UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities and Exchange Act of 1934
For the Quarter Ended Commission File Number
June 30, 1995 1-8233
USF&G CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-1220567
(State of incorporation) (IRS employer identification no.)
100 Light Street, Baltimore, Maryland 21202
(Address of principal executive offices and zip code)
(410) 547-3000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, Par Value $2.50; 111,647,800 shares outstanding as of August 9,
1995.
USF&G Corporation
Contents
PART I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Statement of Financial Position 3
Condensed Consolidated Statement of Operations 4
Condensed Consolidated Statement of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 8
Report of Independent Auditors 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II. Other Information
Item 1. Legal Proceedings 27
Item 4. Submission of Matters to a Vote of Shareholders 27
Item 6. Exhibits and Reports on Form 8-K 27
Exhibit 4 - Instruments Defining the Rights of Security
Holders, Including Indentures 27
Exhibit 11- Computation of Earnings Per Share 28
Exhibit 12- Computation of Ratio of Consolidated Earnings
to Fixed Charges and Preferred Stock Dividends 29
Exhibit 15- Letter Regarding Unaudited Interim Financial
Information 30
Signature 31
<TABLE>
USF&G Corporation
Condensed Consolidated Statement of Financial Position (Unaudited)
<S><C> <C> <S><C> <C>
At June 30 At December 31
(dollars in millions except per share data) 1995 1994*
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost (market, 1995, $4,595; 1994, $4,284) $ 4,583 $ 4,659
Available for sale, at market (cost, 1995, $4,431; 1994, $4,266) 4,504 4,081
Common stocks, at market (cost, 1995, $44; 1994, $53) 41 46
Preferred stocks, at market (cost, 1995, $27; 1994, $26) 27 26
Short-term investments 287 450
Mortgage loans 293 349
Real estate 658 662
Other invested assets 374 288
Total investments 10,767 10,561
Cash 97 69
Accounts, notes, and other receivables 717 741
Reinsurance receivables 649 554
Servicing carrier receivables 698 706
Deferred policy acquisition costs 476 504
Other assets 838 845
Total assets $ 14,242 $ 13,980
Liabilities
Unpaid losses, loss expenses, and policy benefits $ 9,815 $ 9,962
Unearned premiums 1,005 968
Corporate debt 602 586
Real estate and other debt 30 42
Other liabilities 1,078 981
Total liabilities 12,530 12,539
Shareholders' Equity
Preferred stock, par value $50.00 (12,000,000 shares authorized;
shares issued, 1995, 5,299,910; 1994, 6,627,896) 265 331
Common stock, par value $2.50 (240,000,000 shares authorized;
shares issued, 1995, 110,672,296; 1994, 104,810,794) 276 262
Paid-in capital 1,155 1,104
Net unrealized gains (losses) on investments and foreign currency 56 (147)
Minimum pension liability (63) (63)
Retained earnings (deficit) 23 (46)
Total shareholders' equity 1,712 1,441
Total liabilities and shareholders' equity $ 14,242 $ 13,980
See Notes to Condensed Consolidated Financial Statements.
* 1994 amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria Financial
Corporation. See Note 11.
</TABLE>
<TABLE>
USF&G Corporation
Condensed Consolidated Statement of Operations (Unaudited)
<S> <C> <C>
Three Months Ended June 30
(dollars in millions except per share data) 1995 1994*
Revenues
Premiums earned $ 659 $ 608
Net investment income 182 193
Other 14 11
Revenues before realized gains 855 812
Net realized gains on investments 1 1
Total revenues 856 813
Expenses
Losses, loss expenses, and policy benefits 551 536
Underwriting, acquisition, and operating expenses 247 229
Interest expense 12 8
Facilities exit costs (income) - -
Total expenses 810 773
Income from operations before income taxes 46 40
Provision for income taxes (benefit) - (35)
Net income $ 46 $ 75
Preferred stock dividend requirements 7 12
Net income available to common stock $ 39 $ 63
Primary Earnings Per Common Share $ .35 $ .66
Fully Diluted Earnings Per Common Share $ .33 $ .56
Weighted average common shares outstanding (000s):
Primary 110,565 94,514
Fully diluted 130,022 129,404
Dividends declared per common share $ .05 $ .05
See Notes to Condensed Consolidated Financial Statements.
