Filed Pursuant to Rule 424(b)(2)
Registration No. 33-51859
$150,000,000
USF&G CORPORATION
8 3/8% SENIOR NOTES DUE 2001
------------------------
Interest on the 8 3/8% Senior Notes due 2001 (the "Notes") of USF&G
Corporation (the "Corporation") will be payable semiannually on June 15 and
December 15 of each year, commencing December 15, 1994. The Notes will mature on
June 15, 2001 and are not redeemable prior to maturity. The Notes will
constitute unsecured and unsubordinated indebtedness of the Corporation and will
rank on a parity with its other unsecured and unsubordinated indebtedness. See
"Description of the Notes."
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) CORPORATION(1)(3)
Per Note....................................... 99.455% 1.125% 98.33%
Total.......................................... $149,182,500 $1,687,500 $147,495,000
</TABLE>
(1) Plus accrued interest, if any, from June 30, 1994.
(2) The Corporation has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting estimated expenses of $130,000 payable by the Corporation.
------------------------
The Notes are offered by the several Underwriters, subject to prior sale,
when, as and if issued to and accepted by them, subject to approval of certain
legal matters by counsel for the Underwriters and certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that the Notes will be
delivered in book-entry form only on or about June 30, 1994 through the
facilities of The Depository Trust Company against payment therefor in
immediately available funds.
------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
KIDDER, PEABODY & CO.
INCORPORATED
J.P. MORGAN SECURITIES INC.
------------------------
The date of this Prospectus Supplement is June 23, 1994.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED
HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
------------------------
FOR NORTH CAROLINA RESIDENTS: THE COMMISSIONER OF INSURANCE OF THE STATE OF
NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR HAS THE
COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
------------------------
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to those documents identified in the accompanying Prospectus,
the Corporation's Annual Report on Form 10-K for the year ended December 31,
1993 and the Corporation's Quarterly Report on Form 10-Q for the three months
ended March 31, 1994 are incorporated herein by reference.
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in the Prospectus, this Prospectus Supplement
and the consolidated financial statements, including the notes thereto,
incorporated herein by reference. Unless indicated otherwise, all financial data
have been prepared using generally accepted accounting principles ("GAAP").
THE CORPORATION
USF&G Corporation ("USF&G" or the "Corporation") is a holding company
engaged primarily in the insurance business. United States Fidelity and Guaranty
Company ("USF&G Company"), its principal subsidiary, was founded in 1896 and is
the twenty-fourth largest property/casualty insurer in the United States, based
on net premiums written for the year ended December 31, 1993. USF&G Company
markets commercial and personal insurance products, concentrating on targeted
market segments, through a distribution network of approximately 3,900
independent agents. USF&G's life insurance subsidiary, Fidelity and Guaranty
Life Insurance Company ("F&G Life"), markets life insurance and annuity products
through a network of wholesalers, brokers and specialty marketing organizations.
The Corporation's premiums earned totaled approximately $2.5 billion for the
year ended December 31, 1993.
RESTRUCTURING AND STRATEGY
USF&G has undergone a significant restructuring since the appointment of
Norman P. Blake, Jr. as Chairman, President and Chief Executive Officer in
November 1990. This restructuring included (i) divesting non-strategic
businesses, (ii) strengthening the capital base, investment portfolio and
reserve position, (iii) withdrawing from unattractive state markets and product
lines to improve underwriting results, (iv) installing a new management team,
and (v) reducing costs and increasing productivity. As a result, USF&G's
financial condition and profitability have improved significantly over the past
three years.
USF&G has adopted a niche market segmentation strategy designed to produce
attractive returns in select market segments within the property/casualty and
life insurance industries. In the Corporation's property/casualty lines of
business, USF&G is pursuing a hybrid strategy of regionalization and product
specialization. Regional offices were established to improve distribution
effectiveness and better manage a restructured branch network. In addition,
product specialization is being pursued through market segmentation and the
establishment of business units focused on specific product lines. Management
continues to focus on the development of strict underwriting and loss
guidelines, risk management and expense control. In the life insurance business,
USF&G is focusing on products with higher returns and more predictable
persistency, such as annuities to insureds in settlement of property/casualty
liability claims and tax sheltered annuities.
S-3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Notes............................... $150,000,000 aggregate principal amount of 8 3/8% Senior Notes due 2001.
Maturity............................ June 15, 2001.
Interest Payment Dates.............. June 15 and December 15 of each year, commencing December 15, 1994.
Optional Redemption................. The Notes are not redeemable prior to maturity.
Ranking............................. The Notes will be unsecured obligations and will rank pari passu with all
other unsecured and unsubordinated indebtedness of the Corporation. See
"Description of the Notes--General" and "--Ranking."
Covenants........................... The Notes contain certain covenants which limit, among other things, the
issuance, sale or other disposition of capital stock of the principal
insurance subsidiaries of the Corporation and the incurrence of liens on
the common stock of the principal insurance subsidiaries of the
Corporation. See "Description of the Notes." The Notes do not contain any
other provision which will restrict the Corporation from incurring,
assuming or becoming liable with respect to any indebtedness or other
obligations, whether secured or unsecured, or from paying dividends or
making other distributions on its capital stock or purchasing or
redeeming its capital stock. The Notes do not contain any financial
ratios, or specified levels of net worth or liquidity to which the
Corporation must adhere. In addition, the Notes do not contain any
provision which would require that the Corporation repurchase or redeem
or otherwise modify the terms of any of the Notes upon a change in
control or other events involving the Corporation which may adversely
affect the creditworthiness of the Notes.
Use of Proceeds..................... The net proceeds of the Offering will be used by the Corporation to repay a
portion of the $375 million indebtedness outstanding under the
Corporation's bank credit facility. See "Use of Proceeds."
</TABLE>
S-4
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The following table sets forth selected consolidated statement of
operations and financial position data for the periods indicated. The selected
consolidated statement of operations and financial position data, at or for each
of the periods presented below, were derived from the consolidated financial
statements of the Corporation. Annual financial statements were audited and
quarterly financial statements were reviewed by Ernst & Young, independent
auditors. The table should be read in conjunction with the consolidated
financial statements, related notes and other financial information incorporated
herein by reference.
<TABLE><CAPTION>
THREE MONTHS ENDED MARCH
31, YEARS ENDED DECEMBER 31,
------------------------ --------------------------------------------------
1994 1993 1993 1992 1991 1990
----------- ----------- ----------- ----------- ----------- -----------
(UNAUDITED) (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Premiums Earned................................... $ 570 $ 674 $ 2,456 $ 2,637 $ 3,187 $ 3,516
Net Investment Income............................. 183 192 749 817 877 929
Realized Gains (Losses) and Other................. 13 9 44 206 108 (274)
----------- ----------- ----------- ----------- ----------- -----------
Total Revenues................................ 766 875 3,249 3,660 4,172 4,171
----------- ----------- ----------- ----------- ----------- -----------
Losses, Loss Expenses and Policy Benefits......... 509 590 2,153 2,465 2,982 3,188
Underwriting, Acquisition and Operating
Expenses............................................ 224 252 956 1,069 1,225 1,326
Interest Expense.................................. 9 10 41 40 46 54
Restructuring Charges............................. -- -- -- 51 60 34
----------- ----------- ----------- ----------- ----------- -----------
Total Expenses................................ 742 852 3,150 3,625 4,313 4,602
----------- ----------- ----------- ----------- ----------- -----------
Pretax Income (Loss) from Continuing Operations
before Cumulative Effect of Adopting New
Accounting Standards................................ 24 23 99 35 (141) (431)
Provision for Income Taxes (Benefit).............. 1 -- (28) -- 3 2
----------- ----------- ----------- ----------- ----------- -----------
Income (Loss) from Continuing Operations before
Cumulative Effect of Adopting New Accounting
Standards........................................... 23 23 127 35 (144) (433)
Loss from Discontinued Operations................. -- -- -- (7) (32) (136)
Cumulative Effect of Adopting New Accounting
Standards........................................... -- 38 38 -- -- --
Extraordinary Item................................ -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net Income (Loss)................................. 23 61 165 28 (176) (569)
Preferred Stock Dividends......................... 12 12 48 48 37 16
----------- ----------- ----------- ----------- ----------- -----------
Net Income (Loss) Available to Common
Shareholders........................................ $ 11 $ 49 $ 117 $ (20) $ (213) $ (585)
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
PER SHARE DATA:
Income (Loss) from Continuing Operations before
Cumulative Effect of Adopting New Accounting
Standards........................................... $ .13 $ .13 $ .93 $ (.16) $ (2.15) $ (5.37)
Loss from Discontinued Operations................. -- -- -- (.08) (.38) (1.62)
Cumulative Effect of Adopting New Accounting
Standards........................................... -- .45 .45 -- -- --
Net Income (Loss)(1).............................. .13 .58 1.38 (.24) (2.53) (6.99)
Dividends Declared................................ $ .05 $ .05 $ .20 $ .20 $ .20 $ 2.44
RATIO OF CONSOLIDATED EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS............... 1.4 1.4 1.4 0.8 Note 2 Note 2
CONSOLIDATED STATEMENT OF FINANCIAL POSITION:
Total Investments................................. $ 11,038 $ 11,331 $ 11,377 $ 11,346 $ 12,167 $ 11,221
Total Assets...................................... 14,144 14,802 14,355 13,134 14,486 13,902
Unpaid Losses, Loss Expenses
and Policy Benefits............................. 10,231 10,968 10,302 9,436 9,477 9,554
Unearned Premiums................................. 927 927 917 770 981 1,091
Corporate Debt.................................... 585 573 574 574 617 659
Real Estate and Other Debt........................ 43 42 44 42 60 120
Total Liabilities................................. 12,787 13,478 12,824 11,864 13,163 12,697
Shareholders' Equity.............................. 1,357 1,324 1,511 1,270 1,323 1,205
Statutory Surplus (USF&G Company)................. 1,552 1,518 1,541 1,467 1,404 1,352
<CAPTION>
1989
-----------
CONSOLIDATED STATEMENT OF OPERATIONS:
Premiums Earned................................... $ 3,697
Net Investment Income............................. 911
Realized Gains (Losses) and Other................. 28
-----------
Total Revenues................................ 4,636
-----------
Losses, Loss Expenses and Policy Benefits......... 3,066
Underwriting, Acquisition and Operating
Expenses............................................ 1,371
Interest Expense.................................. 42
Restructuring Charges............................. --
-----------
Total Expenses................................ 4,479
-----------
Pretax Income (Loss) from Continuing Operations
before Cumulative Effect of Adopting New
Accounting Standards................................ 157
Provision for Income Taxes (Benefit).............. 9
-----------
Income (Loss) from Continuing Operations before
Cumulative Effect of Adopting New Accounting
Standards........................................... 148
Loss from Discontinued Operations................. (31)
Cumulative Effect of Adopting New Accounting
Standards........................................... --
Extraordinary Item................................ 2
-----------
Net Income (Loss)................................. 119
Preferred Stock Dividends......................... 16
-----------
Net Income (Loss) Available to Common
Shareholders........................................ $ 103
-----------
-----------
PER SHARE DATA:
Income (Loss) from Continuing Operations before
Cumulative Effect of Adopting New Accounting
Standards........................................... $ 1.58
Loss from Discontinued Operations................. (.37)
Cumulative Effect of Adopting New Accounting
Standards........................................... --
Net Income (Loss)(1).............................. 1.24
Dividends Declared................................ $ 2.80
RATIO OF CONSOLIDATED EARNINGS TO COMBINED FIXED
CHARGES AND PREFERRED STOCK DIVIDENDS............... 2.4
CONSOLIDATED STATEMENT OF FINANCIAL POSITION:
Total Investments................................. $ 10,894
Total Assets...................................... 13,551
Unpaid Losses, Loss Expenses
and Policy Benefits............................. 8,299
Unearned Premiums................................. 1,139
Corporate Debt.................................... 543
Real Estate and Other Debt........................ 87
Total Liabilities................................. 11,544
Shareholders' Equity.............................. 2,007
Statutory Surplus (USF&G Company)................. 1,417
</TABLE>
- - ---------------
(1) For the three months ended March 31, 1993, and twelve months ended December
31, 1993, fully-diluted net income per share was $.51 and $1.32,
respectively. In other periods shown, there was no difference between
primary and fully-diluted net income (loss) per share.
(2) The Corporation had net losses in 1991 and 1990, and earnings were
inadequate to cover combined fixed charges and preferred stock dividends by
$186 million in 1991 and by $452 million in 1990.
S-5
<PAGE>
THE CORPORATION
GENERAL. USF&G is a holding company engaged primarily in the insurance
business. USF&G Company, its principal subsidiary, founded in 1896, is the
twenty-fourth largest property/casualty insurer in the United States, based on
net premiums written for the year ended December 31, 1993. USF&G Company markets
commercial and personal insurance products, concentrating on targeted market
segments, through a distribution network of approximately 3,900 independent
agents. USF&G's life insurance subsidiary, F&G Life, markets life insurance and
annuity products through a network of wholesalers, brokers and specialty
marketing organizations. The Corporation's premiums earned totaled approximately
$2.5 billion for the year ended December 31, 1993.
PROPERTY/CASUALTY INSURANCE. USF&G Company, which accounted for $2.3
billion (or 95%) of USF&G Corporation's 1993 premiums earned, writes both
commercial and personal insurance, as well as certain specialty lines of
insurance. Commercial lines, which accounted for 53% of 1993 property/casualty
premiums earned, includes property, auto, inland marine, workers compensation
and general and umbrella liability coverage for businesses. In commercial lines,
USF&G Company targets small and middle market businesses nationwide through its
independent agency network. USF&G Company provides services to its agents and
customers through 30 branch offices, each of which has service teams providing
policy administration from underwriting through claims processing. Personal
lines, which accounted for 29% of 1993 property/casualty premiums earned,
includes auto, homeowners, watercraft and umbrella insurance for individuals and
families. Personal auto insurance represented 74% of personal lines premiums
earned in 1993. USF&G Company also markets certain specialty insurance lines,
including fidelity/surety insurance and reinsurance products, which accounted
for 5% and 13% of 1993 property/casualty premiums earned, respectively.
The table below shows premiums earned and the statutory loss ratio by lines
of property/casualty insurance.
<TABLE><CAPTION>
1993 1992 1991
------------------------------------- ------------------------------------- -----------
PREMIUMS STATUTORY PREMIUMS STATUTORY PREMIUMS
EARNED % LOSS RATIO EARNED % LOSS RATIO EARNED
----------- --------- ------------- ----------- --------- ------------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
COMMERCIAL LINES
Auto............................. $ 399 17% 55.2 $ 442 18% 64.5 $ 531
General Liability................ 351 15 80.9 388 15 99.2 487
Property......................... 321 14 60.4 332 13 69.5 370
Workers Compensation............. 152 7 212.3 318 13 121.0 497
----------- --- ------ ----------- --- ------ -----------
Total Commercial Lines....... 1,223 53 83.6 1,480 59 86.9 1,885
----------- --- ------ ----------- --- ------ -----------
FIDELITY/SURETY
Fidelity......................... 18 1 56.1 19 1 24.6 21
Surety........................... 100 4 49.5 92 3 33.5 96
----------- --- ------ ----------- --- ------ -----------
Total Fidelity/Surety........ 118 5 50.5 111 4 32.0 117
----------- --- ------ ----------- --- ------ -----------
PERSONAL LINES
Auto............................. 504 22 70.8 551 22 73.6 658
Homeowners....................... 149 6 73.8 184 7 102.2 207
Property......................... 28 1 66.0 50 2 67.9 55
----------- --- ------ ----------- --- ------ -----------
Total Personal Lines......... 681 29 71.2 785 31 80.0 920
----------- --- ------ ----------- --- ------ -----------
ASSUMED REINSURANCE
Finite Risk...................... 169 7 70.1 74 3 78.9 32
Traditional Risk................. 136 6 62.1 83 3 72.8 64
----------- --- ------ ----------- --- ------ -----------
Total Assumed Reinsurance.... 305 13 67.3 157 6 76.9 96
----------- --- ------ ----------- --- ------ -----------
Total............................ $ 2,327 100% 75.4 $ 2,533 100% 82.0 $ 3,018
----------- --- ------ ----------- --- ------ -----------
----------- --- ------ ----------- --- ------ -----------
<CAPTION>
STATUTORY
% LOSS RATIO
--------- -------------
COMMERCIAL LINES
Auto............................. 18% 75.0
General Liability................ 16 91.1
Property......................... 12 67.1
Workers Compensation............. 16 128.5
--- ------
Total Commercial Lines....... 62 91.6
--- ------
FIDELITY/SURETY
Fidelity......................... 1 45.2
Surety........................... 3 41.6
--- ------
Total Fidelity/Surety........ 4 42.3
--- ------
PERSONAL LINES
Auto............................. 22 79.6
Homeowners....................... 7 87.0
Property......................... 2 58.4
--- ------
Total Personal Lines......... 31 80.0
--- ------
ASSUMED REINSURANCE
Finite Risk...................... 1 76.1
Traditional Risk................. 2 17.6
--- ------
Total Assumed Reinsurance.... 3 59.1
--- ------
Total............................ 100% 84.1
--- ------
--- ------
</TABLE>
S-6
<PAGE>
LIFE INSURANCE. F&G Life offers a variety of annuity and life insurance
products, primarily to individuals nationwide. In 1993, F&G Life accounted for
14% of the Corporation's total revenues (which includes investment income) and
34% of its total assets. F&G Life's principal products include (i) structured
settlements of USF&G Company claims, (ii) single premium deferred annuities sold
through financial institutions, brokers and independent agents, (iii) tax
sheltered annuities ("TSAs") marketed primarily to teachers through a national
wholesale distribution network, and (iv) universal and term life policies sold
through independent agents.
The following table shows life insurance and annuity sales by product type.
<TABLE><CAPTION>
1993 1992 1991
-------------------------- -------------------------- --------------------------
PREMIUMS PREMIUMS PREMIUMS
AND DEPOSITS % AND DEPOSITS % AND DEPOSITS %
--------------- --------- --------------- --------- --------------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
PRODUCT TYPE
Structured settlement annuities.............. $ 66 39% $ 37 35% $ 71 34%
Single-premium deferred annuities............ 44 26 33 32 70 33
Tax-sheltered annuities...................... 35 21 -- -- -- --
Other annuities.............................. 17 10 23 22 54 26
Life insurance............................... 6 4 11 11 14 7
------ --------- ------ --------- ------ ---------
Total................................... $ 168 100% $ 104 100% $ 209 100%
------ --------- ------ --------- ------ ---------
------ --------- ------ --------- ------ ---------
</TABLE>
RECENT HISTORY. During the late 1980s, USF&G embarked on a diversification
effort, investing substantial amounts of capital and management attention in
noninsurance related ventures. Many of these ventures proved unsuccessful,
diverting resources from the Corporation's core insurance operations. During the
same period, a significant portion of the Corporation's investment portfolio was
invested in relatively high risk assets (non-investment grade bonds, equity
securities and real estate).
Norman P. Blake, Jr. was appointed Chairman, President and Chief Executive
Officer in November 1990 and immediately began the task of rebuilding USF&G. He
instituted a restructuring strategy that involved the following critical
elements: (i) focusing on core insurance operations while divesting and
liquidating non-strategic businesses; (ii) strengthening the balance sheet
through a combination of improving the capital base, repositioning the
investment portfolio and improving overall reserve strength; (iii) withdrawing
from unattractive state markets and product lines in order to improve
underwriting results; (iv) installing a new management team focused on
repositioning insurance operations; (v) lowering operational and financial
leverage; and (vi) reducing costs and increasing productivity. As a result,
USF&G's financial condition and profitability have significantly improved over
the last three years. Net income totaled $165 million in 1993, compared with $28
million in 1992 and losses of $176 million and $569 million in 1991 and 1990,
respectively.
Since the end of 1990, significant steps were taken to implement this
restructuring strategy. These steps included the following:
. A new senior management team was recruited, with many positions being
filled by executives with proven track records in the insurance industry.
. Substantially all of the noninsurance financial services ventures were
discontinued. In total, the Corporation divested or liquidated 13
operating businesses in an effort to concentrate management and capital
resources on core insurance operations and eliminate the earnings drag
associated with nonstrategic operations.
. The capital position was improved primarily through the sale of $320
million (liquidation value) of convertible preferred stock in mid-1991.
. The investment portfolio was repositioned through the reduction of
relatively high risk investments (non-investment grade bonds, equity
securities and real estate) from 29% of invested assets
S-7
<PAGE>
at December 31, 1990 to 15% at March 31, 1994. In addition, the
Corporation repositioned its assets to better match liabilities and
reduce volatility. At March 31, 1994, 83% of USF&G's investment portfolio
was invested in fixed income securities, 94% of which were investment
grade.
. Emphasis was placed on core insurance operations in favorable regulatory
environments. Selected lines of business, predominantly personal
automobile and workers compensation insurance, were discontinued in
states where the regulatory environment provided little or no opportunity
for adequate pricing, or where the involuntary residual market load
undermined the ability to realize an adequate level of profitability.
. The ratio of debt to total capital was reduced from 39% at December 31,
1990 to 32% at March 31, 1994 and the ratio of property/casualty net
premiums written to surplus was reduced from 2.4x in the year ended
December 31, 1990 to 1.3x in the twelve months ended March 31, 1994. This
was largely the result of USF&G's capital raising efforts in 1991, its
paring of unprofitable property/casualty premiums and its return to
profitability.
