USF&G CORP, 8-K, 1994-02-14

USF&G CORP
8-K, 1994-02-14
FIRE, MARINE & CASUALTY INSURANCE

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

__________

FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of
earliest event reported): Commission File Number
February 14, 1994 1-8233

USF&G CORPORATION
(Exact Name of Registrant as Specified in Charter)

Maryland 52-1220567
(State or Other Jurisdiction (IRS Employer Identification No.)
of Incorporation)

100 Light Street, Baltimore, Maryland 21202
(Address of Principal Executive Offices)

(410) 547-3000
(Registrant's telephone number, including area code)

USF&G CORPORATION
FORM 8-K
______________________

Item 5. Other Events.
The attached audited financial statements for the year ended
December 31, 1993, and a related Management's Discussion and
Analysis, and other related financial information is incorporated
herein by reference.

USF&G CORPORATION

Signatures

Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Current Report on Form
8-K to be signed on its behalf by the undersigned hereonto duly
authorized.

USF&G Corporation

By: DAN L. HALE
Dan L. Hale

Executive Vice President, Chief
Financial Officer and Principal
Accounting Officer

February 14, 1994

INFORMATION FILED UNDER ITEM 5

I. Financial Statements

II. Notes to Consolidated Financial Statements

III. Management's Discussion and Analysis of Financial
Condition and Results of Operations

IV. Supplemental Insurance Information

V. Index to Exhibits to Registration Statement

<PAGE>

I. FINANCIAL STATEMENTS

<TABLE>
USF&G Corporation
Consolidated Statement of Operations
<CAPTION>

For the Years Ended December 31
(dollars in millions except per share data) 1993 1992 1991
REVENUES
<S> <C> <C> <C>
Premiums earned $ 2,456 $ 2,637 $ 3,187
Net investment income 749 817 877
Other 38 58 70
Revenues before realized gains 3,243 3,512 4,134
Realized gains on investments 6 148 38
Total revenues 3,249 3,660 4,172
EXPENSES
Losses, loss expenses, and policy benefits 2,153 2,465 2,982
Underwriting, acquisition, and operating expenses 956 1,069 1,225
Interest expense 41 40 46
Restructuring charges -- 51 60
Total expenses 3,150 3,625 4,313
Pretax income (loss) from continuing operations before
cumulative effect of adopting new accounting standards 99 35 (141)
Provision for income taxes (benefit) (28) -- 3
Income (loss) from continuing operations before
cumulative effect of adopting new accounting standards 127 35 (144)
Loss from discontinued operations -- (7) (32)
Income (loss) from cumulative effect of adopting new
accounting standards:
Income taxes (Note 9) 90 -- --
Postretirement benefits (Note 8) (52) -- --
Net income (loss) $ 165 $ 28 $ (176)
Preferred stock dividend requirements 48 48 37
Net income (loss) available to common stock $ 117 $ (20) $ (213)

PRIMARY EARNINGS PER COMMON SHARE
Income (loss) from continuing operations before
cumulative effect of adopting new accounting standards $ .93 $ (.16) $ (2.15)
Loss from discontinued operations -- (.08) (.38)
Income from cumulative effect of adopting new
accounting standards .45 -- --
Net income (loss) $ 1.38 $ (.24) $ (2.53)
FULLY DILUTED EARNINGS PER COMMON SHARE
Income (loss) from continuing operations before
cumulative effect of adopting new accounting standards $ .98 $ (.16) $ (2.15)
Loss from discontinued operations -- (.08) (.38)
Income from cumulative effect of adopting new
accounting standards .34 -- --
Net income (loss) $ 1.32 $ (.24) $ (2.53)
Weighted average common shares outstanding:
Primary 84,780,283 84,355,431 84,169,091
Fully Diluted 112,692,855 84,355,431 84,169,091
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>

<TABLE>
USF&G
Consolidated Statement of Financial Position
<CAPTION>

At December 31
(dollars in millions except share data) 1993 1992 1991
ASSETS
<S> <C> <C> <C>
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market, 1993,
$4,796; 1992, $7,290; 1991, $3,880) $ 4,661 $ 7,218 $ 3,749
Available for sale, at market* (cost, 1993, $4,681;
market, 1992, $2,029; 1991, $5,606) 4,903 1,987 5,364
Common stocks, at market (cost, 1993, $98; 1992, $179;
1991, $480) 87 142 487
Preferred stocks, at market (cost, 1993, $48;
1992, $24; 1991, $34) 48 29 34
Short-term investments 322 518 1,170
Mortgage loans 302 186 283
Real estate 685 818 784
Other invested assets 369 448 225
Other investments held for sale -- -- 71
Total investments 11,377 11,346 12,167
Cash 17 25 87
Accounts, notes, and other receivables 656 725 897
Reinsurance receivables 573 -- --
Servicing carrier receivables 719 -- --
Deferred policy acquisition costs 435 466 534
Other assets 571 588 692
Net assets (liabilities) of discontinued operations (13) (16) 109
Total assets $14,335 $13,134 $14,486
LIABILITIES
Unpaid losses, loss expenses, and policy benefits $10,302 $ 9,436 $ 9,477
Unearned premiums 917 770 981
Corporate debt 574 574 617
Real estate and other debt 44 42 60
Other liabilities 987 1,042 2,028
Total liabilities 12,824 11,864 13,163
SHAREHOLDERS' EQUITY
Preferred stock, par value $50.00 (12,000,000 shares
authorized; shares issued, 1993, 9,099,910;
1992 and 1991, 9,100,000) 455 455 455
Common stock, par value $2.50 (240,000,000 shares
authorized; shares issued, 1993, 85,009,482;
1992, 84,512,758; 1991, 84,273,327) 212 211 211
Paid-in capital 963 957 955
Net unrealized gains (losses) on investments 192 (31) (21)
Net unrealized gains (losses) on foreign currency (2) 2 10
Minimum pension liability (85) -- --
Retained earnings (deficit) (224) (324) (287)
Total shareholders' equity 1,511 1,270 1,323
Total liabilities and shareholders' equity $14,335 $13,134 $14,486
<FN>
* 1992 and 1991 amounts are at amortized cost (Note 1.2).
See Notes to Consolidated Financial Statements.
</TABLE>

<TABLE>
USF&G Corporation
Consolidated Statement of Cash Flows
<CAPTION>

For the Years Ended December 31
(dollars in millions) 1993 1992 1991
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 165 $ 28 $ (176)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Loss from discontinued operations -- 7 32
Cumulative effect of accounting changes (38) -- --
Realized gains on investments (6) (148) (38)

Change in insurance liabilities 36 37 237
Change in deferred policy acquisition costs 31 68 36
Change in receivables 60 149 (147)
Change in other liabilities (56) (74) (2)
Change in other assets (129) (17) 56
Other items, net 24 49 (2)
Net cash provided from (used in) continuing
operations 87 99 (4)
Net cash used in discontinued operations -- (2) (10)
Net cash provided from (used in) operating
activities 87 97 (14)
INVESTING ACTIVITIES
Net sales and maturities of short-term investments 197 61 640
Purchases of fixed maturities held to maturity (1,912) (6,945) --
Sales of fixed maturities held to maturity 462 1,116 --
Maturities/repayments of fixed maturities
held to maturity 941 323 --
Purchases of fixed maturities available for sale (1,203) (458) (13,368)
Sales of fixed maturities available for sale 1,252 4,796 11,919
Repayments of fixed maturities available for sale 308 772 480
Purchases of equities and other investments (255) (438) (481)
Sales, maturities, or repayments of equities and
other investments 398 842 1,206
Sales of subsidiaries -- 17 38
Purchases of property and equipment (28) (12) (7)
Disposals of property and equipment 4 7 27
Net investing activities of discontinued operations -- 2 60
Net cash provided from investing activities 164 83 514
FINANCING ACTIVITIES
Deposits for universal life and investment contracts 168 164 247
Withdrawals of universal life and investment contracts (364) (289) (689)
Net short-term borrowings (repayments) -- (1) (60)
Repayments of long-term borrowings (3) (53) (38)
Repurchases of securities pursuant to put options -- -- (124)
Issuances of common stock 6 3 2
Issuances of preferred stock -- -- 310
Cash dividends paid to shareholders (66) (66) (62)
Net financing activities of discontinued operations -- -- (50)
Net cash used in financing activities (259) (242) (464)
Increase (decrease) in cash (8) (62) 36
Cash at beginning of year 25 87 51
Cash at end of year $ 17 $ 25 $ 87
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
USF&G Corporation
Consolidated Statement of Shareholders' Equity

For the Years Ended December 31
(dollars in millions except per share data) 1993 1992 1991
<S> <C> <C> <C>
PREFERRED STOCK
Balance at beginning of year $ 455 $ 455 $ 200
Par value of shares issued:
Series B -- -- 65
Series C -- -- 190
Balance at end of year 455 455 455
COMMON STOCK
Balance at beginning of year 211 211 210
Par value of shares issued 1 -- 1
Balance at end of year 212 211 211
PAID-IN CAPITAL
Balance at beginning of year 957 955 898
Excess of proceeds over par value of shares issued 6 2 57
Balance at end of year 963 957 955
NET UNREALIZED GAINS (LOSSES) ON INVESTMENTS
Balance at beginning of year (31) (21) (58)
Change in unrealized gains (losses) 223 (10) 37
Balance at end of year 192 (31) (21)
NET UNREALIZED GAINS (LOSSES) ON FOREIGN CURRENCY
Balance at beginning of year 2 10 12
Change in unrealized gains (losses) (4) (8) (2)
Balance at end of year (2) 2 10
MINIMUM PENSION LIABILITY
Balance of beginning of year -- -- --
Change in unfunded accumulated benefits (85) -- --
Balance at end of year (85) -- --
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year (324) (287) (57)
Net income (loss) 165 28 (176)
Common stock dividends declared (per share,
1993, 1992, and 1991, $.20) (17) (17) (17)
Preferred stock dividends declared (per share,
1993 and 1992, Series A, $4.10, Series B, $10.25,
Series C, $5.00; 1991, Series A, $4.10, Series B,
$5.75, Series C, $3.05) (48) (48) (37)
Balance at end of year (224) (324) (287)
Total shareholders' equity $1,511 $1,270 $1,323
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>

II. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

USF&G Corporation
Notes to Consolidated Financial Statements

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

1.1. BASIS OF PRESENTATION
The consolidated financial statements are prepared in accordance
with generally accepted accounting principles ("GAAP"). These
statements include the accounts of USF&G Corporation and its
subsidiaries ("USF&G"). Intercompany transactions are eliminated
in consolidation. Certain prior year amounts are reclassified to
conform to the 1993 presentation.