* 1994 amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria Financial
Corporation. See Note 11.
</TABLE>
<TABLE>
USF&G Corporation
Condensed Consolidated Statement of Operations (Unaudited)
<S> <C> <C>
Six Months Ended June 30
(dollars in millions except per share data) 1995 1994*
Revenues
Premiums earned $1,276 $1,195
Net investment income 367 377
Other 26 20
Revenues before realized gains 1,669 1,592
Net realized gains on investments 5 6
Total revenues 1,674 1,598
Expenses
Losses, loss expenses, and policy benefits 1,069 1,058
Underwriting, acquisition, and operating expenses 494 460
Interest expense 22 17
Facilities exit costs (income) (6) -
Total expenses 1,579 1,535
Income from operations before income taxes 95 63
Provision for income taxes (benefit) - (35)
Net income $ 95 $ 98
Preferred stock dividend requirements 15 24
Net income available to common stock $ 80 $ 74
Primary Earnings Per Common Share $ .73 $ .78
Fully Diluted Earnings Per Common Share $ .69 $ .72
Weighted average common shares outstanding (000s):
Primary 108,870 94,420
Fully diluted 129,996 126,932
Dividends declared per common share $ .10 $ .10
See Notes to Condensed Consolidated Financial Statements.
* 1994 amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria Financial
Corporation. See Note 11.
</TABLE>
<TABLE>
USF&G Corporation
Condensed Consolidated Statement of Cash Flows (Unaudited)
<S> <C> <C>
Three Months Ended June 30
(in millions) 1995 1994*
Operating Activities
Direct premiums collected $ 486 $ 498
Net investment income collected 209 193
Direct losses, loss expenses, and policy benefits paid (433) (494)
Net reinsurance activity 1 (34)
Underwriting and operating expenses paid (171) (180)
Interest paid (10) (8)
Income taxes paid (2) (4)
Other items, net 21 11
Net cash provided from (used in) operating activities 101 (18)
Investing Activities
Net sales and maturities of short-term investments 60 12
Purchases of fixed maturities held to maturity - (154)
Sales of fixed maturities held to maturity 6 37
Maturities/repayments of fixed maturities held to maturity 27 92
Purchases of fixed maturities available for sale (276) (79)
Sales of fixed maturities available for sale 105 177
Maturities/repayments of fixed maturities available for sale 91 107
Purchases of equities and other investments (42) (141)
Sales, maturities, and repayments of equities and other investments 76 95
Purchases of property and equipment (7) (9)
Disposals of property and equipment - 1
Net cash provided from investing activities 40 138
Financing Activities
Deposits for universal life and investment contracts 90 56
Withdrawals of universal life and investment contracts (195) (113)
Net short-term borrowings (repayments) (227) (160)
Long-term borrowings 228 148
Repayments of long-term borrowings (15) -
Issuances of common stock 4 2
Cash dividends paid to shareholders (12) (17)
Net cash used in financing activities (127) (84)
Increase in cash 14 36
Cash at beginning of period 83 48
Cash at end of period $ 97 $ 84
See Notes to Condensed Consolidated Financial Statements.
* 1994 amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria Financial
Corporation. See Note 11.
