UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K/A
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File Number
December 31, 1994 1-8233
USF&G CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-1220567
(State of Incorporation) (IRS Employer Identification No.)
100 Light Street, Baltimore, Maryland 21202
(Address of principal executive offices) (zip code)
Telephone: 410-547-3000
Securities registered pursuant to Section 12(b) of the Act:
$4.10 Series A Convertible Exchangeable Preferred Stock, Par Value $50
Registered-New York Stock Exchange
Registered-Pacific Stock Exchange
$5.00 Series C Cumulative Convertible Preferred Stock, Par Value $50
Registered-New York Stock Exchange
Registered-Pacific Stock Exchange
Preferred Share Purchase Rights
Registered-New York Stock Exchange
Registered-Pacific Stock Exchange
Common Stock, Par Value $2.50
Registered-New York Stock Exchange
Registered-Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant as of March 28, 1995, was $1,416,793,672.
Voting stock held by any persons who may be deemed to be affiliates under Rule
405 would be immaterial.
The number of shares outstanding of the issuer's common stock as of March 28,
1995:
Common Stock, Par Value $2.50; 101,199,548 shares outstanding.
Documents Incorporated by Reference:
Portions of the 1994 Annual Report to Shareholders (Restated) are incorporated
by reference into Parts I and II.
Portions of the definitive proxy statement for the Annual Meeting held on
May 17, 1995, are incorporated by reference into Part III.
Exhibit Index is on page 15.
USF&G Corporation
Index
Part I
Item 1. Description of Business
1.1. General 1
1.2. Business Segments 1
1.3. Distribution Systems 5
1.4. Competition 6
1.5. Investments 6
1.6. Property/Casualty Loss Reserves 7
1.7. Life Benefit Reserves 10
1.8. Geographical Distribution 11
1.9. Executive Officers of the Registrant 11
Item 2. Business Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Part II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters 13
Item 6. Selected Financial Data 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
Part III
Item 10. Executive Officers and Directors of the Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial Owners
and Management 14
Item 13. Certain Relationships and Related Transactions 14
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 15
USF&G Corporation
Part I
Item 1. Description of Business
1.1. General
USF&G Corporation (the "Corporation") is a holding corporation organized in 1981
as a Maryland corporation. United States Fidelity and Guaranty Company ("USF&G
Company"), organized in 1896 under Maryland law, is the predecessor registrant
of the Corporation. The term "Corporation" as used in the Form 10-K/A refers to
the Corporation and all of its subsidiaries. As of December 31, 1994, the
Corporation had approximately 6,300 employees.
USF&G Corporation's Form 10-K for the year ended December 31, 1994 is hereby
amended to reflect mergers with Discover Re Managers, Inc. ("Discover Re"), and
Victoria Financial Corporation ("Victoria"), which were completed during the
second quarter of 1995. Restatement of prior periods is provided due to the
application of the pooling-of-interests method of accounting.
The Corporation, through its subsidiaries, is primarily engaged in the business
of insurance. Property/casualty insurance is its primary business. USF&G
Company, the Corporation's largest subsidiary, is the 24th largest
property/casualty insurer among over 2,400 insurers in the United States based
on 1993 statutory net premiums written. Life insurance and annuity products are
sold by Fidelity and Guaranty Life Insurance Company ("F&G Life"). Noninsurance
operations are composed of the parent company, asset management, and management
consulting services.
1.2. Business segments
Financial information about the Corporation's business segments is set forth in
Note 14 of the Notes to Consolidated Financial Statements in the Corporation's
1994 Annual Report to Shareholders (Restated) and incorporated herein by
reference. A description of the Corporation's principal business segments begins
with the Property/Casualty Insurance Segment on page 1, and continues with the
Life Insurance Segment on page 4, and Parent and Noninsurance Operations on page
5 of this Form 10-K/A.
1.2a. Property/casualty insurance segment
Selected financial data for the property/casualty insurance segment are as
follows:
<TABLE>
(dollars in millions) 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Results:
Premiums earned $2,356 $2,392 $2,579 $3,044 $3,349 $3,548 $3,623 $3,754 $3,542 $2,964
Losses and loss
expenses 1,744 1,805 2,120 2,562 2,776 2,743 2,654 2,738 2,767 2,623
Underwriting
expenses 814 816 887 1,001 1,096 1,142 1,134 1,112 1,051 921
Underwriting loss $ (202) $ (229) $ (428) $ (519) $ (523) $ (337) $ (165) $ (96) $ (276) $ (580)
Net investment income $ 429 $ 437 $ 478 $ 501 $ 577 $ 624 $ 622 $ 607 $ 565 $ 348
Net income (loss) 498 285 194 (41) (192) 200 318 331 309 (116)
Financial Position:
Investments $6,440 $7,012 $7,019 $7,648 $7,021 $7,496 $7,428 $6,658 $6,033 $5,001
Assets 9,487 9,710 8,362 9,422 9,008 9,468 9,310 8,496 7,781 6,779
Unpaid losses and loss
expenses* 6,158 6,370 5,565 5,716 5,636 5,467 5,260 4,777 4,113 3,521
Operating Ratios-GAAP:
Loss ratio 74.0 75.4 82.2 84.2 82.9 77.3 73.2 72.9 78.1 88.5
Expense ratio 34.9 34.2 34.5 32.9 32.7 32.2 31.3 29.6 29.7 31.1
Combined ratio 108.9 109.6 116.7 117.1 115.6 109.5 104.5 102.5 107.8 119.6
Statutory Data:**
Premiums written $2,389 $2,502 $2,475 $3,064 $3,651 $3,717 $3,903 $3,854 $3,701 $3,152
Policyholders' surplus
(USF&G Company) 1,621 1,577 1,498 1,432 1,359 1,423 1,400 1,246 1,241 913
Operating Ratios-Statutory:
Loss ratio 73.1 75.3 81.8 84.0 81.8 76.4 73.0 73.2 79.1 90.7
Expense ratio 34.8 33.5 34.8 33.1 32.9 32.8 31.2 30.1 29.1 30.0
Combined ratio 107.9 108.8 116.6 117.1 114.7 109.2 104.2 103.3 108.2 120.7
Policyholders'
dividend ratio .3 .3 .3 .5 .5 .6 .6 .9 .8 1.0
*USF&G adopted SFAS No. 113 in 1993 which requires the effects of reinsurance
activity to be reported on a gross basis. Prior to 1993 information presented
for the property/casualty insurance segment is net of applicable reinsurance
amounts.
**For comparability, statutory amounts are restated for Discover Re and
Victoria; however, restatement of prior periods for business combinations is not
prescribed by statutory accounting.
USF&G Company currently underwrites most forms of property/casualty insurance.
USF&G Company's property/casualty business is grouped into four business
categories: commercial, personal, reinsurance, and fidelity/surety. In 1994,
the property/casualty segment accounted for 84 percent of the Corporation's
total revenues and 68 percent of its total assets.
USF&G Company reinsures portions of its policy risks with other insurance
companies or underwriters and remains contingently liable under these contracts
(ceded reinsurance). In addition, it assumes policy risks from other insurance
companies and through participation in pools and associations (assumed
reinsurance). (Refer to the Assumed Reinsurance Category discussion on page 3 of
this Form 10-K/A.)
Ceded reinsurance allows USF&G Company to obtain indemnification against losses
associated with insurance contracts it has written by entering into a
reinsurance contract with another insurance enterprise (the reinsurer). USF&G
Company pays (cedes) an amount to the reinsurer who agrees to reimburse USF&G
Company for a specified portion of any claims paid on business under the
reinsured contracts. Reinsurance gives USF&G Company the ability to write
certain individually large risks or groups of risks, and control its exposure to
losses by ceding a portion of such large risks. USF&G Company's ceding
reinsurance agreements are generally structured on a treaty basis whereby
all risks meeting a certain criteria are automatically reinsured.
USF&G Company may also use supplemental facultative reinsurance based on an
underwriter's evaluation of characteristics of a specific insured risk. The
following table summarizes the approximate extent of the Company's reinsurance
coverages.
Coverage
Risk Type Percentage Retention Coverage
Property Cat Program (a) 95% $75 million $140 million
Property Per Risk (b) 100 Variable 50 million
Fidelity 100 2 million 13 million
Surety (c) 100 5 million 30 million
Workers' Compensation (d) 100 1 million 525 million
Commercial Umbrella 100 15 million 5 million
(a) Second Event Coverage purchased lowers retention to $50 million for second
catastrophe.
(b) Retention of individual property losses are $1 million, but can be increased
to $4 million subject to underwriting criteria.
(c) Represents limits at December 31, 1994. Fourth layer canceled for 1995,
reducing limit to $25 million.
(d) Represents limits at December 31, 1994. Accident and Health Workers'
Compensation Catastrophe Coverage canceled for 1995, reducing limit to $425
million.
Commercial Category: Commercial coverages provide protection related to
property loss, liability claims and workers' compensation benefits to businesses
and other institutions. This type of insurance protects against loss from damage
to the insured's covered properties and protects against legal liability for
injuries to other persons or damage to their property arising from the insured's
business operations. Workers' compensation provides benefits to employees, as
mandated by state laws, for employment-related accidents, injuries or illnesses.
Selected data for the commercial category are as follows:
(dollars in millions) 1994 1993 1992
Automobile:
Premiums written $ 376 $ 391 $ 413
Statutory combined ratio 86.6 86.9 96.5
General Liability:
Premiums written $ 352 $ 365 $ 366
Statutory combined ratio 133.3 118.9 137.6
Property:
Premiums written $ 329 $ 326 $ 315
Statutory combined ratio 111.8 100.0 115.6
Workers' Compensation:
Premiums written $ 142 $ 165 $ 261
Statutory combined ratio 151.6 232.2 150.0
Total Commercial:
Premiums written $1,199 $1,247 $1,355
Underwriting loss* (186) (223) (343)
Percent of total premiums written 50% 50% 54%
GAAP Underwriting Ratios:
Loss ratio 78.1 83.0 87.8
Expense ratio 37.5 35.3 35.4
Combined ratio 115.6 118.3 123.2
Statutory Underwriting Ratios:
Loss ratio 78.1 83.0 86.9
Expense ratio 36.2 34.4 36.3
Combined ratio 114.3 117.4 123.2
*Reported in accordance with Generally Accepted Accounting Principles ("GAAP")
Personal Category: Personal coverages for automobile and homeowners insurance
include aspects of property loss and liability risks. Automobile policies cover
liability to third-parties for bodily injury and property damage, and cover
physical damage to the insured's own vehicle resulting from collision and
various other perils. Homeowners policies protect against loss of dwellings and
contents arising from a variety of perils, as well as liability arising from
ownership or occupancy. Selected data for the personal category are as follows:
(dollars in millions) 1994 1993 1992
Automobile:
Premiums written $402 $493 $512
Statutory combined ratio 99.6 99.9 103.5
Homeowners:
Premiums written $124 $139 $169
Statutory combined ratio 150.2 115.4 143.0
Other Property:
Premiums written $ 38 $ 26 $ 45
Statutory combined ratio 105.2 131.4 110.0
Total Personal:
Premiums written $564 $658 $726
Underwriting loss* (60) (28) (110)
Percent of total premiums written 24% 26% 29%
GAAP Underwriting Ratios:
Loss ratio 74.2 70.6 80.9
Expense ratio 36.3 33.5 33.1
Combined ratio 110.5 104.1 114.0
Statutory Underwriting Ratios:
Loss ratio 74.2 70.7 80.0
Expense ratio 36.8 33.7 33.2
Combined ratio 111.0 104.4 113.2
*Reported in accordance with GAAP
Assumed Reinsurance Category: USF&G Company operates a separate reinsurance
division which underwrites treaty reinsurance and is composed of various wholly-
owned subsidiaries. The lead company in this group, F&G Re, Inc., acts as the
reinsurance underwriting manager and solicits and services assumed
reinsurance for USF&G Company. F&G Re, Inc., writes reinsurance in North America
and in specific foreign countries (mainly in Western Europe and Japan).
Reinsurance prices and conditions are not normally subject to the same state
regulation applicable to the primary insurance market because reinsurers
contract solely with other insurance companies. Selected data for the
reinsurance category are as follows:
(dollars in millions)
1994 1993 1992
Premiums written $415 $403 $243
Underwriting gain* 40 32 20
Percent of total premiums written 17% 16% 10%
GAAP Underwriting Ratios:
Loss ratio 73.2 66.7 75.0
Expense ratio 16.5 22.6 12.1
Combined ratio 89.9 89.3 87.1
Statutory Underwriting Ratios:
Loss ratio 67.9 67.3 76.9
Expense ratio 22.7 24.6 17.0
Combined ratio 90.6 91.9 93.9
*Reported in accordance with GAAP
Fidelity/Surety Category: Fidelity bonds indemnify employers against the
dishonesty or default of employees in their employment. These types of bonds are
written for mercantile businesses, financial institutions, and public officials.
Surety bonds guarantee the performance of a principal who undertakes
contractual or statutory obligations, and indemnify third-party obligees for
damages caused by the principal's failure to perform. Selected data for the
fidelity/surety category are as follows:
(dollars in millions) 1994 1993 1992
Fidelity:
Premiums written $ 21 $ 19 $ 18
Statutory combined ratio 74.5 108.8 75.8
Surety:
Premiums written $113 $102 $ 91
Statutory combined ratio 93.8 105.8 100.1
Total Fidelity/Surety:
Premiums written $134 $121 $109
Underwriting gain (loss)* 6 (8) 6
Percent of total premiums written 6% 5% 4%
GAAP Underwriting Ratios:
Loss ratio 36.7 50.2 32.3
Expense ratio 57.9 56.6 62.6
Combined ratio 94.6 106.8 94.9
Statutory Underwriting Ratios:
Loss ratio 36.7 50.2 32.0
Expense ratio 54.2 56.0 64.0
Combined ratio 90.9 106.2 96.0
*Reported in accordance with GAAP
Discover Re: Discover Re provides insurance, reinsurance and related services
to the alternative risk transfer ("ART") market, primarily in the
municipalities, transportation, education and retail sectors. The ART market
represents approximately 30 percent of the commercial insurance market.
This merger facilitates USF&G's access to the ART market and, management
believes, provides increased growth potential by augmenting certain of the
existing core commercial lines operations. Selected data for Discover Re are as
follows:
(dollars in millions) 1994 1993 1992
Premiums written $ 27 $ 20 $ 12
Underwriting loss* - (1) -
Percent of total premiums written 1% 1% 1%
GAAP Underwriting Ratios:
Loss ratio 76.2 76.2 80.0
Expense ratio 23.8 26.7 30.3
Combined ratio 100.0 102.9 110.3
Statutory Underwriting Ratios:
Loss ratio 76.2 76.2 80.0
Expense ratio 22.6 23.9 28.4
Combined ratio 98.8 100.1 108.4
*Reported in accordance with GAAP
Victoria: Victoria is an insurance holding company which specializes in
nonstandard personal lines auto coverage. Management believes that this merger
will allow USF&G to enhance premium retention and grow the personal lines
business through an expanded product portfolio. Selected data for Victoria are
as follows:
(dollars in millions) 1994 1993 1992
Premiums written $ 50 $ 53 $ 43
Underwriting loss* (2) (1) (1)
Percent of total premiums written 2% 2% 2%
GAAP Underwriting Ratios:
Loss ratio 69.1 70.1 69.1
Expense ratio 31.2 28.5 30.1
Combined ratio 100.3 98.6 99.2
Statutory Underwriting Ratios:
Loss ratio 69.1 70.1 69.1
Expense ratio 32.2 28.2 30.3
Combined ratio 101.3 98.3 99.4
*Reported in accordance with GAAP
1.2b. Life insurance segment
The life insurance segment ("F&G Life") sells many forms of annuity and life
insurance products. In 1994, F&G Life segment accounted for 14 percent of the
Corporation's total revenues and 33 percent of its total assets. Selected
financial data for the life insurance segment are as follows:
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(dollars in millions) 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating Results:
Premium income $ 152 $ 129 $ 104 $ 169 $ 186 $ 165 $ 178 $ 133 $ 79 $ 67
Net investment income 317 321 349 370 348 273 159 88 67 50
Net income (loss) 12 10 (5) 31 (16) 31 14 37 20 27
Life Insurance Sales:
Annuities $ 274 $ 199 $ 144 $ 266 $ 1,032 $ 934 $ 962 $ 221 $ 67 $ 104
Permanent 9 4 9 12 17 20 106 51 10 9
Term and group 3 2 2 2 5 6 9 6 6 6
Total $ 286 $ 205 $ 155 $ 280 $ 1,054 $ 960 $ 1,077 $ 278 $ 83 $ 119
Financial Position:
Investments $ 4,202 $ 4,540 $ 4,512 $ 4,672 $ 4,308 $ 3,372 $ 2,240 $ 1,086 $ 707 $ 535
Assets 4,575 4,848 4,856 5,012 4,721 3,645 2,471 1,194 784 607
Policy benefit reserves 3,804 3,973 3,896 3,773 3,924 2,838 1,875 795 501 402
Statutory surplus 326 316 310 283 254 245 169 107 82 56
Life Insurance in Force:
Permanent $ 6,348 $ 6,733 $ 6,769 $ 6,937 $ 7,014 $ 6,038 $ 4,930 $ 3,979 $ 3,035 $ 2,228
Term 5,467 5,347 5,549 5,854 6,463 6,438 6,603 6,579 6,648 6,338
Group 27 30 42 586 4,373 4,605 4,058 2,834 2,687 2,737
Total $11,842 $12,110 $12,360 $13,377 $17,850 $17,081 $15,591 $13,392 $12,370 $11,303
</TABLE>
F&G Life Products: Life insurance and annuity sales (premiums and deposits) by
product type are as follows:
(in millions) 1994 1993 1992
Structured settlement annuities $ 88 $ 66 $ 37
Single premium deferred annuities 82 44 33
Tax-sheltered annuities 63 35 -
Other annuities 41 54 74
Life insurance 12 6 11
Total $286 $205 $155
Single premium deferred annuities ("SPDAs") offer the owner the option of
receiving a lump sum distribution at a future date or a series of fixed payments
over a specified period. Tax-sheltered annuity ("TSA") products, which provide
retirement income, are a type of deferred annuity. Other annuities consist
of single premium immediate annuities ("SPIAs"), which provide for payments that
begin within one year after the sale and continue over a fixed period or an
individual's lifetime. Structured settlements are immediate annuities
principally sold through the property/casualty company in settlement of
insurance claims.
Other insurance products include recurring and single premium universal life and
term insurance that generally provide a fixed benefit upon the death of the
insured. These products were sold on an individual and group basis. However, F&G
Life sold its group life business in 1991. Universal life insurance provides a
death benefit for the life of the insured and accumulates cash values to which
interest is credited. Term life insurance provides a fixed death benefit if the
insured dies during the contractual period.
Universal life products, which represent all the permanent life insurance sales
in 1992 through 1994, and have been the majority of permanent life insurance
sales since 1988, also include a cash value component that is credited with
interest at competitive rates. The interest rates are applied to premiums
for one year from receipt; new rates are declared quarterly on recurring premium
policies and semi-monthly on single premium policies. Universal life cash values
are charged for the cost of life insurance coverage and for administrative
expenses. Additional information on F&G Life's products is discussed on page 22
of Management's Discussion and Analysis of Financial Condition and Results of
Operations.
1.2c. Parent and noninsurance operations
Selected financial data for the parent company and noninsurance operations are
as follows:
(in millions) 1994 1993 1992
Revenues before realized gains:
Management consulting $ 32 $ 32 $ 30
Oil and gas - - 19
Other noninsurance investments 24 10 4
Parent 20 8 14
Total revenues before realized gains $ 76 $ 50 $ 67
Parent company expenses:
Interest expense $ (34) $ (37) $ (35)
Unallocated expense, net (48) (35) (34)
Noninsurance gains (losses):
Management consulting 1 (2) (4)
Oil and gas - - (18)
Other noninsurance investments 2 (9) (13)
Facilities exit costs (211) - -
Realized gains (losses) on investments 14 (45) (50)
Restructuring charges - - (2)
Loss from discontinued operations - - (7)
Other 3 2 3
Total parent/noninsurance net loss $(273) $(126) $(160)
The parent company performs corporate functions including managing the capital
requirements of the Corporation and its subsidiaries. The noninsurance
operations include management consulting services, asset management services,
and discontinued operations. As a result of restructuring, there were no oil and
gas operating losses in 1994 and 1993. During 1992, the investment in oil and
gas properties was merged with another oil and gas exploration and production
company. Discontinued operations included certain investment management,
leasing, marketing, and travel services, and other noninsurance operations.
During 1994, the Corporation committed to a plan to consolidate its home office
operations in Baltimore, Maryland at its Mount Washington facility. The parent
company recognized facilities exit costs of $211 million representing the
present value of the rent and other operating expenses to be incurred under the
lease on the Corporation's principal office building from the time USF&G vacates
the building through the expiration of the lease in 2009. (Refer to Note 6 of
the Notes to Consolidated Financial Statements in the Corporation's 1994 Annual
Report to Shareholders (Restated).)
1.3. Distribution systems
The Corporation's subsidiaries market a full range of property/casualty
insurance and life insurance products.
Property/Casualty Insurance: USF&G Company's products have been sold
exclusively by independent agents since its founding in 1896. Independent agents
generally represent multiple insurance companies. USF&G Company's products are
sold through approximately 3,800 independent agencies in the United States on a
commission basis.
As of December 31, 1994, USF&G Company maintained 5 regional offices and 30
branch offices to service its independent agents and policyholders. The regional
offices are located in the Northeast, Southeast, Midwest, and Western areas, and
in Mississippi. The branch offices are located throughout the United States.
These offices support the administration of underwriting standards, the delivery
of policies, and the supervision of the Company's claim offices. In the first
quarter of 1995, the Company eliminated the Midwest regional office and
consolidated its business into the other regional offices. This measure was
taken to save expenses as well as increase efficiency of operations.
Life Insurance: F&G Life's sales by distribution system are as
follows:
(in millions) 1994 1993 1992
Direct-structured settlements $ 88 $ 66 $ 37
Property/casualty brokerage 48 49 67
National brokerage 46 14 -
National wholesaler 71 39 -
Other 33 37 51
Total $286 $205 $155
Structured settlements are annuities sold predominantly through the
property/casualty company in settlement of certain of its insurance claims. Tax-
sheltered annuities are sold through a national wholesale distribution network
primarily to teachers. SPDAs are sold primarily through independent agents and
insurance brokers. Prior to 1992, most SPDAs were sold through securities
brokerage firms (New York Stock Exchange member firms and other financial
institutions).
1.4. Competition
Property/Casualty Insurance: The property/casualty insurance industry is highly
competitive with about 2,400 companies nationwide. These insurers are not only
stock companies, but also mutual companies and other underwriting organizations.
USF&G Company ranked 24th in the industry, based on 1993 statutory net premiums
written and 23rd based on 1993 statutory policyholders' surplus. USF&G Company
competes with other property/casualty insurance companies whose products are
distributed through national, regional and local independent agencies, direct
sales and brokers. Consumers may also use self-insurance, which includes captive
insurance subsidiaries.
Pricing is a primary means of competition in the property/casualty industry. The
industry is currently in a period of significant price competition, which
adversely affects USF&G Company's profitability. Availability and quality of
products, quality and speed of service (including claims service),
financial strength, distribution systems and technical expertise are also
important elements of competition. In personal and other lines offered by USF&G
Company, significant price competition is experienced from direct-writing
companies that do not use independent agents and generally have lower policy
acquisition costs.
Life Insurance: The Corporation's life insurance subsidiaries operate in a
competitive environment, with approximately 1,300 companies in the industry
including stock and mutual companies. F&G Life ranked 86th in the United States
based on 1993 statutory assets and 97th based on 1993 statutory capital and
surplus.
In the life insurance industry, interest crediting rates, policy features,
financial stability and service quality are important competitive factors. F&G
Life's products compete not only with those offered by other life insurance
companies, but also with other income accumulation-oriented products offered by
other financial institutions. F&G Life has experienced considerable
competitive pressure in recent periods as a result of its relatively lower
credit ratings. Competitive pressures for agency business also have intensified
in recent years because of an increase in the variety of products available in
the market and efforts of competitors to expand their market shares.
Premium Rates: Most states have laws requiring that rate schedules and other
information be filed with a regulatory authority for substantially all property,
casualty, and surety lines. Some states permit insurers to use rates without
prior regulatory approval whereas other states prohibit implementation
of new rates without such approval. The authority may disapprove a filing if it
finds that the rates are inadequate, excessive, or unfairly discriminatory.
Rates are not necessarily uniform for all insurers. In states that require prior
approval of rates, regulators usually require the submission of historical
data to justify rate increases and, accordingly, there is often a time lag
between identifying the need for rate increases and securing such increases. The
effect of this lag is particularly severe in times of rising claims and
inflation. Rates for life insurance are generally not regulated.
1.5. Investments
Investing the net cash flows from operations is a major aspect of the
property/casualty and life insurance businesses. The components of the
Corporation's investment portfolio and investment performance are discussed on
pages 24 through 29, 46 through 48, 51 and 52 of the 1994 Annual Report
to Shareholders (Restated), which pages are incorporated herein by reference.
1.6. Property/casualty loss reserves
1.6a. General
The reserve liabilities for property/casualty losses and loss expenses represent
estimates of the ultimate net cost of all unpaid losses and loss adjustment
expenses incurred through December 31 of each year. The reserves are determined
using adjusters' individual case estimates and actuarially based statistical
projections.
USF&G Company's estimates of losses for reported claims are established
judgmentally on an individual case basis. Such estimates are based on a claim
adjuster's particular expertise with the type of risk involved and knowledge of
circumstances surrounding the individual claims. These estimates are reviewed
on a regular basis and updated as additional facts become known.
The reserves derived from statistical projections are subject to the effects of
trends in claim severity and frequency. Statistical projections are employed in
three specific areas: 1) to calculate bulk reserves for incurred but not
reported ("IBNR") losses and provide for development of case basis loss
reserves; 2) to calculate allocated loss expense reserves; and 3) to calculate
unallocated loss expense reserves.
IBNR and Case Development Reserves: USF&G Company's estimates of IBNR and case
development reserves are derived from analyses of historical patterns of
development of paid and reported losses by accident year for each line of
business. The loss projection procedures used in this analysis contain explicit
provisions for quantifying the effect of inflation on loss payments expected to
be made in the future. This process relies on the basic assumption that past
experience adjusted for the effect of current developments and likely trends is
an appropriate basis for predicting future events.
Loss Expense: USF&G Company's estimates of unpaid loss expenses are based on
analyses of the long-term relationship of projected ultimate loss expense to
projected ultimate losses for each line of business. By using incurred losses as
a base, inflation assumptions applicable to loss reserves apply equally to
allocated expense reserves.
Unallocated Loss Expense: Unallocated loss expense reserves are based on
historical relationships of paid unallocated expenses to paid losses. As with
allocated loss expenses, the inflation assumptions applicable to loss reserves
are presumed to apply equally to unallocated expense reserves.
The process of estimating the liability for unpaid losses and loss expenses is
inherently judgmental. The process is influenced by factors which are subject to
significant variation. Possible sources of variation include changing rates
of inflation (particularly medical cost inflation) as well as changes in other
economic conditions, the legal system and internal claims settlement practices,
among other variables. In many cases, significant periods of time may lapse
between the occurrence of an insured event, the reporting of a claim to
USF&G Company and USF&G Company's final settlement of the claim. More than 46
percent of USF&G Company's loss and loss expense reserves are provided for
claims which have been incurred but not reported and for future development on
reported claims. While USF&G Company reports a single amount as the estimate
for unpaid loss and loss expenses as of each valuation date, the
reported reserves should be considered the best estimate from a range of
possible outcomes. It is unlikely that future losses and loss expenses will
develop exactly as projected and may in fact vary significantly from
projections. These estimates are continually reviewed and updated as experience
develops and new information becomes known. Any resulting adjustments are
reflected in current operating results.
1.6b. Discounted loss reserves
The reserves for permanent-total disability benefits and long-term medical care
benefits under workers' compensation insurance are discounted at rates of
interest generally ranging from 3 percent to 5 percent. The carrying amount of
such workers' compensation reserves, net of reinsurance and net of discount, was
$1.60 billion, $1.75 billion, and $1.80 billion at December 31, 1994, 1993, and
1992, respectively. The discount is amortized over the expected lifetimes of the
claimants. Discounted reserves come from three sources: reserves assumed from
the Workers' Compensation Reinsurance Bureau ("WCRB"), reserves assumed from
residual market pools, and reserves for USF&G Company's net retained business.
(in millions) 1994 1993 1992
Estimated discount, January 1 $508 $680 $683
Estimated (reduction) additional discount
accrued (32) (138) 29
Estimated discount amortized (35) (34) (32)
Estimated discount, December 31 $441 $508 $680
The source of the negative discount accrual of $32 million in 1994 results from
an acceleration in the underlying payment pattern of workers' compensation
claims. An increase in the use of structured settlements to resolve claims is
the primary factor affecting the change in the payment stream. The source of
the negative discount accrual of $34 million in 1993 results from the WCRB
commutation and the concurrent reduction in discount rates. Additionally, the
discount was reduced by a redistribution of reserves to states and re-
apportionment on reserves assumed from residual market pools.
1.6c. Roll-forward of liability for loss and loss expenses
The following table reconciles the changes in loss and loss expense reserves for
the years presented:
(in millions) 1994 1993 1992
Net balance at January 1 $5,316 $5,564 $5,716
Related To:
Current year 1,752 1,744 2,042
Prior years (8) 61 78
Total incurred 1,744 1,805 2,120
Paid Related To:
Current year 634 582 698
Prior years 1,284 1,471 1,574
Total paid 1,918 2,053 2,272
Net balance at December 31 5,142 5,316 5,564
Plus reinsurance recoverables 1,016 1,054 1
Total reserve at end of year, gross $6,158 $6,370 $5,565
1.6d. Analysis of loss and loss expense reserve development
The following table shows property/casualty loss reserves net of ceded
reinsurance as recorded in the indicated years, subsequent payments made with
respect to such reserves and re-estimates of such reserves. The top line shows
the estimated liability that was recorded at the end of each of the indicated
years for all current and prior year unpaid losses and loss expenses. The upper
portion of the table shows the cumulative amount subsequently paid in succeeding
years. The lower portion of the table shows re-estimates of the original
recorded reserve as of the end of each successive year. Such re-estimations
result from development of additional facts and circumstances pertaining to
unsettled claims. The bottom line shows the dollar amount of the cumulative
change through 1994 that is attributable to the original recorded reserve for
each prior year. Such change has been reflected in income of subsequent years.
A new table, added in 1994, provides data gross of ceded reinsurance for the
carried reserve at year ends 1993 and 1994 and the development of the year end
1993 reserve. This information immediately follows the Analysis of Net Loss and
Net Loss Expense Reserve Development table.