Reporting practices for insurance subsidiaries prescribed or permitted
by state regulatory authorities (statutory accounting) differ from
GAAP. Statutory amounts for USF&G's insurance operations are as
follows:
<TABLE>
<CAPTION>
Years Ended December 31
(in millions) 1993 1992 1991
<S> <C> <C> <C>
Statutory Net Income (Loss):
Property/casualty insurance $ 199 $ 216 $(163)
Reinsurance affiliates 1 1 --
Life insurance 5 23 77
</TABLE>
<TABLE>
<CAPTION> At December 31
1993 1992 1991
<S> <C> <C> <C>
Statutory Surplus:
Property/casualty insurance* $1,541 $1,467 $1,404
Reinsurance affiliates 147 152 146
Life insurance 316 310 283
<FN>
*This amount includes the surplus of the life insurance subsidiary.
</TABLE>

1.2. INVESTMENTS
Fixed Maturities: USF&G classifies fixed maturities as "held to
maturity" if it has both the positive intent and ability to hold
the securities until maturity or near enough to maturity such
that interest rate risk is substantially eliminated as a pricing
factor. Fixed maturities held to maturity are carried at
amortized cost. Changes in the market values of these
investments are generally not recognized in the financial
statements. Valuation allowances are provided for impairments in
estimated net realizable value based on periodic evaluation.
Specific write-downs are taken when an impairment is deemed
other than temporary.

Fixed maturities not classified as either "held to maturity" or
"trading securities" are classified as "available for sale."
These securities are held for an indefinite period of time and
may be sold in response to changes in interest rates and the
yield curve, prepayment risk, liquidity needs, or other factors.
Effective December 31, 1993 upon the initial adoption of a new
accounting standard, SFAS No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" available for sale
fixed maturities are carried at fair value, with unrealized
gains and losses recorded as a separate component of
shareholders' equity. Also effective December 31, 1993, with the
adoption of SFAS No. 115 unrealized gains or losses on fixed
maturities available for sale are offset by an adjustment to
life insurance deferred policy acquisition costs which is made
on a proforma basis as if the unrealized gains on those assets
which match certain life insurance liabilities were realized. At
December 31, 1992 and 1991, before adoption of SFAS No. 115,
fixed maturities available for sale were carried at the lower of
aggregate amortized cost or fair value. Fair value exceeded
amortized cost at December 31, 1992 and 1991; therefore, there
were no unrealized losses reported in shareholders' equity.

Equity Securities and Options: Investments in common and
preferred stocks are carried at market value with the resulting
unrealized gains or losses reported directly in shareholders'
equity. In 1992 and 1991 premiums received on options written
were recorded as liabilities. The premiums paid on options
purchased were recorded as assets. Outstanding option positions
were carried at market value, and the resulting unrealized gains
or losses were reported directly in shareholders' equity. There
were no outstanding options at December 31, 1993.

Securities Lending: USF&G participates in a securities lending
program where certain securities from its portfolio are loaned
to other institutions for short periods of time. A fee is paid
to USF&G by the borrower. Collateral that exceeds the market
value of the loaned securities is invested by the lending agent
to represent USF&G's interest. USF&G'S interest in securities
lending is reported in other invested assets at December 31, 1993
and 1992, and in short-term investments at December 31, 1991. USF&G'S
other invested assets and other liabilities include $141 million, $206
million, and $594 million at December 31, 1993, 1992, and 1991,
respectively, related to its interest in the securities lending
program.

Mortgage Loans and Real Estate: Mortgage loans are carried at
unpaid principal balances. Real estate investments are reported
at cost adjusted for equity participation. Real estate acquired
through an in-substance foreclosure or deed-in-lieu of
foreclosure is initially recorded at estimated market value.
Valuation allowances are provided for impairments in estimated
net realizable value based on periodic evaluations. Specific
write-downs are taken when an impairment is deemed other than
temporary.

Other Investments Held for Sale: In 1991, investments were
designated as "held for sale" based on USF&G'S intent to dispose
of them within a year. These investments included high-risk
investments such as real estate, high-yield bonds, and equity
securities and were carried at the lower of cost or estimated
net realizable value. Such investments were sold during 1992.

Interest and Dividend Income: Interest on fixed-maturity
investments is recorded as income when earned and is adjusted
for any amortization of purchase premium or discount. Dividends
on equity securities are recorded as income on ex-dividend dates.

Option Income: In 1992 and 1991, investment income on covered
call options was recorded when the option positions were closed.
There was no option income in 1993. The amount of investment
income recorded for a covered call option was the time value
component of the premium received. The remainder (the "intrinsic
value") of the premium on the in-the-money options was recorded
as a realized gain when option positions were closed.

Premiums paid for closing purchase transactions on covered call
options reduced investment income if the option was
out-of-the-money when the transaction was closed. If the option
was in-the-money, the time value portion of the premium paid
reduced investment income, and the intrinsic value portion was
recorded as a realized loss.

Realized Gains or Losses: Realized gains and losses on the sale
of investments are determined based on specific cost. Realized
losses are recorded when an investment's net realizable value is
below cost, and the decline is considered other than temporary.
Realized gains and losses also result from changes in investment
valuation allowances.

1.3. RECOGNITION OF PREMIUM REVENUES
Property/Casualty Insurance: Property/casualty insurance
premiums are earned principally on a pro rata basis over the
lives of the policies. Unearned premiums represent the portion
of premiums written applicable to the unexpired terms of
policies in force. Unearned premiums also include estimated and
unbilled premium adjustments.

Life Insurance: Premiums on life policies with fixed and
guaranteed premiums and benefits and premiums on annuities with
significant life contingencies are recognized when due.
Universal life policies and annuity contracts are issued on both
a single-premium and recurring-premium basis. Revenues for these
contracts consist of policy charges assessed against benefit
account balances during the period for the cost of insurance,
policy administration, and surrenders.

1.4. UNPAID LOSSES, LOSS EXPENSES, AND POLICY BENEFITS
Property/Casualty Insurance: The liability for unpaid
property/casualty insurance losses and loss adjustment expenses
is based on an evaluation of reported losses and on estimates of
incurred but unreported losses. The reserve liabilities are
determined using adjusters' individual case estimates and
statistical projections. The liability was reported net of
estimated salvage and subrogation recoverables of $139 million,
$138 million, and $162 million at December 31, 1993, 1992, and
1991, respectively. Adjustments to the liability based on
subsequent developments or other changes in the estimate are
reflected in results of operations in the period in which such
adjustments become known.

Certain liabilities for unpaid losses and loss adjustment
expenses related to workers compensation coverage are discounted
to present value. The carrying amount of such workers compensation
liabilities, net of reinsurance and net of discount, was $1,752
million, $1,798 million, and $1,854 million at December 31, 1993,
1992, and 1991, respectively. Interest rates used to discount
these liabilities generally ranged from 3 percent to 5 percent.

Life Insurance: Ordinary life insurance reserves are computed
under the net level premium method using assumptions for future
investment yields, mortality, and withdrawal rates. These
assumptions reflect USF&G'S experience, modified to reflect
anticipated trends, and provide for possible adverse deviation.
Reserve interest rate assumptions are graded and range from 4.25
percent to 8.25 percent.

Universal life and deferred annuity reserves are computed on the
retrospective deposit method, which produces reserves equal to
the cash value of the contracts. Such reserves are not reduced
for charges that would be deducted from the cash value of
policies surrendered. Reserves on immediate annuities with
guaranteed payments are computed on the prospective deposit
method, which produces reserves equal to the present value of
future benefit payments.

1.5. DEFERRED POLICY ACQUISITION COSTS
Acquisition costs, consisting of commissions, brokerage, and
other expenses incurred at policy issuance, are generally
deferred. Anticipated losses, loss expenses, policy benefits,
and remaining costs of servicing the policies are considered in
determining the amount of costs to be deferred. Anticipated
investment income is considered in determining whether a premium
deficiency exists related to short-duration contracts.
Amortization of deferred policy acquisition costs totaled $673
million, $738 million, and $886 million, for the years ended
December 31, 1993, 1992, and 1991, respectively.

Property/Casualty Insurance: Property/casualty acquisition
costs are amortized over the period that related premiums are
earned.

Life Insurance: Life insurance acquisition costs are amortized
based on assumptions consistent with those used for computing
policy benefit reserves. Acquisition costs on ordinary life
business are amortized over their assumed premium paying
periods. Universal life and investment annuity acquisition costs
are amortized in proportion to the present value of their
estimated gross profits over the products' assumed durations,
which are regularly evaluated and adjusted as appropriate.

1.6. PROPERTY AND EQUIPMENT
Property and equipment is carried at cost less accumulated
depreciation. At December 31, 1993, 1992, and 1991, $194
million, $200 million, and $226 million, respectively, of
property and equipment was included in other assets.
Depreciation is computed on the straight-line basis over the
estimated useful lives of the assets. For the years ended
December 31, 1993, 1992, and 1991, depreciation expense of $21
million, $25 million, and $24 million, respectively, is included
in underwriting, acquisition, and operating expenses.