</TABLE>
<TABLE>
USF&G Corporation
Condensed Consolidated Statement of Cash Flows (Unaudited)
<S> <C> <C>
Six Months Ended June 30
(in millions) 1995 1994*
Operating Activities
Direct premiums collected $1,005 $ 981
Net investment income collected 376 375
Direct losses, loss expenses, and policy benefits paid (878) (927)
Net reinsurance activity 73 (15)
Underwriting and operating expenses paid (411) (401)
Interest paid (21) (18)
Income taxes paid (2) (5)
Other items, net 14 7
Net cash provided from (used in) operating activities 156 (3)
Investing Activities
Net (purchases)/sales and maturities of short-term investments 150 (17)
Purchases of fixed maturities held to maturity - (351)
Sales of fixed maturities held to maturity 6 50
Maturities/repayments of fixed maturities held to maturity 53 251
Purchases of fixed maturities available for sale (448) (158)
Sales of fixed maturities available for sale 132 200
Maturities/repayments of fixed maturities available for sale 166 291
Purchases of equities and other investments (53) (253)
Sales, maturities, and repayments of equities and other investments 143 245
Purchases of property and equipment (13) (15)
Disposals of property and equipment - 4
Net cash provided from investing activities 136 247
Financing Activities
Deposits for universal life and investment contracts 168 106
Withdrawals of universal life and investment contracts (397) (266)
Net short-term borrowings (repayments) (227) (158)
Long-term borrowings 229 270
Repayments of long-term borrowings (15) (123)
Issuances of preferred stock - 23
Issuances of common stock 4 4
Cash dividends paid to shareholders (26) (33)
Net cash used in financing activities (264) (177)
Increase in cash 28 67
Cash at beginning of period 69 17
Cash at end of period $ 97 $ 84
See Notes to Condensed Consolidated Financial Statements.
* 1994 amounts have been restated to reflect mergers with Discover Re Managers, Inc., and Victoria Financial
Corporation. See Note 11.
</TABLE>
USF&G Corporation
Notes to Condensed Consolidated Financial Statements
Note 1 Basis of Accounting
The condensed consolidated financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP"). These statements include the
accounts of USF&G Corporation and its subsidiaries ("USF&G"). Intercompany
transactions are eliminated in consolidation. Certain 1994 amounts have been
reclassified to conform to the 1995 presentation. (See also Note 11 regarding
restatements for mergers consummated in the second quarter of 1995.) The
interim financial statements in this report should be read in conjunction with
the consolidated financial statements and notes thereto in USF&G's Annual Report
to Shareholders for the year ended December 31, 1994. In the opinion of
management, the accompanying unaudited condensed consolidated financial
statements contain the necessary adjustments, all of which are of a normal
recurring nature for interim period reporting purposes, for a fair presentation
of results for the interim periods.
Note 2 Review of Independent Auditors
USF&G's independent auditors, Ernst & Young LLP, have performed a review of the
condensed consolidated financial statements in this Form 10-Q as to the three
and six month periods ended June 30, 1995 and 1994. Their limited review in
accordance with standards established by the American Institute of Certified
Public Accountants did not constitute an audit. Accordingly, they do not
express an opinion on this information.
Note 3 Earnings Per Common Share
Primary earnings per common share are based on income, after deduction of
preferred stock dividends, and the weighted average number of common shares
outstanding during the periods. Common stock equivalents were not included as
they were insignificant. Fully diluted earnings per common share assume the
conversion of all securities whose contingent issuance would have a dilutive
effect on earnings. Refer to the computation in Exhibit 11.
Note 4 Ratio of Consolidated Earnings to Fixed Charges
For purposes of computing the ratio of consolidated earnings to fixed charges
and preferred stock dividends, earnings consist of income before considering
income taxes and fixed charges. Fixed charges consist of interest and that
portion of rents that is deemed to be an appropriate interest factor. Refer to
the computation in Exhibit 12.