<TABLE>
Analysis of Net Loss and Net Loss Expense Reserve Development*
At December 31
(in millions) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid losses
and loss expenses $2,817 $3,510 $4,090 $4,744 $5,208 $5,467 $5,636 $5,716 $5,564 $5,316 $5,142
Cumulative paid as of:
One year later 1,027 1,251 1,348 1,374 1,539 1,723 1,654 1,574 1,471 1,284
Two years later 1,659 2,040 2,164 2,258 2,614 2,794 2,746 2,534 2,393 -
Three years later 2,131 2,557 2,778 3,032 3,350 3,593 3,418 3,225 - -
Four years later 2,451 2,971 3,314 3,550 3,939 4,055 3,929 - - -
Five years later 2,708 3,362 3,640 3,992 4,265 4,435 - - - -
Six years later 2,947 3,595 3,864 4,239 4,542 - - - - -
Seven years later 3,112 3,759 4,056 4,456 - - - - - -
Eight years later 3,243 3,918 4,234 - - - - - - -
Nine years later 3,368 4,068 - - - - - - - -
Ten years later 3,497 - - - - - - - - -
Liability re-estimated:
One year later 3,131 3,696 4,209 4,883 5,237 5,679 5,766 5,794 5,625 5,308
Two years later 3,249 3,914 4,444 4,943 5,485 5,800 5,906 5,922 5,644 -
Three years later 3,384 4,168 4,586 5,109 5,566 5,960 6,150 5,974 - -
Four years later 3,563 4,341 4,722 5,287 5,761 6,245 6,216 - - -
Five years later 3,696 4,457 4,917 5,442 6,029 6,331 - - - -
Six years later 3,778 4,631 5,049 5,700 6,125 - - - - -
Seven years later 3,932 4,743 5,279 5,788 - - - - - -
Eight years later 4,039 4,954 5,365 - - - - - - -
Nine years later 4,220 5,032 - - - - - - - -
Ten years later 4,288 - - - - - - - - -
Cumulative (deficiency)
excess (1,471) (1,522) (1,275) (1,044) (917) (864) (580) (258) (80) 8
Analysis of Gross Loss and Gross Loss Expense Reserve Development*
At December 31
(in millions) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
Net reserve $ - $ - $ - $ - $ - $ - $ - $ - $ - $5,316 $5,142
Reinsurance recoverables - - - - - - - - - 1,054 1,016
Gross reserve - - - - - - - - - 6,370 6,158
Net re-estimated reserve - - - - - - - - - 5,308
Re-estimated reinsurance
recoverables - - - - - - - - - 1,044
Gross re-estimated reserve - - - - - - - - - 6,352
Gross cumulative excess $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 18
</TABLE>
*Certain reserves are recorded on a discounted basis to reflect the value of
timing differences between the recording of reserves and subsequent payment. The
amortization of that discount is included in the reserve deficiencies shown
above.
Conditions and trends that have affected reserve development in the past have
changed and may not necessarily occur in the future. Therefore, care should be
exercised in extrapolating future reserve redundancies or deficiencies from such
development.
The net development table shows a $8 million decrease in the current year on
prior year incurred loss and loss expenses net of ceded reinsurance. Although
the overall development is flat, there are a number of offsetting occurrences.
Adverse development resulted from discount amortization in workers' compensation
and reserve strengthening in general liability for environmental and asbestos
liabilities. The adverse development was offset by favorable development in both
personal and commercial auto liability.
A decrease of $18 million in the current year on prior year incurred loss and
loss expenses gross of ceded reinsurance is shown on the gross development
table. The gross development table shows more favorable development than the net
development table due to favorable development on losses ceded to reinsurers.
Effect of Reserve Re-estimations on Calendar Year Operations
(increase) decrease in reserves
<TABLE> Accident
(in millions) 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Year
<C> <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <S>
Accident Years:
1984 & Prior $(314) $(118) $(135) $(179) $(133) $ (82) $(154) $(107) $(181) $ (68) $(1,471)
1985 - (68) (83) (75) (40) (34) (20) (5) (30) (10) (365)
1986 - - 99 19 31 (20) (21) (20) (19) (8) 61
1987 - - - 96 82 (30) 17 (23) (28) (2) 112
1988 - - - - 31 (82) 97 (40) (10) (8) (12)
1989 - - - - - 36 (40) 35 (17) 10 24
1990 - - - - - - (9) 20 41 20 72
1991 - - - - - - - 62 116 14 192
1992 - - - - - - - - 67 33 100
1993 - - - - - - - - - 27 27
Total by calendar
year $(314) $(186) $(119) $(139) $ (29) $(212) $(130) $ (78) $ (61) $ 8 $(1,260)
</TABLE>
In the table above all entries are shown net of ceded reinsurance. Each column
total shows reserve re-estimates made in the indicated calendar year for each
accident year. Adverse development on accident years prior to 1986 is primarily
attributable to workers' compensation discount amortization and environmental
and asbestos reserve strengthening. Ongoing review of automobile liability
reserves indicates more favorable projections of ultimate incurred loss than
previously recognized on accident years 1991 and subsequent.
1.6e. Loss portfolio transfers
Also included in the table "Analysis of Net Loss and Net Loss Expense Reserve
Development" are various loss portfolio transfer transactions. These
transactions are reinsurance contracts that do not involve the same type of risk
as traditional reinsurance. In a loss portfolio reinsurance contract, USF&G
Company assumes another insurer's outstanding loss reserves for a price equal to
their discounted value plus a fee. These contracts generally provide for fixed
loss payments at specified future dates. The financial risk involved is whether
the investment income earned on the cash received will cover the discount
associated with the losses assumed. This financial risk is controlled by the
Corporation's asset/liability management techniques, which involve matching the
maturities of the investment portfolio to expected patterns of future claim and
benefit payments.
Loss portfolio transfers have had no impact on reported reserve deficiencies and
no future loss development, either adverse or favorable, is anticipated. Loss
portfolio transfers included in outstanding reserves were as follows:
(in millions)
1994 $ 86
1993 110
1992 123
1991 279
1990 324
1989 397
1988 394
1987 355
1.6f. Structured settlements
Structured settlements represent the settlement of claims through the purchase
of annuities. While they result in accelerated claim payments, structured
settlements generally reduce the ultimate amount of losses paid. Structured
settlements are used primarily in the third-party liability and workers'
compensation lines of business. These types of settlements were not used
extensively on liability lines until 1985. Their use was extended to workers'
compensation claims in 1987. The number of such settlements has grown steadily
and they appear to be having an impact on claim payment patterns. USF&G Company
has developed procedures to ensure that the impact of structured settlements is
given appropriate recognition in estimating ultimate reserve liabilities.
1.6g. Reconciliation of liability for loss and loss expenses from SAP to GAAP
The following table presents the differences between property/casualty insurance
claim reserves reported in accordance with GAAP in the consolidated financial
statements in the 1994 Annual Report to Shareholders (Restated), and the
consolidated annual statement filed with state insurance departments in
accordance with statutory accounting practices ("SAP"):
At December 31
(in millions) 1994 1993 1992
SAP basis property/casualty reserves $4,875 $ 5,001 $5,385
Reserves of foreign subsidiaries (consolidated
for GAAP but not SAP) 267 315 240
Estimated salvage and subrogation recoveries
(primarily on property and surety lines, cash
basis for SAP but accrual basis for GAAP until
1993), plus other material items - - (61)
GAAP basis property/casualty reserves, net 5,142 5,316 5,564
Reinsurance receivable 1,016 1,054 N/A
GAAP basis property/casualty reserves, gross 6,158 6,370 5,564
Reserves of life insurance subsidiaries, net 3,798 3,969 3,896
Reinsurance receivable 6 4 N/A
Reserves of life insurance subsidiaries, gross 3,804 3,973 3,896
Total liability on GAAP basis $9,962 $10,343 $9,460
1.7. Life benefit reserves
Ordinary life insurance future policy benefit reserves are computed under the
net level premium method using assumptions for future investment yields,
mortality, and withdrawal rates. These assumptions reflect F&G Life's
experience, modified to reflect anticipated trends, and provide for possible
adverse deviation. Reserve interest rate assumptions are graded and range from
4.25 percent to 8.25 percent.
Universal life and annuity reserves are computed on the retrospective deposit
method, which produces reserves equal to the cash value of the contracts. Such
reserves are not reduced for charges that would be deducted from the cash value
of policies surrendered. Reserves on single premium annuities with
guaranteed payments are computed on the prospective deposit method, which
produces reserves equal to the present value of future benefit payments.
The table below shows F&G Life's benefit reserves by policy type.
At December 31
(in millions) 1994 1993 1992
Single Premium Annuities:
Deferred $1,860 $2,138 $2,077
Immediate 867 815 788
Other annuities 492 462 508
Universal life/term/group life 579 554 523
Total, net 3,798 3,969 3,896
Reinsurance receivable 6 4 N/A
Total, gross $3,804 $3,973 $3,896
1.8. Geographical distribution
The risks insured by the Corporation's insurance subsidiaries are geographically
diversified primarily throughout the United States. The Corporation has
established a subsidiary to market fidelity/surety insurance in Canada.
Reinsurance risks are incurred throughout North America and specific foreign
countries (mainly in Western Europe and Japan). The products marketed by
the Corporation's management consulting subsidiary, a part of noninsurance
operations, are distributed throughout the world. Total assets and revenues of
foreign operations are not material. The tables below show the composition of
statutory voluntary direct premiums written for the Corporation's
property/casualty operations and statutory premium income of its life insurance
operations by region for the year ended 1994.
Property/Casualty
Voluntary Direct Premiums Written
Northeast 29%
Southeast 24
Midwest 21
West 18
Mississippi 8
Total 100%
Life Statutory
Premium Income
Northeast 41%
Northwest 21
South 14
Southwest 13
Midwest 11
Total 100%
1.9. Executive officers of the Registrant
Positions and Office with Registrant or
Name Age Significant Subsidiaries
Norman P. Blake, Jr. 53 Chairman of the Board, President, Chief
Executive Officer, and Director
Glenn W. Anderson 42 Executive Vice President-Commercial Lines
Gary C. Dunton 39 Executive Vice President-Field Operations
Dan L. Hale 50 Executive Vice President-Chief Financial Officer
Kenneth E. Cihiy 48 Senior Vice President-Claim
Paul B. Ingrey 55 President-F&G Re, Inc.
Robert J. Lamendola 50 Senior Vice President-Fidelity/Surety
James R. Lewis 46 Senior Vice President-Personal Lines
Thomas K. Lewis, Jr. 42 Senior Vice President-Chief Information Officer
John A. MacColl 46 Senior Vice President-General Counsel and Senior
Vice President-Human Resources
Andrew A. Stern 37 Senior Vice President-Strategic Planning,
Corporate Marketing
Harry N. Stout 42 President-F&G Life
John C. Sweeney 50 Chairman-Falcon Asset Management, Inc., and
Senior Vice President-Chief Investment Officer
All persons in the preceding table are officers of the Registrant except Glenn
W. Anderson, Gary C. Dunton, Kenneth E. Cihiy, Robert J. Lamendola and James R.
Lewis, who are executive officers of United States Fidelity and Guaranty Company
(a wholly owned subsidiary of the Registrant); Paul B. Ingrey who is an
executive officer of F&G Re, Inc.; and Harry N. Stout who is an executive
officer of Fidelity and Guaranty Life Insurance Company.
Mr. Blake was Chairman and Chief Executive Officer of Heller International
Corporation, a world-wide commercial financial services organization, and joined
the Corporation in November 1990. Mr. Anderson was Vice President of Strategic
Target Marketing with Fireman's Fund Insurance Company, a domestic insurance
company, and joined the Corporation in December 1992. Mr. Dunton was Vice
President and Division Manager of Standard Lines with Aetna Life and Casualty
Company and joined the Corporation in December 1992. Mr. Hale was President and
Chief Executive Officer of Chase Manhattan Leasing Company, an international
leasing company, and joined the Corporation in February 1991. Mr. Cihiy was
Resident Vice President of Sacramento Field Operations with Aetna Life and
Casualty Company, an insurance and financial services company, and joined the
Corporation in May 1993. Mr. Ingrey was Resident Vice President and Director of
Prudential Reinsurance Company and joined the Corporation in October 1983. Mr.
Lamendola was Managing Director of Marsh & McLennan, Inc. and joined the
Corporation in June 1992. Mr. James R. Lewis was Senior Vice President and
General Manager of CIGNA and joined the Corporation in October 1992. Mr. Thomas
K. Lewis, Jr. was Vice President and General Manager for Europe, Middle East,
and Africa for Seer Technologies, a joint venture of CS First Boston and IBM,
and joined the Corporation in November 1993. Mr. MacColl was previously a
partner in the Baltimore office of the law firm of Piper & Marbury, and joined
the Corporation in January 1989. Mr. Stern was Partner and Vice President of
Booz Allen & Hamilton, a national business consulting firm, and joined the
Corporation in May 1993. Mr. Stout was Senior Vice President of United Pacific
Life Insurance Company and joined the Corporation in May 1993. Mr. Sweeney was
a Principal and Practice Director with Tillinghast/Towers Perrin, an asset
management and consulting company, and joined the Corporation in November 1992.
Item 2. Business Properties
Real estate owned and used in the regular conduct of business consists of 12
business properties located in various cities throughout the United States. The
Corporation's Mount Washington Center, located in Baltimore, Maryland, is the
principal owned property. This is the headquarters for the life insurance
operations, and the location of the information systems, and training and
development complexes.
In addition, the Corporation leases approximately 120 offices in various cities
in the regular course of business. See Note 6 of Notes to the Consolidated
Financial Statements. The principal leased property is a 40-story home office
building in Baltimore, Maryland, sold in 1984 and leased back by the
Corporation. During 1994, the Corporation committed to a plan to consolidate
its home office operations in Baltimore, Maryland at its Mount Washington
facility. The facilities exit costs of $183 million represent the present value
of the rent and other operating expenses to be incurred under the lease on the
Corporation's principal office building from the time USF&G vacates the
building through the expiration of the lease in 2009. (Refer to Note 6 of the
Notes to Consolidated Financial Statements in the Corporation's 1994 Annual
Report to Shareholders (Restated).)
Item 3. Legal Proceedings
The Corporation's insurance subsidiaries are routinely engaged in litigation in
the normal course of their business, including defending claims for punitive
damages. As a liability insurer, they defend third-party claims brought against
their insureds. As an insurer, they defend themselves against coverage claims.
In the opinion of management, such litigation and the litigation described in
Section 8.1 and 8.2 of Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 13 of the Notes to Consolidated
Financial Statements of the 1994 Annual Report to Shareholders (Restated), which
section and Note are herein incorporated by reference, is not expected to have a
material adverse effect on USF&G Corporation's consolidated financial position,
although it is possible that the results of operations in a particular quarter
or annual period would be materially affected by an unfavorable outcome.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1994.
USF&G Corporation
Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market and dividend information for the Corporation's common stock on page 69 of
the 1994 Annual Report to Shareholders (Restated) is incorporated herein by
reference.
Item 6. Selected Financial Data
Selected financial data of the Corporation on pages 36 and 37 of the 1994
Annual Report to Shareholders (Restated) is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis on pages 12 through 35 of the 1994 Annual
Report to Shareholders (Restated) is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Corporation and notes to such
financial statements on pages 38 through 62 of the 1994 Annual Report to
Shareholders (Restated) are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
USF&G Corporation
Part III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the Corporation's executive officers can be found on pages
11 and 12 of this Form 10-K/A. Information regarding the Corporation's directors
is incorporated herein by reference to the Election of Directors section of the
Corporation's definitive proxy statement for its annual meeting of shareholders
which was held May 17, 1995.
Item 11. Executive Compensation
See the Compensation of Executive Officers and Directors section of the
Corporation's definitive proxy statement for its Annual Meeting of Shareholders
which was held May 17, 1995, which section is incorporated herein by reference.
To the best of the Corporation's knowledge, there were no late filings under
Section 16(a) of the Securities Exchange Act of 1934.
Item 12. Security Ownership of Certain Beneficial Owners and Management
See the Stock Ownership of Certain Beneficial Owners, Directors and Management
section of the Corporation's definitive proxy statement for its Annual Meeting
of Shareholders which was held May 17, 1995, which section is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
See the Other Information-Certain Business Relationships section of the
Corporation's definitive proxy statement for its Annual Meeting of Shareholders
which was held May 17, 1995, which section is incorporated herein by reference.
USF&G Corporation
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements of USF&G Corporation and its
subsidiaries, included in the Registrant's 1994 Annual Report to Shareholders
(Restated), are incorporated by reference in Item 8:
Consolidated Statement of Operations
Consolidated Statement of Financial Position
Consolidated Statement of Cash Flows
Consolidated Statement of Shareholders' Equity
Notes to Consolidated Financial Statements
Report of Independent Auditors
(2) Schedules
The following consolidated financial statement schedules of USF&G
Corporation and its subsidiaries are included in Item 14(d):
Page 20 Schedule I. Summary of Investments-Other than Investments in
Related Parties
21-23 Schedule II. Condensed Financial Information of Registrant
24 Schedule III. Supplementary Insurance Information
25 Schedule IV. Reinsurance
26 Schedule VI. Supplemental Information Concerning Consolidated
Property/Casualty Insurance Operations
All other schedules specified by Article 7 of Regulation S-X are not required
pursuant to the related instructions or are inapplicable and, therefore, have
been omitted.
(3) Exhibits
The following exhibits are included in Item 14:
Page 27 Exhibit 11 Computation of Earnings Per Share
28 Exhibit 12 Computation of Ratio of Consolidated Earnings to
Fixed Charges and Preferred Stock Dividends
A copy of all other exhibits not included with this Form 10-K/A may be obtained
without charge upon written request to the Secretary at the address shown on
page 29 of this Form 10-K/A.
Exhibit 3A
Charter of USF&G Corporation. Incorporated by reference to Exhibit 3A to the
Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 3B
Amended By-laws of USF&G Corporation.
Exhibit 4A
Rights agreement dated as of September 18, 1987, between USF&G Corporation and
First Chicago Trust Company of New York (successor to Morgan Shareholder's
Service Trust Company) including Form of Rights Certificate. Incorporated by
reference to Exhibits 1 and 2 to the Registrant's Form 8-A filed September
30, 1987, File No. 1-8233.
Exhibit 4B
Bond issuance and payment agreement dated November 16, 1987, for Swiss Franc
Public Issue of 5 1/2% Bonds 1988-1996 of Swiss Francs 120,000,000. Incorporated
by reference to Exhibit 4M to the Registrant's Form 10-K for the year ended
December 31, 1987, File No. 1-8233.
Exhibit 4C
Indenture dated January 28, 1994, between USF&G Corporation and Chemical Bank.
Incorporated by reference to Exhibit 4E to the Registrant's Form 10-K for the
year ended December 31, 1993, File No. 1-8233.
Exhibit 4D
Indenture dated January 28, 1994, between USF&G Corporation and Signet Bank.
Exhibit 4E
Form of Note dated March 3, 1994, for Zero Coupon Convertible Subordinated Notes
due 2009. Incorporated by reference to Exhibit 4 to the Registrant's Form 8-K
dated March 3, 1994, File No. 1-8233.
Exhibit 4F
Form of Note dated June 30, 1994, for 8 3/8% Senior Notes due 2001. Incorporated
by reference to Exhibit 4 to the Registrant's Form 8-K dated June 30, 1994,
File No. 1-8233.
Exhibit 4G
Credit Agreement dated as of September 30, 1994, among USF&G Corporation and
Morgan Guaranty Trust Company of New York as agent. Incorporated by reference to
Exhibit 10 to the Registrant's Form 10-Q for the quarter ended September 30,
1994, File No. 1-8233.
Exhibit 4H
Credit Agreement dated as of December 1, 1994, among USF&G Corporation and
Deutsche Bank AG, as agent.
Exhibit 4I
Letter of Credit Agreement dated as of October 25, 1994, among USF&G Corporation
and The Bank of New York, as agent.
Exhibit 10A
1994 Stock Plan For Employees of USF&G.
Exhibit 10B
Stock Option Plan of 1987. Incorporated by reference to Exhibit 4.1 to the
Registrant's Form S-8 dated July 28, 1987, File No. 33-16111.
Exhibit 10C
Employment Agreement dated November 20, 1990, between the Registrant and Norman
P. Blake, Jr. Incorporated by reference to Exhibit 10A to the Registrant's Form
10-K for the year ended December 31, 1990, File No. 1-8233.
Exhibit 10D
USF&G Supplemental Executive Retirement Agreement between the Registrant and
Norman P. Blake, Jr., dated November 20, 1990. Incorporated by reference to
Exhibit 10B to the Registrant's Form 10-K for the year ended December 31, 1990,
File No. 1-8233.
Exhibit 10E
Stock Option Plan of 1990. Incorporated by reference to Exhibit 4 to the
Registrant's Form S-8 Registration Statement as filed December 7, 1990, File No.
33-38113. Certified Copy of the Board Resolution adopted on December 6, 1990,
amending the Stock Option Plan of 1990. Incorporated by reference to Exhibit
10G to the Registrant's Form 10-K for the year ended December 31, 1990, File No.
1-8233.
Exhibit 10F
Description of Management Incentive Plan. Incorporated by reference to Exhibit
10J to the Registrant's Form 10-K for the year ended December 31, 1990, File No.
1-8233.
Exhibit 10G
Description of Long-Term Cash Incentive Compensation Plan. Incorporated by
reference to Exhibit 10K to the Registrant's Form 10-K for the year ended
December 31, 1990, File No. 1-8233.
Exhibit 10H
Stock Incentive Plan of 1991. Incorporated by reference to Exhibit 4(a) to the
Registrant's Form S-8 Registration Statement as filed February 11, 1992, File
No. 33-45664.
Exhibit 10I
Form of Stock Option Agreement used in connection with the Stock Option Plan of
1987, Stock Option Plan of 1990, and Stock Incentive Plan of 1991. Incorporated
by reference to Exhibit 10I to the Registrant's Form 10-K for the year ended
December 31, 1993, File No. 1-8233.
Exhibit 10J
1993 Stock Plan for Non-Employee Directors. Incorporated by reference to
Exhibit 10N to the Registrant's Form 10-K for the year ended December 31, 1992,
File No. 1-8233.
Exhibit 10K
Employment Agreement dated November 10, 1993, between the Registrant and Norman
P. Blake, Jr. Incorporated by reference to Exhibit 10K to the Registrant's Form
10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10L
Stock Option Agreement dated November 10, 1993, between the Registrant and
Norman P. Blake, Jr. Incorporated by reference to Exhibit 10L to the
Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10M
Stock Option Agreement dated November 10, 1993, between the Registrant and
Norman P. Blake, Jr. Incorporated by reference to Exhibit 10M to the
Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10N
Waiver dated November 10, 1993, between the Registrant and Norman P. Blake, Jr.
Incorporated by reference to Exhibit 10N to the Registrant's Form 10-K for the
year ended December 31, 1993, File No. 1-8233.
Exhibit 10O
First Amendment to USF&G Supplemental Executive Retirement Agreement between the
Registrant and Norman P. Blake, Jr. dated November 10, 1993. Incorporated by
reference to Exhibit 10O to the Registrant's Form 10-K for the year ended
December 31, 1993, File No. 1-8233.
Exhibit 10P
Letter dated November 19, 1992, describing Employment Arrangement between the
Registrant and Gary C. Dunton. Incorporated by reference to Exhibit 10K to the
Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10Q
USF&G Supplemental Retirement Plan. Incorporated by reference to Exhibit 10Q to
the Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-
8233.
Exhibit 10R
Amended and Restated Stock Incentive Plan of 1991.
Exhibit 10S
Long-Term Incentive Plan.
Exhibit 11
Computation of earnings per share.
Exhibit 12
Computation of ratio of consolidated earnings to fixed charges and preferred
stock dividends.
Exhibit 13
1994 Annual Report to Shareholders (Restated).
Exhibit 21
Subsidiaries of the Registrant.
Exhibit 23
Consent of Independent Auditors.
Exhibit 28
Information from reports furnished to state insurance regulatory authorities.
All other exhibits specified by Item 601 of Regulation S-K are not required
pursuant to the related instructions or are inapplicable and, therefore, have
been omitted.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K on October 28, 1994, reporting under Item 5,
Other Events, a press release announcing call of shares of Series C Cumulative
Convertible Preferred Stock. The Registrant filed a Form 8-K on December 21,
1994, reporting under Item 5, Other Events, a press release announcing the
signing of a definitive agreement by which USF&G will acquire all of the
outstanding Victoria Financial Corporation ("Victoria") stock for approximately
$55.3 million of USF&G common stock. The Registrant filed a Form 8-K on January
12, 1995, reporting under Item 5, Other Events, a press release announcing the
signing of a definitive agreement by which USF&G will acquire all of the
outstanding Discover Re equity for approximately $78.5 million of USF&G common
stock and options. The Registrant filed a Form 8-K on January 20, 1995,
reporting under Item 5, Other Events, a press release announcing information as
to fourth quarter earnings expectations in addition to an announcement relating
to plans to consolidate its Baltimore facilities. The Registrant filed a Form 8-
K on January 25, 1995, reporting under Item 5, Other Events, a press release
announcing its call for redemption of all outstanding shares of Series C
Cumulative Convertible Preferred Stock.
USF&G Corporation
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Annual Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
USF&G CORPORATION
NORMAN P. BLAKE, JR.
Norman P. Blake, Jr.
Chairman of the Board, President, and Chief Executive Officer
Dated at Baltimore, Maryland
October 6, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Principal Executive Officer:
NORMAN P. BLAKE, JR.
Norman P. Blake, Jr.
Chairman of the Board, President, Chief Executive Officer, and
Director
Principal Financial and Accounting Officer:
DAN L. HALE
Dan L. Hale
Executive Vice President and Chief Financial Officer
Dated at Baltimore, Maryland
October 6, 1995
Directors
H. FURLONG BALDWIN
H. Furlong Baldwin
MICHAEL J. BIRCK
Michael J. Birck
GEORGE L. BUNTING, JR.
George L. Bunting, Jr.
ROBERT E. DAVIS
Robert E. Davis
DALE F. FREY
Dale F. Frey
ROBERT E. GREGORY, JR.
Robert E. Gregory, Jr.
ROBERT J. HURST
Robert J. Hurst
WILBUR G. LEWELLEN
Wilbur G. Lewellen
HENRY A. ROSENBERG, JR.
Henry A. Rosenberg, Jr.
LARRY P. SCRIGGINS
Larry P. Scriggins
ANNE MARIE WHITTEMORE
Anne Marie Whittemore
R. JAMES WOOLSEY
R. James Woolsey
USF&G Corporation
Schedule I. Summary of Investments-Other Than Investments in Related Parties
At December 31, 1994*
Amount at which shown
Market in the Statement of
(in millions) Cost Value Financial Position
Fixed Maturities
Bonds:
Held to maturity:
United States Government and government
agencies and authorities $ 1,291 $ 1,211 $ 1,291
States, municipalities, and political
subdivisions 107 102 107
Foreign governments 15 14 15
Public utilities 265 240 265
All other corporate bonds 2,981 2,717 2,981
Total fixed maturities held to
maturity 4,659 4,284 4,659
Available for sale:
United States Government agencies and
authorities 784 752 752
States, municipalities, and political
subdivisions 258 253 253
Foreign governments 108 92 92
Public utilities 143 136 136
All other corporate bonds 2,972 2,848 2,848
Total fixed maturities available
for sale 4,265 4,081 4,081
Total fixed maturities $ 8,924 $ 8,365 $ 8,740
Equity Securities
Common stocks:
Banks, trust, and insurance companies $ 2 $ 1 $ 1
Industrial, miscellaneous, and
all other 51 45 45
Total common stocks 53 46 46
Nonredeemable preferred stocks 26 26 26
Total equity securities $ 79 $ 72 $ 72
Short-term investments 450 450 450
Mortgage loans 349 331 349
Real estate 662 662
Other invested assets 288 288
Total investments $10,752 $10,561
*Amounts have been restated to reflect mergers with Discover Re Managers, Inc.,
and Victoria Financial Corporation.
USF&G Corporation
Schedule II. Condensed Financial Information of Registrant-
Statement of Financial Position (Parent Company)
At December 31
(in millions) 1994 1993 1992
Assets
Cash $ 1 $ 2 $ 10
Investment in subsidiaries, at equity 2,503 2,399 2,127
Due from subsidiaries 131 127 135
Other assets 24 23 34
Total assets $2,659 $2,551 $2,306
Liabilities
Debt (short-term, 1994, $215; 1993,
$395; 1992, $375) $ 586 $ 574 $ 574
Dividends payable to shareholders 14 16 16
Due to subsidiaries 310 322 335
Other liabilities 308 83 81
Total liabilities 1,218 995 1,006
Shareholders' Equity
Preferred stock 331 455 455
Common stock 262 228 225
Paid-in capital 1,104 986 971
Net unrealized gains (losses) on
investments (147) 191 (29)
Minimum pension liability (63) (85) -
Retained earnings (deficit) (46) (219) (322)
Total shareholders' equity 1,441 1,556 1,300
Total liabilities and shareholders'
equity $2,659 $2,551 $2,306
See Note to Condensed Financial Statements.
Statement of Operations (Parent Company)
Years Ended December 31
(in millions) 1994 1993 1992
Revenues
Net investment income:
Dividends from subsidiaries $125 $125 $125
Interest expense on loans from
subsidiaries (8) (6) (7)
Other (1) - -
Other revenues:
From subsidiaries 7 7 9
From others 5 5 22
Total revenues 128 131 149
Expenses
Facilities exit costs 211 - -
Interest expense 34 37 43
Lease expense 30 21 21
Other operating expense 24 19 20
299 77 84
Foreign currency losses - - 1
Total expenses 299 77 85
Income (loss) from continuing operations
before income taxes and equity in earnings
of subsidiaries and cumulative effect of
adopting new accounting standards (171) 54 64
Provision for income taxes - - -
Income (loss) from continuing operations
before equity in earnings of subsidiaries
and cumulative effect of adopting new
accounting standards (171) 54 64
Equity in undistributed earnings of
subsidiaries:
Continuing operations 408 76 (28)
Discontinued operations - - (7)
Income from cumulative effect of adopting
new accounting standards - 38 -
Net income $237 $168 $ 29
See Note to Condensed Financial Statements.
Statement of Cash Flows (Parent Company)
Years Ended December 31
(in millions) 1994 1993 1992
Net Cash Provided From Operating
Activities $ 129 $ 58 $ 71
Investing Activities
Purchases of short-term investments - - (23)
Sales or maturities of short-term
investments - - 23
Other, net (4) (4) (12)
Net cash used in investing activities (4) (4) (12)
Financing Activities
Repayments of short-term borrowings (160) - -
Intercompany advances, net (51) (2) 49
Long-term borrowings 270 - -
Repayments of long-term borrowings (120) - (36)
Issuances of common stock 14 6 3
Redemption of preferred stock (13) - -
Cash dividends paid to shareholders (66) (66) (66)
Net cash provided from (used in)
financing activities (126) (62) (50)
Increase (decrease) in cash (1) (8) 9
Cash at beginning of year 2 10 1
Cash at end of year $ 1 $ 2 $ 10
See Note to Condensed Financial Statements.
Note to Condensed Financial Statements
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of the 1994 Annual
Report to Shareholders (Restated) incorporated herein by reference. Amounts have
been restated to reflect mergers with Discover Re Managers, Inc., and Victoria
Financial Corporation, which were completed during the second quarter of 1995.
