuing Operations before Cumulative
Effect of Adopting New Accounting Standards............. $ .93 $ (.16) $ (2.15) $ (5.37) $ 1.58
Loss from Discontinued Operations......................... -- (.08) (.38) (1.62) (.37)
Cumulative Effect of Adopting New Accounting Standards.... .45 -- -- -- --
Net Income (Loss)(1)...................................... 1.38 (.24) (2.53) (6.99) 1.24
Dividends Declared........................................ $ .20 $ .20 $ .20 $ 2.44 $ 2.80
Weighted Average Shares Outstanding......................... 84,780,283 84,355,431 84,169,091 83,783,423 83,155,041
Ratio of Consolidated Earnings to Combined Fixed Charges and
Preferred Stock Dividends................................... 1.4 0.8 Note 2 Note 2 2.4
CONSOLIDATED STATEMENT OF FINANCIAL POSITION:
Total Investments......................................... $ 11,377 $ 11,346 $ 12,167 $ 11,221 $ 10,894
Total Assets.............................................. 14,355 13,134 14,486 13,902 13,551
Unpaid Losses, Loss Expenses and Policy Benefits.......... 10,302 9,436 9,477 9,554 8,299
Unearned Premiums......................................... 917 770 981 1,091 1,139
Corporate Debt............................................ 574 574 617 659 543
Real Estate and Other Debt................................ 44 42 60 120 87
Total Liabilities......................................... 12,824 11,864 13,163 12,697 11,544
Shareholders' Equity...................................... 1,511 1,270 1,323 1,205 2,007
Statutory Surplus (USF&G Company)......................... 1,541 1,467 1,404 1,352 1,417
</TABLE>
- ---------------
(1) In 1993, fully-diluted net income per share was $1.32. In other years shown,
there was no difference between primary and fully-diluted net income (loss)
per share.
(2) The Corporation had net losses in 1991 and 1990, and earnings were
inadequate to cover combined fixed charges and preferred stock dividends by
$186 million in 1991 and by $452 million in 1990.
S-20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section provides management's assessment of financial results and
material changes in financial position for USF&G and discusses the results of
operations for the 1993 year. The analysis focuses on the performance of USF&G's
business segments and its investment portfolio. (Note: A glossary of certain
terms used in this discussion can be found at the end of this section. The terms
are italicized the first time they appear in the text.) Balance sheet
information is as of December 31 of each year shown and income statement
information is for the year ended December 31 for each year shown.
INDEX
1. Consolidated Results 6. Financial Condition
2. Property/Casualty Insurance Operations 7. Liquidity
3. Life Insurance Operations 8. Regulation
4. Parent and Noninsurance Operations 9. Income Taxes
5. Investments 10. Glossary of Terms
1. CONSOLIDATED RESULTS
1.1 SUMMARY OF NET INCOME
The table below shows the major components of net income (loss).
<TABLE><CAPTION>
1993 1992 1991
----------- --------- ---------
(in millions)
<S> <C> <C> <C>
Income (loss) from continuing operations before income taxes, realized gains, and
cumulative effect of adopting new accounting standards................................ $ 93 $ (113) $ (179)
Realized gains on investments, net.................................................... 6 148 38
Loss from discontinued operations..................................................... -- (7) (32)
Income (loss) from cumulative effect of adopting new accounting standards:
Income taxes..................................................................... 90 -- --
Postretirement benefits.......................................................... (52) -- --
Income tax (expense) benefit.......................................................... 28 -- (3)
----------- --------- ---------
Net income (loss)................................................................ $ 165 $ 28 $ (176)
----------- --------- ---------
----------- --------- ---------
</TABLE>
The major factor contributing to the $137 million increase in net income
from 1992 to 1993 was a $200 million improvement in property/casualty insurance
underwriting results (refer to Section 2.2 in this Analysis). Net realized gains
on investments declined by $142 million in 1993 compared with 1992 (refer to
Section 5.2 in this Analysis) due to a high level of gains in 1992 realized
primarily to enhance capital and surplus and to offset the effect of Hurricane
Andrew (refer to Section 2.4 in this Analysis). Net income in 1993 also was
favorably impacted by $38 million due to the net effect of the adoption of
certain new accounting standards (refer to Section 1.2 of this Analysis). Income
tax benefits of $28 million were recognized in 1993 primarily as a result of
reducing the valuation allowance on net deferred tax assets (refer to Section 9
in this Analysis). The improvement in net income from 1991 to 1992 was also
driven primarily by improved property/casualty insurance underwriting results,
as well as the increase in realized gains in 1992.
S-21
<PAGE>
The table below shows the components of the changes in income from
continuing operations before income taxes, realized gains and the cumulative
effect of adopting new accounting standards by major business segment.
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
Property/Casualty insurance........................................................... $ 182 $ (3) $ (84)
Life insurance........................................................................ (6) (4) 5
Parent and noninsurance............................................................... (83) (106) (109)
Eliminations.......................................................................... -- -- 9
--------- --------- ---------
Income (loss) from continuing operations before income taxes, realized gains, and
cumulative effect of adopting new accounting standards................................ $ 93 $ (113) $ (179)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The $185 million improvement in the property/casualty insurance segment
from 1992 to 1993 occurred as a result of a $72 million reduction in catastrophe
losses and an improvement of $128 million in underwriting results excluding
catastrophes due primarily to product/market mix management and cost containment
strategies (refer to Section 2.2 in this Analysis). These improvements were
partially offset by a $42 million reduction in investment income. The life
insurance segment's decline of $2 million from 1992 to 1993 primarily resulted
from declining investment yields and related declining margins on
interest-sensitive products (refer to Section 3.2 in this Analysis). The results
for parent and noninsurance operations improved $23 million from 1992 to 1993
primarily due to savings resulting from the fourth quarter 1992 restructuring of
the oil and gas investment (refer to Section 4 in this Analysis). Improvement in
income from 1991 to 1992 was driven primarily by improved property/casualty
results, especially in commercial lines. Income comparisons are also affected by
restructuring charges of $51 million in 1992 and $60 million in 1991. There were
no restructuring charges in 1993 (refer to Section 1.3 in this Analysis).
1.2. NEW ACCOUNTING STANDARDS
Net income for 1993 included the effect of the implementation of two
Statements of Financial Accounting Standards ("SFAS") which resulted in a net
increase of $38 million. SFAS No. 109, "Accounting for Income Taxes," increased
net income by $90 million as a result of the recognition of net deferred tax
assets (refer to Section 9 in this Analysis). This increase was partially offset
by a $52 million charge to net income for SFAS No. 106, "Employer's Accounting
for Postretirement Benefits Other Than Pensions" as a result of the accrual of a
liability for the cost of health care, life insurance, and other retiree
benefits.
USF&G adopted two additional accounting standards which had no effect on
net income. SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," increased assets by $1.2 billion
with a corresponding increase in liabilities at December 31, 1993, compared with
December 31, 1992. This standard requires reinsurance receivables and prepaid
reinsurance premiums to be reported separately as assets instead of the previous
practice of netting such receivables against the related loss and unearned
premium liabilities. This standard also establishes the conditions required for
a contract to be accounted for as reinsurance and prescribes income recognition
and reporting standards for those contracts. SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," increased the book value of
fixed maturities portfolio classified as "available for sale" and shareholders'
equity by $222 million as a result of unrealized gains in this portfolio. SFAS
No. 115 requires securities classified as available for sale to be reported at
market value with unrealized gains and losses reported as a component of
shareholders' equity. In addition, the adjustment to the book value of fixed
maturities required by SFAS No. 115 resulted in a related $30 million decrease
in shareholders' equity for life insurance deferred policy acquisition costs.
S-22
<PAGE>
1.3. STATUS OF RESTRUCTURING
In 1990, USF&G initiated a broad restructuring program. Restructuring
initiatives began in the fourth quarter of 1990 with charges of $34 million. Net
income reflects provisions of $60 million of restructuring charges in 1991 and
$51 million in 1992. There were no restructuring charges in 1993.
Since 1990, USF&G has implemented programs to reduce the cost structure of
the organization by consolidating branch offices, establishing a regional
structure, reducing staff levels, and eliminating certain advertising and
promotional expenses. In addition, USF&G has implemented plans to dispose of
nonstrategic businesses which resulted in losses from discontinued operations of
$7 million, $32 million, and $136 million in 1992, 1991, and 1990, respectively.
The implementation of these restructuring and cost containment initiatives
and the disposition of discontinued operations have been substantially
completed. General and administrative expenses (which do not include
commissions, premium taxes and claim expenses) have declined by 31 percent from
$635 million in 1990 to $437 million in 1993. Staffing levels have declined by
48 percent from approximately 12,500 employees at December 31, 1990 to
approximately 6,500 employees at December 31, 1993.
In 1991, USF&G continued to implement programs to reduce operating
expenses. The additional $60 million of restructuring charges incurred in 1991
were both a revision to the original estimates and an expansion of the
restructuring program during the year. The costs were related to additional
staff reductions and branch consolidations and to the disposition of a
subsidiary that developed and marketed computer software to insurance agencies.
In 1992, the property/casualty segment began to implement a regionalization
strategy to form separate strategic product and market business units in order
to improve marketing and underwriting operations. The related establishment of
regional offices and further staff reductions resulted in $46 million of
additional restructuring charges. Implementation of these restructuring
strategies is expected to be completed in 1994. Restructuring charges of $2
million were incurred in 1992, related to the restructuring of an oil and gas
investment. The life insurance segment incurred restructuring costs of $3
million in 1992 to implement a plan to rebalance distribution channels and
centralize processing activities. The life insurance and oil and gas investment
restructuring actions were essentially completed in 1992.
2. PROPERTY/CASUALTY INSURANCE OPERATIONS
Property/casualty insurance operations accounted for 85 percent of USF&G's
revenues in 1993 and 67 percent of its assets at December 31, 1993. Financial
results for this segment are as follows:
<TABLE><CAPTION>
1993 1992 1991
---------- ---------- ----------
(in millions)
<S> <C> <C> <C>
Premiums earned............................................................... $ 2,327 $ 2,533 $ 3,018
Losses and loss expenses incurred............................................. (1,758) (2,088) (2,545)
Underwriting expenses......................................................... (796) (872) (988)
---------- ---------- ----------
Net underwriting loss......................................................... (227) (427) (515)
Net investment income......................................................... 433 475 498
Restructuring charges......................................................... -- (46) (52)
Other revenues and expenses................................................... (24) (5) (15)
---------- ---------- ----------
Income (loss) before income taxes, realized gains, and the cumulative effect
of adopting new accounting standards.......................................... $ 182 $ (3) $ (84)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
S-23
<PAGE>
Income (loss) before income taxes, realized gains, and the cumulative
effect of adopting new accounting standards significantly improved in 1993
primarily due to improved underwriting results (refer to Section 2.2 of this
Analysis). Net investment income declined primarily due to the lower interest
rate environment in 1993 (refer to Section 5.1 of this Analysis). Restructuring
charges relating to staff reductions and other cost containment programs
affected results in 1991 and 1992. The fluctuations in other revenues and
expenses primarily reflect the decision to eliminate certain policyholders
dividends in 1992 and the reversal in that year of previously accrued but unpaid
dividends.
2.1. PREMIUMS EARNED
Premiums earned totaled $2.3 billion in 1993, compared with $2.5 billion in
1992 and $3.0 billion in 1991. The table below shows the major components of
premiums earned and premiums written.
<TABLE><CAPTION>
1993 1992 1991
---------------------------- -------------------------- --------------------------
Premiums Premiums Premiums Premiums Premiums Premiums
Earned Written Earned Written Earned Written
------------- ------------- ------------ ------------ ------------ ------------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Branch office voluntary
production.......................... $ 1,825 $ 1,847 $ 2,172 $ 1,986 $ 2,625 $ 2,523
Voluntary pools and associations.... 45 46 41 44 50 51
Involuntary pools and
associations........................ 152 133 163 147 247 247
Assumed reinsurance................. 305 403 157 243 96 211
------------- ------------- ------------ ------------ ------------ ------------
Total........................ $ 2,327 $ 2,429 $ 2,533 $ 2,420 $ 3,018 $ 3,032
------------- ------------- ------------ ------------ ------------ ------------
------------- ------------- ------------ ------------ ------------ ------------
</TABLE>
Premiums earned declined 8 percent from 1992 to 1993 and 16 percent from
1991 to 1992 primarily as a result of planned management actions to reduce
premium production in unprofitable markets and product lines. The decline in
premiums earned of 16 percent from 1991 to 1992 was primarily due to the effects
of USF&G's exiting personal lines markets in nine states since 1991, eliminating
writing new voluntary workers compensation in 11 states, and reducing exposure
to other unprofitable markets. Such actions, combined with adherence to strict
underwriting standards, led to further declines in premium volume during 1993,
but are designed to continue to improve underwriting results over time. The
decrease in premiums has slowed as strategies are implemented to grow business
in targeted areas. The significant increase in assumed reinsurance premiums in
1993 is due to the strong demand for reinsurance and the higher premium rates
available as a result of the record high catastrophes in 1992 which led to a
reinsurance capacity shortage in 1993. However, with the formation of several
new reinsurance companies in 1993, capacity has been added to the reinsurance
market, which is expected to generate competitive pressure in 1994.
S-24
<PAGE>
The table below shows premiums earned and the statutory loss ratios by
lines of property/casualty insurance.
<TABLE><CAPTION>
1993 1992 1991
------------------------------------- ------------------------------------- ----------------------
Premiums Statutory Premiums Statutory Premiums
Earned % Loss Ratio Earned % Loss Ratio Earned %
----------- --------- ------------- ----------- --------- ------------- ----------- ---------
(dollars in millions)
COMMERCIAL LINES
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Auto.......................... $ 399 17% 55.2 $ 442 18% 64.5 $ 531 18%
General Liability............. 351 15 80.9 388 15 99.2 487 16
Property...................... 321 14 60.4 332 13 69.5 370 12
Workers Compensation.......... 152 7 212.3 318 13 121.0 497 16
----------- --------- ------------- ----------- --- ------ ----------- ---
Total Commercial
Lines......................... 1,223 53 83.6 1,480 59 86.9 1,885 62
----------- --------- ------------- ----------- --- ------ ----------- ---
FIDELITY/SURETY
Fidelity...................... 18 1 56.1 19 1 24.6 21 1
Surety........................ 100 4 49.5 92 3 33.5 96 3
----------- --------- ------------- ----------- --- ------ ----------- ---
Total Fidelity/Surety.. 118 5 50.5 111 4 32.0 117 4
----------- --------- ------------- ----------- --- ------ ----------- ---
PERSONAL LINES
Auto.......................... 504 22 70.8 551 22 73.6 658 22
Homeowners.................... 149 6 73.8 184 7 102.2 207 7
Property...................... 28 1 66.0 50 2 67.9 55 2
----------- --------- ------------- ----------- --- ------ ----------- ---
Total Personal Lines... 681 29 71.2 785 31 80.0 920 31
----------- --------- ------------- ----------- --- ------ ----------- ---
ASSUMED REINSURANCE
Finite Risk................... 169 7 70.1 74 3 78.9 32 1
Traditional Risk.............. 136 6 62.1 83 3 72.8 64 2
----------- --------- ------------- ----------- --- ------ ----------- ---
Total Assumed
Reinsurance................... 305 13 67.3 157 6 76.9 96 3
----------- --------- ------------- ----------- --- ------ ----------- ---
Total......................... $ 2,327 100% 75.4 $ 2,533 100% 82.0 $ 3,018 100%
----------- --------- ------------- ----------- --- ------ ----------- ---
----------- --------- ------------- ----------- --- ------ ----------- ---
<CAPTION>
Statutory
Loss Ratio
-------------
COMMERCIAL LINES
Auto.......................... 75.0
General Liability............. 91.1
Property...................... 67.1
Workers Compensation.......... 128.5
------
Total Commercial
Lines......................... 91.6
------
FIDELITY/SURETY
Fidelity...................... 45.2
Surety........................ 41.6
------
Total Fidelity/Surety.. 42.3
------
PERSONAL LINES
Auto.......................... 79.6
Homeowners.................... 87.0
Property...................... 58.4
------
Total Personal Lines... 80,0
------
ASSUMED REINSURANCE
Finite Risk................... 76.1
Traditional Risk.............. 17.6
------
Total Assumed
Reinsurance................... 59.1
------
Total......................... 84.1
------
------
</TABLE>
The above table illustrates the changes in premium mix from 1991 to 1993.
Management's focus on reducing exposure to less profitable lines of insurance
has been a key factor in the improved underwriting results. The most dramatic
example is the workers compensation line which has a cumulative three-year
statutory loss ratio of 139.1 and represented 16 percent of total
property/casualty premiums earned in 1991 but only 7 percent in 1993.
2.2. UNDERWRITING RESULTS
Underwriting results generally represent premiums earned less incurred
losses, loss adjustment expenses, and underwriting expenses. Property/casualty
insurance companies typically have underwriting losses that are offset by
investment income.
S-25
<PAGE>
Underwriting gains (losses) by major business category are as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
Commercial..................................................... $ (223) $ (343) $ (455)
Fidelity/surety................................................ (8) 6 11
Personal....................................................... (28) (110) (97)
Assumed reinsurance............................................ 32 20 26
--------- --------- ---------
Net underwriting losses................................. $ (227) $ (427) $ (515)
--------- --------- ---------
--------- --------- ---------
Voluntary...................................................... $ (176) $ (390) $ (375)
Involuntary.................................................... (51) (37) (140)
--------- --------- ---------
Net underwriting losses................................. $ (227) $ (427) $ (515)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Consolidated property/casualty GAAP and statutory underwriting ratios are
as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
GAAP UNDERWRITING RATIOS:
<S> <C> <C> <C>
Loss ratio*................................................... 75.6 82.4 84.3
Expense ratio*................................................ 34.2 34.4 32.7
Combined ratio................................................ 109.8 116.8 117.0
STATUTORY UNDERWRITING RATIOS:
Loss ratio.................................................... 75.4 82.0 84.1
Expense ratio................................................. 33.7 34.9 33.1
Combined ratio................................................ 109.1 116.9 117.2
</TABLE>
- ---------------
* See Glossary of Terms
Underwriting results in 1993 improved by $200 million and $288 million over
1992 and 1991, respectively. The improvements over 1992 and 1991 resulted from
lower incurred losses from catastrophes (refer to Section 2.4 of this Analysis),
as well as management's actions to improve product/market mix, apply stricter
underwriting standards, and improve claims practices. Excluding catastrophe
losses from Hurricane Andrew, which occurred in 1992, the statutory loss ratio
improved 3.6 points from 1992 to 1993 and 5.1 points from 1991 to 1992.
Hurricane Andrew contributed approximately 3.0 points to the statutory loss
ratio in 1992. Underwriting results in the voluntary business for 1993 improved
$214 million over 1992 and $199 million over 1991. Underwriting losses from
involuntary business in 1993 were $14 million more than 1992 but were $89
million less than 1991. The improved overall trend in 1993 and 1992 over 1991
reflects management's actions to reduce exposure to involuntary business in
states with substantial involuntary market burdens. The increase in involuntary
underwriting losses in 1993 over 1992 is primarily due to an assessment of loss
reserves from involuntary workers compensation insurance pools.
Underwriting results showed improvement despite continuing competitive
pressures, the inflationary claims environment, and the adverse impact of
involuntary markets. Competitive pressures continue to depress underwriting
results, especially in the pricing of commercial lines products. Competitive
pressures include the historic cyclicality of the property/casualty insurance
industry pricing environment. These cycles are evidenced by extended periods of
overcapacity that adversely affect premium rates, followed by periods of
undercapacity resulting in rising rates. The industry has experienced an intense
period of price competition since 1987, during which companies have been unable
to charge rates sufficient to offset rising claim costs. Some industry analysts
are beginning to point to factors such as high catastrophe losses, low interest
rates, and reduced reinsurance capacity as indications that the underwriting
cycle has started to improve. Other analysts believe that excess surplus
capacity still exists in the industry and that pricing pressure
S-26
<PAGE>
will continue. USF&G is unable to predict whether or when the property/casualty
insurance cycle will improve but is continuing to manage to long term objectives
that include continued underwriting improvements without reliance on a
significant cycle turn.
COMMERCIAL LINES
Commercial lines products include property, auto, inland marine, workers
compensation, and general and umbrella liability coverage for businesses. The
commercial lines business has two distinct market segments--middle market and
small business. USF&G has further defined the middle market into three strategic
business units: service businesses, contractors, and manufacturers to better
service customers and become more cost efficient.
The following table shows the components of underwriting results for
commercial lines:
<TABLE><CAPTION>
1993 1992 1991
---------- --------- ---------
(in millions)
<S> <C> <C> <C>
Premiums written................................................................. $ 1,239 $ 1,355 $ 1,780
Premiums earned.................................................................. 1,223 1,480 1,885
Losses........................................................................... (1,014) (1,299) (1,728)
Expenses......................................................................... (432) (524) (612)
---------- --------- ---------
Net underwriting losses........................................................ $ (223) $ (343) $ (455)
---------- --------- ---------
---------- --------- ---------
Voluntary........................................................................ $ (187) $ (316) $ (341)
Involuntary...................................................................... (36) (27) (114)
---------- --------- ---------
Net underwriting losses........................................................ $ (223) $ (343) $ (455)
---------- --------- ---------
---------- --------- ---------
</TABLE>
GAAP and statutory underwriting ratios are as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
GAAP UNDERWRITING RATIOS:
<S> <C> <C> <C>
Loss ratio......................................................................... 83.0 87.8 91.7
Expense ratio...................................................................... 35.3 35.4 32.5
--------- --------- ---------
Combined ratio..................................................................... 118.3 123.2 124.2
--------- --------- ---------
--------- --------- ---------
STATUTORY UNDERWRITING RATIOS:
Loss ratio......................................................................... 83.6 86.9 91.6
Expense ratio...................................................................... 34.7 36.3 33.4
--------- --------- ---------
Combined ratio..................................................................... 118.3 123.2 125.0
--------- --------- ---------
--------- --------- ---------
</TABLE>
Underwriting results in the commercial lines category improved $120 million
over 1992 and $232 million over 1991. This improvement is primarily the result
of the change in the mix of business, as well as the application of stricter
underwriting standards and lower catastrophe losses.
In commercial lines, the mix of the least profitable line of business,
workers compensation, is decreasing, and the mix of the two most profitable
lines of business, auto and property, is increasing. Workers compensation
represented 12 percent of premiums earned in commercial lines in 1993, compared
with 21 percent in 1992 and 26 percent in 1991, with a cumulative three year
statutory loss ratio in this line of 139.1. Commercial auto, with a statutory
loss ratio of 55.2 in 1993, increased from 28 percent of commercial lines
premiums earned in 1991 to 33 percent in 1993. Commercial property, with a
statutory loss ratio of 60.4 in 1993, increased from 20 percent of commercial
lines premiums earned in 1991 to 26 percent in 1993.
S-27
<PAGE>
The involuntary business losses were $9 million more in 1993 than in 1992,
but were $78 million less than 1991. The improved involuntary results in 1992
and 1993 compared with 1991 result primarily from management actions to reduce
workers compensation premiums which led to reduced participation in the
involuntary workers compensation pools. In addition, involuntary underwriting
losses in 1991 were adversely affected by a $20 million involuntary pool
assessment related to special reserve increases from the National Workers
Compensation Reinsurance Pool ("NWCRP").
The statutory loss ratio improved 3.3 points in 1993 from 1992 and 8.0
points in 1993 from 1991. Contributing to this significant improvement over 1992
were losses incurred from Hurricane Andrew which were approximately 1.6 points
of the commercial lines 1992 statutory loss ratio. Excluding Hurricane Andrew,
USF&G is still experiencing an improved loss ratio trend, which management
believes is evidence of the positive effects of the strategies implemented to
improve underwriting results.
Although premiums in the commercial lines business have declined since
1990, the 9 percent decline in premiums written in 1993 from 1992 was less than
the 24 percent and 18 percent declines in 1992 and 1991, respectively. Excluding
workers compensation, the declines in premiums written are 2 percent, 17
percent, and 14 percent in 1993, 1992, and 1991, respectively. State exits and
other initiatives which began in 1990 to reduce exposure to unprofitable markets
were essentially completed in 1993. During 1994, commercial lines initiatives
will focus on penetrating target markets and implementing new products and
services with the objective of premium growth.
FIDELITY/SURETY
The fidelity/surety segment provides contract bonds, financial institution
bonds, judicial bonds, and fidelity/surety bonds to commercial businesses,
banks, credit unions, and construction companies.
The following table shows the components of underwriting results for
fidelity/surety:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
Premiums written.................................................. $ 120 $ 109 $ 116
Premiums earned................................................... 118 111 117
Losses............................................................ (59) (36) (41)
Expenses.......................................................... (67) (69) (65)
--------- --------- ---------
Net underwriting gains (losses)................................. $ (8) $ 6 $ 11
--------- --------- ---------
--------- --------- ---------
Voluntary......................................................... $ (8) $ 6 $ 11
Involuntary....................................................... -- -- --
--------- --------- ---------
Net underwriting gains (losses)................................. $ (8) $ 6 $ 11
--------- --------- ---------
--------- --------- ---------
</TABLE>
GAAP and statutory underwriting ratios are as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
GAAP UNDERWRITING RATIOS:
<S> <C> <C> <C>
Loss ratio................................................... 50.2 32.3 35.5
Expense ratio................................................ 56.6 62.6 55.5
--------- --------- ---------
Combined ratio............................................... 106.8 94.9 91.0
--------- --------- ---------
--------- --------- ---------
STATUTORY UNDERWRITING RATIOS:
Loss ratio................................................... 50.5 32.0 42.3
Expense ratio................................................ 56.4 64.0 56.3
--------- --------- ---------
Combined ratio............................................... 106.9 96.0 98.6
--------- --------- ---------
--------- --------- ---------
</TABLE>
S-28
<PAGE>
Fidelity/surety experienced a decline in underwriting results in 1993 due
to increased losses. Premiums earned increased approximately 6 percent over 1992
and were consistent with 1991. The increased premiums in 1993 from 1992 related
to market expansion strategies. Losses, however, increased $23 million or 64
percent over 1992, primarily as a result of unfavorable loss development on a
limited number of prior years' claims. Underwriting expenses have remained
generally consistent.
PERSONAL LINES
Personal lines products include auto, homeowners, watercraft and personal
excess insurance for individuals and families.
The following table shows the components of underwriting results for the
personal lines category:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
Premiums written................................................ $ 653 $ 726 $ 925
Premiums earned................................................. 681 785 920
Losses.......................................................... (481) (635) (736)
Expenses........................................................ (228) (260) (281)
--------- --------- ---------
Net underwriting losses....................................... $ (28) $ (110) $ (97)
--------- --------- ---------
--------- --------- ---------
Voluntary....................................................... $ (13) $ (100) $ (71)
Involuntary..................................................... (15) (10) (26)
--------- --------- ---------
Net underwriting losses....................................... $ (28) $ (110) $ (97)
--------- --------- ---------
--------- --------- ---------
</TABLE>
GAAP and statutory underwriting ratios are as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
GAAP UNDERWRITING RATIOS:
<S> <C> <C> <C>
Loss ratio.................................................... 70.6 80.9 80.0
Expense ratio................................................. 33.5 33.1 30.5
--------- --------- ---------
Combined ratio................................................ 104.1 114.0 110.5
--------- --------- ---------
--------- --------- ---------
STATUTORY UNDERWRITING RATIOS:
Loss ratio.................................................... 71.2 80.0 80.0
Expense ratio................................................. 33.9 33.2 30.4
--------- --------- ---------
Combined ratio................................................ 105.1 113.2 110.4
--------- --------- ---------
--------- --------- ---------
</TABLE>
Management strategies to reduce exposure in unprofitable markets and lines
of business improved the underwriting results of the personal lines segment.
Strategies that have contributed to the improvement include reunderwriting the
auto book of business, applying stricter underwriting standards and reducing
exposure in high risk catastrophe areas.
Despite premiums earned decreasing $104 million in 1993 compared with 1992
and $239 million compared with 1991, underwriting results improved $82 million
in 1993 over 1992 and $69 million over 1991. The statutory loss ratio improved
8.8 points from 1992 to 1993 (a 3.0 point improvement excluding Hurricane Andrew
in 1992) which management believes is evidence of the positive effects of
strategies implemented to improve underwriting results.