Note 5 Supplemental Cash Flow Information
The Condensed 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:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1995 1994 1995 1994
Operating Activities
Net income $ 46 $ 75 $ 95 $ 98
Adjustments to reconcile net income
to net cash provided from (used in)
operating activities:
Realized gains on investments (1) (1) (5) (6)
Change in insurance liabilities 100 22 127 61
Change in deferred policy
acquisition costs 9 (23) 28 (43)
Change in receivables (41) (6) (63) (68)
Change in other liabilities 6 (53) (3) (77)
Change in other assets (6) (46) (12) (6)
Other items, net (12) 14 (11) 38
Net cash provided from (used in)
operating activities $ 101 $ (18) $ 156 $ (3)
Note 6 Unrealized Gains (Losses) on Investments
At June 30, 1995, gross unrealized gains and gross unrealized losses pertaining
to equity securities totaled $2 million and $5 million, respectively. In
addition, gross unrealized gains and gross unrealized losses on limited
partnerships and other investments totaled $12 million and $4 million,
respectively. At June 30, 1995, there were gross unrealized gains of $106
million and gross unrealized losses of $33 million pertaining to fixed
maturities available for sale. There were also $20 million of gross unrealized
losses relating to a deferred policy acquisition cost ("DPAC") adjustment. This
DPAC adjustment was made to reflect assumptions about the effect of potential
asset sales of fixed maturities available for sale on future DPAC amortization.
The changes in net unrealized gains (losses) on investments and foreign currency
amount to a gain of $203 million during the six months ended June 30, 1995,
compared with a loss of $268 million during the six months ended June 30, 1994.
Note 7 Proceeds From Sales of Fixed Maturity Investments
During the six month period ended June 30, 1995, proceeds from sales of fixed
maturities held to maturity were $6 million. These sales involved the partial
holdings of two different issuers and were based on evidence of significant
deterioration of the issuers' creditworthiness. Gross losses of less than $1
million were realized on those sales. The remaining holdings of these two
issuers, with amortized cost of $23 million and unrealized losses of $2 million,
were transferred to the available for sale category, where it is anticipated
they will be sold in the near future. During the six month period ended June
30, 1994, proceeds from sales of fixed maturities held to maturity were $50
million. Such sales involved the entire holdings of 15 different issuers and
were based on evidence of significant deterioration of the issuers'
creditworthinesss. Gross gains and losses of less than $1 million were realized
on these sales. Proceeds from sales of fixed maturities available for sale were
$132 million for the six months ended June 30, 1995, compared with $200 million
for the same period in 1994. Gross gains and gross losses of $2 million were
realized on 1995 sales. Gross gains and gross losses of $1 million were
realized on 1994 sales.
Note 8 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. Facilities exit costs
of $183 million were recorded in the fourth quarter of 1994, representing the
present value of the rent and other operating expenses to be incurred under the
lease on the Corporation's principal office building ("the Tower") from the time
USF&G vacates the building through the expiration of the lease in 2009.
Facilities exit costs recorded in 1994 did not consider any potential future
sublease income, as such income was neither probable nor reasonably estimable at
that time. To the extent that additional or extended subleases are subsequently
negotiated, the present value of income to be received over the term of those
subleases is recognizable in the period such income becomes probable and
reasonably estimable. Net income for the six months ended June 30, 1995
includes $6 million of sublease income recognized as a result of USF&G's
renegotiation in the first quarter of 1995 of a sublease with a tenant. The
sublease covers two floors of the Tower already occupied by the tenant and
extends that occupancy through July 2009. No subleases were negotiated in the
second quarter of 1995.
Note 9 Legal Contingencies
USF&G's insurance subsidiaries are routinely engaged in litigation in the normal
course of their business, including defending claims for punitive damages. As a
liability insurer, they defend third-party claims brought against their
insureds. As an insurer, they defend themselves against coverage claims.
Additional information regarding contingencies that may arise from insurance
regulatory matters and regulatory litigation matters may be found in the
Regulation section of Management's Discussion and Analysis of Financial
Condition and Results of Operations, as well as in USF&G's Annual Report to
Shareholders for the year ended December 31, 1994.
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.
9.1. 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.
9.2. 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. After reviewing documents
provided by USF&G, the plaintiffs agreed to dismiss USF&G from the case without
prejudice and filed motions to dismiss on June 6, 1995.
9.3. 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.
9.4. 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.
