UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the Quarter Ended Commission File Number
March 31, 1994 1-8233
USF&G CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-1220567
(State of incorporation) (IRS employer identification no.)
100 Light Street, Baltimore, Maryland 21202
(Address of principal executive offices and zip code)
(410) 547-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding twelve (12)
months, and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date:
Common Stock, Par Value $2.50; 85,297,345 shares outstanding as
of April 29, 1994.
USF&G Corporation
Contents
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Statement of Financial Position 3
Condensed Consolidated Statement of Operations 4
Condensed Consolidated Statement of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Independent Auditor's Review Report 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 4. Submission of Matters to a Vote of Shareholders 23
Item 6. Exhibits and Reports on Form 8-K 23
Exhibit 4 - Instruments Defining the Rights of Security Holders
Including Indentures 23
Exhibit 10 - Material Contracts 23
Exhibit 11 - Computation of Earnings Per Share 29
Exhibit 12 - Computation of Ratio of Consolidated Earnings
to Fixed Charges and Preferred Stock Dividends 30
Exhibit 15 - Letter Regarding Unaudited Interim Financial
Information 31
SIGNATURE 32
USF&G Corporation
Condensed Consolidated Statement of Financial Position
At March 31 At December 31
(dollars in millions except share data) 1994 1993
Assets Unaudited
Investments:
Fixed maturities:
Held to maturity, at amortized cost
(market, 1994, $4,568;1993, $4,796) $ 4,675 $ 4,661
Available for sale, at market
(cost, 1994, $4,500; 1993,$4,681) 4,540 4,903
Common stocks, at market (cost, 1994,
$85; 1993, $98) 75 87
Preferred stocks, at market
(cost, 1994, $48; 1993, $48) 48 48
Short-term investments 340 322
Mortgage loans 320 302
Real estate 659 685
Other invested assets 381 369
Total investments 11,038 11,377
Cash 47 17
Accounts, notes, and other receivables 761 656
Reinsurance receivables 613 573
Servicing carrier receivables 704 719
Deferred policy acquisition costs 455 435
Other assets 526 558
Total assets $14,144 $14,335
Liabilities
Unpaid losses, loss expenses, and policy
benefits $10,231 $10,302
Unearned premiums 927 917
Corporate debt 585 574
Real estate and other debt 43 44
Other liabilities 1,001 987
Total liabilities 12,787 12,824
Shareholders' Equity
Preferred stock, par value $50.00
(12,000,000 shares authorized;
shares issued, 1994 and 1993, 9,099,910) 455 455
Common stock, par value $2.50
(240,000,000 shares authorized;
shares issued, 1994, 85,248,974;
1993, 85,009,482) 213 212
Paid-in capital 965 963
Net unrealized gains on investments 27 192
Net unrealized losses on foreign currency - (2)
Minimum pension liability (85) (85)
Retained earnings (deficit) (218) (224)
Total shareholders' equity 1,357 1,511
Total liabilities and shareholders'
equity $14,144 $14,335
See Notes to Condensed Consolidated Financial Statements.
USF&G Corporation
Condensed Consolidated Statement of Operations (Unaudited)
Three Months Ended March 31
(dollars in millions except per share data) 1994 1993
Revenues
Premiums earned (net of premiums ceded,
1994, $127; 1993, $134) $ 570 $ 674
Net investment income 183 192
Other 8 8
Revenues before realized gains 761 874
Realized gains on investments 5 1
Total revenues 766 875
Expenses
Losses, loss expenses, and policy
benefits (net of losses ceded,
1994, $65; 1993, $64) 509 590
Underwriting, acquisition, and operating
expenses 224 252
Interest expense 9 10
Total expenses 742 852
Pretax income before cumulative effect of
adopting new accounting standards 24 23
Provision for income taxes 1 -
Income before cumulative effect of adopting
new accounting standards 23 23
Income (loss) from cumulative effect
adopting new accounting standards:
Income taxes - 90
Postretirement benefits - (52)
Net income $ 23 $ 61
Preferred stock dividend requirements 12 12
Net income available to common stock $ 11 $ 49
Primary Earnings Per Common Share
Income before cumulative effect of
adopting new accounting standards $ .13 $ .13
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 1.06
Postretirement benefits - (.61)
Net income $ .13 $ .58
Full Diluted Earnings Per Common Share
Income before cumulative effect of
adopting new accounting standards $ .13 $ .17
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - .80
Postretirement benefits - (.46)
Net income $ .13 $ .51
Weighted average common shares
outstanding (000s):
Primary 85,132 84,541
Fully diluted 85,132 112,736
Dividends declared per common share $ .05 $ .05
See Notes to Condensed Consolidated Financial Statements
USF&G Corporation
Condensed Consolidated Statement of Cash Flow (Unaudited)
Three Months Ended March 31
(dollars in millions) 1994 1993
Operating Activities
Net income $ 23 $ 61
Adjustments to reconcile net
income to net cash provided from
operating activities:
Cumulative effect of adopting new
accounting standards - (38)
Realized gains on investments (5) (1)
Change in insurance liabilities 39 37
Change in deferred policy acquisition costs (20) -
Change in receivables (62) 16
Change in other liabilities (24) 50
Change in other assets 40 (15)
Other items, net 16 9
Net cash provided from operating
activities 7 119
Investing Activities
Net (purchases) sales and maturities of
short-term investments (19) 270
Purchases of fixed maturities held to
maturity (197) (1,241)
Sales of fixed maturities held to maturity 13 46
Maturities/repayments of fixed maturities
held to maturity 159 208
Purchases of fixed maturities available
for sale (49) -
Sales of fixed maturities available
for sale 17 640
Repayments of fixed maturities available
for sale 182 28
Purchases of equities and other investments (113) (41)
Sales, maturities, or repayments of equities
and other investments 150 74
Purchases of property and equipment (7) (4)
Disposals of property and equipment 3 -
Net cash provided from (used in)
investing activities 139 (20)
Financing Activities
Deposits for universal life and investment
contracts 50 35
Withdrawals of universal life and investment
contracts (153) (131)
Long-term borrowings 122 -
Repayments of long-term borrowings (121) -
Issuances of common stock 2 1
Cash dividends paid to shareholders (16) (16)
Net cash used in financing activities (116) (111)
Increase (decrease) in cash 30 (12)
Cash at beginning of period 17 25
Cash at end of period $ 47 $ 13
See Notes to Condensed Consolidated Financial Statement
USF&G Corporation
Notes to Condensed Consolidated Financial Statements
1. Basis of Accounting
The condensed consolidated financial statements are prepared
in accordance with generally accepted accounting principles
("GAAP"). These statements include the accounts of USF&G
Corporation and its subsidiaries ("USF&G"). Intercompany
transactions are eliminated in consolidation.
Certain 1993 amounts have been reclassified to conform to the
1994 presentation. The interim financial statements in this
report should be read in conjunction with the consolidated
financial statements and notes thereto in USF&G's Annual Report
to Shareholders for the year ended December 31, 1993. In the
opinion of management, the accompanying unaudited condensed
consolidated financial statements contain the necessary
adjustments, all of which are of a normal recurring nature for
interim period reporting purposes, for a fair presentation of
results for the interim periods.