Underwriting losses from involuntary markets increased $5 million in 1993
compared with 1992, but have improved $11 million compared with 1991. The
increase in 1993 losses is due to unfavorable development on prior years claims
and costs associated with third party administrators managing the assigned risk
involuntary business. The substantially improved involuntary underwriting
results in 1993 and 1992 compared with 1991 was a result of USF&G's strategy,
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<PAGE>
initiated in 1990, to withdraw from unprofitable markets in order to reduce
adverse loss exposure. Although personal lines premiums have declined since
1990, the 10 percent decline in premiums written in 1993 was less than the 21
percent in 1992. The premium decreases primarily resulted from planned
management actions to exit specific states and other unprofitable markets, and
to reduce writings in high risk catastrophe areas. Net premium declines in 1993
also reflect the higher cost of ceded reinsurance. During 1994, personal lines
initiatives are expected to result in growth in selected target markets;
however, continued management of unprofitable markets and high ceded reinsurance
costs is expected to offset premium growth in these selected markets.
ASSUMED REINSURANCE
Reinsurance products are managed by F&G Re and marketed through national
and international reinsurance brokers. The reinsurance segment has historically
produced underwriting gains.
The following table shows the components of underwriting results for
assumed reinsurance lines:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- -----------
(in millions)
<S> <C> <C> <C>
Premiums written................................................ $ 403 $ 243 $ 211
Premiums earned................................................. 305 157 96
Losses.......................................................... (204) (118) (40)
Expenses........................................................ (69) (19) (30)
--------- --------- -----------
Net underwriting gains..................................... $ 32 $ 20 $ 26
--------- --------- -----------
--------- --------- -----------
Finite risk..................................................... $ 9 $ 14 $ 7
Traditional risk................................................ 23 6 19
--------- --------- -----------
Net underwriting gains..................................... $ 32 $ 20 $ 26
--------- --------- -----------
--------- --------- -----------
</TABLE>
GAAP and statutory underwriting ratios are as follows:
<TABLE><CAPTION>
1993 1992 1991
----------- ----------- -----------
GAAP UNDERWRITING RATIOS:
<S> <C> <C> <C>
Loss ratio...................................................... 66.7 75.0 40.9
Expense ratio................................................... 22.6 12.1 31.5
----------- ----------- -----------
Combined ratio.................................................. 89.3 87.1 72.4
----------- ----------- -----------
----------- ----------- -----------
STATUTORY UNDERWRITING RATIOS:
Loss ratio...................................................... 67.3 76.9 59.1
Expense ratio................................................... 24.6 17.0 29.9
----------- ----------- -----------
Combined ratio.................................................. 91.9 93.9 89.0
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
During 1993, underwriting results in this category were affected by
increased premiums due to the strong demand for reinsurance caused primarily by
the shrinking capacity in the international property catastrophe market. New
accounting requirements as a result of the issuance of SFAS No. 113 and EITF
93-6 are expected to cause a substantial reduction in the demand for finite risk
reinsurance.
2.3. LOSSES INCURRED AND LOSS RESERVES
Losses and loss adjustment expenses incurred totaled $1.8 billion in 1993,
compared with $2.1 billion and $2.5 billion in 1992 and 1991, respectively. The
reduction is due primarily to lower catastrophe losses, lower premium volume,
and actions taken to better manage claims and claim costs and reduce exposures
in undesirable markets.
Reserves for unpaid losses and loss expenses totaled $6.3 billion at
December 31, 1993, compared with $5.5 billion and $5.7 billion at the end of
1992 and 1991, respectively. The impact of
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<PAGE>
adopting SFAS No. 113 increased reserves by $1.2 billion. This new accounting
standard eliminated the previous practice of reporting assets and liabilities
net of the effect of reinsurance. Excluding the effects of SFAS No. 113,
reserves in 1993 declined 7 percent from 1992 and 10 percent from 1991. This
compares to the 8 percent and 23 percent declines in premiums earned in 1993
compared with 1992 and 1991, respectively. Reserve levels have also been reduced
as a result of reduced claim activity. The number of outstanding claims at
December 31, 1993 declined by 12 percent compared with year-end 1992. The number
of new claims reported (excluding catastrophe claims) declined 23 percent from
1991 to 1993.
Catastrophes and individually large claims (claims in excess of $1
million), net of reinsurance, accounted for $245 million, $268 million and $302
million of incurred losses in 1993, 1992, and 1991, respectively (refer to
Section 2.4 of this Analysis). Net of reinsurance, individually large claims and
related claims accounted for $177 million of incurred losses in 1993 and $128
million and $229 million in 1992 and 1991, respectively. USF&G seeks to limit
its exposure to catastrophe and individually large claims through the purchase
of reinsurance (refer to Section 2.5 of this Analysis).
USF&G also categorizes environmental, product liability, other long term
exposures such as asbestos and other types of exposures where multiple claims
relate to a similar cause of loss (excluding catastrophes) as "common
circumstance claims." Total common circumstance claims paid (including loss
adjustment expenses) for the period 1985 through 1993 were $343 million. Case
reserves (exclusive of bulk reserves) outstanding for such claims were $214
million, $171 million, and $127 million at December 31, 1993, 1992, and 1991,
respectively. USF&G's most significant common circumstance claim exposures
include negligent construction, environmental, and asbestos claims. The table
below sets forth selected information for each of these three categories:
<TABLE><CAPTION>
TOTAL CLAIMS PAID
FROM 1985-1993 CASE RESERVES AT
CATEGORY (INCLUDES LAE) DECEMBER 31, 1993
- ----------------------------------------------- ------------------- -----------------------
(IN MILLIONS)
<S> <C> <C>
Negligent construction......................... $ 78 $ 74
Environmental.................................. 125 61
Asbestos....................................... 81 45
</TABLE>
At December 31, 1993, USF&G had 1,200 active files relating to
environmental matters, including 76 coverage disputes. The number of claims
under each file may vary significantly. In 1993, approximately 35 percent of
paid environmental claims related to matters under which a USF&G insured was a
potentially responsible party ("PRP") under the Comprehensive Environmental
Response, Compensation, and Liability Act, commonly referred to as "Superfund",
but many of these PRPs were only peripherally involved. Management does not
believe that USF&G has material exposure to environmental or asbestos matters in
excess of reserves or relative to other large property/casualty insurers because
USF&G's customer base generally does not include large manufacturing companies,
which tend to incur most of the known environmental and product liability
exposures. Many of USF&G's environmental claims relate to small industrial or
transportation accidents which individually are unlikely to involve material
exposures. In addition, USF&G has recently consolidated handling of common
circumstance claims into a specialized unit designed to more effectively manage
such claim exposures.
The above discussion regarding common circumstance claims relates solely to
USF&G's direct business and does not include exposures assumed through F&G Re or
otherwise. Management does not believe that assumed business which includes
common circumstance claims involves exposures materially in excess of
established reserves.
S-31
<PAGE>
The level of loss reserves for both current and prior years' claims is
continually monitored and adjusted for changing economic, social, judicial, and
legislative conditions. Management believes that loss reserves are adequate, but
establishing appropriate reserves, particularly with respect to environmental or
other long term exposure claims which are the subject of evolving legislative
and judicial theories of liability, is highly judgmental and an inherently
uncertain process.
2.4. CATASTROPHE LOSSES
Gross catastrophe losses totaled $81 million in 1993, compared with $292
million in 1992. These losses, net of losses ceded to reinsurers, were $68
million in 1993 compared with $140 million in 1992. Gross and net catastrophe
losses totaled $73 million in 1991 as no losses were ceded. Catastrophe losses,
net of reinsurance, represented 3 percent of premiums earned for the year ended
December 31, 1993, compared with 6 percent and 2 percent for 1992 and 1991,
respectively. Catastrophe losses in 1993 included $27 million from the East
Coast blizzard in March. The 1992 losses, the highest in USF&G's history, were
primarily from Hurricane Andrew in Florida and hailstorms and tornadoes in
Kansas and Oklahoma. The industry as a whole experienced record catastrophe
losses in 1992 of approximately $23 billion, over five times the level of
industry losses in 1991 of $4 billion. The catastrophe losses in 1991, the third
highest in USF&G's history, resulted from a series of storms and tornadoes in
the South and Midwest, Hurricane Bob, and the California fires.
2.5. CEDED REINSURANCE
USF&G reinsures portions of its policy risks with other insurance companies
or underwriters. Reinsurance allows USF&G to obtain indemnification against
losses associated with insurance contracts it has written by entering into a
reinsurance contract with another insurance enterprise (the reinsurer). USF&G
pays (cedes) an amount to the reinsurer who agrees to reimburse USF&G for a
specified portion of any claims paid on business under the reinsured contracts.
Reinsurance gives USF&G the ability to write certain individually large risks or
groups of risks, and control its exposure to losses by ceding a portion of such
large risks. USF&G's ceding reinsurance agreements are generally structured on a
treaty basis whereby all risks meeting a certain criteria are automatically
reinsured. Shrinking capacity in the reinsurance market and the high catastrophe
losses in recent years have increased prices and reduced the availability of
catastrophe reinsurance. Property catastrophe reinsurance costs were $30 million
in 1993, compared with $26 million and $21 million in 1992 and 1991,
respectively. USF&G's property catastrophe loss retention levels have increased
from $23 million in 1992 to approximately $50 million in 1993 at greater cost.
2.6. CAPACITY
A key measure of both strength and growth capacity for property/casualty
insurers is the ratio of premiums written to statutory policyholders' surplus.
At year-end 1993, USF&G's premium-to-surplus ratio was 1.4:1, slightly higher
than the industry average of 1.3:1, and represents an improvement over 1992's
ratio of 1.5:1. Insurance regulators generally accept a ceiling for this ratio
of 3.0:1; therefore, at its current ratio, USF&G has the capacity to grow by
writing new business.
S-32
<PAGE>
3. LIFE INSURANCE OPERATIONS
Life insurance operations represented 14 percent of USF&G's revenues in
1993 and 34 percent of its assets at December 31, 1993. F&G Life's financial
results are as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
Premiums........................................................ $ 129 $ 104 $ 169
Net investment income........................................... 321 349 370
Policy benefits................................................. (395) (377) (437)
Underwriting and operating expenses............................. (61) (77) (94)
Other revenues and expenses..................................... -- -- (1)
Restructuring charges........................................... -- (3) (2)
--------- --------- ---------
Income (loss) before income taxes, realized gains, and the
cumulative effect of adopting new accounting standards........ $ (6) $ (4) $ 5
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income (loss) comparisons were affected by increased sales and lower
operating expenses offset by lower investment income in 1993. In 1992, F&G Life
repositioned itself to become more competitive and service oriented. The
repositioning resulted in a broadened product mix and a balanced distribution
system. The revised market strategies, new distribution channels, and enhanced
customer service are the major factors of the increase in sales in 1993 (refer
to Section 3.2 in this Analysis). In addition, strategic repositioning and
management actions to reduce costs contributed to a 29 percent decline in
operating expenses in 1993 compared with 1992.
3.1. PRODUCTS
F&G Life issues annuity and life insurance products. F&G Life's principal
products are structured settlements, deferred annuities (including tax sheltered
annuities), and other annuity products. Structured settlements are immediate
annuities principally sold to the property/casualty company in settlement of
insurance claims.
Deferred annuity products accumulate cash values to which interest is
credited. In 1993, deferred annuities were credited with interest rates that
ranged between 9.0 and 4.5 percent, depending upon the year of issue and
interest guarantee duration. The majority of deferred annuities in force were
issued with initial interest guarantees from one to six years, with most written
between 1988 and 1990 with a six year interest guarantee. The deferred annuities
also include provisions for charges if the annuitant chooses to surrender the
policy (see Section 3.3 of this Analysis). After the interest guarantee expires,
the interest crediting rates can be adjusted annually on a policy's anniversary
date. Deferred annuity products are sold through independent agents, insurance
brokers, and national wholesale distributors. F&G Life's tax sheltered annuity
products are deferred annuities that provide retirement income. Tax sheltered
annuities are sold through a national wholesale distribution network primarily
to teachers.
Other annuities sold by F&G Life primarily consist of single premium
immediate annuities ("SPIAs"). SPIAs provide a fixed stream of payments over a
fixed period of time or over an individual's lifetime.
F&G Life also markets, primarily through independent agents, universal life
("UL") and term life insurance products. UL insurance provides a death benefit
for the life of the insured and accumulates cash values to which interest is
credited. Term life insurance provides a fixed death benefit if the insured dies
during the contractual period.
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<PAGE>
3.2. SALES
The following table shows life insurance and annuity sales (premiums and
deposits) by distribution system and product type:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(in millions)
DISTRIBUTION SYSTEM
<S> <C> <C> <C>
Direct-structured settlement annuities.......................... $ 66 $ 37 $ 71
Independent agencies/insurance brokers.......................... 60 60 76
National wholesaler--TSA........................................ 35 -- --
Member firm/financial institutions.............................. 7 7 62
--------- --------- ---------
Total...................................................... $ 168 $ 104 $ 209
--------- --------- ---------
--------- --------- ---------
PRODUCT TYPE
Structured settlement annuities................................. $ 66 $ 37 $ 71
Single premium deferred annuities............................... 44 33 70
Tax sheltered annuities......................................... 35 -- --
Other annuities................................................. 17 23 54
Life insurance.................................................. 6 11 14
--------- --------- ---------
Total...................................................... $ 168 $ 104 $ 209
--------- --------- ---------
--------- --------- ---------
</TABLE>
Sales in 1993 were favorably affected by F&G Life's refocus on its
marketing and customer service operations. F&G Life's restructuring replaced
high fixed cost marketing programs with variable cost distribution channels. New
products were designed to meet the needs of targeted customers and to increase
sales opportunities. Since the implementation of the program in 1992, 1993 sales
increased 62 percent when compared with 1992. In its effort to continue the
improvement in sales, F&G Life intends to expand its existing distribution
channels while developing other specialized marketing networks. F&G Life will
develop new products, in concert with its distribution partners, to meet the
needs of its targeted customers. However, given the expectation of continued low
interest rates into 1994 and other market forces, there is no assurance that the
1993 improved sales trend will continue. As market interest rates declined in
1992 and 1993, F&G Life likewise lowered the rates offered on its annuity and
universal life insurance policies to maintain adequate profit margins. F&G
Life's 1992 sales declined by 50 percent from 1991 levels due to the effect of
the low interest rate environment and the residual effects of USF&G's
restructuring efforts and its credit ratings. Current and projected spreads
between investment income and interest credited to policyholders have narrowed
but remain positive. Total life insurance in force decreased to $12.1 billion in
1993, compared with $12.4 billion in 1992 and $13.4 billion in 1991. Since 1991,
insurance in force has been affected by the decline in life insurance sales and
an increase in universal life policy surrenders.
3.3. POLICY SURRENDERS
Deferred annuities and universal life products are subject to surrender.
Nearly all of F&G Life's surrenderable annuity policies allow for the refund of
the cash value less a surrender charge. Surrender charges provide protection
against premature policy surrender. Surrender activity has also been positively
affected by the lower interest rate environment since most of the surrenderable
annuities have guaranteed crediting rates higher than interest rates currently
available. Deferred annuities, which represent 78 percent of surrenderable
business, include surrender charges for periods ranging from 5 to 10 years. The
majority of business in force was issued with surrender charges that declined
from six percent to zero over six years.
S-34
<PAGE>
Policy surrenders totaled $211 million in 1993, compared with $192 million
in 1992 and $586 million in 1991. Surrender activity was significantly reduced
from the unusually high level experienced in 1991 when policyholders reacted to
negative public perception of the life insurance industry in general, and the
annuity business in particular, as well as the uncertainty at that time about
USF&G's restructuring efforts. The total account value of F&G Life's
surrenderable annuities was $2.6 billion at December 31, 1993, and approximately
$229 million was surrenderable at current account value (i.e., without surrender
charges) on that date. The surrender charge period on $2.2 billion of F&G Life's
single-premium deferred annuity products expires within the next four years. The
surrender charge period on $751 million expires during 1994. Management has a
conservation program in place to provide holders of policies maturing with
renewal options in an effort to provide them with investment alternatives within
F&G Life. F&G Life's investments have been structured to provide sufficient
liquidity to fund withdrawals. Management believes that F&G Life, with a liquid
assets to surrender value of surrenderable business of 126 percent at December
31, 1993, continues to maintain a high degree of liquidity and has the ability
to meet surrender obligations for the foreseeable future.
3.4. DEFERRED POLICY ACQUISITION COSTS ("DPAC")
Costs to acquire and issue life insurance policies are generally deferred
and amortized in future periods. The recoverability of these amounts is
regularly reviewed. In reviewing the assumptions used to amortize DPAC,
management analyzes expected policy surrender experience, projected investment
spreads, and other criteria.
Policy acquisition costs unfavorably affected results as $8 million, $10
million, and $9 million of normally deferrable costs were expensed in 1993,
1992, and 1991, respectively, because sales levels were not sufficient to
support the deferral of such costs. In 1992, $10 million of previously deferred
costs were expensed as a result of management's evaluation and subsequent
changes in the estimates and assumptions used to amortize these costs.
Management considered policy surrenders that, although significantly reduced
from 1991 levels, were still considered above "normal," the expectation of
future investment yields, and the spread between investment yields and interest
credited to policyholders. In 1991, the above normal levels of policy surrenders
resulted in the expensing of $20 million of previously deferred costs, which
were offset by income from surrender charges of $15 million. High surrender
activity or changes in expected profit margins in future years could have
similar negative effects on future results.
4. PARENT AND NONINSURANCE OPERATIONS
Parent company interest and other unallocated expenses and net losses from
noninsurance operations were as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(in millions)
PARENT COMPANY EXPENSES:
<S> <C> <C> <C>
Interest expense............................................... $ (37) $ (35) $ (42)
Unallocated expenses, net...................................... (35) (34) (20)
NONINSURANCE LOSSES:
Management consulting.......................................... (2) (4) (2)
Oil and gas.................................................... -- (18) (17)
Other noninsurance investments................................. (9) (13) (22)
RESTRUCTURING CHARGES............................................ -- (2) (6)
--------- --------- ---------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND REALIZED
GAINS............................................................ $ (83) $ (106) $ (109)
--------- --------- ---------
--------- --------- ---------
</TABLE>
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<PAGE>
Interest expense in 1993 was generally consistent with 1992; however,
compared with 1991, interest expense was lower due primarily to declines in
outstanding debt and lower rates on short-term debt. As a result of a
restructuring, there were no oil and gas operating losses in 1993. During 1992,
USF&G incurred $2 million of restructuring charges related to its oil and gas
operations. The result of this restructuring was to merge the operations with
another oil and gas exploration and production company. In 1993, the successor
company issued shares through an initial public offering, thereby reducing
USF&G's percentage ownership. The improvement in other noninsurance investments
from 1992 to 1993 primarily related to income from notes received from the sale
of an investment management subsidiary in 1992. Restructuring charges in 1991
related to revisions to restructuring estimates originally established in the
prior year and the expansion of the restructuring program during the year.
5. INVESTMENTS
The table below shows the distribution of USF&G's investment portfolio.
<TABLE><CAPTION>
1993 1992 1991
----------- ---------- ----------
<S> <C> <C> <C>
Total investments (in millions)........................ $ 11,377 $ 11,346 $ 12,167
Fixed maturities:
Held to maturity..................................... 41% 64% 31%
Available for sale................................... 43 17 44
----------- ---------- ----------
Total fixed maturities............................ 84 81 75
----------- ---------- ----------
Common and preferred stocks............................ 1 1 4
Short-term investments................................. 3 5 10
Mortgage loans and real estate......................... 9 9 9
Other invested assets.................................. 3 4 2
----------- ---------- ----------
Total............................................. 100% 100% 100%
----------- ---------- ----------
----------- ---------- ----------
</TABLE>
USF&G's investment mix has been repositioned to increase the percentage of
high quality fixed-income securities in the portfolio. Long-term fixed
maturities comprise 84 percent of total investments at December 31, 1993,
compared with 81 percent and 75 percent at December 31, 1992 and 1991,
respectively. At December 31, 1990, fixed maturities comprised less than 65
percent of total investments. The general level of investment in fixed
maturities is expected to be maintained through 1994. The increased proportion
of fixed maturities "available for sale" at December 31, 1993 compared with
prior periods reflects the implementation of SFAS No. 115.
5.1. NET INVESTMENT INCOME
The following table shows the components of net investment income.
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(dollars in millions)
Net investment income from:
<S> <C> <C> <C>
Fixed maturities................................................ $ 721 $ 739 $ 711
Equity securities............................................... 14 12 29
Options......................................................... -- 37 65
Short-term investments.......................................... 9 27 73
Real estate and mortgage loans.................................. 41 50 35
Other, less expenses............................................ (36) (48) (36)
--------- --------- ---------
Total........................................................ $ 749 $ 817 $ 877
--------- --------- ---------
--------- --------- ---------
Average yield..................................................... 6.7% 7.3% 7.8%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Investment results were significantly affected by declining interest rates
in 1993. The interest rate environment had a two-pronged effect on net
investment income, which decreased 8 percent and 15 percent when compared with
1992 and 1991, respectively. The reduction in interest rates
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<PAGE>
triggered prepayments on mortgage-backed securities and refinancing of debt by
long-term borrowers. During 1993, maturities and other repayments of USF&G's
fixed maturity investments totaled $1.3 billion and proceeds from fixed
maturities sales totaled $1.7 billion. Proceeds from these sales and repayments
of fixed maturities were reinvested at substantially lower rates. For 1993, net
investment income from fixed maturities decreased by 2.4 percent when compared
with 1992 and increased by 1.4 percent when compared with 1991. Average yields
on fixed maturities were 7.7 percent, 8.6 percent, and 9.2 percent for the years
ended December 31, 1993, 1992, and 1991, respectively.
While interest rate changes have contributed to declines in average yields
since 1991, another significant factor was the elimination of option income.
Prior to 1993, options were written on a segment of USF&G's fixed maturity
portfolio. In 1993, USF&G elected to eliminate its debt option writing program
and thereby forfeit option income in order to avoid exposing its fixed
maturities to the possibility of being called. Excluding option income the
average yield on invested assets was 7.2 percent in 1991 and 7.0 percent in 1992
compared with 6.7 percent in 1993.
The reduction in net investment income from short-term investments since
1991 reflects both the effect of lower interest rates and the reduced level of
assets allocated to short-term investments. The sale of income-producing
properties combined with losses on equity partnerships were the primary factors
in the decline from 1992 to 1993 in real estate and mortgage loan investment
income.
Management does not anticipate a significant increase in interest rates
during 1994. Therefore, it is likely that net investment income will decline
further in 1994 as prepayments and maturities continue and proceeds are
reinvested at continued low rates.
5.2. REALIZED GAINS (LOSSES)
The components of net realized gains (losses) include the following:
<TABLE><CAPTION>
1993 1992 1991
----------- --------- ---------
(in millions)
Net gains (losses) from sales:
<S> <C> <C> <C>
Fixed maturities................................................ $ 79 $ 179 $ 157
Equities and options............................................ 5 52 (2)
Real estate and mortgage loans.................................. 6 (3) (3)
Other........................................................... -- 11 (44)
----------- --------- ---------
Total net gains.............................................. 90 239 108
----------- --------- ---------
Provisions for impairment:
Fixed maturities................................................ (10) (20) (15)
Equities........................................................ (8) -- (18)
Real estate..................................................... (51) (43) (29)
Other........................................................... (15) (28) --
----------- --------- ---------
Total provisions............................................. (84) (91) (62)
----------- --------- ---------
Losses due to portfolio restructuring............................. -- -- (8)
----------- --------- ---------
Net realized gains.............................................. $ 6 $ 148 $ 38
----------- --------- ---------
----------- --------- ---------
</TABLE>
To more effectively match the duration of its investments with its life
insurance liabilities, USF&G repositioned a portion of its fixed maturity
investments in 1993. The related sales of fixed maturities were the primary
reason for net gains of $90 million in 1993. Investment sales to offset declines
in capital and statutory surplus caused by catastrophe losses and other sales as
part of
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<PAGE>
USF&G's portfolio repositioning resulted in net gains of $239 million and $108
million in 1992 and 1991, respectively. In 1992, USF&G realized $52 million of
gains on equities and reallocated the proceeds to relatively less volatile fixed
maturities.
To reflect impairments in the value of certain of its investments, USF&G
made provisions for impairment of $84 million in 1993 compared with $91 million
in 1992 and $62 million in 1991. Real estate provisions in 1993 primarily
related to specific properties either sold in 1993 or expected to be sold in the
near term. These properties were written down to net realizable value with
corresponding increases to real estate reserves. Similar real estate provisions
were taken in 1992 and 1991 to reflect both changes in circumstances related to
specific properties and general real estate market deterioration. The
recognition of other than temporary impairments on two equity holdings which
were subsequently sold during 1993 and one investment where USF&G holds a
minority interest were key elements in net realized losses of $3 million on
equities and $15 million on other invested assets in 1993.
5.3. UNREALIZED GAINS (LOSSES)
The components of the changes in unrealized gains (losses) were as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
Equity securities.................................................. $ 23 $ (39) $ 47
Fixed maturities available for sale................................ 222 -- --
Deferred policy acquisition cost adjustment........................ (30) -- --
Other.............................................................. 8 29 (10)
--------- --------- ---------
Total....................................................... $ 223 $ (10) $ 37
--------- --------- ---------
--------- --------- ---------
</TABLE>
USF&G's adoption of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," favorably impacted shareholders' equity as market
value changes in fixed maturities "available for sale" were reflected in
unrealized gains on investments in 1993. Unrealized gains on fixed maturities
classified as "available for sale" were $222 million at December 31, 1993. Prior
to adoption of SFAS No. 115, appreciation on fixed maturities was not included
as a component of shareholders' equity. This was partially offset by a DPAC
adjustment reflecting assumptions about the effect of potential asset sales on
future DPAC amortization should the unrealized gains on assets matched to
certain life insurance liabilities be realized and the proceeds reinvested at
lower rates. Under this scenario margins on annuity products could potentially
be reduced, leading to an acceleration of DPAC amortization. Appreciation in the
equity portfolio and several stock funds as well as the partial sale of a
foreign equity holding which had an unrealized loss at December 31, 1992, also
contributed to the favorable change in unrealized gains. A reduction in
unrealized gains of $10 million occurred in 1992 largely due to the realization
of gains on the sale of equities offset by the elimination of unrealized losses
on written options. A general appreciation in the equity markets resulted in a
$47 million increase in unrealized gains on equity securities in 1991.
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<PAGE>
5.4. FIXED MATURITY INVESTMENTS
The tables below detail the composition of the fixed maturity portfolio.
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(dollars in millions)
<S> <C> <C> <C>
U.S. Government bonds....................................... $ 308 $ 554 $ 2,613
Corporate investment grade bonds............................ 4,866 3,103 1,806
Mortgage-backed securities.................................. 2,403 3,824 3,174
Asset-backed securities..................................... 1,149 995 793
High-yield bonds*........................................... 562 522 433
Tax-exempt bonds............................................ 48 71 173
Other....................................................... 6 136 121
--------- --------- ---------
Total fixed maturities at amortized cost............... $ 9,342 $ 9,205 $ 9,113
--------- --------- ---------
--------- --------- ---------
Total market value of fixed maturities...................... $ 9,699 $ 9,319 $ 9,486
Net unrealized gains........................................ $ 357 $ 114 $ 373
--------- --------- ---------
Percent market-to-amortized cost............................ 104% 101% 104%
</TABLE>
- ---------------
* See Glossary of Terms
<TABLE><CAPTION>
1993 1992 1991
----------------------- ------------------------- -------------------------
Amortized Market Amortized Market Amortized Market
Cost Value Cost Value Cost Value
------------ --------- ------------ ----------- ------------ -----------
(in millions)
Fixed maturities:
<S> <C> <C> <C> <C> <C> <C>
Held to maturity........................... $ 4,661 $ 4,796 $ 7,218 $ 7,290 $ 3,749 $ 3,880
Available for sale......................... 4,681 4,903 1,987 2,029 5,364 5,606
------------ --------- ------------ ----------- ------------ -----------
Total................................... $ 9,342 $ 9,699 $ 9,205 $ 9,319 $ 9,113 $ 9,486
------------ --------- ------------ ----------- ------------ -----------
------------ --------- ------------ ----------- ------------ -----------
</TABLE>
In compliance with SFAS No. 115, USF&G classified 50 percent of its fixed
maturity portfolio as "available for sale." Management believes that this level
of securities available for sale is adequate for USF&G to meet its operating
liquidity needs and provides the flexibility necessary to respond to changes in
the investment markets. Securities classified as available for sale are carried
at market value with unrealized gains and losses included in shareholders'
equity. At December 31, 1993, unrealized gains were $222 million. Securities
classified as "held to maturity", which are carried at amortized cost, had
unrealized gains of $135 million at December 31, 1993. Prior to the adoption of
SFAS No. 115, gains on fixed maturities were not recognized in USF&G's financial
statements until the gains were realized at the time of sale. Such unrealized
gains on fixed maturities available for sale were $42 million and $242 million
at December 31, 1992 and 1991, respectively. Unrealized gains on securities
classified as held to maturity were $72 million and $131 million at December 31,
1992 and 1991, respectively. Declining interest rates, which resulted in rising
bond prices, were responsible for the three percentage point increase from 1992
to 1993 in the fixed maturity portfolio's overall market-to-amortized cost
ratio.