Restatement of prior periods is provided due to the application of the pooling-
of-interests method of accounting. Certain amounts have been reclassified to
conform to the 1994 presentation. The parent company's provision for income
taxes is based on the Corporation's consolidated federal income tax allocation
policy.
<TABLE>
USF&G Corporation
Schedule III. Supplementary Insurance Information
At December 31* Years Ended December 31*
Deferred Unpaid Other Amortization
policy losses, loss policy- Net Losses, loss of deferred Other
acquisi- expenses, Unearned holders' investment expenses, policy operating
tion & policy premiums funds Premium income & policy acquisition expenses Premiums
(in millions) costs benefits (B) (B) (A) revenue (A) benefits costs (A) written
<C> <S> <C> <S> <C> <C> <C> <S> <C> <S> <C> <S>
1994
Property/casualty
insurance:
Commercial $161 $ 3,891 $455 $1,189 $ 929 $354 $ 97 $1,200
Personal 71 471 253 575 427 151 45 565
Reinsurance 9 668 41 395 289 67 27 415
Fidelity/surety 30 54 65 124 46 60 17 134
Discover Re and
Victoria 9 58 37 73 53 15 15 77
Reinsurance
receivable - 1,016 117 - - - - -
Other - - - - - - - (2)
Property/
casualty 280 6,158 968 $ 7 2,356 $432 1,744 647 201 2,389
Life insurance 224 3,804 - 79 152 317 388 21 45 N/A
Total $504 $ 9,962 $968 $86 $2,508 $749 $2,132 $668 $246 $2,389
1993
Property/casualty
insurance:
Commercial $168 $ 4,108 $444 $1,223 $1,014 $359 $ 71 $1,239
Personal 69 553 264 681 481 175 46 653
Reinsurance 6 559 29 305 204 71 28 403
Fidelity/surety 28 56 56 118 59 59 9 120
Discover Re and
Victoria 9 40 33 65 47 12 11 73
Reinsurance
receivable - 1,054 124 - - - - -
Other - - - - - - - 14
Property/
casualty 280 6,370 950 $ 7 2,392 $432 1,805 676 165 2,502
Life insurance 164 3,973 - 67 129 321 395 9 50 N/A
Total $444 $10,343 $950 $74 $2,521 $753 $2,200 $685 $215 $2,502
1992
Property/casualty
insurance:
Commercial $170 $ 4,348 $420 $1,480 $1,299 $426 $ 86 $1,356
Personal 76 626 286 785 635 210 42 727
Reinsurance 3 511 11 157 118 22 25 243
Fidelity/surety 28 55 53 111 36 55 19 109
Discover Re and
Victoria 6 24 27 46 32 9 9 55
Other - - - - - - - (15)
Property/
casualty 283 5,564 797 $ 9 2,579 $471 2,120 722 181 2,475
Life insurance 189 3,896 - 56 104 349 377 25 51 N/A
Total $472 $ 9,460 $797 $65 $2,683 $820 $2,497 $747 $232 $2,475
*Amounts have been restated to reflect mergers with Discover Re Managers, Inc.,
and Victoria Financial Corporation.
N/A - Not applicable to life insurance pursuant to Rule 12-16 of Regulation S-X.
(A) Other policyholders' funds, net investment income, and other operating
expenses are not allocated to property/casualty categories.
(B) Unpaid losses and loss expenses reflect the implementation of SFAS No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts," which increased liabilities by $1.2 billion with a corresponding
increase in assets at December 31, 1993. This standard requires reinsurance
receivables and prepaid reinsurance premiums to be reported separately as
assets instead of the previous practice of netting such receivables against the
related loss and unearned premium liabilities.
USF&G Corporation
Schedule IV. Reinsurance
Years Ended December 31*
Ceded to Assumed Percentage of
Gross other from other Net amount
(in millions) amount companies companies amount assumed to net
1994
Life insurance in force $11,683 $1,350 $160 $10,493 1.5%
Premiums earned:
Life insurance $ 155 $ 4 $ - $ 151 -%
Accident/health insurance - - 1 1 98.5
Property/casualty
insurance 2,284 516 588 2,356 25.0
Total $ 2,439 $ 520 $589 $ 2,508 23.5%
1993
Life insurance in force $11,955 $1,404 $155 $10,706 1.4%
Premiums earned:
Life insurance $ 133 $ 5 $ - $ 128 -%
Accident/health insurance - - 1 1 99.1
Property/casualty
insurance 2,390 521 523 2,392 21.9
Total $ 2,523 $ 526 $524 $ 2,521 20.8%
1992
Life insurance in force $12,228 $1,444 $132 $10,916 1.2%
Premiums earned:
Life insurance $ 107 $ 5 $ 1 $ 103 .3%
Accident/health insurance - - 1 1 94.0
Property/casualty
insurance 2,734 539 384 2,579 14.9
Total $ 2,841 $ 544 $386 $ 2,683 14.4%
*Amounts have been restated to reflect mergers with Discover Re Managers, Inc.,
and Victoria Financial Corporation.
USF&G Corporation
Schedule VI. Supplemental Information Concerning Consolidated
Property/Casualty Insurance Operations
At December 31
(in millions) 1994* 1993* 1992*
Deferred policy acquisition costs $ 280 $ 280 $ 283
Reserves for unpaid losses and loss expenses (A) 6,158 6,370 5,564
Discount deducted from reserves (B) 441 508 680
Unearned premiums (A) 968 950 797
(A) Reserves for unpaid claims and claim adjustments reflect the implementation
of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts," which increased liabilities by $1.2 billion with
a corresponding increase in assets at December 31, 1993. This standard requires
reinsurance receivables and prepaid reinsurance premiums to be reported
separately as assets instead of the previous practice of netting such
receivables against the related loss and unearned premium liabilities.
(B) Certain long-term disability payments for workers' compensation are
discounted at rates ranging from 3% to 5%.
Years Ended December 31
(in millions) 1994* 1993* 1992*
Earned premiums $2,356 $2,392 $2,579
Net investment income 432 432 471
Losses and loss expenses incurred related to:
Current year 1,752 1,744 2,042
Prior years (8) 61 78
Amortization of deferred policy acquisition costs 647 676 722
Paid losses and loss expenses 1,918 2,053 2,272
Premiums written 2,389 2,502 2,475
*Amounts have been restated to reflect mergers with Discover Re Managers, Inc.,
and Victoria Financial Corporation.
USF&G Corporation
Exhibit 11 - Computation of Earnings per Share
Years Ended December 31
(dollars in millions except per share data) 1994* 1993* 1992*
Net Income Available to Common Stock
Primary:
Income from continuing operations before cumulative effect of
adopting new accounting standards $ 237 $ 130 $ 36
Less preferred stock dividend requirements (46) (48) (48)
Income (loss) from continuing operations before cumulative effect of
adopting new accounting standards available to common stock 191 82 (12)
Loss from discontinued operations - - (7)
Income from cumulative effect of adopting new accounting standards - 38 -
Net income (loss) available to common stock $ 191 $ 120 $ (19)
Fully diluted:
Income from continuing operations before cumulative effect of
adopting new accounting standards $ 237 $ 130 $ 36
Less preferred stock dividend requirements (16) (16) (48)
Add interest expense on zero coupon bonds 5 - -
Income (loss) from continuing operations before cumulative effect of
adopting new accounting standards available to common stock 226 114 (12)
Loss from discontinued operations - - (7)
Income from cumulative effect of adopting new accounting standards - 38 -
Net income (loss) available to common stock $ 226 $ 152 $(19)
Weighted Average Shares Outstanding
Primary common shares (A) 95,796,671 90,566,398 89,235,158
Fully diluted (B):
Common shares 95,796,671 90,566,398 89,235,158
Assumed conversion of preferred stock 24,950,202 26,611,211 -
Assumed exercise of stock options 1,038,214 1,672,482 -
Assumed conversion of zero coupon bonds 6,022,712 - -
Total fully diluted 127,807,799 118,850,091 89,235,158
Earnings Per Common Share
Primary (A):
Income (loss) from continuing operations before cumulative effect of
adopting new accounting standards $2.00 $ .90 $(.14)
Loss from discontinued operations - - (.08)
Income from cumulative effect of adopting new accounting standards - .42 -
Net income (loss) $2.00 $1.32 $(.22)
Fully diluted (B):
Income (loss) from continuing operations before cumulative effect of
adopting new accounting standards $1.77 $ .96 $(.14)
Loss from discontinued operations - - (.08)
Income from cumulative effect of adopting new accounting standards - .32 -
Net income (loss) $1.77 $1.28 $(.22)
*Amounts have been restated to reflect mergers with Discover Re Managers, Inc.,
and Victoria Financial Corporation.
(A) Shares issuable under stock options (1,021,230 shares in 1994, 1,672,482
shares in 1993, 876,839 shares in 1992) have not been used as common stock
equivalents in the computation of primary earnings per common share presented
on the face of the Consolidated Statement of Operations because the dilutive
effect is not material.
(B) Fully diluted earnings per common share amounts are calculated assuming the
conversion of all securities whose contingent issuance would have a dilutive
effect on earnings. The effect of assuming conversion of the preferred stock
(30,959,211 shares in 1992) is antidilutive and, therefore, the amounts
presented in the Consolidated Statement of Operations for primary and fully
diluted earnings per share are the same. Shares issuable under stock options
(1,151,647 in 1992) have not been used as common stock equivalents because the
dilutive effect is not material.
USF&G Corporation
Exhibit 12 - Computation of Ratio of Consolidated Earnings to Fixed Charges
and Preferred Stock Dividends
Years Ended December 31
(dollars in millions) 1994* 1993* 1992*
Fixed Charges
Interest expense $ 37 $ 41 $ 41
Interest capitalized - - 8
Portion of rents representative of interest (A) 159 27 28
Total fixed charges 196 68 77
Preferred stock dividend requirements (B) 46 48 48
Combined Fixed Charges and Preferred Stock Dividends $242 $116 $125
Consolidated Earnings Available for Fixed Charges and
Preferred Stock Dividends
Income (loss) from continuing operations before
income taxes and cumulative effect of adopting new
accounting standards $(43) $103 $ 36
Adjustments:
Fixed charges 196 68 77
Less interest capitalized during the period - - (8)
Consolidated earnings available for fixed charges
and preferred stock dividends $153 $171 $105
Ratio of Consolidated Earnings to Fixed Charges (C) (D) 0.8 2.5 1.4
Ratio of Consolidated Earnings to Combined Fixed Charges
and Preferred Stock Dividends (C) (D) 0.6 1.5 0.8
* Amounts have been restated to reflect mergers with Discover Re Managers, Inc.,
and Victoria Financial Corporation.
(A) Includes approximately $130 million net present value of rents
representative of interest included in facilities exit costs in 1994.
(B) Preferred stock dividend requirements of $46 million in 1994 and $48 million
in both 1993 and 1992 divided by 100% less the effective income tax rate of 0%
in 1994, 1993, and 1992.
(C) In 1994, the ratio of consolidated earnings before facilities exit costs to
fixed charges was 3.1, and the ratio of consolidated earnings before facilities
exit costs to combined fixed charges and preferred stock dividends was 1.8.
(D) In 1994, earnings were inadequate to cover fixed charges by $43 million and
combined fixed charges and preferred stock dividends by $89 million.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO ANNUAL REPORT ON FORM 10-K/A
USF&G CORPORATION
For the Fiscal Year Ended Commission File Number
December 31, 1994 1-8233
A copy of all other of the Corporation's Exhibits to the 1994 Form 10-K/A
report not included herein may be obtained without charge upon written request
to John F. Hoffen, Jr., Corporate Secretary at the corporate headquarters:
100 Light Street
Baltimore, Maryland 21202
</TABLE>
USF&G Corporation
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This section provides management's assessment of financial results and material
changes in financial position for USF&G Corporation and its two primary
subsidiaries, United States Fidelity and Guaranty Company ("USF&G Company") and
Fidelity and Guaranty Life Insurance Company ("F&G Life"), (collectively,
"USF&G" or "the Corporation") and discusses the results of operations for the
year ended December 31, 1994. The analysis focuses on the performance of
USF&G's business segments and its investment portfolio. Amounts have not been
restated for the mergers with Discover Re Managers, Inc. ("Discover Re"), and
Victoria Financial Corporation ("Victoria"). The mergers are accounted for as
poolings-of-interests; therefore, the consolidated financial statements and
notes thereto have been restated. A reconciliation of the previously separate
enterprises to the restated financial statements is included as Note 1.11 to
the consolidated financial statements. Separate discussions regarding Discover
Re and Victoria are included at Section 2a and Section 2b of this Analysis,
respectively. (Note: A glossary of certain terms used in this discussion can be
found at the end of this section. The terms are italicized the first time they
appear in the text.)
Index
1. Consolidated Results 12
2. Property/Casualty Insurance Operations 13
2a. Discover Re 21
2b. Victoria 22
3. Life Insurance Operations 22
4. Parent and Noninsurance Operations 24
5. Investments 24
6. Financial Condition 29
7. Liquidity 30
8. Regulation 31
9. Income Taxes 33
10. Glossary of Terms 35
1. Consolidated Results
1.1. Summary of net income
The table below shows the major components of net income.
(in millions) 1994 1993 1992
Income (loss) from continuing
operations before realized gains,
facilities exit costs, income taxes
and cumulative effect of adopting
new accounting standards $ 129 $ 3 $(113)
Net realized gains on investments 5 6 148
Facilities exit costs (183) - -
Loss from discontinued operations - - (7)
Income tax benefit 281 28 -
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 90 -
Postretirement benefits - (52) -
Net income $ 232 $ 165 $ 28
The table below shows the components by major business segment of income (loss)
from continuing operations before realized gains, facilities exit costs, income
taxes and cumulative effect of adopting new accounting standards.
(in millions) 1994 1993 1992
Property/casualty insurance $194 $182 $ (3)
Life insurance 14 (6) (4)
Parent and noninsurance (79) (83) (106)
Income (loss) from continuing
operations before realized gains,
facilities exit costs, income taxes
and cumulative effect of adopting
new accounting standards $129 $ 93 $(113)
Property/casualty insurance segment income (loss) from continuing operations
before realized gains, facilities exit costs, income taxes and cumulative
effect of adopting new accounting standards increased $12 million from 1993 to
1994 due to improved underwriting results. The life insurance segment's
$20 million improvement from 1993 to 1994 was due to the combined effects of
higher product sales and improved spreads on annuity products. The major
factors influencing the improvement in the parent and noninsurance segment for
1994 are the improved results from noninsurance subsidiaries and reduced
interest expense partially offset by a loss on long-term subleases.
Other items affecting net income include a $183 million charge related to the
planned consolidation of the Corporation's Baltimore headquarters facilities
(refer to Section 1.2 of this Analysis). Also included in net income is a $281
million income tax benefit primarily related to the recognition of deferred
tax assets (refer to Section 9 of this Analysis).
The $137 million improvement in net income from 1992 to 1993 was driven by a
$200 million improvement in property/casualty underwriting results. The 1992
net income included $51 million in restructuring charges related to branch
office consolidation which has been completed.
1.2. Facilities exit costs
As a result of USF&G's restructuring activities in the early 1990s and ongoing
efforts to improve the overall cost effectiveness of the Corporation, USF&G's
available headquarters office space significantly exceeds it needs,
particularly at the 40-story office building ("the Tower") in downtown
Baltimore. USF&G sold the Tower in 1984 and subsequently leased it back. Since
1991, the total headquarters staff has decreased by approximately 28 percent,
including a 48 percent decrease in the number of employees who are located at
the Tower. During 1994, USF&G developed and committed to a plan to consolidate
its Baltimore headquarters facilities. The plan encompasses relocating all
USF&G personnel currently residing at the Tower to the Mount Washington
facilities in Baltimore which USF&G owns. Implementation of the plan began in
January 1995. The relocation of Tower personnel will begin in mid-1995 and is
expected to be completed by the end of 1996. The lease on the Tower, which
expires in September 2009, will not be terminated. Approximately 30 percent of
the Tower is currently sublet and USF&G intends to sublet the remaining space
as it is vacated.
The facilities exit costs of $183 million recorded in the fourth quarter of
1994 represent the present value of the rent and other operating expenses
incurred under the Tower lease from the time USF&G vacates the Tower through
the expiration of the lease in 2009. Approximately $28 million of unamortized
deferred gain arising from the 1984 sale-leaseback was also recognized upon
adoption of the facilities exit plan. Potential future sublease income was not
considered in calculating the facilities exit costs. To the extent that
additional or extended subleases are signed in the future, the present value of
income to be received over the term of such a sublease will be recognized in
the period the sublease is signed.
2. Property/Casualty Insurance Operations
Property/casualty insurance operations, the principal business segment,
accounted for 84 percent of USF&G's revenues in 1994, compared with 85 percent
and 88 percent in 1993 and 1992, respectively, and 67 percent of its assets at
December 31, 1994 and 1993, compared with 63 percent at December 31, 1992.
Financial results for this segment are as follows:
(in millions) 1994 1993 1992
Premiums earned* $ 2,283 $ 2,327 $ 2,533
Losses and loss expenses (1,691) (1,758) (2,088)
Underwriting expenses (792) (796) (872)
Net underwriting losses (200) (227) (427)
Net investment income 423 433 475
Restructuring charges - - (46)
Other revenues and (expenses), net (29) (24) (5)
Income (loss) from continuing
operations before realized gains,
facilities exit costs, income taxes
and cumulative effect of adopting
new accounting standards $ 194 $ 182 $ (3)
*See Glossary of Terms
Improved underwriting results were the primary reason for the increase in
property/casualty income in 1994 when compared with 1993 and 1992 (refer to
Section 2.2 of this Analysis). The decrease in net investment income is
attributable to an investment base which declined in order to meet cash flow
needs (refer to Section 5.1 of this Analysis). The 1993 fluctuation in other
revenues and expenses primarily reflects the decision to eliminate certain
policyholders' dividends in 1992 and the reversal in that year of previously
accrued but unpaid dividends. Restructuring charges relating to branch office
consolidations also affected results in 1992.
2.1. Premiums earned
Premiums earned totaled $2.3 billion in 1994 and 1993, compared with $2.5
billion in 1992. The table below shows the major components of premiums earned
and premiums written.
1994 1993 1992
Premiums Premiums Premiums
(in millions) Earned Written Earned Written Earned Written
Branch Office
Voluntary Production:
Direct $1,919 $1,968 $1,949 $1,929 $2,272 $2,128
Ceded reinsurance (150) (162) (124) (124) (85) (85)
Net branch office
voluntary 1,769 1,806 1,825 1,805 2,187 2,043
Voluntary pools and
associations 41 37 45 46 41 44
Involuntary pools and
associations 83 70 152 133 163 147
Other premium
adjustments (5) (16) - 42 (15) (57)
Total primary 1,888 1,897 2,022 2,026 2,376 2,177
Assumed Reinsurance:
Finite risk 172 180 169 249 74 171
Traditional risk 223 235 136 154 83 72
Total assumed 395 415 305 403 157 243
Total $2,283 $2,312 $2,327 $2,429 $2,533 $2,420
Direct voluntary premiums written increased two percent in 1994 in response to
management's strategies to grow business in targeted market segments. These
growth strategies follow planned actions to exit unprofitable markets and
product lines in 1993 which had reduced premium production by nine percent in
that year. The increase in ceded reinsurance is primarily the result of risk
management as part of USF&G's strategy to enter the excess property market in
commercial lines. Additionally, USF&G ceded $5 million of catastrophe
reinsurance premiums under an assessment by the Florida Hurricane Catastrophe
Fund which was established in response to 1992's Hurricane Andrew. Premiums
from involuntary pools and associations decreased 47 percent in 1994, after a
10 percent decrease in 1993, as USF&G continued to reduce exposure in these
unprofitable markets. Other premium adjustments relate primarily to changes in
earned but not reported premiums and unbilled installment premiums.
Traditional risk assumed reinsurance premiums increased substantially in
1994 as USF&G expanded into international reinsurance markets, while the demand
for finite risk reinsurance has decreased as a result of the new accounting
requirements of Statement of Financial Accounting Standards ("SFAS") No. 113
and Emerging Issues Task Force ("EITF") 93-6 which were issued in 1993.
The table below shows net premiums earned and the statutory loss ratios by
lines of property/casualty insurance including results from voluntary and
involuntary pools and associations. The table illustrates the changes in
premium mix from 1992 to 1994. Management's focus on reducing exposure to less
profitable lines of insurance has been a key factor in the improved
underwriting results. The most dramatic examples are the workers' compensation
line and assumed reinsurance. Workers' compensation has a cumulative three-year
statutory loss ratio of 143.8 and represented 13 percent of total
property/casualty premiums earned in 1992 but only 5 percent in 1994. Assumed
reinsurance premiums increased from 6 percent of total premiums earned in
1992 to 17 percent in 1994, with a cumulative three-year statutory loss ratio
of 69.9 as of December 31, 1994.
In 1995, management will continue to develop strategies to achieve a more
profitable mix of business by further penetrating target markets, implementing
new products and services, and enhancing underwriting and customer service
structures through improved technology and performance.
<TABLE>
1994 1993 1992
Premiums Statutory Premiums Statutory Premiums Statutory
Earned % Loss Ratio Earned % Loss Ratio Earned % Loss Ratio
(dollars in millions)
<S> <C> <S> <C> <S> <C> <S>
Commercial Lines:
Auto $ 380 17% 58.8 $ 399 17% 54.8 $ 442 18% 64.5
General
liability 357 16 89.4 351 15 80.5 388 15 99.2
Property 326 14 71.8 321 14 60.4 332 13 69.5
Workers'
compensation 126 5 121.0 152 7 210.8 318 13 121.0
Total commercial
lines 1,189 52 78.1 1,223 53 83.0 1,480 59 86.9
Fidelity/Surety:
Fidelity 17 1 29.6 18 1 55.7 19 1 24.6
Surety 107 5 37.8 100 4 49.2 92 3 33.5
Total fidelity/
surety 124 6 36.7 118 5 50.2 111 4 32.0
Personal Lines:
Auto 410 18 66.5 504 22 70.3 551 22 73.6
Homeowners 126 5 107.3 149 6 73.3 184 7 102.2
Other personal 39 2 49.1 28 1 65.6 50 2 67.9
Total personal
lines 575 25 74.2 681 29 70.7 785 31 80.0
Assumed Reinsurance:
Finite risk 172 7 71.9 169 7 70.1 74 3 78.9
Traditional risk 223 10 64.8 136 6 62.1 83 3 72.8
Total assumed
reinsurance 395 17 67.9 305 13 67.3 157 6 76.9
Total $2,283 100% 73.1 $2,327 100% 75.4 $2,533 100% 82.0
</TABLE>
2.2. Underwriting results
Underwriting results represent premiums earned less incurred losses, loss
expenses and underwriting expenses. It is not unusual for property/casualty
insurance companies to have underwriting losses that are offset by investment
income.
Underwriting gains (losses) by major business category are as follows:
(in millions) 1994 1993 1992
Commercial $(186) $(223) $(343)
Fidelity/surety 6 (8) 6
Personal (60) (28) (110)
Total primary (240) (259) (447)
Assumed reinsurance 40 32 20
Net underwriting losses $(200) $(227) $(427)
Voluntary $(179) $(176) $(390)
Involuntary (21) (51) (37)
Net underwriting losses $(200) $(227) $(427)
Consolidated property/casualty underwriting ratios, calculated based on
generally accepted accounting principles ("GAAP") and statutory accounting
practices, are as follows:
1994 1993 1992
GAAP Underwriting Ratios:
Loss ratio 74.0 75.6 82.4
Expense ratio* 34.7 34.2 34.4
Combined ratio 108.7 109.8 116.8
Statutory Underwriting Ratios:
Loss ratio 73.1 75.4 82.0
Expense ratio 35.0 33.7 34.9
Combined ratio 108.1 109.1 116.9
*See Glossary of Terms
Statutory underwriting ratios exclude the effects of policyholder dividends
which, if included, would increase the ratios by 0.3 each year.
Underwriting results improved $27 million from 1993 to 1994 and $200 million
from 1992 to 1993. The improvements generally resulted from management's
actions to improve product/market mix, apply stricter underwriting standards,
and improve claims practices, as well as from lower incurred catastrophe losses
in 1994 and 1993 when compared to 1992 (refer to Section 2.4 of this Analysis).
The rate of improvement in 1994 was not as dramatic as that seen in 1993 since
net catastrophe losses were relatively consistent from 1993 to 1994 after
decreasing $72 million from 1992 to 1993. Additionally, significant weather
related losses not designated as catastrophe losses had an adverse effect on
1994 results, particularly in personal lines. The statutory loss ratio has
improved 8.9 points overall since 1992, and 6.7 points in that same period when
catastrophe losses are excluded. The overall improvement of $16 million in
involuntary underwriting results since 1992 reflects management's actions to
reduce exposure to involuntary business in states with substantial involuntary
market burdens. The major impact of these actions was felt in 1992 when
involuntary underwriting results improved more than $100 million when compared
to previous years. While management will remain focused on controlling
involuntary underwriting losses, the degree of improvement is expected to be
less than that realized in previous years. The increase in involuntary
underwriting losses in 1993 over 1992 was primarily due to an assessment of
loss reserves from involuntary workers' compensation insurance pools.
Improved premium mix and reduced costs have been the main reason for the
improved underwriting results since 1990, despite continuing competitive
pressures. Management intends to monitor the premium mix and costs and
implement other strategies with the goal of continuing the improvement in
underwriting results, although such improvements cannot be assured. These
strategies include the introduction of specialty products, continued
penetration of targeted industries and market segments, further development of
underwriting expertise, reduced catastrophe exposure and investments in
technological advancements. Management will also continue to focus on
improving product pricing, although intense competitive pressures in the
property/casualty insurance industry, especially in the pricing of commercial
lines products, is expected to continue to restrict underwriting results.
Commercial Lines
Commercial lines products include property, auto, inland marine, workers'
compensation, and general and umbrella liability coverage for businesses. The
commercial lines business has two distinct market segments-middle market and
small business. USF&G has further defined the middle market into three
strategic business units in an effort to better service customers and improve
profitability: service businesses, contractors, and manufacturers.
The following table shows the components of underwriting results for commercial
lines:
(in millions) 1994 1993 1992
Premiums Written:
Branch office voluntary direct $ 1,210 $ 1,165 $ 1,303
Other, net of ceded reinsurance (11) 82 52
Total premiums written $ 1,199 $ 1,247 $ 1,355
Premiums earned $ 1,189 $ 1,223 $ 1,480
Losses (929) (1,014) (1,299)
Expenses (446) (432) (524)
Net underwriting losses $ (186) $ (223) $ (343)
Voluntary $ (181) $ (187) $ (316)
Involuntary (5) (36) (27)
Net underwriting losses $ (186) $ (223) $ (343)
GAAP and statutory underwriting ratios are as follows:
1994 1993 1992
GAAP Underwriting Ratios:
Loss ratio 78.1 83.0 87.8
Expense ratio 37.5 35.3 35.4
Combined ratio 115.6 118.3 123.2
Statutory Underwriting Ratios:
Loss ratio 78.1 83.0 86.9
Expense ratio 36.2 34.4 36.3
Combined ratio 114.3 117.4 123.2
Commercial lines branch office voluntary direct premiums written increased 4
percent in 1994, compared with decreases of 11 percent and 20 percent in 1993
and 1992, respectively. The increase is primarily the result of new business
growth in targeted market segments. Although net premiums written in the
commercial lines business have declined, the largest components of the decline
have been the reduced participation in voluntary pools and the decrease in
involuntary premium, both of which have benefited net underwriting results. The
involuntary business losses were $31 million less in 1994 than in 1993,
after increasing $9 million from 1992 to 1993. The improved involuntary results
arose primarily from management actions to reduce workers' compensation
premiums which led to reduced participation in the involuntary workers'
compensation pools.
Underwriting results in the commercial lines category improved $37 million over
1993 and $120 million from 1992 to 1993. This improvement is primarily the
result of the change in the mix of business and the application of stricter
underwriting standards, as well as lower catastrophe losses in 1994 and 1993.
In commercial lines, the mix of the least profitable line of business, workers'
compensation, with a 1994 statutory loss ratio of 121.0, has decreased from 21
percent of commercial lines premiums earned in 1992 to 11 percent in 1994,
while the mix of the two most profitable lines of business, auto and core
property, has increased. Commercial auto, with a statutory loss ratio of 58.8
in 1994, increased from 30 percent of commercial lines premiums earned in 1992
to 32 percent in 1994. USF&G's core commercial property business consists of
fire/allied and inland marine products, which had a statutory loss ratio of
62.1 in 1994. Premiums from these product lines increased from 15 percent of
commercial lines premiums earned in 1992 to 19 percent in 1994.
The statutory loss ratio for commercial lines improved 4.9 points in 1994 from
1993 and 8.8 points in 1994 from 1992. Management believes the improved loss
ratio trend is evidence of the positive effects of the strategies implemented
to improve underwriting results. Also contributing to the improvement over
1992 is the reduction in catastrophe losses (refer to Section 2.4 of this
Analysis). Losses incurred from Hurricane Andrew represented approximately 1.6
points of the 1992 commercial lines statutory loss ratio.
In January 1995, USF&G entered into a definitive agreement to purchase all of
the outstanding equity of Discover Re Managers, Inc. The transaction closed in
the second quarter of 1995. See Section 2a of this Analysis.
Fidelity/Surety
The fidelity/surety segment provides contract and non-contract surety bonds to
construction companies, commercial businesses and individuals; financial
institution bonds to banks, stockbrokers and credit unions; and fidelity bonds
to commercial businesses and governmental entities.
The following table shows the components of underwriting results for
fidelity/surety:
(in millions) 1994 1993 1992
Premiums Written:
Branch office voluntary direct $169 $148 $137
Other, net of ceded reinsurance (35) (27) (28)
Total premiums written $134 $121 $109
Premiums earned $124 $118 $111
Losses (46) (59) (36)
Expenses (72) (67) (69)
Net underwriting gains (losses) $ 6 $ (8) $ 6
Voluntary $ 6 $ (8) $ 6
Involuntary - - -
Net underwriting gains (losses) $ 6 $ (8) $ 6
GAAP and statutory underwriting ratios are as follows:
1994 1993 1992
GAAP Underwriting Ratios:
Loss ratio 36.7 50.2 32.3
Expense ratio 57.9 56.6 62.6
Combined ratio 94.6 106.8 94.9
Statutory Underwriting Ratios:
Loss ratio 36.7 50.2 32.0
Expense ratio 54.2 56.0 64.0
Combined ratio 90.9 106.2 96.0
Fidelity/surety experienced an improvement in underwriting results in 1994 due
to increased premiums and decreased losses. The regionalization of USF&G's
surety business in 1993 led to further penetration of existing contract surety
markets in 1994, while new products and further expansion into financial
institutions markets resulted in premium growth in the fidelity lines. Losses
decreased in 1994 after a $23 million increase in 1993 which was primarily a
result of unfavorable loss developments on a limited number of prior years'
claims.
Personal Lines
Personal lines products include auto, homeowners, watercraft and personal
excess insurance for individuals and families.