2. Review by Independent Auditors
USF&G's independent auditors, Ernst & Young, have performed a review
of the condensed consolidated financial statements in this Form 10-Q
as to the three month periods ended March 31, 1994, and 1993. Their
limited review in accordance with standards established by the
American Institute of Certified Public Accountants did not
constitute an audit. Accordingly, they do not express an opinion
on this information.
3. Earnings Per Common Share
Primary earnings per common share are based on income, after
deduction of preferred stock dividends, and the weighted average
number of common shares outstanding during the periods. Common stock
equivalents were not included as they were insignificant. Fully diluted
earnings per common share assume the conversion of all securities whose
contingent issuance would have a dilutive effect on earnings.
Refer to the computation in Exhibit 11.
4. Ratio of Consolidated Earnings to Fixed Charges
For purposes of computing the ratio of consolidated earnings
to fixed charges and preferred stock dividends, earnings consist of
income before considering income taxes, the cumulative effect of
adopting new accounting standards, and fixed charges. Fixed charges
consist of interest, that portion of rentals that is deemed to be an
appropriate interest factor, and preferred stock dividend
requirements. Refer to the computation in Exhibit 12.
5. Unrealized Gains (Losses) on Investments
At March 31, 1994, gross unrealized gains and gross unrealized
losses pertaining to equity securities totaled $3 million and $13 million,
respectively. In addition, gross unrealized gains and gross
unrealized losses on limited partnerships included in other
investments totaled $11 million and $1 million, respectively. At
March 31, 1994, there were gross unrealized gains of $41 million
and gross unrealized losses of $1 million pertaining to fixed
maturities available for sale. There were also $13 million of gross
unrealized losses relating to a deferred policy acquisition cost
adjustment. The change in net unrealized gains (losses) on investments
amounted to a loss of $165 million during the three months ended
March 31, 1994, compared with a gain of $14 million during the three
months ended March 31, 1993.
6. Proceeds From Sales of Fixed Maturity Investments
Proceeds on sales of fixed maturities held to maturity were $13 million
for the three months ended March 31, 1994. Gross gains and gross
losses of less than $1 million were realized on those sales. During
the three month period ended March 31, 1993, proceeds from sales of
fixed maturities held to maturity were $46 million. Gross gains of
$3 million and gross losses of less than $1 million were realized on
sales in 1993. Proceeds from sales of fixed maturities available for sale
were $17 million for the three months ended March 31, 1994,
compared with $640 million for the same period in 1993. Gross
gains and gross losses of less than $1 million were realized on 1994
sales. Gross gains of $19 million and gross losses of $1 million were
realized on sales in 1993.
7. Legal Contingencies
7.1. 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, such litigation and the litigation
described below is not expected to have a material adverse
effect on USF&G's consolidated financial position, although it
is possible that the results of operations in a particular
quarter or annual period would be materially affected by an
unfavorable outcome.
7.2. 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 sought review from the United States Supreme Court and the time
period in which to do so has expired.
7.3 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
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 have moved to voluntarily dismiss without
prejudice the class action and, on April 20, 1994, the court
granted the requested dismissal. Because the dismissal is
without prejudice, the plaintiffs may seek to refile this case
at a later date.
7.4. 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.
USF&G Corporation
Report of Independent Auditors
Board of Directors
USF&G Corporation
We have reviewed the accompanying condensed consolidated
statement of financial position of USF&G Corporation as of March
31, 1994, and the related condensed consolidated statements of
operations and cash flows for the three-month periods ended
March 31, 1994 and 1993. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information consists
principally of applying analytical review procedures to
financial data, and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in
scope than an audit conducted in accordance with generally
accepted auditing standards, which will be performed for the
full year with the objective of expressing an opinion regarding
the financial statements taken as a whole. Accordingly, we do
not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the accompanying condensed
consolidated financial statements referred to above for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally
accepted auditing standards, the consolidated statement of
financial position of USF&G Corporation as of December 31, 1993,
and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended
(not presented herein) and, in our report dated February 11,
1994, we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated statement of
financial position as of December 31, 1993, is fairly stated, in
all material respects, in relation to the consolidated statement
of financial position from which it has been derived.
ERNST & YOUNG
Baltimore, Maryland
May 13, 1994
USF&G Corporation
Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section provides an assessment of financial results and
material changes in financial position for USF&G Corporation and
its subsidiaries ("USF&G") and explains the results of
operations for the first quarter. The analysis focuses on the
performance of USF&G's business segments and its investment
portfolio. This discussion updates the "Management's Discussion
and Analysis" in the 1993 Annual Report to Shareholders and
should be read in conjunction therewith. The results of
operations for the first quarter 1994 are compared with those
for the same period of 1993, unless otherwise noted. Financial
position at March 31, 1994, will be compared with December, 31,
1993. (Note: A glossary of certain terms used in this discussion
can be found at the end of this section. The terms are
underlined the first time they appear in the text.)
1. Consolidated Results
The table below shows the major components of net income.
Three Months Ended March 31
(in millions) 1994 1993
Pretax income before realized gains
and cumulative effect of adopting
new accounting standards $ 19 $ 22
Realized gains on investments, net 5 1
Income tax expense (1) -
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 90
Postretirement benefits - (52)
Net income $ 23 $ 61
The table below shows the components of pretax income before
realized gains and cumulative effect of adopting new accounting
standards by major business segment.
Three Months Ended March 31
(in millions) 1994 1993
Property/casualty insurance $ 33 $ 40
Life insurance 4 -
Parent and noninsurance (18) (18)
Pretax income before realized gains
and cumulative effect of adopting
new accounting standards $ 19 $ 22
The $38 million decrease in net income for the first quarter of
1994 is primarily due to the first quarter 1993 adoption of two
new Statements of Financial Accounting Standards ("SFAS").
Pretax income before these accounting changes and
realized gains and losses for the property/casualty insurance
segment decreased $7 million primarily as a result of lower net
investment income offset by improved underwriting results despite
higher catastrophe losses. The life insurance segment's $4 million
increase resulted from the combined effects of higher product sales,
improved profit margins, and income generated from the sale of a majority
of its timberland investment.
2. Property/Casualty Insurance Operations
Property/casualty insurance operations, the principal business segment,
accounted for 83 percent of USF&G's revenues in the first quarter of 1994
compared with 87 percent in the first quarter of 1993.
Financial results for this segment were as follows:
Three Months Ended March 31
(in millions) 1994 1993
Premiums earned $ 533 $ 648
Losses and loss expenses incurred (408) (500)
Underwriting expenses (187) (216)
Net underwriting loss (62) (68)
Net investment income 100 110
Other revenues and expenses, net (5) (2)
Pretax income before realized
gains and the cumulative effect
of adopting new accounting standards $ 33 $ 40
The decrease in pretax income before realized gains and the
cumulative effect of adopting new accounting standards in the
first quarter of 1994 compared with the first quarter of 1993
was primarily due to $10 million higher catastrophe losses and
lower investment income. Underwriting results continued to
improve despite lower premiums earned and higher catastrophe
losses.