The effect on fixed maturities of falling interest rates was most evident
in the decline in holdings of mortgage-backed securities during 1993.
Investments in mortgage-backed securities declined 37 percent and 24 percent
when compared with holdings at December 31, 1992 and 1991, respectively, due
primarily to the reallocation of principal prepayments to corporate investment
grade bonds. Declining interest rates in 1993 led to the prepayment of a
significant portion of USF&G's mortgage-backed portfolio. Proceeds from these
prepayments, combined with other sales proceeds, were invested in corporate
investment grade securities to maintain a balance of sufficient credit quality
and overall portfolio yield. While subject to the prepayment risk experienced
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<PAGE>
during 1993, credit risk related to mortgage-backed securities is believed to be
minimal as 99 percent of such securities at December 31, 1993 have AAA ratings
or are collateralized by obligations of the U. S. Government or its agencies.
Debt obligations of the U. S. Government and its agencies and other
investment-grade bonds comprised 94 percent of the portfolio at December 31,
1993, compared with 93 percent at both December 31, 1992 and 1991. The table
below shows the credit quality of the long-term fixed maturity portfolio as of
December 31, 1993.
<TABLE><CAPTION>
Percent Market-
Amortized Market to-Amortized
Cost Percent Value Cost
------------ ------------- ----------- -----------------------
(dollars in millions)
<S> <C> <C> <C> <C>
U. S. Government and U. S. Government Agencies......... $ 2,351 25% $ 2,453 104%
AAA.................................................... 1,808 19 1,866 103
AA..................................................... 1,305 14 1,342 103
A...................................................... 2,296 25 2,390 104
BBB.................................................... 1,020 11 1,055 103
Below BBB.............................................. 562 6 593 106
------------ ----- ----------- -----
Total............................................. $ 9,342 100% $ 9,699 104%
------------ ----- ----------- -----
------------ ----- ----------- -----
</TABLE>
USF&G's holdings in high-yield bonds comprised six percent of the total
fixed maturity portfolio at December 31, 1993, compared to five percent of the
portfolio at December 31, 1992 and 1991. High-yield bonds' market-to-amortized
cost ratio has improved three percentage points and seven percentage points
compared to December 31, 1992 and 1991, respectively. Of the total high-yield
bond portfolio, 69 percent is held by the life insurance segment, representing 9
percent of the life segment's total investments. The table below illustrates the
credit quality of the high-yield bond portfolio at December 31, 1993.
<TABLE><CAPTION>
Percent Market-
Amortized Market to-Amortized
Cost Percent Value Cost
------------- ------------- ----------- -----------------------
(dollars in millions)
<S> <C> <C> <C> <C>
BB..................................................... $ 352 63% $ 369 105%
B...................................................... 209 37 218 104
CCC and lower.......................................... 10 2 6 60
Valuation allowance.................................... (9) (2) -- --
------ ----- ----------- -----
Total............................................. $ 562 100% $ 593 106%
------ ----- ----------- -----
------ ----- ----------- -----
</TABLE>
- ---------------
The information on credit quality in the preceding two tables is based upon the
higher of the rating assigned to each issue of fixed-income bonds by either
Standard & Poor's or Moody's. Where neither Standard & Poor's nor Moody's has
assigned a rating to a particular fixed maturity issue, classification is based
on 1) ratings available from other recognized rating services; 2) ratings
assigned by the NAIC; or 3) an internal assessment of the characteristics of
the individual security if no other rating is available.
At December 31, 1993, USF&G's five largest investments in high-yield bonds
totaled $86 million in book value and had a market value of $90 million. None of
these investments individually exceeded $28 million. USF&G's largest single
high-yield bond exposure represented 5 percent of the high-yield portfolio and
0.3 percent of the total fixed maturity portfolio.
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<PAGE>
5.5. REAL ESTATE
The table below shows the components of USF&G's real estate portfolio.
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(in millions)
<S> <C> <C> <C>
Mortgage loans............................................... $ 302 $ 186 $ 291
Equity real estate........................................... 793 926 864
Reserves..................................................... (108) (108) (88)
--------- --------- ---------
Total...................................................... $ 987 $ 1,004 $ 1,067
--------- --------- ---------
--------- --------- ---------
</TABLE>
The increased allocation to mortgage loans in 1993 reflects a strategy of
maintaining a generally consistent level of real estate assets while allocating
more funds to traditional mortgage loans and reducing real estate equity-type
investments.
USF&G's real estate investment strategy emphasizes diversification by
geographic region, property type, and stage of development. The diversification
of USF&G's mortgage loan and real estate portfolio is as follows:
<TABLE><CAPTION>
1993 1992 1991
----------- ----------- -----------
GEOGRAPHIC REGION
<S> <C> <C> <C>
Pacific/Mountain................................................ 33% 33% 31%
Southeast....................................................... 22 22 23
Mid-Atlantic.................................................... 19 17 17
Midwest......................................................... 18 19 20
Southwest....................................................... 5 6 6
Northeast....................................................... 3 3 3
TYPE OF PROPERTY
Office.......................................................... 37% 33% 34%
Land............................................................ 27 28 25
Apartments...................................................... 19 16 18
Industrial...................................................... 9 11 11
Retail/other.................................................... 6 10 8
Timberland/agriculture.......................................... 2 2 4
DEVELOPMENT STAGE
Operating property.............................................. 73% 72% 75%
Land development................................................ 16 17 14
Land packaging.................................................. 11 11 11
</TABLE>
Real estate investments are generally appraised at least once every three
years. Appraisals are obtained more frequently under certain circumstances such
as when there are significant changes in property performance or market
conditions. All of these appraisals are performed by professionally certified
appraisers.
USF&G's five largest real estate investments had a book value of $322
million at December 31, 1993. The largest single investment was $89 million, or
eight percent of the total real estate portfolio.
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<PAGE>
Mortgage loans and real estate investments not performing in accordance
with contractual terms, or performing significantly below expectation, are
categorized as nonperforming. Nonperforming real estate investments totaled $249
million at December 31, 1993, which represented declines of 28 percent and 37
percent, respectively, when compared with December 31, 1992 and 1991. The
reduction in nonperforming real estate was driven by operating improvements in
properties warranting reclassification to performing real estate, the sale of
certain nonperforming real estate properties, and write-downs on specific
properties.
The book value of the components of nonperforming real estate were as
follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- -----------
(dollars in millions)
<S> <C> <C> <C>
Loans not current as to interest or principal..................... $ -- $ -- $ 72
Restructured loans and investments................................ 4 4 21
Real estate held as in-substance foreclosure...................... 14 15 4
Real estate acquired through foreclosure or
deed-in-lieu of foreclosure..................................... 121 190 157
Land investments.................................................. 57 71 60
Nonperforming equity investments.................................. 53 66 79
--------- --------- -----------
Total nonperforming real estate.............................. $ 249 $ 346 $ 393
--------- --------- -----------
--------- --------- -----------
Real estate reserves.............................................. $ 108 $ 108 $ 88
Reserves/nonperforming real estate................................ 43% 31% 22%
--------- --------- -----------
--------- --------- -----------
</TABLE>
Valuation allowances are established for impairments of mortgage loans and
real estate equity values based on periodic evaluations of the operating
performance of the properties and their exposure to declines in value. The
allowance totaled $108 million, or 10 percent of the entire real estate
portfolio, at both December 31, 1993 and 1992. In 1991, the allowance was $88
million, which represented 8 percent of the total real estate portfolio. In
light of USF&G's current plans with respect to the portfolio, management
believes the allowance at December 31, 1993 adequately reflects the current
condition of the portfolio. Should deterioration occur in the general real
estate market or with respect to individual properties in the future, additional
reserves may be required. Prospectively, efforts will continue to reduce risk
and increase yields in the real estate portfolio by selling equity real estate
when it is advantageous to do so and reinvesting the proceeds in medium-term
mortgage loans.
6. FINANCIAL CONDITION
6.1. ASSETS
USF&G's assets totaled $14.3 billion at December 31, 1993, compared to
$13.1 billion and $14.5 billion at the end of 1992 and 1991, respectively. The
$1.2 billion increase in 1993 is primarily due to the implementation of SFAS No.
113, "Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts" (refer to Section 1.2 in this Analysis).
6.2. DEBT
USF&G's debt totaled $618 million at December 31, 1993, compared with $616
million and $677 million at December 31, 1992 and 1991, respectively. The
increase in debt from 1992 to 1993 is attributable to $5 million of additional
debt resulting from a change in percentage ownership of a real estate limited
partnership, offset by a $3 million repayment of industrial revenue bonds by the
property/casualty segment. Real estate debt is project related and generally
depends on the project's cash flow to provide debt service. As a result of
entering into currency swap agreements, there was no effect on net income from
translation of non-U.S. dollar denominated debt.
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<PAGE>
6.3. SHAREHOLDERS' EQUITY
USF&G's shareholders' equity totaled $1.51 billion at December 31, 1993,
$1.27 billion at December 31, 1992, and $1.32 billion at December 31, 1991. The
increase in 1993 was the result of an increase in unrealized gains on
investments primarily related to the implementation of SFAS No. 115 (refer to
Section 1.2 in this Analysis) which, as a result of recording fixed maturity
investments available for sale at market value, increased shareholders' equity
by $222 million. This was offset by a $30 million adjustment in unrealized
losses related to DPAC (refer to Section 5.3 in this Analysis). Additionally,
net income of $165 million and an increase of $6 million in paid-in capital due
to the exercise of stock options and the granting of stock awards pursuant to
the 1993 Stock Plan for Non-Employee Directors increased shareholders' equity.
These increases in equity were reduced by an $85 million minimum pension
liability which was recorded due to the declining interest rate environment in
1993 and a related decrease in the discount rate assumed to estimate the present
value of pension benefit obligations. Dividends to shareholders reduced equity
by $66 million. Common stock dividends declared in 1993, 1992, and 1991 totaled
$17 million per year. Annual preferred stock dividends declared in 1993 and 1992
totaled $48 million per year, compared with $37 million in 1991.
6.4. CAPITAL STRATEGY
Subject to capital market conditions, over the next two years USF&G plans
to refinance up to approximately $600 million of debt. In anticipation of the
expiration in 1995 of the short-term bank credit facility, it is expected that
the $375 million balance outstanding at December 31, 1993 will be refinanced
with longer term debt and that a reduced short-term facility will be
renegotiated. Where opportunities exist, other outstanding debt may be
refinanced at lower interest rates. In addition, depending upon the market value
of its Common Stock, USF&G plans to call for redemption the Series C Preferred
Stock and a portion of the Series B Preferred Stock under circumstances which
will result in shares of those series of Preferred Stock being converted to
Common Stock.
7. LIQUIDITY
Liquidity is a measure of an entity's ability to secure enough cash to meet
its contractual obligations and operating needs. USF&G requires cash primarily
to pay policyholders' claims and benefits, debt and dividend obligations, and
operating expenses. USF&G's sources of cash include cash flow from operations,
credit facilities, and sales of marketable securities and other assets.
Management believes that internal and external sources of cash will continue to
exceed USF&G'S short and long-term needs. In addition, USF&G has $647 million in
aggregate unissued debt, preferred stock and common stock (and warrants to
purchase debt and equity securities) registered pursuant to shelf registrations
with the Securities and Exchange Commission. These securities may be issued from
time to time, depending on market conditions. The shelf amount will be reduced
by the total proceeds received from the public upon completion of this offering
of the Notes.
7.1. CASH FLOW FROM OPERATIONS
USF&G had cash flow from continuing operations of $87 million in 1993 and
$99 million in 1992, compared with negative cash flow from continuing operations
of $4 million in 1991. The primary factors contributing to the decrease in cash
flow for 1993 in comparison with 1992 were a decline in premiums and investment
income in the property/casualty segment, offset by a reduction in loss payments
and operating expenses.
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<PAGE>
7.2. CREDIT FACILITIES
USF&G maintains a $700 million committed credit facility with a group of
foreign and domestic banks. Borrowings outstanding under the credit facility
totaled $375 million at December 31, 1993, 1992, and 1991. This credit facility
expires in 1995. The credit agreement contains restrictive covenants, defined in
the agreement, pertaining to indebtedness and tangible net worth levels. USF&G
was in compliance with these covenants at December 31, 1993, 1992, and 1991.
7.3. MARKETABLE SECURITIES
USF&G's fixed maturity, equity, and short-term investment portfolios are
liquid and represent substantial sources of cash. Fixed maturities are
classified as "held to maturity" if USF&G has both the ability and intent to
hold the securities until maturity or near maturity. Fixed maturities that may
be sold prior to maturity are classified as "available for sale." The market
value of fixed maturities held to maturity was $4.8 billion at December 31 ,
1993, which represents 103 percent of amortized cost. Fixed maturities available
for sale had a market value of $4.9 billion at December 31, 1993, which
represents 105 percent of amortized cost. At year-end, equity securities, which
are reported at market value in the balance sheet, totaled $135 million.
Short-term investments totaled $322 million.
7.4. LIQUIDITY RESTRICTIONS
There are certain restrictions on the payment of dividends by insurance
subsidiaries that may limit USF&G's ability to receive funds from its insurance
subsidiaries. The Maryland Insurance Code requires the Maryland Insurance
Commissioner's prior approval for any dividend payments during a twelve-month
period from a Maryland subsidiary, such as USF&G Company, to its holding company
which exceed 10 percent of policyholders' surplus as of the prior calendar year
end. In addition, notice of any other dividend must be given to the Maryland
Insurance Commissioner prior to payment, and the Commissioner has the right to
prevent payment of such dividend if it is determined that such payment could
impair the insurer's financial condition. USF&G Company's policyholders' surplus
at December 31, 1993, totaled $1.5 billion. USF&G's insurance subsidiaries'
admitted assets for statutory purposes included a total of approximately $245
million in receivables from the parent and affiliated companies. Dividends of
$154 million are currently available for payment to USF&G from USF&G Company
during 1994 without prior regulatory approval. Dividends paid to USF&G totaled
$125 million in 1993 and 1992, compared with $127 million in 1991.
8. REGULATION
8.1. GENERAL
USF&G's insurance subsidiaries are subject to extensive regulatory
oversight in the jurisdictions where they do business. This regulatory
structure, which generally operates through state insurance departments,
involves the licensing of insurance companies and agents, limitations on the
nature and amount of certain investments, restrictions on the amount of single
insured risks, approval of policy forms and rates, limitations on dividends,
limitations on the ability to withdraw from certain lines of business such as
personal lines and workers compensation, and other matters. Recently, there has
been increased scrutiny of the insurance regulatory framework. A number of state
legislatures have considered or enacted legislation that alters and, in many
cases, increases state authority to regulate insurance companies. Proposals to
adopt a federal regulatory framework have also been discussed recently. It is
not possible to predict the future impact of increasing state or potential
federal regulation on USF&G's operations.
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<PAGE>
8.2. PROPOSITION 103
In November 1988, California voters passed Proposition 103, which required
insurers doing business in that state to rollback property/casualty premium
prices in effect between November 1988 and November 1989 to 1987 levels, less an
additional 20 percent discount, unless an insurer could establish that such rate
levels threatened its solvency. As a result of a court challenge, the California
Supreme Court ruled in May 1989 that an insurer does not have to face insolvency
in order to qualify for exemption from the rollback requirements and is entitled
to a "fair and reasonable return." Significant controversy has surrounded the
numerous regulations proposed by the California Insurance Department, which
would be used to determine whether rate rollbacks and premium refunds are
required by insurers. Some of the Insurance Department's proposals were
disapproved by the California Office of Administrative Law ("OAL"), which is
responsible for the review and approval of such regulations. The most recent
regulations proposed by the Insurance Department have not yet been reviewed by
the OAL, pending a recent court challenge by various insurers to the
Department's authority to issue such regulations. On February 25, 1993, the
trial judge presiding over that court challenge voided substantial parts of the
regulations proposed by the Insurance Department. The court held that the
Insurance Department's regulations exceeded the Department's authority by
setting rates based upon an across-the-board formula. The court indicated that
rates and what constitutes a reasonable return would have to be determined
individually for each insurer and that the Department's authority was to approve
or disapprove rates proposed by insurers rather than setting rates which cannot
vary from a prescribed formula. An appeal is currently pending before the
California Supreme Court.
During 1989, less than five percent of USF&G's total premiums were written
in the State of California. USF&G believes that the returns it received, both
during and since the one-year rollback period, have not exceeded the "fair and
reasonable return" standard. Additionally, based on the long history of events
and the significant uncertainty about the Insurance Department's regulations,
management does not believe it is probable that the revenue recognized during
the rollback period will be subject to a material refund. Management believes
that no premium refund should be required for any period after November 8, 1988,
but that any rate rollbacks and premium refunds, if ultimately required, would
not have a material adverse effect on USF&G's financial position.
8.3. MAINE "FRESH START" LITIGATION
In 1987, the State of Maine adopted workers compensation reform legislation
which was intended to rectify historic rate inadequacies and encourage insurance
companies to reenter the Maine voluntary workers compensation market. This
legislation, which was popularly known as "Fresh Start," required the Maine
Superintendent of Insurance to annually determine whether the premiums collected
for policies written in the involuntary market and related investment income
were adequate on a policy-year basis. The Superintendent was required to assess
a surcharge on policies written in later policy years if it was determined that
rates were inadequate. Assessments were to be borne by workers compensation
policyholders, except that for policy years beginning in 1989 the Superintendent
could require insurance carriers to absorb up to 50 percent of any deficits if
the Superintendent found that insurance carriers failed to make good faith
efforts to expand the voluntary market and depopulate the residual market.
Insurance carriers which served as servicing carriers for the involuntary market
would be obligated to pay 90 percent of the insurance industry's share. The
Maine Fresh Start statute requires the Superintendent to annually estimate each
year's deficit for seven years before making a final determination with respect
to that year.
In March 1993, the Superintendent affirmed a prior Decision and Order
(known as the "1992 Fresh Start Order") in which he, among other things, found
that there were deficits for the 1988, 1989, and 1990 policy years, and that
insurance carriers had not made a good faith effort to expand the voluntary
market and consequently were required to bear 50 percent of any deficits
relating to the 1989 and 1990 policy years. The Superintendent further found
that a portion of these
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<PAGE>
deficits were attributable to servicing carrier inefficiencies and poor
investment practices and ordered that these costs be absorbed by insurance
carriers. Also, in May 1993 the Superintendent found that insurance carriers
would be liable for 50 percent of any deficits relating to the 1991 policy year
(the "1993 Fresh Start Order"), but indicated that he would make no further
determinations regarding the portions of any deficits attributable to alleged
servicing carrier inefficiencies and poor investment practices until his
authority to make such determinations was clarified in the various suits
involving prior Fresh Start orders.
USF&G was a servicing carrier for the Maine residual market in 1988, 1989,
1990, and 1991. USF&G withdrew from the Maine voluntary market and as a
servicing carrier effective December 31, 1991. USF&G has joined in an appeal of
the 1992 Fresh Start Order which was filed April 5, 1993, in a case captioned
The Hartford Accident and Indemnity Company, et al., v. Superintendent of
Insurance filed in Superior Court, State of Maine, Kennebec. In addition to The
Hartford Accident and Indemnity Company and USF&G, the National Council of
Compensation Insurance ("NCCI") and several other insurance companies which were
servicing carriers during this time frame have instituted similar appeals. These
appeals will be heard on a consolidated basis in a case captioned National
Council of Compensation Insurance, et al., v. Atchinson. USF&G is seeking, among
other things, to have the court set aside the Superintendent's findings that the
industry did not make a good faith effort to expand the voluntary market and is
responsible for deficiencies resulting from alleged poor servicing and
investments. Similar appeals of the Superintendent's 1993 Fresh Start Order have
been filed by USF&G, the NCCI and several other servicing carriers in the same
court. The appeals of the 1993 Fresh Start Order will be heard on a consolidated
basis in a case captioned The National Council of Compensation Insurance, et
al., v. Atchinson.
Estimates of the potential deficits vary widely and are continuously
revised as loss and claims data matures. If the Superintendent were to prevail
on all issues, then the range of liability for USF&G, based on the most recent
estimates provided by the Superintendent and the NCCI, respectively, could range
from approximately $12 million to approximately $19 million. However, USF&G
believes that it has meritorious defenses and has determined to defend the
actions vigorously.
8.4. INVOLUNTARY MARKET PLANS
Most states require insurers to provide coverage for less desirable risks
through participation in mandatory programs. USF&G's participation in assigned
risk pools and similar plans, mandated now or in the future, creates and is
expected to create downward pressure on earnings.
8.5. WITHDRAWAL FROM BUSINESS LINES
Some states have adopted legislation or regulations restricting or
otherwise limiting an insurer's ability to withdraw from certain lines of
business. Such restrictions are most often found in personal lines and workers
compensation insurance. Such restrictions limit USF&G's ability to manage its
exposure to unprofitable lines and adversely affects earnings to the extent
USF&G is required to continue writing unprofitable business.
8.6. GUARANTY FUNDS
Insurance guaranty fund laws have been adopted in most states to protect
policyholders in case of an insurer's insolvency. Insurers doing business in
those states can be assessed for certain obligations of insolvent companies to
policyholders and claimants, which assessments can under certain circumstances
be credited against future premium taxes. Net of such tax credits, USF&G
incurred $15 million of guaranty fund expense in 1993 and $13 million in 1992.
Financial difficulties of certain insurance companies over the past several
years could result in additional assessments that would have a negative impact
on future earnings. State laws limit the
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<PAGE>
amount of annual assessments which are based on percentages (generally two
percent) of assessable annual premiums in the year of insolvency. The amount of
these assessments cannot be reasonably estimated and is not expected to have a
material adverse effect on USF&G's financial position.
8.7. NAIC PROPOSALS
The National Association of Insurance Commissioners ("NAIC") has proposed
several model laws and regulations which are in varying stages of discussion.
The NAIC has adopted model regulations which establish minimum capitalization
requirements based on a "risk-based capital" formula. One version of this model
regulation is applicable for life insurers with respect to their financial
position as of December 31, 1993. A second version was adopted by the NAIC in
December 1993 for implementation by property/casualty insurers in 1995 with
respect to their financial position as of December 31, 1994. The statutory "risk
adjusted" capital of USF&G Company and F&G Life as of December 31, 1993, were
such that no regulatory action would be required (assuming that the NAIC model
regulation applied to property/casualty insurers in 1993). The NAIC has also
proposed a Model Investment Law which prescribes the investments that are
permissible for property/casualty and life insurers to hold. Adoption of this
model law is targeted for September 1994, at the earliest. It is not expected
that the final adoption of these regulations by the NAIC will result in any
material adverse effect on USF&G's liquidity or financial position.
8.8. NATIONAL HEALTH CARE
President Clinton has presented a proposal to enact a comprehensive
national health care system. One component of this proposal would merge the
medical payment system for workers compensation and the medical payments
component of automobile insurance into a single health care system. Although
some form of the Administration's national health care proposal may be enacted,
it is unclear whether any such legislation will address workers compensation or
personal automobile insurance. Several alternatives currently being discussed
would not have a significant impact on the workers compensation system, while
others could have a significant effect. The likelihood of passage of any
particular form of legislation cannot be predicted at this time. It is too early
to predict the impact of any such legislation on USF&G.
8.9. SUPERFUND
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), more commonly known as Superfund, is currently scheduled to be
reauthorized in 1994. Insurance companies, other businesses, environmental
groups and municipalities are advocating a variety of reform proposals to revise
the cleanup and liability provisions of CERCLA. No reliable prediction can be
made as to the ultimate outcome of the legislative deliberations regarding the
reauthorization of CERCLA or the effect any revisions could have on USF&G.
8.10. INSURANCE REGULATORY INFORMATION SYSTEM
The NAIC's Insurance Regulatory Information System ("IRIS") ratios are
intended to assist state insurance departments in their review of the financial
condition of insurance companies operating within their respective states. IRIS
specifies eleven industry ratios and establishes a "usual range" for each ratio.
Significant departure from a number of ratios may lead to inquiries from state
insurance regulators. As of December 31, 1993, USF&G was within the "usual
range" for all IRIS ratios.
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<PAGE>
9. INCOME TAXES
Effective January 1, 1993, USF&G changed its method of accounting for
income taxes as required by SFAS No. 109, "Accounting for Income Taxes." This
standard requires recognition of future tax benefits attributable to net
operating loss carry-forwards ("NOLs") and to deductible temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance is
required if it is more likely than not that some or all of the deferred tax
asset may not be realized.
A $90 million tax benefit was recorded in income as a cumulative effect of
adopting this new accounting standard. As a result of the enactment of the
Omnibus Budget Reconciliation Act of 1993 which increased the corporate tax rate
to 35 percent, an additional $3 million deferred tax benefit was recognized.
At December 31, 1993, USF&G has recorded a $119 million net deferred tax
asset, representing that in the opinion of management it is more likely than not
that there will be sufficient future taxable income to result in the realization
of this benefit. Total deferred tax assets attributable to deductible temporary
differences and NOLs totaled $944 million and total deferred tax liabilities
totaled $343 million. Significant temporary differences include deferred policy
acquisition costs, loss reserve discounting, and unrealized gains and losses.
USF&G recorded a valuation allowance of $482 million to offset the gross
deferred tax assets.
Management believes there will be sufficient taxable income to absorb all
existing NOLs; but, in light of the guidance in the standard, believes it is
appropriate to establish an allowance. USF&G will evaluate the realizability of
the deferred tax asset periodically and assess the need for a change in the
valuation allowance.
A valuation allowance is established based on an evaluation of positive and
negative evidence as to the likelihood of realizing some or all of the deferred
tax asset. The primary negative evidence that existed was the cumulative losses
resulting from 1991. The positive evidence included 1) the forecast of future
taxable income sufficient to recover some tax benefit within three to five
years; 2) a tax planning strategy identified to generate future income, if
necessary; 3) the return to profitability in 1992 and 1993; 4) the sources of
the losses in 1991, which are not likely to recur given the restructuring
actions taken; and 5) a history of substantial NOLs in prior years being fully
utilized.
Management's determination that it is more likely than not that a $119
million deferred tax benefit will be realized is based on the identification of
two primary sources of taxable income: 1) forecasted future taxable income
generated and 2) a prudent and feasible tax strategy to generate taxable income
to prevent NOLs from expiring, if necessary. Based on USF&G's history of prior
earnings, particularly for the core insurance business, and its expectations in
the future as a result of restructuring actions taken to reduce costs and
achieve long-term profitability, management believes ordinary income of the
Corporation will be sufficient to realize at least $103 million of tax benefit.
Management has evaluated forecasted future income within three to five years and
judgmentally discounted the later years due to the greater uncertainty of
forecasting these later years. Management has identified a specific tax strategy
that would result in the realization of $16 million of deferred tax assets.
Realization of the deferred tax asset is dependent, in whole or in part, on
USF&G's ability to generate future taxable income from ordinary and recurring
operations. Based on USF&G's evaluation, approximately $340 million of future
taxable income would need to be generated over the tax carry-forward period to
realize the $119 million deferred tax asset.
USF&G has NOLs of $634 million ($222 million tax-effected at a 35 percent
corporate rate), which expire as follows: $38 million in 2001, $191 million in
2005, and $405 million in 2006. The NOLs available for future utilization were
generated primarily by the noninsurance businesses of USF&G and nonrecurring
charges related to the business restructuring program. A majority of these
S-48
<PAGE>
noninsurance businesses that caused a significant drain on prior earnings have
been sold, divested, or liquidated by USF&G. Management believes the results of
the restructuring actions, including the disposal of noninsurance businesses,
will allow USF&G to resume its previous history of earnings.
Future levels of net income and taxable income from the core insurance
operations are dependent on several factors including general economic or
specific insurance industry conditions and competitive pressures that may lead
to unplanned premium declines or adversely impact voluntary and involuntary loss
experience. Other factors that could impact future net income include
catastrophe losses, a continued reduction in interest rates, or a further
decline in the real estate market. Because of the risk factors indicated as well
as other factors beyond the control of management, no assurance can be given
that sufficient taxable income will be generated to utilize the NOLs or
otherwise realize the deferred tax assets. However, management has considered
these factors in reaching its conclusion that it is more likely than not that
there will be sufficient future taxable income to result in the realization of
the recorded $119 million deferred tax asset.