. Operating expenses were reduced significantly, predominantly as a result
of a 48% reduction in staffing levels from 12,500 employees at December
31, 1990 to 6,600 employees at March 31, 1994. Reductions were made
possible by the discontinuation of substantially all noninsurance
operations and the implementation of programs to improve operating
efficiencies in core insurance operations, including a reduction in the
number of full-service branch offices from 54 to 30.
. In 1994, USF&G commenced a capital strategy to refinance over $500
million of outstanding debt. The first step in this strategy was the
issuance of $245 million aggregate principal amount of zero coupon
convertible notes (providing net proceeds of $122 million to the
Corporation), the net proceeds of which were used to redeem outstanding
higher coupon debt.
S-8
<PAGE>
STRATEGY
After effecting a significant repositioning over the last three years,
USF&G's strategy is to earn attractive returns in select market segments within
the property/casualty and life insurance industries. This niche approach has
resulted in the segmentation of the property/casualty and life insurance
businesses and a focus on developing tailored products for customers within
those segments. This strategy is designed to capitalize on USF&G's competitive
strengths, including its distribution network of approximately 3,900 independent
agents, sophisticated underwriting techniques and procedures, improved financial
position, customer driven approach to products and services and the
long-standing reputation of the USF&G name. The Corporation's concentration on
particular market segments represents a significant change from historical
efforts to be a broad multi-line company, marketing essentially all products in
all markets.
PROPERTY/CASUALTY. USF&G Company is pursuing a hybrid strategy of
regionalization and product specialization. Regional offices have been
established in order to improve distribution effectiveness and better manage the
branch office network. Management believes that by regionalizing its field
operations it will enhance its knowledge of local markets and realize cost
reductions through centralization of processing and more efficient customer
service. Product specialization has resulted in market segmentation and the
establishment of business units focused on product development for these
specific markets. Specialized product line management, coupled with specific
profit and loss responsibility, facilitates product development and focuses
pricing and underwriting standards on the characteristics of particular markets.
USF&G Company's property/casualty business consists of commercial lines,
personal lines, fidelity/surety and reinsurance. In commercial lines, USF&G
focuses on middle market and small business segments. The middle market segment,
generally considered to include businesses with more than 20 employees, has been
divided into manufacturing, services and contractor segments, with each further
divided into subsegments with differing product needs. Management believes that
the critical elements of success in the middle market are the development of
value added products and risk management. USF&G Company has implemented several
programs to manage risk, including (i) developing strict underwriting guidelines
and procedures, (ii) hiring experienced underwriting and claims personnel, (iii)
creating specialized underwriting teams and (iv) developing an integrated claims
approach.
The small business segment, generally considered to include businesses with
20 or fewer employees, is generally characterized by lower and less volatile
loss ratios, but higher processing expenses resulting from lower average
revenues per transaction. Management believes that the keys to success in this
market are the centralization and standardization of underwriting and claims
procedures and expense control. To address these issues, USF&G Company has
consolidated processing into regional locations and is in the process of
developing automated underwriting systems and other technological improvements.
Management believes that the key factors for success in personal lines are
risk management, market focus and customer service. As in commercial lines,
management has implemented several risk management programs, including (i)
extensive reunderwriting of existing automobile and homeowners books of
business, (ii) withdrawal from or reduction of exposure in selected states
(where permitted by applicable regulations), particularly in areas where
catastrophe exposures and involuntary market allocations prevent USF&G Company
from achieving adequate rates, and (iii) developing a sophisticated system to
monitor potential losses by geographic area, including procedures that isolate
exposure by zip code. New products also are being introduced to meet specific
market needs and provide value added services to policyholders.
The strategy of F&G Re, Inc. ("F&G Re"), the reinsurance management arm of
USF&G Company, is to continue to target profitable business primarily in the
traditional reinsurance market
S-9
<PAGE>
and to monitor the pricing environment for growth opportunities. F&G Re's
current emphasis is on property rather than casualty reinsurance, with the vast
majority of its business written on a treaty basis. The strategy for the
fidelity/surety business is to leverage USF&G Company's strong historical
position in these markets and to improve results through the development of
national account distribution and an integrated customer approach. Management
also expects to leverage the existing agency force to capture additional
fidelity/surety business.
LIFE. F&G Life's strategy is to diversify its product mix while focusing on
products with higher returns and more predictable persistency. Focus is being
placed on increased sales of annuities to insureds in settlement of USF&G
Company claims ("structured settlements") and the marketing of tax sheltered
annuities through a national wholesaler. F&G Life also has eliminated its branch
office distribution system and now distributes products generally through
channels characterized by variable cost structures.
OVERVIEW. Management believes that the strategies being employed in each of
its business lines offer significant opportunities for continued improvement in
profitability and results of operations. Significant progress has been made as
evidenced by the improvement in profitability over the last three years. The
Corporation's withdrawal from particular markets and its product segmentation
strategy has produced a significant decline in premium volume and an
accompanying market share decline. However, during the latter part of 1993,
premiums in USF&G's target markets began to level off and have increased in some
market segments. Management expects to be able to achieve profitable growth by
maintaining a disciplined, customer focused approach to underwriting in its core
commercial and personal lines, and continuing to expand its relatively unique
position in its specialty lines of fidelity/surety and reinsurance and
increasing sales of life insurance and annuity products.
USE OF PROCEEDS
The net proceeds to the Corporation from this offering are expected to be
approximately $147.3 million. The net proceeds will be used by the Corporation
to repay a portion of the $375 million indebtedness outstanding under the
Corporation's bank credit facility. Indebtedness under the bank credit facility
bears interest at a variable rate (4.697% as of June 23, 1994) and the bank
credit facility matures in March 1995. Morgan Guaranty Trust Co. of New York, an
affiliate of J.P. Morgan Securities Inc., is a lender under the Corporation's
bank credit facility and is expected to receive approximately $9.0 million of
the net proceeds from this offering as a result of the repayment of a portion of
the bank credit facility. See "Underwriting."
S-10
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Corporation as of March 31, 1994 and as adjusted to give effect to the issuance
and sale of the Notes offered hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
<TABLE><CAPTION>
MARCH 31, 1994
--------------------------
ACTUAL AS ADJUSTED
--------- ---------------
(IN MILLIONS)
<S> <C> <C>
SHORT-TERM DEBT:
Corporate............................................................................ $ 375 $ 228
Real estate and other................................................................ 12 12
--------- ---------------
Total short-term debt........................................................... 387 240
--------- ---------------
LONG-TERM DEBT:
Corporate:
5 1/2% Swiss Franc Bonds due 1996................................................. 84 84
Zero Coupon Convertible Subordinated Notes due 2009............................... 126 126
8 3/8% Senior Notes due 2001...................................................... -- 150
--------- ---------------
Subtotal........................................................................ 210 360
--------- ---------------
Real estate and other:
8% Secured note due 1995.......................................................... 11 11
9.96% Secured notes due through 1999.............................................. 14 14
Other............................................................................. 6 6
--------- ---------------
Subtotal........................................................................ 31 31
--------- ---------------
Total long-term debt.............................................................. 241 391
--------- ---------------
Total debt........................................................................ 628 631
--------- ---------------
SHAREHOLDERS' EQUITY:
Capital Stock:
Preferred Stock, par value $50.00; 12,000,000 shares authorized
$4.10 Series A Convertible Exchangeable Preferred Stock;
4,000,000 shares issued...................................................... 200 200
$10.25 Series B Cumulative Convertible Preferred Stock; 1,300,000 shares
issued................................................................................. 65 65
$5.00 Series C Cumulative Convertible Preferred Stock; 3,800,000 shares
issued................................................................................. 190 190
Common Stock, par value $2.50; 240,000,000 shares authorized; 85,248,974
issued................................................................................. 213 213
Paid-in capital...................................................................... 965 965
Net unrealized gains on investments.................................................. 27 27
Minimum pension liability............................................................ (85) (85)
Retained earnings (deficit)....................................................... (218) (218)
--------- ---------------
Total shareholders' equity........................................................ 1,357 1,357
--------- ---------------
Total capitalization.............................................................. $ 1,985 $ 1,988
--------- ---------------
--------- ---------------
</TABLE>
S-11
<PAGE>
SUMMARY MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This section provides a discussion of the financial results and material
changes in financial position for USF&G for the first quarter of 1994 as well as
for the years ended December 31, 1993, 1992 and 1991. The discussion includes
excerpts from, and summarizes in certain respects, the Management's Discussion
and Analysis of Financial Condition and Results of Operations included in
USF&G's Form 10-Q for the quarter ended March 31, 1994, and Form 10-K for the
year ended December 31, 1993. Reference is made to such documents and the
Management's Discussion and Analysis included therein for a more complete review
and discussion of USF&G's financial results and financial position. A glossary
of certain terms used in this discussion can be found at the end of this
section. The terms are italicized the first time they appear in the text.
INDEX
1. 1994 First Quarter Results
2. 1993 Year-End Results
3. Financial Condition and Liquidity
4. Regulation
5. Glossary of Terms
1. 1994 FIRST QUARTER RESULTS
The results of operations for the first quarter of 1994 are compared with
those for the same period of 1993. Financial position at March 31, 1994 is
compared with December 31, 1993.
1.1. CONSOLIDATED RESULTS
The table below shows the major components of net income.
<TABLE><CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
1994 1993
----------- ---------
(IN MILLIONS)
<S> <C> <C>
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
----- ---------
----- ---------
</TABLE>
The table below shows the components of pretax income before realized gains
and cumulative effect of adopting new accounting standards by major business
segment.
<TABLE><CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1994 1993
--------- ---------
(IN MILLIONS)
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
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"), SFAS
S-12
<PAGE>
109, "Accounting for Income Taxes", and SFAS 106, "Employer's Accounting for
Postretirement Benefits Other Than Pensions." 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.
1.2. 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:
<TABLE><CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1994 1993
--------- ---------
(IN MILLIONS)
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
- - ---------------
* See Glossary of Terms
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.
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.
<TABLE><CAPTION>
THREE MONTHS ENDED MARCH 31
--------------------------------------------------
1994 1993
------------------------ ------------------------
PREMIUMS PREMIUMS PREMIUMS PREMIUMS
EARNED WRITTEN EARNED WRITTEN
----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C>
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
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
S-13
<PAGE>
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 "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" 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 voluntary direct premium has slowed in recent
quarters and is expected to level-off.
The table below shows premiums earned and written and the statutory loss
ratios by lines of property/casualty insurance.
<TABLE><CAPTION>
THREE MONTHS ENDED MARCH 31
--------------------------------------------------------------------------------
1994 1993
--------------------------------------- ---------------------------------------
PREMIUMS PREMIUMS STATUTORY PREMIUMS PREMIUMS STATUTORY
EARNED WRITTEN LOSS RATIO EARNED WRITTEN LOSS RATIO
----------- ----------- ------------- ----------- ----------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Commercial lines......................... $ 301 $ 303 74.6 $ 319 $ 341 87.2
Fidelity/Surety.......................... 28 31 28.3 25 25 25.6
Personal lines........................... 141 131 98.4 181 161 78.1
----------- ----------- ----- ----------- ----------- -----
Total primary....................... 470 465 79.0 525 527 81.1
Assumed reinsurance...................... 63 85 58.6 123 160 61.3
----------- ----------- ----- ----------- ----------- -----
Total............................. $ 533 $ 550 76.5 $ 648 $ 687 76.6
----------- ----------- ----- ----------- ----------- -----
----------- ----------- ----- ----------- ----------- -----
</TABLE>
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.
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:
<TABLE><CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
(IN MILLIONS)
1994 1993
--------- ---------
<S> <C> <C>
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)
--------- ---------
--------- ---------
</TABLE>
S-14
<PAGE>
Consolidated property/casualty GAAP and statutory underwriting ratios are
as follows:
<TABLE><CAPTION>
THREE MONTHS
ENDED MARCH 31
--------------------
1994 1993
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
- - ---------------
* 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. 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
the 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.
Most states require insurers to provide coverage for less desirable risks
through participation in mandatory programs (involuntary business). 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. Losses from
involuntary business 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 voluntary 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.
Underwriting results showed improvement despite continuing competitive
pressures, the inflationary claims environment, and the adverse impact of
involuntary markets. Competitive pressures continue to affect 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
S-15
<PAGE>
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.
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 expenses 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 and EITF 93-6.
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:
<TABLE><CAPTION>
TOTAL CLAIMS PAID
FROM 1985-1994* CASE RESERVES AT
(INCLUDES LAE) MARCH 31, 1994
------------------- -------------------
(IN MILLIONS)
<S> <C> <C>
Negligent construction....................... $ 80 $ 70
Environmental................................ 131 65
Asbestos..................................... 90 36
</TABLE>
- - ---------------
* 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. From 1985 through the first quarter of 1994,
approximately 35 percent of paid environmental claims related to matters under
which a USF&G insured was a potentially responsible party ("PRP") under the
Comprehensive Environmental Response, Compensation, and Liability Act, commonly
referred to as "Superfund", but many of these PRPs were only peripherally
involved. Management does not believe that USF&G has material exposure to
environmental or asbestos matters in excess of reserves or relative to other
large property/casualty insurers because USF&G's customer base generally does
not include large manufacturing companies, which tend to incur most of the known
environmental and product liability exposures. Many of USF&G's environmental
claims relate to small industrial or transportation accidents which individually
are unlikely to involve material exposures. In addition, USF&G consolidated
handling of common circumstance claims into a specialized unit designed to more
effectively manage such claim exposures.
The discussion herein regarding common circumstance claims relates solely
to USF&G's direct business and does not include exposures assumed through F&G Re
or otherwise. Management does not believe that assumed business, which includes
common circumstance claims, involves exposures materially in excess of
established reserves.
S-16
<PAGE>
The level of loss reserves for both current and prior years' claims is
continually monitored and adjusted for changing economic, social, judicial, and
legislative conditions. Management believes that loss reserves are adequate, but
establishing appropriate reserves, particularly with respect to environmental or
other long term exposure claims which are the subject of evolving legislative
and judicial theories of liability, is highly judgmental and an inherently
uncertain process.
1.3. LIFE INSURANCE OPERATIONS
F&G Life issues annuity and life insurance products. F&G Life's principal
products are structured settlements, deferred annuities (including tax sheltered
annuities), and other annuity products. Structured settlements are immediate
annuities principally sold to the property/casualty company in settlement of
insurance claims.
Life insurance operations represented 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:
<TABLE><CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1994 1993
--------- ---------
(IN MILLIONS)
<S> <C> <C>
Premiums earned............................................... $ 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 $ --
--------- ---------
--------- ---------
</TABLE>
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. Net investment income increased primarily due to the sale
of a majority of an investment in timberland. Management expects investment
income to decrease over the remainder of 1994.
The following table shows life insurance and annuity sales (premiums and
deposits) by distribution system and product type.
<TABLE><CAPTION>
THREE MONTHS ENDED MARCH
31
------------------------
1994 1993
----------- -----------
(IN MILLIONS)
<S> <C> <C>
DISTRIBUTION SYSTEM
Direct structured settlements.............................. $ 21 $ 10
Independent agencies/insurance brokers..................... 22 10
National wholesaler........................................ 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
----- -----
----- -----
</TABLE>
S-17
<PAGE>
Sales 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.
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 ("SPDAs"), 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 policyholders surrender or rollover to new products, although
this could be partially offset by acceleration of the amortization of deferred
policy acquisition costs ("DPAC"). 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.
1.4. PARENT AND NONINSURANCE OPERATIONS
Parent company interest and other unallocated expenses and net losses from
noninsurance operations were as follows:
<TABLE><CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1994 1993
--------- ---------
(IN MILLIONS)
<S> <C> <C>
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)
--------- ---------
--------- ---------
</TABLE>
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 is expected to
S-18
<PAGE>
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,
including the Notes offered hereby.
1.5. INVESTMENTS
At March 31, 1994, USF&G's investment mix was 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.
<TABLE><CAPTION>
AT AT
MARCH 31, 1994 DECEMBER 31, 1993
--------------- ------------------
<S> <C> <C>
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%
--------------- ----------
--------------- ----------
</TABLE>
The following table shows the components of net investment income.
<TABLE><CAPTION>
THREE MONTHS ENDED
MARCH 31
--------------------
1994 1993
--------- ---------
(DOLLARS IN
MILLIONS)
<S> <C> <C>
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%
--------- ---------
--------- ---------
</TABLE>
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 life insurance surrenders and decreased
property/casualty premiums. 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.
S-19
<PAGE>
The components of net realized gains (losses) include the following:
<TABLE><CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
1994 1993
----- ---------
(IN MILLIONS)
<S> <C> <C>
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
--- ---------
--- ---------
</TABLE>
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.
The components of the changes in unrealized gains (losses) were as follows:
<TABLE><CAPTION>
THREE MONTHS ENDED
MARCH 31
----------------------
1994 1993
--------- -----
(IN MILLIONS)
<S> <C> <C>
Fixed maturities available for sale........................... $ (182) $ --
Deferred policy acquisition cost adjustment................... 17 --
Equity securities............................................. (3) 9
Other......................................................... 3 5
--------- -----
Total.................................................. $ (165) $ 14
--------- -----
--------- -----
</TABLE>
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 available for sale 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
unrealized gain on fixed maturities available for sale from $222 million at
December 31, 1993 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.
S-20
<PAGE>
The following tables detail the composition of the fixed maturity
portfolio.
<TABLE><CAPTION>
AT AT
MARCH 31, 1994 DECEMBER 31, 1993
--------------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
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%
--------------- --------
--------------- --------
</TABLE>
- - ------------------------
* See Glossary of Terms
<TABLE><CAPTION>
AT DECEMBER 31, 1993
AT MARCH 31, 1994 -------------------------------------
----------------------------------- NET
NET UNREALIZED
AMORTIZED MARKET UNREALIZED AMORTIZED MARKET GAIN
COST VALUE GAIN (LOSS) COST VALUE (LOSS)
----------- --------- ----------- ----------- --------- -------------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
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
----------- --------- ----------- ----------- --------- ------
----------- --------- ----------- ----------- --------- ------
</TABLE>
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.
S-21
<PAGE>
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.
<TABLE><CAPTION>
AMORTIZED MARKET PERCENT MARKET-
COST PERCENT VALUE TO-AMORTIZED COST
----------- ----------- --------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
U.S. Government and 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%
----------- ----- --------- -----
----------- ----- --------- -----
</TABLE>
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 F&G Life's total investments. The table below
illustrates the credit quality of the high-yield bond portfolio at March 31,
1994.
<TABLE><CAPTION>
PERCENT MARKET-
AMORTIZED MARKET TO-AMORTIZED
COST PERCENT VALUE COST
----------- ----------- ----------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
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%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
The information on credit quality in the preceding two tables is based upon
the higher of the rating assigned to each issue of fixed-income 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 National Association of Insurance Commissioners ("NAIC"); or 3)
an internal assessment of the characteristics of the individual security, if no
other rating is available.
The table below shows the components of USF&G's real estate portfolio.
<TABLE><CAPTION>
AT AT
MARCH 31, 1994 DECEMBER 31, 1993
----------------- -------------------
(IN MILLIONS)
<S> <C> <C>
Mortgage loans.............................. $ 320 $ 302
Equity real estate.......................... 767 793
Reserves.................................... (108) (108)
------- -------
Total................................ $ 979 $ 987
------- -------
------- -------
</TABLE>
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.
S-22
<PAGE>
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:
<TABLE><CAPTION>
GEOGRAPHIC REGION TYPE OF PROPERTY DEVELOPMENT STAGE
- - ---------------------- ---------------- -----------------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
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 and write-downs on other specific properties,
partially offset by a reclassification from performing real estate of another
property.
The book value of the components of nonperforming real estate are as
follows:
<TABLE><CAPTION>
AT AT
MARCH 31, 1994 DECEMBER 31, 1993
----------------- ---------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
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%
------ ------
------ ------
</TABLE>
- - ---------------
* See Glossary of Terms
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.
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.
S-23
<PAGE>
2. 1993 YEAR-END RESULTS
Unless otherwise indicated, balance sheet information is as of December 31
of each year shown and income statement information is for the year ended
December 31 for each year shown.
2.1. CONSOLIDATED RESULTS
The table below shows the major components of net income (loss).
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Income (loss) from continuing operations before income
taxes, realized gains, and cumulative effect of
adopting new accounting standards....................... $ 93 $ (113) $ (179)
Realized gains on investments, net...................... 6 148 38
Loss from discontinued operations....................... -- (7) (32)
Income (loss) from cumulative effect of adopting new
accounting standards:
Income taxes.......................................... 90 -- --
Postretirement benefits............................... (52) -- --
Income tax (expense) benefit............................ 28 -- (3)
--------- --------- ---------
Net income (loss)....................................... $ 165 $ 28 $ (176)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The major factor contributing to the $137 million increase in net income
from 1992 to 1993 was a $200 million improvement in property/casualty insurance
underwriting results. Net realized gains on investments declined by $142 million
in 1993 compared with 1992 due to a high level of gains in 1992 realized
primarily to enhance capital and surplus and to offset the effect of Hurricane
Andrew. Net income in 1993 also was favorably impacted by $38 million due to the
net effect of the adoption of certain new accounting standards. Income tax
benefits of $28 million were recognized in 1993 primarily as a result of
reducing the valuation allowance on net deferred tax assets. The improvement in
net income from 1991 to 1992 was also driven primarily by improved
property/casualty insurance underwriting results, as well as the increase in
realized gains in 1992.
The table below shows the components of the changes in income from
continuing operations before income taxes, realized gains, and the cumulative
effect of adopting new accounting standards by major business segment.