The following table shows the components of underwriting results for personal
lines:
(in millions) 1994 1993 1992
Premiums Written:
Branch office voluntary direct $ 589 $ 616 $ 688
Other, net of ceded reinsurance (25) 42 38
Total premiums written $ 564 $ 658 $ 726
Premiums earned $ 575 $ 681 $ 785
Losses (427) (481) (635)
Expenses (208) (228) (260)
Net underwriting losses $ (60) $ (28) $(110)
Voluntary $ (44) $ (13) $(100)
Involuntary (16) (15) (10)
Net underwriting losses $ (60) $ (28) $(110)
GAAP and statutory underwriting ratios are as follows:
1994 1993 1992
GAAP Underwriting Ratios:
Loss ratio 74.2 70.6 80.9
Expense ratio 36.3 33.5 33.1
Combined ratio 110.5 104.1 114.0
Statutory Underwriting Ratios:
Loss ratio 74.2 70.7 80.0
Expense ratio 36.8 33.7 33.2
Combined ratio 111.0 104.4 113.2
Branch office voluntary premium has declined only 4 percent in 1994, after
declining 10 percent in 1993. In 1994, the net premium decrease resulted from
management's plans to improve the agency force and exit certain involuntary
markets, and from increased ceded reinsurance. The net premium decreases in
1993 were a result of planned management actions to exit certain unprofitable
markets and to reduce writings in high risk catastrophe areas.
The increased underwriting loss in 1994 is primarily due to increased losses
from the homeowners line of business which was adversely affected in 1994 by
significantly higher than normal first quarter weather related losses not
designated as catastrophe losses. Winter storms and the Northridge earthquake
in the first quarter of 1994 produced most of the $32 million in catastrophe
losses for the personal lines business, primarily in homeowners. Exclusive of
these catastrophe losses, the homeowners statutory loss ratio was 84.2 in 1994,
compared with 107.3 when catastrophe losses are included. Although the personal
lines statutory loss ratio increased 3.5 points in 1994, almost half of that
increase is the result of catastrophe losses. The personal lines statutory loss
ratio improved 9.3 points from 1992 to 1993 (a 3.5 point improvement excluding
Hurricane Andrew in 1992).
Management's strategies to reduce exposure in unprofitable markets and lines of
business, including reunderwriting the auto book of business, applying stricter
underwriting standards, reducing exposure in certain high risk catastrophe
areas and introducing new products, have improved the underwriting results and
statutory loss ratios of the auto and other personal lines of business since
1992. These strategies are currently being applied to the homeowners line, and
are anticipated to result in improvements in 1995 in selected target markets.
Underwriting losses from involuntary markets were relatively consistent from
1993 to 1994, and increased $5 million from 1992 to 1993. The increase in 1993
losses was due to unfavorable development on prior years' claims and costs
associated with third party administrators managing the assigned risk
involuntary business.
In December 1994, USF&G entered into a definitive agreement to purchase all of
the outstanding stock of Victoria Financial Corporation. The transaction
closed in the second quarter of 1995. See Section 2b of this Analysis.
Assumed Reinsurance
Reinsurance products are managed by F&G Re and marketed through national and
international reinsurance brokers. The reinsurance segment has historically
produced underwriting gains.
The following table shows the components of underwriting results for assumed
reinsurance lines:
(in millions) 1994 1993 1992
Premiums written $ 415 $ 403 $ 243
Premiums earned $ 395 $ 305 $ 157
Losses (290) (204) (118)
Expenses (65) (69) (19)
Net underwriting gains $ 40 $ 32 $ 20
Finite risk $ 12 $ 9 $ 14
Traditional risk 28 23 6
Net underwriting gains $ 40 $ 32 $ 20
GAAP and statutory underwriting ratios are as follows:
1994 1993 1992
GAAP Underwriting Ratios:
Loss ratio 73.2 66.7 75.0
Expense ratio 16.5 22.6 12.1
Combined ratio 89.7 89.3 87.1
Statutory Underwriting Ratios:
Loss ratio 67.9 67.3 76.9
Expense ratio 22.7 24.6 17.0
Combined ratio 90.6 91.9 93.9
Underwriting results in this category continue to be favorably affected by
increased premiums due to the strong demand for reinsurance. Recent large
catastrophe losses, such as Hurricane Andrew in 1992 and the Northridge
earthquake in 1994, have increased the demand for traditional risk reinsurance
in both the international and domestic property catastrophe markets.
Net premiums written in the international market for traditional risk assumed
reinsurance increased to $120 million in 1994 from $49 million in 1993. This
growth in international writings accounts for over 87 percent of the increase
in traditional risk premiums written. This increase is offset by the reduced
demand for finite risk assumed reinsurance as a result of the accounting
requirements of SFAS No. 113 and EITF 93-6 which were issued in 1993.
2.3. Losses incurred and loss reserves
Losses and loss expenses incurred totaled $1.7 billion in 1994, compared with
$1.8 billion and $2.1 billion in 1993 and 1992, respectively. The reduction is
due primarily to lower premium volume and actions taken to better manage claims
and claim costs and reduce exposures in undesirable markets. The reduction from
1992 to 1993 is also due to lower catastrophe losses. Reserves for unpaid
losses and loss expenses totaled $6.1 billion at December 31, 1994, a decrease
of $229 million from December 31, 1993. The impact of adopting SFAS No. 113
increased reserves by $1.2 billion at December 31, 1993 when compared with
December 31, 1992. This new accounting standard eliminated the previous
practice of reporting assets and liabilities net of the effect of reinsurance.
Excluding the effects of SFAS No. 113, reserves in 1993 declined $264 million
from 1992.
Selected claims information for the property/casualty segment is as follows:
(dollars in millions) 1994 1993 1992
At December 31:
Net reserves $5,084 $5,276 $5,540
Number of outstanding claims 81,024 91,285 103,952
For the year ended December 31:
Losses paid $1,883 $2,022 $2,252
Number of new claims 342,292 352,194 395,697
Although reserve levels have been reduced, the 8 percent decrease in net
reserves since 1992 is significantly less than the decreases in earned
premiums, losses paid and claim activity over the same period. Earned premiums
decreased $250 million, or 10 percent, since 1992, while losses paid decreased
16 percent over the same period. The number of outstanding claims at December
31, 1994 declined by 22 percent compared with December 31, 1992, and the number
of new claims reported (excluding catastrophe claims) declined 13 percent from
1992 to 1994.
USF&G categorizes environmental, asbestos and other long-term exposures where
multiple claims relate to a similar cause of loss (excluding catastrophes) as
"common circumstance claims." Reserves for losses that have been reported and
certain legal expenses are established on the "case basis." Common
circumstance claims which have emerged, while substantial, are a relatively
small portion of total claim payments and reserves. Case reserves for these
claims are approximately three percent of the total reserves for unpaid losses
and loss expenses at December 31, 1994 and 1993.
The most significant common circumstance claim exposures include negligent
construction, environmental, and asbestos claims. Case reserves for these
exposures represent 82 percent of total common circumstance case reserves at
December 31, 1994. Other common circumstance claim categories stem from a
variety of situations such as lead paint, toxic fumes, breast implants, sexual
molestation and other disparate causes, provisions for which are included in
the total common circumstance case reserves.
The following tables set forth selected information for each of the three
primary categories of common circumstance claims, net of ceded reinsurance.
Negligent
(in millions) Construction Environmental Asbestos
Total reserves at
December 31, 1991 $ 48 $184 $106
Losses incurred 25 30 33
Claims paid (3) (27) (13)
Total reserves at
December 31, 1992 70 187 126
Losses incurred 14 99 22
Claims paid (10) (37) (23)
Total reserves at
December 31, 1993 74 249 125
Losses incurred (6) 106 5
Claims paid (13) (26) (5)
Total reserves at
December 31, 1994 $ 55 $329 $125
Total Reserves at December 31
(in millions) 1994 1993 1992
Negligent Construction:
Case reserves $ 18 $ 14 $ 14
Bulk reserves 37 60 56
Total $ 55 $ 74 $ 70
Environmental:
Case reserves $ 65 $ 61 $ 43
Bulk reserves 264 188 144
Total $329 $249 $187
Asbestos:
Case reserves $ 25 $ 45 $ 46
Bulk reserves 100 80 80
Total $125 $125 $126
The increase in environmental incurred losses is primarily due to an increased
allocation of bulk reserves from other lines of business based on enhancements
in the actuarial database with respect to such claims. This reallocation did
not effect management's assessment of the overall adequacy of the reserve
position. Management believes that USF&G's reserve position is adequate
relative to its exposure to environmental and asbestos matters, and compares
favorably to other large property/casualty insurers. USF&G's customer base
generally does not include large manufacturing companies, which tend to incur
most of the known environmental and asbestos exposures. Many of USF&G's
environmental claims relate to small industrial or transportation accidents
which individually are unlikely to involve material exposures. In addition,
USF&G has traditionally been a primary coverage carrier, having written
relatively little high-level excess coverage; therefore, liability exposures
are generally restricted to primary coverage limits. USF&G's net paid losses
and loss expenses for environmental and asbestos claims have averaged
approximately $35 million per year over the last five years, or less than two
percent of the estimated industry level as of December 31, 1994, while USF&G's
related reserves at the end of 1994 are three percent of the estimated industry
total. In a study published in 1994, A.M. Best Company, Inc., an insurance
industry rating agency, measured the environmental and asbestos reserves held
by property/casualty insurers in terms of the number of years the reserves
could fund the average rate of payments, described as the "survival ratio."
USF&G's survival ratio of approximately 13 years for environmental and asbestos
losses is almost double A.M. Best's estimated 1994 industry average.
In 1994, approximately 28 percent of paid environmental claims related to
matters under which a USF&G insured was a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation and Liability Act,
commonly referred to as "Superfund", but many of these PRPs were only
peripherally involved. In 1993, 35 percent of the environmental claims paid
related to Superfund.
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, as well as for changes in historical trends as
information regarding such conditions and actual claims develops. Management
believes that loss reserves are adequate, but establishing appropriate
reserves, particularly with respect to environmental, asbestos and other long-
term exposure claims, is highly judgmental and an inherently uncertain process.
It is possible that, as conditions change and claims experience develops,
additional reserves may be required in the future. There can be no assurance
that such adjustments will not have a material adverse effect on USF&G's
results of operations or financial condition.
2.4. Catastrophe losses
Gross catastrophe losses totaled $73 million in 1994, compared with $81 million
in 1993 and $292 million in 1992. These losses, net of losses ceded to
reinsurers, were $67 million in 1994, $68 million in 1993 and $140 million in
1992. Catastrophe losses, net of reinsurance, represented three percent of
premiums earned for the years ended December 31, 1994 and 1993, compared with
six percent for 1992. Net catastrophe losses in 1994 included $23 million from
the Northridge earthquake in February, as well as approximately $26 million
from winter storms in the first quarter of the year, while 1993's net
catastrophe losses included $27 million from the East Coast blizzard in March
1993. 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.
2.5. Ceded reinsurance
USF&G reinsures portions of its policy risks with other insurance companies or
underwriters. Reinsurance allows USF&G to obtain indemnification against
losses associated with insurance contracts it has written by entering into a
reinsurance contract with another insurance enterprise (the reinsurer). USF&G
pays (cedes) an amount to the reinsurer which in turn agrees to reimburse USF&G
for a specified portion of any claims paid under the reinsured contracts.
Reinsurance gives USF&G the ability to write certain individually large risks
or groups of risks, and helps to control its exposure to losses by ceding a
portion of such large risks. USF&G's ceding reinsurance agreements are
generally structured on a treaty basis whereby all risks meeting a certain
criteria are automatically reinsured. Shrinking capacity in the reinsurance
market and the high catastrophe losses in recent years have increased prices
and reduced the availability of catastrophe reinsurance. Property catastrophe
reinsurance costs were $34 million in 1994 (including a $5 million assessment
from the Florida Hurricane Catastrophe Fund), compared with $30 million and $26
million in 1993 and 1992, respectively. The current catastrophe structure shows
improvement from prior years by increasing USF&G's total reinsurance protection
from $205 million in 1993 to $215 million in 1994, and by providing greater
protection in all treaty layers through increased reinsurance placement.
USF&G's property catastrophe loss retention level at December 31, 1994 is $75
million, which in the event of a second loss, is lowered to $50 million. Loss
retention levels for 1993 and 1992 were $50 million and $23 million,
respectively, and did not include any "second event" protection.
2.6. Capacity
A key measure of both strength and growth capacity for property/casualty
insurers is the ratio of premiums written to statutory policyholders' surplus.
At the end of 1994 and 1993, USF&G's premium-to-surplus ratio was 1.4:1,
compared with 1.5:1 at the end of 1992. The industry average is approximately
1.3:1. Insurance regulators generally accept a ceiling for this ratio of 3.0:1;
therefore, at its current ratio, USF&G has the capacity to grow by writing new
business.
2a. Discover Re
On April 13, 1995, USF&G consummated its merger with Discover Re. In the
transaction, which is accounted for as a pooling-of-interests, USF&G exchanged
5.4 million shares of common stock, worth approximately $78.5 million, for all
of the outstanding equity of Discover Re. Discover Re provides insurance,
reinsurance and related services to the alternative risk transfer ("ART")
market, primarily in the municipalities, transportation, education and retail
sectors. Through the ART market, a company can self-insure the predictable,
frequency portion of its own losses. The insurance premiums which were
previously paid to traditional insurance companies in order to transfer risk
are instead used to self-insure those relatively predictable losses and to
purchase insurance for the less frequent, high severity losses that could have
a major financial impact on a company. Although ART mechanisms reduce the
amount of premium to the traditional market, they do not reduce the need for
comprehensive risk management services, including policy and claims management
and processing, underwriting, actuarial, investment and other administrative
management. Also, in some cases, ART clients still require third party
insurance policies. The ART market represents approximately 30 percent of the
commercial insurance market. This merger facilitates USF&G's access to the ART
market and, management believes, provides increased growth potential by
augmenting certain of the existing core commercial lines insurance operations.
The following table shows the components of underwriting results for Discover
Re:
(in millions) 1994 1993 1992
Premiums written $ 27 $ 20 $ 12
Premiums earned $ 22 $ 16 $ 8
Losses (17) (13) (6)
Expenses (5) (4) (2)
Net underwriting losses $ - $ (1) $ -
GAAP and statutory underwriting ratios are as follows:
1994 1993 1992
GAAP Underwriting Ratios:
Loss ratio 76.2 76.2 80.0
Expense ratio 23.8 26.7 30.3
Combined ratio 100.0 102.9 110.3
Statutory Underwriting Ratios:
Loss ratio 76.2 76.2 80.0
Expense ratio 22.6 23.9 28.4
Combined ratio 98.8 100.1 108.4
2b. Victoria
On May 22, 1995, USF&G consummated its merger with Victoria. In the
transaction, which is accounted for as a pooling-of-interests, USF&G exchanged
3.8 million shares of common stock, worth approximately $59.1 million, for all
of the outstanding equity of Victoria. Victoria is an insurance holding company
which specializes in nonstandard personal lines auto coverage. Nonstandard
automobile insurance companies provide automobile insurance to individuals who
are unable to obtain preferred or standard insurance coverage due to their
inability to meet certain standard underwriting criteria, based on factors such
as age, type of automobile, residence location and driving record. Management
believes that this merger will allow USF&G to enhance premium retention and
grow the personal lines business through an expanded product portfolio.
The following table shows the components of underwriting results
for Victoria:
(in millions) 1994 1993 1992
Premiums written $ 50 $ 53 $ 43
Premiums earned $ 51 $ 49 $ 38
Losses (36) (34) (26)
Expenses (17) (16) (13)
Net underwriting losses $ (2) $ (1) $ (1)
GAAP and statutory underwriting ratios are as follows:
1994 1993 1992
GAAP Underwriting Ratios:
Loss ratio 69.1 70.1 69.1
Expense ratio 31.2 28.5 30.1
Combined ratio 100.3 98.6 99.2
Statutory Underwriting Ratios:
Loss ratio 69.1 70.1 69.1
Expense ratio 32.2 28.2 30.3
Combined ratio 101.3 98.3 99.4
3. Life Insurance Operations
Life insurance operations (F&G Life) represent 15 percent of USF&G's total
revenues in 1994, compared with 14 percent and 13 percent in 1993 and 1992,
respectively. F&G Life also represents 33 percent of the assets at December 31,
1994, compared with 34 percent and 37 percent at December 31, 1993 and 1992,
respectively.
Financial results for F&G Life are as follows:
Years Ended December 31
(in millions) 1994 1993 1992
Premiums $ 152 $ 129 $ 104
Net investment income 317 321 349
Policy benefits (388) (395) (377)
Underwriting and operating expenses (67) (61) (77)
Restructuring charges - - (3)
Income (loss) from continuing operations
before realized gains, facilities exit
costs, income taxes and cumulative effect
of adopting new accounting standards $ 14 $ (6) $ (4)
Income for the year ended December 31, 1994 improved when compared with 1993
and 1992 as a result of continued positive sales trends and improved profit
margins, partially offset by higher sales related expenses. The increase in
sales is attributed to the new product initiatives and refocused distribution
channels (refer to Section 3.2 of this Analysis). Profit margins improved
during the year as current and projected spreads between investment income and
interest credited to policyholders improved compared with 1993 levels. This
resulted from lower rates being credited to annuities where the guaranteed rate
period has expired and improved spread management on new and renewal business.
The higher profit margins are also attributable to the favorable retention of
the single premium deferred annuity ("SPDA") block, originally sold in 1988
through 1990 by investment brokers (refer to Section 3.3 of this Analysis). The
declining trend in net investment income is primarily due to SPDA surrenders
which are reducing the level of invested assets. This trend is likely to
continue in 1995. This trend was partially offset in 1994 by the recognition
of $8 million from the sale of a timber investment.
3.1. Products
F&G Life issues annuity and life insurance products. F&G Life's principal
products are structured settlements, deferred annuities (including tax
sheltered annuities), immediate annuities and life insurance products.
Structured settlements are immediate annuities principally sold to the
property/casualty company in settlement of insurance claims.
Deferred annuity products accumulate cash values to which interest is credited.
In 1994, deferred annuities were credited with interest rates that ranged
between 4.0 and 9.5 percent, depending upon the year of issue and interest
guarantee duration. The majority of deferred annuities in force were issued
with initial interest guarantees from one to six years, with most of these
written between 1988 and 1990 with a six year interest guarantee. The deferred
annuities also include provisions for charges if the annuitant chooses to
surrender the policy (see Section 3.3 of this Analysis). After the interest
guarantee expires, the interest crediting rates can be adjusted annually on a
policy's anniversary date.
Deferred annuity products are sold through independent agents, insurance
brokers and national wholesale distributors. F&G Life's tax sheltered annuity
products ("TSAs") are deferred annuities that provide retirement income. TSAs
are sold through a national wholesale distribution network primarily to
teachers.
Other annuities sold by F&G Life primarily consist of single premium immediate
annuities ("SPIAs"). SPIAs provide a fixed stream of payments over a fixed
period of time or over an individual's lifetime.
F&G Life markets universal life ("UL") and term life insurance products,
primarily through independent agents. UL insurance provides a death benefit for
the life of the insured and accumulates cash values to which interest is
credited. Term life insurance provides a fixed death benefit if the insured
dies during the contractual period.
3.2. Sales
The following table shows life insurance and annuity sales (premiums and
deposits) by distribution system and product type:
(in millions) 1994 1993 1992
Distribution System:
Direct-structured settlements $ 88 $ 66 $ 37
Property/casualty brokerage 48 49 67
National brokerage 46 14 -
National wholesaler 71 39 -
Other 33 37 51
Total $286 $205 $155
Product Type:
Structured settlement annuities $ 88 $ 66 $ 37
Single premium deferred annuities 82 44 33
Tax sheltered annuities 63 35 -
Other annuities 41 54 74
Life insurance 12 6 11
Total $286 $205 $155
Sales in 1994, led by structured settlement annuities, single premium deferred
annuities, and tax sheltered annuities, have increased 40 percent over 1993
sales and 85 percent over 1992 sales. In its effort to continue the improvement
in sales and profitability, F&G Life intends to continue 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
products, and modifying current product offerings to meet customer needs.
Despite F&G Life's attention to expanding its distribution channels and to
product development, demand for its products is affected by fluctuating
interest rates and the relative attractiveness of alternative investment,
annuity or insurance products, as well as its credit ratings. As a result,
there is no assurance that the improved sales trend will continue at the same
level. Total life insurance in force was $11.8 billion at December 31, 1994,
compared with $12.1 billion and $12.4 billion at December 31, 1993 and 1992,
respectively.
3.3. Policy surrenders
Deferred annuities and universal life products are subject to surrender. Nearly
all of F&G Life's surrenderable annuity policies allow a refund of the cash
value balance less a surrender charge. The surrender charge varies by product.
Single premium deferred annuities, which represent 67 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. Newer
products that have been issued during 1994 have surrender charges that
decline from nine percent in the first policy year to zero percent in the tenth
and later policy years. Such built-in surrender charges provide protection
against premature policy surrender.
Policy surrenders totaled $576 million for the year ended December 31, 1994.
This compares with $211 million and $192 million for 1993 and 1992,
respectively. Surrender activity has increased as a result of expiring
surrender charges, primarily on the investment broker block of SPDA, as
policyholders seek other investment alternatives.
During 1994, management had in place a policy conservation program that
provided policyholders with a competitive renewal option within F&G Life once
their surrender charge period had expired. Through December 31, 1994,
policyholders representing approximately 27 percent of the expiring block
elected this option. An additional 23 percent of the expiring block was
retained under the terms of the original contract, free of surrender charges
and at short-term interest rates which are adjusted annually.
The total account value of F&G Life's deferred annuities is $2.3 billion, 15
percent of which is surrenderable at current account value (i.e., without
surrender charges). The surrender charge period on an additional $1.3 billion
of F&G Life's single premium deferred annuity products expires through the end
of 1997, of which $515 million expires during 1995. The experience thus far
for $693 million of SPDAs where the surrender charge period expired in the
fourth quarter of 1993 through the fourth quarter of 1994 indicates that on
average, 50 percent of the expiring block may surrender; however, in the
future, a larger percentage may surrender should interest rates continue their
upward trend. While this will put pressure on F&G Life's ability to increase
assets, given the relatively high interest rates credited when these annuities
were issued, overall profit margins would continue to improve as they surrender
or rollover to new products with lower rates. Management believes that F&G
Life, with liquid assets equal to 124 percent of the surrender value of
surrenderable business at December 31, 1994, continues to maintain a high
degree of liquidity and has the ability to meet surrender obligations for the
foreseeable future.
3.4. Deferred policy acquisition costs ("DPAC")
Costs to acquire and issue annuities and life insurance policies are generally
deferred and amortized in future periods in relationship to expected gross
profits. The recoverability of these amounts is regularly reviewed by
management through monitoring of surrender experience, projected investment
spreads and other criteria.
Policy acquisition costs unfavorably affected results as $4 million, $8 million
and $10 million of normally deferrable costs were expensed in 1994, 1993 and
1992, respectively, because surrender experience and sales levels did not
support the continued deferral of such costs.
During the year ended December 31, 1994, $26 million of current year expense
has been deferred compared with $12 million and $11 million for the years ended
December 31, 1993 and 1992, respectively. The increase in the deferral is due
to the higher level of sales and improved future spread income during 1994
compared with 1993 and 1992. Amortization of the beginning DPAC balance was
$21 million, $10 million and $25 million for the years ended 1994, 1993 and
1992, respectively. The rate of amortization in future periods would be
accelerated if surrender activity increases and/or product margins permanently
narrow.
4. Parent and Noninsurance Operations
Parent company interest and other unallocated expenses and net losses from
noninsurance operations were as follows:
Years Ended December 31
(in millions) 1994 1993 1992
Parent Company Expenses:
Interest expense $ (34) $ (37) $ (35)
Unallocated expense, net (48) (35) (34)
Noninsurance Operations:
Management consulting 1 (2) (4)
Oil and gas - - (18)
Other noninsurance investments 2 (9) (13)
Restructuring charges - - (2)
Income (loss) from continuing operations
before realized gains, facilities exit
costs, income taxes and cumulative effect
of adopting new accounting standards $ (79) $ (83) $(106)
The results for the parent company and noninsurance operations improved
slightly when compared to 1993. This improvement was primarily a result of
recognizing $6 million of dividend income from an investment in an asset
management company, as well as improvements in management consulting operations
and certain real estate investments. Unallocated expenses increased over 1993
due primarily to a $9 million non-recurring loss on long-term subleases.
Interest expense was slightly lower in 1994 than 1993; however, interest
expense is expected to increase in 1995 due to higher short-term interest rates
(refer to Section 6 of this Analysis). The $18 million loss in 1992 related to
an oil and gas subsidiary which was merged with another oil and gas company
converting USF&G's interest into an equity investment of the successor company.
5. Investments
USF&G's investment mix continues to reflect a concentration in high quality
fixed-income securities. Long-term fixed maturities comprised 83 percent of
total investments at December 31, 1994, compared with 84 percent and 81 percent
at December 31, 1993 and 1992, respectively. Total investments have decreased
due to unrealized losses in the available for sale portfolio, as well as the
use of proceeds from sales and repayments of fixed maturities to meet cash flow
needs, primarily from SPDA surrenders. The following table shows the
distribution of USF&G's investment portfolio.
At December 31
(dollars in millions) 1994 1993 1992
Total investments $10,421 $11,377 $11,346
Fixed Maturities:
Held to maturity 45% 41% 64%
Available for sale 38 43 17
Total fixed maturities 83 84 81
Common and preferred stocks 1 1 1
Short-term investments 4 3 5
Mortgage loans and real estate 10 9 9
Other invested assets 2 3 4
Total 100% 100% 100%
5.1. Net investment income
The following table shows the components of net investment income.
Years Ended December 31
(dollars in millions) 1994 1993 1992
Net Investment Income From:
Fixed maturities $669 $721 $739
Equity securities 7 9 12
Options - - 37
Short-term investments 13 9 27
Mortgage loans and real estate 58 41 50
Other, less expenses (4) (31) (48)
Total $743 $749 $817
Average Yields:
Total investments 6.9% 6.7% 7.3%
Fixed maturities 7.4% 7.7% 8.6%
Investment income for the period ended December 31, 1994 decreased $6 million
or one percent, and $74 million or nine percent when compared to the same
periods of 1993 and 1992, respectively. The decrease in investment income from
fixed maturities is primarily due to an investment base which declined in order
to meet SPDA surrenders and other cash flow needs. In addition, given the
relatively low long-term interest rate environment, proceeds from sales,
maturities or repayments of fixed maturities during 1993 and 1994 were
reinvested in fixed maturities with lower yields. Overall, investment income in
fixed maturities decreased by seven percent and ten percent when compared to
1993 and 1992, respectively. Although interest rates have increased in 1994,
new purchases of fixed maturities totaling $693 million were not significant
enough to affect the average yield.
The increase in net investment income from short-term investments since 1993
primarily reflects the higher short-term interest rate environment. Real estate
and mortgage loan investment income has increased as a result of the sale of
timberland investments, prepayment of a mortgage loan, and a new loan program
whereby USF&G is investing a greater percentage of capital in commercial
mortgage loans versus equity real estate. Other income less expenses improved
primarily due to USF&G's share of earnings from an equity interest in
Renaissance Reinsurance Ltd. ("Renaissance Re"), an offshore reinsurance
company. USF&G recorded $17 million of net investment income from Renaissance
Re during 1994 and $5 million during 1993. Future income from the investment
in Renaissance Re is subject to volatility and exposure to catastrophe losses
and other risks inherent in the property/casualty reinsurance industry. Reduced
interest expense accrued on ceded premiums held by USF&G accounts for the
remainder of the improvement in other net investment income.
5.2. Net realized gains on investments
The components of net realized gains include the following:
Years Ended December 31
(in millions) 1994 1993 1992
Net Gains From Sales:
Fixed maturities $ 3 $ 79 $179
Equities and options - 5 44
Real estate and other 12 6 16
Total net gains 15 90 239
Impairments:
Fixed maturities (1) (10) (20)
Equities - (8) -
Real estate and other (9) (66) (71)
Total impairments (10) (84) (91)
Net realized gains $ 5 $ 6 $148
Realized gains from real estate and other investments for 1994 resulted from
the sale of timberland investments and USF&G's portion of realized gains from
investments in limited partnerships. The $79 million in realized gains on fixed
maturities in 1993 is primarily due to USF&G's repositioning a portion of its
fixed maturity investments to more effectively match the duration of its life
insurance liabilities. The $179 million in realized gains in 1992 is the result
of investment sales to offset declines in capital and statutory surplus caused
by catastrophe losses in 1992. In 1992, USF&G realized $52 million of gains on
equities and reallocated the proceeds to relatively less volatile fixed
maturities.
To reflect the impairments in the value of certain investments, USF&G made
provisions for impairment of $10 million in 1994 compared with $84 million in
1993 and $91 million in 1992. Real estate impairments in 1994 primarily
related to specific properties whose recent appraisal values reflected other
than temporary impairments. Real estate impairments were taken in 1993 to
write down to net realizable value properties that were sold or expected to be
sold in the near term. Real estate impairments in 1992 reflect both changes in
circumstances related to specific properties and general real estate market
deterioration. The impairment of fixed maturities relates to specific
investments whose impairment is considered other than temporary. The 1993
impairments on equities related to specific equity holdings which were sold
shortly thereafter.
5.3. Unrealized gains (losses)
The components of the changes in unrealized gains (losses) were as follows:
Years Ended December 31
(in millions) 1994 1993 1992
Fixed maturities available for sale $(401) $222 $ -
Deferred policy acquisition
costs adjustment 63 (30) -
Equity securities 3 23 (39)
Options, foreign currency and other 1 4 21
Total $(334) $219 $(18)
USF&G adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," in the fourth quarter of 1993. SFAS 115 requires that the
portion of fixed maturity investments classified as "available for sale" be
recorded at market value with the unrealized gains/losses reported as a
component of shareholders' equity. Prior to the adoption of SFAS No. 115,
fixed maturities available for sale were recorded at lower of cost or market
with no effect on shareholders' equity. Unrealized gains on fixed maturities
at December 31, 1993 reflects the low interest rate environment of 1993.
However, rising interest rates during 1994 resulted in a decrease in the
unrealized gain on fixed maturities available for sale from $222 million at
December 31, 1993 to an unrealized loss of $179 million at December 31, 1994.
This was partially offset by a related change in the DPAC adjustment from the
prior year's unrealized loss of $30 million to an unrealized gain of $33
million at December 31, 1994. This adjustment is made to reflect assumptions
about the effect of potential asset sales of fixed maturities available for
sale on future DPAC amortization.
5.4. Fixed maturity investments
The tables below detail the composition of the fixed maturity portfolio.