USF&G's tax returns have not been reviewed by the Internal Revenue Service
("IRS") since 1989 and the availability of the NOLs could be challenged by the
IRS upon review of returns through 1992. Management believes, however, that IRS
challenges that would limit the recoverability of $119 million in tax benefits
are unlikely, and adjustments to the tax liability, if any, for years through
1993 will not have a material adverse effect on USF&G's financial position.
10. GLOSSARY OF TERMS
Account value: Deferred annuity cash value available to policyholders
before the assessment of surrender charges.
Catastrophe losses: Property/casualty insurance claim losses resulting from
a sudden calamitous event, such as a severe storm, are categorized as
"catastrophes" when they meet certain severity and other criteria determined by
a national organization.
EITF: Emerging Issues Task Force of the Financial Accounting Standards
Board.
Expense ratio: The ratio of underwriting expenses to net premiums written,
if determined in accordance with statutory accounting practices ("SAP"), or the
ratio of underwriting expenses (adjusted by deferred policy acquisition costs)
to earned premiums, if determined in accordance with GAAP.
GAAP: Generally Accepted Accounting Principles.
High-yield bonds: Fixed maturity investments with a credit rating below the
equivalent of Standard & Poor's "BBB." In addition, nonrated fixed maturities
that, in the judgment of USF&G, have credit characteristics similar to those of
a fixed maturity rated below BBB are considered high-yield bonds.
Involuntary business: Property/casualty insurance companies are required by
state laws to participate in a number of assigned risk pools, automobile
reinsurance facilities, and similar mandatory plans ("involuntary market
plans"). These plans generally require coverage of less desirable risks,
principally for workers compensation and automobile liability, that do not meet
the companies' normal underwriting standards. As mandated by legislative
authorities, insurers generally participate in such plans based upon their
shares of the total writings of certain classes of insurance.
Liquid assets to surrender value: Liquid assets (publicly traded bonds,
stocks, cash, and short-term investments) divided by surrenderable policy
liabilities, net of surrender charges. A measure of an insurance company's
ability to meet liquidity needs in case of annuity surrenders.
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<PAGE>
Loss ratio: The ratio of incurred losses and loss adjustment expenses to
earned premiums, determined in accordance with SAP or GAAP, as applicable. The
difference between SAP and GAAP relates to salvage recoverable accruals for GAAP
purposes and deposit accounting for GAAP related to financial reinsurance.
Nonperforming real estate: Mortgage loans and real estate investments that
are not performing in accordance with their contractual terms or that are
performing at an economic level significantly below expectations. Included in
the table of nonperforming real estate are the following terms:
Deed-in-lieu of foreclosure: Real estate to which title has been
obtained in satisfaction of a mortgage loan receivable in order to prevent
foreclosure proceedings.
In-substance foreclosure: Collateral for a mortgage loan is
in-substance foreclosed when the borrower has little or no equity in the
collateral, does not have the ability to repay the loan, and has
effectively abandoned control of the collateral to USF&G.
Land investments: Land investments that are held for future
development where, based on current market conditions, returns are
projected to be significantly below original expectations.
Loans not current as to interest and principal: Loans on which the
borrower has failed to meet mortgage obligations.
Nonperforming equity investments: Equity investments with cash and
GAAP return on book value less than five percent, but excluding land
investments.
Restructured loans and investments: Loans and investments whose terms
have been restructured as to interest rates, participation, and/or maturity
date such that returns are projected to be significantly below original
expectations.
Policyholders' surplus: The net assets of an insurer as reported to
regulatory agencies based on accounting practices prescribed or permitted by the
National Association of Insurance Commissioners and the state of domicile.
Premiums earned: The portion of premiums written applicable to the expired
period of policies, after the assumption and cession of reinsurance.
Premiums written: Premiums retained by an insurer, after the assumption and
cession of reinsurance.
Underwriting results: Property/casualty pretax operating results excluding
investment results, policyholders' dividends, and noninsurance activities;
generally, premiums earned less losses and loss expenses incurred and
"underwriting" expenses incurred.
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<PAGE>
PROPERTY/CASUALTY LOSS RESERVES
GENERAL
The reserve liabilities for USF&G Company's property/casualty losses and
loss adjustment expenses ("LAE") represent estimates of the ultimate net cost of
all unpaid losses and loss adjustment expenses incurred through December 31 of
each year. The reserves are determined using adjusters' individual case
estimates and actuarially based statistical projections.
USF&G Company's estimates of losses for reported claims are established
judgmentally on an individual case basis. Such estimates are based on USF&G
Company's particular expertise with the type of risk involved and its knowledge
of circumstances surrounding the individual claims. These estimates are reviewed
on a regular basis and updated as additional facts become known.
The reserves derived from statistical projections are subject to the
effects of trends in claim severity and frequency. Statistical projections are
employed in three specific areas: (i) to calculate reserves for incurred but not
reported ("IBNR") losses and provide for development of case basis loss
reserves; (ii) to calculate allocated LAE reserves; and (iii) to calculate
unallocated LAE reserves.
IBNR AND CASE DEVELOPMENT RESERVES. USF&G Company's estimates of IBNR and
case development reserves are derived from analyses of historical patterns of
development of paid and reported losses by accident year for each line of
business. The loss projection procedures used in this analysis contain explicit
provisions for quantifying the effect of inflation on loss payments expected to
be made in the future. This process relies on the basic assumption that past
experience adjusted for the effect of current developments and likely trends is
an appropriate basis for predicting future events.
ALLOCATED LOSS ADJUSTMENT EXPENSES. USF&G Company's estimates of unpaid
loss adjustment expenses are based on analyses of the long-term relationship of
projected ultimate loss adjustment expenses to projected ultimate losses for
each line of business. By using incurred losses as a base, inflation assumptions
applicable to loss reserves apply equally to allocated expense reserves.
UNALLOCATED LOSS ADJUSTMENT EXPENSES. Unallocated loss adjustment expense
reserves are based on historical relationships of paid unallocated expenses to
paid losses. As with allocated loss adjustment expenses, the inflation
assumptions applicable to loss reserves are presumed to apply equally to
unallocated expense reserves.
The process of estimating the liability for unpaid losses and loss
adjustment expenses is inherently judgmental. The process is influenced by
factors which are subject to significant variation. Possible sources of
variation include changing rates of inflation (particularly medical cost
inflation) as well as changes in other economic conditions, the legal system and
internal claims settlement practices, among other variables. In many cases
significant periods of time may lapse between the occurrence of an insured
event, the reporting of a claim to USF&G Company and USF&G Company's final
settlement of the claim. More than 45% of USF&G Company's loss and loss
adjustment expense reserves are provided for claims which have been incurred but
not reported and for future development on reported claims. While USF&G Company
reports a single amount as the estimate for unpaid losses and loss adjustment
expenses as of each valuation date, the reported reserves should be considered
the best estimate from a range of possible outcomes. It is unlikely that future
losses and loss adjustment expenses will develop exactly as projected and may in
fact vary significantly from projections. These estimates are continually
reviewed and updated as experience develops and new information becomes known.
Any resulting adjustments are reflected in current operating results.
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<PAGE>
ROLL-FORWARD OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The following table reconciles the changes in loss and loss adjustment
expense reserves for the years presented.
<TABLE><CAPTION>
Years Ended
December 31,
-------------------------------
1993 1992 1991
--------- --------- ---------
(In millions)
<S> <C> <C> <C>
Reserve for losses and LAE at beginning of year, net............................. $ 5,540 $ 5,704 $ 5,631
Incurred losses and LAE for claims occurring during:
Current year................................................................... 1,696 2,010 2,416
Prior years.................................................................... 62 78 129
--------- --------- ---------
Total incurred............................................................ 1,758 2,088 2,545
--------- --------- ---------
Losses and LAE payments for claims occurring during:
Current year................................................................... 562 684 821
Prior years.................................................................... 1,460 1,568 1,651
--------- --------- ---------
Total paid................................................................ 2,022 2,252 2,472
--------- --------- ---------
Reserve for losses and LAE at end of year, net................................... $ 5,276 $ 5,540 $ 5,704
--------- --------- ---------
Reinsurance receivable......................................................... 1,053
---------
Reserve for losses and LAE, gross................................................ $ 6,329
---------
</TABLE>
S-52
<PAGE>
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE DEVELOPMENT
The following table shows property/casualty loss reserves as recorded in
the indicated years and subsequent payments made with respect to such reserves
and re-estimates of such reserves. The top line shows the estimated liability
that was recorded at the end of each of the indicated years for all current and
prior year unpaid losses and loss adjustment expenses. The upper portion of the
table shows the cumulative amount subsequently paid in succeeding years. The
lower portion of the table shows re-estimates of the original recorded reserve
as of the end of each successive year. Such re-estimations result from
development of additional facts and circumstances pertaining to unsettled
claims. The bottom line shows the deficiency for each year and represents the
dollar amount of the cumulative change through 1993 that is attributable to the
original recorded reserve for each prior year. Such change has been reflected in
income during subsequent years.
The columns in the table below are cumulative. For example, the deficiency
related to losses settled in 1993 but incurred in 1983 and prior years would be
included in the cumulative deficiency amounts for 1983 through 1992, but the
re-estimation of such losses would have affected income for 1993 only.
Conditions and trends that have affected reserve development in the past may
change and may not necessarily occur in the future. Therefore, care should be
exercised in extrapolating future reserve redundancies or deficiencies from such
development.
<TABLE><CAPTION>
AT DECEMBER 31
--------------------------------------------------------------------------------------
1983 1984 1985 1986 1987 1988 1989 1990
--------- --------- --------- --------- --------- --------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for Unpaid Losses and
LAE.................................. $ 2,352 $ 2,817 $ 3,510 $ 4,089 $ 4,741 $ 5,204 $ 5,461 $ 5,630
- -----------------------------------------------------------------------------------------------------------------------------
Cumulative Paid as of:
One year later..................... 845 1,027 1,251 1,347 1,373 1,537 1,719 1,650
Two years later.................... 1,354 1,659 2,040 2,163 2,256 2,611 2,789 2,740
Three years later.................. 1,737 2,131 2,557 2,777 3,030 3,347 3,587 3,411
Four years later................... 2,040 2,451 2,971 3,313 3,548 3,935 4,049 --
Five years later................... 2,246 2,708 3,362 3,639 3,990 4,261 -- --
Six years later.................... 2,415 2,947 3,595 3,863 4,237 -- -- --
Seven years later.................. 2,592 3,112 3,759 4,055 -- -- -- --
Eight years later.................. 2,691 3,243 3,918 -- -- -- -- --
Nine years later................... 2,778 3,368 -- -- -- -- -- --
Ten years later.................... 2,874 -- -- -- -- -- -- --
Liability Reestimated:
One year later..................... 2,479 3,131 3,696 4,208 4,881 5,233 5,673 5,759
Two years later.................... 2,655 3,249 3,914 4,443 4,941 5,481 5,794 5,899
Three years later.................. 2,719 3,384 4,168 4,585 5,107 5,562 5,954 6,143
Four years later................... 2,818 3,563 4,341 4,721 5,285 5,757 6,239 --
Five years later................... 2,944 3,696 4,457 4,916 5,440 6,025 -- --
Six years later.................... 3,049 3,778 4,631 5,048 5,698 -- -- --
Seven years later.................. 3,118 3,932 4,743 5,278 -- -- -- --
Eight years later.................. 3,243 4,039 4,954 -- -- -- -- --
Nine years later................... 3,330 4,220 -- -- -- -- -- --
Ten years later.................... 3,475 -- -- -- -- -- -- --
Cumulative Deficiency................ $ (1,123) $ (1,403) $ (1,444) $ (1,189) $ (957) $ (821) $ (778) $ (513)
<CAPTION>
1991 1992 1993
--------- --------- ---------
Liability for Unpaid Losses and
LAE.................................. $ 5,704 $ 5,540 $ 5,276
- -------------------------------------
Cumulative Paid as of:
One year later..................... 1,568 1,460
Two years later.................... 2,524 --
Three years later.................. -- --
Four years later................... -- --
Five years later................... -- --
Six years later.................... -- --
Seven years later.................. -- --
Eight years later.................. -- --
Nine years later................... -- --
Ten years later.................... -- --
Liability Reestimated:
One year later..................... 5,782 5,602
Two years later.................... 5,911 --
Three years later.................. -- --
Four years later................... -- --
Five years later................... -- --
Six years later.................... -- --
Seven years later.................. -- --
Eight years later.................. -- --
Nine years later................... -- --
Ten years later.................... -- --
Cumulative Deficiency................ $ (207) $ (62)
</TABLE>
- ---------------
Certain reserves are recorded on a discounted basis to reflect the value of
timing differences between the recording of reserves and subsequent payment. The
amortization of that discount is included in the reserve deficiencies shown
above.
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<PAGE>
In the following table, each column total shows reserve re-estimates made
in the indicated calendar year and details the accident year to which the
re-estimates apply. Cumulative reserves have developed favorably for accident
years from 1986 to 1992. Adverse development on accident years prior to 1986
results primarily from the continued re-evaluation of data in the general
liability and workers compensation lines of business. Acquisition of additional
data, more refined data segments and enhancements in reserve evaluation
techniques have resulted in an increase in the provision for losses and loss
adjustment expenses in those accident years.
EFFECT OF RESERVE REESTIMATIONS ON CALENDAR YEAR OPERATIONS
(increase) decrease in reserves
<TABLE><CAPTION>
Calendar Year
(in millions)
Accident Years 1984 1985 1986 1987 1988 1989 1990 1991
- -------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1983 & Prior.................. $ (127) $ (176) $ (64) $ (99) $ (126) $ (105) $ (69) $ (125)
1984.......................... -- (138) (54) (36) (53) (28) (13) (29)
1985.......................... -- -- (68) (83) (75) (40) (34) (21)
1986.......................... -- -- -- 99 19 31 (20) (20)
1987.......................... -- -- -- -- 95 82 (30) 17
1988.......................... -- -- -- -- -- 31 (82) 97
1989.......................... -- -- -- -- -- -- 36 (40)
1990.......................... -- -- -- -- -- -- -- (7)
1991.......................... -- -- -- -- -- -- -- --
1992.......................... -- -- -- -- -- -- -- --
Total by calendar year.......... $ (127) $ (314) $ (186) $ (119) $ (140) $ (29) $ (212) $ (128)
<CAPTION>
Total by
Accident Years 1992 1993 Accident Year
- -------------------------------- ----------- --------- ---------------
1983 & Prior.................. $ (87) $ (145) $ (1,123)
1984.......................... (20) (36) (407)
1985.......................... (5) (30) (356)
1986.......................... (20) (19) 70
1987.......................... (23) (28) 113
1988.......................... (40) (10) (4)
1989.......................... 35 (17) 14
1990.......................... 21 41 55
1991.......................... 61 115 176
1992.......................... -- 67 67
Total by calendar year.......... $ (78) $ (62) $ (1,395)
</TABLE>
S-54
<PAGE>
DESCRIPTION OF NOTES
The following description of the particular terms of the Notes offered
hereby supplements, and to the extent inconsistent therewith replaces, the
description of the general terms and provisions of the Debt Securities and the
Subordinated Indenture set forth in the Prospectus, to which reference is hereby
made.
The Notes will constitute Original Issue Discount Securities of the
Corporation and are to be issued under the Subordinated Indenture as defined in
the Prospectus. The following summary of certain provisions of the Notes does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Notes and the Subordinated Indenture,
including the definitions therein of certain terms which are not otherwise
defined in this Prospectus Supplement or the Prospectus. Reference is made to
the Prospectus for a detailed summary of additional provisions of the Notes and
of the Subordinated Indenture under which the Notes are to be issued. Wherever
particular provisions or defined terms of the Subordinated Indenture (or of the
Form of Note) are referred to, such provisions or defined terms are incorporated
herein by reference.
GENERAL
The Notes will be unsecured subordinated obligations of the Corporation
limited to $220,000,000 aggregate principal amount at maturity ($245,000,000
aggregate principal amount at maturity if the Underwriters' over-allotment
option is exercised in full) and will mature on March , 2009. The principal
amount at maturity of each Note is $1,000, and will be payable at the office of
the Paying Agent, which initially will be the Trustee, or an office or agency
maintained by the Corporation for such purpose, in the Borough of Manhattan, The
City of New York. The Subordinated Indenture contains no limitation on the
amount of additional indebtedness, including Senior Debt, that may be incurred
by the Corporation and its subsidiaries or on the ability of the Corporation and
its subsidiaries to enter into agreements that restrict the ability of the
respective subsidiaries to pay cash dividends or make advances or other payments
to the Corporation.
The Notes are being offered at a substantial discount from their principal
amount at maturity. See "Certain United States Federal Tax Considerations."
There will be no periodic payments of interest. The calculation of the accrual
of OID (the difference between the Issue Price and the principal amount at
maturity of a Note) in the period during which a Note remains outstanding will
be on a semi-annual bond equivalent basis using a 360-day year composed of
twelve 30-day months; such accrual will commence from the Issue Date of the
Notes. (Form of Note, paragraph 1.) Maturity, conversion, purchase by the
Corporation at the option of a Holder, or redemption of a Note at the option of
the Corporation will cause OID (and interest, if any), to cease to accrue on
such Note, under the terms and subject to the conditions of the Subordinated
Indenture and the Notes. (Form of Note, paragraphs 6 and 7.)
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 of principal amount at maturity or an integral multiple
thereof. (Form of Note, paragraph 11.) Notes may be presented for conversion at
the office of the Conversion Agent and for exchange or registration of transfer
at the office of the Registrar, each of which will initially be the Trustee. See
"Book-Entry System." (Form of Note, paragraph 9.)
SUBORDINATION OF NOTES
Indebtedness evidenced by the Notes will be subordinated in right of
payment as set forth in the Subordinated Indenture, to the prior payment in full
of all existing and future Senior Debt of the Corporation and effectively
subordinated to all existing and future liabilities of the Corporation's
subsidiaries. For a description of the subordination provisions of the
Subordinated Indenture and the definition of "Senior Debt" see "Description of
Debt Securities--Subordination of Subordinated Debt Securities" in the
accompanying Prospectus.
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<PAGE>
As of December 31, 1993, outstanding Senior Debt of the Corporation was
approximately $950 million, which amount includes approximately $245 million of
Intercompany Debt. Not more than $250 million of Intercompany Debt may qualify
as Senior Debt. In addition, as of December 31, 1993, the Corporation's
subsidiaries had total liabilities of approximately $11.9 billion (including
estimated liabilities for insurance claims) to which the Notes will be
effectively subordinated.
CONVERSION RIGHTS
A Holder of a Note may convert it into Common Stock at any time before the
close of business on March , 2009; provided, however, that if a Note is called
for redemption, the Holder may convert it only until the close of business on
the Redemption Date. A Note in respect of which a Holder has delivered a
Purchase Notice or a Change in Control Purchase Notice exercising the option of
such Holder to require the Corporation to purchase such Note may be converted
only if such notice is withdrawn in accordance with the terms of the Notes.
(Form of Note, paragraph 9.) A Holder may convert a portion of such Holder's
Notes so long as such portion amounts to $1,000 principal amount at maturity or
an integral multiple thereof. (Form of Note, paragraph 9.)
The initial Conversion Rate is shares of Common Stock per Note
(representing an effective initial conversion price per share of $ ,
based on the Issue Price of $ per Note), subject to adjustment upon
the occurrence of certain events described below. (Form of Note, paragraph 9.)
See "Price Range of Common Stock and Dividends." A Holder entitled to a
fractional share of Common Stock shall receive cash equal to the then current
market value of such fractional share based on the Sale Price on the Trading Day
immediately preceding the Conversion Date. (Form of Note, paragraph 9.)
On conversion of a Note, a Holder will not receive any cash payment
representing accrued OID. The Corporation's delivery to the Holder of the fixed
number of shares of Common Stock into which the Note is convertible (together
with the cash payment, if any, in lieu of fractional shares) will be deemed to
satisfy the Corporation's obligation to pay the principal amount at maturity of
the Note, including the accrued OID attributable to the period from the Issue
Date through the Conversion Date. Thus, the accrued OID is deemed to be paid in
full rather than canceled, extinguished or forfeited. The Conversion Rate will
not be adjusted at any time during the term of the Notes for such accrued OID.
(Form of Note, paragraph 9.) For a discussion of the tax treatment of a Holder
receiving Common Stock upon conversion, see "Certain United States Federal Tax
Considerations."
To convert a Note into shares of Common Stock, the Holder must (i) complete
and manually sign the conversion notice on the back of the Note (or complete and
manually sign a facsimile thereof) and deliver such notice to the Conversion
Agent or, if applicable, complete and deliver to The Depository Trust
Corporation ("DTC") or any successor thereto (the "Depository") the appropriate
instruction form for conversion pursuant to the Depository's book-entry
conversion program, (ii) surrender the Note to the Conversion Agent, (iii) if
required, furnish appropriate endorsements and transfer documents, and (iv) if
required, pay all transfer or similar taxes. The date on which all of the
foregoing requirements have been satisfied is the Conversion Date. (Form of
Note, paragraph 9.)
The "Sale Price" on any date means the closing per share sale price for the
Common Stock (or, if no closing sale price is reported, the average of the bid
and ask prices on such date) on the NYSE Composite Tape or, in the event shares
of the Common Stock are not listed on the NYSE, such other national or regional
securities exchange upon which the shares of Common Stock are listed, as
reported in the composite transactions for the principal United States
securities exchange on which the Common Stock is traded or, if such Common Stock
is not listed on a United States national or regional securities exchange, as
reported by NASDAQ, or, if such Common Stock is not reported by NASDAQ, the high
per share bid price for such Common Stock in the over-the-
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<PAGE>
counter market as reported by the National Quotations Bureau or similar
organization or, if such bid price is not available, the per share market value
of such Common Stock on such date as determined by the Corporation on such basis
as it deems appropriate. (Form of Note, paragraph 9.)
The Conversion Rate will be adjusted for (i) dividends or distributions on
Common Stock payable in Common Stock or other capital stock; (ii) subdivisions,
combinations or certain reclassifications of Common Stock; (iii) distributions
to all holders of Common Stock of certain rights, warrants or options to
purchase Common Stock for a period expiring within 60 days at less than the Sale
Price at the Time of Determination; and (iv) distributions to all holders of
Common Stock of assets or debt securities of the Corporation or certain rights,
warrants or options to purchase securities of the Corporation (excluding any
rights, warrants or options referred to in clause (iii), cash dividends or other
cash distributions paid from consolidated earnings or consolidated earned
surplus of the Corporation and Normal Cash Dividends). However, no adjustment
need be made if Holders may participate in the transaction or in certain other
cases. In cases where the fair market value of assets, debt securities or
certain rights, warrants or options to purchase securities of the Corporation
applicable to one share of Common Stock distributed to shareholders equals or
exceeds the Average Sale Price of the Common Stock as of the Time of
Determination, or such Average Sale Price exceeds the fair market value of such
assets, debt securities or rights, warrants or options so distributed by less
than $1.00, rather than being entitled to an adjustment in the Conversion Rate,
the Holder of a Note upon conversion thereof will be entitled to receive, in
addition to the shares of Common Stock into which such Note is convertible, the
kind and amount of assets, debt securities or rights, warrants or options
comprising the distribution that such Holder would have received if such Holder
had converted such Note immediately prior to the record date for determining the
shareholders entitled to receive the distribution. The Corporation may increase
the Conversion Rate from time to time and for any period of time (provided that
such period is not less than 20 Business Days). (Form of Note, paragraph 9.)
"Normal Cash Dividends" are defined as dividends at the quarterly rate of
$.10 per share or increases therein payable out of cumulative consolidated net
income of the Corporation for the period from January 1, 1994 through the date
of the most recent consolidated quarterly financial statements of the
Corporation as at the time of the declaration of the dividend. (Form of Note,
paragraph 9.)
If the Corporation is party to a consolidation, merger or statutory share
exchange or a sale or conveyance of all or substantially all of its properties
or assets (including cash), the right to convert a Note into Common Stock may be
changed into a right to convert it into the kind and amount of securities, cash
or other property of the Corporation or another person which the Holder would
have received if the Holder had converted such Holder's Notes immediately before
the effective date of the transaction.
In the event of a taxable distribution to holders of Common Stock which
results in an adjustment of the Conversion Rate or in the event the Conversion
Rate is increased at the discretion of the Corporation, the Holders of the Notes
may, in certain circumstances, be deemed to have received a distribution subject
to federal income tax as a dividend. See "Certain United States Federal Tax
Considerations."
REDEMPTION OF NOTES AT THE OPTION OF THE CORPORATION
No sinking fund is provided for the Notes. Prior to March , 1999, the
Notes will not be redeemable at the option of the Corporation. At any time on
and after that date, the Notes are redeemable for cash at the option of the
Corporation, in whole or in part, at the Redemption Prices specified below, as
described below. (Form of Note, paragraph 5.) Not less than 30 days' nor more
than 60 days' notice of redemption shall be given by mail to Holders of Notes.
(Form of Note, paragraph 7.)
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<PAGE>
The table below shows Redemption Prices of a Note on March , 1999, at
each March thereafter prior to maturity and at maturity on March , 2009,
which prices reflect the accrued OID calculated through each such date. The
Redemption Price of a Note redeemed between such dates would include an
additional amount reflecting the additional OID accrued since the next preceding
date in the table. (Form of Note, paragraph 5.)
<TABLE><CAPTION>
(1) (2) (3)
REDEMPTION
NOTE ACCRUED OID PRICE
REDEMPTION DATE ISSUE PRICE AT % (1) + (2)
- ------------------------------------------------------------- -------------- ---------------- ---------------
<S> <C> <C> <C>
March , 1999............................................... $ $ $
March , 2000...............................................
March , 2001...............................................
March , 2002...............................................
March , 2003...............................................
March , 2004...............................................
March , 2005...............................................
March , 2006...............................................
March , 2007...............................................
March , 2008...............................................
At Maturity.................................................. $ 1,000
</TABLE>
If less than all of the outstanding Notes are to be redeemed, the Trustee
shall select the Notes to be redeemed in principal amounts at maturity of $1,000
or integral multiples thereof by lot, pro rata or by any other method the
Trustee considers fair and appropriate. If a portion of a Holder's Notes is
selected for partial redemption and such Holder converts a portion of such
Notes, such converted portion shall be deemed (so far as may be) to be the
portion selected for redemption. (Form of Note, paragraph 10.)
PURCHASE OF NOTES AT THE OPTION OF THE HOLDER
On March , 1999 and March , 2004 (each, a "Purchase Date"), the
Corporation will become obligated to purchase, at the option of the Holder
thereof, any outstanding Note for which a written Purchase Notice has been
delivered by the Holder to the Paying Agent at any time from the opening of
business on the date that is 20 Business Days prior to such Purchase Date until
the close of business on such Purchase Date and for which such Purchase Notice
has not been withdrawn, subject to certain additional conditions. The Purchase
Price payable in respect of a Note shall be equal to the Issue Price plus
accrued OID through the Purchase Date, with respect to each Purchase Date. The
Corporation, at its option, may elect to pay the Purchase Price with respect to
any particular Purchase Date in cash or shares of Common Stock, or in any
combination thereof. (Form of Note, paragraph 6.) For a discussion of the tax
treatment of a Holder receiving cash, Common Stock or any combination thereof,
see "Certain United States Federal Tax Considerations."
The Corporation will be required to give notice (the "Corporation Notice")
on a date not less than 20 Business Days prior to the Purchase Date to all
Holders at their addresses shown in the register of the Registrar (and to
beneficial owners as required by applicable law) stating, among other things,
(i) whether the Corporation will pay the Purchase Price of Notes in cash or
Common Stock or any combination thereof (specifying the percentages of each);
(ii) if the Corporation elects to pay in Common Stock, in whole or in part, the
method of calculating the Market Price of the Common Stock; and (iii) the
procedures that Holders must follow to require the Corporation to purchase Notes
from such Holders. (Form of Note, paragraph 6.)