1.7. FOREIGN CURRENCY TRANSLATION
The functional currency for USF&G'S foreign operations is the
applicable local currency. Foreign currency balance sheet
accounts are translated to U.S. dollars using exchange rates in
effect at the balance sheet date. Revenue and expense accounts
are translated using the average exchange rates prevailing
during the year. The unrealized gains or losses, net of
applicable deferred income taxes, resulting from translation are
included in shareholders' equity.

Foreign currency gains and losses on transactions denominated in
a currency other than the entity's functional currency are
generally recorded in operations. Such gains and losses may be
reduced or effectively eliminated by certain financial
instruments used by USF&G to reduce its foreign exchange
exposure.

1.8. EARNINGS PER COMMON SHARE
Primary earnings per common share are computed by subtracting
dividends on preferred stock from consolidated income and then
dividing by the weighted-average common shares outstanding
during the period. The effect of common stock equivalents is
excluded from the calculations because their effect is not
material. Fully diluted earnings per common share assume the
conversion of all securities whose contingent issuance would
have a dilutive effect on earnings.

1.9. RESTRUCTURING CHARGES AND DISCONTINUED OPERATIONS
Restructuring initiatives began in the fourth quarter of 1990.
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,
and reducing staff. In addition, USF&G has implemented plans to
dispose of nonstrategic businesses which resulted in losses from
discontinued operations of $7 million and $32 million in 1992
and 1991, respectively. Revenues of the discontinued operations
totaled $5 million, $42 million, and $114 million for the years
ended December 31, 1993, 1992, and 1991, respectively. The net
assets of discontinued operations are carried at estimated net
realizable value.

Other financial data for the discontinued operations are
summarized below.
<TABLE>
<CAPTION>
Years Ended December 31
(in millions) 1993 1992 1991
<S> <C> <C> <C>
Results of operations $ -- $ -- $ (6)
Provision for income taxes -- -- (1)
-- -- (7)
Loss on disposal of subsidiaries -- (7) (25)
Net loss from discontinued operations $ -- $ (7) $(32)
</TABLE>
<TABLE>
<CAPTION>
At December 31
1993 1992 1991
<S> <C> <C> <C>
Assets
Investments $ -- $ -- $ 11
Accounts and notes receivable 1 2 21
Acquisition-related goodwill 4 5 92
Property and equipment -- 1 8
Other assets 1 2 35
Total assets $ 6 $ 10 $167
Liabilities
Accrued loss on disposal $ -- $ 7 $ 25
Other liabilities 19 19 33
Total liabilities 19 26 58
Net assets (liabilities) $(13) $(16) $109
</TABLE>

NOTE 2 INVESTMENTS

2.1. COMPONENTS OF NET INVESTMENT INCOME
<TABLE>
<CAPTION>

Years Ended December 31
(in millions) 1993 1992 1991
<S> <C> <C> <C>
Interest on fixed maturities $721 $739 $711
Equity security dividends 14 12 29
Option income -- 37 65
Short-term interest 9 27 73
Real estate and mortgage loans 41 50 35
Other, and expenses (36) (48) (36)
Net investment income $749 $817 $877
</TABLE>
2.2. NET REALIZED GAINS (LOSSES)
<TABLE>
<CAPTION>

Years Ended December 31
(in millions) 1993 1992 1991
<S> <C> <C> <C>
Gains (Losses) on Sales:
Fixed maturities $ 79 $179 $157
Equity securities 5 53 18
Options -- (1) (20)
Real estate 6 (3) (3)
Other -- 11 (44)
Net gains on sales 90 239 108
Provisions for Impairment:
Fixed maturities (10) (20) (15)
Equity securities (8) -- (18)
Real estate (51) (43) (29)
Other (15) (28) --
Total provisions for impairment (84) (91) (62)
Losses due to portfolio restructuring -- -- (8)
Net realized gains $ 6 $148 $ 38
</TABLE>

2.3. ALLOWANCES FOR IMPAIRMENT IN VALUE
Valuation allowances for impairment in value of investments,
recorded in the Consolidated Statement of Financial Position as
a reduction of the respective asset category, are as follows:
<TABLE>
<CAPTION>
At December 31
(in millions) 1993 1992 1991
<S> <C> <C> <C>
Fixed maturities $ 20 $ 12 $ --
Real estate and mortgage loans 108 108 88
Other 3 5 --
</TABLE>
2.4. GROSS UNREALIZED GAINS AND LOSSES
<TABLE>
<CAPTION>
At December 31
(in millions) 1993 1992 1991
<S> <C> <C> <C>
Unrealized Gains:
Fixed maturities $224 $ -- $ --
Equity securities 14 16 51
Options and other 10 3 9
Gross unrealized gains 248 19 60
Unrealized Losses:
Fixed maturities (2) -- --
Deferred policy acquisition cost
adjustment (30) -- --
Equity securities (23) (48) (44)
Options and other (1) (2) (37)
Gross unrealized losses (56) (50) (81)
Unrealized gains (losses), net $192 $(31) $(21)
</TABLE>
2.5. CHANGE IN UNREALIZED GAINS (LOSSES)
<TABLE>
<CAPTION>
Years Ended December 31
(in millions) 1993 1992 1991
<S> <C> <C> <C>
Fixed maturities $222 $ -- $ --
Deferred policy acquisition cost
adjustment (30) -- --
Equity securities 23 (39) 47
Options and other 8 29 (10)
Net change $223 $(10) $ 37
</TABLE>
2.6. ESTIMATED MARKET VALUES OF FIXED MATURITY INVESTMENTS
The increase (decrease) in the difference between cost and
market value of fixed maturity investments for the years ended
December 31, 1993, 1992, and 1991 was $243 million, $(259)
million, and $441 million, respectively. The cost and market
value of total fixed maturities are as follows:
<TABLE>
<CAPTION>
At December 31
1993 1992 1991
Gross
Unrecognized/ Gross Gross
Unrealized Market Unrecognized Market Unrecognized Market
(in millions) Cost Gains Losses Value Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed maturities held to maturity $4,661 $191 $(56) $4,796 $7,218 $171 $ (99) $7,290 $3,749 $173 $(42) $3,880
Fixed maturities available
for sale 4,681 224 (2) 4,903 1,987 49 (7) 2,029 5,364 261 (19) 5,606
Total $9,342 $415 $(58) $9,699 $9,205 $220 $(106) $9,319 $9,113 $434 $(61) $9,486
</TABLE>

The cost and market value of fixed maturities held to maturity are as follows:
<TABLE>
<CAPTION>
At December 31
1993 1992 1991
Gross Gross Gross
Unrecognized Market Unrecognized Market Unrecognized Market
(in millions) Cost Gains Losses Value Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government bonds $ 4 $ -- $ (1) $ 3 $ 348 $ 3 $ -- $ 351 $ 561 $ 18 $ -- $ 579
Mortgage/asset-backed securities 1,669 70 (19) 1,720 3,535 88 (47) 3,576 1,893 104 (16) 1,981
Corporate bonds 2,463 79 (30) 2,512 2,660 48 (40) 2,668 849 29 (15) 863
High-yield bonds 505 37 (6) 536 511 24 (12) 523 298 7 (6) 299
Tax-exempt bonds 14 3 -- 17 55 4 -- 59 70 6 (3) 73
Other 6 2 -- 8 109 4 -- 113 78 9 (2) 85
Total $4,661 $191 $(56) $4,796 $7,218 $171 $(99) $7,290 $3,749 $173 $(42) $3,880
</TABLE>

The cost and market value of fixed maturities available for sale are as follows:
<TABLE>
<CAPTION>
At December 31
1993 1992 1991
Gross Gross Gross
Unrealized Market Unrecognized Market Unrecognized Market
(in millions) Cost Gains Losses Value Cost Gains Losses Value Cost Gains Losses Value
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government bonds $ 304 $ 20 $ -- $324 $206 $ 3 $-- $ 209 $2,052 $ 59 $ -- $2,111
Mortgage/asset-backed securities 1,883 73 -- 1,956 1,284 39 (4) 1,319 2,074 116 -- 2,190
Corporate bonds 2,403 126 -- 2,529 443 7 (1) 449 957 76 (7) 1,026
High-yield bonds 57 2 (2) 57 11 -- (1) 10 135 5 (12) 128
Tax-exempt bonds 34 3 -- 37 16 -- (1) 15 103 4 -- 107
Other -- -- -- -- 27 -- -- 27 43 1 -- 44
Total $4,681 $224 $ (2) $4,903 $1,987 $49 $(7) $2,029 $5,364 $261 $(19) $5,606
</TABLE>
2.7. STATED DUE DATES OF FIXED MATURITIES
The table below shows the stated due dates of fixed maturities
classified as "held to maturity."
<TABLE>
<CAPTION>
At December 31, 1993
Market
(in millions) Cost Value
<S> <C> <C>
In 1994 $ 48 $ 48
1995 through 1998 185 192
1999 through 2003 1,684 1,756
After 2003 1,075 1,080
Subtotal 2,992 3,076
Mortgage/asset-backed securities 1,669 1,720
Fixed maturities held to maturity $4,661 $4,796
</TABLE>
The table below shows the stated due dates of fixed maturities
available for sale.

At December 31, 1993
Market
(in millions) Cost Value
In 1994 $ 40 $ 40
1995 through 1998 1,334 1,378
1999 through 2003 850 913
After 2003 574 616
Subtotal 2,798 2,947
Mortgage/asset-backed securities 1,883 1,956
Fixed maturities available for sale $4,681 $4,903

Expected maturities may differ from stated due dates as
borrowers may have the right to call or prepay obligations.
During 1993, USF&G received proceeds from sales or repayments of
fixed maturities of $3.0 billion. The table below illustrates
the source of 1993 proceeds.