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Property/casualty insurance............................. $ 182 $ (3) $ (84)
Life insurance.......................................... (6) (4) 5
Parent and noninsurance................................. (83) (106) (109)
Eliminations............................................ -- -- 9
--------- --------- ---------
Income (loss) from continuing operations before income
taxes, realized gains, and cumulative effect of
adopting new accounting standards....................... $ 93 $ (113) $ (179)
--------- --------- ---------
--------- --------- ---------
</TABLE>
The $185 million improvement in the property/casualty insurance segment
from 1992 to 1993 occurred as a result of a $72 million reduction in catastrophe
losses and an improvement of $128 million in underwriting results excluding
catastrophes due primarily to product/market mix management and cost containment
strategies. These improvements were partially offset by a $42 million reduction
in investment income. The life insurance segment's decline of $2 million from
1992 to 1993 primarily resulted from declining investment yields and related
declining margins on interest-sensitive products. The results for parent and
noninsurance operations improved $23 million from 1992 to 1993 primarily due to
savings resulting from the fourth quarter 1992 restructuring of the oil and gas
investment.
S-24
<PAGE>
Improvement in income from 1991 to 1992 was driven primarily by improved
property/casualty results, especially in commercial lines. Income comparisons
are also affected by restructuring charges of $51 million in 1992 and $60
million in 1991. There were no restructuring charges in 1993.
2.2. PROPERTY/CASUALTY INSURANCE OPERATIONS
Property/casualty insurance operations accounted for 85 percent of USF&G's
revenues in 1993 and 67 percent of its assets at December 31, 1993. Financial
results for this segment are as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Premiums earned................................. $ 2,327 $ 2,533 $ 3,018
Losses and loss expenses incurred............... (1,758) (2,088) (2,545)
Underwriting expenses........................... (796) (872) (988)
--------- --------- ---------
Net underwriting loss........................... (227) (427) (515)
Net investment income........................... 433 475 498
Restructuring charges........................... -- (46) (52)
Other revenues and expenses..................... (24) (5) (15)
--------- --------- ---------
Income (loss) before income taxes, realized
gains, and the cumulative effect of adopting
new accounting standards...................... $ 182 $ (3) $ (84)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income (loss) before income taxes, realized gains, and the cumulative
effect of adopting new accounting standards significantly improved in 1993
primarily due to improved underwriting results. Net investment income declined
primarily due to the lower interest rate environment in 1993. Restructuring
charges relating to staff reductions and other cost containment programs
affected results in 1991 and 1992. The fluctuations in other revenues and
expenses primarily reflect the decision to eliminate certain policyholders'
dividends in 1992 and the reversal in that year of previously accrued but unpaid
dividends.
Premiums earned totaled $2.3 billion in 1993, compared with $2.5 billion in
1992 and $3.0 billion in 1991. The table below shows the major components of
premiums earned and premiums written.
<TABLE><CAPTION>
1993 1992 1991
------------------------ ------------------------ ------------------------
PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS PREMIUMS
EARNED WRITTEN EARNED WRITTEN EARNED WRITTEN
----------- ----------- ----------- ----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Branch office voluntary production......... $ 1,825 $ 1,847 $ 2,172 $ 1,986 $ 2,625 $ 2,523
Voluntary pools and associations........... 45 46 41 44 50 51
Involuntary pools and associations......... 152 133 163 147 247 247
Assumed reinsurance........................ 305 403 157 243 96 211
----------- ----------- ----------- ----------- ----------- -----------
Total............................... $ 2,327 $ 2,429 $ 2,533 $ 2,420 $ 3,018 $ 3,032
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
</TABLE>
Premiums earned declined 8 percent from 1992 to 1993 and 16 percent from
1991 to 1992 primarily as a result of planned management actions to reduce
premium production in unprofitable markets and product lines. The decline in
premiums earned of 16 percent from 1991 to 1992 was primarily due to the effects
of USF&G's exiting personal lines markets in nine states, eliminating writing
new voluntary workers compensation in 11 states, and reducing exposure to other
unprofitable markets. Such actions, combined with adherence to strict
underwriting standards, led to further declines in premium volume during 1993,
but are designed to continue to improve underwriting results over time. The
decrease in premiums has slowed as strategies are implemented to grow business
in targeted areas. The significant increase in assumed reinsurance premiums in
1993 is due to the strong
S-25
<PAGE>
demand for reinsurance and the higher premium rates available as a result of the
record high catastrophes in 1992 which led to a reinsurance capacity shortage in
1993. However, with the formation of several new reinsurance companies in 1993,
capacity has been added to the reinsurance market, which is expected to generate
competitive pressure in 1994.
The table below shows premiums earned and the statutory loss ratios by
lines of property/casualty insurance.
<TABLE><CAPTION>
1993 1992 1991
------------------------------------- ------------------------------------- -----------
PREMIUMS STATUTORY PREMIUMS STATUTORY PREMIUMS
EARNED % LOSS RATIO EARNED % LOSS RATIO EARNED
----------- --- ------------- ----------- --- ------------- -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
Commercial lines..................... $ 1,223 53% 83.6 $ 1,480 59% 86.9 $ 1,885
Fidelity/Surety...................... 118 5 50.5 111 4 32.0 117
Personal lines....................... 681 29 71.2 785 31 80.0 920
----------- --- ----- ----------- --- ----- -----------
Total primary................. 2,022 87 76.9 2,376 94 82.6 2,922
Assumed reinsurance.................. 305 13 67.3 157 6 76.9 96
----------- --- ----- ----------- --- ----- -----------
Total......................... $ 2,327 100% 75.4 $ 2,533 100% 82.0 $ 3,018
----------- --- ----- ----------- --- ----- -----------
----------- --- ----- ----------- --- ----- -----------
<CAPTION>
STATUTORY
% LOSS RATIO
--- -------------
Commercial lines..................... 62% 91.6
Fidelity/Surety...................... 4 42.3
Personal lines....................... 31 80.0
--- -----
Total primary................. 97 86.0
Assumed reinsurance.................. 3 59.1
--- -----
Total......................... 100% 84.1
--- -----
--- -----
</TABLE>
Underwriting gains (losses) by major business category are as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Commercial............................................ $ (223) $ (343) $ (455)
Fidelity/Surety....................................... (8) 6 11
Personal.............................................. (28) (110) (97)
Assumed reinsurance................................... 32 20 26
--------- --------- ---------
Net underwriting losses........................ $ (227) $ (427) $ (515)
--------- --------- ---------
Voluntary............................................. $ (176) $ (390) $ (375)
Involuntary........................................... (51) (37) (140)
--------- --------- ---------
Net underwriting losses........................ $ (227) $ (427) $ (515)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Consolidated property/casualty GAAP and statutory underwriting ratios are
as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
GAAP UNDERWRITING RATIOS:
Loss ratio............................................ 75.6 82.4 84.3
Expense ratio......................................... 34.2 34.4 32.7
--------- --------- ---------
Combined ratio........................................ 109.8 116.8 117.0
--------- --------- ---------
--------- --------- ---------
STATUTORY UNDERWRITING RATIOS:
Loss ratio............................................ 75.4 82.0 84.1
Expense ratio......................................... 33.7 34.9 33.1
--------- --------- ---------
Combined ratio........................................ 109.1 116.9 117.2
--------- --------- ---------
--------- --------- ---------
</TABLE>
Underwriting results in 1993 improved by $200 million and $288 million over
1992 and 1991, respectively. The improvements over 1992 and 1991 resulted from
lower incurred losses from catastrophes, as well as management's actions to
improve product/market mix, apply stricter underwriting standards, and improve
claims practices. Excluding catastrophe losses from Hurricane Andrew, which
occurred in 1992, the statutory loss ratio improved 3.6 points from 1992 to 1993
and 5.1 points from 1991 to 1992. Hurricane Andrew contributed approximately 3.0
points to the statutory loss ratio in 1992. Underwriting results in the
voluntary business for 1993 improved $214 million over 1992 and $199 million
over 1991. Underwriting losses from involuntary business in 1993 were $14
million more than 1992 but were $89 million less than 1991. The improved overall
trend in 1993 and 1992 over 1991
S-26
<PAGE>
reflects management's actions to reduce exposure to involuntary business in
states with substantial involuntary market burdens. The increase in involuntary
underwriting losses in 1993 over 1992 is primarily due to an assessment of loss
reserves from involuntary workers compensation insurance pools.
Losses and loss adjustment expenses incurred totaled $1.8 billion in 1993,
compared with $2.1 billion and $2.5 billion in 1992 and 1991, respectively. The
reduction is due primarily to lower catastrophe losses, lower premium volume,
and actions taken to better manage claims and claim costs and reduce exposures
in undesirable markets.
Reserves for unpaid losses and loss expenses totaled $6.3 billion at
December 31, 1993, compared with $5.5 billion and $5.7 billion at the end of
1992 and 1991, respectively. The impact of adopting SFAS No. 113 increased
reserves by $1.2 billion. Excluding the effects of SFAS No. 113, reserves in
1993 declined 7 percent from 1992 and 10 percent from 1991. This compares to the
8 percent and 23 percent declines in premiums earned in 1993 compared with 1992
and 1991, respectively. Reserve levels have also been reduced as a result of
reduced claim activity. The number of outstanding claims at December 31, 1993,
declined by 12 percent compared with year-end 1992. The number of new claims
reported (excluding catastrophe claims) declined 23 percent from 1991 to 1993.
Gross catastrophe losses totaled $81 million in 1993, compared with $292
million in 1992. These losses, net of losses ceded to reinsurers, were $68
million in 1993 compared with $140 million in 1992. Gross and net catastrophe
losses totaled $73 million in 1991 as no losses were ceded. Catastrophe losses,
net of reinsurance, represented 3 percent of premiums earned for the year ended
December 31, 1993, compared with 6 percent and 2 percent for 1992 and 1991,
respectively. Catastrophe losses in 1993 included $27 million from the East
Coast blizzard in March. The 1992 losses, the highest in USF&G's history, were
primarily from Hurricane Andrew in Florida and hailstorms and tornadoes in
Kansas and Oklahoma. The industry as a whole experienced record catastrophe
losses in 1992 of approximately $23 billion, over five times the level of
industry losses in 1991 of $4 billion. The catastrophe losses in 1991, the third
highest in USF&G's history, resulted from a series of storms and tornadoes in
the South and Midwest, Hurricane Bob, and the California fires.
Catastrophes and individually large claims (claims in excess of $1
million), net of reinsurance, accounted for $245 million, $268 million and $302
million of incurred losses in 1993, 1992, and 1991, respectively. Net of
reinsurance, individually large claims and related claims accounted for $177
million of incurred losses in 1993 and $128 million and $229 million in 1992 and
1991, respectively. USF&G seeks to limit its exposure to catastrophe and
individually large claims through the purchase of reinsurance.
Total common circumstance claims paid (including loss adjustment expenses)
for the period 1985 through 1993 were $343 million. Case reserves (exclusive of
bulk reserves) outstanding for such claims were $214 million, $171 million, and
$127 million at December 31, 1993, 1992, and 1991, respectively. USF&G's most
significant common circumstance claim exposures include negligent construction,
environmental, and asbestos claims.
S-27
<PAGE>
2.3. LIFE INSURANCE OPERATIONS
Life insurance operations represented 14 percent of USF&G's revenues in
1993 and 34 percent of its assets at December 31, 1993. F&G Life's financial
results are as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Premiums.............................................. $ 129 $ 104 $ 169
Net investment income................................. 321 349 370
Policy benefits....................................... (395) (377) (437)
Underwriting and operating expenses................... (61) (77) (94)
Other revenues and expenses........................... -- -- (1)
Restructuring charges................................. -- (3) (2)
--------- --------- ---------
Income (loss) before income taxes, realized gains, and
the cumulative effect of adopting new accounting
standards............................................. $ (6) $ (4) $ 5
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income (loss) comparisons were affected by increased sales and lower
operating expenses offset by lower investment income in 1993. In 1992, F&G Life
repositioned itself to become more competitive and service oriented. The
repositioning resulted in a broadened product mix and a balanced distribution
system. The revised market strategies, new distribution channels, and enhanced
customer service are the major factors for the increase in sales in 1993. In
addition, strategic repositioning and management actions to reduce costs
contributed to a 29 percent decline in operating expenses in 1993 compared with
1992.
The following table shows life insurance and annuity sales (premiums and
deposits) by distribution system and product type:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
DISTRIBUTION SYSTEM
Direct-structured settlement annuities.............. $ 66 $ 37 $ 71
Independent agencies/insurance brokers.............. 60 60 76
National wholesaler................................. 35 -- --
Member firm/financial institutions.................. 7 7 62
--------- --------- ---------
Total.......................................... $ 168 $ 104 $ 209
--------- --------- ---------
PRODUCT TYPE
Structured settlement annuities..................... $ 66 $ 37 $ 71
Single premium deferred annuities................... 44 33 70
Tax-sheltered annuities............................. 35 -- --
Other annuities..................................... 17 23 54
Life insurance...................................... 6 11 14
--------- --------- ---------
Total.......................................... $ 168 $ 104 $ 209
--------- --------- ---------
--------- --------- ---------
</TABLE>
Sales in 1993 were favorably affected by F&G Life's refocus on its
marketing and customer service operations. F&G Life's restructuring replaced
high fixed cost marketing programs with variable cost distribution channels. New
products were designed to meet the needs of targeted customers and to increase
sales opportunities. Since the implementation of the program in 1992, 1993 sales
increased 62 percent when compared with 1992. However, there is no assurance
that the 1993 improved sales trend will continue. F&G Life's 1992 sales declined
by 50 percent from 1991 levels due to the effect of the low interest rate
environment and the residual effects of USF&G's restructuring efforts and its
credit ratings. Total life insurance in force decreased to $12.1 billion in
1993, compared with $12.4 billion in 1992 and $13.4 billion in 1991. Since 1991,
insurance in force has been affected by the decline in life insurance sales and
an increase in universal life policy surrenders.
S-28
<PAGE>
Policy surrenders totaled $211 million in 1993, compared with $192 million
in 1992 and $586 million in 1991. Surrender activity was significantly reduced
from the unusually high level experienced in 1991 when policyholders reacted to
negative public perception of the life insurance industry in general, and the
annuity business in particular, as well as the uncertainty at that time about
USF&G's restructuring efforts.
2.4. PARENT AND NONINSURANCE OPERATIONS
Parent company interest and other unallocated expenses and net losses from
noninsurance operations were as follows:
<TABLE><CAPTION>
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
PARENT COMPANY EXPENSES:
Interest expense...................................... $ (37) $ (35) $ (42)
Unallocated expenses, net............................. (35) (34) (20)
NONINSURANCE LOSSES:
Management consulting................................. (2) (4) (2)
Oil and gas........................................... -- (18) (17)
Other noninsurance investments........................ (9) (13) (22)
Restructuring charges................................... -- (2) (6)
--------- --------- ---------
Loss from continuing operations before income taxes and
realized gains.......................................... $ (83) $ (106) $ (109)
--------- --------- ---------
--------- --------- ---------
</TABLE>
Interest expense in 1993 was generally consistent with 1992; however,
compared with 1991, interest expense was lower due primarily to declines in
outstanding debt and lower rates on short-term debt. As a result of a
restructuring, there were no oil and gas operating losses in 1993. During 1992,
USF&G incurred $2 million of restructuring charges related to its oil and gas
operations. The result of this restructuring was to merge the operations with
another oil and gas exploration and production company. In 1993, the successor
company issued shares through an initial public offering, thereby reducing
USF&G's percentage ownership. The improvement in other noninsurance investments
from 1992 to 1993 primarily related to income from notes received from the sale
of an investment management subsidiary in 1992. Restructuring charges in 1991
related to revisions to restructuring estimates originally established in the
prior year and the expansion of the restructuring program during the year.
S-29
<PAGE>
2.5. INVESTMENTS
The table below shows the distribution of USF&G's investment portfolio.
<TABLE><CAPTION>
AT DECEMBER 31
-------------------------------
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
Total investments (in millions).............................................. $ 11,377 $ 11,346 $ 12,167
Fixed maturities:
Held to maturity........................................................... 41% 64% 31%
Available for sale......................................................... 43 17 44
--------- --------- ---------
Total fixed maturities................................................ 84 81 75
--------- --------- ---------
Common and preferred stocks.................................................. 1 1 4
Short-term investments....................................................... 3 5 10
Mortgage loans and real estate............................................... 9 9 9
Other invested assets........................................................ 3 4 2
--------- --------- ---------
Total................................................................. 100% 100% 100%
--------- --------- ---------
--------- --------- ---------
</TABLE>
USF&G's investment mix has been repositioned to increase the percentage of
high quality fixed-income securities in the portfolio. Long-term fixed
maturities comprise 84 percent of total investments at December 31, 1993,
compared with 81 percent and 75 percent at December 31, 1992 and 1991,
respectively. At December 31, 1990, fixed maturities comprised less than 65
percent of total investments. The general level of investment in fixed
maturities is expected to be maintained through 1994. The increased proportion
of fixed maturities "available for sale" at December 31, 1993 reflects the
implementation of SFAS No. 115.
The following table shows the components of net investment income.
<TABLE><CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1993 1992 1991
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net investment income from:
Fixed maturities.................................................................. $ 721 $ 739 $ 711
Equity securities................................................................. 14 12 29
Options........................................................................... -- 37 65
Short-term investments............................................................ 9 27 73
Real estate and mortgage loans.................................................... 41 50 35
Other, less expenses.............................................................. (36) (48) (36)
--------- --------- ---------
Total........................................................................ $ 749 $ 817 $ 877
--------- --------- ---------
--------- --------- ---------
Average yield....................................................................... 6.7% 7.3% 7.8%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Investment results were significantly affected by declining interest rates
in 1993. The interest rate environment had a two-pronged effect on net
investment income, which decreased 8 percent and 15 percent when compared with
1992 and 1991, respectively. The reduction in interest rates triggered
prepayments on mortgage-backed securities and refinancing of debt by long-term
borrowers. During 1993, maturities and other repayments of USF&G's fixed
maturity investments totaled $1.3 billion and proceeds from fixed maturities
sales totaled $1.7 billion. Proceeds from these sales and repayments of fixed
maturities were reinvested at substantially lower rates. For 1993, net
investment income from fixed maturities decreased by 2.4 percent when compared
with 1992 and increased by 1.4 percent when compared with 1991. Average yields
on fixed maturities were 7.7 percent, 8.6 percent, and 9.2 percent for the years
ended December 31, 1993, 1992, and 1991, respectively.
S-30
<PAGE>
While interest rate changes have contributed to declines in average yields
since 1991, another significant factor was the elimination of option income.
Prior to 1993, options were written on a segment of USF&G's fixed maturity
portfolio. In 1993, USF&G elected to eliminate its debt option writing program
and thereby forfeit option income in order to avoid exposing its fixed
maturities to the possibility of being called. Excluding option income the
average yield on invested assets was 7.2 percent in 1991 and 7.0 percent in 1992
compared with 6.7 percent in 1993.
The reduction in net investment income from short-term investments since
1991 reflects both the effect of lower interest rates and the reduced level of
assets allocated to short-term investments. The sale of income-producing
properties combined with losses on equity partnerships were the primary factors
in the decline from 1992 to 1993 in real estate and mortgage loan investment
income.
The components of net realized gains (losses) include the following:
<TABLE><CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net gains (losses) from sales:
Fixed maturities.................................................................. $ 79 $ 179 $ 157
Equities and options.............................................................. 5 52 (2)
Real estate and mortgage loans.................................................... 6 (3) (3)
Other............................................................................. -- 11 (44)
--------- --------- ---------
Total net gains.............................................................. 90 239 108
--------- --------- ---------
Provisions for impairment:
Fixed maturities.................................................................. (10) (20) (15)
Equities.......................................................................... (8) -- (18)
Real estate....................................................................... (51) (43) (29)
Other............................................................................. (15) (28) --
--------- --------- ---------
Total provisions............................................................. (84) (91) (62)
--------- --------- ---------
--------- --------- ---------
Losses due to portfolio restructuring............................................... -- -- (8)
--------- --------- ---------
--------- --------- ---------
Net realized gains........................................................... $ 6 $ 148 $ 38
--------- --------- ---------
--------- --------- ---------
</TABLE>
To more effectively match the duration of its investments with its life
insurance liabilities, USF&G repositioned a portion of its fixed maturity
investments in 1993. The related sales of fixed maturities were the primary
reason for net gains of $90 million in 1993. Investment sales to offset declines
in capital and statutory surplus caused by catastrophe losses and other sales as
part of USF&G's portfolio repositioning resulted in net gains of $239 million
and $108 million in 1992 and 1991, respectively. In 1992, USF&G realized $52
million of gains on equities and reallocated the proceeds to relatively less
volatile fixed maturities.
To reflect impairments in the value of certain of its investments, USF&G
made provisions for impairment of $84 million in 1993 compared with $91 million
in 1992 and $62 million in 1991. Real estate provisions in 1993 primarily
related to specific properties either sold in 1993 or expected to be sold in the
near term. These properties were written down to net realizable value with
corresponding increases to real estate reserves. Similar real estate provisions
were taken in 1992 and 1991 to reflect both changes in circumstances related to
specific properties and general real estate market deterioration. The
recognition of other than temporary impairments on two equity holdings which
were subsequently sold during 1993 and one investment where USF&G holds a
minority interest were key elements in net realized losses of $3 million on
equities and $15 million on other invested assets in 1993.