At December 31
1994
Net
Amortized Market Unrealized
(in millions) Cost Value (Loss)
Fixed Maturities:
Held to maturity $4,650 $4,275 $(375)
Available for sale 4,160 3,981 (179)
Total $8,810 $8,256 $(554)
At December 31
1993
Net
Amortized Market Unrealized
(in millions) Cost Value Gain
Fixed Maturities:
Held to maturity $4,661 $4,796 $135
Available for sale 4,681 4,903 222
Total $9,342 $9,699 $357
At December 31
1992
Net
Amortized Market Unrealized
(in millions) Cost Value Gain
Fixed Maturities:
Held to maturity $7,218 $7,290 $72
Available for sale 1,987 2,029 42
Total $9,205 $9,319 $114
At December 31
(dollars in millions) 1994 % 1993 % 1992 %
Corporate investment-grade bonds $5,017 57 $4,866 52 $3,103 34
Mortgage-backed securities 1,915 22 2,403 26 3,824 42
Asset-backed securities 931 10 1,149 12 995 11
U.S. Government bonds 277 3 308 3 554 6
High-yield bonds* 616 7 562 6 522 5
Tax-exempt bonds 47 1 48 1 71 1
Other 7 - 6 - 136 1
Total fixed maturities at
amortized cost 8,810 100 9,342 100 9,205 100
Total market value of
fixed maturities 8,256 9,699 9,319
Net unrealized gains (losses) $ (554) $ 357 $ 114
Percent market-to-amortized cost 94 104 101
*See Glossary of Terms
Increasing interest rates, which resulted in declining bond prices, were
responsible for the 10 percent decrease in the fixed maturity portfolio's
overall market-to-amortized cost ratio from December 31, 1993. Interest rates
rose an average 270 basis points during 1994.
Investments in mortgage-backed securities declined 20 percent and 50 percent
when compared with holdings at December 31, 1993 and 1992, respectively, due
primarily to prepayments of the underlying mortgages. While subject to
prepayment risk, credit risk related to USF&G's mortgage-backed securities
portfolio at December 31, 1994 is believed to be minimal since 99 percent of
such securities have AAA ratings or are collateralized by obligations of the
U.S. Government or its agencies. Asset-backed securities declined 19 percent
and six percent when compared with holdings at December 31, 1993 and 1992,
respectively, as a result of sales and maturities. The net proceeds from sales,
maturities and prepayments in 1994 were generally reinvested into corporate
investment-grade bonds.
Investment-grade bonds, including debt obligations of the U.S. Government and
its agencies, comprised 93 percent of the portfolio at December 31, 1994,
compared with 94 percent and 93 percent at December 31, 1993 and 1992,
respectively. The table below shows the credit quality of the long-term fixed
maturity portfolio as of December 31, 1994.
Percent Market-
Amortized Market to-Amortized
(dollars in millions) Cost Percent Value Cost
U.S. Government and
U.S. Government
Agencies $2,075 23% $1,952 94%
AAA 1,368 16 1,324 97
AA 1,317 15 1,191 90
A 2,395 27 2,244 94
BBB 1,039 12 973 94
Below BBB 616 7 572 93
Total $8,810 100% $8,256 94%
USF&G's holdings in high-yield bonds comprised seven percent of the total fixed
maturity portfolio at December 31, 1994, compared with six percent at both
December 31, 1993 and 1992. Of the total high-yield bond portfolio, 72 percent
is held by the life insurance segment, representing 10 percent of its total
investments. The table below illustrates the credit quality of USF&G's high-
yield bond portfolio at December 31, 1994.
Percent Market-
Amortized Market to-Amortized
(dollars in millions) Cost Percent Value Cost
BB $366 60% $337 92%
B 248 40 233 94
CCC and lower 2 - 2 100
Total $616 100% $572 93%
The information on credit quality in the preceding two tables is based upon the
higher of the rating assigned to each issue by either Standard & Poor's or
Moody's. Where neither Standard & Poor's nor Moody's has assigned a rating to a
particular fixed maturity issue, classification is based on 1) ratings
available from other recognized rating services; 2) ratings assigned by the
NAIC; or 3) an internal assessment of the characteristics of the individual
security, if no other rating is available.
At December 31, 1994, USF&G's five largest investments in high-yield bonds
totaled $88 million in amortized cost and had a market value of $72 million.
None of these investments individually exceeded $30 million. USF&G's largest
single high-yield bond exposure represented five percent of the high-yield
portfolio and 0.3 percent of the total fixed maturity portfolio.
5.5. Real estate
The table below shows the components of USF&G's real estate portfolio.
At December 31
(in millions) 1994 1993 1992
Mortgage loans $ 349 $ 302 $ 186
Equity real estate 760 793 926
Reserves (98) (108) (108)
Total $1,011 $ 987 $1,004
The increase in mortgage loans reflects USF&G's strategy of maintaining a
generally consistent level of real estate assets while changing the mix to more
traditional mortgage loans and less equity real estate investments. This
strategy is designed to reduce risk and increase yields in the real estate
portfolio.
USF&G's real estate investment strategy emphasizes diversification by
geographic region, property type and stage of development. The diversification
of USF&G's mortgage loan and real estate portfolio is as follows:
At December 31
1994 1993 1992
Geographic Region:
Pacific/Mountain 34% 33% 33%
Midwest 20 18 19
Mid-Atlantic 17 19 17
Southeast 16 22 22
Southwest 8 5 6
Northeast 5 3 3
Type of Property:
Office 37% 37% 33%
Land 26 27 28
Apartments 24 19 16
Retail/other 7 6 10
Industrial 6 9 11
Timberland/agriculture - 2 2
Development Stage:
Operating property 75% 73% 72%
Land development 15 16 17
Land packaging 10 11 11
Real estate investments are generally appraised at least once every three
years. Appraisals are obtained more frequently under certain circumstances such
as when there have been significant changes in property performance or market
conditions. All of these appraisals are performed by professionally certified
appraisers.
At December 31, 1994, USF&G's five largest real estate investments had a book
value of $325 million. The largest single investment was a land development
project located in San Diego, California with a book value of $93 million, or
nine 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 at
December 31, 1994 declined 16 percent and 40 percent when compared with
December 31, 1993 and 1992, respectively. This decline in nonperforming real
estate was a result of the combination of the sale of a nonperforming real
estate property, write-downs on other specific properties, and
reclassifications.
The book value of the components of nonperforming real estate are as follows:
At December 31
(dollars in millions) 1994 1993 1992
Restructured loans and investments* $ - $ 4 $ 4
Real estate held as in-substance
foreclosure* - 14 15
Real estate acquired through foreclosure
or deed-in-lieu of foreclosure* 117 121 190
Land investments* 56 57 71
Nonperforming equity investments* 35 53 66
Total nonperforming real estate $ 208 $ 249 $ 346
Real estate reserves $ (98) $(108) $(108)
Reserves/nonperforming real estate 47% 43% 31%
*See Glossary of Terms
Valuation allowances are established for impairments of mortgage loans and
equity real estate values based on periodic evaluations of the operating
performance of the properties and their exposure to declines in value. The
allowance totaled $98 million, or nine percent of the entire real estate
portfolio, at December 31, 1994, compared with $108 million, or 10 percent of
the total real estate portfolio, at both December 31, 1993 and 1992. The
decrease in the reserves on real estate investments is a result of applying the
reserve to specific properties where permanent impairment has occurred. In
light of USF&G's current plans with respect to the portfolio, management
believes the allowance at December 31, 1994 continues to adequately reflect
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. Although USF&G anticipates that
any sales of real estate will be in an orderly fashion as and when market
conditions permit, if USF&G was required to dispose of a significant portion of
its real estate in the near term, it is likely that it would recover amounts
substantially less than the related carrying values. Prospectively, efforts
will continue to reduce risk and increase yields in the real estate portfolio
by selling equity real estate when it is advantageous to do so and reinvesting
the proceeds in medium-term mortgage loans.
6. Financial Condition
6.1. Assets
USF&G's assets totaled $13.8 billion at December 31, 1994, compared with $14.3
billion and $13.1 billion at the end of 1993 and 1992, respectively. The $561
million reduction in 1994 is primarily due to a $401 million reduction in the
market value of the fixed maturity investments classified as available for
sale. In addition, proceeds from the sale of investments were used to meet
cash flow needs.
6.2. Debt
USF&G's corporate debt totaled $586 million at December 31, 1994, compared with
$574 million at December 31, 1993 and 1992. The increase in corporate debt is
mainly attributable to foreign currency translation adjustments of $13 million
from non-U.S. dollar denominated debt. As a result of entering into forward
contracts, there was no effect on net income from the translation of non-U.S.
dollar denominated debt.
Proceeds from two debt offerings in 1994 were used to retire other portions of
USF&G Corporation's debt. During the first quarter of 1994, proceeds of $126
million from the issuance of Zero Coupon Convertible Notes were used to redeem
higher interest bearing medium and long-term notes. USF&G also issued $150
million 8 3/8% Senior Notes due 2001 in the second quarter of 1994, the
proceeds from which were used to repay a portion of the short-term bank credit
facility (see Section 7 of this Analysis).
USF&G's real estate and other debt totaled $30 million at December 31, 1994,
compared with $44 million and $42 million at December 31, 1993 and 1992,
respectively. Real estate debt increased as a result of the restructuring of a
real estate partnership where USF&G became a controlling general partner.
Shortly thereafter, USF&G defeased all but $9 million of such debt. Real estate
debt was reduced by $11 million as a result of a deed-in-lieu of foreclosure,
whereby property in which USF&G has a partnership interest was conveyed back to
the lender, and further reduced by the early payoff of a $11 million real
estate loan.
6.3. Shareholders' equity
USF&G's shareholders' equity totaled $1.4 billion at December 31, 1994, $1.5
billion at December 31, 1993 and $1.3 billion at December 31, 1992. The
decrease was primarily the result of the $401 million decline in unrealized
gains on fixed maturity investments available for sale reduced by a $63 million
change in the related life insurance segment's DPAC adjustment. Net income of
$232 million less common and preferred dividends of $64 million partially
offset the reduction in equity.
6.4. Regulatory risk-based capital
The National Association of Insurance Commissioners ("NAIC") has adopted model
regulations which establish minimum capitalization requirements based on a
"risk-based capital" formula. These regulations, which were first effective for
property/casualty companies for the year ended December 31, 1994 and for life
insurance companies for the year ended December 31, 1993, establish four levels
at which corrective action must be taken. These levels are: (1) the "company
action level," at which the company must submit a comprehensive financial plan
with specific proposals to address certain financial problems; (2) the
"regulatory action level," at which the appropriate regulatory authorities will
perform a financial analysis and order certain corrective actions; (3) the
"authorized control level," at which the regulatory authorities may place the
company under regulatory control; and (4) the "mandatory control level," at
which the regulatory authorities must place the company under regulatory
control.
Application of these levels depends upon the insurer's "adjusted risk-based
capital" as a percentage of the "minimum risk-based capital." Risk-based
capital is calculated after adjusting capital for certain asset, credit,
market, underwriting, off balance sheet and other risks inherent in the assets,
liabilities and business of the insurer. Various levels of corrective actions
are required if the adjusted risk-based capital is less than 200% of the
authorized control level risk-based capital.
USF&G Company had adjusted risk-based capital of $1.62 billion as of December
31, 1994, which represented 382% of the authorized control level risk-based
capital. F&G Life had adjusted risk-based capital of $427 million and $441
million as of December 31, 1994 and 1993, respectively, which represented 422%
and 396% of the authorized control level risk-based capital as of those dates.
Accordingly, as of the dates indicated, both USF&G Company and F&G Life had
adjusted risk-based capital above the levels which would require corrective
action.
6.5. Capital strategy
In January 1994, USF&G filed a shelf registration statement with the Securities
and Exchange Commission. As of the time this registration statement went into
effect, USF&G had available $647 million of unissued debt, preferred stock,
common stock and warrants to purchase debt and stock. This registration
statement was reduced by $126 million after the issuance of the Zero Coupon
Convertible Notes and by $149 million after the issuance of the 8 3/8% Senior
Notes. Subject to capital market conditions, USF&G plans to refinance up to
$300 million of debt over the next several years.
During 1994, USF&G called for redemption 2.4 million shares of its Series C
Preferred Stock. The remaining shares were called for redemption effective
February 24, 1995. As a result of these calls, over 93 percent of the Series C
Preferred Stock converted into 14.7 million shares of common stock in
accordance with the terms of the Series C Preferred Stock. Pursuant to
arrangements the Corporation previously entered into with an unaffiliated
financial institution, USF&G sold 716,600 shares of common stock to this
institution to fund a portion of the cash redemptions resulting from these
calls.
In December 1994, USF&G entered into a definitive agreement to purchase all of
the outstanding stock of Victoria Financial Corporation for approximately 4.1
million shares or $55.3 million of USF&G's common stock, depending on the
average market price of USF&G common stock over a specified period preceding
the closing of the transaction. Victoria is an insurance holding company which
specializes in nonstandard auto coverage. Additionally, in January 1995, USF&G
entered into a definitive agreement to purchase all of the outstanding equity
of Discover Re Managers, Inc., for approximately 5.4 million shares or $78.5
million of USF&G's common stock. Discover Re provides insurance, reinsurance
and related services to the alternative risk transfer market. Both
transactions are expected to close in the second quarter of 1995.
As further explained in Section 7.2 of this Analysis, USF&G negotiated a $400
million credit facility in 1994 to replace the $700 million facility that was
due to expire in March 1995.
7. Liquidity
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs. USF&G requires cash primarily to
pay policyholders' claims and benefits, debt and dividend obligations, and
operating expenses. USF&G's sources of cash include cash flow from operations,
credit facilities, marketable securities and sales of other assets. Management
believes that internal and external sources of cash will continue to exceed
USF&G's short-term and long-term needs.
7.1. Cash flow
USF&G had cash flow from operating activities of $115 million for the year
ended December 31, 1994 and $87 million and $97 million for the years ended
December 31, 1993 and 1992, respectively. The growth of cash flows from
operating activities for 1994 as compared to 1993 is due primarily to large
repayments made to reinsurers in 1993 because of new accounting pronouncements
that initiated the termination of several reinsurance contracts. In addition,
deposits and withdrawals of universal life and investment contracts, which for
GAAP reporting purposes are considered financing activities, had a net cash
outflow of $418 million in 1994 as compared to $196 million and $125 million
for 1993 and 1992, respectively.
7.2. Credit facilities
At December 31, 1994, USF&G maintained a $400 million committed credit facility
with a group of foreign and domestic banks. This represents the renegotiation
of a prior credit facility of $700 million at December 31, 1993. Management
elected to reduce the size of the facility due to the reduction in borrowings
against it and the Corporation's reestablished access to capital markets.
Borrowings outstanding under the credit facility totaled $215 million at
December 31, 1994 and $375 million at both December 31, 1993 and 1992. The
credit agreement contains restrictive covenants pertaining to indebtedness,
tangible net worth, liens and other matters. USF&G was in compliance with these
covenants at December 31, 1994, 1993 and 1992.
In addition, at December 31, 1994, USF&G maintained a $100 million foreign
currency credit facility and a $100 million letter of credit facility. There
were no borrowings on the foreign currency credit facility or the letter of
credit facility at December 31, 1994.
7.3. Marketable securities
USF&G's fixed-income, equity security and short-term investment portfolios are
liquid and represent substantial sources of cash. The market value of its
fixed-income securities was $8.3 billion at December 31, 1994 which represents
94 percent of its amortized cost. At December 31, 1994, equity securities,
which are reported at market value on the balance sheet, totaled $70 million.
Short-term investments totaled $421 million.
7.4. Liquidity restrictions
There are certain restrictions on payments 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 12 month
period from a Maryland insurance 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. Dividends of approximately $157 million are currently available for
payment to USF&G Corporation from USF&G Company during 1995 without prior
regulatory approval. Dividends paid to USF&G Corporation from USF&G Company
totaled $125 million in 1994, 1993 and 1992. USF&G's insurance subsidiaries'
admitted assets for statutory purposes included a total of approximately $244
million in receivables from the parent and affiliated companies.
7.5. Technology upgrades
USF&G has initiated a plan to upgrade its information technology and convert
its mainframe based systems to a client server based system. During 1995, USF&G
plans to invest over $20 million in this project. Total expenditures over the
next three years on this project are estimated to be approximately $50 million.
USF&G's plan is to recover this investment through future cost savings and
competitive advantages.
8. Regulation
USF&G's insurance subsidiaries are subject to extensive regulatory oversight in
the jurisdictions where they do business. This regulatory structure, which
generally operates through state insurance departments, involves the licensing
of insurance companies and agents, limitations on the nature and amount of
certain investments, restrictions on the amount of single insured risks,
approval of policy forms and rates, setting of capital requirements,
limitations on dividends, limitations on the ability to withdraw from certain
lines of business such as personal lines and workers' compensation, and other
matters. From time to time, the insurance regulatory framework has been the
subject of increased scrutiny. At any one time there may be numerous
initiatives within state legislatures or state insurance departments to alter
and, in many cases, increase state authority to regulate insurance companies
and their businesses. Proposals to adopt a federal regulatory framework have
also been discussed. It is not possible to predict the future impact of
increasing state or potential federal regulation on USF&G's operations.
Additional information regarding legal and regulatory contingencies may be
found in Note 13, "Legal Contingencies," to the consolidated financial
statements.
8.1. Proposition 103
In November 1988, voters in the State of California passed Proposition 103,
which required insurers doing business in California to rollback most
property/casualty premium prices in effect between November 1988 and November
1989 to November 1987 levels, less an additional 20 percent discount, unless an
insurer could establish that such rate levels threatened its solvency. In May
1989, the California Supreme Court ruled that an insurer does not have to face
insolvency in order to qualify for an exemption from the rollback requirements
and is entitled to a "fair and reasonable return."
The California Insurance Department's authority to establish regulations
setting forth a basis for determining what constitutes a "fair and reasonable
return" has been the subject of significant controversy. In August 1994, the
California Supreme Court issued its opinion in 20th Century Insurance Company
v. Garamendi, affirming the California Insurance Department's authority to
establish a broad industry-wide formula for implementing Proposition 103. The
20th Century Insurance Company subsequently settled the matter with the
California Insurance Department, and on February 22, 1995, the United States
Supreme Court denied the writ of certiorari filed by the other litigants in the
proceedings. It is not clear how the current regulations adopted by the
California Insurance Department will apply to USF&G, and there are many issues
which remain unsettled. The range of liability to USF&G could be from less than
$10 million up to approximately $31 million, including interest. The ultimate
outcome of this issue is not expected to have a material adverse effect on
USF&G's results of operations or financial position since any such liability is
not expected to materially exceed amounts already reserved.
8.2. Maine "Fresh Start" litigation
In 1987, the State of Maine adopted workers' compensation reform legislation
which was intended to rectify historic rate inadequacies and encourage
insurance companies to reenter the Maine voluntary workers' compensation
market. This legislation, which was popularly known as "Fresh Start," required
the Maine Superintendent of Insurance to annually determine whether the
premiums collected for policies written in the involuntary market and related
investment income were adequate on a policy-year basis. The Superintendent was
required to assess a surcharge on policies written in later policy years if it
was determined that rates were inadequate. Assessments were to be borne by
workers' compensation policyholders, except that for policy years beginning in
1989 the Superintendent could require insurance carriers to absorb up to 50
percent of any deficits if the Superintendent found that insurance carriers
failed to make good faith efforts to expand the voluntary market and depopulate
the residual market. Insurance carriers which served as servicing carriers for
the involuntary market would be obligated to pay 90 percent of the insurance
industry's share. The Maine Fresh Start statute requires the Superintendent to
annually estimate each year's deficit for seven years before making a final
determination with respect to that year.
In March 1993, the Superintendent affirmed a prior Decision and Order (known as
the "1992 Fresh Start Order") in which he found, among other things, that there
were deficits for the 1988, 1989 and 1990 policy years, and that insurance
carriers had not made a good faith effort to expand the voluntary market and
consequently were required to bear 50 percent of any deficits relating to the
1989 and 1990 policy years. The Superintendent further found that a portion of
these deficits were attributable to servicing carrier inefficiencies and poor
investment practices and ordered that these costs be absorbed by insurance
carriers. Also, in May 1993, the Superintendent found that insurance carriers
would be liable for 50 percent of any deficits relating to the 1991 policy year
(the "1993 Fresh Start Order"), but indicated that he would make no further
determinations regarding the portions of any deficits attributable to alleged
servicing carrier inefficiencies and poor investment practices until his
authority to make such determinations was clarified in the various suits
involving prior Fresh Start orders.
USF&G was a servicing carrier for the Maine residual market in 1988 through
1991. USF&G withdrew from the Maine voluntary market and as a servicing carrier
effective December 31, 1991. USF&G joined in an appeal of the 1992 Fresh Start
Order which was filed April 5, 1993 in the Maine Superior Court. In addition to
The Hartford Accident and Indemnity Company and USF&G, the National Council of
Compensation Insurance ("NCCI") and several other insurance companies which
were servicing carriers during this time frame have instituted similar appeals.
Similar appeals of the Superintendent's 1993 Fresh Start Order have been filed
by USF&G, the NCCI and several other servicing carriers in the same court. The
appeals of the 1993 Fresh Start Order will be heard on a consolidated basis.
On October 17, 1994, the Superior Court of Maine upheld the Superintendent's
finding in the 1992 Fresh Start Order that the insurance carriers failed to
exercise their good faith best efforts to expand the voluntary market and
consequently were required to bear 50 percent of the deficit relating to the
1989 and 1990 policy years. The Superior Court also held that the
Superintendent improperly held that $40 million of the deficit should be
attributed to the carriers due to servicing carrier inefficiencies and poor
investment practices. USF&G and the other parties challenging the
Superintendent's order have appealed to the Maine Law Court, the highest court
in Maine, the Superior Court's ruling on the carriers' lack of good faith, and
the Superintendent may likewise appeal the Superior Court ruling that it was
improper to shift $40 million of the deficit to carriers due to alleged
inefficiencies and poor investment practices.
Estimates of the potential deficits vary widely and are continuously revised as
loss and claims data matures. If the Superintendent were to prevail on all
issues, then the range of ultimate liability for USF&G, based on the most
recent estimates provided by the Superintendent and the NCCI, respectively,
could range from approximately $12 million to approximately $21 million.
8.3. Involuntary market plans
Most states require insurers to provide coverage for less desirable risks
through participation in mandatory programs. USF&G's participation in assigned
risk pools and similar plans, mandated now or in the future, creates and is
expected to create downward pressure on earnings.
8.4. Withdrawal from business lines
Some states have adopted legislation or regulations restricting or otherwise
limiting an insurer's ability to withdraw from certain lines of business. Such
restrictions are most often found in personal lines and workers' compensation
insurance. They include prohibitions on mid-term cancellations and limiting
reasons based upon which an insurer may non-renew policies, requirements for
amendments to underwriting standards, rates and policy forms to be approved by
state regulators, specifications of a maximum percentage of a book of business
which may be non-renewed within the state within any 12 month period, and
prohibitions on exiting a single line of business within a state (thus
requiring an insurer to either continue an unprofitable line or give up all
lines of business and withdraw from a state entirely). Such restrictions limit
USF&G's ability to manage its exposure to unprofitable lines and adversely
affects earnings to the extent USF&G is required to continue writing
unprofitable business.
8.5. Guaranty funds
Insurance guaranty fund laws have been adopted in most states to protect
policyholders in case of an insurer's insolvency. Insurers doing business in
those states can be assessed for certain obligations of insolvent companies
to policyholders and claimants. These assessments, under certain circumstances
can be credited against future premium taxes. Net of such tax credits, USF&G
incurred $9 million of guaranty fund expense in 1994 and $15 million and $13
million in 1993 and 1992, respectively.
Financial difficulties of certain insurance companies over the past several
years are expected to result in additional assessments that could have a
negative impact on future earnings. State laws limit the amount of annual
assessments which are based on percentages (generally two percent) of
assessable annual premiums in the year of insolvency. The ultimate amount of
these assessments cannot be reasonably estimated, but are not expected to have
a material adverse effect on USF&G's financial position.
8.6. NAIC proposals
The National Association of Insurance Commissioners ("NAIC") has proposed
several model laws and regulations which are in varying stages of discussion.
The NAIC has adopted model regulations which establish minimum capitalization
requirements based on a "risk-based capital" formula (refer to Section 6.4 of
this Analysis). The NAIC has also proposed a Model Investment Law and
amendments to the Model Holding Company System Regulatory Act. These model acts
address investments which are permissible for property/casualty and life
insurers to hold, and investments in subsidiaries and affiliates, respectively.
Adoption of these model laws is targeted for 1995. It is not expected that the
final adoption of these regulations by the NAIC will result in any material
adverse effect on USF&G's liquidity or financial position.
8.7. National health care
President Clinton and Congress have considered various proposals to enact a
comprehensive national health care system. Enactment of certain of these
proposals would result in the coordination of the medical payment system for
workers' compensation and the medical payments component of automobile
insurance within a reformed national health care system or a merger of workers'
compensation and automobile medical coverage into a reformed health care
system. Although some form of national health care may be enacted, it is
unclear whether or to what extent such legislation will address workers'
compensation or personal automobile insurance. No reliable prediction can be
made at this time as to the ultimate outcome of the legislative deliberations
regarding national health care reform or the effect such legislation may have
on USF&G.
8.8. Superfund
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), more commonly known as "Superfund," is scheduled to be reauthorized
in 1995. Insurance companies, other businesses, environmental groups and
municipalities are advocating a variety of reform proposals to revise the
cleanup and liability provisions of CERCLA. No reliable prediction can be made
as to the ultimate outcome of the legislative deliberations regarding the
reauthorization of CERCLA or the effect such revisions may have on USF&G.
8.9. Insurance regulatory information system
The NAIC's Insurance Regulatory Information System ("IRIS") ratios are intended
to assist state insurance departments in their review of the financial
condition of insurance companies operating within their respective states. IRIS
specifies eleven industry ratios and establishes a "usual range" for each
ratio. Significant departure from a number of ratios may lead to inquiries
from state insurance regulators. As of December 31, 1994, USF&G was within the
"usual range" for all IRIS ratios.
8.10. Taxation of deferred annuities
From time to time, various proposals have been considered by Congress, the
Office of Management and Budget and the Department of the Treasury to include
within current taxable income all or a portion of the interest payments which
accrue on certain deferred annuity products, including some deferred annuity
products sold by F&G Life. Currently, such interest is not taxed until the time
of distribution. All such proposals have focused exclusively on deferred
annuities and have not included annuities issued in connection with structured
settlements of claims or on tax sheltered annuities. No reliable prediction can
be made at this time as to the outcome of any such proposals or the effect such
proposals may have on F&G Life.
8.11. Federal antitrust legislation
Congress has considered various proposals to revise the McCarran-Ferguson Act
of 1945. This act has historically provided the insurance industry with broad
antitrust exemptions. Various proposals have been made which would repeal many
of those exemptions, although "safe harbors" may be preserved for data
collection, loss development, common policy forms, residual market pooling
arrangements and other areas essential to the property/casualty insurance
industry. No reliable prediction can be made at this time as to the outcome of
any of these proposals or the effect they may have on USF&G.
9. Income Taxes
Effective January 1, 1993, USF&G changed its method of accounting for income
taxes as required by SFAS No. 109, "Accounting for Income Taxes." This
standard requires recognition of future tax benefits attributable to net
operating loss carry-forwards ("NOLs") and to deductible temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. A valuation allowance is
required if it is more likely than not that some or all of the deferred tax
asset may not be realized. The valuation allowance is established based on an
evaluation of positive and negative evidence as to the likelihood of realizing
some or all of the deferred tax assets.
At December 31, 1993, USF&G had recorded a $119 million net deferred tax asset,
as it was the opinion of management it was more likely than not that there
would be sufficient future taxable income to result in the realization of this
benefit. The primary negative evidence that existed at December 31, 1993 was
the cumulative pretax net losses for the years 1991 through 1993. The primary
positive evidence at that time was forecasted taxable income sufficient to
recover a portion of the tax benefit within three to five years and a tax
planning strategy to generate future taxable income to utilize such NOLs, if
necessary.
At December 31, 1994, the net deferred tax asset increased to $416 million,
primarily based on the increasing weight of positive evidence which resulted in
a $203 million net decrease in the valuation allowance. Management reviews the
valuation allowance on a quarterly basis. Throughout 1994, the weight of
evidence became increasingly more positive as the core earnings trend improved
each quarter. As 1994 progressed, the negative evidence of cumulative losses
which were caused by 1991 results became increasingly less of a factor. By the
end of 1994, cumulative pretax net income was positive from 1992 through 1994.
Given the substantially reduced degree of negative evidence and management's
increased confidence in the sustainability of the improved earnings of the core
insurance segments and, therefore, its enhanced ability to forecast future
taxable income, it became appropriate to reduce the valuation allowance
beginning in the second quarter of 1994. The largest adjustment to the
valuation allowance occurred in the fourth quarter of 1994 as the Corporation
continued to achieve its forecasted results. This coincided with the
elimination of the negative evidence of three-year cumulative net losses and
with the completion of the Corporation's budgeting and mid-range forecasting
process, allowing for more reliable projections of future taxable income.
USF&G has NOLs of $750 million which expire as follows: $147 million in 2005
and $603 million in 2006. The NOLs available for future utilization were
generated primarily by the noninsurance businesses of USF&G and nonrecurring
charges related to the business restructuring program. A majority of these
noninsurance businesses that caused a significant drain on prior earnings have
been sold, divested or liquidated by USF&G.
Future levels of net income and taxable income from the core insurance
operations are dependent on several factors, including general economic and
specific insurance industry conditions, competitive pressures, catastrophe
losses, adverse involuntary loss experience, etc. Because of these risk
factors, as well as other factors beyond the control of management, no
assurance can be given that sufficient taxable income will be generated to
utilize the NOLs or otherwise realize the deferred tax assets. However,
management has considered these factors in reaching its conclusion that it is
more likely than not that there will be sufficient future taxable income to
result in the realization of the recorded $416 million deferred tax asset. This
realization is dependent, in whole or in part, on USF&G's ability to generate
future taxable income from ordinary and recurring operations. Based on USF&G's
evaluations, approximately $1.2 billion of future taxable income would need to
be generated to realize the $416 million deferred tax asset. If 1994 pretax
net income before realized gains and facilities exit costs of $129 million is
assumed to be an average taxable income for future years, then USF&G will be
able to realize enough income within nine years to fully recognize the net
deferred tax asset. This is well within the tax carry-forward period. Further,
management's three to five year forecast, which reflects management's
expectations as to earnings growth, indicates sufficient future taxable income
to, more likely than not, realize the recorded asset.
USF&G's tax returns have not been reviewed by the Internal Revenue Service
("IRS") since 1989 and the availability of the NOLs could be challenged by the
IRS upon review of returns through 1993. Management believes, however, that IRS
challenges that would limit the recoverability of $416 million in tax benefits
are unlikely, and adjustments to the tax liability, if any, for years through
1994 will not have a material adverse effect on USF&G's financial position.
10. Glossary of Terms
Account value: Deferred annuity cash value available to policyholders before
the assessment of surrender charges.
Catastrophe losses: Property/casualty insurance claim losses resulting from a
sudden calamitous event, such as a severe storm, are categorized as
"catastrophes" when they meet certain severity and other criteria determined by
a national organization.
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.
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 pools and associations: Property/casualty insurance companies are
required by state laws to participate in a number of assigned risk pools,
automobile reinsurance facilities, and similar mandatory plans ("involuntary
market plans"). These plans generally require coverage of less desirable risks,
principally for workers' compensation and automobile liability, that do not
meet the companies' normal underwriting standards. As mandated by legislative
authorities, insurers generally participate in such plans based upon their
shares of the total writings of certain classes of insurance.