Gross Gross
(in millions) Cost Proceeds Gains Losses
Proceeds From Sales of
Fixed Maturities:
Held to maturity $ 454 $ 462 $ 20 $(12)
Available for sale 1,181 1,252 73 (2)
Subtotal 1,635 1,714 93 (14)
Proceeds From Repayments:
Held to maturity 946 941 9 (14)
Available for sale 313 308 1 (6)
Subtotal 1,259 1,249 10 (20)
Total proceeds $2,894 $2,963 $103 $(34)

Proceeds from sales of fixed maturities classified as "held to maturity"
occurred primarily due to repositioning a portion of the portfolio
in anticipation of the adoption of SFAS No. 115. In 1992,
proceeds from fixed maturities held to maturity totaled $119
million with gross gains of $6 million and gross losses of $36
million. Proceeds from sales of fixed maturities available for sale
were $6 billion in 1992 with gross gains of $355 million and gross
losses of $166 million. During 1991, before fixed maturities were
classified as available for sale, proceeds from sales totaled $12
billion with gross gains of $225 million and gross losses of $137 million.

2.8. INVESTMENT COMMITMENTS
USF&G has outstanding commitments to provide permanent financing
for various real estate development projects. The funded amounts
of these commitments are collateralized by the real estate
projects. At December 31, 1993, unfunded commitments totaled
approximately $12 million, and approximately $8 million of this
is expected to be funded in 1994.

USF&G has a potential commitment to purchase $14 million of
preferred shares in an investment unless the investment procures
an alternative source of financing prior to March 31, 1994.

USF&G has a potential commitment to fund $13 million under the
terms of a participatory note investment if certain
collateralization tests are not met.

2.9. NONINCOME-PRODUCING INVESTMENTS
Fixed maturities and other invested assets held at December 31,
1993, for which no income was recorded during 1993, totaled $4
million and $1 million, respectively. In addition, nonperforming
real estate, defined as mortgage loans and real estate
investments that are not performing in accordance with their
contractual terms or are performing significantly below
expectations, totaled $249 million at December 31, 1993.

NOTE 3 DEBT AND CREDIT ARRANGEMENTS

3.1. DEBT OUTSTANDING

At December 31
(in millions) 1993 1992 1991
Corporate:
Short-term $395 $375 $388
Long-term:
9.98% and 10.1% Universal
Medium-Term notes due 1994 -- 20 20
8 7/8% Notes due 1996 99 99 99
5 1/2% Swiss Franc Bonds due 1996 80 80 86
5.35% Swiss Franc Loan due 1993 -- -- 24
Subtotal 574 574 617
Real Estate and Other:
Short-term 12 3 12
Long-term:
8% Secured note due 1995 11 11 --
9 3/8% Secured note due 1994 -- 11 11
12 3/4% Secured note due through 1995 -- -- 11
9.96% Secured notes due through 1999 14 15 21
Other 7 2 5
Subtotal 44 42 60
Total $618 $616 $677

3.2. SHORT-TERM DEBT
For general corporate purposes, USF&G maintains a committed,
standby credit facility with a group of foreign and domestic
banks totaling $700 million. The facility was entered into
during 1990 and expires in 1995. USF&G pays fixed facility fees
and commitment fees for the unused portion of the facility based
on its long-term debt credit ratings. Borrowings at December 31,
1993, 1992, and 1991, totaled $375 million. Interest rates are
based on current market rates. USF&G was in compliance with the
covenants contained in these agreements at December 31, 1993,
1992, and 1991. The two most restrictive covenants, as defined
in the agreements, require USF&G to maintain a tangible net
worth of at least $1 billion and an indebtedness-to-capital
ratio below 70 percent.

3.3. SHELF REGISTRATIONS
In January 1994, USF&G filed a shelf registration statement
with the Securities and Exchange Commission. As of the time
this registration statement went effective in February 1994,
USF&G had available $647 million of unissued debt, preferred
stock, common stock, and warrants to purchase debt and stock.
These securities may be sold from time to time with various
terms appropriate to the securities issued to be determined
at the time of issuance.

3.4. REDEEMABLE DEBT
Beginning in 1993, the 8 7/8% Notes are redeemable at par, plus
accrued interest. The 5 1/2% Swiss Franc Bonds are subject to
various redemption options beginning in 1992 at 101 percent of
par, plus accrued interest.

3.5. CURRENCY SWAPS
USF&G entered into currency swap agreements to hedge its foreign
currency exposure on the 33 million 5.35% Swiss Franc Loan
and the 120 million 5 1/2% Swiss Franc Bonds. These agreements
were in place through the maturity of the related debt issues.
USF&G is subject to the risks that the counterparties will fail to
perform and that the value of the currency swaps will fluctuate.
However, these risks are mitigated by the credit quality of the
counterparties and the foreign exchange gains or losses on the
related debt. USF&G is exposed to credit losses for periodic
settlement of amounts due, which are not material at December
31, 1993. In December 1992, USF&G repaid the 33 million Swiss
Franc Loan and cancelled the related currency swap; however, a
currency swap agreement is still in effect on the 5 1/2%
Swiss Franc Bonds. As a result of the currency swaps, debt-related
foreign currency translation had no effect on net income.

3.6. INTEREST RATE SWAPS
USF&G entered into interest rate swaps to exchange variable commercial
paper rates for fixed borrowing costs. Three interest rate swaps
expired during 1993. The remaining interest rate swap has a fixed
rate of 9.405 percent through 2000 on notional principal of
$25 million. This agreement involves, to varying degrees,
interest rate and credit risk in excess of amounts recognized in
the balance sheet. The notional amount indicates USF&G'S
involvement but not future cash requirements. The maximum credit
risk related to the remaining agreement is the amount related to
periodic settlements, which is not material at December 31, 1993.
USF&G controls the credit risk through monitoring procedures and
investigation of counterparties to the transaction.

3.7. INTEREST
Interest paid in the years ended December 31, 1993, 1992, and
1991 was $41 million, $49 million, and $52 million,
respectively. Interest incurred and capitalized in the years
ended December 31, 1992 and 1991 was $8 million. There was no
interest incurred and capitalized in 1993.

3.8. MATURITIES OF LONG-TERM DEBT

Real Estate
(in millions) Corporate and Other
1994* $ 20 $11
1995 -- 11
1996 179 --
1997 -- --
1998 -- --
*This amount is included with short-term debt in the debt
outstanding table.

NOTE 4 FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value information presented is based on quoted market
prices where available. In cases where quoted market prices are
not available, fair values are based on internal estimates using
present value or other valuation techniques. Those techniques
are significantly affected by the assumptions used, such as
applicable discount rate and estimated future cash flows.
Therefore, the derived fair value estimates cannot be
substantiated by comparison to independent markets and in many
cases, could not be realized in immediate settlement of the
instrument. Fair value disclosure requirements exclude certain
financial instruments and all nonfinancial instruments. The fair
value of many insurance-related liabilities do not require disclosure.
However, in its strategy of asset/liability matching, USF&G takes into
consideration the future cash requirements of its
insurance-related liabilities. Had a presentation of these
liabilities been made, due to their long-term nature, the fair
value of insurance-related liabilities would have been
significantly less than their carrying value.

Cash and Short-Term Investments: The carrying amounts reported
in the Statement of Financial Position for these instruments
approximate their fair values.

Fixed-Maturity Investments: Fair values for publicly-traded
fixed-maturity investments are based on quoted market prices.
For privately placed fixed maturities, estimated fair values,
obtained from independent pricing services, are derived by
discounting expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of
the investment. At December 31, 1993, the amortized cost,
carrying amounts, and fair values of fixed-maturity investments
were as follows:

Amortized Carrying Fair
(in millions) Cost Amount Value
Publicly traded $9,181 $9,401 $9,536
Private placements 161 163 163
Total fixed-maturity investments $9,342 $9,564 $9,699

The preceeding table includes fixed maturities available for sale
with a market and carrying value of $4,903 million and amortized
cost of $4,681 million. Such investments are reported in the
Consolidated Statement of Financial Position at market value.

Equity Investments: The carrying values of equity securities as
reported in the Statement of Financial Position are based on
quoted market prices and reflect their fair values.

Mortgage Loans and Policy Loans: The fair values for mortgage
loans and policy loans are estimated using discounted cash flow
analyses, using interest rates currently being offered for
similar loans to borrowers with similar credit ratings. Loans
with similar characteristics are aggregated for purposes of the
calculations. At December 31, 1993, the carrying amounts and
fair values of investments in mortgage loans and policy loans
were as follows:

Carrying Fair
(in millions) Amount Value
Mortgage loans $302 $304
Policy loans 55 59

Other Assets and Other Liabilities: Other invested assets
considered financial instruments include equity interests in
minority ownership investments, interests in limited
partnerships and related notes receivable. It is not practicable
to estimate a fair market value due to the closely-held nature
of these investments.

Other assets and liabilities considered financial instruments
include agents' balances receivable, prepaid and accrued
expenses, and other receivables generally of a short-term
nature. It is assumed the carrying value approximates fair
market value.