2.1. PREMIUMS EARNED
Premiums earned totaled $533 million for the first three
months of 1994 compared with $648 million in the
first quarter of 1993. The table below shows the major
components of premiums earned and premiums written.
Three Months Ended March 31
1994 1993
Premiums Premiums Premiums Premiums
(in millions) Earned Written Earned Written
Branch office voluntary production:
Direct $467 $473 $489 $496
Other premium adjustments (1) (9) - -
Ceded reinsurance (36) (37) (23) (23)
Voluntary pools and
associations 13 13 11 12
Involuntary pools and
associations 27 25 48 42
Total primary 470 465 525 527
Assumed reinsurance:
Finite risk 23 38 103 133
Traditional risk 40 47 20 27
Total $533 $550 $648 $687
More than half of the total decline in premiums earned and
written are from finite risk assumed reinsurance. The market
demand for this product was diminished by the effects of accounting
changes under SFAS No. 113 and EITF 93-6 adopted in 1993. Premiums
from new business increased 14 percent in the first quarter of 1994
compared with the first quarter 1993; however, this increase has not
compensated for the lower renewal base principally caused by past
actions to reduce writings. As a result, total branch office direct
voluntary premium written is down six percent. This rate of decline
compares favorably with the declines of greater than 15 percent in
1992 and 1993.
Management still plans to limit premium writings and reduce
exposures in certain catastrophe prone geographical areas and
less profitable markets and product lines; however, the decline
in branch office voluntary direct premium has slowed in recent
quarters and is expected to level-off.
The table below shows premiums earned and the statutory loss
ratios by lines of property/casualty insurance.
Three Months Ended March 31
1994 1993
Premiums Statutory Premiums Statutory
(in millions) Earned Loss Ratio Earned Loss Ratio
Commercial lines $301 74.6 $319 87.2
Fidelity/Surety 28 28.3 25 25.6
Personal lines 141 98.4 181 78.1
Total primary 470 79.0 525 81.1
Assumed reinsurance 63 58.6 123 61.3
Total $533 76.5 $648 76.6
The significant increase in the statutory loss ratio for
personal lines is primarily due to the high catastrophe losses
and the generally poor weather conditions which impacted the
homeowners line of business. The commercial lines loss ratio
was also negatively effected by catastrophe losses, however,
this was offset by improved core underwriting performance and
favorable results from reinsurance pools.
2.2. UNDERWRITING RESULTS
Underwriting results generally represent premiums earned
less incurred losses, loss adjustment expenses ("LAE"), and
underwriting expenses. Property/casualty insurance companies
typically have underwriting losses that are offset by investment
income.
Underwriting gains (losses) by major business category are as
follows:
Three Months Ended March 31
(in millions) 1994 1993
Commercial $(30) $(66)
Fidelity/Surety 4 3
Personal (46) (16)
Total primary (72) (79)
Assumed reinsurance 10 11
Net underwriting losses $(62) $(68)
Voluntary $(59) $(48)
Involuntary (3) (20)
Net underwriting losses $(62) $(68)
Consolidated property/casualty GAAP and statutory underwriting
ratios are as follows:
Three Months Ended March 31
1994 1993
GAAP underwriting ratios:
Loss ratio* 76.5 77.2
Expense ratio* 35.2 33.2
Combined ratio 111.7 110.4
Statutory underwriting ratios:
Loss ratio 76.5 76.6
Expense ratio 34.5 33.8
Combined ratio 111.0 110.4
*See Glossary of Terms
Underwriting results in the first three months of 1994 improved
by $6 million over the same period in 1993, despite the high
catastrophe losses and the generally poor weather conditions,
which produced a greater than normal level of losses that were
not classified as catastrophes. In addition, as discussed in Section 2.4,
results from involuntary pools and associations improved. Underwriting
results in the first three months of 1994 included $40 million of net
catastrophe losses compared with $30 million in the same period
of 1993. Gross catastrophe losses were $40 million in the first
quarter of 1994 compared with $35 million in the same period of
1993. The average net catastrophe losses for the five first
quarters from 1989 to 1993 was $13 million. The high catastrophe
losses in the first three months of 1994 were related to severe
winter snow and ice storms and the Los Angeles earthquake. The
catastrophes in the first quarter of 1993 were primarily from
the March blizzard. Excluding catastrophe losses, the statutory
loss ratio for the first quarter of 1994 improved 3.3 points
when compared with first quarter of 1993.
Although overall voluntary underwriting losses have increased,
commercial lines voluntary results improved due to the favorable
impact of reinsurance recoverables and improved results from
reinsurance pools. The poor weather conditions and high
catastrophe losses contributed to the deteriorated personal
lines results especially in the homeowners line of business.
Underwriting results showed improvement despite continuing
competitive pressures, the inflationary claims environment, and
the adverse impact of involuntary markets. Competitive pressures
continue to effect 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 have been
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 the
industry generally has 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, as the result of capital infusions and other
factors, that excess surplus capacity still exists in the
industry and that pricing pressure will continue. USF&G is
unable to predict whether or when the property/casualty
insurance cycle will improve but is continuing to manage long
term objectives that include continued underwriting improvements
without reliance on a significant cycle turn.
2.3. LOSSES INCURRED AND LOSS RESERVES
Losses and loss adjustment expenses incurred totaled $408 million
in the first quarter of 1994, compared with $500 million for the same
period of 1993. The reduction is due primarily to lower premium volume
as well as actions taken to better manage claims and claim costs and reduce
exposures in undesirable markets.
Reserves for unpaid losses and loss expense totaled $6.3 billion
at March 31, 1994 and December 31, 1993. Reserves for unpaid losses
and loss expenses decreased $35 million, a decrease of less than one
percent despite the 6 percent decline in premiums earned after deducting
the change in assumed reinsurance that was affected by SFAS No. 113.
USF&G 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." Case reserves
(exclusive of bulk reserves) outstanding for such claims
were $199 million at March 31, 1994, compared with $214 million
at December 31, 1993. The primary reason for the decrease in the
case reserves relates to reinsurance recoverables and payments made
during the first three months of 1994.
The 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:
Total Claims Paid
from 1985-1994* Case Reserves at
(in millions) (includes LAE) March 31, 1994
Negligent construction $ 80 $70
Environmental 131 65
Asbestos 90 36
*amount is through the first quarter of 1994.
At March 31, 1994, USF&G had 1,110 active files relating to
environmental matters, including 78 coverage disputes. The
number of claims under each file may vary significantly. Through
the first quarter of 1994, approximately 28 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 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. 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. INVOLUNTARY MARKET PLANS
Most states require insurers to provide coverage for less
desirable risks through participation in mandatory programs.
The extent of participation in these programs is primarily based
on voluntary premium volume in the applicable states. USF&G's
participation in these involuntary programs has historically
depressed underwriting results.
The underwriting gains (losses) on involuntary business by
category of insurance are as follows:
Three Months Ended March 31
(in millions) 1994 1993
Commercial $ 1 $(15)
Personal (4) (5)
Total involuntary gain (loss) $ (3) $(20)
Losses from involuntary markets decreased $17 million in the
first quarter of 1994 compared with the same period in 1993.