Liquid assets to surrender value: Liquid assets (publicly traded bonds,
stocks, cash and short-term investments) divided by surrenderable policy
liabilities, net of surrender charges. A measure of an insurance company's
ability to meet liquidity needs in case of annuity surrenders.
Loss ratio: The ratio of incurred losses and loss expenses to earned premiums,
determined in accordance with SAP or GAAP, as applicable. The difference
between SAP and GAAP relates to deposit accounting for GAAP related to certain
financial reinsurance assumed.
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.
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.
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.
<TABLE>
USF&G Corporation
Eleven-Year Summary of Selected Financial Data
Years Ended December 31
(dollars in millions
except per share data) 1994* 1993* 1992* 1991*
<S> <C> <C> <C> <C> <C>
Consolidated Results
Premiums earned $ 2,508 $ 2,521 $ 2,683 $ 3,213
Revenues 3,310 3,323 3,712 4,202
Income (loss) from continuing
operations before cumulative effect
of adopting new accounting standards 237 130 36 (145)
Income (loss) from discontinued operations - - (7) (32)
Cumulative effect of adopting new
accounting standards - 38 - -
Net income (loss) 237 168 29 (177)
Per Share Results
Income (loss) from continuing
operations before cumulative effect
of adopting new accounting standards $ 2.00 $ .90 $ (.14) $ (2.06)
Income (loss) from discontinued operations - - (.08) (.36)
Cumulative effect of adopting new
accounting standards - .42 - -
Net income (loss) 2.00 1.32 (.22) (2.42)
Book value 9.96 11.33 8.66 9.30
Investment Results
Net investment income $ 749 $ 753 $ 820 $ 880
Realized gains (losses) 5 6 148 38
Change in unrealized gains (losses) (338) 220 (18) 37
Financial Position
Assets $ 13,980 $14,481 $13,242 $14,555
Investments 10,561 11,474 11,417 12,216
Corporate debt 586 574 574 617
Real estate and other debt 42 53 54 73
Shareholders' equity 1,441 1,556 1,300 1,346
Common Stock
Market high $ 16 1/8 $19 5/8 $ 15 $12 1/2
Market low 11 11/16 11 1/8 7 1/8 5 5/8
Market close 13 5/8 14 3/4 12 3/8 7 1/4
Cash dividends declared .20 .20 .20 .20
Common shares outstanding 104,810,794 91,418,372 89,985,083 88,566,897
Property/Casualty Insurance
Premiums earned $ 2,356 $ 2,392 $ 2,579 $ 3,044
Net income (loss) 498 285 194 (41)
Statutory premiums written 2,389 2,502 2,475 3,064
Statutory loss ratio 73.1 75.3 81.8 84.0
Statutory expense ratio 34.8 33.5 34.8 33.1
Statutory combined ratio 107.9 108.8 116.6 117.1
Life Insurance
Sales $ 286 $ 205 $ 155 $ 280
Premium income 152 129 104 169
Net income (loss) 12 10 (5) 31
Noninsurance Operations
Revenues $ 90 $ 5 $ 17 $ 38
Net loss (273) (126) (160) (167)
* Amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria
Financial Corporation.
1990* 1989* 1988* 1987* 1986* 1985* 1984*
<C> <C> <C> <C> <C> <C> <C>
$ 3,535 $ 3,713 $ 3,801 $ 3,888 $ 3,622 $ 3,031 $ 2,275
4,191 4,653 4,559 4,500 4,314 3,589 2,630
(433) 148 251 263 276 (109) (64)
(136) (31) (20) 2 (2) 1 -
- - - - - - -
(569) 119 247 279 295 (108) (64)
$ (5.10) $ 1.52 $ 2.87 $ 3.36 $ 4.04 $ (1.79) $ (1.16)
(1.55) (.35) (.24) .03 (.03) .02 -
- - - - - - -
(6.65) 1.18 2.82 3.57 4.32 (1.77) (1.16)
11.65 20.61 22.29 19.29 19.90 18.62 18.74
$ 930 $ 912 $ 796 $ 699 $ 619 $ 392 $ 369
(354) (36) (92) (133) 53 150 (23)
(30) 32 185 (282) (105) 118 (10)
$13,951 $13,576 $12,342 $10,171 $ 8,943 $ 7,676 $ 6,105
11,259 10,911 9,787 7,901 6,831 5,692 4,146
659 543 448 407 348 197 146
129 92 44 24 5 3 4
1,227 2,011 2,058 1,727 1,579 1,217 1,048
$30 3/8 $ 34 $34 3/8 $48 3/4 $46 3/4 $41 1/2 $30 7/8
7 28 1/4 28 1/2 26 1/4 36 1/4 25 5/8 17 5/8
7 1/2 29 28 1/2 28 3/8 39 3/4 39 27 1/2
2.44 2.80 2.64 2.48 2.32 2.20 2.08
88,157,862 87,864,146 83,320,477 79,193,184 69,319,067 65,371,755 55,923,452
$ 3,349 $ 3,548 $ 3,623 $ 3,754 $ 3,542 $ 2,964 $ 2,217
(192) 200 318 331 309 (116) (69)
3,651 3,717 3,903 3,854 3,701 3,152 2,320
81.8 76.4 73.0 73.2 79.1 90.7 90.5
32.9 32.8 31.2 30.1 29.1 30.0 31.4
114.7 109.2 104.2 103.3 108.2 120.7 121.9
$ 1,054 $ 960 $ 1,077 $ 278 $ 83 $ 119 $ 80
186 165 178 133 79 67 58
(16) 31 14 37 20 27 18
$ 22 $ 84 $ 114 $ 112 $ 8 $ 41 $ 33
(361) (112) (85) (88) (86) (23) (13)
</TABLE>
<TABLE>
USF&G Corporation
Consolidated Statement of Operations
Years Ended December 31
(dollars in millions except per share data) 1994* 1993* 1992*
<C> <S> <C> <C> <C> <C>
Revenues
Premiums earned $2,508 $2,521 $2,683
Net investment income 749 753 820
Other 48 43 61
Revenues before net realized gains 3,305 3,317 3,564
Net realized gains on investments 5 6 148
Total revenues 3,310 3,323 3,712
Expenses
Losses, loss expenses and policy benefits 2,132 2,200 2,497
Underwriting, acquisition and
operating expenses 1,001 979 1,087
Interest expense 37 41 41
Restructuring charges - - 51
Facilities exit costs 183 - -
Total expenses 3,353 3,220 3,676
Income (loss) from continuing operations
before income taxes and cumulative effect
of adopting new accounting standards (43) 103 36
Provision for income taxes (benefit) (280) (27) -
Income from continuing operations before
cumulative effect of adopting new
accounting standards 237 130 36
Loss from discontinued operations - - (7)
Income (loss) from cumulative effect of
adopting new accounting standards:
Income taxes - 90 -
Postretirement benefits - (52) -
Net income $ 237 $ 168 $ 29
Preferred stock dividend requirements 46 48 48
Net income (loss) available to
common stock $ 191 $ 120 $ (19)
Primary Earnings Per Common Share
Income (loss) from continuing operations
before cumulative effect of adopting
new accounting standards $ 2.00 $ .90 $ (.14)
Loss from discontinued operations - - (.08)
Income from cumulative effect of adopting
new accounting standards - .42 -
Net income (loss) $ 2.00 $ 1.32 $ (.22)
Fully Diluted Earnings Per Common Share
Income (loss) from continuing operations
before cumulative effect of adopting
new accounting standards $ 1.77 $ .96 $ (.14)
Loss from discontinued operations - - (.08)
Income from cumulative effect of
adopting new accounting standards - .32 -
Net income (loss) $ 1.77 $ 1.28 $ (.22)
Weighted average common shares outstanding:
Primary 95,796,671 90,566,398 89,235,158
Fully diluted 127,807,799 118,850,091 89,235,158
* Amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria
Financial Corporation (See Note 1.11).
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
USF&G Corporation
Consolidated Statement of Financial Position
At December 31
(dollars in millions except per share data) 1994* 1993* 1992*
<C> <S> <C> <C> <C> <C>
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market,
1994, $4,284; 1993, $4,807; 1992, $7,300) $ 4,659 $ 4,672 $ 7,228
Available for sale, at market** (cost, 1994,
$4,265; 1993, $4,753; market, 1992, $2,076) 4,081 4,976 2,033
Common stocks, at market (cost, 1994, $53;
1993, $80; 1992, $163) 46 66 125
Preferred stocks, at market (cost, 1994, $26;
1993, $23; 1992, $24) 26 23 29
Short-term investments 450 335 532
Mortgage loans 349 302 186
Real estate 662 685 818
Other invested assets 288 415 466
Total investments 10,561 11,474 11,417
Cash 69 18 26
Accounts, notes and other receivables 741 691 748
Reinsurance receivables 554 573 -
Servicing carrier receivables 706 719 -
Deferred policy acquisition costs 504 444 472
Other assets 845 562 579
Total assets $13,980 $14,481 $13,242
Liabilities
Unpaid losses, loss expenses and policy benefits $ 9,962 $10,343 $ 9,460
Unearned premiums 968 950 797
Corporate debt 586 574 574
Real estate and other debt 42 53 54
Other liabilities 981 1,005 1,057
Total liabilities 12,539 12,925 11,942
Shareholders' Equity
Preferred stock, par value $50.00 (12,000,000
shares authorized; shares issued, 1994,
6,627,896; 1993, 9,099,910; 1992, 9,100,000) 331 455 455
Common stock, par value $2.50 (240,000,000 shares
authorized; shares issued, 1994, 104,810,794;
1993, 91,418,372; 1992, 89,985,083) 262 228 225
Paid-in capital 1,104 986 971
Net unrealized gains (losses) on investments
and foreign currency (147) 191 (29)
Minimum pension liability (63) (85) -
Retained earnings (deficit) (46) (219) (322)
Total shareholders' equity 1,441 1,556 1,300
Total liabilities and shareholders' equity $13,980 $14,481 $13,242
* Amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria
Financial Corporation (See Note 1.11).
** 1992 amounts are at amortized cost (See Note 1.3).
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
USF&G Corporation
Consolidated Statement of Cash Flows
Years Ended December 31
(in millions) 1994* 1993* 1992*
<C> <S> <C> <C> <C> <C>
Operating Activities
Direct premiums collected $ 2,029 $ 2,117 $ 2,367
Net investment income collected 750 774 844
Direct losses, loss expenses and
policy benefits paid (1,884) (1,922) (2,134)
Net reinsurance activity 22 (113) (112)
Underwriting and operating expenses paid (789) (774) (842)
Interest paid 31 41 42
Income taxes paid (12) (5) (10)
Other items, net (7) (14) (39)
Net cash provided from continuing operations 140 104 116
Net cash used in discontinued operations - - (2)
Net cash provided from operating activities 140 104 114
Investing Activities
Net sales and maturities of short-term investments (115) 200 58
Purchases of fixed maturities held to maturity (400) (1,912) (6,945)
Sales of fixed maturities held to maturity 65 462 1,116
Maturities/repayments of fixed maturities held
to maturity 348 942 327
Purchases of fixed maturities available for sale (351) (1,257) (499)
Sales of fixed maturities available for sale 345 1,270 4,812
Repayments of fixed maturities available for sale 480 316 778
Purchases of equities and other investments (434) (256) (439)
Sales, maturities and repayments of equities and
other investments 482 399 842
Sales of subsidiaries - - 17
Purchases of property and equipment (33) (29) (12)
Disposals of property and equipment 4 4 7
Net investing activities of discontinued operations - - 2
Net cash provided from investing activities 391 139 64
Financing Activities
Deposits for universal life and investment contracts 246 168 164
Withdrawals of universal life and investment
contracts (664) (364) (289)
Net short-term borrowings (repayments) (167) (3) 2
Long-term borrowings 270 - -
Repayments of long-term borrowings (124) (3) (53)
Issuances of common stock 38 17 3
Redemptions of preferred stock (13) - -
Cash dividends paid to shareholders (66) (66) (66)
Net cash used in financing activities (480) (251) (239)
Increase (decrease) in cash 51 (8) (61)
Cash at beginning of year 18 26 87
Cash at end of year $ 69 $ 18 $ 26
* Amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria
Financial Corporation (See Note 1.11).
See supplemental cash flow information at Note 1.12.
See Notes to Consolidated Financial Statements.
</TABLE>
<TABLE>
USF&G Corporation
Consolidated Statement of Shareholders' Equity
Years Ended December 31
(dollars in millions except per share data) 1994* 1993* 1992*
<C> <S> <C> <C> <C> <C>
Preferred Stock
Balance at beginning of year $ 455 $ 455 $ 455
Par value of shares issued:
Series C shares converted to common shares (111) - -
Series C shares redeemed (13) - -
Balance at end of year 331 455 455
Common Stock
Balance at beginning of year 228 225 221
Par value of shares issued 11 3 4
Par value of shares issued for conversion of Series C shares 23 - -
Balance at end of year 262 228 225
Paid-In Capital
Balance at beginning of year 986 971 967
Excess of proceeds over par value of shares issued 32 15 4
Excess of proceeds over par value of Series C shares converted 86 - -
Balance at end of year 1,104 986 971
Net Unrealized Gains (Losses) on Investments
and Foreign Currency
Balance at beginning of year 191 (29) (11)
Net change in unrealized gains (losses) (338) 220 (18)
Balance at end of year (147) 191 (29)
Minimum Pension Liability
Balance at beginning of year (85) - -
Change in unfunded accumulated benefits 22 (85) -
Balance at end of year (63) (85) -
Retained Earnings (Deficit)
Balance at beginning of year (219) (322) (286)
Net income 237 168 29
Common stock dividends declared (per share,
1994, 1993, and 1992, $.20) (18) (17) (17)
Preferred stock dividends declared (per share, 1994, 1993,
and 1992, Series A, $4.10, Series B, $10.25, Series C, $5.00) (46) (48) (48)
Balance at end of year (46) (219) (322)
Total shareholders' equity $1,441 $1,556 $1,300
* Amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria
Financial Corporation (See Note 1.11).
See Notes to Consolidated Financial Statements.
</TABLE>
USF&G Corporation
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
1.1. Basis of presentation
The consolidated financial statements are prepared in accordance with generally
accepted accounting principles ("GAAP"). These statements include the accounts
of USF&G Corporation and its subsidiaries ("USF&G," or "the Corporation").
Intercompany transactions are eliminated in consolidation. Certain prior year
amounts have been reclassified to conform to the 1994 presentation. See also
Note 1.11 regarding restatements for mergers consummated in the second quarter
of 1995.
1.2. Permitted statutory accounting practices
Reporting practices for insurance subsidiaries prescribed or permitted by state
regulatory authorities (statutory accounting) differ from GAAP. Statutory
amounts for USF&G's insurance operations follow. (Note: For comparability,
amounts are restated to include Discover Re and Victoria (See Note 1.11).
However, restatement of prior periods for business combinations is not
prescribed by statutory accounting.)
Years Ended December 31
(in millions) 1994 1993 1992
Statutory Net Income:
Property/casualty insurance $ 170 $ 202 $ 216
Reinsurance subsidiaries and affiliates 3 1 1
Life insurance 30 5 23
At December 31
(in millions) 1994 1993 1992
Statutory Surplus:
Property/casualty insurance* $1,621 $1,577 $1,498
Reinsurance subsidiaries and affiliates 211 147 152
Life insurance 326 316 310
*This amount includes the surplus of the life insurance subsidiary
and certain reinsurance subsidiaries and affiliates.
USF&G's primary insurance subsidiaries, United States Fidelity and Guaranty
Company ("USF&G Company") and Fidelity and Guaranty Life Insurance Company
("F&G Life"), are domiciled in the State of Maryland and prepare their
statutory financial statements in accordance with accounting practices
prescribed or permitted by the Maryland Insurance Administration. Prescribed
statutory accounting practices include state laws, regulations and general
administrative rules issued by the State of Maryland as well as a variety of
publications and manuals of the National Association of Insurance Commissioners
("NAIC"). Permitted statutory accounting practices encompass all accounting
practices not so prescribed.
Property/Casualty Insurance: USF&G Company received written approval from the
Maryland Insurance Administration to extend the required disposal period for
real property acquired as security for loans or other obligations. Under the
current Maryland Insurance Code, these assets are required to be disposed of
within five years from the date of acquisition. The Maryland Insurance
Administration extended this time period for certain properties up to no later
than December 31, 1997. As of December 31, 1994, this permitted transaction
increased statutory surplus by $19 million over what it would have been
had prescribed accounting practices been followed.
Life Insurance: F&G Life has received permission from the Maryland Insurance
Administration to reduce non-admitted assets by the associated asset valuation
reserve subcomponent ending balance. As of December 31, 1994, this permitted
accounting practice had the effect of increasing statutory surplus by $15
million over what it would have been had prescribed accounting practices been
followed.
Since Maryland does not specifically prescribe by law or regulation reserves
for universal life policies or group annuities, F&G Life follows reserving
practices which are permitted by the State of Maryland. These practices are as
follows:
Universal Life: For older generation universal life ("UL") policies, the full
account value is held as a reserve. For newer generation universal life
policies, reserves are held based on a calculation according to the NAIC UL
Model Regulation, which has been adopted by many states. The reserves
calculated according to the NAIC UL Model Regulation equal the account value at
the end of the surrender charge period which varies from 8 to 15 years.
Group Annuities: Many of the group annuities are used to fund qualified
pension and/or profit sharing plans. For these annuities, the funds are not
allocated to individual participants. The full account value is held as the
reserve for these annuities. For the group annuities where the funds and/or
benefits are allocated to the individual certificate holder, reserves are
calculated according to the laws prescribed for individual annuities.
1.3. Investments
Fixed Maturities: USF&G classifies fixed maturities as "held to maturity" if
it has both the positive intent and ability to hold the securities until
maturity or near enough to maturity such that interest rate risk is
substantially eliminated as a pricing factor. Fixed maturities held to maturity
are carried at amortized cost. Changes in the market values of these
investments are generally not recognized in the financial statements. Specific
write-downs are taken when an impairment is deemed other than temporary.
Fixed maturities that are bought and held principally for the purpose of
selling them in the near term are classified as "trading securities." USF&G
has no securities classified as trading securities.
Fixed maturities not classified as either "held to maturity" or "trading
securities" are classified as "available for sale." These securities are held
for an indefinite period of time and may be sold in response to changes in
interest rates and the yield curve, prepayment risk, liquidity needs, or other
factors. Effective December 31, 1993, upon the adoption of Statement of
Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," available for sale fixed maturities
are carried at market value, with unrealized gains and losses recorded as a
separate component of shareholders' equity. Unrealized gains or losses on fixed
maturities available for sale are offset by an adjustment to life insurance
deferred policy acquisition costs which is made on a proforma basis as if the
unrealized gains or losses on those assets which match certain life insurance
liabilities were realized. At December 31, 1992, before adoption of SFAS No.
115, fixed maturities available for sale were carried at the lower of aggregate
amortized cost or market value. Market value exceeded amortized cost at
December 31, 1992; therefore, there were no unrealized losses reported in
shareholders' equity.
Equity Securities and Options: Investments in common and preferred stocks are
carried at market value with the resulting unrealized gains or losses reported
directly in shareholders' equity. In 1992 premiums received on options written
were recorded as liabilities. The premiums paid on options purchased were
recorded as assets. Outstanding option positions were carried at market value,
and the resulting unrealized gains or losses were reported directly in
shareholders' equity. There were no outstanding options at December 31, 1994
and 1993.
Securities Lending: USF&G participates in a securities lending program where
certain securities from its portfolio are loaned to other institutions for
short periods of time. A fee is paid to USF&G by the borrower. Collateral that
exceeds the market value of the loaned securities is invested by the lending
agent to represent USF&G's interest. USF&G's interest in securities lending is
reported in other invested assets. USF&G's invested assets and other
liabilities include $6 million, $141 million and $206 million at December 31,
1994, 1993 and 1992, respectively, related to its interest in the securities
lending program.
Mortgage Loans and Real Estate: Mortgage loans are carried at unpaid principal
balances. Real estate investments are reported at cost adjusted for equity
participation. Real estate acquired through foreclosure or deed-in-lieu of
foreclosure is initially recorded at estimated market value. Valuation
allowances are provided for probable impairments in estimated net realizable
value based on periodic evaluations. Specific write-downs are taken when an
impairment is deemed other than temporary.
Interest and Dividend Income: Interest on fixed maturity investments is
recorded as income when earned and is adjusted for any amortization of purchase
premium or discount. Dividends on equity securities are recorded as income on
ex-dividend dates.
Realized Gains and Losses: Realized gains and losses on the sale of
investments are determined based on specific cost. Realized losses are also
recorded when an investment's net realizable value is below cost and the
decline is considered other than temporary.
1.4. Recognition of premium revenues
Property/Casualty Insurance: Property/casualty insurance premiums are earned
principally on a pro rata basis over the lives of the policies and include
accruals for ultimate premium revenue anticipated under auditable and
retrospectively rated policies. Unearned premiums represent the portion of
premiums written applicable to the unexpired terms of policies in force.
Unearned premiums also include estimated and unbilled premium adjustments.
Life Insurance: Premiums on life insurance policies with fixed and guaranteed
premiums and benefits, and premiums on annuities with significant life
contingencies are recognized when due. Universal life policies and annuity
contracts are issued on both a single premium and recurring premium basis.
Revenues for these contracts consist of policy charges assessed against benefit
account balances during the period for the cost of insurance, policy
administration and surrenders.
1.5. Unpaid losses, loss expenses and policy benefits
Property/Casualty Insurance: The liability for unpaid property/casualty
insurance losses and loss expenses is based on an evaluation of reported losses
and on estimates of incurred but unreported losses. The reserve liabilities are
determined using adjusters' individual case estimates and statistical
projections. The liability was reported net of estimated salvage and
subrogation recoverables of $116 million, $139 million and $138 million at
December 31, 1994, 1993 and 1992, respectively. Adjustments to the liability
based on subsequent developments or other changes in the estimate are reflected
in results of operations in the period in which such adjustments become known.
Certain liabilities for unpaid losses and loss expenses related to workers'
compensation coverage are discounted to present value. The carrying amount of
such workers' compensation liabilities, net of reinsurance and net of discount,
was $1,598 million, $1,752 million and $1,798 million at December 31, 1994,
1993 and 1992, respectively. Interest rates used to discount these liabilities
generally ranged from 3 percent to 5 percent.
Life Insurance: Ordinary life insurance reserves are computed under the net
level premium method using assumptions for future investment yields, mortality
and withdrawal rates. These assumptions reflect USF&G's experience, modified to
reflect anticipated trends, and provide for possible adverse deviation.
Reserve interest rate assumptions are graded and range from 4.25 percent to
8.25 percent. Universal life and deferred annuity reserves are computed on the
retrospective deposit method, which produces reserves equal to the cash value
of the contracts. Such reserves are not reduced for charges that would be
deducted from the cash value of policies surrendered. Reserves on immediate
annuities with guaranteed payments are computed on the prospective deposit
method, which produces reserves equal to the present value of future benefit
payments.
1.6. Deferred policy acquisition costs
Acquisition costs, consisting of commissions, brokerage, and other expenses
incurred at policy issuance, are generally deferred. Anticipated losses, loss
expenses, policy benefits and remaining costs of servicing the policies are
considered in determining the amount of costs to be deferred. Anticipated
investment income is considered in determining whether a premium deficiency
exists related to short-duration contracts. Amortization of deferred policy
acquisition costs totaled $668 million, $685 million and $747 million for the
years ended December 31, 1994, 1993 and 1992, respectively, and are included in
underwriting, acquisition and operating expenses in the Consolidated Statement
of Operations.
Property/Casualty Insurance: Property/casualty insurance acquisition costs are
amortized over the period that related premiums are earned.
Life Insurance: Life insurance acquisition costs are amortized based on
assumptions consistent with those used for computing policy benefit reserves.
Acquisition costs on ordinary life business are amortized over their assumed
premium paying periods. Universal life and investment annuity acquisition costs
are amortized in proportion to the present value of their estimated gross
profits over the products' assumed durations, which are regularly evaluated and
adjusted as appropriate.
1.7. Property and equipment
Property and equipment is carried at cost less accumulated depreciation. At
December 31, 1994, 1993 and 1992, $189 million, $196 million and $201 million,
respectively, of property and equipment was included in other assets.
Depreciation is computed on the straight-line basis over the estimated useful
lives of the assets. For the years ended December 31, 1994, 1993 and 1992,
depreciation expense of $24 million, $21 million and $25 million, respectively,
is included in underwriting, acquisition and operating expenses.
1.8. Foreign currency translation
The functional currency for USF&G's foreign operations is the applicable local
currency. Foreign currency balance sheet accounts are translated to U.S.
dollars using exchange rates in effect at the balance sheet date. Revenue and
expense accounts are translated using the average exchange rates prevailing
during the year. The unrealized gains or losses, net of applicable deferred
income taxes, resulting from translation are included in shareholders' equity.
Foreign currency gains and losses on transactions denominated in a currency
other than the entity's functional currency are generally recorded in
operations. Such gains and losses may be reduced or effectively eliminated by
certain financial instruments used by USF&G to reduce its foreign exchange
exposure.
1.9. Earnings per common share
Primary earnings per common share are computed by subtracting dividends on
preferred stock from net income and then dividing by the weighted average
common shares outstanding during the period. The effect of common stock
equivalents is excluded from the calculations because their effect is not
material. Fully diluted earnings per common share assume the conversion of all
securities whose contingent issuance would have a dilutive effect on earnings.
1.10. Facilities exit costs
During 1994, USF&G committed to a plan to consolidate its home office
operations in Baltimore, Maryland at its Mount Washington facility. The
facilities exit costs of $183 million represent the present value of the rent
and other operating expenses to be incurred under the lease on the
Corporation's principal office building from the time USF&G vacates the
building through the expiration of the lease in 2009. (See Note 6.)
1.11. Business Combinations
On April 13, and May 22, 1995, USF&G consummated mergers with Discover Re
Managers, Inc. ("Discover Re"), and Victoria Financial Corporation
("Victoria"), respectively. In the transactions, USF&G exchanged 5.4 million
shares of common stock, worth approximately $78.5 million, for all of the
outstanding equity of Discover Re, and 3.8 million shares, worth approximately
$59.1 million, for all of the outstanding equity of Victoria. Discover Re
provides insurance, reinsurance and related services to the alternative risk
transfer market. Victoria is an insurance holding company which specializes in
nonstandard personal lines auto coverage.
Both of these business combinations are accounted for as poolings-of-interests.
Accordingly, the financial statements have been restated to reflect the mergers
with Discover Re and Victoria. A reconciliation of the previously separate
enterprises to the restated consolidated results of operations for periods
prior to the mergers is as follows:
<TABLE>
USF&G Corporation USF&G Corporation
(in millions) as Previously Reported Discover Re Victoria as Restated
<S> <C> <C> <C> <C>
Year Ended December 31, 1994
Revenues
Premiums earned $ 2,435 $ 22 $51 $ 2,508
Net investment income 743 3 3 749
Other 38 5 5 48
Revenues before net realized gains 3,216 30 59 3,305
Realized gains on investments 5 - - 5
Total revenues 3,221 30 59 3,310
Expenses
Losses, loss expenses and
policy benefits 2,079 17 36 2,132
Underwriting, acquisition and
operating expenses 971 9 21 1,001
Interest expense 37 - - 37
Facilities exit costs 183 - - 183
Total expenses 3,270 26 57 3,353
Income (loss) from continuing
operations before income taxes (49) 4 2 (43)
Provision for income taxes (benefit) (281) 1 - (280)
Net income 232 3 2 237
Preferred stock dividend requirements 46 - - 46
Net income available to common stock $ 186 $ 3 $ 2 $ 191
Total assets $13,774 $111 $95 $13,980
</TABLE>
<TABLE>
Year Ended December 31, 1993
<S> <C> <C> <C> <C>
Premiums earned $ 2,456 $ 16 $49 $ 2,521
Net investment income 749 2 2 753
Total revenues 3,249 21 53 3,323
Net income 165 1 2 168
Total assets 14,335 63 83 14,481
Year Ended December 31, 1992
Premiums earned $ 2,637 $ 8 $38 $ 2,683
Net investment income 817 1 2 820
Total revenues 3,660 11 41 3,712
Net income 28 - 1 29
Total assets 13,134 40 68 13,242
</TABLE>
1.12. Supplemental cash flow information
The Consolidated Statement of Cash Flows is presented using the "direct
method," which reports major classes of cash receipts and cash payments. A
reconciliation of net income to net cash provided from operating activities is
as follows:
Years Ended December 31
(in millions) 1994 1993 1992
Net income $ 237 $168 $ 29
Adjustments to reconcile net income
to net cash provided from operating activities:
Loss from discontinued operations - - 7
Cumulative effect of adopting new
accounting standards - (38) -
Facilities exit costs 183 - -
Provision for income taxes (benefit) (280) (27) -
Net realized gains on investments (5) (6) (148)
Change in insurance liabilities 72 60 68
Change in deferred policy acquisition costs (60) 28 66
Change in receivables (24) 48 137
Change in other liabilities (29) (55) (71)
Change in other assets 39 (96) (21)
Change in other items, net 7 22 49
Net cash provided from continuing operations 140 104 116
Net cash used in discontinued operations - - (2)
Net cash provided from operating activities $ 140 $104 $ 114
Note 2 Investments
2.1. Components of net investment income
Years Ended December 31
(in millions) 1994 1993 1992
Interest on fixed maturities $674 $725 $742
Equity security dividends 7 9 12
Option income - - 37
Short-term interest 14 9 27
Real estate and mortgage loans 58 41 50
Other investment income and (expenses) (4) (31) (48)
Net investment income $749 $753 $820
2.2. Net realized gains on investments
Years Ended December 31
(in millions) 1994 1993 1992
Gains (Losses) on Sales:
Fixed maturities $ 3 $ 79 $179
Equity securities and options - 5 44
Real estate and other 12 6 16
Net gains on sales 15 90 239
Impairments:
Fixed maturities (1) (10) (20)
Equity securities and options - (8) -
Real estate and other (9) (66) (71)
Total impairments (10) (84) (91)
Net realized gains on investments $ 5 $ 6 $148
2.3. Gross unrealized gains (losses)
At December 31
(in millions) 1994 1993 1992
Unrealized Gains:
Fixed maturities available for sale $ 9 $225 $ -
Deferred policy acquisition costs adjustment 33 - -
Equity securities 2 14 16
Options, foreign currency and other 16 10 5
Gross unrealized gains 60 249 21
Unrealized Losses:
Fixed maturities available for sale (193) (2) -
Deferred policy acquisition costs adjustment - (30) -
Equity securities (8) (23) (48)
Options, foreign currency and other (6) (3) (2)
Gross unrealized losses (207) (58) (50)
Net unrealized gains (losses) $(147) $191 $(29)
2.4. Change in net unrealized gains (losses)
Years Ended December 31
(in millions) 1994 1993 1992
Fixed maturities available for sale $(407) $223 $ -
Deferred policy acquisition costs adjustment 63 (30) -
Equity securities 3 23 (39)
Options, foreign currency and other 3 4 21
Net change $(338) $220 $(18)
2.5. Estimated market values of fixed maturity investments
The increase (decrease) in the difference between cost and market value of
fixed maturity investments for the years ended December 31, 1994, 1993 and
1992, was $(917) million, $243 million and $(259) million, respectively. The
cost and market value of total fixed maturities are as follows:
At December 31, 1994
Gross Unrecognized/
Unrealized Market
(in millions) Cost Gains Losses Value
Fixed maturities held to maturity $4,659 $32 $(407) $4,284
Fixed maturities available for sale 4,265 9 (193) 4,081
Total $8,924 $41 $(600) $8,365
At December 31, 1993
Gross Unrecognized/
Unrealized Market
(in millions) Cost Gains Losses Value
Fixed maturities held to maturity $4,672 $191 $(56) $4,807
Fixed maturities available for sale 4,753 225 (2) 4,976
Total $9,425 $416 $(58) $9,783
At December 31, 1992
Gross
Unrecognized Market
(in millions) Cost Gains Losses Value
Fixed maturities held to maturity $7,228 $171 $ (99) $7,300
Fixed maturities available for sale 2,033 50 (7) 2,076
Total $9,261 $221 $(106) $9,376
The cost and market value of fixed maturities held to maturity
are as follows:
At December 31, 1994
Gross
Unrecognized Market
(in millions) Cost Gains Losses Value
U.S. Government bonds $ 13 $ - $ (2) $ 11
Mortgage/asset-backed securities 1,496 19 (105) 1,410
Corporate bonds 2,637 6 (268) 2,375
High-yield bonds 483 6 (31) 458
Tax-exempt bonds 23 1 (1) 23
Other 7 - - 7
Total $4,659 $32 $(407) $4,284
At December 31, 1993
Gross
Unrecognized Market
(in millions) Cost Gains Losses Value
U.S. Government bonds $ 4 $ - $ (1) $ 3
Mortgage/asset-backed securities 1,669 70 (19) 1,720
Corporate bonds 2,464 79 (30) 2,513
High-yield bonds 505 37 (6) 536
Tax-exempt bonds 24 3 - 27
Other 6 2 - 8
Total $4,672 $191 $(56) $4,807
At December 31, 1992
Gross
Unrecognized Market
(in millions) Cost Gains Losses Value
U.S. Government bonds $ 349 $ 3 $ - $ 352
Mortgage/asset-backed securities 3,536 88 (47) 3,577
Corporate bonds 2,661 48 (40) 2,669
High-yield bonds 511 24 (12) 523
Tax-exempt bonds 62 4 - 66
Other 109 4 - 113
Total $7,228 $171 $(99) $7,300
The cost and market value of fixed maturities available for
sale are as follows:
At December 31, 1994
Gross
Unrealized Market
(in millions) Cost Gains Losses Value
U.S. Government bonds $ 273 $- $ (12) $ 261
Mortgage/asset-backed securities 1,367 3 (57) 1,313
Corporate bonds 2,394 5 (104) 2,295
High-yield bonds 133 - (19) 114
Tax-exempt bonds 98 1 (1) 98
Other - - - -
Total $4,265 $9 $(193) $4,081
At December 31, 1993
Gross
Unrealized Market
(in millions) Cost Gains Losses Value
U.S. Government bonds $ 308 $ 20 $ - $ 328
Mortgage/asset-backed securities 1,898 73 - 1,971
Corporate bonds 2,418 126 - 2,544
High-yield bonds 57 2 (2) 57
Tax-exempt bonds 72 4 - 76
Other - - - -
Total $4,753 $225 $(2) $4,976
At December 31, 1992
Gross
Unrecognized Market
(in millions) Cost Gains Losses Value
U.S. Government bonds $ 209 $ 3 $ - $ 212
Mortgage/asset-backed securities 1,293 40 (4) 1,329
Corporate bonds 461 7 (1) 467
High-yield bonds 11 - (1) 10
Tax-exempt bonds 32 - (1) 31
Other 27 - - 27
Total $2,033 $50 $(7) $2,076
2.6. Stated due dates of fixed maturities
The table below shows the stated due dates of fixed maturities
held to maturity.