9.5. 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. The
California Supreme Court subsequently 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 has adopted regulations establishing a broad
industry-wide formula for implementing Proposition 103, but it is not clear how
these regulations will apply to USF&G, and many issues 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.
9.6. 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 required the Superintendent to
annually estimate each year's deficit for seven years before making a final
determination with respect to that year.
The amount, cause, and apportionment of deficits arising from the Maine workers'
compensation involuntary market during the years 1988 through 1991 were the
subject of hearings conducted by the Maine Superintendent of Insurance and
subsequent litigation joined in by USF&G, which was a servicing carrier for the
Maine residual market throughout that period. USF&G withdrew from the Maine
voluntary market and as a servicing carrier effective December 31, 1991.
In June 1995, legislation was enacted which effectively resolved the outstanding
Fresh Start litigation by enacting a compromise funding mechanism which will
require USF&G to pay between $5 million and $7 million. USF&G has established a
$6 million reserve for this liability. The insurance industry
and others may also have potential residual liability in the event total
deficits exceed the NCCI's current estimates. Any potential residual liability
of USF&G is not expected to be material. The parties to the litigation,
which is captioned National Council on Compensation Insurance, et al., v.
Superintendent of Insurance, have moved for dismissal and on July 31, 1995 the
Maine Law Court remanded the case with directions to dismiss.
Note 10 Subsequent Events
During August 1995, 189,800 shares of USF&G's Series B Preferred Stock were
converted into 1.6 million shares of common stock.
Note 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 of common stock, 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 auto coverage.
Both of these business combinations are accounted for as poolings-of-interests.
Accordingly, 1994 amounts have been restated to reflect the mergers with
Discover Re and Victoria. A reconciliation of the previously separate
enterprises to the restated consolidated financial position and results of
operations for periods prior to the mergers are as follows:
<TABLE>
At December 31, 1994
<S><C>
USF&G
Corporation USF&G
As Previously Corporation
(in millions) Reported Discover Re Victoria Adjustment As Restated
Assets
Investments:
Fixed maturities:
Held to maturity, at amortized cost $ 4,650 $ - $ 9 $ 4,659
Available for sale, at market 3,981 64 36 4,081
Common stocks, at market 44 - 2 46
Preferred stocks, at market 26 - - 26
Short-term investments 421 13 16 450
Mortgage loans 349 - - 349
Real estate 662 - - 662
Other invested assets 288 - - 288
Total investments 10,421 77 63 - 10,561
Cash 67 1 1 69
Accounts, notes, and other receivables 697 26 18 741
Insurance receivables 554 - - 554
Servicing carrier receivables 706 - - 706
Deferred policy acquisition costs 495 3 6 504
Other assets 834 4 7 845
Total assets $13,774 $111 $95 $ - $13,980
Liabilities
Unpaid losses, loss expenses,
and policy benefits $ 9,904 $ 34 $24 $ 9,962
Unearned premiums 931 15 22 968
Corporate debt 586 - - 586
Real estate and other debt 30 - 12 42
Other liabilities 954 18 9 981
Total liabilities 12,405 67 67 - 12,539
Shareholders' Equity
Preferred stock 331 - - 331
Common stock 239 - - $ 23 262
Paid-in capital 1,062 42 23 (23) 1,104
Net unrealized losses (144) (2) (1) (147)
Minimum pension liability (63) - - (63)
Retained earnings (deficit) (56) 4 6 (46)
Total shareholders' equity 1,369 44 28 - 1,441
Total liabilities and shareholders'
equity $13,774 $111 $95 $ - $13,980
</TABLE>
<TABLE> Three Months Ended June 30, 1994 Six Months Ended June 30, 1994
<S><C> <S><C> <S><C> <S><C>
USF&G USF&G USF&G USF&G
Corporation Corporation Corporation Corporation
As Previously Discover As As Previously Discover As
(in millions) Reported Re Victoria Restated Reported Re Victoria Restated
Revenues
Premiums earned $ 589 $ 5 $14 $ 608 $1,159 $10 $26 $1,195
Net investment income 191 1 1 193 374 2 1 377
Other 10 1 - 11 18 1 1 20
Revenues before realized gains 790 7 15 812 1,551 13 28 1,592
Net realized gains on investments 1 - - 1 6 - - 6