This decrease is attributable to USF&G's managing its exposure
to certain states or product lines where high losses, inadequate
rates, excessive involuntary market costs, and unfavorable
legislative and regulatory environments have created an adverse
insurance climate. Most of the improvement is related to
decreased premium upon which assessments are based as well as improved
underwriting results reported by the involuntary pools. Involuntary
market plans represented five percent of both earned premiums
and underwriting losses in the first quarter of 1994. For the
same period in 1993, involuntary market plans represented 7
percent of earned premiums and 30 percent of USF&G's total
underwriting losses.
3. Life Insurance Operations
Life insurance operations ("F&G Life") represent 15 percent
of USF&G's total revenues for the first quarter of 1994 compared
with 13 percent for the same period of 1993. F&G Life's financial
results were as follows:
Three Months Ended March 31
(in millions) 1994 1993
Premiums $ 37 $ 26
Net investment income 83 82
Policy benefits (101) (90)
Underwriting and operating
expenses (15) (18)
Pretax income before realized gains
and the cumulative effect of adopting
new accounting standards $ 4 $ -
Income comparisons between the first quarter of 1994 and 1993
were affected by increased sales, lower operating expenses, and
improved profit margins. The increase in sales is attributable
to the new product initiatives and refocused distribution
channels (see Sales section). Net investment income increased
primarily due to the sale of a majority of the timberland investment.
Management expects investment income to decrease over the
remainder of 1994.
3.1. SALES
The following table shows life insurance and annuity
sales (premiums and deposits) by distribution system and product
type.
Three Months Ended March 31
(in millions) 1994 1993
Distribution System
Direct structured settlements $21 $10
Independent agencies/insurance brokers 22 10
National wholesaler - TSA 14 4
Member firm/financial institutions 8 11
Total $65 $35
Product Type
Structured settlement annuities $21 $10
Single premium deferred annuities 17 4
Tax sheltered annuities 12 4
Other annuities 13 15
Life insurance 2 2
Total $65 $35
Sales in the first quarter of 1994 continue to be favorably
affected by F&G Life's refocus on its marketing and customer
service operations. Variable cost distribution channels have
replaced high fixed cost marketing programs. New products
introduced in the past year were designed to meet the needs of
the distributors and increase sales. As a result, sales, led by
structured settlement annuities, single premium deferred
annuities ("SPDAs") and tax sheltered annuities ("TSAs"), have
increased 86 percent over the first quarter of 1993. In its
effort to continue the improvement in sales and profitability,
F&G Life intends to concentrate on the expansion of its existing
distribution channels while also developing other marketing
networks. F&G Life is also continuing the development of
selected market products and modifying current product offerings
to meet customer needs. There is no assurance that the improved
sales trend will continue, however, the recent rise in interest
rates and other market forces may have a positive effect on
future sales. During the first quarter of 1994, current and
projected spreads between investment income and interest
credited to policyholders improved. This resulted from lower
rates being credited to policies where the guaranteed rate
period has expired. Total life insurance in force decreased to
$11.7 billion at March 31, 1994, compared with $12.1 billion at
December 31, 1993.
3.2. POLICY SURRENDERS
Deferred annuities and universal life products are subject to
surrender. Nearly all of F&G Life's surrenderable annuity policies
allow a refund of the cash value balance less a surrender charge.
The surrender charge varies by product. Single premium deferred
annuities, which represent 78 percent of surrenderable business,
have surrender charges that decline from six percent in the first
policy year to zero percent in the seventh and later policy years.
Such built-in surrender charges provide protection against premature policy
surrender.
Policy surrenders totaled $131 million and $50 million for the
periods ended March 31, 1994 and 1993, respectively. Surrender
activity has increased as a result of expiring surrender
charges, especially on SPDAs, as policyholders seek other
investment alternatives with higher yields. Management has
implemented a conservation program to provide those policies
maturing in the near term with renewal options in an effort to
provide policyholders with investment alternatives within F&G
Life.
The total account value of F&G Life's deferred annuities is $2.5
billion, with only nine percent surrenderable at current account
value (i.e., without surrender charges). The surrender charge
period on $2.0 billion of F&G Life's single-premium deferred
annuity products expires within the next four years. The
surrender charge period on $563 million expires through 1994.
The experience so far for $242 million of SPDAs where the
surrender charge period expired in the fourth quarter of 1993
through the first quarter of 1994 indicates that up to 50 percent of
the expiring block may surrender, however, a larger percentage may
surrender should interest rates rise throughout the year. This
is likely to result in decreasing life insurance assets,
though, given the relatively high interest rates
credited when these annuities were issued, overall profit
margins may improve as they surrender or rollover to new
products, although this could be partially offset by
acceleration of the amortization of deferred policy acquisition
costs (see Deferred Policy Acquisition Cost section.) F&G Life,
with a liquid assets to surrender value of surrenderable business
of 126 percent at March 31, 1994, continues to maintain a high
degree of liquidity and has the ability to meet surrender obligations
for the foreseeable future.
3.3. DEFERRED POLICY ACQUISITION COSTS ("DPAC")
Costs to acquire and issue 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 sales levels, policy surrender experience,
projected investment spreads, and other criteria. Policy
acquisition costs unfavorably affected March 31, 1993, results
as $3 million of otherwise deferrable costs were expensed
because sales levels were not sufficient to support the deferral
of such costs. In the first quarter of 1994, no such expense
was incurred as sales were higher and policy surrenders were
less than expected. Should the level of sales begin to decline
or surrender activity increase, future results could be
negatively affected by the need to accelerate DPAC amortization.
4. Parent and Noninsurance Operations
Parent company interest and other unallocated expenses and net losses
from noninsurance operations were as follows:
Three Months Ended March 31
(in millions) 1994 1993
Parent Company Expenses:
Interest expense $ (8) $ (9)
Unallocated expense, net (9) (7)
Noninsurance losses:
Management consulting - (1)
Other noninsurance investments (1) (1)
Loss from operations before income
taxes and realized gains $(18) $(18)
The results for parent and noninsurance operations for the first
quarter of 1994 remained essentially unchanged from the first quarter
of 1993. During 1994, interest expense may increase as the result of higher
short-term interest rates and as USF&G replaces at least a portion of its
short-term credit facility with longer term debt (see Financial Condition
section).
5. Investments
At March 31, 1994, USF&G's investment mix is
consistent with year-end 1993. Long-term fixed maturities
comprise 83 percent of total investments at March 31, 1994,
compared with 84 percent at December 31, 1993. The table below
shows the distribution of USF&G's investment portfolio.
At March 31, 1994 At December 31, 1993
Total Investments (in millions) $11,038 $11,377
Fixed maturities:
Held to maturity 42% 41%
Available for sale 41 43
Total fixed maturities 83 84
Common and preferred stocks 1 1
Short-term investments 3 3
Mortgage loans and real estate 9 9
Other invested assets 4 3
Total 100% 100%
5.1. NET INVESTMENT INCOME
The following table shows the components of net investment income.