Short and Long-Term Debt: The carrying amount of USF&G'S
short-term borrowings approximates its fair value. The fair
value of long-term debt is estimated using discounted cash flow
analyses, based on USF&G'S current incremental borrowing rates
for similar types of borrowing arrangements. The carrying
amounts and estimated fair value of debt instruments at December
31, 1993, were as follows:
<TABLE>
<CAPTION>
Carrying Fair
(in millions) Amount Value
<S> <C> <C>
Corporate:
Short-term $395 $395
Long-term 179 179
Real estate 44 46
Other -- --
Total $618 $620
</TABLE>
Investment Contracts: Fair values for USF&G'S single premium
deferred annuities, other deferred annuities, single premium
immediate annuities and supplementary contracts are primarily
derived by estimating the cost to extinguish its liabilities
under an assumption reinsurance transaction. The estimated
statutory profits the assuming company would realize from the
transaction are discounted at a typical internal rate of return
objective. If such a transaction were to occur, GAAP would
require the unamortized balance of deferred acquisition costs
associated with these liabilities be immediately expensed. The
amount of the related unamortized deferred acquisition costs was
approximately $99 million at December 31, 1993. The fair values
of the remaining liabilities under investment contracts are
estimated using discounted cash flow calculations, based on
interest rates currently being offered for like contracts with
similar maturities. The carrying amounts and estimated fair
values of USF&G'S liabilities for investment contracts at
December 31, 1993, are as follows:

Carrying Fair
(in millions) Amount Value

Single premium deferred annuities $2,138 $2,104
Other deferred annuities 292 276
Single premium immediate annuities
and supplementary contracts 150 150
Funding agreements 1 1
Group annuities 167 167
Total $2,748 $2,698

Off-Balance Sheet Financial Instruments: The fair values of
USF&G'S unfunded real estate commitments and its financial
commitment on investments are estimated using discounted cash
flow analyses, based on USF&G'S current incremental borrowing
rate for similar types of borrowing arrangements. The estimate
of the fair value of USF&G'S interest rate swaps were obtained
from the counterparties to the agreements and were derived by
discounting the expected future cash flows using the basis point
differential between the current and contracted interest rates.
The estimated fair values of USF&G'S off-balance sheet financial
instruments at December 31, 1993, are as follows:

Fair
(in millions) Value
Unfunded real estate commitments $(11)
Commitment on investments (27)
Interest rate swaps (5)

NOTE 5 LEASES

USF&G occupies office facilities under lease agreements that
expire at various dates through 2009. In addition, data
processing, office, and transportation equipment is leased under
agreements that expire at various dates through 1998.

USF&G'S principal office lease involves a 40-story office
building that was sold in 1984 and subsequently leased back.
This lease provides for renewal options and rent increases every
five years and a repurchase option at the end of the lease. The
deferred gain arising from this sale is being amortized over the
noncancelable lease term of 25 years. The unamortized amount of
the deferred gain of $30 million, $31 million, and $33 million
at December 31, 1993, 1992, and 1991, respectively, is included
in other liabilities. For the years ended December 31, 1993,
1992, and 1991, amortization of $2 million is netted with
underwriting, acquisition, and operating expenses.

Most leases contain renewal options that may provide for rent
increases based on prevailing market conditions. Some leases
also may contain purchase options based on fair market values or
contractual values, if greater. All leases are accounted for as
operating leases. Rent expense for the years ended December 31,
1993, 1992, and 1991, was $54 million, $58 million, and $63
million, respectively.

Future net minimum payments under noncancelable leases at
December 31, 1993, are as follows:

Home Other
Office Office
(in millions) Building Space Equipment Total
1994 $ 14 $17 $11 $ 42
1995 16 14 7 37
1996 16 12 5 33
1997 17 10 1 28
1998 17 8 -- 25
After 1998 269 10 -- 279
Total $349 $71 $24 $444

NOTE 6 SHAREHOLDERS' EQUITY

6.1. CLASSES OF STOCK
USF&G is authorized to issue 12 million shares of $50 par value
preferred stock and 240 million shares of $2.50 par value common
stock.

6.2. PREFERRED STOCK
USF&G has 4 million shares of $4.10 Series A Convertible
Exchangeable Preferred Stock, 1.3 million shares of $10.25
Series B Cumulative Convertible Preferred Stock, and 3.8 million
shares of $5.00 Series C Cumulative Convertible Preferred Stock
issued and outstanding at December 31, 1993, 1992, and 1991.

Each share of the Series A and Series C preferred stock entitles
the holder to an annual cumulative dividend of $4.10 and $5.00,
respectively, and a liquidation preference of $50 plus accrued
and unpaid dividends. Each share of Series B preferred stock
entitles the holder to an annual cumulative dividend of $10.25
and a liquidation preference of $100 plus accrued and unpaid
dividends.

At December 31, 1993, at the option of the holder, subject to
adjustment under certain conditions, each share of Series A,
B, and C preferred stock is convertible to 1.179, 8.316, and
4.158 shares, respectively, of USF&G'S common stock. The Series
A stock is exchangeable in whole at USF&G'S option on any
dividend payment date for the corporation's 8.2 percent Convertible
Subordinated Debentures due in 2011 at a rate of $50 principal
amount per share. Series B and Series C stock are not exchangeable.

The Series A shares are redeemable for cash, in whole or in
part, at USF&G'S option at $51.23 per share, plus accrued and
unpaid dividends to the redemption date. The redemption price
declines to $50 per share in 1996. Series B shares are
redeemable for cash, in whole or in part, at USF&G'S option
commencing in 1994 at $100 per share and accrued and unpaid
dividends plus a premium of $10.25 per share that declines
ratably to zero per share in 2001. No redemption may be made
prior to 1997 unless the closing price of the common stock
exceeds 150 percent of the Series B conversion price and subject
to certain other conditions. In addition, if a change in control
event should occur, then at the election of each holder of
Series B Preferred Stock, USF&G will issue and sell additional
nonredeemable equity securities and apply the net proceeds
thereof to redeem these Series B shares, but only if and to the
extent any such proceeds are raised. Series C shares are
redeemable for cash, in whole or in part, at USF&G'S option
commencing in 1994 at $53.50 per share, plus accrued and unpaid
dividends to the redemption date. The redemption price declines
to $50 per share in 2001.

Holders of the preferred stock are not entitled to vote, except
that they may vote separately with respect to certain matters
including the authorizations of any additional classes of
capital stock that would rank senior to the preferred stock. In
the event that two quarterly dividends for Series B and C
preferred stock or six quarterly dividends for Series A stock
are unpaid, USF&G'S Board of Directors will be increased by two,
and holders of preferred stock may elect two directors until all
such dividends in arrears have been paid.

6.3. DIVIDEND RESTRICTIONS
Payment of dividends to USF&G Corporation by its subsidiary is
subject to certain restrictions. The Maryland Insurance code
requires the Maryland Insurance Commissioner's prior approval
for any dividend payments during a twelve month period from a
Maryland subsidiary, such as USF&G Company, to its holding
company which exceeds 10 percent of policyholders' surplus.
At December 31, 1993, $154 million of dividends is currently
available for payment to USF&G Corporation from its insurance
subsidiary during 1994 without restriction. During 1993, $147
million in dividends was available for payment to USF&G Corporation
from its insurance subsidiary without restriction, of which
$125 million of dividends was paid.

6.4. CHANGES IN COMMON STOCK SHARES

Years Ended December 31
1993 1992 1991
Common Stock:
Balance, January 1 84,512,758 84,273,327 83,958,222
Shares issued 496,724 239,431 315,105
Balance, December 31 85,009,482 84,512,758 84,273,327

6.5. SHAREHOLDER RIGHTS PLAN
USF&G has a shareholder rights plan ("the plan") to deter
coercive or unfair takeover tactics and to prevent a potential
purchaser from gaining control of USF&G without offering a fair
price to all of the corporation's shareholders. Under the plan,
each outstanding share of USF&G'S common stock has one preferred
share purchase right (a "right") expiring in 1997. Each right
entitles the registered holder to purchase 1/100 of a share of a
new class of junior preferred stock for $140. The rights cannot
be exercised unless certain events occur that might lead to a
concentration in ownership of common shares. At that time, the
rights may be exercised for common stock having a value of twice
the exercise price. Under certain conditions, the rights also
become exercisable into shares of common stock of a purchaser
having a value of twice the exercise price. USF&G will generally
be entitled to redeem the rights, at $.05 per right, any time
before the tenth day after a 20 percent position is acquired.

NOTE 7 STOCK OWNERSHIP PLANS

7.1. STOCK OPTIONS AND STOCK PURCHASE PLANS
Stock Options: Stock options have been granted to full-time
officers and key employees under four incentive plans: Long-Term
Incentive Plan, Stock Option Plan of 1987, Stock Option Plan of
1990, and Stock Incentive Plan of 1991. In addition, the
Employee Stock Option Plan of 1992 granted eligible employees,
other than officers and key employees participating in other
stock incentive plans, options to purchase 50 or 100 shares of
stock. Options granted under the plans are based on market
quotations at the time of grant. Activity under the stock option
plans is as follows:

Years Ended December 31
1993 1992 1991
Outstanding, January 1 4,473,572 2,816,748 1,820,942
Granted 1,143,282 2,590,295 1,646,152
Exercised (338,940) (26,868) --
Surrendered or cancelled (1,115,690) (906,603) (650,346)
Outstanding, December 31 4,162,224 4,473,572 2,816,748
Expiration dates 1/94-12/2003 1/93-12/2002 4/92-12/2001
Exercise and surrender prices $6.25-30.82 $6.25-30.82 $6.25-34.00
Shares reserved and
available for grant 2,985,959 3,026,179 1,042,046

Stock Purchase Plans: Shares have been offered to employees under
the Employees' Stock Purchase Plans of 1985 and 1990. None were offered
in 1991, 1992, or 1993. The purchase price is 85 percent of the
market value of USF&G'S common stock on the grant date or the
end of the two-year purchase period, whichever is less. Activity
under the stock purchase plans is as follows:

Years Ended December 31
1993 1992 1991
Outstanding, January 1 -- 133,379 585,869
Granted -- -- --
Shares purchased -- (98,882) (125,407)
Cancelled -- (34,497) (327,083)
Outstanding, December 31 -- -- 133,379
Expiration dates -- N/A 8/92
Purchase prices -- $11.16 $5.68-23.23
Shares reserved -- N/A 500,000

Accounting Methods: Proceeds from the shares sold under the
stock option and stock purchase plans are credited to common
stock and paid-in capital. USF&G makes no charges to income for
the plans. The number of shares under the plans are adjusted for
any future stock dividends, stock splits, or similar changes.