Total revenues 791 7 15 813 1,557 13 28 1,598
Expenses
Losses, loss expenses, and policy
benefits 523 4 9 536 1,032 7 19 1,058
Underwriting, acquisition, and
operating expenses 223 2 4 229 447 4 9 460
Interest expense 7 - 1 8 16 1 - 17
Facilities exit costs (income) - - - - - - - -
Total expenses 753 6 14 773 1,495 12 28 1,535
Income from operations before income taxes 38 1 1 40 62 1 - 63
Provision for income taxes (benefit) (35) - - (35) (34) (1) - (35)
Net income $ 73 $ 1 $ 1 $ 75 $ 96 $ 2 $ - $ 98
Preferred stock dividend
requirements 12 - - 12 24 - - 24
Net income available to common stock $ 61 $ 1 $ 1 $ 63 $ 72 $ 2 $ - $ 74
</TABLE>
USF&G Corporation
Report of Independent Auditors
Board of Directors
USF&G Corporation
We have reviewed the accompanying condensed consolidated statement of financial
position of USF&G Corporation as of June 30, 1995 and the related condensed
consolidated statements of operations and cash flows for the three-month and
six-month periods ended June 30, 1995 and 1994. These financial statements are
the responsibility of the company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to financial data and making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing standards, which
will be performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial position of USF&G Corporation
as of December 31, 1994, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the year then ended (not presented
herein) and, in our report dated February 24, 1995, we expressed an unqualified
opinion on those consolidated financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated statement of
financial position as of December 31, 1994, is fairly stated in all material
respects, in relation to the consolidated statement of financial position from
which it has been derived.
ERNST & YOUNG LLP
Baltimore, Maryland
August 9, 1995
USF&G Corporation
Management's Discussion and Analysis of Financial Condition and Results of
Operations
This section provides an analysis of financial results and material changes in
financial position for USF&G Corporation and its subsidiaries ("USF&G") for the
quarter ended June 30, 1995. The analysis focuses on the performance of USF&G's
business segments and its investment portfolio. This discussion updates the
"Management's Discussion and Analysis" in the 1994 Annual Report to Shareholders
and should be read in conjunction therewith. The results of operations for the
quarter and six months ended June 30, 1995, are compared with those for the
same periods of 1994, unless otherwise noted. Financial position at June 30,
1995, is compared with December 31, 1994. Amounts for 1994 have been restated
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 required due to the
application of the pooling-of-interests method of accounting. (Note: A
glossary of certain terms used in the discussion can be found at the end of this
section. The terms are italicized the first time they appear in text.)
Index
1. Consolidated Results 15
2. Property/Casualty Insurance Operations 16
3. Life Insurance Operations 19
4. Parent and Noninsurance Operations 20
5. Investments 20
6. Financial Condition 23
7. Liquidity 24
8. Regulation 25
9. Glossary of Terms 26
1. Consolidated Results
The table below shows the major components of net income.
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1995 1994 1995 1994
Income from operations before
realized gains, facilities exit
costs, and income taxes $45 $39 $84 $57
Net realized gains on investments 1 1 5 6
Facilities exit (costs) income - - 6 -
Income taxes - 35 - 35
Net income $46 $75 $95 $98
The table below shows the components by major business segment of income from
continuing operations before realized gains, facilities exit costs, and income
taxes.
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1995 1994 1995 1994
Property/casualty insurance $ 59 $ 55 $115 $ 88
Life insurance 6 4 12 8
Parent and noninsurance (20) (20) (43) (39)
Income from operations before
realized gains, facilities exit
costs, and income taxes $ 45 $ 39 $ 84 $ 57
Income from operations before realized gains, facilities exit costs, and income
taxes for the property/casualty insurance segment increased for the quarter and
six months ended June 30, 1995, due to continued improvement in underwriting
results. The continued improvement in the life insurance segment resulted
principally from higher product sales and improved profit margins.