The Purchase Notice given by each Holder electing to require the
Corporation to purchase Notes shall state (i) if applicable, the certificate
numbers of the Notes to be delivered by such
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Holder for purchase by the Corporation; (ii) the portion of the principal amount
at maturity of Notes to be purchased, which portion must be $1,000 or an
integral multiple thereof; (iii) that such Notes are to be purchased by the
Corporation pursuant to the applicable provisions of the Notes; and (iv) in the
event the Corporation elects, pursuant to the Corporation Notice, to pay the
Purchase Price with respect to the applicable Purchase Date in Common Stock, in
whole or in part, but such Purchase Price is ultimately to be paid to such
Holder entirely in cash because any of the conditions to payment of the Purchase
Price (or portion thereof) in Common Stock is not satisfied prior to the close
of business on such Purchase Date, as described below, whether such Holder
elects (a) to withdraw such Purchase Notice as to some or all of the Notes to
which it relates (stating the principal amount at maturity and, if applicable,
certificate numbers of the Notes as to which such withdrawal shall relate), or
(b) to receive cash in respect of the entire Purchase Price for all Notes (or
portion thereof) to which such Purchase Notice relates. If the Holder fails to
indicate, in the Purchase Notice and in any written notice of withdrawal, such
Holder's choice with respect to the election described in clause (iv) above,
such Holder shall be deemed to have elected to receive cash in respect of the
entire Purchase Price for all Notes subject to such Purchase Notice in such
circumstances. (Form of Note, paragraph 6.) For a discussion of the tax
treatment of a Holder receiving cash instead of Common Stock, see "Certain
United States Federal Tax Considerations."
Any Purchase Notice may be withdrawn by the Holder by a written notice of
withdrawal delivered to the Paying Agent prior to the close of business on the
Purchase Date. The notice of withdrawal shall state the principal amount at
maturity and the certificate numbers of the Notes, if applicable, as to which
the withdrawal notice relates and the principal amount at maturity, if any,
which remains subject to the Purchase Notice. (Form of Note, paragraph 6.)
The table below shows the Purchase Price of a Note as of each of the
specified Purchase Dates:
PURCHASE DATE PURCHASE PRICE
- ------------------------------------------------------------ --------------
March , 1999............................................. $
March , 2004.............................................
If the Corporation elects to pay the Purchase Price, in whole or in part,
in shares of Common Stock, the number of shares of Common Stock to be delivered
in respect of the portion of the Purchase Price to be paid in Common Stock shall
be equal to such portion of the Purchase Price divided by the Market Price (as
defined below) of a share of Common Stock. No fractional shares of Common Stock
will be delivered upon any purchase by the Corporation of Notes through the
delivery of such Common Stock in payment, in whole or in part, of the Purchase
Price. Instead, the Corporation will pay cash based on the Market Price (as
defined below) for all fractional shares of Common Stock. (Form of Note,
paragraph 6.) See "Certain United States Federal Tax Considerations."
The "Market Price" applicable to a particular date means the average of the
Sale Prices of the Common Stock for the five Trading Day period ending on the
third Business Day (if the third Business Day prior to the applicable Purchase
Date is a Trading Day or, if not, then on the last Trading Day prior thereto)
prior to the applicable Purchase Date, appropriately adjusted to take into
account the occurrence, during the period commencing on the first of such
Trading Days during such five Trading Day period and ending on such Purchase
Date, of certain events that would result in an adjustment of the Conversion
Rate with respect to the Common Stock. Because the Market Price of the Common
Stock is determined prior to the applicable Purchase Date, Holders of Notes bear
the market risk with respect to the value of the Common Stock to be received
from the date such Market Price is determined to such Purchase Date. The
Corporation may pay the Purchase Price (or any portion thereof) in Common Stock
only if the information necessary to calculate the
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Market Price is published in The Wall Street Journal or another daily newspaper
of national circulation. (Form of Note, paragraph 6.)
Upon determination of the actual number of shares of Common Stock in
accordance with the foregoing provisions, the Corporation will publish such
determination in The Wall Street Journal or another daily newspaper of national
circulation. (Form of Note, paragraph 6.).
The Corporation's right to purchase Notes, in whole or in part, with Common
Stock is subject to the satisfaction by the Corporation of various conditions,
including: (i) the registration of the Common Stock under the Securities Act and
the Exchange Act, if required; and (ii) any necessary qualification or
registration under applicable state securities laws. If such conditions are not
satisfied with respect to a Holder or Holders prior to the close of business on
the Purchase Date, the Corporation will pay the Purchase Price of the Notes of
such Holder or Holders entirely in cash. (Form of Note, paragraph 6.) See
"Certain United States Federal Tax Considerations." The Corporation may not
change the form of consideration (or components or percentages of components
thereof) to be paid once the Corporation has given its Corporation Notice to
Holders of Notes except as described in the second sentence of this paragraph.
(Form of Note, paragraph 6.)
Payment of the Purchase Price for a Note for which a Purchase Notice has
been delivered and not validly withdrawn is conditioned upon delivery or
book-entry transfer of such Note (together with necessary endorsements) to the
Paying Agent at any time (whether prior to, on or after the Purchase Date) after
delivery of such Purchase Notice. (Form of Note, paragraph 6.) See "Book-Entry
System." Payment of the Purchase Price for such Note will be made promptly
following the later of the Purchase Date or the time of delivery or book-entry
transfer of such Note. (Form of Note, paragraph 6.) If the Paying Agent holds,
in accordance with the terms of the Subordinated Indenture, money or securities
sufficient to pay the Purchase Price of such Note on the Business Day following
a Purchase Date, then, immediately after such Purchase Date, such Note will
cease to be outstanding and OID on such Note will cease to accrue, whether or
not such Note is delivered to the Paying Agent, and all other rights of the
Holder shall terminate (other than the right to receive the Purchase Price upon
delivery of the Note.) (Form of Note, paragraph 6.)
The Corporation's ability to purchase Notes with cash may be limited by the
terms of its then existing borrowing agreements. No Notes may be purchased for
cash at the option of Holders if there has occurred (prior to, on, or after the
giving, by the Holders of such Notes, of the required Purchase Notice) and is
continuing an Event of Default with respect to the Notes described under "Events
of Default; Notice and Waiver" below (other than a default in the payment of the
Purchase Price with respect to such Notes). (Form of Note, paragraph 6.)
SHAREHOLDER RIGHTS PLAN
Each share of Common Stock issued upon conversion of a Note or in payment
of the Purchase Price of a Note will be accompanied by a Right to the extent
described in the accompanying Prospectus under "Description of Capital
Stock--Shareholder Rights Plan."
CHANGE IN CONTROL PERMITS PURCHASE OF NOTES AT THE OPTION OF THE HOLDER
In the event of any Change in Control of the Corporation occurring on or
prior to March , 1999, each Holder of Notes will have the right, at the
Holder's option, subject to the terms and conditions of the Notes, to require
the Corporation to purchase all or any portion (provided that the principal
amount at maturity must be $1,000 or an integral multiple thereof) of the
Holder's Notes as of the date that is 35 Business Days after the occurrence of
such Change in Control (a "Change in Control Purchase Date") at a cash price
equal to the Issue Price plus accrued OID through the Change in Control Purchase
Date (the "Change in Control Purchase Price"). (Form of Note, paragraph 6.) If a
Change in Control occurs, there can be no assurance that the Corporation will
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have available funds sufficient to pay the Change in Control Purchase Price for
all of the Notes that might be delivered by Holders. See "Investment
Considerations--Change in Control."
Within 15 Business Days after the occurrence of a Change in Control, the
Corporation is obligated to mail to the Trustee and to all Holders of Notes at
their addresses shown in the register of the Registrar (and to beneficial owners
as required by applicable law) a notice regarding the Change in Control, which
notice shall state, among other things: (i) the events causing a Change in
Control and the date of such Change in Control, (ii) the last date on which the
purchase right may be exercised, (iii) the Change in Control Purchase Date, (iv)
the Change in Control Purchase Price, (v) a brief description of the conversion
rights of the Notes, (vi) the name and address of the Paying Agent and the
Conversion Agent, (vii) the Conversion Rate and any adjustments thereto, (viii)
that Notes with respect to which a Change in Control Purchase Notice is given by
the Holder may be converted into Common Stock only if the Change in Control
Purchase Notice is withdrawn, (ix) the procedures that Holders must follow to
exercise these purchase rights, and (x) the procedures for withdrawing a Change
in Control Purchase Notice. The Corporation will cause a copy of such notice to
be published in The Wall Street Journal or another daily newspaper of national
circulation. (Form of Note, paragraph 6.)
To exercise this right, the Holder must deliver a written notice (a "Change
in Control Purchase Notice") to the Paying Agent (initially the Trustee) prior
to the close of business on the Change in Control Purchase Date. The Change in
Control Purchase Notice shall state (i) if applicable, the certificate numbers
of the Notes to be delivered by the Holder thereof for purchase by the
Corporation; (ii) the portion of the principal amount at maturity of Notes to be
purchased, which portion must be $1,000 or an integral multiple thereof; and
(iii) that such Notes are to be purchased by the Corporation pursuant to the
applicable provisions of the Notes. (Form of Note, paragraph 6.) See "Book-Entry
System."
Any Change in Control Purchase Notice may be withdrawn by the Holder by a
written notice of withdrawal delivered to the Paying Agent prior to the close of
business on the Change in Control Purchase Date. The notice of withdrawal shall
state the principal amount at maturity, and, if applicable, the certificate
numbers of the Notes as to which the withdrawal notice relates and the principal
amount at maturity, if any, which remains subject to a Change in Control
Purchase Notice. (Form of Note, paragraph 6.) See "Book-Entry System."
Payment of the Change in Control Purchase Price for a Note for which a
Change in Control Purchase Notice has been delivered and not validly withdrawn
is conditioned upon delivery or book-entry transfer of such Note (together with
necessary endorsements) to the Paying Agent at any time (whether prior to, on or
after the Change in Control Purchase Date) after the delivery of such Change in
Control Purchase Notice. (Form of Note, paragraph 6.) See "Book-Entry System."
Payment of the Change in Control Purchase Price for such Note will be made
promptly following the later of the Change in Control Purchase Date or the time
of delivery of such Note. (Form of Note, paragraph 6.) If the Paying Agent
holds, in accordance with the terms of the Notes, money sufficient to pay the
Change in Control Purchase Price of such Note on the Business Day following the
Change in Control Purchase Date, then, immediately after such Change in Control
Purchase Date, OID on such Note will cease to accrue, whether or not such Note
is delivered to the Paying Agent, and all other rights of the Holder shall
terminate (other than the right to receive the Change in Control Purchase Price
upon delivery of the Note). (Form of Note, paragraph 6.)
Under the Notes, a "Change in Control" of the Corporation is deemed to have
occurred at such time as (i) any person, including its Affiliates and
Associates, other than the Corporation, its subsidiaries or their employee
benefit plans, files a Schedule 13D or 14D-1 (or any successor schedule, form or
report under the Exchange Act) disclosing that such person has become the
beneficial owner of 50% or more of the Common Stock of the Corporation, with
certain exceptions, or (ii) there shall be consummated any consolidation or
merger of or statutory share exchange
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involving the Corporation (a) in which the Corporation is not the continuing,
surviving or successor corporation or (b) pursuant to which the Common Stock
would be converted into cash, securities or other property, in each case, other
than a consolidation or merger of or statutory share exchange involving the
Corporation in which the holders of the Common Stock immediately prior to the
consolidation, merger or share exchange have, directly or indirectly, at least a
majority of the common equity of the continuing, surviving or successor
corporation immediately after the consolidation, merger or share exchange. The
Board of Directors of the Corporation is not permitted to waive the
Corporation's obligation to purchase Notes at the option of Holders in the event
of a Change in Control of the Corporation. (Form of Note, paragraph 6.)
The Corporation could, in the future, enter into certain transactions,
including certain recapitalizations of the Corporation, that would not
constitute a Change in Control with respect to the Change in Control purchase
feature of the Notes, but that would increase the amount of Senior Debt
outstanding at such time. No Notes may be purchased at the option of Holders
upon a Change in Control of the Corporation if there has occurred (prior to, on
or after the giving, by the Holders of such Notes, of the required Change in
Control Purchase Notice) and is continuing an Event of Default with respect to
the Notes described under "Events of Default; Notice and Waiver" below (other
than a default in the payment of the Change in Control Purchase Price with
respect to such Notes). (Form of Note, paragraph 6.) Further, the Notes are
subordinated to the prior payment of Senior Debt as described under
"Subordination of Notes" above, which Senior Debt may be accelerated upon a
Change of Control.
EVENTS OF DEFAULT; NOTICE AND WAIVER
The Subordinated Indenture and the Notes provide that, if an Event of
Default specified therein shall have happened and be continuing, either the
Trustee or the Holders of not less than 25% in aggregate principal amount at
maturity of the Notes then outstanding may declare the Issue Price of the Notes
plus the OID on the Notes accrued through the date of such declaration to be
immediately due and payable. In the case of certain events of bankruptcy or
insolvency, the Issue Price of the Notes plus the OID accrued thereon through
the occurrence of such event shall automatically become and be immediately due
and payable. (Form of Note, paragraph 15.) Under certain circumstances, the
Holders of a majority in aggregate principal amount at maturity of the
outstanding Notes may rescind any such acceleration with respect to the Notes
and its consequences. (Form of Note, paragraph 15.) Interest shall, to the
extent permitted by law, accrue and be payable on demand upon a default in the
payment of the principal amount at maturity, Issue Price plus accrued OID, or
any Redemption Price, Purchase Price or Change in Control Purchase Price with
respect to any Note and such interest shall be compounded semi-annually. The
accrual of such interest on overdue amounts shall be in lieu of, and not in
addition to, the continued accrual of OID. (Form of Note, paragraph 1.)
Under the Subordinated Indenture and the Notes, an Event of Default with
respect to the Notes includes any of the following: (i) default in payment of
the principal amount at maturity, Issue Price plus accrued OID, Redemption
Price, Purchase Price or Change in Control Purchase Price with respect to any
Note when such becomes due and payable (whether or not payment is prohibited by
the provisions of the Subordinated Indenture); (ii) failure to deliver shares of
Common Stock when such Common Stock is required to be delivered following
conversion of a Note; (iii) failure by the Corporation to comply with any of its
other agreements in the Notes or the Subordinated Indenture with respect to the
Notes upon receipt by the Corporation of notice of such default by the Trustee
or by Holders of not less than 25% in aggregate principal amount at maturity of
the Notes then outstanding, and the Corporation's failure to cure (or obtain a
waiver of) such default within 90 days after receipt by the Corporation of such
notice; (iv) default under any bond, debenture or other evidence of indebtedness
for money borrowed of the Corporation or any Principal Insurance Subsidiary
having an aggregate outstanding principal amount in excess of $25 million, which
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default shall have resulted in such indebtedness being accelerated, without such
indebtedness being discharged or such acceleration having been rescinded or
annulled within 30 days after receipt of notice thereof by the Corporation from
the Trustee or by the Corporation and the Trustee from the Holders of not less
than 25% in aggregate principal amount at maturity of the Notes then
outstanding; or (v) certain events of bankruptcy or insolvency. (Form of Note,
paragraph 15.)
The right of any Holder (x) to receive payment of the principal amount at
maturity, Issue Price plus accrued OID, Redemption Price, Purchase Price or
Change in Control Purchase Price with respect to any Note and any interest in
respect of a default in the payment of any such amounts on such Note, on or
after the due date expressed in such Note, (y) to convert Notes or (z) to
institute suit for the enforcement of any such payments or conversion shall not
be impaired or adversely affected without such Holder's consent. (Form of Note,
paragraph 15.) The Holders of at least a majority in aggregate principal amount
at maturity of the outstanding Notes may waive an existing default and its
consequences, other than (i) any default by the Corporation in any payment on
the Notes, (ii) any default by the Corporation in delivering shares of Common
Stock when such Common Stock is required to be delivered, (iii) any default
which constitutes a failure to convert any Note in accordance with its terms or
(iv) any default in respect of certain covenants or provisions in the
Subordinated Indenture which may not be modified without the consent of the
Holder of each Note as described in "Modification" below. (Form of Note,
paragraph 15.)
MODIFICATION
For a description of restrictions relating to modification of the
Subordinated Indenture and the Notes, see "Description of Debt
Securities--Modification and Waiver" in the accompanying Prospectus. In
addition, with respect to the Notes, the Corporation and the Trustee may,
without the consent of any Holder of Notes, provide for uncertificated Notes in
addition to certificated Notes (so long as any uncertificated Notes are in
registered form for purposes of the Internal Revenue Code). With respect to the
Notes, the Subordinated Indenture and the Notes may not be amended, without the
consent of each Holder affected thereby, to: (i) reduce the principal amount at
maturity, Issue Price, Purchase Price, Change in Control Purchase Price or
Redemption Price with respect to any Note, or extend the Stated Maturity of any
Note or alter the manner or rate of accrual of OID or interest, or make any Note
payable in money or securities other than that stated in the Note; (ii) make any
reduction in the principal amount at maturity of Notes whose Holders must
consent to an amendment or any waiver under the Subordinated Indenture or the
Notes or modify the Subordinated Indenture or Note provisions relating to such
amendments or waivers; (iii) make any change that adversely affects the right to
convert any Note or the right to require the Corporation to purchase a Note;
(iv) modify the provisions of the Subordinated Indenture relating to the
subordination of the Notes in a manner adverse to the Holders of the Notes; or
(v) impair the right to institute suit for the enforcement of any payment with
respect to, or conversion of, the Notes. (Form of Note, paragraph 14.)
LIMITATIONS OF CLAIMS IN BANKRUPTCY
If a bankruptcy proceeding is commenced in respect of the Corporation, the
claim of the Holder of a Note may be, under Title 11 of the United States Code,
limited to the Issue Price of the Note plus that portion of the OID that has
accrued from the date of issue to the commencement of the proceeding. In
addition, the Holders of the Notes will be subordinated in right of payment to
Senior Debt and effectively subordinated to the indebtedness and other
liabilities of the Corporation's subsidiaries. See "Subordination of Notes."
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BOOK-ENTRY SYSTEM
The Notes initially will be represented by one or more global securities
(the "Global Securities") deposited with DTC and registered in the name of a
nominee of DTC. Except as set forth below, the Notes will be available for
purchase in denominations of $1,000 principal amount at maturity, and integral
multiples thereof, in book-entry form only.
Upon the issuance of the Global Securities, the Depository for such Global
Securities or its nominee will credit on its book-entry registration and
transfer system the respective principal amounts of the Notes represented by
such Global Securities to the accounts of the persons that have accounts with
such Depository (the "Participants"). Such accounts shall be designated by the
underwriter, dealers or agents with respect to such Notes. Ownership of
beneficial interests in such Global Securities will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
the Depository or its nominee (with respect to interests of Participants) and
records of Participants (with respect to interests of persons who hold through
Participants). The laws of some states require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to own, pledge or transfer
beneficial interests in a Global Security.
Unless and until certificated Notes are issued under the limited
circumstances described below, no beneficial owner of a Note shall be entitled
to receive a definitive certificate representing a Note. So long as the
Depository or its nominee is the registered owner of all the Global Securities,
the Depository or such nominee, as the case may be, will be considered to be the
sole owner or Holder of the Notes for all purposes of the Subordinated
Indenture. Unless and until exchanged in whole or in part for the Notes
represented thereby, the Global Securities may not be transferred except in
their entirety by the Depository to a nominee of the Depository or by a nominee
of such Depository to such Depository or another nominee of such Depository or
by the Depository or any nominee to a successor depository or any nominee of
such successor.
So long as the Notes are represented by the Global Securities, any payments
in respect of the Notes will be made to the Depository or its nominee, as the
registered owner of the Global Securities. Payments to beneficial owners of the
Notes are expected to be made through the Depository or its nominee, as
described in this Prospectus Supplement. None of the Corporation, the Trustee,
any Paying Agent or the Registrar will have any responsibility or liability for
any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in the Global Securities for the Notes or for
maintaining, supervising or reviewing any records relating to such beneficial
interests.
If the Depository is at any time unwilling, unable or ineligible to
continue as Depository and a successor Depository is not appointed by the
Corporation within 90 days, the Corporation will issue individual Notes in
definitive form in exchange for the Global Securities representing the Notes. In
addition, the Corporation may at any time and in its sole discretion determine
not to have the Notes represented by Global Securities and, in such event, will
issue individual Notes in definitive form in exchange for the Global Securities.
In either instance, the Corporation will issue Notes in definitive form equal in
aggregate principal amount to the Global Securities, in such names and in such
principal amounts as the Depository shall request. Notes so issued in definitive
form will be issued in denominations of $1,000 principal amount at maturity and
integral multiples thereof and will be issued in registered form only, without
coupons.
DTC has advised the Corporation and the Underwriters as follows: DTC is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
was created to hold securities of its participants and to facilitate the
clearance and settlement
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of securities transactions among its participants in such securities through
electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. DTC's
participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations, some of which (and/or their representatives) own DTC. Access to
DTC's book-entry system is also available to others, such as banks, brokers,
dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly.
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following summary is a general discussion of certain of the United
States federal tax considerations involved in the ownership, disposition and
conversion of Notes. This summary does not consider all possible tax
consequences of the purchase, ownership or disposition of Notes or Common Stock
and is not intended to reflect the individual tax position of any individual
Holder. It does not deal with Holders who: (i) acquired Notes other than at
their original issuance for their original issue price, (ii) are involved in
special tax situations, such as the holding of Notes or Common Stock as part of
a straddle with other investments or situations in which the functional currency
is not the U.S. dollar, (iii) are subject to special treatment under the federal
income tax laws (such as dealers in securities, individual retirement accounts
and other tax-deferred accounts, life insurance companies and tax-exempt
organizations), or (iv) do not hold the Notes or Common Stock as capital assets.
This discussion is based on interpretation of the Internal Revenue Code of 1986,
as amended (the "Code"), and Treasury Regulations (including certain proposed
Treasury Regulations) all as in effect as of the date of this Prospectus
Supplement and all of which are subject to change or different interpretations
by the Internal Revenue Service ("IRS") or the courts. Persons considering the
purchase of a Note should consult their own tax advisors regarding their
particular circumstances and with respect to the effects of state, local or
non-United States tax laws to which they may be subject. For purposes of this
discussion, a U.S. Holder is an individual who is a citizen or resident of the
United States, any partnership or corporation that is organized under the laws
of the United States or any state thereof, any estate or trust the income of
which is subject to United States federal income tax regardless of its source,
and any other person whose income, if any, arising from the ownership of Notes
or Common Stock is effectively connected with a U.S. trade or business carried
on by such individual or corporation. The term also includes certain former
citizens of the United States whose income and gain on the Notes will be subject
to U.S. income tax.
The Corporation has been advised by its counsel, Piper & Marbury, that in
their opinion the Notes should be treated as indebtedness for federal income tax
purposes under existing law and the following discussion of tax consequences
assumes that the Notes will be treated as indebtedness. However, the IRS is not
precluded from adopting a contrary position.
U.S. HOLDERS
ORIGINAL ISSUE DISCOUNT. The following summary is based in part upon the
original issue discount ("OID") provisions of the Code and regulations issued
thereunder. On January 27, 1994, final original issue discount regulations (the
"OID Regulations") were issued. The OID Regulations generally apply to debt
instruments issued on or after April 4, 1994. Taxpayers may, however, rely on
the OID Regulations for debt instruments issued after December 21, 1992, and
before April 4, 1994. The discussion below assumes that the OID Regulations are
applicable to the Notes.
The Notes are being issued at a substantial discount from their stated
redemption price at maturity. For federal income tax purposes, the difference
between the Issue Price (the first price at which a substantial amount of the
Notes is sold) and the stated redemption price at maturity of
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each Note constitutes OID. The Notes will carry a substantial amount of OID.
U.S. Holders of the Notes will be required to include OID in income periodically
over the term of the Notes before receipt of the cash attributable to such
income. A holder of a Note must include in gross income for federal income tax
purposes the sum of the daily portions of OID with respect to the Note for each
day during the taxable year or portion of a taxable year on which such U.S.
Holder holds the Note. The daily portion is determined by allocating to each day
of the accrual period a pro rata portion of an amount equal to the adjusted
issue price (as defined below) of the Note at the beginning of the accrual
period multiplied by the yield to maturity of the Note (determined by
compounding at the close of each accrual period and adjusted for the length of
the accrual period). The accrual period generally will be each six-month period
(or shorter period from the date of original issue) that ends on a day in the
calendar year corresponding to the maturity date of the Note or the date six
months before such maturity date. It may be possible for a U.S. Holder to adopt
one or more shorter accrual periods. The adjusted issue price of the Note at the
start of any accrual period is the Issue Price of the Note increased by the
accrued OID for each prior accrual period. Under these rules, U.S. Holders will
have to include in gross income increasingly greater amounts of OID in each
successive accrual period. A U.S. Holder's original tax basis for determining
gain or loss on the sale or other disposition of a Note will be increased by any
accrued OID includible in such U.S. Holder's gross income.
DISPOSITION, CONVERSION OR PURCHASE BY THE CORPORATION
GENERAL. Any gain or loss realized upon a sale or other disposition of a
Note (including a sale to or redemption by the Corporation that is paid in
cash), except as described below, will be capital gain or loss (which will be
long term if a Note is held for more than one year). The amount of any such gain
or loss will equal the difference between the sale or redemption proceeds and
the U.S. Holder's adjusted tax basis in the Note.
CONVERSION. A U.S. Holder's conversion of a Note into Common Stock will
generally not be a taxable event (except with respect to cash received in lieu
of a fractional share). The U.S. Holder's obligation to include in gross income
the daily portions of OID with respect to a Note will terminate on the date of
conversion. The U.S. Holder's basis in the Common Stock received on conversion
of a Note will be the same as the U.S. Holder's basis in the Note at the time of
conversion (exclusive of any tax basis allocable to a fractional share), and the
holding period for the Common Stock received on conversion will include the
holding period of the Note converted, except that the holding period of Common
Stock allocable to accrued OID should commence on the day following the date of
conversion.
TENDER OF NOTES. If the U.S. Holder elects to exercise his option to tender
the Notes to the Corporation on a Purchase Date or to the Corporation on a
Change in Control Purchase Date and the Corporation purchases the Notes for cash
only, such purchase will be a taxable sale. The U.S. Holder would recognize
capital gain or loss upon the sale, measured by the difference between the
amount of cash transferred by the Corporation to the U.S. Holder in satisfaction
of the Purchase Price or the Change in Control Purchase Price and the U.S.
Holder's adjusted tax basis in the tendered Note.
If the U.S. Holder elects to exercise his option to tender the Notes to the
Corporation on a Purchase Date and the Corporation issues Common Stock in
satisfaction of all or part of the Purchase Price, the exchange of the Note for
Common Stock should qualify as a reorganization or an otherwise nontaxable
transaction for federal income tax purposes. If the Purchase Price is paid
solely in Common Stock, neither gain nor loss would be recognized by the U.S.
Holder, except as described below with respect to a fractional share. If the
Purchase Price is paid in a combination of shares of Common Stock and cash
(other than cash received in lieu of a fractional share), gain (but not loss)
realized by the U.S. Holder would be recognized, but only to the extent such
gain does not
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exceed such cash. A U.S. Holder's tax basis in the Common Stock received in the
exchange will be the same as the U.S. Holder's tax basis in the Note tendered to
the Corporation in exchange therefor (exclusive of any tax basis allocable to a
fractional share interest as described below), decreased by the amount of cash
(other than cash received in lieu of a fractional share), if any, received in
the exchange and increased by the amount of any gain recognized by the U.S.
Holder on the exchange (other than gain with respect to a fractional share). The
holding period for Common Stock received in the exchange will be determined in
accordance with the principles applicable to a conversion as described above.
Under the present advance ruling policy of the IRS, cash received in lieu
of a fractional share of Common Stock upon conversion or purchase of a Note
should be treated as a payment in exchange for the fractional share interest in
such Common Stock. Accordingly, the receipt of cash in lieu of a fractional
share of Common Stock should generally result in capital gain or loss (measured
by the difference between the cash received for the fractional share interest
and the U.S. Holder's tax basis in the fractional share interest).
CONSTRUCTIVE DIVIDEND. If at any time the Corporation makes a distribution
of property to stockholders that would be taxable to such stockholders as a
dividend for federal income tax purposes (for example, distributions of
evidences of indebtedness or assets of the Corporation, but generally not stock
dividends or rights to subscribe for Common Stock) and, pursuant to the anti-
dilution provisions of the Notes, the Conversion Rate of the Notes is increased,
such increase may be deemed to be the payment of a taxable dividend to U.S.
Holders of Notes. If the Conversion Rate is increased at the discretion of the
Corporation, such increase may be deemed to be the payment of a taxable dividend
to U.S. Holders of Notes.