7.2. DIRECTORS STOCK PLAN
Directors Stock Plan: The Corporation adopted the 1993 Stock
Plan for Non-Employee Directors (the "Directors Stock Plan") on
May 12, 1993. Only the Corporation's outside directors are
eligible to participate and participation is mandatory. The
Directors Stock Plan has two components: (i) annual retainer
awards, and (ii) retirement awards. The Directors Stock Plan
authorizes the issuance of up to 300,000 shares of the
Corporation's common stock, par value $2.50 per share. Activity
under the Directors Stock Plan is as follows:

December 31, 1993
Retirement Annual Retainer
Award Award

Outstanding, January 1 -- --
Stock Units Awarded 123,958 11,927
Stock Issued (17,300) (5,000)
Outstanding, December 31 106,658 6,927

Accounting Method: USF&G records an accounting expense equal to
the market value at grant date of the vested stock or stock
units awarded under the Directors Stock Plan. In 1993, $2
million of compensation expense was recognized relating to this
plan. The future accounting expense related to these plans is
expected to be minimal.

NOTE 8 RETIREMENT BENEFITS

8.1. RETIREMENT PLANS
USF&G has various noncontributory retirement plans covering most
regular full-time employees of the corporation and its
affiliates. An employee's pension benefit is based on salary,
years of service, and Social Security benefits. USF&G makes
contributions to the pension plans based on amounts required to
be funded under provisions of the Employee Retirement Income
Security Act of 1974. The plans' funded status and amounts
recognized in the consolidated financial statements are as
follows:
<TABLE>
<CAPTION>
At December 31
(in millions) 1993 1992 1991
<S> <C> <C> <C>
Actuarial Present Value of:
Accumulated benefit obligation $338 $263 $252
Vested benefits 322 249 241
Plan assets at fair value $297 $265 $237
Projected benefit obligation 351 278 262
Funded status (54) (13) (25)
Unrecognized net loss 123 55 62
Unrecognized prior service cost (benefit) (25) (28) (31)
Unrecognized net asset at January 1 -- -- (19)
Adjustment for minimum pension liability (85) -- --
Net prepaid (accrued) pension cost $(41) $ 14 $(13)
Actuarial Assumptions:
Weighted-average discount rate 7.5% 8.75% 8.75%
Average rate of increase in future
compensation levels 5 6 6
Expected long-term rate of return on assets 8.5 9.5 9.5
</TABLE>
As a result of the lower interest rate environment, USF&G decreased
the discount rate assumption which caused the accumulated benefit
obligation to increase. In accordance with SFAS No. 87, USF&G recorded a
minimum pension liability for the underfunded amount representing
the accumulated benefit obligation in excess of the fair value of
the plans' assets plus the amount of prepaid pension costs. The
minimum pension liability is reported as a separate reduction
to shareholders' equity.

The assets held by the plans consist primarily of fixed-income
and equity securities. USF&G classifies prepaid pension cost
with other assets and accrued pension cost with other
liabilities in the Consolidated Statement of Financial Position.
<TABLE>
The components of net pension expense are as follows:
<CAPTION>
Years Ended December 31
(in millions) 1993 1992 1991
<S> <C> <C> <C>
Service cost $ 4 $ 5 $ 9
Interest cost 25 23 25
Actual return on plan assets (19) (15) (27)
Net amortization and deferral -- (10) 5
Net periodic pension expense $10 $ 3 $ 12
</TABLE>

8.2. POSTRETIREMENT BENEFITS
USF&G sponsors a defined dollar postretirement health care
plan (medical and dental) and noncontributory life insurance
plan covering most regular full-time employees of the
corporation and its affiliates. USF&G'S contributions and costs
are determined based on the annual salary and the type of
coverage elected by covered employees. USF&G'S contributions
to the plan are a percentage of plan costs based on age and
service of employees at retirement. Additionally, the plan
costs are capped at projected 1995 cost levels, and retiree
contributions are increased for the total medical costs over
the projected levels.

Effective January 1, 1993, USF&G adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." This
statement requires USF&G to accrue a liability for the cost of
health care, life insurance, and other retiree benefits when the
employees' services are rendered. As permitted under the new
rule, the transition obligation of $52 million at January 1,
1993, was recognized as an immediate charge to net income by
including the cumulative effect of this accounting change. The
effect of adopting the statement increased 1993 net periodic
postretirement benefit cost by approximately $1 million to an
annual expense of $5 million. USF&G continues to fund the health
care and life insurance benefit costs principally on a
pay-as-you-go basis.

The plans' combined funded status and amounts recognized in the
consolidated financial statements at December 31, 1993, are as
follows
<TABLE>
<CAPTION>
(in millions)
<S> <C>
Accumulated postretirement benefit obligation:
Retirees $(46)
Fully eligible active plan participants (4)
Other active plan participants (8)
(58)
Plan assets at fair value --
Funded status (58)
Unrecognized net loss 6
Unrecognized transition obligation --
Accrued postretirement benefit cost $(52)
</TABLE>

USF&G classifies accrued postretirement benefit cost with other
liabilities in the Consolidated Statement of Financial Position.
<TABLE>
The components of the net periodic postretirement benefit cost
for the 1993 year are as follows:
<CAPTION>
(in millions)
<S> <C>
Service cost $1
Interest cost 4
Net periodic postretirement benefit cost $5
</TABLE>

The weighted-average annual assumed rate of increase in per
capita cost of covered benefits (i.e., medical trend rate) for
the plans is 10.5 percent for 1994 (13 percent assumed for 1993)
and is assumed to decrease to 5.5 percent in 2002 for
participants age 65 or younger, and 8.0 percent for 1994 (8.75
percent for 1993), decreasing to 5.5 percent for participants
over age 65 and remain at that level thereafter. Increasing the assumed
medical trend rate by one percentage point in each year would increase
the accumulated postretirement benefit obligation by
approximately $4 million and the aggregate of the service and
interest cost components of net periodic postretirement benefit
cost for the year by approximately $0.3 million. The
weighted-average discount rate used in determining the
accumulated postretirement benefit obligation is 7.5 percent at
December 31, 1993.

The pay-as-you-go expenditures for postretirement benefits were
$5 million in 1993, $4 million in 1992, and $3 million in 1991.

<TABLE>
The effect of the accounting change discussed above is
summarized as follows:
<CAPTION>
(in millions) 1993
<S> <C>
Cumulative effect of accounting change on January 1, 1993 $52
Plus postretirement benefit expense 5
Less postretirement cash expenditures (5)
Accrued postretirement benefit cost at December 31, 1993 $52
</TABLE>

As part of USF&G'S business restructuring program, special early
retirement benefits were offered to eligible employees during
1991. Included in restructuring charges for 1991 was $3 million
of pension expense related to these special benefits. There
were no similar expenses in 1993 or 1992.

NOTE 9 FEDERAL INCOME TAXES

USF&G and its subsidiaries file a consolidated federal income
tax return. The provision for income taxes gives effect to
permanent differences between income before income taxes and
taxable income. Deferred federal income taxes are provided on
temporary differences and net operating loss carry-forwards
(1993) and timing differences (1992 and 1991) between financial
and taxable income.

Effective January 1, 1993, USF&G changed its method of
accounting for income taxes as required by SFAS No. 109,
"Accounting for Income Taxes." Under the standard, a deferred
tax liability is recognized for taxable temporary differences
and a deferred tax asset is recognized for deductible temporary
differences and net operating loss carry-forwards ("NOLs") that
will offset future taxable income. A valuation allowance is
required if, based on the weight of available evidence, it is
more likely than not that some or all of the deferred tax asset
will not be realized. As permitted under the new standard, prior
years' financial statements have not been restated.

SFAS No. 109 requires that deferred income taxes reflect the net
tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The
cumulative effect of adopting SFAS No. 109 as of January 1,
1993, was to increase net income by $90 million. As a result of
the Omnibus Budget Reconciliation Act of 1993 which increased
the corporate rate to 35 percent, an additional $3 million
deferred tax benefit was recognized. At December 31, 1993, the
deferred tax asset of $119 million recorded by USF&G is
supported by a combination of forecasted taxable income and a
tax strategy that USF&G would implement to prevent NOLs from
expiring. A valuation allowance of $482 million has been
recognized to offset the gross deferred tax assets. USF&G had
NOLs of $634 million ($222 million tax-effected at a 35 percent
corporate rate) for income tax purposes that expire in the years
2000 through 2006.

9.1. SIGNIFICANT COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
<TABLE>
<CAPTION>
(in millions) December 31, 1993
<S> <C>
Deferred tax liabilities:
Deferred policy acquisition costs $(140)
Bonds (69)
Minimum pension liability (30)
Other invested assets (44)
Other (60)
Total deferred tax liabilities (343)
Deferred tax assets:
Loss reserves 304
Unearned premium revenue 45
Foreign reinsurance 49
Real estate 30
Future policy benefits 50
Net unrealized gains and losses 88
Other liabilities 113
Other 43
Net operating loss carry-forwards 222
Total deferred tax assets 944
Valuation allowance for deferred tax assets 482
Deferred tax assets, net of valuation allowance 462
Net deferred tax assets $ 119
</TABLE>
During the year, the net change in the valuation allowance was
$56 million to reflect the change in the realizability of the
deferred tax asset. In addition, the valuation allowance
increased $15 million due to the tax rate change enacted in 1993.