Three Months Ended March 31
(dollars in millions) 1994 1993
Net investment income from:
Fixed maturities $170 $185
Equity securities - 1
Short-term investments 3 3
Real estate and mortgage loans 17 12
Other, less expenses (7) (9)
Total $183 $192
Average yield (annualized) 6.6% 6.8%
Investment income from fixed maturities has declined as a result
of investing cash flows in a declining interest rate environment
during 1993. Average yields on fixed maturities were 7.3 percent
and 7.9 percent for the quarters ended March 31, 1994 and 1993,
respectively. Also, total investable assets were down as a
result of surrenders and decreased premium. During the first
quarter of 1994, maturities and other repayments of USF&G's
fixed maturity investments totaled $341 million and proceeds
from fixed maturities sales totaled $30 million. Proceeds from
these sales and repayments of fixed maturities were reinvested
at lower rates.
5.2. REALIZED GAINS (LOSSES)
The components of net realized gains (losses) include the following:
Three Months Ended March 31
(in millions) 1994 1993
Net gains (losses) from sales:
Fixed maturities $ 2 $ 18
Equities and options (1) -
Real estate and mortgage loans 9 -
Other 3 -
Total net gains 13 18
Provisions for impairment:
Fixed maturities - (3)
Equities - (1)
Real estate (5) (11)
Other (3) (2)
Total provisions (8) (17)
Net realized gains $ 5 $ 1
F&G Life's sale of timberland properties resulted in the
majority of the realized gains from sales of real estate in the
first quarter of 1994. The $18 million of realized gains in 1993
primarily relates to USF&G's repositioning of a portion of its
fixed maturity investments to more effectively match the
duration of its investments with its life insurance liabilities.
To reflect impairments in the value of certain real estate
investments, USF&G made provisions for impairment of $5 million
in 1994 compared with $11 million in 1993. Real estate
provisions in 1994 primarily related to specific properties
whose recent appraisal values reflected other than temporary
impairments of the investments. Real estate provisions were
taken in 1993 relating to other specific properties.
5.3. UNREALIZED GAINS (LOSSES)
The components of the changes in unrealized gains (losses) were as follows:
Three Months Ended March 31
(dollars in millions) 1994 1993
Fixed maturities available for sale $(182) $ -
Deferred policy acquisition cost adjustment 17 -
Equity securities (3) 9
Other 3 5
Total $(165) $14
USF&G adopted SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities," in the fourth quarter of 1993.
Prior to the adoption of SFAS No. 115, unrealized gains (losses)
on fixed maturities were not included as a component of
shareholders' equity. An average interest rate increase of 95
basis points during the first quarter of 1994 reduced the prior
year's unrealized gain on fixed maturities available for sale
from $222 million to $40 million at March 31, 1994. This was
partially offset by a DPAC adjustment reflecting assumptions
about the effect of potential asset sales of fixed maturities
available for sale on future DPAC amortization.
5.4. FIXED MATURITY INVESTMENTS
The tables below detail the composition of the fixed maturity portfolio.
(dollars in millions) At March 31, 1994 At December 31, 1993
Corporate investment-grade
bonds $4,970 $4,866
Mortgage-backed securities 2,167 2,403
Asset-backed securities 1,136 1,149
U.S. Government bonds 273 308
High-yield bonds* 569 562
Tax-exempt bonds 53 48
Other 7 6
Total fixed maturities at
amortized cost $9,175 $9,342
Total market value of fixed maturities $9,108 $9,699
Net unrealized gains (losses) $ (67) $ 357
Percent market-to-amortized cost 99% 104%
* See Glossary of Terms
At March 31, 1994 At December 31, 1993
Net Net
Amortized Market Unrealized Amortized Market Unrealized
(in millions) Cost Value Gain(Loss) Cost Value Gain
Fixed maturities:
Held to maturity $4,675 $4,568 $(107) $4,661 $4,796 $135
Available for
sale 4,500 4,540 40 4,681 4,903 222
Total $9,175 $9,108 $ (67) $9,342 $9,699 $357
Increasing interest rates, which resulted in declining bond
prices, were responsible for the five percentage point decrease
in the fixed maturity portfolio's overall market-to-amortized
cost ratio from December 31, 1993.
Investments in mortgage-backed securities declined 10 percent
when compared with holdings at December 31, 1993, due primarily
to prepayments and the reinvestment of the proceeds into
corporate investment-grade bonds. While subject to the
prepayment risk experienced during 1993, credit risk related to
USF&G's mortgage-backed securities portfolio at March 31, 1994,
is believed to be minimal as 99 percent of such securities 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 March 31, 1994 and December 31, 1993. The table
below shows the credit quality of the long-term fixed maturity
portfolio as of March 31, 1994.
Percent Market-
Amortized Market to-Amortized
(dollars in millions) Cost Percent Value Cost
U.S. Government and
U.S. Government
Agencies $2,195 24% $2,201 100%
AAA 1,731 19 1,733 100
AA 1,319 14 1,275 97
A 2,329 26 2,312 99
BBB 1,032 11 1,019 99
Below BBB 569 6 568 100
Total $9,175 100% $9,108 99%
USF&G's holdings in high-yield bonds comprised six percent of
the total fixed maturity portfolio at March 31, 1994 and
December 31, 1993. As a result of the changing interest rate
environment, the high-yield bond market-to-amortized cost ratio
has declined six percentage points compared with December 31,
1993. Of the total high-yield bond portfolio, 70 percent is held
by the life insurance segment, representing 9 percent of the
F&G Life's total investments. The table below illustrates the
credit quality of the high-yield bond portfolio at March 31,
1994.
Percent Market-
Amortized Market to-Amortized
(dollars in millions) Cost Percent Value Cost
BB $372 65% $367 99%
B 197 35 196 100
CCC and lower 9 2 5 57
Valuation allowance (9) (2) - -
Total $569 100% $568 100%
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
maturities 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 March 31, 1994, USF&G's five largest investments in
high-yield bonds totaled $91 million in amortized cost and had a
market value of $85 million. None of these investments
individually exceeded $30 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.
5.5. REAL ESTATE
The table below shows the components of USF&G's real estate portfolio.
(dollars in millions) At March 31, 1994 At December 31, 1993
Mortgage loans $ 320 $ 302
Equity real estate 767 793
Reserves (108) (108)
Total $ 979 $ 987
The increase in mortgage loans reflects USF&G's continuing
strategy of maintaining a generally consistent level of real
estate assets while changing the mix to more traditional
mortgage loans and less real estate equity-type investments.
This strategy is designed to reduce risk and increase yields in
the real estate portfolio.
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 at March 31, 1994, is as follows:
Geographic Region Type of Property Development Stage
Pacific/Mountain 33% Office 37% Operating property 73%
Southeast 20 Land 27 Land development 16
Mid-Atlantic 19 Apartments 21 Land packaging 11
Midwest 16 Industrial 9
Southwest 9 Retail/other 6
Northeast 3
Real estate investments are generally appraised at least once
every three years. Appraisals are obtained more frequently under
certain circumstances such as significant changes in property
performance or market conditions. All of these appraisals are
performed by professionally certified appraisers.
At March 31, 1994, USF&G's five largest real estate investments
had a book value of $312 million. The largest single investment
was $88 million, or eight percent of the total real estate
portfolio.