THE COMMON STOCK. Distributions, if any, paid on the Common Stock after an
exchange, to the extent made from current and accumulated earnings and profits
of the Corporation, as determined for federal income tax purposes, will be
included in a U.S. Holder's income as they are paid. Gain or loss realized on a
sale or exchange of Common Stock will equal the difference between the amount
realized on such sale or exchange and the Holder's adjusted tax basis in such
shares. Such gain or loss will generally be long-term capital gain or loss if
the holding period for such shares exceeds one year.
NON-U.S. HOLDERS
The following discussion is a summary of the principal United States
federal income and estate tax consequences resulting from the ownership of Notes
or Common Stock by Non-U.S. Holders.
WITHHOLDING TAX ON PAYMENTS OF PRINCIPAL AND OID ON NOTES. The payment of
principal (including any OID included therein) of a Note by the Corporation or
any paying agent of the Corporation to any Non-U.S. Holder that does not
actually or constructively own 10 percent or more of the total combined voting
power of all classes of stock of the Corporation (including any Common Stock
that may be received in exchange for a Note) will not be subject to United
States federal withholding tax, provided that in the case of payment of OID
either (i) the beneficial owner of the Note certifies to the Corporation or its
agent, under penalties of perjury, that it is not a U.S. Holder and provides its
name and address on United States Treasury Form W-8 (or a suitable substitute
form) or (ii) a securities clearing organization, bank or other financial
institution that holds customers' securities in the ordinary course of its trade
or business (a "financial institution") and holds the Note or an interest
therein certifies under penalties of perjury that such a Form W-8 (or suitable
substitute form) has been received from the beneficial owner by it or by a
financial institution between it and the beneficial owner and furnishes the
payor with a copy thereof. If the IRS were successfully to contend that the
Notes are not indebtedness for federal income tax purposes, however, the
Corporation would generally be obligated to withhold from amounts paid to a
Non-U.S. Holder (or from shares of Common Stock issued upon exercise by a
Non-U.S. Holder of
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a conversion or purchase right) an amount equal to 30 percent of the amount of
dividend income that the Non-U.S. Holder would be considered to have received as
a result of such payment or share issuance. In the event of such a
reclassification of the Notes, a Non-U.S. Holder's effective yield on the Notes
would be materially reduced.
WITHHOLDING TAX ON PAYMENTS OF DIVIDENDS ON COMMON STOCK. Dividends, if
any, paid on the Common Stock after an exchange to a Non-U.S. Holder generally
will be subject to a 30 percent United States federal withholding tax, subject
to reduction for Holders eligible for the benefits of certain income tax
treaties.
GAIN ON DISPOSITION OF NOTES AND COMMON STOCK. Provided that the
Corporation is at no time a United States real property holding corporation
within the meaning of Section 897(c) of the Code (a "USRPHC"), a Non-U.S. Holder
will not be subject to United States federal income tax on gain or income
realized on the sale, exchange or redemption of a Note, including the exchange
of a Note for Common Stock, or the sale or exchange of Common Stock unless (i)
such Non-U.S. Holder is an individual present in the United States for 183 days
or more in the year of such sale, exchange or redemption and either (a) has a
"tax home" in the United States and the gain or income is not attributable to an
office or other fixed place of business maintained by such non-U.S. Holder
outside of the United States, or (b) the gain from the disposition is
attributable to an office or other fixed place of business in the United States
or (ii) such gain is effectively connected with the conduct by such Non-U.S.
Holder of a trade or business in the United States. Under present law the
Corporation would not be a USRPHC so long as during a specified 5-year period
(i) the fair market value of its United States real property interests is less
than (ii) 50 percent of the sum of the fair market value of its United States
real property interests, interests in real property located outside the United
States and other of its assets that are used or held for use in a trade or
business.
The Corporation believes that it is not presently a USRPHC, but there can
be no assurance that it will not become a USRPHC in the future.
Even if the Corporation is determined to be a USRPHC, a Non-U.S. Holder
that is not described in clauses (i) or (ii) of the first sentence under
"--Non-U.S. Holders--Gain on Disposition of Notes and Common Stock" will not be
subject to United States federal income tax on any gain or income on (i) the
sale or other disposition of the Common Stock, provided that such Holder did not
actually or constructively own (during the shorter of its holding period or the
5-year period ending on the date of disposition) more than 5 percent of the
Common Stock (including any Common Stock that may be received in exchange for a
Note) and (ii) on the sale or other disposition of the Notes, provided that (A)
if the Notes are regularly traded on an established securities market, the Non-
U.S. Holder did not (during the shorter of its holding period or 5-year period
ending on the date of disposition) own more than 5 percent of the outstanding
Notes and (B) if the Notes are not regularly traded on an established securities
market, the fair market value of the Notes held by the Non-U.S. Holder did not
(on the date of their acquisition) exceed the fair market value of 5 percent of
the then outstanding Common Stock. For purposes of the foregoing discussion, the
Common Stock is currently regularly traded (and is expected to continue to be
so), but the Notes are not regularly traded (and are not expected to become so).
U.S. FEDERAL ESTATE TAX. A Note held by an individual who at the time of
death is not a citizen or resident of the United States (as specially defined
for United States federal estate tax purposes) will not be subject to United
States federal estate tax if (i) the individual does not actually or
constructively own 10 percent or more of the total combined voting power of all
classes of stock of the Corporation entitled to vote and (ii) at the time of the
individual's death, payments with respect to such Note would not have been
effectively connected with the conduct by such individual of a trade or business
in the United States. An individual who at the time of death is not a citizen or
resident of the United States (as specially defined for United States federal
estate tax purposes) who is treated as the owner of, or who has made certain
lifetime transfers of, the Common Stock
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will be subject to United States federal estate tax, subject to reduction of
such estate tax if the individual is eligible for the benefits of an estate tax
treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Payments on the Notes made by the Corporation or any paying agent of the
Corporation, accrued OID on the Notes and payments of dividends on the Common
Stock, to certain non-corporate Holders of the Notes or Common Stock generally
will be subject to information reporting and possibly to "backup withholding" at
a rate of 31 percent. Information reporting and backup withholding will not
apply, however, to (i) payments made on and accrued OID with respect to a Note
if the certification described in clause (i) under "--Non-U.S.
Holders--Withholding Tax on Payments of Principal and OID on Notes" above is
received, provided in each case that the payor does not have actual knowledge
that the Holder is a U.S. Holder, or to payments made on the Common Stock if
such payments are subject to the 30 percent (or reduced treaty rate) withholding
tax described above under "--Non U.S. Holders--The Common Stock" and (ii)
payment to certain U.S. Holders who qualify for exemption.
Payment of proceeds from the sale of a Note or Common Stock by a Non-U.S.
Holder to or through the United States office of a broker is subject to
information reporting and backup withholding unless the Holder or beneficial
owner certifies as to its non-United States status or otherwise establishes an
exemption from information reporting and backup withholding. Payment outside the
United States of the proceeds of the sale of a Note or Common Stock by a
Non-U.S. Holder to or through a foreign office of a "broker" (as defined in
applicable U.S. Treasury Department regulations) will not be subject to
information reporting or backup withholding, except that if the broker is a U.S.
person, a controlled foreign corporation for United States tax purposes or a
foreign person 50 percent or more of whose gross income is from a United States
trade or business, information reporting will apply to such payment unless the
broker had documentary evidence in its records that the beneficial owner is not
a U.S. Holder and certain other conditions are met, or the beneficial owner
otherwise establishes an exemption.
The Corporation will compute OID and report to the IRS and to each holder
of record (other than, in general, for certain holders for which reporting is
not required, such as corporations) such information regarding OID with respect
to the Notes as may be required under applicable regulations. No assurance can
be given that the IRS will not challenge the accuracy of the reported
information.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Corporation has agreed to sell to each of the Underwriters named below, and each
of the Underwriters has severally agreed to purchase from the Corporation, the
principal amount of the Notes set forth opposite its name below:
<TABLE><CAPTION>
PRINCIPAL AMOUNT
UNDERWRITER OF NOTES
- ------------------------------------------------------------------ ----------------------
<S> <C>
Goldman, Sachs & Co. ............................................. $
Kidder, Peabody & Co. Incorporated................................
----------------------
Total...................................................... $ 220,000,000
----------------------
----------------------
</TABLE>
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all of the Notes offered hereby,
if any are taken.
The Underwriters propose to offer the Notes in part directly to the public
at the initial public offering price set forth on the cover page of this
Prospectus Supplement and in part to certain securities dealers at such price
less a concession of % of the principal amount at maturity of the Notes. The
Underwriters may allow, and such dealers may reallow, a concession not to exceed
% of the principal amount at maturity of the Notes to certain brokers and
dealers. After the Notes are released for sale to the public, the offering price
and other selling terms may from time to time be varied by the Underwriters.
The Notes are a new issue of securities with no established trading market.
The Corporation has been advised by the Underwriters that the Underwriters
intend to make a market in the Notes but are not obligated to do so and may
discontinue market making at any time without notice. No assurance can be given
as to the liquidity of the trading market for the Notes.
The Corporation has granted the Underwriters an option exercisable for 30
days after the date of this Prospectus Supplement to purchase up to $25,000,000
additional aggregate principal amount at maturity of Notes at the initial public
offering price, solely to cover over-allotments, if any, and the Underwriters
shall be entitled to the underwriting commission with respect to any such Notes
sold, as set forth on the cover page of this Prospectus Supplement. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same proportion thereof that the principal amount at maturity of Notes to be
purchased by each of them, as shown in the foregoing table, bears to the
$220,000,000 aggregate principal amount at maturity of Notes offered.
The Corporation has agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock or any securities substantially
similar to the Notes or any securities convertible, exercisable or exchangeable
into shares of Common Stock or any securities substantially similar to the Notes
for a period of 90 days after the date of this Prospectus Supplement without the
prior written consent of the Underwriters, except for the shares of Common Stock
and the related Rights issuable on conversion of the Series A Preferred Stock,
the Series B Preferred Stock and the Series C Preferred Stock, any securities
required to be issued in connection with the redemption of such preferred stock
and shares of Common Stock issued pursuant to employee stock option or similar
benefit plans and dividend reinvestment plans.
The Corporation has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act. Robert J.
Hurst, a Director of the Corporation, is a partner of Goldman, Sachs Group, L.P.
and its principal affiliate, Goldman, Sachs & Co. Dale F. Frey, a Director of
the Corporation, is Vice President and Treasurer of General Electric Company, of
which Kidder, Peabody & Co. Incorporated is an indirect, wholly owned
subsidiary. In addition,
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General Electric Pension Trust and related entities own 1,000,000 shares of
Series B Preferred Stock, 7,000 shares of Series C Preferred Stock and 212,281
shares of Common Stock.
EXPERTS
The consolidated financial statements of the Corporation for the year ended
December 31, 1993, appearing in the Corporation's Current Report on Form 8-K,
have been audited by Ernst & Young, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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<PAGE>
$600,000,000
[USF&G LOGO] USF&G CORPORATION
DEBT SECURITIES, PREFERRED STOCK,
COMMON STOCK AND WARRANTS
------------------------
USF&G Corporation (the "Corporation") may from time to time offer, together
or separately, its (i) debt securities (the "Debt Securities") which may be
either senior debt securities (the "Senior Debt Securities") or subordinated
debt securities (the "Subordinated Debt Securities"), (ii) shares of its
preferred stock, $50.00 par value per share (the "Preferred Stock"), which may
be issued in the form of Depositary Shares evidenced by Depositary Receipts,
(iii) shares of its common stock, $2.50 par value per share (the "Common
Stock"), and (iv) warrants to purchase securities of the Corporation as shall be
designated by the Corporation at the time of the offering (the "Warrants"), in
amounts, at prices and on terms to be determined at the time of the offering.
The Debt Securities, Preferred Stock, Common Stock and Warrants are collectively
called the "Securities."
The Securities offered pursuant to this Prospectus may be issued in one or
more series or issuances and will be limited to $600,000,000 aggregate public
offering price (or its equivalent (based on the applicable exchange rate at the
time of sale) in one or more foreign currencies, currency units or composite
currencies as shall be designated by the Corporation). Certain specific terms of
the particular Securities in respect of which this Prospectus is being delivered
are set forth in the accompanying Prospectus Supplement (the "Prospectus
Supplement"), including, where applicable, in the case of Debt Securities, the
specific title, aggregate principal amount, the denomination, whether such Debt
Securities are secured or unsecured obligations, maturity, premium, if any, the
interest rate (which may be fixed, floating or adjustable), the time and method
of calculating payment of interest, if any, the place or places where principal
of (and premium, if any) and interest, if any, on such Debt Securities will be
payable, the currency in which principal of (and premium, if any) and interest,
if any, on such Debt Securities will be payable, any terms of redemption at the
option of the Corporation or the holder, any sinking fund provisions, terms for
any conversion or exchange into other Securities or property, the initial public
offering price and other special terms, in the case of Preferred Stock, the
specific title, the aggregate number of shares offered, any dividend (including
the method of calculating payment of dividends), liquidation, redemption, voting
and other rights, any terms for any conversion or exchange into other
Securities, the initial public offering price and other terms, and, in the case
of Warrants, the duration, purchase price, exercise price and detachability of
such Warrants and a description of the Securities for which each Warrant is
exercisable. If so specified in the applicable Prospectus Supplement, Debt
Securities of a series may be issued in whole or in part in the form of one or
more temporary or permanent global securities (the "Global Securities").
The Corporation's Common Stock is listed on the New York Stock Exchange
under the trading symbol "FG." Any Common Stock sold pursuant to a Prospectus
Supplement will be listed on such exchange, subject to official notice of
issuance. The Corporation's Common Stock is also listed on the Pacific Stock
Exchange, the London Stock Exchange and the Swiss Exchanges in Basle, Geneva and
Zurich, Switzerland.
Unless otherwise specified in a Prospectus Supplement, the Senior Debt
Securities, when issued, will be unsecured and will rank equally with all other
unsecured and unsubordinated indebtedness of the Corporation. The Subordinated
Debt Securities, when issued, will be subordinated in right of payment to all
Senior Debt (as defined herein) of the Corporation.
The Prospectus Supplement will contain information concerning certain
United States federal income tax considerations, if applicable to the Securities
offered.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
The Securities will be sold directly, through agents, underwriters or
dealers as designated from time to time, or through a combination of such
methods. If agents of the Corporation or any dealers or underwriters are
involved in the sale of the Securities in respect of which this Prospectus is
being delivered, the names of such agents, dealers or underwriters and any
applicable commissions or discounts are set forth in or may be calculated from
the Prospectus Supplement with respect to such Securities.
------------------------
The date of this Prospectus is February 4, 1994.
<PAGE>
AVAILABLE INFORMATION
The Corporation is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files reports, proxy or information statements and other information
with the Securities and Exchange Commission (the "Commission"). This Prospectus
contains information concerning the Corporation but does not contain all of the
information set forth in the Registration Statement and exhibits thereto which
the Corporation has filed with the Commission under the Securities Act of 1933
(the "Securities Act"). Such reports, proxy or information statements,
Registration Statement and exhibits and other information filed by the
Corporation with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth St.,
N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission at 7
World Trade Center, New York, New York 10048, and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
reports, proxy or information statements, Registration Statement and exhibits
and other information concerning the Corporation can also be inspected at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005, and the Pacific Stock Exchange, Inc., 301 Pine Street, San
Francisco, California 94104 and 233 South Beaudry Avenue, Los Angeles,
California 90012.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Corporation hereby incorporates by reference in this Prospectus its (i)
Annual Report on Form 10-K for the year ended December 31, 1992, as amended on
July 13, 1993, under File No. 1-8233, (ii) Quarterly Report on Form 10-Q for the
three months ended March 31, 1993, under File No. 1-8233, (iii) Quarterly Report
on Form 10-Q for the six months ended June 30, 1993, under File No. 1-8233, (iv)
Quarterly Report on Form 10-Q for the nine months ended September 30, 1993,
under File No. 1-8233, and (v) the description of the Corporation's Common Stock
and Shareholder Rights Plan contained in its Registration Statements filed
pursuant to Section 12 of the Exchange Act and any amendment or report filed for
the purpose of updating those descriptions.
All documents filed by the Corporation pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and made a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other document subsequently filed with the
Commission which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Corporation will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents incorporated by reference herein (not including
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should be
directed to: USF&G Corporation, 100 Light Street, Baltimore, Maryland 21202,
Attention: John F. Hoffen, Jr., Secretary, telephone (410) 547-3000.
2
<PAGE>
THE CORPORATION
USF&G Corporation (the "Corporation") is a holding company whose principal
subsidiaries are engaged in writing property/casualty insurance and life
insurance/annuities. Property/casualty insurance is written primarily by United
States Fidelity and Guaranty Company, founded in 1896, and is sold through
independent agents supported by the company's underwriting, marketing,
administrative and claim services offices located throughout the United States.
Life insurance and annuities are written primarily by Fidelity and Guaranty Life
Insurance Company, founded in 1959, and are sold throughout the United States
through independent agents. The Corporation is incorporated in Maryland, and its
principal executive office is located at 100 Light Street, Baltimore, Maryland
21202, telephone (410) 547-3000.
RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES AND RATIO
OF CONSOLIDATED EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
On a consolidated basis, the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred stock dividends include the
earnings and fixed charges of the Corporation and its subsidiaries.
<TABLE><CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
-------------------------------- -------------------------------------
1993 1992 1992 1991 1990
------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges.............. 2.3 1.3 1.4 (A) (B)
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends..................... 1.3 .8 .8 (A) (B)
<CAPTION>
1989 1988
----------- -----------
Ratio of Earnings to Fixed Charges.............. 2.9 5.1
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends..................... 2.4 4.0
</TABLE>
- ---------------
<TABLE>
<S> <C>
(A) The Corporation had a net loss for the year ended December 31, 1991, and earnings were inadequate to cover
fixed charges and combined fixed charges and preferred stock dividends by $149 million and $186 million,
respectively, for the year ended December 31, 1991.
(B) The Corporation had a net loss for the year ended December 31, 1990, and earnings were inadequate to cover
fixed charges and combined fixed charges and preferred stock dividends by $435 million and $452 million,
respectively, for the year ended December 31, 1990.
</TABLE>
The ratios were determined by dividing consolidated earnings by total fixed
charges and total fixed charges and preferred stock dividends, respectively.
Earnings consist of income from continuing operations before considering income
taxes, the cumulative effect of accounting changes, and fixed charges. Fixed
charges consist of interest, that portion of rentals which is deemed to be an
appropriate interest factor and preferred stock dividend requirements.
USE OF PROCEEDS
Except as otherwise stated in a Prospectus Supplement, the net proceeds
from the sale of the Securities will be added to the general funds of the
Corporation and will be available for general corporate purposes, including the
repayment of indebtedness.
3
<PAGE>
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions
of the Debt Securities to which any Prospectus Supplement may relate. The
particular terms of the Debt Securities offered by any Prospectus Supplement and
the extent, if any, to which such general provisions may not apply to the Debt
Securities so offered will be described in the Prospectus Supplement relating to
such Debt Securities.
The Senior Debt Securities are to be issued under an Indenture dated as of
January 28, 1994 (the "Senior Indenture"), between the Corporation and Signet
Trust Company, as trustee. The Subordinated Debt Securities are to be issued
under a separate Indenture dated as of January 28, 1994 (the "Subordinated
Indenture"), between the Corporation and Chemical Bank, as trustee. The Senior
Indenture and the Subordinated Indenture are sometimes referred to collectively
as the "Indentures." Copies of the Senior Indenture and the Subordinated
Indenture have been filed as exhibits to the Registration Statement. Each of
Signet Trust Company and Chemical Bank is hereinafter referred to as a "Trustee"
and collectively, as the "Trustees." The following summaries of certain
provisions of the Senior Debt Securities, the Subordinated Debt Securities and
the Indentures do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all the provisions of the
Indentures applicable to a particular series of Debt Securities, including the
definitions therein of certain terms. Wherever particular Sections, Articles or
defined terms of the Indentures are referred to, it is intended that such
Sections, Articles or defined terms shall be incorporated herein by reference.
Article and Section references used herein are references to the applicable
Indenture. Capitalized terms not otherwise defined herein shall have the meaning
given in the Indentures.
GENERAL
The Indentures do not limit the aggregate principal amount of Debt
Securities which may be issued thereunder and each Indenture provides that Debt
Securities may be issued thereunder from time to time in one or more series and
may be denominated and payable in foreign currencies or units based on or
relating to foreign currencies. Unless otherwise specified in the Prospectus
Supplement, the Senior Debt Securities when issued will be unsecured and
unsubordinated obligations of the Corporation and will rank equally and ratably
with all other unsecured and unsubordinated indebtedness of the Corporation. The
Subordinated Debt Securities when issued will be subordinated in right of
payment to the prior payment in full of all Senior Debt (as defined below) of
the Corporation, as described under "Subordination of Subordinated Debt
Securities" and in the Prospectus Supplement applicable to an offering of
Subordinated Debt Securities.
Reference is made to the Prospectus Supplement relating to the particular
Debt Securities offered thereby (the "Offered Debt Securities") which shall set
forth whether the Offered Debt Securities shall be Senior Debt Securities or
Subordinated Debt Securities, and shall further set forth the following terms of
the Offered Debt Securities: (i) the title of the Offered Debt Securities; (ii)
any limit on the aggregate principal amount of the Offered Debt Securities;
(iii) the Person to whom any interest on the Offered Debt Securities will be
payable, if other than the Person in whose name such Offered Debt Securities are
registered on any Regular Record Date; (iv) the date or dates on which the
principal of the Offered Debt Securities will be payable; (v) the rate or rates
per annum (which may be fixed, floating or adjustable) at which the Offered Debt
Securities will bear interest, if any, or the formula pursuant to which such
rate or rates shall be determined, the date or dates from which such interest
will accrue and the dates on which such interest, if any, will be payable and
the Regular Record Dates for such interest payment dates; (vi) whether the
Offered Debt Securities will be secured; (vii) the place or places where
principal of (and premium, if any) and interest, if any, on Offered Debt
Securities will be payable; (viii) if applicable, the price at which, the
periods within which and the terms and conditions upon which the Offered Debt
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Securities may he redeemed at the option of the Corporation pursuant to a
sinking fund or otherwise; (ix) if applicable, any obligation of the Corporation
to redeem or purchase Offered Debt Securities pursuant to any sinking fund or
analogous provisions or at the option of a Holder thereof, and the period or
periods within which, the price or prices at which and the terms and conditions
upon which the Offered Debt Securities will be redeemed or purchased, in whole
or in part; (x) if applicable, the terms of any right to convert or exchange the
Offered Debt Securities into other securities or property of the Corporation;
(xi) if other than denominations of $1,000 and any integral multiple thereof,
the denominations in which the Offered Debt Securities will be issuable; (xii)
the currency or currencies, including composite currencies or currency units, in
which payment of the principal of (or premium, if any) or interest, if any, on
any of the Offered Debt Securities will be payable if other than the currency of
the United States of America; (xiii) if the amount of payments of principal of
(or premium, if any) or interest, if any, on the Offered Debt Securities may be
determined with reference to one or more indices, the manner in which such
amounts will be determined; (xiv) if the principal of (or premium, if any) or
interest, if any, on any of the Offered Debt Securities of the series is to be
payable, at the election of the Corporation or a Holder thereof, in one or more
currencies, including composite currencies, or currency units other than that or
those in which the Securities are stated to be payable, the currency,
currencies, including composite currencies, or currency units in which payment
of the principal of (or premium, if any) or interest, if any, on Securities of
such series as to which such election is made will be payable, and the periods
within which and the terms and conditions upon which such election is to be
made; (xv) the portion of the principal amount of the Offered Debt Securities,
if other than the principal amount thereof, payable upon acceleration of
maturity thereof; (xvi) whether all or any part of the Offered Debt Securities
will be issued in the form of a Global Security or Securities and, if so, the
depositary for, and other terms relating to, such Global Security or Securities;
(xvii) any event or events of default applicable with respect to the Offered
Debt Securities in addition to those provided in the Indentures; (xviii) any
other covenant or warranty included for the benefit of the Offered Debt
Securities in addition to (and not inconsistent with) those included in the
Indentures for the benefit of Debt Securities of all series, or any other
covenant or warranty included for the benefit of the Offered Debt Securities in
lieu of any covenant or warranty included in the Indentures for the benefit of
Debt Securities of all series, or any provision that any covenant or warranty
included in the Indentures for the benefit of Debt Securities of all series
shall not be for the benefit of the Offered Debt Securities, or any combination
of such covenants, warranties or provisions; (xix) any restriction or condition
on the transferability of the Offered Debt Securities; (xx) any authenticating
or paying agents, registrars, conversion agents or any other agents with respect
to the Offered Debt Securities; and (xxi) any other terms of the Offered Debt
Securities. (Indentures, Section 301) Debt Securities may also be issued under
the Indentures upon the exercise of Warrants. See "Description of Warrants."
Unless otherwise indicated in the Prospectus Supplement relating thereto,
the Offered Debt Securities are to be issued as registered securities without
coupons in denominations of $1,000 or any integral multiple of $1,000.
(Indentures, Section 302) No service charge will be made for any transfer or
exchange of such Offered Debt Securities, but the Corporation or the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith. (Indentures, Section 305)
Debt Securities may be issued under the Indentures as Original Issue
Discount Securities to be sold at a substantial discount below their stated
principal amount. Federal income tax consequences and other considerations
applicable thereto will be described in the Prospectus Supplement relating
hereto.
Since the Corporation is a holding company, the rights of the Corporation,
and hence the right of creditors of the Corporation (including the Holders of
Debt Securities), to participate in any distribution of the assets of any
subsidiary upon its liquidation or reorganization or otherwise is
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necessarily subject to the prior claims of creditors of the subsidiary, except
to the extent that claims of the Corporation itself as a creditor of the
subsidiary may be recognized.
The Indentures do not contain any provisions that limit the ability of the
Corporation or any Subsidiary to incur indebtedness or that afford Holders of
the Debt Securities protection in the event of a highly leveraged or similar
transaction involving the Corporation or any Subsidiary.
EVENTS OF DEFAULT AND NOTICE THEREOF
Unless otherwise specified in the Prospectus Supplement, the following
events are defined in the Indentures as "Events of Default" with respect to Debt
Securities of any series: (i) failure to pay principal (including any sinking
fund payment) of, or premium (if any) on, any Debt Security of that series when
due (in the case of the Subordinated Indenture, whether or not payment is
prohibited by the subordination provisions); (ii) failure to pay interest, if
any, on any Debt Security of that series when due and such failure continues for
a period of 30 days; (iii) failure by the Corporation to perform in any material
respect any other covenant in the Indentures (other than a covenant included in
the Indentures solely for the benefit of a series of Debt Securities other than
that series) which continues for a period of 90 days after written notice to the
Corporation; (iv) due acceleration (which acceleration shall not have been
rescinded within 30 days after written notice to the Corporation) of any
indebtedness for borrowed money in a principal amount in excess of $50,000,000
for which the Corporation or any Principal Insurance Subsidiary is liable,
including Debt Securities of another series, or a default by the Corporation or
any Principal Insurance Subsidiary in the payment at final maturity of
outstanding indebtedness for borrowed money in a principal amount in excess of
$50,000,000 unless such acceleration or default at maturity shall be remedied or
cured by the Corporation or any Principal Insurance Subsidiary or rescinded,
annulled or waived by the holders of such indebtedness, in which case such
acceleration or default at maturity shall not constitute an Event of Default
under this provision and any acceleration relating thereto shall be rescinded;
and (v) certain events of insolvency, reorganization, receivership or
liquidation of the Corporation or any Principal Insurance Subsidiary.
(Indentures, Section 501)
No Event of Default with respect to Debt Securities of a particular series
shall necessarily constitute an Event of Default with respect to Debt Securities
of any other series. If an Event of Default with respect to Debt Securities of
any series at the time Outstanding shall occur and be continuing, either the
Trustee or the Holders of at least 25% in principal amount of the Outstanding
Debt Securities of that series may declare the principal amount (or, if the Debt
Securities of that series are Original Issue Discount Securities, such portion
of the principal amount as may be specified in the terms of that series) of all
Debt Securities of that series to be due and payable immediately; provided,
however, that under certain circumstances the Holders of a majority in aggregate
principal amount of Outstanding Debt Securities of that series may rescind or
annul such declaration and its consequences. (Indentures, Section 502)
Reference is made to the Prospectus Supplement relating to any series of
Offered Debt Securities which are Original Issue Discount Securities for the
particular provisions relating to the principal amount of such Original Issue
Discount Securities due on acceleration upon the occurrence of an Event of
Default and the continuation thereof.