At December 31, 1994
Market
(in millions) Cost Value
In 1995 $ 18 $ 18
1996 through 1999 341 324
2000 through 2004 1,820 1,684
After 2004 984 848
Subtotal 3,163 2,874
Mortgage/asset-backed securities 1,496 1,410
Fixed maturities held to maturity $4,659 $4,284
The table below shows the stated due dates of fixed maturities
available for sale.
At December 31, 1994
Market
(millions) Cost Value
In 1995 $ 153 $ 153
1996 through 1999 1,467 1,418
2000 through 2004 735 702
After 2004 543 495
Subtotal 2,898 2,768
Mortgage/asset-backed securities 1,367 1,313
Fixed maturities available for sale $4,265 $4,081
Expected maturities may differ from stated due dates as
borrowers may have the right to call or prepay obligations.
During 1994, USF&G received proceeds from sales or repayments of
fixed maturities of $1.2 billion. The table below illustrates
the source of 1994 proceeds.
Gross Gross
(in millions) Cost Proceeds Gains Losses
Proceeds From Sales of Fixed Maturities:
Held to maturity $ 65 $ 65 $1 $(1)
Available for sale 347 345 2 (4)
Subtotal 412 410 3 (5)
Proceeds from Maturities/Repayments:
Held to maturity 344 348 5 (1)
Available for sale 479 480 1 -
Subtotal 823 828 6 (1)
Total proceeds $1,235 $1,238 $9 $(6)
Sales in 1994 of fixed maturities classified as held to maturity involved 21
different issuers and were based on evidence of significant deterioration of
the issuers' creditworthiness. The determination of significant credit
deterioration was based upon current developments related specifically to the
issuers. USF&G performed a detailed analysis of the issuers' operating trends,
cash flows and its ability to meet debt service. USF&G's analysts continually
monitor news events, published financial results, rating agency reports and
other related financial information. Sales of fixed maturities under such
circumstances are not inconsistent with their original classifications as held
to maturity. Prior to the adoption of SFAS No. 115 in 1993, proceeds from sales
of fixed maturities held to maturity totaled $462 million with gross gains of
$20 million and gross losses of $12 million and occurred primarily due to
repositioning a portion of the portfolio to more effectively match the duration
of life insurance liabilities. Proceeds from sales of fixed maturities
available for sale were $1.3 billion in 1993 with gross gains of $73 million
and gross losses of $2 million. In 1992, proceeds from sales of fixed
maturities held to maturity totaled $1.1 billion with gross gains of $68
million and gross losses of $9 million. Proceeds from sales of fixed maturities
available for sale were $4.8 billion in 1992 with gross gains of $293 million
and gross losses of $193 million.
2.7. Investment commitments
USF&G has outstanding commitments to provide permanent financing for various
real estate development projects. The funded amounts of these commitments are
collateralized by the real estate projects. At December 31, 1994, unfunded
commitments totaled approximately $7 million, with approximately $3 million of
this expected to be funded in 1995. USF&G has a potential commitment to fund
$12 million under the terms of a participatory note investment if certain
collateralization tests are not met.
2.8. Nonincome-producing investments
Fixed maturities held at December 31, 1994, for which no income was recorded
during 1994, totaled $2 million. In addition, nonperforming real estate,
defined as mortgage loans and real estate investments that are not performing
in accordance with their contractual terms or are performing significantly
below expectations, totaled $208 million at December 31, 1994.
Note 3 Insurance Liabilities
3.1. Property/casualty insurance reserves - unpaid losses and loss
expenses
Activity in the unpaid losses and loss expenses for the property/casualty
segment is summarized as follows:
(in millions) 1994 1993 1992
Total reserve at beginning of year, gross $6,370 $5,565 $5,716
Less reinsurance recoverables 1,054 1 N/A
Net balance at January 1 5,316 5,564 5,716
Incurred Related To:
Current year 1,752 1,744 2,042
Prior years (8) 61 78
Total incurred 1,744 1,805 2,120
Paid Related To:
Current year 634 582 698
Prior years 1,284 1,471 1,574
Total paid 1,918 2,053 2,272
Net balance at December 31 5,142 5,316 5,564
Plus reinsurance recoverables 1,016 1,054 1
Total reserve at end of year, gross $6,158 $6,370 $5,565
Loss and loss expenses recorded in the current period financial statements are
affected by changes in estimates of insured events occurring in prior periods.
Losses incurred in 1994 but related to prior years were a reduction of $8
million, or less than 1 percent of 1994 incurred losses. Losses incurred but
related to prior years were $61 million in 1993, primarily as a result of the
strengthening of the unallocated loss expense reserve for voluntary and
servicing carrier business, and increased by $78 million in 1992 primarily
because of adverse development on reinsurance assumed from underwriting pools
and associations.
Reserves for asbestos-related illnesses and environmental claims cannot be
estimated with traditional loss reserving techniques. Liabilities are
established for known claims (including the cost of litigation) when sufficient
information has been developed to indicate the involvement of a specific
insurance policy, and management can reasonably estimate its liability. In
addition, liabilities have been established to cover additional exposures
on both known and unasserted claims. Estimates of the liabilities are reviewed
and updated continually. Developed case law and adequate claim history do not
exist for such claims, especially because significant uncertainty exists about
the outcome of coverage litigation and whether past claim experience will be
representative of future loss experience.
3.2. Life benefit reserves
The table below shows F&G Life's benefit reserves by policy type.
At December 31
(in millions) 1994 1993 1992
Single Premium Annuities:
Deferred $1,860 $2,138 $2,077
Immediate 867 815 788
Other annuities 492 462 508
Universal life/term/group life 579 554 523
Net balance 3,798 3,969 3,896
Reinsurance receivable 6 4 -
Total reserve at end of year, gross $3,804 $3,973 $3,896
Note 4 Debt and Credit Arrangements
4.1. Debt outstanding
<TABLE>
At December 31
(in millions) 1994 1993 1992
<C> <S> <C> <C> <C> <C>
Corporate:
Short-term $215 $395 $375
Long-term:
9.98% and 10.1% Universal Medium-Term Notes due 1994 - - 20
8 7/8% Notes due 1996 - 99 99
5 1/2% Swiss Franc Bonds due 1996 92 80 80
Zero Coupon Convertible Notes due 2009 130 - -
8 3/8% Senior Notes due 2001 149 - -
Total corporate debt 586 574 574
Real Estate and Other:
Short-term 12 18 12
Long-term:
8% Secured Note due 1995 - 11 11
9 3/8% Secured Note due 1994 - - 11
9.96% Secured Notes due through 1999 14 14 15
Other 16 10 5
Total real estate and other debt 42 53 54
Total debt outstanding $628 $627 $628
</TABLE>
4.2. Short-term debt
For general corporate purposes, USF&G maintained a committed, standby credit
facility with a group of foreign and domestic banks totaling $400 million at
December 31, 1994. This new facility, which expires in 1997, represents the
renegotiation of a prior credit facility of $700 million which was available at
December 31, 1993. USF&G pays facility fees on the total amount of the
commitments which are based on its long-term debt credit ratings. In order to
minimize facility fees, and due to the reduced borrowings against it, the
Corporation elected to reduce the size of the facility to its current level.
Borrowings against the facilities totaled $215 million at December 31, 1994 and
$375 million at December 31, 1993 and 1992. Interest rates are based on current
market rates. USF&G was in compliance with the covenants contained in these
agreements at December 31, 1994, 1993 and 1992. The most restrictive covenants
require USF&G to maintain a tangible net worth of at least $1.1 billion plus 50
percent of the net income earned during the commitment period and an
indebtedness-to-capital ratio below 55 percent.
In 1994, USF&G also entered into agreements under which a $100 million foreign
currency credit facility and a $100 million letter of credit facility are
available. USF&G pays facility fees on the total amount of each commitment.
There were no borrowings against these facilities at December 31, 1994.
4.3. Debt extinguishments
With proceeds from the issuance of the Zero Coupon Convertible Notes issued in
March 1994, USF&G extinguished $99 million principal of the Corporation's 8
7/8% Notes due 1996 and $20 million principal of Medium-Term Notes due 1994.
Proceeds from the issuance of the 8 3/8% Senior Notes in June 1994 were used to
reduce the short-term credit facility borrowings by $147 million. Real estate
debt was reduced by $11 million as the result of prepaying notes due in 1995
and further reduced $11 million as a result of a deed-in-lieu of foreclosure
whereby property in which USF&G had a partnership interest was conveyed back to
the lender. Real estate debt increased by $63 million as a result of the
restructuring of a real estate partnership whereby USF&G became a controlling
general partner. Shortly thereafter, $54 million of this partnership debt was
defeased, reducing the amount that would otherwise have been consolidated as a
result of this restructuring to $9 million.
4.4. Shelf registrations
In January 1994, USF&G filed a shelf registration statement with the Securities
and Exchange Commission. As of the time this registration statement went into
effect, USF&G had available $647 million of unissued debt, preferred stock,
common stock and warrants to purchase debt and stock. This registration
statement was reduced by $126 million by the issuance of the Zero Coupon
Convertible Notes and $149 million by the issuance of the 8 3/8% Senior Notes.
4.5. Redeemable debt
In 1994 and thereafter, the 5 1/2% Swiss Franc Bonds are redeemable at par plus
accrued interest. The Zero Coupon Convertible Notes are redeemable beginning in
1999 for an amount equal to the original issue price plus amortized original
issue discount.
4.6. Currency swaps
USF&G entered into currency swap agreements in 1989 to hedge its foreign
currency exposure on the SwF120 million 5 1/2% Swiss Franc Bonds. This hedge
was canceled in September 1994 and USF&G received a payment of approximately
$19 million. USF&G then rehedged the repayment of the SwF120 million Swiss
Franc debt and interest payments with forward contracts.
4.7. Interest rate swaps
As of December 31, 1993, USF&G had outstanding an interest rate swap for the
notional amount of $25 million to exchange variable rate debt into a fixed rate
of 9.405%. During 1994, USF&G entered into a new floating-for-fixed-rate swap
to reduce the floating rate exposure created by the prior swap. In conjunction
with the issuance of the 8 3/8% Senior Notes, USF&G entered into two interest
rate swaps with a total notional amount of $150 million which convert the fixed
interest payments from the debt issuance to floating rate debt for the first
three years of the seven year term of the debt.
These agreements involve, to varying degrees, interest rate and credit risk.
The notional amount represents the amount of the underlying debt to which the
swap applies, not future cash requirements. The maximum credit risk related to
the swap agreements is the amount related to periodic settlements, which is not
material at December 31, 1994. USF&G seeks to manage the credit risk through
monitoring procedures and investigation of counterparties to the transactions.
4.8. Interest
Interest expense incurred in the years ended December 31, 1994, 1993 and 1992
was $37 million, $41 million and $41 million, respectively. Interest incurred
and capitalized in 1992 was $8 million. There was no interest capitalized in
1993 or 1994.
4.9. Maturities of long-term debt
Real Estate
(in millions) Corporate and Other
1995 $ - $ 12
1996 92 -
1997 - -
1998 - -
1999 - 24
Note 5 Financial Instruments and Derivatives
Fair value information is based on quoted market prices where available. In
cases where quoted market prices are not available, fair values are based on
internal estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used, such as
applicable discount rate and estimated future cash flows. Therefore, the
derived fair value estimates cannot be substantiated by comparison to
independent markets and, in many cases, could not be realized in immediate
settlement of the instrument. Fair value disclosure requirements exclude
certain financial instruments and all nonfinancial instruments. The fair value
of many insurance related liabilities do not require disclosure. However, in
its strategy of asset/liability matching, USF&G takes into consideration the
future cash requirements of its insurance related liabilities. Had a
presentation of these liabilities been made, due to their long-term nature, the
fair value of insurance related liabilities would have been significantly less
than their carrying value.
5.1. Financial instruments
Cash and Short-Term Investments: The carrying amounts reported in the
Consolidated Statement of Financial Position for these instruments approximate
their fair values.
Fixed Maturity Investments: Fair values for publicly traded fixed maturity
investments are based on quoted market prices. For privately placed fixed
maturities, estimated fair values are derived by discounting expected future
cash flows using a current market rate applicable to the yield, credit quality
and maturity of the investment. At December 31, 1994, the amortized cost,
carrying amounts and fair values of fixed maturity investments were as follows:
Amortized Carrying Fair
(in millions) Cost Amount Value
Publicly traded $8,694 $8,513 $8,147
Private placements 230 227 218
Total fixed maturity investments $8,924 $8,740 $8,365
The preceding table includes fixed maturities available for sale with a market
and carrying value of $4.1 billion and amortized cost of $4.3 billion. Such
investments are reported in the Consolidated Statement of Financial Position at
market value.
Equity Investments: The carrying values of equity securities as reported in
the Consolidated Statement of Financial Position are based on quoted market
prices and reflect their fair values.
Mortgage Loans and Policy Loans: The fair values for mortgage loans and policy
loans are estimated based on discounted cash flow analyses, using interest
rates currently being offered for similar loans to borrowers with similar
credit ratings. Loans with similar characteristics are aggregated for purposes
of the calculations. At December 31, 1994, the carrying amounts and fair values
of investments in mortgage loans and policy loans were as follows:
Carrying Fair
(in millions) Amount Value
Mortgage loans $349 $331
Policy loans 61 55
Other Assets and Other Liabilities: Other invested assets considered financial
instruments include equity interests in minority ownership investments,
interests in limited partnerships and related notes receivable. It is not
practicable to estimate their fair value due to the closely-held nature of
these investments.
Other assets and liabilities considered financial instruments include agents'
balances receivable, prepaid and accrued expenses and other receivables
generally of a short-term nature. It is assumed the carrying value of these
financial instruments approximates their fair value.
Short and Long-Term Debt: The carrying amount of USF&G's short-term borrowings
approximates its fair value. The fair value of long-term debt is based on
market quotes or estimated discounted cash flow analyses, based on USF&G's
current incremental borrowing rates for similar types of borrowing
arrangements. The carrying amounts and estimated fair value of debt instruments
at December 31, 1994 were as follows:
Carrying Fair
(in millions) Amount Value
Corporate:
Short-term $215 $215
Long-term 371 349
Real estate and other 42 44
Total $628 $608
Investment Contracts: Fair values for F&G Life's single premium deferred
annuities, other deferred annuities, single premium immediate annuities and
supplementary contracts are primarily derived by estimating the cost to
extinguish its liabilities under an assumption reinsurance transaction. The
estimated statutory profits the assuming company would realize from the
transaction are discounted at a typical internal rate of return objective. If
such a transaction were to occur, GAAP would require the unamortized balance of
deferred acquisition costs associated with these liabilities be immediately
expensed. The amount of the related unamortized deferred acquisition costs
was approximately $98 million at December 31, 1994. The fair values of the
remaining liabilities under investment contracts are estimated using discounted
cash flow calculations, based on interest rates currently being offered for
like contracts with similar maturities. The carrying amounts and estimated fair
values of F&G Life's liabilities for investment contracts at December 31, 1994
are as follows:
Carrying Fair
(in millions) Amount Value
Single premium deferred annuities $1,870 $1,818
Other deferred annuities 349 319
Single premium immediate annuities
and supplementary contracts 121 116
Funding agreements 1 1
Group annuities 130 124
Total $2,471 $2,378
Off-Balance Sheet Financial Instruments: The fair values of USF&G's unfunded
real estate commitments and its financial commitment on investments are
estimated using discounted cash flow analyses, based on USF&G's current
incremental borrowing rate for similar types of borrowing arrangements. The
estimates of the fair value of USF&G's interest rate swaps were obtained
from the counterparties to the agreement or were derived by discounting the
expected future cash flows. The estimated fair values of USF&G's off-balance
sheet financial instruments at December 31, 1994, are as follows:
Fair
(in millions) Value
Liabilities:
Unfunded real estate commitments $ 6
Commitment on investments 13
Debt-related Derivatives:
Interest rate swaps 7
Currency forwards 2
5.2. Derivatives
USF&G uses derivative instruments to manage foreign exchange and interest rate
risk, reduce borrowing costs and minimize the impact of rate fluctuations on
the settlement of debt and other financial instruments. USF&G is subject to the
risk that the counterparties will fail to perform. However, these risks are
mitigated by the credit quality of the counterparties and the gains and losses
of the underlying instruments. USF&G does not use derivative instruments for
trading purposes.
Foreign Exchange Rate Instruments: The Corporation relies predominantly on
natural hedges to manage foreign exchange rate risk by maintaining offsetting
foreign asset and foreign liability positions wherever possible, without
sacrificing other financing objectives. Foreign exchange derivative instruments
in use as of December 31, 1994 were two currency forward contracts to purchase
Swiss Francs for the principal and interest payment associated with USF&G's
SwF120 million 5 1/2% Swiss Franc Bonds due 1996. The difference between the
spot rate at the initiation of the forward contract and the forward rate is
amortized over the life of the forward contract as foreign currency expense.
Interest Rate Instruments: The Corporation uses interest rate derivatives
selectively to enable it to maintain a certain fixed/floating rate exposure
given the current and projected interest rate environment. The interest rate
environment in 1994 was one in which short-term floating rate obligations
initially provided lower cost financing, but entailed greater interest rate
risk and provided only short duration liquidity. At the outset of 1994, USF&G
had approximately 61 percent floating rate debt ($375 million) and 39 percent
fixed rate debt ($243 million). In June 1994, USF&G issued $150 million of 8
3/8% Senior Notes due 2001, proceeds of which were used to repay a portion of
the floating rate debt. USF&G subsequently entered into two interest rate swaps
with a total notional amount of $150 million in which it pays floating interest
rates and receives a fixed interest rate to maintain an appropriate
fixed/floating rate exposure. At December 31, 1994, USF&G had approximately 59
percent floating rate debt ($364 million) and 41 percent fixed rate debt ($252
million).
Additionally, in 1994, USF&G entered into a $25 million floating-for-fixed-rate
swap to reduce the exposure created by a 1990 fixed-for-floating-rate swap. The
new floating-for-fixed-rate swap has terms similar to the remaining terms of
the 1990 transaction.
Other Instruments: USF&G has issued financial instruments with a maximum
contingent liability of $2 million depending on the market price of USF&G's
common stock at the maturity of the instruments.
Note 6 Leases
USF&G occupies office facilities under lease agreements that expire at various
dates through 2009. In addition, data processing, office and transportation
equipment is leased under agreements that expire at various dates through 1999.
Most leases contain renewal options that may provide for rent increases based
on prevailing market conditions. Some leases also may contain purchase options
based on fair market values or contractual values, if greater. All leases are
accounted for as operating leases. Rent expense for the years ended December
31, 1994, 1993 and 1992 was $63 million, $55 million and $59 million,
respectively. Rent expense in 1994 included a $9 million loss on long-term
subleases.
The table below shows the future minimum payments to be made under
noncancelable leases at December 31, 1994.
Home Other
Office Office Equip-
(in millions) Building Space ment Total
1995 $ 16 $18 $11 $ 45
1996 16 13 6 35
1997 16 11 3 30
1998 16 9 2 27
1999 19 7 - 26
After 1999 250 6 - 256
Total $333 $64 $22 $419
USF&G is also the lessor under various subleases on its office facilities. The
minimum rentals to be received in the future under noncancelable subleases is
$33 million at December 31, 1994.
USF&G's principal office lease involves a 40-story office building ("the
Tower") which the Corporation sold in 1984 and subsequently leased back. During
1994, USF&G developed and committed to a plan to consolidate its Baltimore
headquarters facilities. The plans encompass relocating all USF&G personnel
currently residing at the Tower to the Mount Washington facilities in Baltimore
which USF&G owns. Implementation of the plan began in January 1995. The
relocation of Tower personnel will begin in mid-1995 and is expected to be
completed by the end of 1996. The facilities exit costs of $183 million
recorded in the fourth quarter of 1994 represent the present value of the
acceleration of net expenses, including rent and operating expenses, to be
incurred under the Tower lease from the time USF&G vacates the Tower through
the expiration of the lease in 2009. The lease on the Tower, which provides for
rent increases every five years through its expiration in September 2009, will
not be terminated. USF&G will continue to make rental payments under the lease.
The deferred gain arising from the sale-leaseback was being amortized over the
noncancelable lease term prior to the recognition of the facilities exit costs.
For each of the years ended December 31, 1994, 1993 and 1992, amortization of
approximately $2 million is netted with underwriting, acquisition and operating
expenses. The unamortized amount of the deferred gain of $30 million and $31
million at December 31, 1993 and 1992, respectively, is included in other
liabilities. The unamortized deferred gain of $28 million at December 31, 1994
was recognized upon adoption of the facilities exit plan and is netted against
the lease expenses included in the facilities exit costs.
Note 7 Shareholders' Equity
7.1. Classes of stock
USF&G is authorized to issue 12 million shares of $50 par value preferred stock
and 240 million shares of $2.50 par value common stock.
7.2. Preferred stock
USF&G has 4 million shares of $4.10 Series A Convertible Exchangeable Preferred
Stock ("Series A Preferred Stock"), 1.3 million shares of $10.25 Series B
Cumulative Convertible Preferred Stock ("Series B Preferred Stock"), and 1.3
million shares of $5.00 Series C Cumulative Convertible Preferred Stock
("Series C Preferred Stock") issued and outstanding at December 31, 1994. USF&G
had 4 million shares of Series A Preferred Stock, 1.3 million shares of Series
B Preferred Stock, and 3.8 million shares of Series C Preferred Stock issued
and outstanding at December 31, 1993 and 1992.
During 1994, USF&G called for redemption 2.4 million shares of its Series C
Preferred Stock. The remaining shares were called for redemption effective
February 24, 1995. As a result of these calls, over 93 percent of the Series C
Preferred Stock converted into 14.7 million shares of common stock in
accordance with the terms of the Series C Preferred Stock. Pursuant to
arrangements the Corporation previously entered into with an unaffiliated
financial institution, USF&G sold 716,600 shares of common stock to this
institution to fund a portion of the cash redemptions resulting from these
calls.
Each share of the Series A Preferred Stock entitles the holder to an annual
cumulative dividend of $4.10 and a liquidation preference of $50 plus accrued
and unpaid dividends. Each share of Series B Preferred Stock entitles the
holder to an annual cumulative dividend of $10.25 and a liquidation preference
of $100 plus accrued and unpaid dividends.
At December 31, 1994, at the option of the holder, subject to adjustment under
certain conditions, each share of Series A and Series B Preferred Stock is
convertible to 1.192 and 8.316 shares, respectively, of USF&G's common stock.
The Series A Preferred Stock is exchangeable in whole at USF&G's option on any
dividend payment date for 8.2% Convertible Subordinated Debentures due in 2011
at a rate of $50 principal amount per share. Series B Preferred Stock is not
exchangeable.
Shares of the Series A Preferred Stock are redeemable for cash, in whole or in
part, at USF&G's option at $50.82 per share plus accrued and unpaid dividends
to the redemption date. The redemption price declines to $50 per share in 1996.
One half of the outstanding shares of Series B Preferred Stock are redeemable
for cash, in part, at USF&G's option commencing in 1994 at $100 per share plus
accrued and unpaid dividends and a premium that declines ratably to zero per
share in 2001. The remainder is redeemable beginning in 1995 and 1996. No
redemption may be made prior to 1997 unless the closing price of the common
stock exceeds 150 percent of the Series B Preferred Stock conversion price and
subject to certain other conditions. In addition, if a change in control event
should occur, then at the election of each holder of Series B Preferred Stock,
USF&G will issue and sell additional nonredeemable equity securities and apply
the net proceeds thereof to redeem these shares, but only if and to the extent
any such proceeds are raised.
Holders of the preferred stock are not entitled to vote, except that they may
vote separately with respect to certain matters including the authorizations of
any additional classes of capital stock that would rank senior to the preferred
stock. In the event that six quarterly dividends for Series A Preferred Stock
or two quarterly dividends for Series B Preferred Stock are unpaid, USF&G's
Board of Directors will be increased by two members, and holders of preferred
stock may elect two directors until all such dividends in arrears have been
paid.
7.3. Dividend restrictions
Payment of dividends to USF&G Corporation by its insurance subsidiary is
subject to certain restrictions. The Maryland Insurance Code requires the
Maryland Insurance Commissioner's prior approval for any dividend payments
during a twelve month period from a Maryland insurance subsidiary, such as
USF&G Company, to its holding company which exceeds 10 percent of
policyholders' surplus. 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 of financial condition. At December
31, 1994, $157 million of dividends is currently available for payment to USF&G
Corporation from its insurance subsidiary during 1995 without prior regulatory
approval. At December 31, 1993, $154 million in dividends was available for
payment to USF&G Corporation from its insurance subsidiary without restriction,
of which $125 million of dividends was paid during 1994.
7.4. Changes in common stock shares
Years Ended December 31
1994 1993 1992
Common Stock:
Outstanding, January 1 91,418,372 89,985,083 88,566,897
Shares issued 13,392,422 1,433,289 1,418,186
Outstanding, December 31 104,810,794 91,418,372 89,985,083
USF&G issued 9.9 million shares of common stock during 1994 related to the
conversion of Series C Preferred Stock. Another 5.5 million common stock shares
were issued in February 1995 for the conversion of the remaining Series C
Preferred Stock.
7.5. Shareholder rights plan
USF&G has a shareholder rights plan ("the plan") to deter coercive or unfair
takeover tactics and to prevent a potential purchaser from gaining control of
USF&G without offering a fair price to all of the Corporation's shareholders.
Under the plan, each outstanding share of USF&G's common stock has one
preferred share purchase right (a "right") expiring in 1997. Each right
entitles the registered holder to purchase 1/100 of a share of a new class of
junior preferred stock for $140. The rights cannot be exercised unless certain
events occur that might lead to a concentration in ownership of common shares.
At that time, the rights may be exercised for common stock having a value of
twice the exercise price. Under certain conditions, the rights also become
exercisable into shares of common stock of a purchaser having a value of twice
the exercise price. USF&G will generally be entitled to redeem the rights, at
$.05 per right, any time before the tenth day after a 20 percent position is
acquired.
Note 8 Stock Ownership Plans
8.1. Stock options and stock purchase plans
Stock Options: Stock options have been granted to full-time officers and key
employees under four incentive plans: Long-Term Incentive Plan, Stock Option
Plan of 1987, Stock Option Plan of 1990, and Stock Incentive Plan of 1991. In
addition, the Employee Stock Option Plan of 1992 and the 1994 Stock Plan For
Employees of USF&G granted eligible employees, other than officers and key
employees participating in other stock incentive plans, options to purchase
shares based on market quotations at the time of grant.
Activity under the stock option plans is as follows:
1994 1993 1992
Outstanding, January 1 4,824,136 5,135,484 3,478,660
Granted 2,245,500 1,143,282 2,590,295
Exercised (483,590) (338,940) (26,868)
Surrendered or cancelled (677,595) (1,115,690) (906,603)
Outstanding, December 31 5,908,451 4,824,136 5,135,484
Expiration dates 1/95-12/2004 1/94-12/2003 1/93-12/2002
Exercise and surrender prices $6.25-30.82 $6.25-30.82 $6.25-30.82
Shares reserved and available
for grant 8,106,029 2,324,047 2,364,267
Stock Purchase Plans: Shares had been offered to employees under the
Employees' Stock Purchase Plans of 1985 and 1990. None were offered in 1992,
1993 or 1994. The purchase price was 85 percent of the market value of USF&G's
common stock on the grant date or the end of the two-year purchase period,
whichever was less. Activity under the stock purchase plans is as follows:
1994 1993 1992
Outstanding, January 1 - - 133,379
Granted - - -
Shares purchased - - (98,882)
Cancelled - - (34,497)
Outstanding, December 31 - - -
Expiration dates - - N/A
Purchase prices - - $11.16
Shares reserved - - N/A
Proceeds from the shares sold under the stock option and stock purchase plans
are credited to common stock and paid-in capital. USF&G makes no charges to
income for the plans. The number of shares under the plans are adjusted for any
future stock dividends, stock splits or similar changes.