S-31
<PAGE>
The components of the changes in unrealized gains (losses) were as follows:
<TABLE><CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Equity securities..................................................................... $ 23 $ (39) $ 47
Fixed maturities available for sale................................................... 222 -- --
Deferred policy acquisition cost adjustment........................................... (30) -- --
Other................................................................................. 8 29 (10)
--------- --------- ---------
Total.......................................................................... $ 223 $ (10) $ 37
--------- --------- ---------
--------- --------- ---------
</TABLE>
USF&G's adoption of SFAS No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," favorably impacted shareholders' equity as market
value changes in fixed maturities "available for sale" were reflected in
unrealized gains on investments in 1993. Unrealized gains on fixed maturities
classified as "available for sale" were $222 million at December 31, 1993. Prior
to adoption of SFAS No. 115, appreciation on fixed maturities was not included
as a component of shareholders' equity. This was partially offset by a DPAC
(deferred policy acquisition costs) adjustment reflecting assumptions about the
effect of potential asset sales on future DPAC amortization should the
unrealized gains on assets matched to certain life insurance liabilities be
realized and the proceeds reinvested at lower rates. Under this scenario margins
on annuity products could potentially be reduced, leading to an acceleration of
DPAC amortization. Appreciation in the equity portfolio and several stock funds
as well as the partial sale of a foreign equity holding which had an unrealized
loss at December 31, 1992, also contributed to the favorable change in
unrealized gains. A reduction in unrealized gains of $10 million occurred in
1992 largely due to the realization of gains on the sale of equities offset by
the elimination of unrealized losses on written options. A general appreciation
in the equity markets resulted in a $47 million increase in unrealized gains on
equity securities in 1991.
The tables below detail the composition of the fixed maturity portfolio.
<TABLE><CAPTION>
AT DECEMBER 31
-------------------------------
1993 1992 1991
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
U. S. Government bonds........................................................... $ 308 $ 554 $ 2,613
Corporate investment-grade bonds................................................. 4,866 3,103 1,806
Mortgage-backed securities....................................................... 2,403 3,824 3,174
Asset-backed securities.......................................................... 1,149 995 793
High-yield bonds................................................................. 562 522 433
Tax-exempt bonds................................................................. 48 71 173
Other............................................................................ 6 136 121
--------- --------- ---------
Total fixed maturities at amortized cost.................................. $ 9,342 $ 9,205 $ 9,113
--------- --------- ---------
--------- --------- ---------
Total market value of fixed maturities........................................... $ 9,699 $ 9,319 $ 9,486
Net unrealized gains............................................................. $ 357 $ 114 $ 373
--------- --------- ---------
--------- --------- ---------
Percent market-to-amortized cost................................................. 104% 101% 104%
--------- --------- ---------
--------- --------- ---------
</TABLE>
<TABLE><CAPTION>
AT DECEMBER 31
----------------------------------------------------------------------
1993 1992 1991
---------------------- ---------------------- ----------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE
----------- --------- ----------- --------- ----------- ---------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Held to maturity........................... $ 4,661 $ 4,796 $ 7,218 $ 7,290 $ 3,749 $ 3,880
Available for sale......................... 4,681 4,903 1,987 2,029 5,364 5,606
----------- --------- ----------- --------- ----------- ---------
Total................................. $ 9,342 $ 9,699 $ 9,205 $ 9,319 $ 9,113 $ 9,486
----------- --------- ----------- --------- ----------- ---------
----------- --------- ----------- --------- ----------- ---------
</TABLE>
S-32
<PAGE>
In compliance with SFAS No. 115, USF&G classified 50 percent of its fixed
maturity portfolio as "available for sale." Management believes that this level
of securities available for sale is adequate for USF&G to meet its operating
liquidity needs and provides the flexibility necessary to respond to changes in
the investment markets. Securities classified as "available for sale" are
carried at market value with unrealized gains and losses included in
shareholders" equity. At December 31, 1993, unrealized gains were $222 million.
Securities classified as "held to maturity", which are carried at amortized
cost, had unrealized gains of $135 million at December 31, 1993. Prior to the
adoption of SFAS No. 115, gains on fixed maturities were not recognized in
USF&G's financial statements until the gains were realized at the time of sale.
Such unrealized gains on fixed maturities available for sale were $42 million
and $242 million at December 31, 1992 and 1991, respectively. Unrealized gains
on securities classified as "held to maturity" were $72 million and $131 million
at December 31, 1992 and 1991, respectively. Declining interest rates, which
resulted in rising bond prices, were responsible for the three percentage point
increase from 1992 to 1993 in the fixed maturity portfolio's overall market-to-
amortized cost ratio.
The effect on fixed maturities of falling interest rates was most evident
in the decline in holdings of mortgage-backed securities during 1993.
Investments in mortgage-backed securities declined 37 percent and 24 percent
when compared with holdings at December 31, 1992 and 1991, respectively, due
primarily to the reallocation of principal prepayments to corporate investment
grade bonds. Declining interest rates in 1993 led to the prepayment of a
significant portion of USF&G's mortgage-backed portfolio. Proceeds from these
prepayments, combined with other sales proceeds, were invested in corporate
investment grade securities to maintain a balance of sufficient credit quality
and overall portfolio yield. While subject to the prepayment risk experienced
during 1993, credit risk related to mortgage-backed securities is believed to be
minimal as 99 percent of such securities at December 31, 1993, have AAA ratings
or are collateralized by obligations of the U. S. Government or its agencies.
Debt obligations of the U. S. Government and its agencies and other
investment-grade bonds comprised 94 percent of the portfolio at December 31,
1993, compared with 93 percent at both December 31, 1992 and 1991. The table
below shows the credit quality of the long-term fixed maturity portfolio as of
December 31, 1993.
<TABLE><CAPTION>
AMORTIZED MARKET PERCENT MARKET-
COST PERCENT VALUE TO-AMORTIZED COST
----------- ----------- --------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
U. S. Government and agencies.............. $ 2,351 25% $ 2,453 104%
AAA........................................ 1,808 19 1,866 103
AA......................................... 1,305 14 1,342 103
A.......................................... 2,296 25 2,390 104
BBB........................................ 1,020 11 1,055 103
Below BBB.................................. 562 6 593 106
----------- ----- --------- -----
Total............................... $ 9,342 100% $ 9,699 104%
----------- ----- --------- -----
----------- ----- --------- -----
</TABLE>
USF&G's holdings in high-yield bonds comprised six percent of the total
fixed maturity portfolio at December 31, 1993, compared with five percent of the
portfolio at December 31, 1992 and 1991. The high-yield bond market-to-amortized
cost ratio has improved three percentage points and seven percentage points
compared with December 31, 1992 and 1991, respectively. Of the total high-yield
bond portfolio, 69 percent is held by the life insurance segment, representing 9
percent of the life
S-33
<PAGE>
segment's total investments. The table below illustrates the credit quality of
the high-yield bond portfolio at December 31, 1993.
<TABLE><CAPTION>
AMORTIZED MARKET PERCENT MARKET-
COST PERCENT VALUE TO-AMORTIZED COST
----------- ----------- ----------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
BB............................... $ 352 63% $ 369 105%
B................................ 209 37 218 104
CCC and lower.................... 10 2 6 60
Valuation allowance.............. (9) (2) -- --
----------- ----- ----------- -----
Total..................... $ 562 100% $ 593 106%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
The information on credit quality in the preceding two tables is based upon
the higher of the rating assigned to each issue of fixed-income bonds by either
Standard & Poor's or Moody's. Where neither Standard & Poor's nor Moody's has
assigned a rating to a particular fixed maturity issue, classification is based
on 1) ratings available from other recognized rating services; 2) ratings
assigned by the NAIC; or 3) an internal assessment of the characteristics of the
individual security if no other rating is available.
The table below shows the components of USF&G's real estate portfolio.
<TABLE><CAPTION>
AT DECEMBER 31
-------------------------------
1993 1992 1991
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Mortgage loans........................................ $ 302 $ 186 $ 291
Equity real estate.................................... 793 926 864
Reserves.............................................. (108) (108) (88)
--------- --------- ---------
Total.......................................... $ 987 $ 1,004 $ 1,067
--------- --------- ---------
--------- --------- ---------
</TABLE>
The increased allocation to mortgage loans in 1993 reflects a strategy of
maintaining a generally consistent level of real estate assets while allocating
more funds to traditional mortgage loans and reducing real estate equity-type
investments.
Real estate investments are generally appraised at least once every three
years. Appraisals are obtained more frequently under certain circumstances such
as when there are significant changes in property performance or market
conditions. All of these appraisals are performed by professionally certified
appraisers.
USF&G's five largest real estate investments had a book value of $322
million at December 31, 1993. The largest single investment was $89 million, or
eight percent of the total real estate portfolio.
Mortgage loans and real estate investments not performing in accordance
with contractual terms, or performing significantly below expectation, are
categorized as nonperforming. Nonperforming real estate investments totaled $249
million at December 31, 1993, which represented declines of 28 percent and 37
percent, respectively, when compared with December 31, 1992 and 1991. The
reduction in nonperforming real estate was driven by operating improvements in
properties warranting reclassification to performing real estate, the sale of
certain nonperforming real estate properties, and write-downs on specific
properties.
S-34
<PAGE>
The book value of the components of nonperforming real estate were as
follows:
<TABLE><CAPTION>
BOOK VALUE AT DECEMBER 31
-------------------------------
1993 1992 1991
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Loans not current as to interest or principal............. $ -- $ -- $ 72
Restructured loans and investments........................ 4 4 21
Real estate held as in-substance foreclosure.............. 14 15 4
Real estate acquired through foreclosure or deed-in-lieu
of foreclosure............................................ 121 190 157
Land investments.......................................... 57 71 60
Nonperforming equity investments.......................... 53 66 79
--------- --------- ---------
Total nonperforming real estate.................... $ 249 $ 346 $ 393
--------- --------- ---------
--------- --------- ---------
Real estate reserves...................................... $ 108 $ 108 $ 88
--------- --------- ---------
--------- --------- ---------
Reserves/nonperforming real estate........................ 43% 31% 22%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Valuation allowances are established for impairments of mortgage loans and
real estate equity values based on periodic evaluations of the operating
performance of the properties and their exposure to declines in value. The
allowance totaled $108 million, or 10 percent of the entire real estate
portfolio, at both December 31, 1993 and 1992. In 1991, the allowance was $88
million, which represented 8 percent of the total real estate portfolio. In
light of USF&G's current plans with respect to the portfolio, management
believes the allowance at December 31, 1993, adequately reflects the current
condition of the portfolio. Should deterioration occur in the general real
estate market or with respect to individual properties in the future, additional
reserves may be required. Prospectively, efforts will continue to reduce risk
and increase yields in the real estate portfolio by selling equity real estate
when it is advantageous to do so and reinvesting the proceeds in medium-term
mortgage loans.
3. FINANCIAL CONDITION AND LIQUIDITY
Unless otherwise indicated, financial position at March 31, 1994 is
compared with December 31, 1993.
3.1. FINANCIAL CONDITION
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.
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 due 2009 which were
issued during the first quarter of 1994. The proceeds of those notes were used
to redeem $119 million of higher cost medium and long term notes. 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.
S-35
<PAGE>
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 the $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 net income of
$23 million less $16 million in common and preferred stock dividends.
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, at least a portion of the $375 million
balance outstanding at March 31, 1994 will be refinanced and the short-term
facility is expected to 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.
3.2. 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 as
a result of the issuance of the zero coupon convertible subordinated notes
issued in March 1994 and will be further reduced as a result of this Offering.
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.
USF&G had cash flow from continuing operations of $87 million in 1993 and
$99 million in 1992, compared with negative cash flow from continuing operations
of $4 million in 1991. The primary factors contributing to the decrease in cash
flow for 1993 in comparison with 1992 were a decline in premiums and investment
income in the property/casualty segment, offset by a reduction in loss payments
and operating expenses.
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.
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.
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
S-36
<PAGE>
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.
4. REGULATION
The Corporation's insurance subsidiaries are subject to extensive
regulation and supervision in the states and other jurisdictions in which they
do business. This regulatory oversight includes, for example, matters relating
to licensing and examination, rate setting, trade practices, policy forms,
restrictions on underwriting standards, cancellation and nonrenewal of insurance
policies, withdrawal from a market, claims practices and mandated participation
in involuntary pools and guaranty funds. The insurance laws of these states and
other jurisdictions also regulate the nature and amount of permitted
investments, reserve adequacy, insurer solvency and transactions between
affiliates. Such regulation and supervision are primarily for the benefit and
protection of policyholders and are not for the benefit of investors.
In recent years, the state insurance regulatory framework has come under
increased scrutiny and many state legislatures have considered or enacted laws
that regulate insurance companies and insurance holding company systems.
Further, the National Association of Insurance Commissioners (the "NAIC") and
state insurance regulators are reexamining existing laws and regulations,
specifically focusing on issues relating to insurance company investments, the
solvency of insurance companies and risk-based capital ("RBC") guidelines. In
addition, Congress and certain federal government agencies are investigating the
current condition of the insurance industry to determine whether federal
regulation is warranted. President Clinton also has presented a proposal to
enact a comprehensive national health care system, one component of which would
merge the medical payment system for workers compensation and the medical
payment component of automobile insurance into a single health care system.
Also, while current federal income tax law permits the tax-deferred accumulation
of earnings on the premiums paid by an annuity owner and holders of certain
savings oriented life insurance products, no assurance can be given that future
tax laws will continue to allow such tax deferrals. If such deferrals were not
allowed, consumer demand for the affected products would be substantially
reduced. It is not possible to predict the future impact of increasing state or
potential federal regulation of the Corporation's operations.
USF&G Company is required by state law to participate in various
involuntary pools principally involving workers compensation and automobile
insurance. From time to time, such pools assess charges on their participants to
reflect claims which have been made against such pools. The Corporation has
withdrawn from certain jurisdictions and has taken steps in other jurisdictions
to reduce its risk to these exposures, although it continues to face potential
assessments, even in states where it has withdrawn, related to its prior
participation in such markets. There can be no assurance that any such charges,
if assessed, will not have a material adverse effect on the Corporation.
In addition to the foregoing, insurance guaranty fund laws have been
adopted in most states to protect policyholders in case of an insurer's
insolvency. Insurers doing business in those states can be assessed for certain
obligations of insolvent companies to policyholders and claimants, which
assessments can under certain circumstances be credited against future premium
taxes. Net of such tax credits, USF&G incurred $15 million of guaranty fund
expense in 1993 and $13 million in 1992.
Financial difficulties of certain insurance companies over the past several
years are expected to result in additional assessments that would have a
negative impact on future earnings. State laws limit
S-37
<PAGE>
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, but is not expected to have a
material adverse effect on USF&G's financial position.
In order to enhance the regulation of insurer solvency, the NAIC has
approved a formula and model law to implement RBC requirements designed to
assess capital adequacy of insurers. These regulations are currently effective
for life insurance companies and will be effective with respect to year end 1994
financial statements for property/casualty companies. Insurers having less
statutory surplus than required by the RBC calculation will be subject to
varying degrees of regulatory action, depending on the level of capital
inadequacy. In addition, it is possible that the comparative RBC levels will
become a relevant competitive factor in the industry. Based on the NAIC formula,
both USF&G Company and F&G Life have statutory surplus at December 31, 1993 in
excess of the RBC Company Action Level (as defined by the NAIC). There can be no
assurance that, in the future, surplus will not fall below the RBC amount that
would initiate regulatory intervention or that the Corporation's subsidiaries
will not be adversely affected by the RBC measurements.
5. 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 voluntary 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 a life 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 salvage recoverable accruals for GAAP
purposes and deposit accounting for GAAP related to finite reinsurance.
S-38
<PAGE>
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.
S-39
<PAGE>
DESCRIPTION OF THE NOTES
The Notes are to be issued under an Indenture dated as of January 28, 1994
(the "Indenture") entered into by the Corporation and Signet Trust Company, as
trustee (the "Trustee"). The following summaries of certain provisions of the
Notes and the Indenture, a copy of which is filed as an exhibit to the
Registration Statement of which the Prospectus is a part, do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Notes and the Indenture, including the
definitions therein of certain terms. Capitalized terms used herein have the
meanings attributed to them in the Notes or the Indenture (unless otherwise
defined herein).
The following description of the particular terms of the Notes offered
hereby supplements and, to the extent inconsistent therewith, replaces the
description of the general terms and provisions of the Debt Securities and the
Indenture set forth in the Prospectus, to which reference is hereby made.
GENERAL
The Notes will be limited to $150,000,000 aggregate principal amount and
will mature on June 15, 2001. The Notes will bear interest at the rate set forth
on the front cover of this Prospectus Supplement from June 30, 1994, payable
semi-annually on June 15 and December 15 of each year, commencing December 15,
1994, to the registered holders at the close of business on the June 1 or
December 1 preceding such June 15 or December 15, whether or not such day is a
business day. Interest on the Notes will be computed on the basis of a 360-day
year of twelve 30-day months.
Principal of and interest on the Notes is payable at the office or agency
of the Corporation maintained for such purposes (which initially is the
Trustee); provided, however, that payment of interest may also be made at the
option of the Corporation by check mailed to the Person entitled thereto as
shown on the security register. The Notes will be issued only in fully
registered form, without coupons, in denominations of $1,000 and any integral
multiple thereof. No service charge will be made for any registration of
transfer or exchange of Notes, except in certain circumstances for any tax or
other governmental charge that may be imposed in connection therewith.
RANKING
The Notes will be general unsecured obligations and will rank pari passu
with all other unsecured and unsubordinated senior indebtedness of the
Corporation.
The Corporation is a holding company whose principal asset is the stock of
USF&G Company. USF&G Company, in turn, owns the stock of F&G Life and the
Corporation's other principal subsidiaries. Since the Corporation is a holding
company, its rights and the rights of its creditors, including the holders of
the Notes, to participate in the assets of any subsidiary upon the latter's
liquidation or recapitalization generally will be subject to the prior claims of
the subsidiary's creditors (including, in the case of an insurance subsidiary,
its policyholders). In addition, there are certain regulatory limitations on the
payment of dividends and on loans and other transfers of funds to the
Corporation by its subsidiaries.
Because the operations of the Corporation are conducted through its
subsidiaries, the Corporation is dependent on dividends from its subsidiaries to
meet its obligations for payment of interest and principal on outstanding debt
obligations, dividends to shareholders and corporate expenses. Approval of the
Maryland Insurance Commissioner is required for dividend payments from a
Maryland insurance subsidiary to its holding company during a twelve month
period in excess of 10% of the subsidiary's statutory policyholders' surplus as
of the prior calendar year end. In addition, notice of any dividend must be
given to the Maryland Insurance Commissioner prior to payment, and the
Commissioner has the right to prevent payment of such dividend if it is
determined that such payment could impair the insurer's surplus or financial
condition. During 1994, approximately $154 million in dividends are
S-40
<PAGE>
available for payment to the Corporation from its insurance subsidiaries without
prior approval from the Maryland Insurance Commissioner.
OPTIONAL REDEMPTION
The Notes will not be redeemable prior to maturity.
SINKING FUND
There will be no sinking fund payments for the Notes.
COVENANTS
The Notes contain, among others, the following covenants:
Limitation on Issuance or Disposition of Stock of Principal Insurance
Subsidiaries. The Corporation will not, nor will it permit any Principal
Insurance Subsidiary to, issue, sell or otherwise dispose of any shares of
Capital Stock (other than non-voting Preferred Stock) of any Principal Insurance
Subsidiary, except for (i) directors qualifying shares; (ii) sales or other
dispositions to the Corporation or to one or more Principal Insurance
Subsidiaries; (iii) the disposition of all or any part of the Capital Stock of
any Principal Insurance Subsidiary for consideration which is at least equal to
the fair value of such Capital Stock as determined by the Corporation's board of
directors (acting in good faith); or (iv) any issuance, sale, assignment,
transfer or other disposition made in compliance with an order of a court or
regulatory authority of competent jurisdiction, other than an order issued at
the request of the Corporation or any Principal Insurance Subsidiary.
Limitation on Liens. As long as any of the Notes remain outstanding, the
Corporation will not, and will not permit any Principal Insurance Subsidiary to,
issue, assume, incur or guarantee any indebtedness for borrowed money secured by
a mortgage, pledge, lien or other encumbrance, directly or indirectly, on any of
the Common Stock of a Principal Insurance Subsidiary, which Common Stock is
owned by the Corporation or by any Principal Insurance Subsidiary, unless the
Notes and, if the Corporation so elects, any other indebtedness of the
Corporation ranking on a parity with the Notes, shall be secured equally and
ratably with, or prior to, such secured indebtedness for borrowed money so long
as it is outstanding.
"Principal Insurance Subsidiary" means each of USF&G Company and F&G Life,
so long as it remains a Subsidiary, or any other Subsidiary of the Corporation
which shall hereafter succeed by merger or otherwise to a major part of the
business of one or more of the Principal Insurance Subsidiaries. The decision as
to whether a Subsidiary shall have succeeded to a major part of the business of
one or more of the Principal Insurance Subsidiaries shall be made in good faith
by the Board of Directors of the Corporation or a committee thereof by the
adoption of a resolution so stating, and the Corporation shall within 30 days of
the date of the adoption of such resolution deliver to the Trustee a copy
thereof, certified by the Corporate Secretary or an Assistant Corporate
Secretary of the Corporation.
"Capital Stock" means any and all shares, interests, rights to purchase,
warrants, options, participations or other equivalents of or interests in
(however designated) corporate stock, including any Preferred Stock.
"Common Stock" means, with respect to any Principal Insurance Subsidiary,
stock of any class, however designated, except stock which is non-participating
beyond fixed dividend and liquidation preferences and the holders of which have
either no voting rights or limited voting rights entitling them, only in the
case of certain contingencies, to elect less than a majority of the directors
(or persons performing similar functions) of such Principal Insurance
Subsidiary, and shall include securities of any class, however designated, which
are convertible into such Common Stock.