The Indentures provide that the applicable Trustee may withhold notice to
the Holders of the Debt Securities of any default (except in payment of
principal (or premium, if any) or interest, if any) if it considers it in the
interest of the Holders of the Debt Securities to do so. (Indentures, Section
502)
The Corporation will be required to furnish to the Trustees annually a
statement by certain officers of the Corporation as to the compliance with all
conditions and covenants of the Indentures. (Indentures, Section 1004)
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The Holders of a majority in principal amount of the Outstanding Debt
Securities of any series affected will have the right, subject to certain
limitations, to direct the time, method and place of conducting any proceeding
for any remedy available to the applicable Trustee or exercising any trust or
power conferred on such applicable Trustee with respect to the Debt Securities
of such series, and to waive certain defaults. (Indentures, Sections 512 and
513)
The Indentures provide that, in case an Event of Default shall occur and be
continuing, the applicable Trustee shall exercise such of its rights and powers
under the Indentures, and use the same degree of care and skill in its exercise,
as a prudent man would exercise or use under the circumstances in the conduct of
his own affairs. (Indentures, Section 601) Subject to such provisions, the
applicable Trustee will be under no obligation to exercise any of its rights or
powers under the Indentures at the request of any of the Holders of Debt
Securities unless they shall have offered to such Trustee security or indemnity
in form and substance reasonably satisfactory to such Trustee against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request. (Indentures, Section 603)
No Holder of a Debt Security of any series will have any right to institute
any proceeding with respect to the Indentures or for any remedy thereunder,
unless such Holder shall have previously given to the applicable Trustee written
notice of a continuing Event of Default and unless also the Holders of at least
25% in aggregate principal amount of the Outstanding Debt Securities of the same
series shall have made written request, and offered security or indemnity to
such Trustee in form and substance reasonably satisfactory to such Trustee, to
institute such proceeding as trustee, and such Trustee shall not have received
from the Holders of a majority in aggregate principal amount of the Outstanding
Debt Securities of the same series a direction inconsistent with such request
and shall have failed to institute such proceeding within 60 days. (Indentures,
Section 507) However, such limitations do not apply to a suit instituted by a
Holder of a Debt Security for enforcement of payment of the principal of (or
premium, if any) or interest, if any, on such Debt Security on or after the
respective due dates expressed in such Debt Security, or of the right to convert
such Debt Security in accordance with the Indentures (if applicable).
(Indentures, Section 508)
MODIFICATION AND WAIVER
Modifications and amendments of the Indentures may be made by the
Corporation and the applicable Trustee, with the consent of the Holders of not
less than a majority of aggregate principal amount of each series of the
Outstanding Debt Securities issued under the Indentures which is affected by the
modification or amendment; provided, however, that no such modification or
amendment may, without the consent of each Holder of such Debt Security affected
thereby: (i) change the Stated Maturity of the principal of (or premium, if any)
or any installment of principal or interest, if any, on any such Debt Security;
(ii) reduce the principal amount of (or premium, if any) or the interest rate,
if any, on any such Debt Security or the principal amount due upon acceleration
of an Original Issue Discount Security; (iii) change the place or currency of
payment of principal of (or premium, if any) or the interest, if any, on any
such Debt Security; (iv) impair the right to institute suit for the enforcement
of any such payment on or with respect to any such Debt Security; (v) adversely
change the right to convert or exchange, including decreasing the conversion
rate or increasing the conversion price of, such Debt Security (if applicable);
(vi) reduce the percentage of Holders of Debt Securities necessary to modify or
amend the Indentures; (vii) in the case of the Subordinated Indenture, modify
the subordination provisions in a manner adverse to the holders of the
Subordinated Debt Securities; or (viii) modify the foregoing requirements or
reduce the percentage of Outstanding Debt Securities necessary to waive
compliance with certain provisions of the Indentures or for waiver of certain
defaults. (Indentures, Section 902)
The holders of at least a majority of the aggregate principal amount of the
Outstanding Debt Securities of any series may, on behalf of all Holders of that
series, waive compliance by the Corporation with certain restrictive provisions
of the Indentures and waive any past default under the Indentures, except a
default in the payment of principal, premium or interest or in the performance
of certain covenants. (Indentures, Sections 907 and 513)
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DEFEASANCE AND COVENANT DEFEASANCE
The Indentures provide that the Corporation may elect either (A) to defease
and be discharged from any and all obligations with respect to such Debt
Securities (including, in the case of Subordinated Debt Securities, the
provisions described under "Subordination of Subordinated Debt Securities"
herein and except for the obligations to exchange or register the transfer of
such Debt Securities, to replace temporary or mutilated, destroyed, lost or
stolen Debt Securities, to maintain an office or agency in respect of the Debt
Securities, and to hold monies for payments in trust) ("defeasance"), or (B) to
be released from its obligations with respect to such Debt Securities concerning
the restrictions described under "Consolidation, Merger and Sale of Assets" and
any other covenants applicable to such Debt Securities (including, in the case
of Subordinated Debt Securities, the provisions described under "Subordination
of Subordinated Debt Securities" herein), which are subject to covenant
defeasance ("covenant defeasance"), and the occurrence of an event described and
notice thereof in clauses (iii) and (iv) under "Events of Default and Notice
Thereof" (with respect to covenants subject to covenant defeasance) shall no
longer be an Event of Default, in each case, upon the irrevocable deposit with
the applicable Trustee (or other qualifying trustee), in trust for such purpose,
of money, and/or U.S. Government Obligations (or Foreign Government Obligations
in the case of Debt Securities denominated in foreign currencies) which through
the payment of principal and interest in accordance with their terms will
provide money in an amount sufficient to pay the principal of (and premium, if
any) and interest, if any, on such Debt Securities, and any mandatory sinking
fund or analogous payments thereon, on the scheduled due dates therefor. Such a
trust may only be established if, among other things, (i) the Corporation has
delivered to the applicable Trustee an opinion of counsel (as specified in the
Indentures) to the effect that the Holders of such Debt Securities will not
recognize income, gain or loss for federal income tax purposes as a result of
such defeasance or covenant defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such defeasance or covenant defeasance had not occurred, (ii) no
Event of Default or event which with the giving of notice or lapse of time, or
both, would become an Event of Default under the Indenture shall have occurred
and be continuing on the date of such deposit, and (iii) in the case of
Subordinated Debt Securities, (x) no default in the payment of principal of (or
premium, if any) or interest, if any, on any Senior Debt beyond any applicable
grace period shall have occurred and be continuing, and (y) no other default
with respect to any Senior Debt shall have occurred and be continuing and shall
have resulted in the acceleration of such Senior Debt. (Indentures, Article
Thirteen)
The Corporation may exercise its defeasance option with respect to such
Debt Securities notwithstanding its prior exercise of its covenant defeasance
option. If the Corporation exercises its defeasance option, payment of such Debt
Securities may not be accelerated because of an Event of Default. If the
Corporation exercises its covenant defeasance option, payment of such Debt
Securities may not be accelerated by reference to the covenants noted under
clause (B) above. In the event the Corporation omits to comply with its
remaining obligations with respect to such Debt Securities under the Indentures
after exercising its covenant defeasance option and such Debt Securities are
declared due and payable because of the occurrence of any Event of Default, the
amount of money and U.S. Government Obligations (or Foreign Government
Obligations in the case of Debt Securities denominated in foreign currencies) on
deposit with the applicable Trustee may be insufficient to pay amounts due on
the Debt Securities of such series at the time of the acceleration resulting
from such Event of Default. However, the Corporation will remain liable in
respect of such payments. (Indentures, Article Thirteen)
LIMITATION ON LIENS
As long as any of the Debt Securities remains outstanding, the Corporation
will not, and will not permit any Principal Insurance Subsidiary to, issue,
assume, incur or guarantee any indebtedness
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for borrowed money secured by a mortgage, pledge, lien or other encumbrance,
directly or indirectly, on any of the Common Stock of a Principal Insurance
Subsidiary, which Common Stock is owned by the Corporation or by any Principal
Insurance Subsidiary, unless the Debt Securities and, if the Corporation so
elects, any other indebtedness of the Corporation ranking on a parity with the
Debt Securities, shall be secured equally and ratably with, or prior to, such
secured indebtedness for borrowed money so long as it is outstanding.
(Indentures, Section 1005)
"Principal Insurance Subsidiary" means each of United States Fidelity and
Guaranty Company and Fidelity and Guaranty Life Insurance Company, so long as it
remains a Subsidiary, or any other Subsidiary of the Corporation which shall
hereafter succeed by merger or otherwise to a major part of the business of one
or more of the Principal Insurance Subsidiaries. The decision as to whether a
Subsidiary shall have succeeded to a major part of the business of one or more
of the Principal Insurance Subsidiaries shall be made in good faith by the Board
of Directors of the Corporation or a committee thereof by the adoption of a
resolution so stating, and the Corporation shall within 30 days of the date of
the adoption of such resolution deliver to the applicable Trustee a copy
thereof, certified by the Corporate Secretary or an Assistant Corporate
Secretary of the Corporation. (Indentures, Section 101)
"Common Stock" means, with respect to any Principal Insurance Subsidiary,
stock of any class, however designated, except stock which is non-participating
beyond fixed dividend and liquidation preferences and the holders of which have
either no voting rights or limited voting rights entitling them, only in the
case of certain contingencies, to elect less than a majority of the directors
(or persons performing similar functions) of such Principal Insurance
Subsidiary, and shall include securities of any class, however designated, which
are convertible into such Common Stock. (Indentures, Section 101)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Corporation may not consolidate with or merge into any other Person or
sell its property and assets as, or substantially as, an entirety to any Person
and may not permit any Person to merge into or consolidate with the Corporation
unless (i) either the Corporation will be the resulting or surviving entity or
any successor or purchaser is a corporation, partnership or trust organized
under the laws of the United States of America, any State or the District of
Columbia, and any such successor or purchaser expressly assumes the
Corporation's obligations on the Debt Securities under a supplemental Indenture,
(ii) immediately after giving effect to the transaction no Event of Default
shall have occurred and be continuing, and (iii) certain other conditions are
met. (Indentures, Section 801)
CONVERSION RIGHTS
The terms on which Debt Securities of any series may be convertible or
exchangeable into Common Stock or other securities of the Corporation or
exchangeable into securities of another corporation will be set forth in the
Prospectus Supplement relating thereto. Such terms shall include provisions as
to whether conversion or exchange is mandatory, at the option of the holder or
at the option of the Corporation, and may include provisions pursuant to which
the number of shares of Common Stock or other securities of the Corporation or
the securities of another corporation, as the case may be, to be received by the
holders of Debt Securities would be calculated according to the market price of
Common Stock or other securities of the Corporation as of a time stated in the
Prospectus Supplement. (Indentures, Article Twelve)
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
Unless otherwise indicated in the Prospectus Supplement, the following
provisions will apply to the Subordinated Debt Securities.
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The Subordinated Debt Securities will, to the extent set forth in the
Subordinated Indenture, be subordinate in right of payment to the prior payment
in full of all Senior Debt, including the Senior Debt Securities. Upon any
payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshalling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Corporation, the holders of Senior Debt will first
be entitled to receive payment in full of principal of (and premium, if any) and
interest, if any, on such Senior Debt before the holders of the Subordinated
Debt Securities will be entitled to receive or retain any payment in respect of
the principal of (and premium, if any) or interest, if any, on the Subordinated
Debt Securities. (Subordinated Indenture, Section 1502)
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Corporation who are not holders of Senior Debt or Subordinated
Debt Securities may recover less, ratably, than holders of Senior Debt and may
recover more, ratably, than the holders of the Subordinated Debt Securities.
In the event of the acceleration of the maturity of any Subordinated Debt
Securities, the holders of all Senior Debt outstanding at the time of such
acceleration will first be entitled to receive payment in full of all amounts
due thereon (including any amounts due upon acceleration) before the Holders of
the Subordinated Debt Securities will be entitled to receive any payment upon
the principal of (or premium, if any) or interest, if any, on the Subordinated
Debt Securities. (Subordinated Indenture, Section 1503)
No payments on account of principal (or premium, if any) or interest, if
any, in respect of the Subordinated Debt Securities may be made if there shall
have occurred and be continuing a default in any payment with respect to Senior
Debt, or an event of default with respect to any Senior Debt resulting in the
acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default. (Subordinated Indenture, Section 1504)
For purposes of the subordination provisions, the payment, issuance and delivery
of cash, property or securities (other than stock and certain subordinated
securities of the Corporation) upon conversion of a Subordinated Debt Security
will be deemed to constitute payment on account of the principal of such
Subordinated Debt Security. (Subordinated Indenture, Section 1516)
"Debt" means (without duplication and without regard to any portion of
principal amount that has not accrued and to any interest component thereof
(whether accrued or imputed) that is not due and payable) with respect to any
Person, whether recourse is to all or a portion of the assets of such Person and
whether or not contingent, (i) every obligation of such Person for money
borrowed, (ii) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses, (iii) every
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (iv) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business), (v) every
capital lease obligation of such Person, (vi) every Hedging Obligation, (vii)
every obligation of others secured by a lien on any asset of such Person,
whether or not such obligation is assumed by such Person, (viii) every
obligation of the type referred to in clauses (i) through (vii) of another
Person and all dividends of another Person the payment of which, in either case,
such Person has guaranteed or is responsible or liable, directly or indirectly,
as obligor or otherwise, and (ix) any and all deferrals, renewals, extensions
and refundings of, or amendments, modifications or supplements to any liability
of the kind described in any of the preceding clauses (i) through (viii).
"Senior Debt" means the principal of (and premium, if any) and interest, if
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to
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the Corporation to the extent that such claim for post-petition interest is
allowed in such proceeding) payable on, and fees, expenses, reimbursement
obligations, indemnity obligations and other amounts due on or in connection
with, any Debt incurred, assumed or guaranteed by the Corporation, whether on or
prior to the date of the Subordinated Indenture or thereafter incurred, assumed
or guaranteed, unless, in the instrument creating or evidencing the same or
pursuant to which the same is outstanding, it is provided that such obligations
are not superior in right of payment to the Subordinated Debt Securities or to
other Debt which is pari passu with, or subordinated to the Subordinated Debt
Securities; provided, however, that Senior Debt shall not be deemed to include
(i) the Subordinated Debt Securities; or (ii) Intercompany Debt in excess of
$250,000,000.
"Intercompany Debt" means Debt of the Corporation to United States Fidelity
and Guaranty Company and its subsidiaries.
The Subordinated Indenture does not limit or prohibit the incurrence of
additional Senior Debt, which may include indebtedness that is senior to the
Subordinated Debt Securities, but subordinate to other obligations of the
Corporation. The Senior Debt Securities, when issued, will constitute Senior
Debt.
The Prospectus Supplement may further describe the provisions, if any,
applicable to the subordination of the Subordinated Debt Securities of a
particular series.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in the form of one or more
Global Securities that will be deposited with a Depositary or its nominee. In
such a case, one or more Global Securities will be issued in a denomination or
aggregate denominations equal to the portion of the aggregate principal amount
of Outstanding Debt Securities of the series to be represented by such Global
Security or Securities. Unless and until it is exchanged in whole or in part for
Debt Securities in definitive registered form, a Global Security may not be
registered for transfer or exchange except as a whole by the Depositary for such
Global Security to a nominee for such Depositary and except in the circumstances
described in the applicable Prospectus Supplement. (Indentures, Sections 204 and
305)
The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
and a description of the Depositary will be contained in the applicable
Prospectus Supplement.
THE TRUSTEE
The Indentures contain limitations on the right of the applicable Trustee,
as a creditor of the Corporation, to obtain payment of claims in certain cases,
or to realize on certain property received in respect of any such claim as
security or otherwise. In addition, the applicable Trustee may be deemed to have
a conflicting interest and may be required to resign as Trustee if at the time
of a default under the Indenture it is a creditor of the Corporation.
The applicable Trustee or its affiliates may act as depositary for funds
of, make loans to and perform other services for, or may be a customer of, the
Corporation in the ordinary course of business.
GOVERNING LAW
The Indentures are governed by and shall be construed in accordance with
the laws of the State of New York, but without regard to principles of conflicts
of laws.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Corporation consists of 240,000,000
shares of common stock, $2.50 par value per share (the "Common Stock") and
12,000,000 shares of preferred stock, $50.00 par value per share, of which
4,000,000 shares are classified as $4.10 Series A Convertible Exchangeable
Preferred Stock (the "Series A Preferred Stock"), 1,300,000 shares are
classified as Series B Cumulative Convertible Preferred Stock (the "Series B
Preferred Stock"), 3,800,000 shares are classified as $5.00 Series C Cumulative
Convertible Preferred Stock (the "Series C Preferred Stock") and 1,200,000 are
classified as Junior Participating Preferred Stock (the "Junior Preferred
Stock"). As of December 31, 1993, there were issued and outstanding 85,009,482
shares of Common Stock, 4,000,000 shares of Series A Preferred Stock, 1,300,000
shares of Series B Preferred Stock and 3,800,000 shares of Series C Preferred
Stock. The shares of Junior Preferred Stock have been reserved for issuance in
connection with the Corporation's shareholder rights plan and no shares of the
Junior Preferred Stock currently are outstanding.
The following summary of the terms of the Corporation's capital stock does
not purport to be complete and is qualified in its entirety by reference to the
applicable provisions of Maryland law and the Corporation's Articles of
Incorporation, as amended (the "Charter").
The Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock rank on a parity with each other and rank senior to the Junior
Preferred Stock and the Common Stock as to dividends and upon liquidation.
The Transfer Agent and Registrar for the Corporation's Common Stock, Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Junior
Preferred Stock is First Chicago Trust Company, New York, New York ("First
Chicago Trust").
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share of
Common Stock held. Cumulative voting for the election of directors is not
provided for in the Charter or the by-laws. Subject to the prior rights of the
Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred
Stock and the Junior Preferred Stock and any other preferred stock which may be
classified and issued, the holders of the Common Stock of the Corporation are
entitled to receive, pro-rata, such dividends as may be declared by the Board of
Directors out of funds legally available therefor, and are also entitled to
share, pro-rata, in any other distribution to shareholders. There are no
redemption or sinking fund provisions and no direct limitations in any indenture
or agreement on the payment of dividends. Payment of dividends by the
Corporation is not subject to restrictions under the Maryland Insurance Code.
However, payment of dividends to the Corporation by its insurance subsidiaries
is subject to certain restrictions under Maryland and other state insurance
laws. Such restrictions as well as other contractual restrictions may limit the
amount of dividends that may be paid by the Corporation. All shares of Common
Stock sold hereunder will be fully paid and non-assessable.
PREFERRED STOCK
The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock (the "Preferred
Stock") to which any Prospectus Supplement may relate. Certain terms of any
series of the Preferred Stock offered by any Prospectus Supplement will be
described in the Prospectus Supplement relating to such series of the Preferred
Stock. If so indicated in the Prospectus Supplement, the terms of any such
series, including any Depositary Shares (as defined below) issued in respect
thereof, may differ from the terms set forth below. The description of certain
provisions of the Preferred Stock set forth below and in any
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Prospectus Supplement does not purport to be complete and is subject to, and
qualified in its entirety by reference to, the Corporation's Charter which is an
exhibit to this Registration Statement and the articles supplementary to the
Corporation's Charter which has been or will be filed with the Commission in
connection with the offering of such series of Preferred Stock.
General. Under the Corporation's Charter, the Corporation is authorized to
issue 12,000,000 shares of Preferred Stock, in one or more series. The Board of
Directors is authorized to fix and determine the terms, limitations and relative
rights and preferences of any of the series of the Preferred Stock including,
without limitation, any voting rights thereof, to divide and issue any Preferred
Stock in series, and to fix and determine the variations among series to the
extent permitted by law. The Corporation may amend from time to time its Charter
to increase the number of authorized shares of Preferred Stock. Any such
amendment would require the approval of the holders of a majority of the
outstanding shares of Common Stock, and the approval of the holders of a
majority of the outstanding shares of the Series A Preferred Stock, Series B
Preferred Stock and Series C Preferred Stock (together with any other shares of
Preferred Stock which may be then outstanding and have similar rights) voting
together as a single class and the holders of two-thirds of the outstanding
shares of the Series B Preferred Stock voting separately as a class.
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below, unless otherwise provided in the Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the title of
such Preferred Stock and the number of shares offered; (ii) the amount of
liquidation preference per share; (iii) the price at which such Preferred Stock
will be issued; (iv) the dividend rate (or method of calculation), the dates on
which dividends shall be payable, whether such dividends shall be cumulative or
noncumulative and, if cumulative, the dates from which dividends shall commence
to cumulate; (v) any redemption or sinking fund provisions of such Preferred
Stock; (vi) the terms of any right to convert or exchange the Preferred Stock
into other securities or property of the Corporation; (vii) whether the
Corporation has elected to offer Depositary Shares (as defined below); and
(viii) any additional voting, dividend, liquidation, redemption, sinking fund
and other rights, preferences, privileges, limitations and restrictions of such
Preferred Stock.
The Preferred Stock will, when issued, be fully paid and non-assessable and
have no preemptive rights. Unless otherwise specified in the Prospectus
Supplement relating to a particular series of the Preferred Stock, each series
of the Preferred Stock will rank on a parity as to dividends and liquidation
rights in all respects with each other series of the Preferred Stock.
Dividend Rights. Holders of the Preferred Stock of each series will be
entitled to receive, when, as and if declared by the Board of Directors of the
Corporation, out of assets of the Corporation legally available therefor, cash
dividends at such rates and on such dates as are set forth in the Prospectus
Supplement relating to such series of the Preferred Stock. Such rate may be
fixed or variable or both. Each such dividend will be payable to the holders of
record as they appear on the stock record books of the Corporation (or, if
applicable, the records of the Depositary referred to below under "Depositary
Shares") on such record dates as will be fixed by the Board of Directors of the
Corporation or a duly authorized committee thereof. Dividends on any series of
the Preferred Stock may be cumulative or noncumulative, as provided in the
Prospectus Supplement relating thereto.
Each series of Preferred Stock will be entitled to dividends as described
in the Prospectus Supplement relating to such series, which may be based upon
one or more methods of determination. Different series of the Preferred Stock
may be entitled to dividends at different rates or based upon different methods
of determination.
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Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the holders of each
series of Preferred Stock will be entitled to receive out of assets of the
Corporation available for distribution to shareholders, before any distribution
of assets is made to holders of Common Stock or any other class of stock ranking
junior to such series of the Preferred Stock upon liquidation, liquidating
distributions in the amount set forth in the Prospectus Supplement relating to
such series of the Preferred Stock plus an amount equal to accrued and unpaid
dividends for the then-current dividend period and, if such series of the
Preferred Stock is cumulative, for all dividend periods prior thereto, all as
set forth in the Prospectus Supplement with respect to such shares.
Redemption. A series of the Preferred Stock may be redeemable, in whole or
in part, at the option of the Corporation, and may be subject to mandatory
redemption pursuant to a sinking fund, in each case upon terms, at the times and
at the redemption prices set forth in the Prospectus Supplement relating to such
series. After the date fixed for redemption, the shares of Preferred Stock so
called for redemption will no longer be deemed to be outstanding and rights of
the holders of such shares will cease, except the right to receive the moneys
payable upon such redemption and any money or other property to which the
holders of such shares were entitled upon such redemption, upon surrender to the
Corporation of the certificates evidencing such shares.
Conversion and Exchange. The terms, if any, on which shares of any series
of Preferred Stock are convertible into Common Stock or exchangeable for Debt
Securities will be set forth in the Prospectus Supplement relating thereto. Such
terms may include provisions for conversion, either mandatory, at the option of
the holder, or at the option of the Corporation, in which case the number of
shares of Common Stock or the amount of Debt Securities to be received by the
holders of Preferred Stock would be calculated as of a time and in the manner
stated in the Prospectus Supplement.
Transfer Agent and Registrar. The transfer agent, registrar and dividend
disbursement agent for a particular series of Preferred Stock will be named in
the Prospectus Supplement relating to such series of Preferred Stock. The
registrar for shares of such series of Preferred Stock will send notices to
shareholders of any meetings at which holders of such series of the Preferred
Stock have the right to elect directors of the Corporation or to vote on any
other matter.
Voting Rights. Except as indicated in the Prospectus Supplement relating to
a particular series of Preferred Stock, or except as expressly required by
applicable law, the holders of the Preferred Stock will not be entitled to any
voting rights.
Depositary Shares. The Corporation may, at its option, elect to offer
receipts for fractional interests ("Depositary Shares") in Preferred Stock. In
such event, receipts ("Depositary Receipts") for Depositary Shares, each of
which will represent a fraction (to be set forth in the Prospectus Supplement
relating to a particular series of Preferred Stock) of a share of a particular
series of Preferred Stock, will be issued as described below.
The shares of any series of Preferred Stock represented by Depositary
Shares will be deposited under a Deposit Agreement (the "Deposit Agreement")
between the Corporation and the depositary named in the Prospectus Supplement
relating to such shares (the "Preferred Stock Depositary"). Subject to the terms
of the Deposit Agreement, each owner of a Depositary Share will be entitled, in
proportion to the applicable fraction of a share of Preferred Stock represented
by such Depositary Share, to all the rights and preferences of the Preferred
Stock represented thereby (including dividend, voting, redemption, subscription
and liquidation rights). The following summary of certain provisions of the
Deposit Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Deposit
Agreement, including the definitions therein of certain terms. Whenever
particular sections of the Deposit Agreement are referred to, it is intended
that such sections shall be incorporated herein by
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reference. Copies of the forms of Deposit Agreement and Depositary Receipt are
filed as exhibits to the Registration Statement of which this Prospectus is a
part, and the following summary is qualified in its entirety by reference to
such exhibits.
The Preferred Stock Depositary will distribute all cash dividends or other
cash distributions received in respect of the Preferred Stock to the record
holders of Depositary Shares relating to such Preferred Stock in proportion to
the numbers of such Depositary Shares owned by such holders. (Deposit Agreement,
Section 4.01)
In the event of a distribution other than in cash, the Preferred Stock
Depositary will distribute property received by it to the record holders of
Depositary Shares in an equitable manner, unless the Preferred Stock Depositary
determines that it is not feasible to make such distribution, in which case the
Preferred Stock Depositary may sell such property and distribute the net
proceeds from such sale to such holders. (Deposit Agreement, Section 4.02)
Upon surrender of the Depositary Receipts at the corporate trust office of
the Preferred Stock Depositary and upon payment of the taxes, charges and fees
provided for in the Deposit Agreement and subject to the terms thereof, the
holder of the Depositary Shares evidenced thereby is entitled to delivery at
such office, to or upon his or her order, of the number of whole shares of the
related series of Preferred Stock and any money or other property, if any,
represented by such Depositary Shares.
If a series of Preferred Stock represented by Depositary Shares is subject
to redemption, the Depositary Shares will be redeemed from the proceeds received
by the Preferred Stock Depositary resulting from the redemption, in whole or in
part, of such series of Preferred Stock held by the Preferred Stock Depositary.
The redemption price per Depositary Share will be equal to the applicable
fraction of the redemption price per share payable with respect to such series
of the Preferred Stock. Whenever the Corporation redeems shares of Preferred
Stock held by the Preferred Stock Depositary, the Preferred Stock Depositary
will redeem as of the same redemption date the number of Depositary Shares
representing shares of Preferred Stock so redeemed. If fewer than all the
Depositary Shares are to be redeemed, the Depositary Shares to be redeemed will
be selected by lot, pro rata or by any other equitable method as may be
determined by the Preferred Stock Depositary. (Deposit Agreement, Section 2.08)
Upon receipt of notice of any meeting at which the holders of the Preferred
Stock are entitled to vote, the Preferred Stock Depositary will mail the
information contained in such notice of meeting to the record holders of the
Depositary Shares relating to such Preferred Stock. Each record holder of such
Depositary Shares on the record date (which will be the same date as the record
date for the Preferred Stock) will be entitled to instruct the Preferred Stock
Depositary as to the exercise of the voting rights pertaining to the amount of
the Preferred Stock represented by such holder's Depositary Shares. The
Preferred Stock Depositary will endeavor, insofar as practicable, to vote the
amount of the Preferred Stock represented by such Depositary Shares in
accordance with such instructions, and the Corporation will agree to take all
reasonable action which may be deemed necessary by the Preferred Stock
Depositary in order to enable the Preferred Stock Depositary to do so. The
Preferred Stock Depositary will abstain from voting shares of the Preferred
Stock to the extent it does not receive specific instructions from the holder of
Depositary Shares representing such Preferred Stock. (Deposit Agreement, Section
4.05)
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Corporation and the Preferred Stock Depositary. However, any
amendment which materially and adversely alters the rights of the holders of
Depositary Shares will not be effective unless such amendment has been approved
by the holders of at least a majority of the Depositary Shares then outstanding.