9.2. COMPONENTS OF PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
Years Ended December 31
Liability Method Deferred Method
(in millions) 1993 1992 1991
<S> <C> <C> <C>
Current tax (benefit) $ 7 $ 6 $ 4
Deferred tax (benefit) 24 (6) (1)
Adjustment for enacted change
in tax rates (3) -- --
Adjustment of the beginning of the
year valuation allowance (56) -- --
Provision for income taxes $(28) $-- $ 3

Income taxes paid $ 3 $ 9 $ 1
</TABLE>

9.3. TAX EFFECTS OF TIMING DIFFERENCES BETWEEN FINANCIAL AND TAXABLE INCOME
<TABLE>
<CAPTION>
Years Ended December 31
(in millions) 1992 1991
<S> <C> <C>
Tax Effect (Benefit):
Deferred policy acquisition costs $(15) $ (7)
Unbilled premium adjustments (4) (2)
Adjustment of life policy benefit reserves (1) (5)
Adjustment of property/casualty loss reserves 3 (11)
Adjustment of property/casualty unearned
premium reserves (4) (5)
Deferred realized gains and losses (2) 7
Unrecognized benefit of net losses 19 18
Other, net (2) 4
Provision for deferred income tax (benefit) $ (6) $ (1)
</TABLE>

9.4. TAX EFFECTS OF PERMANENT DIFFERENCES BETWEEN FINANCIAL
AND TAXABLE INCOME
<TABLE>
<CAPTION>
Years Ended December 31
Liability Method Deferred Method
(in millions) 1993 1992 1991
<S> <C> <C> <C>
Tax at federal rates $35 $12 $(48)
Tax Effect (Benefit):
Adjustment of the beginning of
the year valuation allowance (56) -- --
Effect of change in tax rates (3) -- --
State and foreign taxes -- -- 1
Dividend received deduction -- (3) (2)
Tax-exempt interest income (2) (3) (7)
Proration adjustment on non-taxable
investment income -- 1 1
Adjustment of property/casualty
salvage and subrogation accruals
(fresh start) -- -- (3)
Adjustment of property/casualty
loss reserves (fresh start) -- (9) (12)
Alternative minimum tax -- -- 10
Unrecognized benefit of net loss -- 2 63
Other (2) -- --
Provision for income taxes $(28) $-- $ 3
</TABLE>

9.5. NET OPERATING LOSS CARRY-FORWARDS (NOLS)
At December 31, 1993, USF&G had NOLs remaining for tax return
purposes expiring in years 2000 through 2006. The amount and
timing of recognizing the benefit of these NOLs depends on
future income and limitations imposed by recent tax acts. The
approximate amounts of USF&G's NOLs on a regular tax basis and
an alternative minimum tax ("AMT") basis at December 31, 1993,
were as follows:
<TABLE>
<CAPTION>
(in millions) Tax Return
<S> <C>
Regular tax basis $634
AMT basis 389
</TABLE>

NOTE 10 REINSURANCE
During 1993, USF&G adopted SFAS No. 113, "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts." This standard requires the effects of reinsurance
activity to be reported on a gross basis. Reinsurance
receivables and prepaid reinsurance premiums are reported
separately as assets, instead of the previous practice of
reporting such receivables net of the related loss and unearned
premium liabilities. The standard also establishes the
conditions required for a contract to be accounted for as
reinsurance and prescribes income recognition and reporting
standards for those contracts. The initial adoption of this
standard had no effect on net income, but increased assets and
liabilities by approximately $1.2 billion at December 31, 1993.
USF&G reinsures portions of its policy risks with other
insurance companies or underwriters. USF&G assumes policy risks
from other insurance companies and through participation in
pools and associations. Reinsurance gives USF&G the ability to
write larger risks and control its exposure to losses from
catastrophes or other events that cause unfavorable underwriting
results. USF&G's ceding reinsurance agreements are generally
structured on a treaty basis whereby all risks meeting a certain
criteria are automatically reinsured. Amounts recoverable from
reinsurers are estimated in a manner consistent with the claim
liability associated with the reinsured policy. Reinsurance
contracts do not relieve USF&G from its obligation to
policyholders. Failure of reinsurers to honor their obligation
could result in losses to USF&G. USF&G evaluates the financial
condition of its reinsurers and monitors concentrations of
credit risks arising from similar economic characteristics of
the reinsurers to minimize its exposure to significant losses
from reinsurer insolvencies.

At December 31, 1993, reinsurance receivables totaled $573 million.
Of this amount, approximately $150 million was associated with the Workers
Compensation Reinsurance Bureau ("WCRB"), a single voluntary
reinsurance association of primary workers compensation insurers
formed for the purpose of providing excess of loss reinsurance to
its members. USF&G is a member of this pool. Each member is
required to hold collateral, for the benefit of all member companies,
in the form of investment-grade securities equaling 115 percent of
the member's share of outstanding receivables of the WCRB. This
collateral requirement mitigates the risk of WCRB becoming insolvent.
Risk of loss is minimal for the remainder of receivables due to
similar pool arrangements with collateral requirements, other
contracts where funds are withheld, or letters of credit
maintained. Credit risk is also diversified among numerous
reinsurers. Additionally, USF&G is active in the involuntary
market as a servicing carrier whereby USF&G processes business
for a pool but takes no direct underwriting risk because it is
directly reimbursed for the cost of processing policies and
settling any related claims. Reinsurance receivables of $719
million associated with this business are separately disclosed
in the Consolidated Statement of Financial Position.
<TABLE>
<CAPTION>
1993 1992 1991
(in Premiums Losses Unpaid Unearned Premiums Losses Unpaid Unearned Premiums Losses Unpaid Unearned
millions) Written Earned Incurred Losses Premiums Written Earned Incurred Losses Premiums Written Earned Incurred Losses Premiums
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Property/Casualty:
Direct $2,345 $2,338 $1,472 $5,078 $813 $2,472 $2,692 $2,182 $5,593 $805 $3,021 $3,127 $2,752 $5,607 $1,025
Assumed 593 506 83 1,251 104 259 376 385 1,555 98 573 423 412 1,667 313
Gross 2,938 2,844 1,555 6,329 917 2,731 3,068 2,567 7,148 903 3,594 3,550 3,164 7,274 1,338
Ceded (509) (517) 203 (1,053) (124) (311) (535) (479) (1,608) (133) (562) (532) (619) (1,570) (357)
Net 2,429 2,327 1,758 5,276 793 2,420 2,533 2,088 5,540 770 3,032 3,018 2,545 5,704 981
Life N/A 129 395 3,973 -- N/A 104 377 3,896 -- N/A 169 437 3,773 --
Total $2,429 $2,456 $2,153 $9,249 $793 $2,420 $2,637 $2,465 $9,436 $770 $3,032 $3,187 $2,982 $9,477 $ 981

</TABLE>

The ceded unpaid losses and assumed unpaid losses for 1993 were
reduced $464 million and $267 million, respectively, from 1992
due to a commutation involving the WCRB. At year end 1993, WCRB
members commuted the lowest layer of reinsurance for accident
years 1980 to 1992. As a result, USF&G was required to take back
all reserves previously ceded into the layer and return
reserves previously assumed.

Included in assumed unpaid losses in the table on the previous page are
$110 million, $123 million and $279 million related to loss portfolio
transfer agreements at December 31, 1993, 1992, and 1991,
respectively. USF&G has not entered into any such agreements to
cede its unpaid losses.

NOTE 11 FINANCIAL GUARANTEES

11.1. INSURANCE GUARANTEES
USF&G has underwritten and reinsured financial guarantee bonds
for principal and interest payments or installment notes when
due. The obligations guaranteed were issued by limited
partnerships, municipalities, and commercial enterprises.
Assessment is made of the likelihood of loss in connection with
these guarantees, and at December 31, 1993, 1992, and 1991, the
reserve for such losses was not material. The risk of loss under
these guarantees is diminished through reinsurance agreements
and collateral.

As of December 31, 1993, USF&G was contingently liable for par
value amounts totaling less than approximately $600 million on
financial guarantee exposures ceded through reinsurance agreements
with a monoline insurance company in which USF&G formally had a
minority ownership interest. In addition, USF&G has other
financial guarantee obligations where the par value guaranteed
totaled $12 million at December 31, 1993, with maturities ranging
from 1994 to 2007.

11.2. CORPORATE GUARANTEES
USF&G has also guaranteed the obligations of certain limited
partnerships where it has an equity interest. The risk of loss
under these guarantees is diminished by collateral in the
underlying projects. The guarantees totaled $82 million at
December 31, 1993, with maturities ranging from 1994 to 1999. In
addition, USF&G has line of credit commitments outstanding
totaling $61 million and purchase commitments outstanding of
$16 million.

NOTE 12 LEGAL CONTINGENCIES

12.1. GENERAL
USF&G's insurance subsidiaries are routinely engaged in
litigation in the normal course of their business, including
defending claims for punitive damages. As a liability insurer,
they defend third-party claims brought against their insureds.
As an insurer, they defend themselves against coverage claims.
Additional information regarding contingencies that may arise
from insurance regulatory matters may be found in the Regulation
section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.

In the opinion of management the litigation described herein is
not expected to have a material adverse effect on USF&G's
consolidated financial position, although it is possible that
the results of operations in a particular quarter or annual
period would be materially affected by an unfavorable outcome.

12.2. SHAREHOLDER CLASS ACTION SUITS
Twelve class action complaints were filed by certain
shareholders of USF&G in 1990 and 1991. USF&G moved to dismiss
all twelve complaints. The complaints refer to USF&G's public
announcement on November 7, 1990, concerning a reduction in its
dividend and related matters. By an order dated February 11,
1993, the court dismissed eleven of the class action complaints
and on April 23, 1993, the court dismissed the remaining action.
The plaintiffs appealed these rulings and on January 6, 1994,
the Fourth Circuit of Appeals affirmed the dismissal of all
twelve suits. The plaintiffs have not yet indicated whether they
will seek review from the United States Supreme Court. While the
outcome cannot be predicted with certainty, management believes
the lawsuits are without merit and the outcome is unlikely to
have a material adverse effect on USF&G's financial position.

12.3. ARKANSAS SERVICING CARRIER LITIGATION
On September 14, 1993, Interstate Contractors, Inc. and two
other Arkansas corporations filed a class action in the U.S.
District Court for the Eastern District of Arkansas, Little
Rock, against the National Council on Compensation Insurance
("NCCI"), USF&G and ten other insurance companies which served
as servicing carriers for the Arkansas involuntary workers
compensation market. The case, which is captioned INTERSTATE
CONTRACTORS, INC., ET AL. v. NATIONAL COUNCIL ON COMPENSATION
INSURANCE, ET AL., alleges that the defendants failed to provide
safety and loss control services, claim management services, and
assistance in moving insureds from the involuntary market to
the voluntary market. The plaintiffs are pursuing their claims
under various legal theories, including breach of contract,
breach of fiduciary duty, and negligence. The plaintiffs seek
unspecified compensatory damages based on the premiums
attributable to services allegedly not performed and damages
allegedly incurred as a result of the alleged failure to provide
such services. USF&G believes that it has meritorious defenses
and has determined to defend the action vigorously. Management
believes that it is unlikely such claims will have a material
adverse effect on USF&G's financial position.