S-41
<PAGE>
"Preferred Stock," as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
Neither the Notes nor the Indenture contain any provisions other than the
foregoing which will restrict the Corporation from incurring, assuming or
becoming liable with respect to any indebtedness or other obligations, whether
secured or unsecured, or from paying dividends or making other distributions on
its capital stock or purchasing or redeeming its capital stock. Neither the
Notes nor the Indenture contain any financial ratios, or specified levels of net
worth or liquidity to which the Corporation must adhere. In addition, neither
the Notes nor the Indenture contain any provision which would require that the
Corporation repurchase or redeem or otherwise modify the terms of any of the
Notes upon a change in control or other events involving the Corporation which
may adversely affect the creditworthiness of the Notes.
EVENTS OF DEFAULT
The Notes shall be subject to the Events of Default set forth in the
Prospectus, except that it shall be an Event of Default with respect to the
Notes in the event of the due acceleration (which acceleration shall not have
been rescinded within 30 days after written notice to the Corporation) of any
indebtedness for borrowed money in a principal amount in excess of $10,000,000
($25,000,000 in the case of Non-Recourse Indebtedness) for which the Corporation
or any Principal Insurance Subsidiary is liable, or a default by the Corporation
or any Principal Insurance Subsidiary in the payment at final maturity of
outstanding indebtedness for borrowed money in a principal amount in excess of
$10,000,000 ($25,000,000 in the case of Non-Recourse Indebtedness), unless such
acceleration or default at maturity shall be remedied or cured by the
Corporation or any Principal Insurance Subsidiary or rescinded, annulled or
waived by the holders of such indebtedness, in which case such acceleration or
default at maturity shall not constitute an Event of Default under this
provision and any acceleration relating thereto shall be rescinded.
"Non-Recourse Indebtedness" means any indebtedness for borrowed money for which
the liability and obligation of the Corporation and any Principal Insurance
Subsidiary is limited solely to property or assets pledged to secure such
indebtedness for borrowed money, without any liability or obligation, direct or
indirect, on the part of the Corporation or any Principal Insurance Subsidiary
for any deficiency in the amount realized from such property or assets.
BOOK-ENTRY, DELIVERY AND FORM
The Notes initially will be represented by one or more global securities
(the "Global Securities") deposited with The Depository Trust Company ("DTC")
and registered in the name of a nominee of DTC. Except as set forth below, the
Notes will be available for purchase in denominations of $1,000 principal amount
at maturity, and integral multiples thereof, in book-entry form only.
Upon the issuance of the Global Securities, the depository for such Global
Securities (the "Depository") or its nominee will credit on its book-entry
registration and transfer system the respective principal amounts of the Notes
represented by such Global Securities to the accounts of the persons that have
accounts with such Depository (the "Participants"). Such accounts shall be
designated by the Underwriters of the Notes. Ownership of beneficial interests
in such Global Securities will be shown on, and the transfer of that ownership
will be effected only through, records maintained by the Depository or its
nominee (with respect to interests of Participants) and records of Participants
(with respect to interests of persons who hold through Participants). The laws
of some states require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such laws may impair the ability
to own, pledge or transfer beneficial interests in a Global Security.
Unless and until certificated Notes are issued under the limited
circumstances described below, no beneficial owner of a Note shall be entitled
to receive a definitive certificate representing a Note. So long
S-42
<PAGE>
as the Depository or its nominee is the registered owner of all the Global
Securities, the Depository or such nominee, as the case may be, will be
considered to be the sole owner or holder of the Notes for all purposes of the
Indenture. Unless and until exchanged in whole or in part for the Notes
represented thereby, the Global Securities may not be transferred except in
their entirety by the Depository to a nominee of the Depository or by a nominee
of such Depository to such Depository or another nominee of such Depository or
by the Depository or any nominee to a successor depository or any nominee of
such successor.
So long as the Notes are represented by the Global Securities, any payments
in respect of the Notes will be made to the Depository or its nominee, as the
registered owner of the Global Securities. None of the Corporation, the Trustee,
any Paying Agent or the Registrar will have any responsibility or liability for
any aspect of the records relating to, or payments made on account of,
beneficial ownership interests in the Global Securities for the Notes or for
maintaining, supervising or reviewing any records relating to such beneficial
interests.
If the Depository is at any time unwilling, unable or ineligible to
continue as Depository and a successor Depository is not appointed by the
Corporation within 90 days, the Corporation will issue individual Notes in
definitive form in exchange for the Global Securities representing the Notes. In
addition, the Corporation may at any time and in its sole discretion determine
not to have the Notes represented by Global Securities and, in such event, will
issue individual Notes in definitive form in exchange for the Global Securities.
In either instance, the Corporation will issue Notes in definitive form equal in
aggregate principal amount to the Global Securities, in such names and in such
principal amounts as the Depository shall request. Notes so issued in definitive
form will be issued in denominations of $1,000 principal amount at maturity and
integral multiples thereof and will be issued in registered form only, without
coupons.
DTC has advised the Corporation and the Underwriters as follows: DTC is a
limited-purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Securities Exchange
Act of 1934, as amended. DTC was created to hold securities of its Participants
and to facilitate the clearance and settlement of securities transactions among
its Participants in such securities through electronic book-entry changes in
accounts of the Participants, thereby eliminating the need for physical movement
of securities certificates. DTC's Participants include securities brokers and
dealers (including the Underwriters), banks, trust companies, clearing
corporations and certain other organizations, some of which (and/or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
CONCERNING THE TRUSTEE
Signet Trust Company is the Trustee under the Indenture and has been
appointed by the Corporation as Registrar and Paying Agent with respect to the
Notes.
S-43
<PAGE>
UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co.,
Kidder, Peabody & Co. Incorporated and J.P. Morgan Securities Inc. (the
"Underwriters") have severally agreed, subject to the terms and conditions of
the Purchase Agreement, to purchase from the Corporation the principal amount of
Notes set forth below opposite their respective names.
<TABLE><CAPTION>
UNDERWRITER PRINCIPAL AMOUNT
- - ------------------------------------------------------------------------------------------------ ----------------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................................................... $ 75,750,000
Goldman, Sachs & Co. ........................................................................... 24,750,000
Kidder, Peabody & Co. Incorporated.............................................................. 24,750,000
J.P. Morgan Securities Inc. .................................................................... 24,750,000
----------------
Total............................................................................. $ 150,000,000
----------------
----------------
</TABLE>
The Underwriters have advised the Corporation that they propose initially
to offer the Notes to the public at the offering price set forth on the cover
page of this Prospectus Supplement, and to certain dealers at such price less a
concession not in excess of .675% of the principal amount of the Notes. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of .25% of the principal amount of the Notes to certain other dealers. After the
initial public offering, the public offering price, concession and discount may
be changed. The Notes are offered subject to receipt and acceptance by the
Underwriters and to certain other conditions, including the right to reject
orders in whole or in part. The Underwriters are committed to purchase all of
the Notes if any are purchased.
The Underwriters receive customary fees for ordinary brokerage transactions
with the Corporation and its affiliates. The Underwriters and their affiliates
have performed investment and commercial banking services in the ordinary course
of their respective businesses for the Corporation and its affiliates in the
past, for which they have received customary compensation, and may continue to
do so in the future. Morgan Guaranty Trust Co. of New York, an affiliate of J.P.
Morgan Securities Inc., is a lender under the Corporation's bank credit facility
and is expected to receive approximately $9.0 million of the net proceeds from
this offering as a result of the repayment of a portion of the bank credit
facility.
The Corporation has agreed to indemnify the Underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended, or to contribute to payments the Underwriters may be required to make
in respect thereof.
EXPERTS
The consolidated financial statements of the Corporation for the year ended
December 31, 1993, incorporated by reference in the Corporation's Annual Report
on Form 10-K, have been audited by Ernst & Young, independent auditors, as set
forth in their report thereon included therein and incorporated herein by
reference. Such consolidated financial statements are incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information for the three-month periods ended March 31, 1994 and March 31, 1993,
incorporated by reference herein, Ernst & Young have reported that they have
applied limited procedures in accordance with professional standards for a
review of such information. However, their separate report, included in the
Corporation's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994, and incorporated herein by reference, states that they did not audit and
they do not express an opinion on that interim financial information.
Accordingly, the degree of reliance on their report on such information should
be restricted in light of the limited nature of the review procedures applied.
The independent auditors are not subject to the liability provisions of Section
11 of the Securities Act of 1933, as amended (the "Act"), for their report on
the unaudited interim financial information because that report is not a
"report" or a "part" of the Registration Statement prepared or certified by the
auditors within the meaning of Sections 7 and 11 of the Act.
S-44
<PAGE>
$600,000,000
[USF&G LOGO] USF&G CORPORATION
DEBT SECURITIES, PREFERRED STOCK,
COMMON STOCK AND WARRANTS
------------------------
USF&G Corporation (the "Corporation") may from time to time offer, together
or separately, its (i) debt securities (the "Debt Securities") which may be
either senior debt securities (the "Senior Debt Securities") or subordinated
debt securities (the "Subordinated Debt Securities"), (ii) shares of its
preferred stock, $50.00 par value per share (the "Preferred Stock"), which may
be issued in the form of Depositary Shares evidenced by Depositary Receipts,
(iii) shares of its common stock, $2.50 par value per share (the "Common
Stock"), and (iv) warrants to purchase securities of the Corporation as shall be
designated by the Corporation at the time of the offering (the "Warrants"), in
amounts, at prices and on terms to be determined at the time of the offering.
The Debt Securities, Preferred Stock, Common Stock and Warrants are collectively
called the "Securities."
The Securities offered pursuant to this Prospectus may be issued in one or
more series or issuances and will be limited to $600,000,000 aggregate public
offering price (or its equivalent (based on the applicable exchange rate at the
time of sale) in one or more foreign currencies, currency units or composite
currencies as shall be designated by the Corporation). Certain specific terms of
the particular Securities in respect of which this Prospectus is being delivered
are set forth in the accompanying Prospectus Supplement (the "Prospectus
Supplement"), including, where applicable, in the case of Debt Securities, the
specific title, aggregate principal amount, the denomination, whether such Debt
Securities are secured or unsecured obligations, maturity, premium, if any, the
interest rate (which may be fixed, floating or adjustable), the time and method
of calculating payment of interest, if any, the place or places where principal
of (and premium, if any) and interest, if any, on such Debt Securities will be
payable, the currency in which principal of (and premium, if any) and interest,
if any, on such Debt Securities will be payable, any terms of redemption at the
option of the Corporation or the holder, any sinking fund provisions, terms for
any conversion or exchange into other Securities or property, the initial public
offering price and other special terms, in the case of Preferred Stock, the
specific title, the aggregate number of shares offered, any dividend (including
the method of calculating payment of dividends), liquidation, redemption, voting
and other rights, any terms for any conversion or exchange into other
Securities, the initial public offering price and other terms, and, in the case
of Warrants, the duration, purchase price, exercise price and detachability of
such Warrants and a description of the Securities for which each Warrant is
exercisable. If so specified in the applicable Prospectus Supplement, Debt
Securities of a series may be issued in whole or in part in the form of one or
more temporary or permanent global securities (the "Global Securities").
The Corporation's Common Stock is listed on the New York Stock Exchange
under the trading symbol "FG." Any Common Stock sold pursuant to a Prospectus
Supplement will be listed on such exchange, subject to official notice of
issuance. The Corporation's Common Stock is also listed on the Pacific Stock
Exchange, the London Stock Exchange and the Swiss Exchanges in Basle, Geneva and
Zurich, Switzerland.
Unless otherwise specified in a Prospectus Supplement, the Senior Debt
Securities, when issued, will be unsecured and will rank equally with all other
unsecured and unsubordinated indebtedness of the Corporation. The Subordinated
Debt Securities, when issued, will be subordinated in right of payment to all
Senior Debt (as defined herein) of the Corporation.
The Prospectus Supplement will contain information concerning certain
United States federal income tax considerations, if applicable to the Securities
offered.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------
The Securities will be sold directly, through agents, underwriters or
dealers as designated from time to time, or through a combination of such
methods. If agents of the Corporation or any dealers or underwriters are
involved in the sale of the Securities in respect of which this Prospectus is
being delivered, the names of such agents, dealers or underwriters and any
applicable commissions or discounts are set forth in or may be calculated from
the Prospectus Supplement with respect to such Securities.
------------------------
The date of this Prospectus is February 4, 1994.
<PAGE>
AVAILABLE INFORMATION
The Corporation is subject to the informational requirements of the
Securities Exchange Act of 1934 (the "Exchange Act") and, in accordance
therewith, files reports, proxy or information statements and other information
with the Securities and Exchange Commission (the "Commission"). This Prospectus
contains information concerning the Corporation but does not contain all of the
information set forth in the Registration Statement and exhibits thereto which
the Corporation has filed with the Commission under the Securities Act of 1933
(the "Securities Act"). Such reports, proxy or information statements,
Registration Statement and exhibits and other information filed by the
Corporation with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth St.,
N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission at 7
World Trade Center, New York, New York 10048, and Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Such
reports, proxy or information statements, Registration Statement and exhibits
and other information concerning the Corporation can also be inspected at the
offices of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005, and the Pacific Stock Exchange, Inc., 301 Pine Street, San
Francisco, California 94104 and 233 South Beaudry Avenue, Los Angeles,
California 90012.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Corporation hereby incorporates by reference in this Prospectus its (i)
Annual Report on Form 10-K for the year ended December 31, 1992, as amended on
July 13, 1993, under File No. 1-8233, (ii) Quarterly Report on Form 10-Q for the
three months ended March 31, 1993, under File No. 1-8233, (iii) Quarterly Report
on Form 10-Q for the six months ended June 30, 1993, under File No. 1-8233, (iv)
Quarterly Report on Form 10-Q for the nine months ended September 30, 1993,
under File No. 1-8233, and (v) the description of the Corporation's Common Stock
and Shareholder Rights Plan contained in its Registration Statements filed
pursuant to Section 12 of the Exchange Act and any amendment or report filed for
the purpose of updating those descriptions.
All documents filed by the Corporation pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Securities shall be deemed to be
incorporated by reference in this Prospectus and made a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other document subsequently filed with the
Commission which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus.
The Corporation will provide without charge to each person to whom this
Prospectus is delivered, upon the written or oral request of such person, a copy
of any or all of the documents incorporated by reference herein (not including
the exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Requests for such copies should be
directed to: USF&G Corporation, 100 Light Street, Baltimore, Maryland 21202,
Attention: John F. Hoffen, Jr., Secretary, telephone (410) 547-3000.
2
<PAGE>
THE CORPORATION
USF&G Corporation (the "Corporation") is a holding company whose principal
subsidiaries are engaged in writing property/casualty insurance and life
insurance/annuities. Property/casualty insurance is written primarily by United
States Fidelity and Guaranty Company, founded in 1896, and is sold through
independent agents supported by the company's underwriting, marketing,
administrative and claim services offices located throughout the United States.
Life insurance and annuities are written primarily by Fidelity and Guaranty Life
Insurance Company, founded in 1959, and are sold throughout the United States
through independent agents. The Corporation is incorporated in Maryland, and its
principal executive office is located at 100 Light Street, Baltimore, Maryland
21202, telephone (410) 547-3000.
RATIO OF CONSOLIDATED EARNINGS TO FIXED CHARGES AND RATIO
OF CONSOLIDATED EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
On a consolidated basis, the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred stock dividends include the
earnings and fixed charges of the Corporation and its subsidiaries.
<TABLE><CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
----------------------- ---------------------------------
1993 1992 1992 1991 1990 1989 1988
-------- ------- ------ ----- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges................... 2.3 1.3 1.4 (A) (B) 2.9 5.1
Ratio of Earnings to Combined Fixed Charges and
Preferred Stock Dividends............................ 1.3 .8 .8 (A) (B) 2.4 4.0
</TABLE>
- - ---------------
(A) The Corporation had a net loss for the year ended December 31, 1991,
and earnings were inadequate to cover fixed charges and combined
fixed charges and preferred stock dividends by $149 million and $186
million, respectively, for the year ended December 31, 1991.
(B) The Corporation had a net loss for the year ended December 31, 1990,
and earnings were inadequate to cover fixed charges and combined
fixed charges and preferred stock dividends by $435 million and $452
million, respectively, for the year ended December 31, 1990.
The ratios were determined by dividing consolidated earnings by total fixed
charges and total fixed charges and preferred stock dividends, respectively.
Earnings consist of income from continuing operations before considering income
taxes, the cumulative effect of accounting changes, and fixed charges. Fixed
charges consist of interest, that portion of rentals which is deemed to be an
appropriate interest factor and preferred stock dividend requirements.
USE OF PROCEEDS
Except as otherwise stated in a Prospectus Supplement, the net proceeds
from the sale of the Securities will be added to the general funds of the
Corporation and will be available for general corporate purposes, including the
repayment of indebtedness.
3
<PAGE>
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions
of the Debt Securities to which any Prospectus Supplement may relate. The
particular terms of the Debt Securities offered by any Prospectus Supplement and
the extent, if any, to which such general provisions may not apply to the Debt
Securities so offered will be described in the Prospectus Supplement relating to
such Debt Securities.
The Senior Debt Securities are to be issued under an Indenture dated as of
January 28, 1994 (the "Senior Indenture"), between the Corporation and Signet
Trust Company, as trustee. The Subordinated Debt Securities are to be issued
under a separate Indenture dated as of January 28, 1994 (the "Subordinated
Indenture"), between the Corporation and Chemical Bank, as trustee. The Senior
Indenture and the Subordinated Indenture are sometimes referred to collectively
as the "Indentures." Copies of the Senior Indenture and the Subordinated
Indenture have been filed as exhibits to the Registration Statement. Each of
Signet Trust Company and Chemical Bank is hereinafter referred to as a "Trustee"
and collectively, as the "Trustees." The following summaries of certain
provisions of the Senior Debt Securities, the Subordinated Debt Securities and
the Indentures do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all the provisions of the
Indentures applicable to a particular series of Debt Securities, including the
definitions therein of certain terms. Wherever particular Sections, Articles or
defined terms of the Indentures are referred to, it is intended that such
Sections, Articles or defined terms shall be incorporated herein by reference.
Article and Section references used herein are references to the applicable
Indenture. Capitalized terms not otherwise defined herein shall have the meaning
given in the Indentures.
GENERAL
The Indentures do not limit the aggregate principal amount of Debt
Securities which may be issued thereunder and each Indenture provides that Debt
Securities may be issued thereunder from time to time in one or more series and
may be denominated and payable in foreign currencies or units based on or
relating to foreign currencies. Unless otherwise specified in the Prospectus
Supplement, the Senior Debt Securities when issued will be unsecured and
unsubordinated obligations of the Corporation and will rank equally and ratably
with all other unsecured and unsubordinated indebtedness of the Corporation. The
Subordinated Debt Securities when issued will be subordinated in right of
payment to the prior payment in full of all Senior Debt (as defined below) of
the Corporation, as described under "Subordination of Subordinated Debt
Securities" and in the Prospectus Supplement applicable to an offering of
Subordinated Debt Securities.
Reference is made to the Prospectus Supplement relating to the particular
Debt Securities offered thereby (the "Offered Debt Securities") which shall set
forth whether the Offered Debt Securities shall be Senior Debt Securities or
Subordinated Debt Securities, and shall further set forth the following terms of
the Offered Debt Securities: (i) the title of the Offered Debt Securities; (ii)
any limit on the aggregate principal amount of the Offered Debt Securities;
(iii) the Person to whom any interest on the Offered Debt Securities will be
payable, if other than the Person in whose name such Offered Debt Securities are
registered on any Regular Record Date; (iv) the date or dates on which the
principal of the Offered Debt Securities will be payable; (v) the rate or rates
per annum (which may be fixed, floating or adjustable) at which the Offered Debt
Securities will bear interest, if any, or the formula pursuant to which such
rate or rates shall be determined, the date or dates from which such interest
will accrue and the dates on which such interest, if any, will be payable and
the Regular Record Dates for such interest payment dates; (vi) whether the
Offered Debt Securities will be secured; (vii) the place or places where
principal of (and premium, if any) and interest, if any, on Offered Debt
Securities will be payable; (viii) if applicable, the price at which, the
periods within which and the terms and conditions upon which the Offered Debt
Securities may he redeemed at the option of the Corporation pursuant to a
sinking fund or otherwise; (ix) if applicable, any obligation of the Corporation
to redeem or purchase
4
<PAGE>
Offered Debt Securities pursuant to any sinking fund or analogous provisions or
at the option of a Holder thereof, and the period or periods within which, the
price or prices at which and the terms and conditions upon which the Offered
Debt Securities will be redeemed or purchased, in whole or in part; (x) if
applicable, the terms of any right to convert or exchange the Offered Debt
Securities into other securities or property of the Corporation; (xi) if other
than denominations of $1,000 and any integral multiple thereof, the
denominations in which the Offered Debt Securities will be issuable; (xii) the
currency or currencies, including composite currencies or currency units, in
which payment of the principal of (or premium, if any) or interest, if any, on
any of the Offered Debt Securities will be payable if other than the currency of
the United States of America; (xiii) if the amount of payments of principal of
(or premium, if any) or interest, if any, on the Offered Debt Securities may be
determined with reference to one or more indices, the manner in which such
amounts will be determined; (xiv) if the principal of (or premium, if any) or
interest, if any, on any of the Offered Debt Securities of the series is to be
payable, at the election of the Corporation or a Holder thereof, in one or more
currencies, including composite currencies, or currency units other than that or
those in which the Securities are stated to be payable, the currency,
currencies, including composite currencies, or currency units in which payment
of the principal of (or premium, if any) or interest, if any, on Securities of
such series as to which such election is made will be payable, and the periods
within which and the terms and conditions upon which such election is to be
made; (xv) the portion of the principal amount of the Offered Debt Securities,
if other than the principal amount thereof, payable upon acceleration of
maturity thereof; (xvi) whether all or any part of the Offered Debt Securities
will be issued in the form of a Global Security or Securities and, if so, the
depositary for, and other terms relating to, such Global Security or Securities;
(xvii) any event or events of default applicable with respect to the Offered
Debt Securities in addition to those provided in the Indentures; (xviii) any
other covenant or warranty included for the benefit of the Offered Debt
Securities in addition to (and not inconsistent with) those included in the
Indentures for the benefit of Debt Securities of all series, or any other
covenant or warranty included for the benefit of the Offered Debt Securities in
lieu of any covenant or warranty included in the Indentures for the benefit of
Debt Securities of all series, or any provision that any covenant or warranty
included in the Indentures for the benefit of Debt Securities of all series
shall not be for the benefit of the Offered Debt Securities, or any combination
of such covenants, warranties or provisions; (xix) any restriction or condition
on the transferability of the Offered Debt Securities; (xx) any authenticating
or paying agents, registrars, conversion agents or any other agents with respect
to the Offered Debt Securities; and (xxi) any other terms of the Offered Debt
Securities. (Indentures, Section 301) Debt Securities may also be issued under
the Indentures upon the exercise of Warrants. See "Description of Warrants."