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 declined two percent at
March 31, 1994, when compared with December 31, 1993. This
decline in nonperforming real estate was a result of the
combination of the sale of a nonperforming real estate property,
write-downs on other specific properties, and the reclassification
from performing real estate of another property.
The book value of the components of nonperforming real estate
are as follows:
(book value in millions) At March 31, 1994 At December 31, 1993
Restructured loans and investments $ - $ 4
Real estate held as in-substance
foreclosure 14 14
Real estate acquired through foreclosure
or deed-in-lieu of foreclosure 120 121
Land investments 56 57
Nonperforming equity investments 54 53
Total nonperforming real estate $244 $249
Real estate reserves $108 $108
Reserves/nonperforming real estate 44% 43%
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 March 31, 1994, and December 31, 1993. Management believes
the allowance at March 31, 1994, 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 $14.1 billion at March 31,
1994, compared with $14.3 billion at December 31, 1993. The $0.2
billion reduction is primarily due to a $182 million reduction
in the market value of the fixed maturity investments available
for sale.
6.2. DEBT
USF&G's debt totaled $628 million at March 31, 1994,
compared with $618 million at December 31, 1993. The increase in
debt is mainly attributable to $126 million of zero coupon
convertible subordinated notes which were issued during the
first quarter of 1994 (see Liquidity section). The proceeds of
the bonds were used to redeem $119 million of medium and long
term notes which were carried at higher interest rates. Foreign
currency translation adjustments of $4 million from non-U.S.
dollar denominated debt also contributed to this increase in
corporate debt. 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.
6.3 EQUITY
USF&G's shareholders equity totaled $1.4 billion at March 31, 1994,
compared with $1.5 billion at December 31, 1993. The decrease is
primarily the result of $182 million decline in unrealized gains
on fixed maturity investments available for sale less a $17 million
change in the related life insurance segment DPAC adjustment. This was
partially offset by income of $23 million less $16 million in common
and preferred stock dividends.
6.4 CAPITAL STRATEGY
Subject to capital market conditions, USF&G plans to refinance up to
approximately $400 million of debt. In anticipation of the expiration
in 1995 of the short-term bank credit facility, it is expected that at least a
portion of the $375 million balance outstanding at March 31, 1994, will be
refinanced and the 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, marketable securities, and sales of other assets.
Management believes that internal and external sources of cash will
continue to exceed USF&G's short-term and long-term needs. In January
1994, USF&G filed a shelf registration statement with the Securities and
Exchange Commission. As of its effective date in February
1994, USF&G had $647 million in aggregate unissued debt,
preferred stock and common stock (and warrants to purchase debt
and equity securities) registered. These securities may be
issued from time to time, depending on market conditions. This
shelf amount was reduced by $126 million in proceeds received
from the zero coupon convertible subordinated notes issued in
March 1994.
7.1. CASH FLOW FROM OPERATIONS
USF&G had cash flow from operations of $7 million and $119
million for the periods ended March 31, 1994 and 1993, respectively.
The primary factor for the decrease in cash flow is reduced premium
from assumed reinsurance.
7.2. CREDIT FACILITIES
USF&G maintains a $500 million committed credit facility with a
group of foreign and domestic banks. Borrowings outstanding under
the credit facility totaled $375 million at March 31, 1994 and
December 31, 1993. 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 March
31, 1994 and December 31, 1993.
7.3. MARKETABLE SECURITIES
USF&G's fixed-income, equity security, and short-term investment
portfolios are liquid and represent substantial sources of cash.
The market value of its fixed-income securities was $9.1 billion
at March 31, 1994, which represents 99 percent of its amortized
cost. At March 31, 1994, equity securities, which are reported
at market value in the balance sheet, totaled $123 million.
Short-term investments totaled $340 million.
7.4. LIQUIDITY RESTRICTIONS
There are certain restrictions on payment of dividends by insurance
subsidiaries that may limit USF&G's ability to receive funds from its
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 exceeds 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
surplus or financial condition. USF&G Company's policyholders'
surplus at December 31, 1993, totaled $1.5 billion. Dividends
of approximately $154 million are available for payment to USF&G
from USF&G Company during 1994 without prior regulatory
approval. Of these available dividends, $31 million was paid
during the three months ended March 31, 1994.
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.
It is not possible to predict the future impact of increasing
state or potential federal regulation on USF&G's operations.
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 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 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. 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.
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. These
assessments, under certain circumstances, can be credited against
future premium taxes. Net of such tax credits, USF&G incurred $2 million
of guaranty fund expense in the first quarter of 1994 and $3
million in the same period of 1993.
Financial difficulties of certain insurance companies over the
past several years are expected to result in additional
assessments that would have a negative impact on future
earnings. State laws limit the 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 and each calendar year thereafter. 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, and
each calendar year thereafter. 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 December 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
coordinate the medical payment system for workers compensation and the
medical payments component of automobile insurance within a reformed
national health care system. The Administration's bill also provides for
a national commission to study the possible merger of workers
compensation and automobile medical coverage into the reformed
health care system. Although some form of the Administration's
national health care proposal may be enacted, it is unclear
whether or to the extent 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. No reliable prediction
can be made at this time as to the ultimate outcome of the
legislative deliberations regarding national health care reform
or the effect such legislation may have 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 such revisions may 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 March 31,
1994, USF&G was within the "usual range" for all IRIS ratios.
8.11. TAXATION OF DEFERRED ANNUITIES
From time to time various proposals have been considered by
Congress and the Department of the Treasury to include within current
taxable income all or a portion of the interest payments which accrue
on certain deferred annuity products, including some deferred annuity
products sold by F&G Life. Currently, such interest is not taxed
until the time of distribution. All such proposals have focused
exclusively on deferred annuities and have not included
annuities issued in connection with structured settlements of
claims or on tax sheltered annuities. No reliable prediction
can be made at this time as to the outcome of any such proposals
or the effect such proposals may have on F&G Life.
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.
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 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.
USF&G Corporation
PART II. Other Information
Item 1. Legal Proceedings See Notes 7.2 and 7.3 of the
Notes to Condensed Consolidated Financial Statements,
respectively, regarding termination of the shareholder class
action suits which were initiated in 1990 and 1991 and the
dismissal without prejudice of the Arkansas servicing carrier
litigation filed in September 1993.
Item 4. Submission of Matters to a Vote of Shareholders (a)
The 1994 annual meeting of shareholders was held May 4, 1994.
(b) and (c) The shareholders elected all proposed nominees for
directors to a term of one year. The elections were uncontested
and nominees were currently directors of USF&G Corporation. Only
directors elected at the annual meeting of shareholders will
continue their terms as directors. The following table describes
the voting tabulations with respect to each nominee for office.