(Deposit
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Agreement, Section 6.01) The Deposit Agreement will only terminate if (i) all
outstanding Depositary Shares have been redeemed or (ii) there has been a final
distribution in respect of the Preferred Stock in connection with any
liquidation, dissolution or winding-up of the Corporation and such distribution
has been distributed to the holders of Depositary Receipts. (Deposit Agreement,
Section 6.02)
The Corporation will pay all transfer and other taxes and governmental
charges arising solely from the existence of the depositary arrangements. The
Corporation will pay charges of the Preferred Stock Depositary in connection
with the initial deposit of the Preferred Stock and issuance of Depositary
Receipts, all withdrawals of shares of Preferred Stock by owners of Depositary
Shares and any redemption of the Preferred Stock. Holders of Depositary Receipts
will pay other transfer and other taxes and governmental charges and such other
charges as are expressly provided in the Deposit Agreement to be for their
accounts. (Deposit Agreement, Section 5.07)
The Preferred Stock Depositary may resign at any time by delivering to the
Corporation notice of its election to do so, and the Corporation may at any time
remove the Preferred Stock Depositary, any such resignation or removal to take
effect upon the appointment of a successor Preferred Stock Depositary and its
acceptance of such appointment. Such successor Preferred Stock Depositary must
be appointed within 60 days after delivery of the notice of resignation or
removal and must be a bank or trust company having its principal office in the
United States and having a combined capital and surplus of at least $50,000,000.
(Deposit Agreement, Section 5.04)
The Preferred Stock Depositary will forward all reports and communications
from the Corporation which are delivered to the Preferred Stock Depositary and
which the Corporation is required or otherwise determines to furnish to the
holders of the Preferred Stock. (Deposit Agreement, Section 4.07)
Neither the Preferred Stock Depositary nor the Corporation will be liable
under the Deposit Agreement to holders of Depositary Receipts other than for its
negligence, willful misconduct or bad faith. Neither the Corporation nor the
Preferred Stock Depositary will be obligated to prosecute or defend any legal
proceeding in respect of any Depositary Shares or Preferred Stock unless
satisfactory indemnity is furnished. The Corporation and the Preferred Stock
Depositary may rely upon written advice of counsel or accountants, or upon
information provided by persons presenting Preferred Stock for deposit, holders
of Depositary Receipts or other persons believed to be competent and on
documents believed to be genuine. (Deposit Agreement, Section 5.03)
OUTSTANDING PREFERRED STOCK
The Corporation currently has outstanding three classes of Preferred Stock.
Series A Preferred Stock. Subject to the limitations discussed herein, the
holders of the Series A Preferred Stock are entitled to receive, when and as
declared by the Board of Directors out of funds legally available therefor,
cumulative dividends at the annual rate of $4.10 per share. Dividends are
payable quarterly, in arrears, on January 31, April 30, July 31 and October 31
in each year. Unless full cumulative dividends on all outstanding Series A
Preferred Stock and any other class of preferred stock ranking on a parity with
the Series A Preferred Stock as to dividends and upon liquidation ("Parity
Stock") have been paid, the Corporation will not declare or pay any dividend on,
or set aside or apply any amount to the redemption or purchase of, any shares of
the Common Stock or any other class of stock ranking junior to the Series A
Preferred Stock (except for dividends payable only in, or rights to subscribe
for or purchase, shares of junior stock).
Except as indicated below, or except as expressly required by applicable
law, the holders of shares of Series A Preferred Stock have no voting rights.
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During any period in which dividends on the Series A Preferred Stock or any
outstanding Parity Stock are cumulatively in arrears in the amount of six or
more full quarterly dividends, the number of directors of the Corporation will
be increased by two and the holders of shares of Series A Preferred Stock,
voting together as a class with the holders of any other class or series of
Parity Stock having a similar voting right, will have the right to elect two
additional directors to the Corporation's Board of Directors to fill such newly
created directorships until all such dividends have been paid in full.
The approval of two-thirds of the outstanding shares of Series A Preferred
Stock and Parity Stock, voting together as a single class, shall be required in
order to amend the Charter of the Corporation to affect adversely the rights of
the holders of the Series A Preferred Stock or to authorize or create any class
of stock having rights senior with respect to dividends and upon liquidation to
the Series A Preferred Stock. In addition, the approval of a majority of the
outstanding shares of Series A Preferred Stock and Parity Stock, voting together
as a single class, shall be required in order to increase the number of shares
of preferred stock authorized in the Charter or to create any other class of
stock (but not any other series of preferred stock) ranking on a parity with the
Series A Preferred Stock as to dividends and upon liquidation.
At the option of the holders of the Series A Preferred Stock, such shares
may be converted into shares of Common Stock of the Corporation at the then
applicable conversion rate. The current conversion rate is 1.179 shares of
Common Stock for each share of Series A Preferred Stock (equivalent to a
conversion price of $42.40 per share). The conversion rate is subject to
adjustment in certain events, including stock dividends, subdivisions, splits
and combinations, and certain other distributions of rights or warrants to
purchase Common Stock at less than the then current market price (as defined),
and distributions to all holders of Common Stock of evidences of indebtedness or
assets of the Corporation other than cash out of earned surplus. The conversion
rate has been adjusted under this provision as a result of dividend payments by
the Corporation on its Common Stock notwithstanding the deficit in its earned
surplus account.
The Series A Preferred Stock is exchangeable in whole but not in part at
the option of the Corporation on any dividend payment date for the Corporation's
8.20% Convertible Subordinated Debentures due October 31, 2011 (the
"Debentures") at a rate of $50.00 principal amount of the Debentures plus cash
in the amount of accrued but unpaid dividends, if any, for each share of Series
A Preferred Stock.
The Series A Preferred Stock is redeemable at the option of the Corporation
for cash, as a whole or in part, at redemption prices declining to $50.00 per
share on October 31, 1996, plus accrued and unpaid dividends to the redemption
date. The Corporation may not purchase or redeem less than all the Series A
Preferred Stock and any other series of Parity Stock if, as of such time, the
Corporation has failed to pay all accrued and unpaid dividends thereon.
In case of the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, holders of any shares of Series A Preferred Stock
are entitled to receive $50.00 per share, plus an amount equal to any dividends
accrued and unpaid to the payment date, before any distribution is made to the
holders of any junior stock.
Series B Preferred Stock. The 1,300,000 shares of the Series B Preferred
Stock were issued in three subseries: 650,000 shares of the Series B Cumulative
Convertible Preferred Stock 1995 (the "Series B Preferred Stock 1995"); 325,000
shares of the Series B Cumulative Convertible Preferred Stock 1996 (the "Series
B Preferred Stock 1996"); and 325,000 shares of the Series B Cumulative
Convertible Preferred Stock 1997 (the "Series B Preferred Stock 1997"). Subject
to the limitations discussed herein, the holders of the Series B Preferred Stock
are entitled to receive, when and as declared by the Board of Directors out of
funds legally available therefor, cumulative dividends at the annual rate of
$10.25 per share. Dividends are payable quarterly, in arrears, on January 31,
April 30, July 31 and October 31 of each year. Unless full cumulative dividends
on all
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outstanding Series B Preferred Stock and any other Parity Stock have been paid,
the Corporation will not declare or pay any dividend on, or set aside or apply
any amount to the redemption or purchase of, any shares of the Common Stock or
any other class of stock ranking junior to the Series B Preferred Stock.
Holders of Series B Preferred Stock have limited voting rights similar to
those of the Series A Preferred Stock except that under the terms of the Series
B Preferred Stock the right to elect two additional directors accrues when
dividends on the Series B Preferred Stock are cumulatively in arrears in the
amount of two or more full quarterly dividends. A special class vote of holders
of two-thirds of the outstanding Series B Preferred Stock is necessary in order
to (i) authorize the issuance of a new, or to increase the authorized number of
any existing, class of capital stock senior or superior to the Series B
Preferred Stock as to dividends and upon liquidation, (ii) increase the number
of shares of preferred stock or create any additional Parity Stock authorized in
the Charter, (iii) reissue any shares of Series B Preferred Stock that have been
redeemed or (iv) take any action to cause any amendment, alteration or repeal of
any of the provisions of the Charter that would materially adversely affect the
rights of holders of Series B Preferred Stock.
At the option of the holders of the Series B Preferred Stock, such shares
may be converted into shares of Common Stock at the then applicable conversion
rate. The current conversion rate for the Series B Preferred Stock is 8.316
shares of Common Stock per converted share of Series B Preferred Stock
(equivalent to a conversion price of $12.025 per share). The conversion rate is
subject to adjustment in certain events, including stock dividends,
subdivisions, splits and combinations, and certain distributions of rights or
warrants to purchase Common Stock at less than the then current market price (as
defined), and distributions to all holders of Common Stock of evidences of
indebtedness or assets of the Corporation (other than regular quarterly Common
Stock dividends consistent with the Corporation's current dividend policy and
future dividends payable out of consolidated earned surplus or current
earnings).
The Series B Preferred Stock is redeemable at the option of the Corporation
for cash, as a whole or in part, at any time or from time to time, as follows:
(i) the Series B Preferred Stock 1995, at any time on or after June 1, 1994;
(ii) the Series B Preferred Stock 1996, at any time on or after June 1, 1995;
and (iii) the Series B Preferred Stock 1997, at any time on or after June 1,
1996; at a per share redemption price equal to the liquidation value of $100.00
and accrued and unpaid dividends plus, beginning after June 1, 1997, a premium
which declines to zero on June 1, 2001. Notwithstanding the foregoing, no
redemption may be effected prior to June 1, 1997, unless the closing price of
the Common Stock exceeds 150% of the then current Series B conversion price on
the date notice of redemption is given and for each of the twenty prior
consecutive trading days.
In the event that there shall occur a "change in control" (as defined
below) of the Corporation, then, at the election of each holder of Series B
Preferred Stock, the Corporation will issue and sell additional nonredeemable
equity securities and apply the net proceeds thereof to redeem the Series B
Preferred Stock at the appropriate redemption price, plus accrued dividends, but
only if and to the extent any such proceeds are raised. The term "change in
control" means any acquisition by any person or group of 50% or more of the
combined voting power of the outstanding voting securities of the Corporation, a
sale of substantially all of the assets of the Corporation, or a merger of the
Corporation with or into another person which results in the exchange,
conversion, reclassification or cancellation of the Common Stock of the
Corporation.
In case of the voluntary liquidation, dissolution or winding-up of the
Corporation, holders of any shares of Series B Preferred Stock are entitled to
receive $100.00 per share, plus an amount equal to any dividends accrued and
unpaid to the payment date, before any distribution is made to the holders of
any junior stock.
Series C Preferred Stock. Subject to the limitations discussed herein, the
holders of the Series C Preferred Stock are entitled to receive, when and as
declared by the Board of Directors
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out of funds legally available therefor, cumulative preferential dividends at
the annual rate of $5.00 per share. Dividends are payable quarterly, in arrears,
on January 31, April 30, July 31 and October 31 in each year. Unless full
cumulative dividends on all outstanding Series C Preferred Stock and any other
Parity Stock have been paid and sufficient funds have been set apart for the
payment of the dividend for the current dividend period with respect to the
Series C Preferred Stock, the Corporation will not declare or pay any dividend
on or set aside or apply any amount to the redemption or purchase of, any shares
of the Common Stock or on any other class of stock ranking junior to the Series
C Preferred Stock (except for dividends payable only in, or rights to subscribe
for or purchase, shares of junior stock).
Holders of Series C Preferred Stock have limited voting rights similar to
those of the Series A Preferred Stock except that under the terms of the Series
C Preferred Stock the right to elect two additional directors accrues when
dividends on the Series C Preferred Stock are cumulatively in arrears in the
amount of two or more full quarterly dividends.
At the option of the holders of the Series C Preferred Stock, such shares
may be converted into shares of Common Stock of the Corporation at the then
applicable conversion rate. The present conversion rate is 4.158 shares of
Common Stock for each share of Series C Preferred Stock (equivalent to a
conversion price of $12.025 per share). The conversion rate is subject to
adjustment in certain events, including stock dividends, subdivisions, splits
and combinations, and certain other distributions of rights or warrants to
purchase Common Stock at less than the then current market price (as defined),
and distributions to all holders of Common Stock of evidences of indebtedness or
assets of the Corporation (other than regular quarterly Common Stock dividends
consistent with the Corporation's current dividend policy and future dividends
payable out of consolidated earned surplus or current earnings). The conversion
rate is also subject to further adjustment in the event of certain transactions
pursuant to a plan under which all or substantially all the Common Stock is to
be exchanged or converted into the right to receive cash, securities or other
assets.
The Series C Preferred Stock is redeemable, commencing on June 13, 1994, at
the option of the Corporation for cash, as a whole or in part, at redemption
prices declining to $50 per share on June 13, 2001, plus accrued and unpaid
dividends to the redemption date. The Corporation may not purchase or redeem
less than all the Series C Preferred Stock and any other series of Parity Stock
if, as of such time, the Corporation has failed to pay all accrued and unpaid
dividends thereon.
In case of the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, holders of any shares of Series C Preferred Stock
are entitled to receive $50 per share, plus an amount equal to any dividends
accrued and unpaid to the payment date, before any distribution is made to the
holders of any junior stock.
SHAREHOLDER RIGHTS PLAN
The Corporation has a shareholder rights plan (the "Plan") to deter
coercive or unfair takeover tactics and to prevent a potential purchaser from
gaining control of the Corporation without offering a fair price to all of the
Corporation's shareholders. Under the Plan, each outstanding share of the
Corporation's Common Stock has one preferred share purchase right (a "Right")
expiring in 1997. Each Right entitles the registered holder to purchase 1/100 of
a share of Junior Preferred Stock for $140. The Rights cannot be exercised
unless certain events occur that might lead to a concentration in ownership of
Common Stock. Under certain conditions, the Rights may be exercised for (i)
Common Stock having a value of twice the exercise price, or (ii) shares of
common stock of a purchaser having a value of twice the exercise price. The
Corporation will generally be entitled to redeem the Rights, at $.05 per Right,
any time before the tenth day after a 20% position in the Corporation is
acquired. The Form 8-A setting forth a description of the Plan is
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an exhibit to the Registration Statement of which this Prospectus is a part and
is incorporated by reference herein.
SPECIAL STATUTORY REQUIREMENTS FOR CERTAIN TRANSACTIONS
Business Combination Statute. The Maryland General Corporation Law
establishes special requirements with respect to "business combinations" between
Maryland corporations and "interested stockholders" unless exemptions are
applicable. Among other things, the law prohibits for a period of five years a
merger and other specified or similar transactions between a corporation and an
interested stockholder and requires a super-majority vote for such transactions
after the end of such five-year period.
"Interested stockholders" are all persons owning beneficially, directly or
indirectly, more than 10% of the outstanding voting stock of a Maryland
corporation. "Business combinations" include any merger or similar transaction
subject to a statutory vote and additional transactions involving transfers of
assets or securities in specified amounts to interested stockholders or their
affiliates. Unless an exemption is available, transactions of these types may
not be consummated between a Maryland corporation and an interested stockholder
or its affiliates for a period of five years after the most recent date on which
the stockholder became an interested stockholder and thereafter may not be
consummated unless recommended by the board of directors of the Maryland
corporation and approved by the affirmative vote of at least 80% of the votes
entitled to be cast by all holders of outstanding shares of voting stock and 66
2/3% of the votes entitled to be cast by all holders of outstanding shares of
voting stock other than the interested stockholder. A business combination with
an interested stockholder which is approved by the board of directors of a
Maryland corporation at any time before an interested stockholder first becomes
an interested stockholder is not subject to the special voting requirements. An
amendment to a Maryland corporation's charter electing not to be subject to the
foregoing requirements must be approved by the affirmative vote of at least 80%
of the votes entitled to be cast by all holders of outstanding shares of voting
stock and 66 2/3% of the votes entitled to be cast by holders of outstanding
shares of voting stock who are not interested stockholders. Any such amendment
is not effective until 18 months after the vote of stockholders and does not
apply to any business combination of a corporation with a stockholder who was an
interested stockholder on the date of the stockholder vote. The Corporation has
not adopted any such amendment to its Charter.
Control Share Acquisition Statute. Maryland law imposes limitations on the
voting rights in a "control share acquisition." The Maryland statute defines a
"control share acquisition" at the 20%, 33 1/3% and 50% acquisition levels, and
requires a two-thirds stockholder vote (excluding shares owned by the acquiring
person and certain members of management) to accord voting rights to stock
acquired in a control share acquisition. The statute also requires Maryland
corporations to hold a special meeting at the request of an actual or proposed
control share acquiror generally within 50 days after a request is made with the
submission of an "acquiring person statement," but only if the acquiring person
(i) posts a bond for the cost of the meeting and (ii) submits a definitive
financing agreement to the extent that financing is not provided by the
acquiring person. In addition, unless the charter or by-laws provide otherwise,
the statute gives the Maryland corporation, within certain time limitations,
various redemption rights if there is a stockholder vote on the issue and the
grant of voting rights is not approved, or if an "acquiring person statement" is
not delivered to the target within 10 days following a control share
acquisition. Moreover, unless the charter or by-laws provide otherwise, the
statute provides that if, before a control share acquisition occurs, voting
rights are accorded to control shares which results in the acquiring person
having majority voting power, then minority stockholders have appraisal rights.
An acquisition of shares may be exempted from the control share statute provided
that a charter or by-law provision is adopted for such purpose prior to the
control share acquisition. There are no such provisions in the charter or by-
laws of the Corporation.
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Reference is made to the full text of the foregoing statutes for their
entire terms, and the partial summary contained in this Prospectus is not
intended to be complete.
Insurance Acquisitions Disclosure and Control Act. Under the Maryland
Insurance Code, unless certain filings are made with the Maryland Insurance
Commissioner, no person may acquire any voting security or security convertible
into a voting security of an insurance holding company, such as the Corporation,
which controls one or more Maryland insurance companies if, as a result of such
acquisition, such person would "control" such insurance holding company. The
acquisition may not proceed unless it has been approved by the Maryland
Insurance Commissioner within 60 days after such filings have been submitted.
"Control" is presumed to exist if a person, directly or indirectly, owns or
controls 10% or more of the voting securities of another person. This
presumption may be rebutted by establishing by a preponderance of evidence that
control does not exist in fact.
Reference is made to the full text of the statute for its entire terms, and
this partial summary is not intended to be complete.
DESCRIPTION OF WARRANTS
The Corporation may issue Warrants, including Warrants to purchase Debt
Securities ("Debt Warrants") as well as other types of Warrants to purchase
Securities. Warrants may be issued independently or together with any Securities
and may be attached to or separate from such Securities. The Warrants are to be
issued under warrant agreements (each a "Warrant Agreement") to be entered into
between the Corporation and a bank or trust company, as warrant agent (the
"Warrant Agent"), all as shall be set forth in the Prospectus Supplement
relating to the Warrants being offered pursuant thereto.
DEBT WARRANTS
The applicable Prospectus Supplement will describe the terms of Debt
Warrants offered thereby, the Warrant Agreement relating to such Debt Warrants
and the debt warrant certificates representing such Debt Warrants, including the
following: (i) the title of such Debt Warrants; (ii) the aggregate number of
such Debt Warrants; (iii) the price or prices at which such Debt Warrants will
be issued; (iv) the currency or currencies, including composite currencies or
currency units, in which the price of such Debt Warrants may be payable; (v) the
designation, aggregate principal amount and terms of the Debt Securities
purchasable upon exercise of such Debt Warrants, and the procedures and
conditions relating to the exercise of such Debt Warrants; (vi) the designation
and terms of any related Debt Securities with which such Debt Warrants are
issued, and the number of such Debt Warrants issued with each such Debt
Security; (vii) the currency or currencies, including composite currencies or
currency units, in which the principal of (or premium, if any), or interest, if
any, on the Debt Securities purchasable upon exercise of such Debt Warrants will
be payable; (viii) the date, if any, on and after which such Debt Warrants and
the related Debt Securities will be separately transferable; (ix) the principal
amount of Debt Securities purchasable upon exercise of each Debt Warrant, and
the price at which and the currency, including composite currency or currency
unit, in which such principal amount of Debt Securities may be purchased upon
such exercise; (x) the date on which the right to exercise such Debt Warrants
shall commence, and the date on which such right shall expire; (xi) the maximum
or minimum number of such Debt Warrants which may be exercised at any time;
(xii) a discussion of material federal income tax considerations, if any; and
(xiii) any other terms of such Debt Warrants and terms, procedures and
limitations relating to the exercise of such Debt Warrants.
Debt warrant certificates will be exchangeable for new debt warrant
certificates of different denominations, and Debt Warrants may be exercised at
the corporate trust office of the Warrant Agent or any other office indicated in
the Prospectus Supplement. Prior to the exercise of their Debt
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Warrants, holders of Debt Warrants will not have any of the rights of holders of
the Debt Securities purchasable upon such exercise and will not be entitled to
payments of principal of (or premium, if any) or interest, if any, on the Debt
Securities purchasable upon such exercise.
PREFERRED STOCK AND COMMON STOCK WARRANTS
The Corporation may issue Warrants exercisable for Preferred Stock or
Common Stock. The applicable Prospectus Supplement will describe the following
terms of any such Warrants in respect of which this Prospectus is being
delivered: (i) the title of such Warrants; (ii) whether such Warrants are
exercisable for Preferred Stock or Common Stock; (iii) the price or prices at
which such Warrants will be issued; (iv) the currency or currencies, including
composite currencies or currency units, in which the price of such Warrants may
be payable; (v) if applicable, the designation and terms of the Preferred Stock
or Common Stock with which such Warrants are issued, and the number of such
Warrants issued with each such share of Preferred Stock or Common Stock; (vi) if
applicable, the date on and after which such Warrants and the related Preferred
Stock or Common Stock will be separately transferable; (vii) if applicable, a
discussion of material federal income tax considerations; and (viii) any other
terms of such Warrants, including terms, procedures and limitations relating to
the exchange and exercise of such Warrants.
EXERCISE OF WARRANTS
Each Warrant will entitle the holder of Warrants to purchase for cash such
principal amount of Debt Securities, Preferred Stock or Common Stock, as the
case may be, at such exercise price as shall in each case be set forth in, or be
determinable as set forth in, the Prospectus Supplement relating to the Warrants
offered thereby. Warrants may be exercised at any time up to the close of
business on the expiration date set forth in the Prospectus Supplement relating
to the Warrants offered thereby. After the close of business on the expiration
date, unexercised Warrants will become void.
Warrants may be exercised as set forth in the Prospectus Supplement
relating to the Warrants offered thereby. Upon receipt of payment and the
warrant certificate properly completed and duly executed at the corporate trust
office of the Warrant Agent or any other office indicated in the Prospectus
Supplement, the Corporation will, as soon as practicable, forward the Securities
purchasable upon such exercise. If less than all of the Warrants represented by
such warrant certificate are exercised, a new warrant certificate will be issued
for the remaining Warrants.
PLAN OF DISTRIBUTION
The Corporation may sell Securities to or through underwriters, and also
may sell Securities directly to other purchasers or through agents.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
Sales of Common Stock offered hereby may be effected from time to time in
one or more transactions on the New York Stock Exchange or in negotiated
transactions or a combination of such methods of sale, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at other negotiated prices.
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Corporation or from purchasers of Securities for
whom they may act as agents in the form of discounts, concessions or
commissions. Underwriters may sell Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents.
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Underwriters, dealers and agents that participate in the distribution of
Securities may be deemed to be underwriters, and any discounts or commissions
received by them from the Corporation and any profit on the resale of Securities
by them may be deemed to be underwriting discounts and commissions, under the
Securities Act. Any such underwriter or agent will be identified, and any such
compensation received from the Corporation will be described, in the Prospectus
Supplement.
Under agreements which may be entered into by the Corporation, underwriters
and agents who participate in the distribution of Securities may be entitled to
indemnification by the Corporation against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, the Corporation will
authorize underwriters or other persons acting as the Corporation's agents to
solicit offers by certain institutions to purchase Securities from the
Corporation pursuant to contracts providing for payment and delivery on a future
date. Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Corporation. The obligations of any
purchaser under any such contract will be subject to the condition that the
purchase of the Securities shall not at the time of delivery be prohibited under
the laws of the jurisdiction to which such purchaser is subject. The
underwriters and such other agents will not have any responsibility in respect
of the validity or performance of such contracts.
Certain of the underwriters or agents and their associates may be customers
of, engage in transactions with and perform services for the Corporation in the
ordinary course of business.
The Securities may or may not be listed on a national securities exchange
or a foreign securities exchange (other than the Common Stock, which is listed
on the New York Stock Exchange, the Pacific Stock Exchange, the London Stock
Exchange and the Swiss Exchanges in Basle, Geneva and Zurich). Any Common Stock
sold pursuant to a Prospectus Supplement will be listed on the New York Stock
Exchange, subject to official notice of issuance. No assurances can be given
that there will be an active trading market for the Securities.
VALIDITY OF SECURITIES
The legal validity of the Securities offered hereby will be passed upon for
the Corporation by Piper & Marbury, Baltimore, Maryland and for any underwriters
or agents by Davis Polk & Wardwell, New York, New York. Davis Polk & Wardwell
will rely upon the opinion of Piper & Marbury as to certain matters governed by
Maryland law. L.P. Scriggins, a Director of the Corporation, is a partner of
Piper & Marbury. As of January 1, 1994 lawyers in the firm of Piper & Marbury
beneficially owned in the aggregate approximately 20,000 shares of Common Stock
or Common Stock equivalents of the Corporation.
EXPERTS
The consolidated financial statements of the Corporation incorporated in
this Prospectus by reference to Form 10-K for the year ended December 31, 1992
have been audited by Ernst & Young, independent auditors, as set forth in their
report thereon included therein and incorporated by reference herein. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information for the three month periods ended March 31, 1993 and 1992, and the
three-and six-month periods ended June 30, 1993 and 1992, and the three-and
nine-month periods ended September 30, 1993 and 1992, incorporated by reference
in this Registration Statement, the independent auditors have
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reported that they have applied limited procedures in accordance with
professional standards for a review of such information. However, their separate
reports included in the Corporation's quarterly reports on Form 10-Q for the
quarters ended March 31, 1993, June 30, 1993, and September 30, 1993, and
incorporated by reference herein, state that they did not audit and they do not
express an opinion on that interim financial information. Accordingly, the
degree of reliance on their reports on such information should be restricted in
light of the limited nature of the review procedures applied. The independent
auditors are not subject to the liability provisions of Section 11 of the
Securities Act for their reports on the unaudited interim financial information
because those reports are not "reports" or a "part" of the Registration
Statement prepared or certified by the auditors within the meaning of Sections 7
and 11 of the Securities Act.
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NO PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS $220,000,000
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS SUPPLEMENT AND THE PROSPECTUS USF&G CORPORATION
DO NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OTHER THAN THE SECURITIES DESCRIBED IN THIS
PROSPECTUS SUPPLEMENT OR AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY SUCH
SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH
OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE ZERO COUPON CONVERTIBLE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE SUBORDINATED NOTES DUE 2009
PROSPECTUS NOR ANY SALE MADE HEREUNDER OR
THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN OR THEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
Prospectus Supplement Summary............. S-3
Investment Considerations................. S-7
The Corporation........................... S-13
Strategy.................................. S-16
Use of Proceeds........................... S-17 [USF&G LOGO]
Price Range of Common Stock and
Dividends............................... S-18
Capitalization............................ S-19
Selected Consolidated Financial
Information............................. S-20
Management's Discussion and Analysis
of Financial Condition and Results of
Operations.............................. S-21 --------------------
Property/Casualty Loss Reserves........... S-51
Description of Notes...................... S-55
Book-Entry System......................... S-64
Certain United States Federal Tax
Considerations.......................... S-65
Underwriting.............................. S-70
Experts................................... S-71
PROSPECTUS
Available Information..................... 2
Incorporation of Certain Documents
by Reference............................ 2
The Corporation........................... 3
Ratio of Consolidated Earnings to Fixed
Charges and Ratio of Consolidated
Earnings to Combined Fixed Charges and
Preferred Stock Dividends............... 3 GOLDMAN, SACHS & CO.
Use of Proceeds........................... 3
Description of Debt Securities............ 4 KIDDER, PEABODY & CO.
Description of Capital Stock.............. 12 INCORPORATED
Description of Warrants................... 21
Plan of Distribution...................... 22
Validity of Securities.................... 23
Experts................................... 23
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