Unless otherwise indicated in the Prospectus Supplement relating thereto,
the Offered Debt Securities are to be issued as registered securities without
coupons in denominations of $1,000 or any integral multiple of $1,000.
(Indentures, Section 302) No service charge will be made for any transfer or
exchange of such Offered Debt Securities, but the Corporation or the Trustee may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith. (Indentures, Section 305)
Debt Securities may be issued under the Indentures as Original Issue
Discount Securities to be sold at a substantial discount below their stated
principal amount. Federal income tax consequences and other considerations
applicable thereto will be described in the Prospectus Supplement relating
hereto.
Since the Corporation is a holding company, the rights of the Corporation,
and hence the right of creditors of the Corporation (including the Holders of
Debt Securities), to participate in any distribution of the assets of any
subsidiary upon its liquidation or reorganization or otherwise is necessarily
subject to the prior claims of creditors of the subsidiary, except to the extent
that claims of the Corporation itself as a creditor of the subsidiary may be
recognized.
5
<PAGE>
The Indentures do not contain any provisions that limit the ability of the
Corporation or any Subsidiary to incur indebtedness or that afford Holders of
the Debt Securities protection in the event of a highly leveraged or similar
transaction involving the Corporation or any Subsidiary.
EVENTS OF DEFAULT AND NOTICE THEREOF
Unless otherwise specified in the Prospectus Supplement, the following
events are defined in the Indentures as "Events of Default" with respect to Debt
Securities of any series: (i) failure to pay principal (including any sinking
fund payment) of, or premium (if any) on, any Debt Security of that series when
due (in the case of the Subordinated Indenture, whether or not payment is
prohibited by the subordination provisions); (ii) failure to pay interest, if
any, on any Debt Security of that series when due and such failure continues for
a period of 30 days; (iii) failure by the Corporation to perform in any material
respect any other covenant in the Indentures (other than a covenant included in
the Indentures solely for the benefit of a series of Debt Securities other than
that series) which continues for a period of 90 days after written notice to the
Corporation; (iv) due acceleration (which acceleration shall not have been
rescinded within 30 days after written notice to the Corporation) of any
indebtedness for borrowed money in a principal amount in excess of $50,000,000
for which the Corporation or any Principal Insurance Subsidiary is liable,
including Debt Securities of another series, or a default by the Corporation or
any Principal Insurance Subsidiary in the payment at final maturity of
outstanding indebtedness for borrowed money in a principal amount in excess of
$50,000,000 unless such acceleration or default at maturity shall be remedied or
cured by the Corporation or any Principal Insurance Subsidiary or rescinded,
annulled or waived by the holders of such indebtedness, in which case such
acceleration or default at maturity shall not constitute an Event of Default
under this provision and any acceleration relating thereto shall be rescinded;
and (v) certain events of insolvency, reorganization, receivership or
liquidation of the Corporation or any Principal Insurance Subsidiary.
(Indentures, Section 501)
No Event of Default with respect to Debt Securities of a particular series
shall necessarily constitute an Event of Default with respect to Debt Securities
of any other series. If an Event of Default with respect to Debt Securities of
any series at the time Outstanding shall occur and be continuing, either the
Trustee or the Holders of at least 25% in principal amount of the Outstanding
Debt Securities of that series may declare the principal amount (or, if the Debt
Securities of that series are Original Issue Discount Securities, such portion
of the principal amount as may be specified in the terms of that series) of all
Debt Securities of that series to be due and payable immediately; provided,
however, that under certain circumstances the Holders of a majority in aggregate
principal amount of Outstanding Debt Securities of that series may rescind or
annul such declaration and its consequences. (Indentures, Section 502)
Reference is made to the Prospectus Supplement relating to any series of
Offered Debt Securities which are Original Issue Discount Securities for the
particular provisions relating to the principal amount of such Original Issue
Discount Securities due on acceleration upon the occurrence of an Event of
Default and the continuation thereof.
The Indentures provide that the applicable Trustee may withhold notice to
the Holders of the Debt Securities of any default (except in payment of
principal (or premium, if any) or interest, if any) if it considers it in the
interest of the Holders of the Debt Securities to do so. (Indentures, Section
502)
The Corporation will be required to furnish to the Trustees annually a
statement by certain officers of the Corporation as to the compliance with all
conditions and covenants of the Indentures. (Indentures, Section 1004)
The Holders of a majority in principal amount of the Outstanding Debt
Securities of any series affected will have the right, subject to certain
limitations, to direct the time, method and place of conducting any proceeding
for any remedy available to the applicable Trustee or exercising any trust or
6
<PAGE>
power conferred on such applicable Trustee with respect to the Debt Securities
of such series, and to waive certain defaults. (Indentures, Sections 512 and
513)
The Indentures provide that, in case an Event of Default shall occur and be
continuing, the applicable Trustee shall exercise such of its rights and powers
under the Indentures, and use the same degree of care and skill in its exercise,
as a prudent man would exercise or use under the circumstances in the conduct of
his own affairs. (Indentures, Section 601) Subject to such provisions, the
applicable Trustee will be under no obligation to exercise any of its rights or
powers under the Indentures at the request of any of the Holders of Debt
Securities unless they shall have offered to such Trustee security or indemnity
in form and substance reasonably satisfactory to such Trustee against the costs,
expenses and liabilities which might be incurred by it in compliance with such
request. (Indentures, Section 603)
No Holder of a Debt Security of any series will have any right to institute
any proceeding with respect to the Indentures or for any remedy thereunder,
unless such Holder shall have previously given to the applicable Trustee written
notice of a continuing Event of Default and unless also the Holders of at least
25% in aggregate principal amount of the Outstanding Debt Securities of the same
series shall have made written request, and offered security or indemnity to
such Trustee in form and substance reasonably satisfactory to such Trustee, to
institute such proceeding as trustee, and such Trustee shall not have received
from the Holders of a majority in aggregate principal amount of the Outstanding
Debt Securities of the same series a direction inconsistent with such request
and shall have failed to institute such proceeding within 60 days. (Indentures,
Section 507) However, such limitations do not apply to a suit instituted by a
Holder of a Debt Security for enforcement of payment of the principal of (or
premium, if any) or interest, if any, on such Debt Security on or after the
respective due dates expressed in such Debt Security, or of the right to convert
such Debt Security in accordance with the Indentures (if applicable).
(Indentures, Section 508)
MODIFICATION AND WAIVER
Modifications and amendments of the Indentures may be made by the
Corporation and the applicable Trustee, with the consent of the Holders of not
less than a majority of aggregate principal amount of each series of the
Outstanding Debt Securities issued under the Indentures which is affected by the
modification or amendment; provided, however, that no such modification or
amendment may, without the consent of each Holder of such Debt Security affected
thereby: (i) change the Stated Maturity of the principal of (or premium, if any)
or any installment of principal or interest, if any, on any such Debt Security;
(ii) reduce the principal amount of (or premium, if any) or the interest rate,
if any, on any such Debt Security or the principal amount due upon acceleration
of an Original Issue Discount Security; (iii) change the place or currency of
payment of principal of (or premium, if any) or the interest, if any, on any
such Debt Security; (iv) impair the right to institute suit for the enforcement
of any such payment on or with respect to any such Debt Security; (v) adversely
change the right to convert or exchange, including decreasing the conversion
rate or increasing the conversion price of, such Debt Security (if applicable);
(vi) reduce the percentage of Holders of Debt Securities necessary to modify or
amend the Indentures; (vii) in the case of the Subordinated Indenture, modify
the subordination provisions in a manner adverse to the holders of the
Subordinated Debt Securities; or (viii) modify the foregoing requirements or
reduce the percentage of Outstanding Debt Securities necessary to waive
compliance with certain provisions of the Indentures or for waiver of certain
defaults. (Indentures, Section 902)
The holders of at least a majority of the aggregate principal amount of the
Outstanding Debt Securities of any series may, on behalf of all Holders of that
series, waive compliance by the Corporation with certain restrictive provisions
of the Indentures and waive any past default under the Indentures, except a
default in the payment of principal, premium or interest or in the performance
of certain covenants. (Indentures, Sections 907 and 513)
7
<PAGE>
DEFEASANCE AND COVENANT DEFEASANCE
The Indentures provide that the Corporation may elect either (A) to defease
and be discharged from any and all obligations with respect to such Debt
Securities (including, in the case of Subordinated Debt Securities, the
provisions described under "Subordination of Subordinated Debt Securities"
herein and except for the obligations to exchange or register the transfer of
such Debt Securities, to replace temporary or mutilated, destroyed, lost or
stolen Debt Securities, to maintain an office or agency in respect of the Debt
Securities, and to hold monies for payments in trust) ("defeasance"), or (B) to
be released from its obligations with respect to such Debt Securities concerning
the restrictions described under "Consolidation, Merger and Sale of Assets" and
any other covenants applicable to such Debt Securities (including, in the case
of Subordinated Debt Securities, the provisions described under "Subordination
of Subordinated Debt Securities" herein), which are subject to covenant
defeasance ("covenant defeasance"), and the occurrence of an event described and
notice thereof in clauses (iii) and (iv) under "Events of Default and Notice
Thereof" (with respect to covenants subject to covenant defeasance) shall no
longer be an Event of Default, in each case, upon the irrevocable deposit with
the applicable Trustee (or other qualifying trustee), in trust for such purpose,
of money, and/or U.S. Government Obligations (or Foreign Government Obligations
in the case of Debt Securities denominated in foreign currencies) which through
the payment of principal and interest in accordance with their terms will
provide money in an amount sufficient to pay the principal of (and premium, if
any) and interest, if any, on such Debt Securities, and any mandatory sinking
fund or analogous payments thereon, on the scheduled due dates therefor. Such a
trust may only be established if, among other things, (i) the Corporation has
delivered to the applicable Trustee an opinion of counsel (as specified in the
Indentures) to the effect that the Holders of such Debt Securities will not
recognize income, gain or loss for federal income tax purposes as a result of
such defeasance or covenant defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have been
the case if such defeasance or covenant defeasance had not occurred, (ii) no
Event of Default or event which with the giving of notice or lapse of time, or
both, would become an Event of Default under the Indenture shall have occurred
and be continuing on the date of such deposit, and (iii) in the case of
Subordinated Debt Securities, (x) no default in the payment of principal of (or
premium, if any) or interest, if any, on any Senior Debt beyond any applicable
grace period shall have occurred and be continuing, and (y) no other default
with respect to any Senior Debt shall have occurred and be continuing and shall
have resulted in the acceleration of such Senior Debt. (Indentures, Article
Thirteen)
The Corporation may exercise its defeasance option with respect to such
Debt Securities notwithstanding its prior exercise of its covenant defeasance
option. If the Corporation exercises its defeasance option, payment of such Debt
Securities may not be accelerated because of an Event of Default. If the
Corporation exercises its covenant defeasance option, payment of such Debt
Securities may not be accelerated by reference to the covenants noted under
clause (B) above. In the event the Corporation omits to comply with its
remaining obligations with respect to such Debt Securities under the Indentures
after exercising its covenant defeasance option and such Debt Securities are
declared due and payable because of the occurrence of any Event of Default, the
amount of money and U.S. Government Obligations (or Foreign Government
Obligations in the case of Debt Securities denominated in foreign currencies) on
deposit with the applicable Trustee may be insufficient to pay amounts due on
the Debt Securities of such series at the time of the acceleration resulting
from such Event of Default. However, the Corporation will remain liable in
respect of such payments. (Indentures, Article Thirteen)
LIMITATION ON LIENS
As long as any of the Debt Securities remains outstanding, the Corporation
will not, and will not permit any Principal Insurance Subsidiary to, issue,
assume, incur or guarantee any indebtedness for borrowed money secured by a
mortgage, pledge, lien or other encumbrance, directly or indirectly, on
8
<PAGE>
any of the Common Stock of a Principal Insurance Subsidiary, which Common Stock
is owned by the Corporation or by any Principal Insurance Subsidiary, unless the
Debt Securities and, if the Corporation so elects, any other indebtedness of the
Corporation ranking on a parity with the Debt Securities, shall be secured
equally and ratably with, or prior to, such secured indebtedness for borrowed
money so long as it is outstanding. (Indentures, Section 1005)
"Principal Insurance Subsidiary" means each of United States Fidelity and
Guaranty Company and Fidelity and Guaranty Life Insurance Company, so long as it
remains a Subsidiary, or any other Subsidiary of the Corporation which shall
hereafter succeed by merger or otherwise to a major part of the business of one
or more of the Principal Insurance Subsidiaries. The decision as to whether a
Subsidiary shall have succeeded to a major part of the business of one or more
of the Principal Insurance Subsidiaries shall be made in good faith by the Board
of Directors of the Corporation or a committee thereof by the adoption of a
resolution so stating, and the Corporation shall within 30 days of the date of
the adoption of such resolution deliver to the applicable Trustee a copy
thereof, certified by the Corporate Secretary or an Assistant Corporate
Secretary of the Corporation. (Indentures, Section 101)
"Common Stock" means, with respect to any Principal Insurance Subsidiary,
stock of any class, however designated, except stock which is non-participating
beyond fixed dividend and liquidation preferences and the holders of which have
either no voting rights or limited voting rights entitling them, only in the
case of certain contingencies, to elect less than a majority of the directors
(or persons performing similar functions) of such Principal Insurance
Subsidiary, and shall include securities of any class, however designated, which
are convertible into such Common Stock. (Indentures, Section 101)
CONSOLIDATION, MERGER AND SALE OF ASSETS
The Corporation may not consolidate with or merge into any other Person or
sell its property and assets as, or substantially as, an entirety to any Person
and may not permit any Person to merge into or consolidate with the Corporation
unless (i) either the Corporation will be the resulting or surviving entity or
any successor or purchaser is a corporation, partnership or trust organized
under the laws of the United States of America, any State or the District of
Columbia, and any such successor or purchaser expressly assumes the
Corporation's obligations on the Debt Securities under a supplemental Indenture,
(ii) immediately after giving effect to the transaction no Event of Default
shall have occurred and be continuing, and (iii) certain other conditions are
met. (Indentures, Section 801)
CONVERSION RIGHTS
The terms on which Debt Securities of any series may be convertible or
exchangeable into Common Stock or other securities of the Corporation or
exchangeable into securities of another corporation will be set forth in the
Prospectus Supplement relating thereto. Such terms shall include provisions as
to whether conversion or exchange is mandatory, at the option of the holder or
at the option of the Corporation, and may include provisions pursuant to which
the number of shares of Common Stock or other securities of the Corporation or
the securities of another corporation, as the case may be, to be received by the
holders of Debt Securities would be calculated according to the market price of
Common Stock or other securities of the Corporation as of a time stated in the
Prospectus Supplement. (Indentures, Article Twelve)
SUBORDINATION OF SUBORDINATED DEBT SECURITIES
Unless otherwise indicated in the Prospectus Supplement, the following
provisions will apply to the Subordinated Debt Securities.
The Subordinated Debt Securities will, to the extent set forth in the
Subordinated Indenture, be subordinate in right of payment to the prior payment
in full of all Senior Debt, including the Senior Debt Securities. Upon any
payment or distribution of assets to creditors upon any liquidation,
9
<PAGE>
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshalling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of the Corporation, the holders of Senior Debt will first
be entitled to receive payment in full of principal of (and premium, if any) and
interest, if any, on such Senior Debt before the holders of the Subordinated
Debt Securities will be entitled to receive or retain any payment in respect of
the principal of (and premium, if any) or interest, if any, on the Subordinated
Debt Securities. (Subordinated Indenture, Section 1502)
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Corporation who are not holders of Senior Debt or Subordinated
Debt Securities may recover less, ratably, than holders of Senior Debt and may
recover more, ratably, than the holders of the Subordinated Debt Securities.
In the event of the acceleration of the maturity of any Subordinated Debt
Securities, the holders of all Senior Debt outstanding at the time of such
acceleration will first be entitled to receive payment in full of all amounts
due thereon (including any amounts due upon acceleration) before the Holders of
the Subordinated Debt Securities will be entitled to receive any payment upon
the principal of (or premium, if any) or interest, if any, on the Subordinated
Debt Securities. (Subordinated Indenture, Section 1503)
No payments on account of principal (or premium, if any) or interest, if
any, in respect of the Subordinated Debt Securities may be made if there shall
have occurred and be continuing a default in any payment with respect to Senior
Debt, or an event of default with respect to any Senior Debt resulting in the
acceleration of the maturity thereof, or if any judicial proceeding shall be
pending with respect to any such default. (Subordinated Indenture, Section 1504)
For purposes of the subordination provisions, the payment, issuance and delivery
of cash, property or securities (other than stock and certain subordinated
securities of the Corporation) upon conversion of a Subordinated Debt Security
will be deemed to constitute payment on account of the principal of such
Subordinated Debt Security. (Subordinated Indenture, Section 1516)
"Debt" means (without duplication and without regard to any portion of
principal amount that has not accrued and to any interest component thereof
(whether accrued or imputed) that is not due and payable) with respect to any
Person, whether recourse is to all or a portion of the assets of such Person and
whether or not contingent, (i) every obligation of such Person for money
borrowed, (ii) every obligation of such Person evidenced by bonds, debentures,
notes or other similar instruments, including obligations incurred in connection
with the acquisition of property, assets or businesses, (iii) every
reimbursement obligation of such Person with respect to letters of credit,
bankers' acceptances or similar facilities issued for the account of such
Person, (iv) every obligation of such Person issued or assumed as the deferred
purchase price of property or services (but excluding trade accounts payable or
accrued liabilities arising in the ordinary course of business), (v) every
capital lease obligation of such Person, (vi) every Hedging Obligation, (vii)
every obligation of others secured by a lien on any asset of such Person,
whether or not such obligation is assumed by such Person, (viii) every
obligation of the type referred to in clauses (i) through (vii) of another
Person and all dividends of another Person the payment of which, in either case,
such Person has guaranteed or is responsible or liable, directly or indirectly,
as obligor or otherwise, and (ix) any and all deferrals, renewals, extensions
and refundings of, or amendments, modifications or supplements to any liability
of the kind described in any of the preceding clauses (i) through (viii).
"Senior Debt" means the principal of (and premium, if any) and interest, if
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Corporation to the extent that
such claim for post-petition interest is allowed in such proceeding) payable on,
and fees, expenses, reimbursement obligations, indemnity obligations and other
amounts due on or in connection with, any Debt incurred, assumed or guaranteed
by the Corporation, whether on or prior to the date of the Subordinated
Indenture or thereafter incurred, assumed or guaranteed, unless, in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding,
10
<PAGE>
it is provided that such obligations are not superior in right of payment to the
Subordinated Debt Securities or to other Debt which is pari passu with, or
subordinated to the Subordinated Debt Securities; provided, however, that Senior
Debt shall not be deemed to include (i) the Subordinated Debt Securities; or
(ii) Intercompany Debt in excess of $250,000,000.
"Intercompany Debt" means Debt of the Corporation to United States Fidelity
and Guaranty Company and its subsidiaries.
The Subordinated Indenture does not limit or prohibit the incurrence of
additional Senior Debt, which may include indebtedness that is senior to the
Subordinated Debt Securities, but subordinate to other obligations of the
Corporation. The Senior Debt Securities, when issued, will constitute Senior
Debt.
The Prospectus Supplement may further describe the provisions, if any,
applicable to the subordination of the Subordinated Debt Securities of a
particular series.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in the form of one or more
Global Securities that will be deposited with a Depositary or its nominee. In
such a case, one or more Global Securities will be issued in a denomination or
aggregate denominations equal to the portion of the aggregate principal amount
of Outstanding Debt Securities of the series to be represented by such Global
Security or Securities. Unless and until it is exchanged in whole or in part for
Debt Securities in definitive registered form, a Global Security may not be
registered for transfer or exchange except as a whole by the Depositary for such
Global Security to a nominee for such Depositary and except in the circumstances
described in the applicable Prospectus Supplement. (Indentures, Sections 204 and
305)
The specific terms of the depositary arrangement with respect to any
portion of a series of Debt Securities to be represented by a Global Security
and a description of the Depositary will be contained in the applicable
Prospectus Supplement.