For Withheld
H. Furlong Baldwin 72,491,973 1,218,823
Michael J. Birck 72,625,596 1,085,200
Norman P. Blake, Jr. 72,593,747 1,117,049
George L. Bunting, Jr. 72,491,892 1,218,904
Robert E. Davis 72,510,041 1,200,755
Dale F. Frey 72,612,095 1,098,701
Robert E. Gregory, Jr 72,608,534 1,102,262
Robert J. Hurst 72,566,868 1,143,928
Wilbur G. Lewellen 72,612,141 1,098,655
Henry A. Rosenberg, Jr. 72,479,879 1,230,917
Larry P. Scriggins 72,441,971 1,268,825
Anne Marie Whittemore 72,136,006 1,574,790
The shareholders approved the Amendment of the Stock Incentive
Plan of 1991 by a vote of 64,715,664 affirmative, 8,124,265
negative with 870,867 abstaining. Information describing the
Plan is set forth under the caption "Proposal to Amend the Stock
Incentive Plan of 1991" in the Corporation's proxy statement
dated March 30, 1994, which section of the proxy statement is
incorporated herein by reference.
The shareholders approved the Material Terms of Performance
Goals for the Long-Term Incentive Program by a vote of
68,794,693 affirmative, 3,942,738 against with 973,365
abstaining. Information describing the terms is set forth under
the caption "Proposal to Approve Material Terms of Performance
Goals for Long-Term Incentive Program" in the Corporation's
proxy statement dated March 30, 1994, which section of the proxy
statement is incorporated herein by reference.
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 4.A Form of Zero Coupon Convertible Subordinated
Note due 2009. (Incorporated by reference to the registrant's
Form 8-K filed on March 3, 1994, File No. 1-8233.)
Exhibit 4.B Indenture dated as of January 28, 1994, between USF&G
Corporation and Chemical Bank, as trustee. (Incorporated by
reference to Exhibit 4E to the registrant's Form 10-K for the
year ended December 31, 1993, File No. 1-8233.)
Exhibit 10.A USF&G Corporation Stock Incentive Plan of 1991, As Amended
and Restated. (Incorporated by reference to Exhibit A to the
registrant's proxy statement dated March 30, 1994, File No.
1-8233.)
Exhibit 10.B USF&G Corporation Long-Term Incentive Program.
(Incorporated by reference to Exhibit B to the
registrant's proxy statement dated March 30, 1994, File No.
1-8233.)
Exhibit 10.C Long Term Incentive Program Agreement.
Exhibit 11. Computation of Earnings per Share.
Exhibit 12. Computation of Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends
Exhibit 15. Letter Regarding Unaudited Interim Financial Information
(b) Reports on Form 8-K.
The registrant filed a Form 8-K on February 14, 1994, reporting
under Item 5, Other Events, audited financial statements for the
year ended December 31, 1993, and a related Management's
Discussion and Analysis, and other related financial
information. The registrant filed a Form 8-K on March 3, 1994,
reporting under Item 5, Other Events, certain information
related to the sale of $240,000,000 face amount at maturity of
Zero Coupon Subordinated Notes, including the form of the note.
USF&G Corporation
Signature
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Quarterly Report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
USF&G Corporation
By DAN L. HALE
Dan L. Hale
Executive Vice President and
Chief Financial Officer
Dated at Baltimore, Maryland
May 13, 1994
1994
LONG-TERM INCENTIVE PROGRAM AGREEMENT
pursuant to the
USF&G CORPORATION
STOCK INCENTIVE PLAN OF 1991 (as amended and restated)
AGREEMENT dated April 1, 1994, between USF&G CORPORATION (the
"Corporation") and _____________ (the "Participant").
The Compensation Committee of the Board of Directors (the "Committee")
has established a Long-Term Incentive Program (the "LTIP Program") for the
purpose of making performance awards ("Performance Awards") pursuant to the
Corporation's Stock Incentive Plan of 1991, as amended and restated (the
"Plan"). The Committee has determined that the Participant is a Key Person
eligible to participate in the Plan and receive a 1994 Performance Award under
the Program.
Accordingly, in consideration of the covenants and agreements herein
contained, the Corporation and the Participant agree as follows:
1. Grant of Performance Award.
For the period commencing January 1, 1994 and ending December 31,
1996 (the "Performance Period"), the Participant shall be eligible to receive a
Target Performance Award equal to the number of Stock Units specified on the
attached Schedule A.
2. Payment of Performance Award.
Within 120 days after the end of the Performance Period, the
Committee will certify in writing, by resolution or otherwise, the Cumulative
Operating Income of the Corporation for the Performance Period. As soon
thereafter as practica ble, the Committee shall determine the Earned
Performance Award. This determination shall be based on such factors as the
Committee shall determine, including the Target Performance Award and the
performance of the Participant's unit and the Partici pant's individual
performance during the Performance Period. The Earned Performance Award sets
forth the number of Stock Units which the Participant has earned and are
payable. The determination of the Earned Performance Award by the Committee
shal l be final and conclusive.
Stock Units earned by the Participant shall be payable in an
equal number of shares of Common Stock as soon as practicable after the
Committee's written certification unless the Participant has properly executed
and delivered to the H ead-Human Resources Department (the "Administrator") a
Payment Deferral Election with respect to this Performance Award before
January 1, 1995 or on such other date as may be specified in writing by the
Committee, in which event the number of Stock Units earned by the Participant
shall be credited to his or her Stock Unit Account and paid on the date
specified by the Payment Deferral Election, or upon death, Permanent Disability
or in the event of a Fundamental Corporate Transaction.
On or as soon as practicable after the payment date for any
Stock Units, the Corporation shall issue and deliver a certificate for a number
of shares of Common Stock equal to the number of Stock Units to be paid;
provided, however, t hat if the Participant is a person subject to Section
16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and has not made an effective Payment Deferral Election and payment is made
within six (6) months of the Committee's certification with respect to such
Stock Units, then the certificate for such shares shall be held by the
Corporation for a period of six (6) months from the date of the Committee's
certification and delivered as soon as practicable following the exp iration of
such six-month period. During such six-month period, the Participant shall
have all of the rights of a shareholder with respect to such Common Stock,
except that such Common Stock shall not be transferable by the Participant
except as pro vided in Article XI of the Plan.
3. Certain Tax Matters.
The Participant agrees that the Corporation may withhold any
applicable federal, state or local taxes at such time and upon such terms and
conditions as required by law or determined by the Corporation. Subject to
compliance with app licable laws and such rules and regulations as the
Committee may prescribe, withholding taxes payable upon distribution of shares
of Common Stock may be paid by the withholding of shares issued pursuant to
this Performance Award with a fair market va lue (as determined by the
Committee) equal to the withholding amount.
4. Termination of Employment.
In the event of the Participant's termination of employment for
any reason at any time prior to the end of the Performance Period, no Stock
Units, shares of Common Stock or other amounts shall be payable hereunder;
provided, however, that in the event of the Participant's death, Permanent
Disability or retirement while employed by the Corporation, the Committee will
award Stock Units to the Participant on a Pro Rata Basis at the same time as
Stock Units are paid with respect to t he Performance Period to other
Participants.
5. Discretion of the Committee.
In the event of a material acquisition or disposition of assets
or businesses, the occurrence of a Fundamental Corporate Transaction, a change
in the Participant's status as a full-time employee of the Corporation, other
unforeseen ev ents or otherwise, the Committee reserves the right to make such
changes to a Participant's Earned Performance Award, the Performance Goal or
other matters as it deems appropriate and in its sole discretions, subject only
to the limitations set forth in the Plan and the LTIP Program.