8.2. Directors stock plan
The Corporation adopted the 1993 Stock Plan for Non-Employee Directors (the
"Directors Stock Plan") on May 12, 1993. Only the Corporation's outside
directors are eligible to participate, and participation is mandatory. The
Directors Stock Plan has two components: (i) annual retainer awards, and (ii)
retirement awards. The Directors Stock Plan authorizes the issuance of up to
300,000 shares of the Corporation's common stock, par value $2.50 per share.
Activity under the Directors Stock Plan is as follows:
1994 1993
Outstanding, January 1 113,585 -
Stock units awarded 17,115 135,885
Stock issued (34,198) (22,300)
Outstanding, December 31 96,502 113,585
USF&G records compensation expense equal to the market value at grant date of
the vested stock or stock units awarded under the Directors Stock Plan. In
1993, $2 million of compensation expense was recognized relating to this plan.
The 1994 compensation expense related to these plans was minimal and is
expected to continue to be so in future years.
Note 9 Retirement Benefits
9.1. Retirement plans
USF&G has noncontributory retirement plans covering most regular full-time
employees of the Corporation and its affiliates. An employee's pension benefit
is based on salary, years of service and Social Security benefits. USF&G makes
contributions to the retirement plans based on amounts required to be funded
under provisions of the Employee Retirement Income Security Act of 1974. The
plans' funded status and amounts recognized in the consolidated financial
statements are as follows:
At December 31
(dollars in millions) 1994 1993 1992
Actuarial Present Value of:
Accumulated benefit obligation $303 $338 $263
Vested benefits 291 322 249
Plan assets at fair value $289 $297 $265
Projected benefit obligation 313 351 278
Funded status (24) (54) (13)
Unrecognized net loss 98 123 55
Unrecognized prior service cost (benefit) (22) (25) (28)
Adjustment for minimum pension liability (63) (85) -
Net prepaid (accrued) pension cost $(11) $(41) $ 14
Actuarial Assumptions:
Weighted average discount rate 8.75% 7.50% 8.75%
Average rate of increase in future
compensation levels 5.0 5.0 6.0
Expected long-term rate of return on assets 8.5 8.5 9.5
As a result of the higher interest rate environment, USF&G increased the
discount rate assumption as of December 31, 1994, which caused the accumulated
benefit obligation to decrease. In accordance with SFAS No. 87, USF&G recorded
a minimum pension liability for the underfunded amount, representing the
accumulated benefit obligation in excess of the fair value of the plans'
assets, plus the amount of prepaid pension costs. The minimum pension liability
is reported as a separate reduction to shareholders' equity.
The assets held by the plan consist primarily of fixed-income and equity
securities. USF&G classifies prepaid pension cost with other assets and accrued
pension cost with other liabilities in the Consolidated Statement of Financial
Position.
The components of net pension expense are as follows:
Years Ended December 31
(in millions) 1994 1993 1992
Service cost $ 6 $ 4 $ 5
Interest cost 26 25 23
Actual return on plan assets 10 (19) (15)
Net amortization and deferral (29) - (10)
Net periodic pension expense $ 13 $ 10 $ 3
9.2. Postretirement benefits
USF&G sponsors a defined dollar postretirement health care plan (medical and
dental) and noncontributory life insurance plan covering most regular
full-time employees of the Corporation and its affiliates. USF&G's
contributions and costs are determined based on the annual salary and the type
of coverage elected by covered employees. USF&G's contributions to the plan are
a percentage of plan costs based on age and service of employees at retirement.
Additionally, the plan costs are capped at projected 1995 cost levels, and
retiree contributions are increased for the total medical costs over the
projected levels.
Effective January 1, 1993, USF&G adopted SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions." This statement requires
USF&G to accrue a liability for the cost of health care, life insurance and
other retiree benefits when the employees' services are rendered. As permitted
under the new standard, the transition obligation of $52 million at January 1,
1993 was recognized as an immediate charge to net income by including the
cumulative effect of adopting this accounting standard. USF&G continues to fund
the health care and life insurance benefit costs principally on a pay-as-you-go
basis. The pay-as-you-go expenditures for postretirement benefits were $5
million in 1994 and 1993, and $4 million in 1992.
The plans' combined funded status and amounts recognized in the consolidated
financial statements are as follows:
At December 31
(in millions) 1994 1993
Accumulated Postretirement Benefit Obligation:
Retirees $(45) $(46)
Fully eligible active plan participants (1) (4)
Other active plan participants (6) (8)
(52) (58)
Plan assets at fair value - -
Funded status (52) (58)
Unrecognized net loss (gain) (1) 6
Accrued postretirement benefit cost $(53) $(52)
USF&G classifies accrued postretirement benefit cost with other liabilities in
the Consolidated Statement of Financial Position.
The components of the net periodic postretirement benefit cost are as follows:
Years Ended December 31
(in millions) 1994 1993
Service cost $1 $1
Interest cost 4 4
Net periodic postretirement benefit cost $5 $5
The weighted average annual assumed rate of increase in per capita cost of
covered benefits (i.e., medical trend rate) for the plans is 9.0 percent for
1995 (10.5 percent assumed for 1994) and is assumed to decrease to 5.5 percent
in 2002 for participants age 65 or younger, and 7.75 percent for 1995 (8.0
percent for 1994), decreasing to 5.5 percent for participants over age 65, and
remain at that level thereafter. Increasing the assumed medical trend rate by
one percentage point in each year would increase the accumulated postretirement
benefit obligation by approximately $4 million and the aggregate of the service
and interest cost components of net periodic postretirement benefit cost for
the year by approximately $0.4 million. The weighted average discount rate used
in determining the accumulated postretirement benefit obligation was 8.75
percent at December 31, 1994 and 7.5 percent at December 31, 1993.
Note 10 Federal Income Taxes
USF&G Corporation and its subsidiaries file a consolidated federal income tax
return. The provision for income taxes gives effect to permanent differences
between income before income taxes and taxable income. Deferred federal income
taxes are provided on temporary differences and net operating loss carry-
forwards (for 1994 and 1993) and timing differences (for 1992) between
financial and taxable income.
Effective January 1, 1993, USF&G changed its method of accounting for income
taxes as required by SFAS No. 109, "Accounting for Income Taxes." Under the
standard, a deferred tax liability or asset is recognized for the estimated
future tax effects attributable to net operating loss carry-forwards ("NOLs")
and to temporary differences between the tax basis and GAAP basis of an asset
or a liability. A valuation allowance is required if, based on the weight of
available evidence, it is more likely than not that some or all of the deferred
tax asset will not be realized. As permitted under SFAS No. 109, 1992 financial
statements have not been restated.
At December 31, 1994, the net deferred tax asset of $419 million recorded by
USF&G is supported by a combination of forecasted taxable income and a tax
strategy that USF&G would implement to prevent NOLs from expiring. A valuation
allowance of $279 million has been recognized to offset the gross deferred tax
assets.
10.1. Significant components of deferred tax assets and liabilities
At December 31
(in millions) 1994 1993
Deferred Tax Liabilities:
Deferred policy acquisition costs $165 $143
Other invested assets 7 44
Other 4 -
Total deferred tax liabilities 176 187
Deferred Tax Assets:
Facilities exit costs 74 -
Unpaid losses and loss expenses 249 306
Unearned premiums 45 47
Foreign reinsurance 50 49
Real estate 25 30
Future policy benefits 54 50
Net unrealized losses 52 -
Other 62 85
Net operating loss carry-forwards 263 222
Total deferred tax assets 874 789
Valuation allowance for deferred tax assets 279 482
Deferred tax assets, net of valuation allowance 595 307
Net deferred tax assets $419 $120
At December 31, 1994, the net deferred tax asset increased to $419 million,
primarily based on the increasing weight of positive evidence which resulted in
a $203 million net decrease in the valuation allowance. Throughout 1994, the
weight of evidence became increasingly more positive as the core earnings trend
improved each quarter. As 1994 progressed, the negative evidence of cumulative
losses which were caused by 1991 results became increasingly less of a factor.
Given the substantially reduced degree of negative evidence and management's
increased confidence in the sustainability of the improved earnings of the core
insurance segments and, therefore, its enhanced ability to forecast future
taxable income, it became appropriate to reduce the valuation allowance. During
1993, the net decrease in the valuation allowance was $56 million reflecting
the change in the realizability of the deferred tax asset. In addition, the
valuation allowance was increased $15 million in 1993 due to the tax rate
change enacted in that year.
10.2. Components of provision for income taxes (benefits)
Years Ended December 31
Liability Liability Deferred
Method Method Method
(in millions) 1994 1993 1992
Current tax $ 32 $ 40 $ 23
NOL Utilization (22) (31) (16)
Current tax, net of NOL utilization 10 9 7
Deferred tax (benefit) (23) 23 (7)
Adjustment for enacted change in tax rates - (3) -
Adjustment of the beginning of the year
valuation allowance (267) (56) -
Provision for income taxes (benefit) $(280) $(27) $ -
Income taxes paid $ 12 $ 5 $ 10
10.3. Tax effects of timing differences between financial and taxable income
Year Ended December 31
(in millions) 1992
Tax Effect (Benefit):
Deferred policy acquisition costs $(15)
Unbilled premium adjustments (4)
Adjustment of life policy benefit reserves (1)
Adjustment of property/casualty loss reserves 3
Adjustment of property/casualty unearned premium reserves (4)
Deferred realized gains and losses (2)
Unrecognized benefit of net losses 19
Other, net (2)
Provision for income taxes (benefit) $ (6)
10.4. Tax effects of permanent differences
Years Ended December 31
Liability Liability Deferred
Method Method Method
(in millions) 1994 1993 1992
Tax at federal rates $ (16) $ 36 $12
Tax Effect (Benefit):
Adjustment of the beginning of the
year valuation allowance (267) (56) -
Effect of change in tax rates - (3) -
Dividend received deduction - - (3)
Tax-exempt interest income (3) (2) (3)
Proration adjustment on non-taxable
investment income - - 1
Adjustment of property/casualty salvage
and subrogation accruals (fresh start) 6 - -
Adjustment of property/casualty
loss reserves (fresh start) - - (9)
Other - (2) 2
Provision for income taxes (benefit) $(280) $(27) $ -
10.5. Net operating loss carry-forwards
At December 31, 1994, USF&G had NOLs remaining for tax return purposes expiring
in years 2005 and 2006. The amount and timing of recognizing the benefit of
these NOLs depends on future taxable income and limitations imposed by tax
laws. The approximate amounts of USF&G's NOLs on a regular tax basis and an
alternative minimum tax ("AMT") basis at December 31, 1994 were as follows:
(in millions) Tax Return
Regular tax basis $750
AMT basis 553
Note 11 Reinsurance
During 1993, USF&G adopted SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts." This standard
requires the effects of reinsurance activity to be reported on a gross basis.
Reinsurance receivables and prepaid reinsurance premiums are reported
separately as assets, instead of the previous practice of reporting such
receivables net of the related loss and unearned premium liabilities. The
standard also establishes the conditions required for a contract to be
accounted for as reinsurance and prescribes income recognition and reporting
standards for those contracts. The initial adoption of this standard had no
effect on net income, but increased assets and liabilities by approximately
$1.2 billion at December 31, 1993. USF&G reinsures portions of its policy
risks with other insurance companies or underwriters, and assumes policy risks
from other insurance companies and through participation in pools and
associations. Reinsurance gives USF&G the ability to write larger risks and
control its exposure to losses from catastrophes or other events that cause
unfavorable underwriting results. USF&G's ceding reinsurance agreements are
generally structured on a treaty basis whereby all risks meeting a certain
criteria are automatically reinsured. Amounts recoverable from reinsurers are
estimated in a manner consistent with the claim liability associated with the
reinsured policy. Reinsurance contracts do not relieve USF&G from its
obligation to policyholders. Failure of reinsurers to honor their obligation
could result in losses to USF&G. USF&G evaluates the financial condition of its
reinsurers and monitors concentrations of credit risks arising from similar
economic characteristics of the reinsurers to minimize its exposure to
significant losses from reinsurer insolvencies.
At December 31, 1994 and 1993, reinsurance receivables totaled $554 million and
$573 million, respectively. Of these amounts, approximately $122 million and
$150 million, respectively, were associated with the Workers' Compensation
Reinsurance Bureau ("WCRB"), a single voluntary reinsurance association of
primary workers' compensation insurers formed for the purpose of providing
excess of loss reinsurance to its members. USF&G is a member of this pool. Each
member is required to hold collateral, for the benefit of all member companies,
in the form of investment-grade securities equaling 115 percent of the member's
share of outstanding receivables of the WCRB. This collateral requirement
mitigates the risk of WCRB becoming insolvent. Risk of loss is minimal for the
remainder of receivables due to similar pool arrangements with collateral
requirements, other contracts where funds are withheld, or letters of credit
maintained. Credit risk is also diversified among numerous reinsurers.
Additionally, USF&G is active in the involuntary market as a servicing carrier
whereby USF&G processes business for a pool but takes no direct underwriting
risk because it is directly reimbursed for the cost of processing policies and
settling any related claims. Servicing carrier receivables of $706 million and
$719 million associated with this business are separately disclosed in the
Consolidated Statement of Financial Position at December 31, 1994 and 1993,
respectively.
1994
Premiums Losses Unpaid Unearned
(in millions) Written Earned Incurred Losses Premiums
Property/Casualty:
Direct $2,303 $2,284 $1,660 $4,826 $855
Assumed 594 588 407 1,332 113
Gross 2,897 2,872 2,067 6,158 968
Ceded (508) (516) (323) (1,016) (116)
Net 2,389 2,356 1,744 5,142 852
Life N/A 152 388 3,804 N/A
Total $2,389 $2,508 $2,132 $8,946 $852
1993
Premiums Losses Unpaid Unearned
(in millions) Written Earned Incurred Losses Premiums
Property/Casualty:
Direct $2,400 $2,390 $1,508 $5,100 $836
Assumed 613 523 96 1,270 114
Gross 3,013 2,913 1,604 6,370 950
Ceded (511) (521) 201 (1,054) (124)
Net 2,502 2,392 1,805 5,316 826
Life N/A 129 395 3,973 N/A
Total $2,502 $2,521 $2,200 $9,289 $826
1992
Premiums Losses Unpaid Unearned
(in millions) Written Earned Incurred Losses Premiums
Property/Casualty:
Direct $2,521 $2,734 $2,210 $5,610 $828
Assumed 271 384 391 1,563 104
Gross 2,792 3,118 2,601 7,173 932
Ceded (317) (539) (481) (1,609) (135)
Net 2,475 2,579 2,120 5,564 797
Life N/A 104 377 3,896 N/A
Total $2,475 $2,683 $2,497 $9,460 $797
Included in assumed unpaid losses in the above table are $86 million, $110
million and $123 million related to loss portfolio transfer agreements at
December 31, 1994, 1993 and 1992, respectively. USF&G has not entered into any
such agreements to cede its unpaid losses.
The ceded unpaid losses and assumed unpaid losses for 1993 were reduced $464
million and $267 million, respectively, from 1992 due to a commutation
involving the WCRB. At year end 1993, WCRB members commuted the lowest layer of
reinsurance for accident years 1980 to 1992. As a result, USF&G was required to
take back all reserves previously ceded into the layer and return reserves
previously assumed.
Note 12 Financial Guarantees
12.1. Insurance guarantees
USF&G has underwritten and reinsured financial guarantee bonds for principal
and interest payments or installment notes when due. The obligations
guaranteed were issued by limited partnerships, municipalities and commercial
enterprises. Assessment is made of the likelihood of loss in connection with
these guarantees, and at December 31, 1994, 1993 and 1992, the reserve for such
losses was not material. The risk of loss under these guarantees is diminished
through reinsurance agreements and collateral.
As of December 31, 1994, USF&G was contingently liable for par value amounts
totaling less than $500 million on financial guarantee exposures ceded through
reinsurance agreements with a monoline insurance company in which USF&G
formerly had a minority ownership interest. In addition, USF&G has other
financial guarantee obligations where the par value guaranteed totaled $27
million at December 31, 1994, maturing in 1995.
12.2. Corporate guarantees
USF&G has also guaranteed the obligations of certain limited partnerships where
it has an equity interest. The risk of loss under these guarantees is
diminished by collateral in the underlying projects. The guarantees totaled $13
million at December 31, 1994, with maturities ranging from 1995 to 1999. In
addition, USF&G has line of credit commitments outstanding totaling $55
million.
Note 13 Legal Contingencies
USF&G's insurance subsidiaries are routinely engaged in litigation in the
normal course of their businesses, including defending claims for punitive
damages. As a liability insurer, they defend third-party claims brought against
their insureds. As an insurer, they defend themselves against coverage claims.
Additional information regarding contingencies that may arise from insurance
regulatory matters and regulatory litigation matters may be found in the
Regulation section of Management's Discussion and Analysis of Financial
Condition and Results of Operations.
In the opinion of management, such litigation and the litigation described
below is not expected to have a material adverse effect on USF&G's consolidated
financial position, although it is possible that the results of operations in a
particular quarter or annual period would be materially affected by an
unfavorable outcome.
13.1. North Carolina workers' compensation litigation
On November 24, 1993, N.C. Steel, Inc. and six other North Carolina employers
filed a class action in the General Court of Justice, Superior Court Division,
Wake County, North Carolina against the National Council on Compensation
Insurance ("NCCI"), North Carolina Rate Bureau, USF&G and eleven other
insurance companies which served as servicing carriers for the North Carolina
involuntary workers' compensation market. On January 20, 1994, the plaintiffs
filed an amended complaint seeking to certify a class of all employers who
purchased workers' compensation insurance in the State of North Carolina after
November 24, 1989. The amended complaint, which is captioned N.C. Steel, Inc.,
et al., v. National Council on Compensation Insurance, et al., alleges that the
defendants conspired to suppress competition with respect to the North Carolina
voluntary and involuntary workers' compensation business, thereby artificially
inflating the rates in such markets and the fees payable to the insurers. The
complaint also alleges that the carriers agreed to improperly deny qualified
companies from acting as servicing carriers, improperly encourage agents to
place employers in the assigned risk pool, and improperly promote inefficient
claims handling. USF&G has acted as a servicing carrier in North Carolina since
1990. The plaintiffs are pursuing their claims under various legal theories,
including violations of the North Carolina antitrust laws, unlawful conspiracy,
breach of fiduciary duty, breach of implied covenant of good faith and fair
dealing, unfair competition, constructive fraud, and unfair and deceptive trade
practices. The plaintiffs seek unspecified compensatory damages, punitive
damages for the alleged constructive fraud and treble damages under the North
Carolina antitrust laws. On February 14, 1995, the trial court granted the
defendant's motion to dismiss the complaint. The plaintiffs have appealed the
trial court's dismissal of the case. USF&G believes that it has meritorious
defenses and has determined to defend the action vigorously.
13.2. Texas workers' compensation litigation
On April 18, 1994, Mi-De-Pizza, Inc. and ten other Texas insureds filed an
amended class action in the District Court of Dallas County, Texas against the
NCCI and all insurance companies and certain insurance brokers that wrote
workers' compensation insurance in Texas during the period 1987 to 1991. The
case, which was subsequently consolidated with another case to which USF&G was
not a party and is now captioned Weatherford Roofing Company, et al., v.
Employers National Insurance Company, et al., alleges that the defendants
utilized rates and forms that had the effect of charging premium rates in
excess of the rates approved by law. The plaintiffs are pursuing recovery of
these alleged excess charges under various legal theories, including breach of
contract, fraud, civil conspiracy and violation of the Texas Insurance Code and
the Texas Business and Commerce Code. USF&G believes that it has meritorious
defenses and has determined to defend the action vigorously.
13.3. South Carolina workers' compensation litigation
On August 22, 1994, the Attorney General of the State of South Carolina filed
suit in the County of Greenville, South Carolina on behalf of South Carolina
employers that have allegedly been damaged as a result of alleged unfair and
deceptive trade practices. Specifically, the Attorney General alleges that the
NCCI, the National Workers' Compensation Reinsurance Pool, USF&G and seven
other insurance companies which served as servicing carriers for the South
Carolina involuntary workers' compensation market, conspired to fix servicing
carrier fees at unreasonably high and noncompetitive levels in violation of the
South Carolina Uniform Trade Practices Act, allegedly causing inflated deficits
in the involuntary market and an excessive expansion of the residual market.
The Attorney General alleges that the conspiracy occurred for an unspecified
period of time prior to January 1994. The Attorney General has indicated that
he intends to pursue recovery on behalf of all South Carolina employers who
have suffered an ascertainable loss as a result of such alleged conduct, civil
penalties of $5,000 for each willful violation, and temporary and permanent
injunctive relief. USF&G believes that it has meritorious defenses and has
determined to defend the action vigorously.
13.4. Alabama workers' compensation litigation
On September 14, 1994, three Alabama employers filed a class action captioned
Four Way Plant Farm, Inc., et al., v. National Council on Compensation
Insurance, et al., in the Circuit Court of Bullock County, Alabama on behalf of
all Alabama employers that have allegedly been damaged as a result of an
alleged conspiracy by the NCCI, the National Workers' Compensation Reinsurance
Pool, USF&G and numerous other insurance companies which served as servicing
carriers for the Alabama involuntary workers' compensation market, to fix
servicing carrier fees at unreasonably high and noncompetitive levels in
violation of Alabama law. The plaintiffs allege that the conspiracy occurred
during the period January 1, 1985 to January 1, 1994, and caused inflated
deficits in the involuntary market and an alleged excessive expansion of the
workers' compensation residual market. The plaintiffs seek unspecified damages
on behalf of each member of the proposed class action. USF&G believes that it
has meritorious defenses and has determined to defend the action vigorously.
Note 14 Information on Business Segments
USF&G's principal business segments are property/casualty insurance and life
insurance.
14.1. Operations
The insurance business is geographically diversified throughout the United
States and Canada. Reinsurance and noninsurance operations are located in the
United States, Europe and various foreign countries. Foreign operations, in
total, are not material. Summarized financial information for the business
segments is as follows:
<TABLE>
Years Ended December 31
Income (Loss) from
Continuing Operations
Revenues Before Income Taxes
(in millions) 1994 1993 1992 1994** 1993 1992***
<C> <S> <C> <C> <C> <C> <C> <C> <C>
Property/Casualty Insurance:
Commercial $1,189 $1,223 $1,480 $(186) $(223) $(343)
Personal 575 681 785 (60) (28) (110)
Reinsurance 395 305 157 40 32 20
Fidelity/surety 124 118 111 6 (8) 6
Discover Re and Victoria 73 65 46 (2) (2) (1)
Property/casualty categories 2,356 2,392 2,579 (202) (229) (428)
Net investment income* 429 437 478 429 437 478
Net realized gains (losses)
on investments* (9) 31 199 (9) 31 199
Other 10 5 4 1 (22) (52)
Total property/casualty
insurance 2,786 2,865 3,260 219 217 197
Life Insurance:
Premium income 152 129 104
Net investment income 317 321 349
Realized gains (losses)
on investments - 20 (1)
Other 1 1 2
Total life insurance 470 471 454 14 14 (5)
Noninsurance operations
and eliminations 54 (13) (2) (276) (128) (156)
Consolidated total $3,310 $3,323 $3,712 $ (43) $ 103 $ 36
</TABLE>
*Net investment income and net realized gains (losses) on investments are not
allocated to property/casualty categories.
**Income (loss) from continuing operations before income taxes for 1994
includes facilities exit costs by segment as follows: Property/casualty, $28
million; and Noninsurance operations, $(211) million.
***Income (loss) from continuing operations before income taxes for 1992
includes restructuring charges by segment as follows: Property/casualty, $46
million; Life, $3 million; and Noninsurance operations, $2 million.
14.2. Assets
The assets of the insurance operations are primarily investments. Foreign
assets are not material. Assets of the business segments are as follows:
At December 31
(in millions) 1994 1993 1992
Property/casualty insurance $ 9,487 $ 9,711 $ 8,361
Life insurance 4,575 4,848 4,856
Noninsurance operations and eliminations (82) (78) 25
Consolidated total $13,980 $14,481 $13,242
Note 15 Interim Financial Data (Unaudited)
<TABLE>
Quarter
(in millions except per share data) First Second Third Fourth
<S> <S> <C> <C> <C> <C>
Summary Quarterly Results:*
Revenues 1994 $786 $812 $ 835 $877
1993 891 837 775 820
1992 952 920 1,024 816
Income from continuing operations
before cumulative effect of adopting
new accounting standards 1994 23 74 76 64
1993 23 26 21 60
1992 4 7 12 13
Loss from discontinued operations 1994 - - - -
1993 - - - -
1992 - (1) (6) -
Income from cumulative effect of
adopting new accounting standards 1994 - - - -
1993 38 - - -
1992 - - - -
Net income 1994 23 74 76 64
1993 61 26 21 60
1992 4 6 6 13
Primary Earnings per Common Share:*
Income (loss) from continuing operations
before cumulative effect of adopting
new accounting standards 1994 $.11 $.66 $.67 $.54
1993 .12 .15 .10 .52
1992 (.09) (.06) - .01
Loss from discontinued operations 1994 - - - -
1993 - - - -
1992 - (.01) (.07) -
Income from cumulative effect of
adopting new accounting standards 1994 - - - -
1993 .42 - - -
1992 - - - -
Net income (loss) 1994 .11 .66 .67 .54
1993 .54 .15 .10 .52
1992 (.09) (.07) (.07) .01
Fully Diluted Earnings per Common Share:*
Income (loss) from continuing operations
before cumulative effect of adopting
new accounting standards 1994 $.11 $.56 $.58 $.47
1993 .16 .15 .10 .47
1992 (.09) (.06) - .01
Loss from discontinued operations 1994 - - - -
1993 - - - -
1992 - (.01) (.07) -
Income from cumulative effect of
adopting new accounting standards 1994 - - - -
1993 .32 - - -
1992 - - - -
Net income (loss) 1994 .11 .56 .58 .47
1993 .48 .15 .10 .47
1992 (.09) (.07) (.07) .01
</TABLE>
*The fourth quarter 1994 results reflect $183 million in facilities exit
costs as discussed in Note 6, and a $210 million tax benefit as discussed in
Note 10. The first quarter 1993 results include a $38 million net benefit of
adopting two new accounting standards. The third quarter 1992 results reflect
$142 million in realized gains on investments, $80 million of catastrophe
losses as a result of Hurricane Andrew, and $51 million of restructuring
charges. The sum of quarterly income (loss) per share amounts may not equal
the full year's amount due to stock issuances during presented periods.
USF&G Corporation
Report of Independent Auditors
Board of Directors
USF&G Corporation
We have audited the accompanying consolidated statement of financial position
of USF&G Corporation as of December 31, 1994, 1993, and 1992, and the related
consolidated statements of operations, shareholders' equity, and cash flows
for the years then ended. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of USF&G
Corporation at December 31, 1994, 1993, and 1992 and the consolidated results
of its operations and its cash flows for the years then ended, in conformity
with generally accepted accounting principles.
In 1993, as a result of adopting new accounting standards and as discussed in
Notes 1, 2, 9, and 10 to the consolidated financial statements, the
Corporation changed its methods of accounting for certain investments in debt
and equity securities, postretirement benefits other than pensions, and
income taxes.
ERNST & YOUNG LLP
Baltimore, Maryland
February 24, 1995,
except for Note 1.11, as to which the date is
May 22, 1995
USF&G Corporation
Shareholders' Information
Corporate Headquarters/Home Office
100 Light Street
Baltimore, Maryland 21202
(410) 547-3000
Annual Meeting
The Annual Meeting of Shareholders will be held Wednesday, May 17, 1995, at
9:00 a.m. at the Sheraton Inner Harbor Hotel, 300 South Charles Street,
Baltimore, Maryland.
Reports Filed with the Securities and Exchange Commission
A copy of USF&G Corporation's Annual Report on Form 10-K or Quarterly Report
on Form 10-Q, as filed with the Securities and Exchange Commission, may be
obtained without charge upon request to John F. Hoffen, Jr., corporate
secretary at the corporate headquarters.
Stock Exchange Listing
Common Stock: USF&G Corporation's common stock (ticker: FG) is listed on the
New York Stock Exchange. The common stock appears in the NYSE Composite
Listing as USFG. The common stock is also listed on the Pacific Stock
Exchange, the London Stock Exchange, and the Stock Exchanges of Basle,
Geneva, and Zurich, Switzerland.
Preferred Stock: USF&G Corporation's $4.10 Series A Convertible Exchangeable
Preferred Stock (ticker: FGpA) is listed on the New York Stock Exchange. The
preferred stock appears in the NYSE Composite Listing as USFGpf, and is also
listed on the Pacific Stock Exchange.
Transfer Agent/Registrar
First Chicago Trust Company of New York is transfer agent, registrar, and
dividend disbursing agent for USF&G Corporation's common and preferred stock.
Inquiries regarding stock transfer requirements, dividend payments, the
Dividend Reinvestment and Stock Purchase Plan, or address changes should be
addressed to:
First Chicago Trust Company of New York
P.O. Box 2500
Jersey City, NJ 07303-2500
Attention: Shareholders' Relations Department
1-800-446-2617
Stock and Dividend Information
The following tabulation presents 1994 and 1993 data on the sale prices of
USF&G Corporation's common stock on the New York Stock Exchange Composite
Listing by quarter, and the dividends paid per share of common stock. At
February 24, 1995, there were 33,689 shareholders of record and the closing
price was $14 7/8.
Sale Price
High Low Dividends Paid
1994
First quarter $16 1/8 $ 13 $.05
Second quarter 14 11 11/16 .05
Third quarter 14 12 1/8 .05
Fourth quarter 14 5/8 12 5/8 .05
1993
First quarter $17 5/8 $ 11 1/8 $.05
Second quarter 19 5/8 15 3/4 .05
Third quarter 19 5/8 13 7/8 .05
Fourth quarter 15 1/4 12 3/8 .05
Dividend Reinvestment and Stock Purchase Plan
The plan provides shareholders with a convenient way to invest cash dividends
and to make optional cash investments in additional shares of USF&G
Corporation's common stock without payment of any charges for brokerage
commissions or fees. First Chicago Trust Company of New York administers the
plan and additional information may be obtained from them by written request.
For Additional Information
Any investors and analysts requesting additional information regarding USF&G
Corporation may dial our new toll-free number, 1-800-335-USFG (8734) or call
directly:
Jennifer Macke
Investor Relations Department
(410) 547-3939
Independent Auditors
Ernst & Young LLP
One North Charles Street
Baltimore, Maryland 21201
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