THE TRUSTEE
The Indentures contain limitations on the right of the applicable Trustee,
as a creditor of the Corporation, to obtain payment of claims in certain cases,
or to realize on certain property received in respect of any such claim as
security or otherwise. In addition, the applicable Trustee may be deemed to have
a conflicting interest and may be required to resign as Trustee if at the time
of a default under the Indenture it is a creditor of the Corporation.
The applicable Trustee or its affiliates may act as depositary for funds
of, make loans to and perform other services for, or may be a customer of, the
Corporation in the ordinary course of business.
GOVERNING LAW
The Indentures are governed by and shall be construed in accordance with
the laws of the State of New York, but without regard to principles of conflicts
of laws.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Corporation consists of 240,000,000
shares of common stock, $2.50 par value per share (the "Common Stock") and
12,000,000 shares of preferred stock, $50.00 par value per share, of which
4,000,000 shares are classified as $4.10 Series A Convertible Exchangeable
Preferred Stock (the "Series A Preferred Stock"), 1,300,000 shares are
classified as Series B Cumulative Convertible Preferred Stock (the "Series B
Preferred Stock"), 3,800,000 shares are classified as $5.00 Series C Cumulative
Convertible Preferred Stock (the "Series C Preferred Stock") and
11
<PAGE>
1,200,000 are classified as Junior Participating Preferred Stock (the "Junior
Preferred Stock"). As of December 31, 1993, there were issued and outstanding
85,009,482 shares of Common Stock, 4,000,000 shares of Series A Preferred Stock,
1,300,000 shares of Series B Preferred Stock and 3,800,000 shares of Series C
Preferred Stock. The shares of Junior Preferred Stock have been reserved for
issuance in connection with the Corporation's shareholder rights plan and no
shares of the Junior Preferred Stock currently are outstanding.
The following summary of the terms of the Corporation's capital stock does
not purport to be complete and is qualified in its entirety by reference to the
applicable provisions of Maryland law and the Corporation's Articles of
Incorporation, as amended (the "Charter").
The Series A Preferred Stock, Series B Preferred Stock and Series C
Preferred Stock rank on a parity with each other and rank senior to the Junior
Preferred Stock and the Common Stock as to dividends and upon liquidation.
The Transfer Agent and Registrar for the Corporation's Common Stock, Series
A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Junior
Preferred Stock is First Chicago Trust Company, New York, New York ("First
Chicago Trust").
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share of
Common Stock held. Cumulative voting for the election of directors is not
provided for in the Charter or the by-laws. Subject to the prior rights of the
Series A Preferred Stock, the Series B Preferred Stock, the Series C Preferred
Stock and the Junior Preferred Stock and any other preferred stock which may be
classified and issued, the holders of the Common Stock of the Corporation are
entitled to receive, pro-rata, such dividends as may be declared by the Board of
Directors out of funds legally available therefor, and are also entitled to
share, pro-rata, in any other distribution to shareholders. There are no
redemption or sinking fund provisions and no direct limitations in any indenture
or agreement on the payment of dividends. Payment of dividends by the
Corporation is not subject to restrictions under the Maryland Insurance Code.
However, payment of dividends to the Corporation by its insurance subsidiaries
is subject to certain restrictions under Maryland and other state insurance
laws. Such restrictions as well as other contractual restrictions may limit the
amount of dividends that may be paid by the Corporation. All shares of Common
Stock sold hereunder will be fully paid and non-assessable.
PREFERRED STOCK
The following description of the terms of the Preferred Stock sets forth
certain general terms and provisions of the Preferred Stock (the "Preferred
Stock") to which any Prospectus Supplement may relate. Certain terms of any
series of the Preferred Stock offered by any Prospectus Supplement will be
described in the Prospectus Supplement relating to such series of the Preferred
Stock. If so indicated in the Prospectus Supplement, the terms of any such
series, including any Depositary Shares (as defined below) issued in respect
thereof, may differ from the terms set forth below. The description of certain
provisions of the Preferred Stock set forth below and in any Prospectus
Supplement does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the Corporation's Charter which is an exhibit to
this Registration Statement and the articles supplementary to the Corporation's
Charter which has been or will be filed with the Commission in connection with
the offering of such series of Preferred Stock.
General. Under the Corporation's Charter, the Corporation is authorized to
issue 12,000,000 shares of Preferred Stock, in one or more series. The Board of
Directors is authorized to fix and determine the terms, limitations and relative
rights and preferences of any of the series of the Preferred Stock including,
without limitation, any voting rights thereof, to divide and issue any Preferred
Stock in series, and to fix and determine the variations among series to the
extent permitted by law. The Corporation may amend from time to time its Charter
to increase the number of authorized shares of
12
<PAGE>
Preferred Stock. Any such amendment would require the approval of the holders of
a majority of the outstanding shares of Common Stock, and the approval of the
holders of a majority of the outstanding shares of the Series A Preferred Stock,
Series B Preferred Stock and Series C Preferred Stock (together with any other
shares of Preferred Stock which may be then outstanding and have similar rights)
voting together as a single class and the holders of two-thirds of the
outstanding shares of the Series B Preferred Stock voting separately as a class.
The Preferred Stock shall have the dividend, liquidation, redemption and
voting rights set forth below, unless otherwise provided in the Prospectus
Supplement relating to a particular series of the Preferred Stock. Reference is
made to the Prospectus Supplement relating to the particular series of the
Preferred Stock offered thereby for specific terms, including: (i) the title of
such Preferred Stock and the number of shares offered; (ii) the amount of
liquidation preference per share; (iii) the price at which such Preferred Stock
will be issued; (iv) the dividend rate (or method of calculation), the dates on
which dividends shall be payable, whether such dividends shall be cumulative or
noncumulative and, if cumulative, the dates from which dividends shall commence
to cumulate; (v) any redemption or sinking fund provisions of such Preferred
Stock; (vi) the terms of any right to convert or exchange the Preferred Stock
into other securities or property of the Corporation; (vii) whether the
Corporation has elected to offer Depositary Shares (as defined below); and
(viii) any additional voting, dividend, liquidation, redemption, sinking fund
and other rights, preferences, privileges, limitations and restrictions of such
Preferred Stock.
The Preferred Stock will, when issued, be fully paid and non-assessable and
have no preemptive rights. Unless otherwise specified in the Prospectus
Supplement relating to a particular series of the Preferred Stock, each series
of the Preferred Stock will rank on a parity as to dividends and liquidation
rights in all respects with each other series of the Preferred Stock.
Dividend Rights. Holders of the Preferred Stock of each series will be
entitled to receive, when, as and if declared by the Board of Directors of the
Corporation, out of assets of the Corporation legally available therefor, cash
dividends at such rates and on such dates as are set forth in the Prospectus
Supplement relating to such series of the Preferred Stock. Such rate may be
fixed or variable or both. Each such dividend will be payable to the holders of
record as they appear on the stock record books of the Corporation (or, if
applicable, the records of the Depositary referred to below under "Depositary
Shares") on such record dates as will be fixed by the Board of Directors of the
Corporation or a duly authorized committee thereof. Dividends on any series of
the Preferred Stock may be cumulative or noncumulative, as provided in the
Prospectus Supplement relating thereto.
Each series of Preferred Stock will be entitled to dividends as described
in the Prospectus Supplement relating to such series, which may be based upon
one or more methods of determination. Different series of the Preferred Stock
may be entitled to dividends at different rates or based upon different methods
of determination.
Liquidation Rights. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Corporation, the holders of each
series of Preferred Stock will be entitled to receive out of assets of the
Corporation available for distribution to shareholders, before any distribution
of assets is made to holders of Common Stock or any other class of stock ranking
junior to such series of the Preferred Stock upon liquidation, liquidating
distributions in the amount set forth in the Prospectus Supplement relating to
such series of the Preferred Stock plus an amount equal to accrued and unpaid
dividends for the then-current dividend period and, if such series of the
Preferred Stock is cumulative, for all dividend periods prior thereto, all as
set forth in the Prospectus Supplement with respect to such shares.
Redemption. A series of the Preferred Stock may be redeemable, in whole or
in part, at the option of the Corporation, and may be subject to mandatory
redemption pursuant to a sinking fund, in each case upon terms, at the times and
at the redemption prices set forth in the Prospectus Supplement relating to such
series. After the date fixed for redemption, the shares of Preferred Stock so
called for
13
<PAGE>
redemption will no longer be deemed to be outstanding and rights of the holders
of such shares will cease, except the right to receive the moneys payable upon
such redemption and any money or other property to which the holders of such
shares were entitled upon such redemption, upon surrender to the Corporation of
the certificates evidencing such shares.
Conversion and Exchange. The terms, if any, on which shares of any series
of Preferred Stock are convertible into Common Stock or exchangeable for Debt
Securities will be set forth in the Prospectus Supplement relating thereto. Such
terms may include provisions for conversion, either mandatory, at the option of
the holder, or at the option of the Corporation, in which case the number of
shares of Common Stock or the amount of Debt Securities to be received by the
holders of Preferred Stock would be calculated as of a time and in the manner
stated in the Prospectus Supplement.
Transfer Agent and Registrar. The transfer agent, registrar and dividend
disbursement agent for a particular series of Preferred Stock will be named in
the Prospectus Supplement relating to such series of Preferred Stock. The
registrar for shares of such series of Preferred Stock will send notices to
shareholders of any meetings at which holders of such series of the Preferred
Stock have the right to elect directors of the Corporation or to vote on any
other matter.
Voting Rights. Except as indicated in the Prospectus Supplement relating to
a particular series of Preferred Stock, or except as expressly required by
applicable law, the holders of the Preferred Stock will not be entitled to any
voting rights.
Depositary Shares. The Corporation may, at its option, elect to offer
receipts for fractional interests ("Depositary Shares") in Preferred Stock. In
such event, receipts ("Depositary Receipts") for Depositary Shares, each of
which will represent a fraction (to be set forth in the Prospectus Supplement
relating to a particular series of Preferred Stock) of a share of a particular
series of Preferred Stock, will be issued as described below.
The shares of any series of Preferred Stock represented by Depositary
Shares will be deposited under a Deposit Agreement (the "Deposit Agreement")
between the Corporation and the depositary named in the Prospectus Supplement
relating to such shares (the "Preferred Stock Depositary"). Subject to the terms
of the Deposit Agreement, each owner of a Depositary Share will be entitled, in
proportion to the applicable fraction of a share of Preferred Stock represented
by such Depositary Share, to all the rights and preferences of the Preferred
Stock represented thereby (including dividend, voting, redemption, subscription
and liquidation rights). The following summary of certain provisions of the
Deposit Agreement does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, all the provisions of the Deposit
Agreement, including the definitions therein of certain terms. Whenever
particular sections of the Deposit Agreement are referred to, it is intended
that such sections shall be incorporated herein by reference. Copies of the
forms of Deposit Agreement and Depositary Receipt are filed as exhibits to the
Registration Statement of which this Prospectus is a part, and the following
summary is qualified in its entirety by reference to such exhibits.
The Preferred Stock Depositary will distribute all cash dividends or other
cash distributions received in respect of the Preferred Stock to the record
holders of Depositary Shares relating to such Preferred Stock in proportion to
the numbers of such Depositary Shares owned by such holders. (Deposit Agreement,
Section 4.01)
In the event of a distribution other than in cash, the Preferred Stock
Depositary will distribute property received by it to the record holders of
Depositary Shares in an equitable manner, unless the Preferred Stock Depositary
determines that it is not feasible to make such distribution, in which case the
Preferred Stock Depositary may sell such property and distribute the net
proceeds from such sale to such holders. (Deposit Agreement, Section 4.02)
Upon surrender of the Depositary Receipts at the corporate trust office of
the Preferred Stock Depositary and upon payment of the taxes, charges and fees
provided for in the Deposit Agreement and subject to the terms thereof, the
holder of the Depositary Shares evidenced thereby is entitled to
14
<PAGE>
delivery at such office, to or upon his or her order, of the number of whole
shares of the related series of Preferred Stock and any money or other property,
if any, represented by such Depositary Shares.
If a series of Preferred Stock represented by Depositary Shares is subject
to redemption, the Depositary Shares will be redeemed from the proceeds received
by the Preferred Stock Depositary resulting from the redemption, in whole or in
part, of such series of Preferred Stock held by the Preferred Stock Depositary.
The redemption price per Depositary Share will be equal to the applicable
fraction of the redemption price per share payable with respect to such series
of the Preferred Stock. Whenever the Corporation redeems shares of Preferred
Stock held by the Preferred Stock Depositary, the Preferred Stock Depositary
will redeem as of the same redemption date the number of Depositary Shares
representing shares of Preferred Stock so redeemed. If fewer than all the
Depositary Shares are to be redeemed, the Depositary Shares to be redeemed will
be selected by lot, pro rata or by any other equitable method as may be
determined by the Preferred Stock Depositary. (Deposit Agreement, Section 2.08)
Upon receipt of notice of any meeting at which the holders of the Preferred
Stock are entitled to vote, the Preferred Stock Depositary will mail the
information contained in such notice of meeting to the record holders of the
Depositary Shares relating to such Preferred Stock. Each record holder of such
Depositary Shares on the record date (which will be the same date as the record
date for the Preferred Stock) will be entitled to instruct the Preferred Stock
Depositary as to the exercise of the voting rights pertaining to the amount of
the Preferred Stock represented by such holder's Depositary Shares. The
Preferred Stock Depositary will endeavor, insofar as practicable, to vote the
amount of the Preferred Stock represented by such Depositary Shares in
accordance with such instructions, and the Corporation will agree to take all
reasonable action which may be deemed necessary by the Preferred Stock
Depositary in order to enable the Preferred Stock Depositary to do so. The
Preferred Stock Depositary will abstain from voting shares of the Preferred
Stock to the extent it does not receive specific instructions from the holder of
Depositary Shares representing such Preferred Stock. (Deposit Agreement, Section
4.05)
The form of Depositary Receipt evidencing the Depositary Shares and any
provision of the Deposit Agreement may at any time be amended by agreement
between the Corporation and the Preferred Stock Depositary. However, any
amendment which materially and adversely alters the rights of the holders of
Depositary Shares will not be effective unless such amendment has been approved
by the holders of at least a majority of the Depositary Shares then outstanding.
(Deposit Agreement, Section 6.01) The Deposit Agreement will only terminate if
(i) all outstanding Depositary Shares have been redeemed or (ii) there has been
a final distribution in respect of the Preferred Stock in connection with any
liquidation, dissolution or winding-up of the Corporation and such distribution
has been distributed to the holders of Depositary Receipts. (Deposit Agreement,
Section 6.02)
The Corporation will pay all transfer and other taxes and governmental
charges arising solely from the existence of the depositary arrangements. The
Corporation will pay charges of the Preferred Stock Depositary in connection
with the initial deposit of the Preferred Stock and issuance of Depositary
Receipts, all withdrawals of shares of Preferred Stock by owners of Depositary
Shares and any redemption of the Preferred Stock. Holders of Depositary Receipts
will pay other transfer and other taxes and governmental charges and such other
charges as are expressly provided in the Deposit Agreement to be for their
accounts. (Deposit Agreement, Section 5.07)
The Preferred Stock Depositary may resign at any time by delivering to the
Corporation notice of its election to do so, and the Corporation may at any time
remove the Preferred Stock Depositary, any such resignation or removal to take
effect upon the appointment of a successor Preferred Stock Depositary and its
acceptance of such appointment. Such successor Preferred Stock Depositary must
be appointed within 60 days after delivery of the notice of resignation or
removal and must be a bank or trust company having its principal office in the
United States and having a combined capital and surplus of at least $50,000,000.
(Deposit Agreement, Section 5.04)
15
<PAGE>
The Preferred Stock Depositary will forward all reports and communications
from the Corporation which are delivered to the Preferred Stock Depositary and
which the Corporation is required or otherwise determines to furnish to the
holders of the Preferred Stock. (Deposit Agreement, Section 4.07)
Neither the Preferred Stock Depositary nor the Corporation will be liable
under the Deposit Agreement to holders of Depositary Receipts other than for its
negligence, willful misconduct or bad faith. Neither the Corporation nor the
Preferred Stock Depositary will be obligated to prosecute or defend any legal
proceeding in respect of any Depositary Shares or Preferred Stock unless
satisfactory indemnity is furnished. The Corporation and the Preferred Stock
Depositary may rely upon written advice of counsel or accountants, or upon
information provided by persons presenting Preferred Stock for deposit, holders
of Depositary Receipts or other persons believed to be competent and on
documents believed to be genuine. (Deposit Agreement, Section 5.03)
OUTSTANDING PREFERRED STOCK
The Corporation currently has outstanding three classes of Preferred Stock.
Series A Preferred Stock. Subject to the limitations discussed herein, the
holders of the Series A Preferred Stock are entitled to receive, when and as
declared by the Board of Directors out of funds legally available therefor,
cumulative dividends at the annual rate of $4.10 per share. Dividends are
payable quarterly, in arrears, on January 31, April 30, July 31 and October 31
in each year. Unless full cumulative dividends on all outstanding Series A
Preferred Stock and any other class of preferred stock ranking on a parity with
the Series A Preferred Stock as to dividends and upon liquidation ("Parity
Stock") have been paid, the Corporation will not declare or pay any dividend on,
or set aside or apply any amount to the redemption or purchase of, any shares of
the Common Stock or any other class of stock ranking junior to the Series A
Preferred Stock (except for dividends payable only in, or rights to subscribe
for or purchase, shares of junior stock).
Except as indicated below, or except as expressly required by applicable
law, the holders of shares of Series A Preferred Stock have no voting rights.
During any period in which dividends on the Series A Preferred Stock or any
outstanding Parity Stock are cumulatively in arrears in the amount of six or
more full quarterly dividends, the number of directors of the Corporation will
be increased by two and the holders of shares of Series A Preferred Stock,
voting together as a class with the holders of any other class or series of
Parity Stock having a similar voting right, will have the right to elect two
additional directors to the Corporation's Board of Directors to fill such newly
created directorships until all such dividends have been paid in full.
The approval of two-thirds of the outstanding shares of Series A Preferred
Stock and Parity Stock, voting together as a single class, shall be required in
order to amend the Charter of the Corporation to affect adversely the rights of
the holders of the Series A Preferred Stock or to authorize or create any class
of stock having rights senior with respect to dividends and upon liquidation to
the Series A Preferred Stock. In addition, the approval of a majority of the
outstanding shares of Series A Preferred Stock and Parity Stock, voting together
as a single class, shall be required in order to increase the number of shares
of preferred stock authorized in the Charter or to create any other class of
stock (but not any other series of preferred stock) ranking on a parity with the
Series A Preferred Stock as to dividends and upon liquidation.
At the option of the holders of the Series A Preferred Stock, such shares
may be converted into shares of Common Stock of the Corporation at the then
applicable conversion rate. The current conversion rate is 1.179 shares of
Common Stock for each share of Series A Preferred Stock (equivalent to a
conversion price of $42.40 per share). The conversion rate is subject to
adjustment in certain events, including stock dividends, subdivisions, splits
and combinations, and certain other distributions of rights or warrants to
purchase Common Stock at less than the then current market price (as defined),
and
16
<PAGE>
distributions to all holders of Common Stock of evidences of indebtedness or
assets of the Corporation other than cash out of earned surplus. The conversion
rate has been adjusted under this provision as a result of dividend payments by
the Corporation on its Common Stock notwithstanding the deficit in its earned
surplus account.
The Series A Preferred Stock is exchangeable in whole but not in part at
the option of the Corporation on any dividend payment date for the Corporation's
8.20% Convertible Subordinated Debentures due October 31, 2011 (the
"Debentures") at a rate of $50.00 principal amount of the Debentures plus cash
in the amount of accrued but unpaid dividends, if any, for each share of Series
A Preferred Stock.
The Series A Preferred Stock is redeemable at the option of the Corporation
for cash, as a whole or in part, at redemption prices declining to $50.00 per
share on October 31, 1996, plus accrued and unpaid dividends to the redemption
date. The Corporation may not purchase or redeem less than all the Series A
Preferred Stock and any other series of Parity Stock if, as of such time, the
Corporation has failed to pay all accrued and unpaid dividends thereon.
In case of the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, holders of any shares of Series A Preferred Stock
are entitled to receive $50.00 per share, plus an amount equal to any dividends
accrued and unpaid to the payment date, before any distribution is made to the
holders of any junior stock.
Series B Preferred Stock. The 1,300,000 shares of the Series B Preferred
Stock were issued in three subseries: 650,000 shares of the Series B Cumulative
Convertible Preferred Stock 1995 (the "Series B Preferred Stock 1995"); 325,000
shares of the Series B Cumulative Convertible Preferred Stock 1996 (the "Series
B Preferred Stock 1996"); and 325,000 shares of the Series B Cumulative
Convertible Preferred Stock 1997 (the "Series B Preferred Stock 1997"). Subject
to the limitations discussed herein, the holders of the Series B Preferred Stock
are entitled to receive, when and as declared by the Board of Directors out of
funds legally available therefor, cumulative dividends at the annual rate of
$10.25 per share. Dividends are payable quarterly, in arrears, on January 31,
April 30, July 31 and October 31 of each year. Unless full cumulative dividends
on all outstanding Series B Preferred Stock and any other Parity Stock have been
paid, the Corporation will not declare or pay any dividend on, or set aside or
apply any amount to the redemption or purchase of, any shares of the Common
Stock or any other class of stock ranking junior to the Series B Preferred
Stock.