6. No Employment Agreement.
Nothing in this Agreement, the Plan or the LTIP Program shall
confer any right to continued employment with the Corporation or its
subsidiaries nor restrict the right of either the Corporation (including such
subsidiaries) or the Part icipant to terminate the employment relationship at
any time, or create any other rights except as specifically provided in
writing.
7. Resolution of Disputes.
Any dispute, disagreement or interpretive issue which shall
arise under, or as a result of, or pursuant to this Agreement shall be
determined by the Committee in its absolute discretion, and any determination
by the Committee shall be final, binding and conclusive on all persons
affected thereby.
8. Shareholder Approval.
This Agreement and the Performance Award evidenced by this
Agreement are subject to all of the terms and conditions of the Plan and the
LTIP Program and are contingent upon approval by the shareholders of the
Corporation in accordance with the terms of the Plan and, if the Participant
is a "covered person" under such section, the requirements of section 162(m)
of the Internal Revenue Code of 1986, as amended (the "Code").
9. Restricted Participants.
Certain limitations are set forth in the LTIP Program with
respect to Earned Performance Awards and payment of Stock Units which are
applicable only to Restricted Participants (as defined in the LTIP Program).
Generally "Restricted P articipants" are persons who could receive compensation
from the Corporation which might be non-deductible for federal income tax
purposes because of the application of section 162(m) of the Code. The
restrictions include prohibitions on any increas e in Earned Performance Awards
over Target Performance Awards and in some instances mandatory deferral of
receipt of Stock Units.
10. Construction.
This Agreement has been entered into in accordance with the
terms of the Plan and the LTIP Program, and the terms of the Plan and the LTIP
Program are deemed incorporated herein. In the event of a conflict between the
terms of this A greement and the Plan or the LTIP Program, the terms of the
Plan or the LTIP Program shall control. Unless otherwise specified herein,
terms defined in the Plan or the LTIP Program are used in this Agreement with
the same meaning. The validity, int erpretation and administration of this
Agreement and the rights of the Participant shall be determined exclusively in
accordance with the laws of the State of Maryland, without regard to the choice
of laws provisions thereof, except to the extent fe deral law controls.
USF&G CORPORATION
By:_________________________________________
THE PARTICIPANT
By:_________________________________________
SCHEDULE A
1994
LONG-TERM INCENTIVE PROGRAM
TARGET PERFORMANCE AWARD
SCHEDULE FOR [PARTICIPANT]
Individual Target Performance Award. The Participant is eligible to receive
the number of Stock Units shown below which corresponds to Cumulative Operating
Income of the Corporation for the Performance Period. The Earned Performance
Award shall be determined by the Committee and shall be based upon, among other
factors, the Target Performance Award and the performance of the Participant's
unit and the Participant's individual performance for the Performance Period.
CUMULATIVE
OPERATING INCOME
OF THE CORPORATION
FOR PERFORMANCE PERIOD* TARGET
PERFORMANCE AWARD
$ Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
Units
--- Units
* Cumulative Operating Income of the Corporation for Performance Period is
defined in the LTIP Program.
USF&G Corporation
Exhibit 11 - Computation of Earnings Per Share (Unaudited)
Three Months Ended March 31
(dollars in millions except per share data) 1994 1993
Net Income Available to Common Stock
Primary
Income before cumulative effect of
adopting new accounting standards $ 23 $ 23
Less preferred stock dividend
requirements 12 12
Income (loss) before cumulative effect
of adopting new accounting standards
available to common stock 11 11
Income (loss) from cumulative effect of
accounting standards:
Income taxes - 90
Postretirement benefits - (52)
Net income (loss) available to
common stock $ 11 $ 49
Fully Diluted:
Income from cumulative effect of
adopting new accounting standards $ 23 $ 23
Less preferred stock dividend
requirements 12 4
Income (loss) before cumulative effect
of adopting new accounting
standards available to common stock 11 19
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 90
Postretirement benefits - (52)
Net income (loss) available to
common stock $ 11 $ 57
Weighted Average Shares Outstanding
Primary Common Shares 85,131,620 84,540,920
Fully Diluted:
Common shares 85,131,620 84,540,920
Assumed conversion of preferred stock - 26,611,211
Assumed exercise of stock options - 1,583,935
Total 85,131,620 112,736,066
Earnings Per Common Share
Primary (A):
Income (loss) before cumulative effect
of adopting new accounting standards $ .13 $ .13
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 1.05
Postretirement benefits - (.60)
Net income (loss) $ .13 $ .58
Fully Diluted (B):
Income (loss) before cumulative effect
of adopting new accounting standards $ .13 $ .17
Income (loss) from cumulative effect
of adopting new accounting standards:
Income taxes - .80
Postretirement benefits - (.46)
Net income (loss) $ .13 $ . 51
(A) Shares issuable under stock options (874,404 shares in 1994
and 1,223,902 in 1993) have not been used as common stock
equivalents in the computation of primary earnings per common
share presented on the face of the Condensed Consolidated
Statement of Operations because the dilutive effect is not
material. (B) Fully diluted earnings per common share amounts
are calculated assuming the conversion of all securities whose
contingent issuance would have a dilutive effect on earnings. In
1994, the effect of assuming conversion of preferred stock
(31,327,105 shares) is antidilutive and, therefore, the amounts
presented in the condensed Consolidated Statment of Operations
for primary and fully diluted earnings per share are the same.
Shares issuable under stock options (874,404 in 1994) have not
been used as common stock equivalents because the dilutive
effect is not material. The 1993 calculation assumes the
conversion of preferred stock series B and C.
USF&G Corporation
Exhibit 12 - Computation of Ratio of Consolidated Earnings to Fixed
Charges and Preferred Stock Dividends
Three Months Ended March 31
(dollars in millions) 1994 1993
Fixed Charges
Interest expense $ 9 $10
Interest capitalized - -
Portion of rents representative of interest 7 7
Total fixed charges 16 17
Preferred stock dividend requirements (a) 12 12
Combined Fixed Charges and Preferred Stock
Dividends $28 $29
Consolidated Earnings Available for Fixed
Charges and Preferred Stock Dividends
Pretax income before cumulative effect of
adopting new accounting standards $24 $23
Adjustments:
Fixed charges 16 17
Less interest capitalized during the period - -
Consolidated earnings available for fixed
charges and preferred stock dividends $40 $40
Ratio of Consolidated Earnings to Fixed
Charges 2.5 2.4
Ratio of Consolidated Earnings to Combined
Fixed Charges and Preferred Stock Dividends 1.4 1.4
(A) Preferred stock dividend requirements of $12 million in 1994
and 1993 divided by 100% less the effective income tax rate of
2.1% in 1994 and 0.2% in 1993.
USF&G Corporation
Exhibit 15 - Letter Regarding Unaudited Interim Financial Information
USF&G Corporation
We are aware of the incorporation by reference in the
Registration Statement Numbers 33-20449, 33-9405, 33-33271, and
33-21132, 33-50825, and 33-51859 on Form S-3 and Numbers
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 our
report on the unaudited condensed consolidated interim financial
statements of USF&G Corporation which is included in its Form
10-Q for the quarter ended March 31, 1994.
ERNST & YOUNG
Baltimore, Maryland
May 13, 1994