12.4. NORTH CAROLINA WORKERS COMPENSATION LITIGATION
On November 24, 1993, N.C. Steel, Inc. and six other North
Carolina employers filed a class action in the General Court of
Justice, Superior Court Division, Wake County, North Carolina,
against the NCCI, North Carolina Rate Bureau, USF&G and eleven
other insurance companies which served as servicing carriers for
the North Carolina involuntary workers compensation market. On
January 20, 1994, the plaintiffs filed an amended complaint
seeking to certify a class of all employers who purchased
workers compensation insurance in the State of North Carolina
after November 24, 1989. The amended complaint, which is
captioned N.C. STEEL INC. ET AL., v. NATIONAL COUNCIL ON
COMPENSATION INSURANCE, ET AL., alleges that the defendants
conspired to suppress competition with respect to the North
Carolina voluntary and involuntary workers compensation
business, thereby artificially inflating the rates in such
markets and the fees payable to the insurers. The complaint also
alleges that the carriers agreed to improperly deny qualified
companies from acting as servicing carriers, improperly
encouraged agents to place employers in the assigned risk pool,
and improperly promoted inefficient claims handling. USF&G has
acted as a servicing carrier in North Carolina since 1990. The
plaintiffs are pursuing their claims under various legal
theories, including violations of the North Carolina antitrust
laws, unlawful conspiracy, breach of fiduciary duty, breach of
implied covenant of good faith and fair dealing, unfair
competition, constructive fraud, and unfair and deceptive trade
practices. The plaintiffs seek unspecified compensatory damages,
punitive damages for the alleged construction fraud, and treble
damages under the North Carolina antitrust laws. USF&G believes
that it has meritorious defenses and has determined to defend
the action vigorously. Management believes that it is unlikely
such claims will have a material adverse effect on USF&G's
financial position.

NOTE 13 INFORMATION ON BUSINESS SEGMENTS

USF&G's principal business segments are property/casualty
insurance and life insurance.

13.1. OPERATIONS
The insurance business is geographically diversified throughout
the United States. Noninsurance operations are located in the
United States, Europe, and other foreign countries. Foreign
operations, in total, are not material. Summarized financial
information for the business segments is as follows:
<TABLE>
<CAPTION>

Years Ended December 31
Income (loss) from Continuing
Revenues Operations Before Income Taxes
(in millions) 1993 1992 1991 1993 1992** 1991**
<S> <C> <C> <C> <C> <C> <C>
Property/Casualty Insurance
Commercial $1,223 $1,480 $1,885 $(223) $(343) $(455)
Personal 681 785 920 (28) (110) (97)
Reinsurance 305 157 96 32 20 26
Fidelity/surety 118 111 117 (8) 6 11
Property/casualty categories 2,327 2,533 3,018 (227) (427) (515)
Net investment income* 433 475 498 433 475 498
Realized gains on investments* 31 199 44 31 199 44
Other -- 1 3 (24) (51) (67)
Total property/casualty 2,791 3,208 3,563 213 196 (40)
Life Insurance
Premium income 129 104 169
Net investment income 321 349 370
Realized gains (losses) on investments 20 (1) 31
Other 1 2 2
Total life 471 454 572 14 (5) 36
Noninsurance Operations and eliminations (13) (2) 37 (128) (156) (137)
Consolidated $3,249 $3,660 $4,172 $ 99 $ 35 $(141)
<FN>
*Net investment income and realized gains (losses) on
investments are not allocated to property/casualty categories.

**Income (loss) from continuing operations before income taxes
for 1992 and 1991 includes restructuring charges by segment as
follows: Property/casualty, $46 million and $52 million; Life,
$3 million and $2 million; and Noninsurance operations, $2
million and $6 million, respectively.
</TABLE>

13.2. ASSETS
The assets of the insurance operations are primarily
investments. Foreign assets are not material. Assets of the
business segments are as follows:
<TABLE>
<CAPTION> At December 31
(in millions) 1993 1992 1991
<S> <C> <C> <C>
Property/casualty insurance $ 9,565 $ 8,253 $ 9,353
Life insurance 4,848 4,856 5,012
Noninsurance operations and eliminations (78) 25 121
Consolidated $14,335 $13,134 $14,486
</TABLE>

NOTE 14 INTERIM FINANCIAL DATE (UNAUDITED)
<TABLE>
<CAPTION>
Quarter
(in millions except per share data) First Second Third Fourth
Summary Quarterly Results:
<S> <C> <C> <C> <C> <C>
Revenues 1993 $ 875 $ 820 $ 755 $ 799
1992 941 906 1,011 802
1991 1,084 1,061 991 1,036

Income (loss) from continuing operations 1993 23 25 20 59
before cumulative effect of adopting new 1992 4 7 11 13
accounting standards 1991 (51) (56) (21) (16)

Loss from discontinued operations 1993 -- -- -- --
1992 -- (1) (6) --
1991 (4) -- (4) (24)

Income (loss) from cumulative effect of 1993 38 -- -- --
adopting new accounting standards 1992 -- -- -- --
1991 -- -- -- --

Net income (loss) 1993 61 25 20 59
1992 4 6 5 13
1991 (55) (56) (25) (40)

Primary Earnings per Common Share:*
Income (loss) from continuing operations 1993 $ .13 $ .15 $ .10 $ .55
before cumulative effect of adopting new 1992 (.09) (.06) (.02) .01
accounting standards 1991 (.65) (.77) (.38) (.34)

Loss from discontinued operations 1993 -- -- -- --
1992 -- (.01) (.07) --
1991 (.05) -- (.06) (.28)

Income (loss) from cumulative effect of 1993 .45 -- -- --
adopting new accounting standards 1992 -- -- -- --
1991 -- -- -- --

Net income (loss) 1993 .58 .15 .10 .55
1992 (.09) (.07) (.09) .01
1991 (.70) (.77) (.44) (.62)

Fully Diluted Earnings per Common Share:*
Income (loss) from continuing operations 1993 $ .17 $ .15 $ .10 $ .49
before cumulative effect of adopting new 1992 (.09) (.06) (.02) .01
accounting standards 1991 (.65) (.77) (.38) (.34)

Loss from discontinued operations 1993 -- -- -- --
1992 -- (.01) (.07) --
1991 (.05) -- (.06) (.28)

Income (loss) from cumulative effect of 1993 .34 -- -- --
adopting new accounting standards 1992 -- -- -- --
1991 -- -- -- --

Net income (loss) 1993 .51 .15 .10 .49
1992 (.09) (.07) (.09) .01
1991 (.70) (.77) (.44) (.62)
<FN>
*The sum of quarterly income (loss) per share amounts may not
equal the full year's amount due to stock issuances during
presented periods.
</TABLE>
In the first quarter of 1993, USF&G adopted two new accounting
standards, which resulted in a net benefit of $38 million. SFAS
No. 109, "Accounting for Income Taxes," increased net income by
$90 million. This was partially offset by a $52 million charge
to net income for SFAS No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions."

The third quarter 1992 results reflect $142 million in realized
gains on investments, $80 million of catastrophe losses as a
result of Hurricane Andrew, and $51 million of restructuring
charges.

The fourth quarter 1991 loss from discontinued operations
reflects the decision to divest the investment management
operations.

<PAGE>
III. 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. In addition,
USF&G Corporation is variously referred to herein as "USF&G" or the
"Corporation", United States Fidelity and Guaranty Company or "USF&G Company"
and Fidelity and Guaranty Life Insurance Company or "F&G Life."

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%
----------- --------- ------------- ----------- --- ------ ----------- ---
----------- --------- ------------- ----------- --- ------ ----------- ---

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,
S-29
<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
S-30
<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.

S-33
<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>

S-35
<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
S-36
<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
S-37

<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.

S-38
<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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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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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.

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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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
AT., 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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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
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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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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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IV. SUPPLEMENTAL INSURANCE INFORMATION

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.

S-51
<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.

S-53
<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>

<PAGE> S-54

V. INDEX TO EXHIBITS TO REGISTRATION STATEMENT

EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS

<PAGE>

EXHIBIT 23

We consent to the incorporation by reference into Registration
Statements Number 33-20449, 33-9405, 33-21132, 33-50825 and
33-51859 on Form S-3, and Number 2-61626, 2-72026, 2-98232,
33-16111, 33-35095, 33-38113, 33-43132, 33-45664, 33-45665 and
33-61965 on Form S-8 of USF&G Corporation of our report dated
February 11, 1994, with respect to the consolidated financial
statements of USF&G Corporation for the year ended December 31,
1993, included in its Current Report (Form 8-K) dated February
14, 1994, filed with the Securities and Exchange Commission.

We also consent to the references to our firm under the captions
"Experts", "Summary Consolidated Financial Information" and "Selected
Consolidated Financial Information" in the Prospectus Supplement to
the Registration Statement (Form S-3 No. 33-51859) dated February 14,
1994, of USF&G Corporation for the registration of $220,000,000 of its
Zero Coupon Convertible Subordinated Notes.

ERNST & YOUNG

Baltimore, Maryland
February 14, 1994

<PAGE>

Board of Directors
USF&G Corporation

We have audited the accompanying consolidated statement of
financial position of USF&G Corporation as of December 31, 1993,
1992, and 1991, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of
the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of USF&G Corporation at December 31, 1993,
1992, and 1991 and the consolidated results of its operations
and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.

In 1993, as a result of adopting new accounting standards and as discussed
in Notes 1, 2, 8, and 9 to the consolidated financial statements, the
Corporation changed its methods of accounting for certain investments
in debt and equity securities, postretirement benefits other than pensions,
and income taxes.

ERNST & YOUNG

Baltimore, Maryland
February 11, 1994