Holders of Series B Preferred Stock have limited voting rights similar to
those of the Series A Preferred Stock except that under the terms of the Series
B Preferred Stock the right to elect two additional directors accrues when
dividends on the Series B Preferred Stock are cumulatively in arrears in the
amount of two or more full quarterly dividends. A special class vote of holders
of two-thirds of the outstanding Series B Preferred Stock is necessary in order
to (i) authorize the issuance of a new, or to increase the authorized number of
any existing, class of capital stock senior or superior to the Series B
Preferred Stock as to dividends and upon liquidation, (ii) increase the number
of shares of preferred stock or create any additional Parity Stock authorized in
the Charter, (iii) reissue any shares of Series B Preferred Stock that have been
redeemed or (iv) take any action to cause any amendment, alteration or repeal of
any of the provisions of the Charter that would materially adversely affect the
rights of holders of Series B Preferred Stock.
At the option of the holders of the Series B Preferred Stock, such shares
may be converted into shares of Common Stock at the then applicable conversion
rate. The current conversion rate for the Series B Preferred Stock is 8.316
shares of Common Stock per converted share of Series B Preferred Stock
(equivalent to a conversion price of $12.025 per share). The conversion rate is
subject to adjustment in certain events, including stock dividends,
subdivisions, splits and combinations, and certain distributions of rights or
warrants to purchase Common Stock at less than the then current market price (as
defined), and distributions to all holders of Common Stock of evidences of
indebtedness or assets of the Corporation (other than regular quarterly Common
Stock dividends consistent with the
17
<PAGE>
Corporation's current dividend policy and future dividends payable out of
consolidated earned surplus or current earnings).
The Series B Preferred Stock is redeemable at the option of the Corporation
for cash, as a whole or in part, at any time or from time to time, as follows:
(i) the Series B Preferred Stock 1995, at any time on or after June 1, 1994;
(ii) the Series B Preferred Stock 1996, at any time on or after June 1, 1995;
and (iii) the Series B Preferred Stock 1997, at any time on or after June 1,
1996; at a per share redemption price equal to the liquidation value of $100.00
and accrued and unpaid dividends plus, beginning after June 1, 1997, a premium
which declines to zero on June 1, 2001. Notwithstanding the foregoing, no
redemption may be effected prior to June 1, 1997, unless the closing price of
the Common Stock exceeds 150% of the then current Series B conversion price on
the date notice of redemption is given and for each of the twenty prior
consecutive trading days.
In the event that there shall occur a "change in control" (as defined
below) of the Corporation, then, at the election of each holder of Series B
Preferred Stock, the Corporation will issue and sell additional nonredeemable
equity securities and apply the net proceeds thereof to redeem the Series B
Preferred Stock at the appropriate redemption price, plus accrued dividends, but
only if and to the extent any such proceeds are raised. The term "change in
control" means any acquisition by any person or group of 50% or more of the
combined voting power of the outstanding voting securities of the Corporation, a
sale of substantially all of the assets of the Corporation, or a merger of the
Corporation with or into another person which results in the exchange,
conversion, reclassification or cancellation of the Common Stock of the
Corporation.
In case of the voluntary liquidation, dissolution or winding-up of the
Corporation, holders of any shares of Series B Preferred Stock are entitled to
receive $100.00 per share, plus an amount equal to any dividends accrued and
unpaid to the payment date, before any distribution is made to the holders of
any junior stock.
Series C Preferred Stock. Subject to the limitations discussed herein, the
holders of the Series C Preferred Stock are entitled to receive, when and as
declared by the Board of Directors out of funds legally available therefor,
cumulative preferential dividends at the annual rate of $5.00 per share.
Dividends are payable quarterly, in arrears, on January 31, April 30, July 31
and October 31 in each year. Unless full cumulative dividends on all outstanding
Series C Preferred Stock and any other Parity Stock have been paid and
sufficient funds have been set apart for the payment of the dividend for the
current dividend period with respect to the Series C Preferred Stock, the
Corporation will not declare or pay any dividend on or set aside or apply any
amount to the redemption or purchase of, any shares of the Common Stock or on
any other class of stock ranking junior to the Series C Preferred Stock (except
for dividends payable only in, or rights to subscribe for or purchase, shares of
junior stock).
Holders of Series C Preferred Stock have limited voting rights similar to
those of the Series A Preferred Stock except that under the terms of the Series
C Preferred Stock the right to elect two additional directors accrues when
dividends on the Series C Preferred Stock are cumulatively in arrears in the
amount of two or more full quarterly dividends.
At the option of the holders of the Series C Preferred Stock, such shares
may be converted into shares of Common Stock of the Corporation at the then
applicable conversion rate. The present conversion rate is 4.158 shares of
Common Stock for each share of Series C Preferred Stock (equivalent to a
conversion price of $12.025 per share). The conversion rate is subject to
adjustment in certain events, including stock dividends, subdivisions, splits
and combinations, and certain other distributions of rights or warrants to
purchase Common Stock at less than the then current market price (as defined),
and distributions to all holders of Common Stock of evidences of indebtedness or
assets of the Corporation (other than regular quarterly Common Stock dividends
consistent with the Corporation's current dividend policy and future dividends
payable out of consolidated earned surplus or current earnings). The conversion
rate is also subject to further adjustment in the event of certain transactions
18
<PAGE>
pursuant to a plan under which all or substantially all the Common Stock is to
be exchanged or converted into the right to receive cash, securities or other
assets.
The Series C Preferred Stock is redeemable, commencing on June 13, 1994, at
the option of the Corporation for cash, as a whole or in part, at redemption
prices declining to $50 per share on June 13, 2001, plus accrued and unpaid
dividends to the redemption date. The Corporation may not purchase or redeem
less than all the Series C Preferred Stock and any other series of Parity Stock
if, as of such time, the Corporation has failed to pay all accrued and unpaid
dividends thereon.
In case of the voluntary or involuntary liquidation, dissolution or
winding-up of the Corporation, holders of any shares of Series C Preferred Stock
are entitled to receive $50 per share, plus an amount equal to any dividends
accrued and unpaid to the payment date, before any distribution is made to the
holders of any junior stock.
SHAREHOLDER RIGHTS PLAN
The Corporation has a shareholder rights plan (the "Plan") to deter
coercive or unfair takeover tactics and to prevent a potential purchaser from
gaining control of the Corporation without offering a fair price to all of the
Corporation's shareholders. Under the Plan, each outstanding share of the
Corporation's Common Stock has one preferred share purchase right (a "Right")
expiring in 1997. Each Right entitles the registered holder to purchase 1/100 of
a share of Junior Preferred Stock for $140. The Rights cannot be exercised
unless certain events occur that might lead to a concentration in ownership of
Common Stock. Under certain conditions, the Rights may be exercised for (i)
Common Stock having a value of twice the exercise price, or (ii) shares of
common stock of a purchaser having a value of twice the exercise price. The
Corporation will generally be entitled to redeem the Rights, at $.05 per Right,
any time before the tenth day after a 20% position in the Corporation is
acquired. The Form 8-A setting forth a description of the Plan is an exhibit to
the Registration Statement of which this Prospectus is a part and is
incorporated by reference herein.
SPECIAL STATUTORY REQUIREMENTS FOR CERTAIN TRANSACTIONS
Business Combination Statute. The Maryland General Corporation Law
establishes special requirements with respect to "business combinations" between
Maryland corporations and "interested stockholders" unless exemptions are
applicable. Among other things, the law prohibits for a period of five years a
merger and other specified or similar transactions between a corporation and an
interested stockholder and requires a super-majority vote for such transactions
after the end of such five-year period.
"Interested stockholders" are all persons owning beneficially, directly or
indirectly, more than 10% of the outstanding voting stock of a Maryland
corporation. "Business combinations" include any merger or similar transaction
subject to a statutory vote and additional transactions involving transfers of
assets or securities in specified amounts to interested stockholders or their
affiliates. Unless an exemption is available, transactions of these types may
not be consummated between a Maryland corporation and an interested stockholder
or its affiliates for a period of five years after the most recent date on which
the stockholder became an interested stockholder and thereafter may not be
consummated unless recommended by the board of directors of the Maryland
corporation and approved by the affirmative vote of at least 80% of the votes
entitled to be cast by all holders of outstanding shares of voting stock and 66
2/3% of the votes entitled to be cast by all holders of outstanding shares of
voting stock other than the interested stockholder. A business combination with
an interested stockholder which is approved by the board of directors of a
Maryland corporation at any time before an interested stockholder first becomes
an interested stockholder is not subject to the special voting requirements. An
amendment to a Maryland corporation's charter electing not to be subject to the
foregoing requirements must be approved by the affirmative vote of at least 80%
of the votes entitled to be cast by all holders of outstanding shares of voting
stock and 66 2/3% of the votes entitled to be cast by holders of outstanding
19
<PAGE>
shares of voting stock who are not interested stockholders. Any such amendment
is not effective until 18 months after the vote of stockholders and does not
apply to any business combination of a corporation with a stockholder who was an
interested stockholder on the date of the stockholder vote. The Corporation has
not adopted any such amendment to its Charter.
Control Share Acquisition Statute. Maryland law imposes limitations on the
voting rights in a "control share acquisition." The Maryland statute defines a
"control share acquisition" at the 20%, 33 1/3% and 50% acquisition levels, and
requires a two-thirds stockholder vote (excluding shares owned by the acquiring
person and certain members of management) to accord voting rights to stock
acquired in a control share acquisition. The statute also requires Maryland
corporations to hold a special meeting at the request of an actual or proposed
control share acquiror generally within 50 days after a request is made with the
submission of an "acquiring person statement," but only if the acquiring person
(i) posts a bond for the cost of the meeting and (ii) submits a definitive
financing agreement to the extent that financing is not provided by the
acquiring person. In addition, unless the charter or by-laws provide otherwise,
the statute gives the Maryland corporation, within certain time limitations,
various redemption rights if there is a stockholder vote on the issue and the
grant of voting rights is not approved, or if an "acquiring person statement" is
not delivered to the target within 10 days following a control share
acquisition. Moreover, unless the charter or by-laws provide otherwise, the
statute provides that if, before a control share acquisition occurs, voting
rights are accorded to control shares which results in the acquiring person
having majority voting power, then minority stockholders have appraisal rights.
An acquisition of shares may be exempted from the control share statute provided
that a charter or by-law provision is adopted for such purpose prior to the
control share acquisition. There are no such provisions in the charter or
by-laws of the Corporation.
Reference is made to the full text of the foregoing statutes for their
entire terms, and the partial summary contained in this Prospectus is not
intended to be complete.
Insurance Acquisitions Disclosure and Control Act. Under the Maryland
Insurance Code, unless certain filings are made with the Maryland Insurance
Commissioner, no person may acquire any voting security or security convertible
into a voting security of an insurance holding company, such as the Corporation,
which controls one or more Maryland insurance companies if, as a result of such
acquisition, such person would "control" such insurance holding company. The
acquisition may not proceed unless it has been approved by the Maryland
Insurance Commissioner within 60 days after such filings have been submitted.
"Control" is presumed to exist if a person, directly or indirectly, owns or
controls 10% or more of the voting securities of another person. This
presumption may be rebutted by establishing by a preponderance of evidence that
control does not exist in fact.
Reference is made to the full text of the statute for its entire terms, and
this partial summary is not intended to be complete.
DESCRIPTION OF WARRANTS
The Corporation may issue Warrants, including Warrants to purchase Debt
Securities ("Debt Warrants") as well as other types of Warrants to purchase
Securities. Warrants may be issued independently or together with any Securities
and may be attached to or separate from such Securities. The Warrants are to be
issued under warrant agreements (each a "Warrant Agreement") to be entered into
between the Corporation and a bank or trust company, as warrant agent (the
"Warrant Agent"), all as shall be set forth in the Prospectus Supplement
relating to the Warrants being offered pursuant thereto.
DEBT WARRANTS
The applicable Prospectus Supplement will describe the terms of Debt
Warrants offered thereby, the Warrant Agreement relating to such Debt Warrants
and the debt warrant certificates representing
20
<PAGE>
such Debt Warrants, including the following: (i) the title of such Debt
Warrants; (ii) the aggregate number of such Debt Warrants; (iii) the price or
prices at which such Debt Warrants will be issued; (iv) the currency or
currencies, including composite currencies or currency units, in which the price
of such Debt Warrants may be payable; (v) the designation, aggregate principal
amount and terms of the Debt Securities purchasable upon exercise of such Debt
Warrants, and the procedures and conditions relating to the exercise of such
Debt Warrants; (vi) the designation and terms of any related Debt Securities
with which such Debt Warrants are issued, and the number of such Debt Warrants
issued with each such Debt Security; (vii) the currency or currencies, including
composite currencies or currency units, in which the principal of (or premium,
if any), or interest, if any, on the Debt Securities purchasable upon exercise
of such Debt Warrants will be payable; (viii) the date, if any, on and after
which such Debt Warrants and the related Debt Securities will be separately
transferable; (ix) the principal amount of Debt Securities purchasable upon
exercise of each Debt Warrant, and the price at which and the currency,
including composite currency or currency unit, in which such principal amount of
Debt Securities may be purchased upon such exercise; (x) the date on which the
right to exercise such Debt Warrants shall commence, and the date on which such
right shall expire; (xi) the maximum or minimum number of such Debt Warrants
which may be exercised at any time; (xii) a discussion of material federal
income tax considerations, if any; and (xiii) any other terms of such Debt
Warrants and terms, procedures and limitations relating to the exercise of such
Debt Warrants.
Debt warrant certificates will be exchangeable for new debt warrant
certificates of different denominations, and Debt Warrants may be exercised at
the corporate trust office of the Warrant Agent or any other office indicated in
the Prospectus Supplement. Prior to the exercise of their Debt Warrants, holders
of Debt Warrants will not have any of the rights of holders of the Debt
Securities purchasable upon such exercise and will not be entitled to payments
of principal of (or premium, if any) or interest, if any, on the Debt Securities
purchasable upon such exercise.
PREFERRED STOCK AND COMMON STOCK WARRANTS
The Corporation may issue Warrants exercisable for Preferred Stock or
Common Stock. The applicable Prospectus Supplement will describe the following
terms of any such Warrants in respect of which this Prospectus is being
delivered: (i) the title of such Warrants; (ii) whether such Warrants are
exercisable for Preferred Stock or Common Stock; (iii) the price or prices at
which such Warrants will be issued; (iv) the currency or currencies, including
composite currencies or currency units, in which the price of such Warrants may
be payable; (v) if applicable, the designation and terms of the Preferred Stock
or Common Stock with which such Warrants are issued, and the number of such
Warrants issued with each such share of Preferred Stock or Common Stock; (vi) if
applicable, the date on and after which such Warrants and the related Preferred
Stock or Common Stock will be separately transferable; (vii) if applicable, a
discussion of material federal income tax considerations; and (viii) any other
terms of such Warrants, including terms, procedures and limitations relating to
the exchange and exercise of such Warrants.
EXERCISE OF WARRANTS
Each Warrant will entitle the holder of Warrants to purchase for cash such
principal amount of Debt Securities, Preferred Stock or Common Stock, as the
case may be, at such exercise price as shall in each case be set forth in, or be
determinable as set forth in, the Prospectus Supplement relating to the Warrants
offered thereby. Warrants may be exercised at any time up to the close of
business on the expiration date set forth in the Prospectus Supplement relating
to the Warrants offered thereby. After the close of business on the expiration
date, unexercised Warrants will become void.
Warrants may be exercised as set forth in the Prospectus Supplement
relating to the Warrants offered thereby. Upon receipt of payment and the
warrant certificate properly completed and duly executed at the corporate trust
office of the Warrant Agent or any other office indicated in the Prospectus
Supplement, the Corporation will, as soon as practicable, forward the Securities
purchasable
21
<PAGE>
upon such exercise. If less than all of the Warrants represented by such warrant
certificate are exercised, a new warrant certificate will be issued for the
remaining Warrants.
PLAN OF DISTRIBUTION
The Corporation may sell Securities to or through underwriters, and also
may sell Securities directly to other purchasers or through agents.
The distribution of the Securities may be effected from time to time in one
or more transactions at a fixed price or prices, which may be changed, or at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices.
Sales of Common Stock offered hereby may be effected from time to time in
one or more transactions on the New York Stock Exchange or in negotiated
transactions or a combination of such methods of sale, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at other negotiated prices.
In connection with the sale of Securities, underwriters or agents may
receive compensation from the Corporation or from purchasers of Securities for
whom they may act as agents in the form of discounts, concessions or
commissions. Underwriters may sell Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of Securities may be deemed to be underwriters, and any
discounts or commissions received by them from the Corporation and any profit on
the resale of Securities by them may be deemed to be underwriting discounts and
commissions, under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from the Corporation will be
described, in the Prospectus Supplement.
Under agreements which may be entered into by the Corporation, underwriters
and agents who participate in the distribution of Securities may be entitled to
indemnification by the Corporation against certain liabilities, including
liabilities under the Securities Act.
If so indicated in the Prospectus Supplement, the Corporation will
authorize underwriters or other persons acting as the Corporation's agents to
solicit offers by certain institutions to purchase Securities from the
Corporation pursuant to contracts providing for payment and delivery on a future
date. Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by the Corporation. The obligations of any
purchaser under any such contract will be subject to the condition that the
purchase of the Securities shall not at the time of delivery be prohibited under
the laws of the jurisdiction to which such purchaser is subject. The
underwriters and such other agents will not have any responsibility in respect
of the validity or performance of such contracts.
Certain of the underwriters or agents and their associates may be customers
of, engage in transactions with and perform services for the Corporation in the
ordinary course of business.
The Securities may or may not be listed on a national securities exchange
or a foreign securities exchange (other than the Common Stock, which is listed
on the New York Stock Exchange, the Pacific Stock Exchange, the London Stock
Exchange and the Swiss Exchanges in Basle, Geneva and Zurich). Any Common Stock
sold pursuant to a Prospectus Supplement will be listed on the New York Stock
Exchange, subject to official notice of issuance. No assurances can be given
that there will be an active trading market for the Securities.
22
<PAGE>
VALIDITY OF SECURITIES
The legal validity of the Securities offered hereby will be passed upon for
the Corporation by Piper & Marbury, Baltimore, Maryland and for any underwriters
or agents by Davis Polk & Wardwell, New York, New York. Davis Polk & Wardwell
will rely upon the opinion of Piper & Marbury as to certain matters governed by
Maryland law. L.P. Scriggins, a Director of the Corporation, is a partner of
Piper & Marbury. As of January 1, 1994 lawyers in the firm of Piper & Marbury
beneficially owned in the aggregate approximately 20,000 shares of Common Stock
or Common Stock equivalents of the Corporation.
EXPERTS
The consolidated financial statements of the Corporation incorporated in
this Prospectus by reference to Form 10-K for the year ended December 31, 1992
have been audited by Ernst & Young, independent auditors, as set forth in their
report thereon included therein and incorporated by reference herein. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
With respect to the unaudited condensed consolidated interim financial
information for the three month periods ended March 31, 1993 and 1992, and the
three-and six-month periods ended June 30, 1993 and 1992, and the three-and
nine-month periods ended September 30, 1993 and 1992, incorporated by reference
in this Registration Statement, the independent auditors have reported that they
have applied limited procedures in accordance with professional standards for a
review of such information. However, their separate reports included in the
Corporation's quarterly reports on Form 10-Q for the quarters ended March 31,
1993, June 30, 1993, and September 30, 1993, and incorporated by reference
herein, state that they did not audit and they do not express an opinion on that
interim financial information. Accordingly, the degree of reliance on their
reports on such information should be restricted in light of the limited nature
of the review procedures applied. The independent auditors are not subject to
the liability provisions of Section 11 of the Securities Act for their reports
on the unaudited interim financial information because those reports are not
"reports" or a "part" of the Registration Statement prepared or certified by the
auditors within the meaning of Sections 7 and 11 of the Securities Act.
23
<PAGE>
================================================================================
- - --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS SUPPLEMENT AND THE
DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS SUPPLEMENT OR
AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE OF SUCH INFORMATION.
------------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
---------
Prospectus Supplement Summary...................... S-3
Selected Consolidated Financial Information........ S-5
The Corporation.................................... S-6
Strategy........................................... S-9
Use of Proceeds.................................... S-10
Capitalization..................................... S-11
Summary Management's Discussion and Analysis of
Financial Condition and Results
of Operations.................................... S-12
Description of the Notes........................... S-40
Underwriting....................................... S-44
Experts............................................ S-44
PROSPECTUS
Available Information.............................. 2
Incorporation of Certain Documents
by Reference..................................... 2
The Corporation.................................... 3
Ratio of Consolidated Earnings to Fixed Charges and
Ratio of Consolidated
Earnings to Combined Fixed Charges and
Preferred Stock Dividends........................ 3
Use of Proceeds.................................... 3
Description of Debt Securities..................... 4
Description of Capital Stock....................... 11
Description of Warrants............................ 20
Plan of Distribution............................... 22
Validity of Securities............................. 23
Experts............................................ 23
================================================================================
- - --------------------------------------------------------------------------------
$150,000,000
USF&G CORPORATION
8 3/8% SENIOR NOTES DUE 2001
[USF&G LOGO]
------------------------------
PROSPECTUS SUPPLEMENT
------------------------------
MERRILL LYNCH & CO.
GOLDMAN, SACHS & CO.
KIDDER, PEABODY & CO.
INCORPORATED
J.P. MORGAN SECURITIES INC.
JUNE 23, 1994
================================================================================
- - --------------------------------------------------------------------------------