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 40-story office building ("the Tower") in
downtown Baltimore to the Mount Washington facilities in Baltimore which USF&G
owns. Implementation of the plan began in January 1995. The relocation of
Tower personnel is expected to be substantially completed by the end of 1996.
Activities associated with the relocation are in process and are generally
proceeding as originally planned.
In the first quarter of 1995, USF&G renegotiated and extended the terms of a
sublease with a tenant. The new lease, which covers the two floors of the Tower
already occupied by the tenant, expires in July 2009. The present value of the
additional income to be received over the term of the new lease, $6 million, was
recognized in the first quarter of 1995, and is shown as a separate item
captioned "facilities exit costs (income)" in the condensed consolidated
statement of operations. No subleases were negotiated in the second quarter
of 1995; however, management is actively marketing the Tower space to
prospective subtenants.
2. Property/Casualty Insurance Operations
Property/casualty insurance operations, the principal business segment,
accounted for 85 percent of USF&G's revenues in the six months ended June 30,
1995 compared with 84 percent in the same period of 1994. Financial results for
this segment were as follows:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1995 1994 1995 1994
Premiums earned* $ 614 $ 577 $1,193 $1,127
Losses and loss expenses incurred (449) (444) (874) (865)
Underwriting expenses (207) (184) (409) (377)
Net underwriting loss (42) (51) (90) (115)
Net investment income 108 113 219 214
Other revenues and expenses, net (7) (7) (14) (11)
Income from operations before
realized gains, facilities exit costs,
and income taxes $ 59 $ 55 $ 115 $ 88
*See Glossary of Terms
Improved underwriting results were the primary reason for the increase in income
from property/casualty operations before realized gains, facilities exit costs,
and income taxes in the second quarter and first half of 1995 when compared
with the same periods of 1994. Over the last several years, management has
spent considerable effort improving the overall quality of the book of
business. This improvement in the mix of business along with targeted premium
growth and continued expense management are the primary contributing factors
to the improved underwriting results. Lower catastrophe losses in the first
quarter were also a major factor in the improvement in the six-month results.
Net investment income was down in the second quarter of 1995, compared with
the second quarter of 1994, primarily due to a $6 million increase in interest
credited to funds withheld on assumed reinsurance contracts. In the six-month
period, net investment income improved primarily due to the property/casualty
segment's share of earnings from an equity interest in Renaissance Reinsurance
Ltd. ("Renaissance Re"), an offshore reinsurance company. Property/casualty
results for the second quarter of 1995 include $6 million of foreign currency
transaction gains related to international exposure in the assumed reinsurance
business. In addition, a reserve of $6 million was established with respect to
the Maine "Fresh Start" litigation (see Note 9.6 to the condensed consolidated
financial statements).
2.1. Premiums earned
Premiums earned totaled $614 million and $1,193 million for the second quarter
and first half of 1995, respectively, compared with $577 million and $1,127
million for the same periods in 1994. The following table shows the major
components of premiums earned and premiums written.
Three Months Ended June 30
1995 1994
Premiums Premiums
(in millions) Written Earned Written Earned
Branch office voluntary production:
Direct $545 $498 $512 $477
Ceded reinsurance (43) (39) (50) (37)
Net branch office voluntary 502 459 462 440
Discover Re and Victoria 23 19 20 19
Pools and associations 15 20 18 20
Other premium adjustments (4) - (3) (2)
Total primary 536 498 497 477
Assumed reinsurance:
Finite risk 50 55 46 51
Traditional risk 57 61 46 49
Total assumed 107 116 92 100
Total $643 $614 $589 $577
Six Months Ended June 30
1995 1994
Premiums Premiums
(in millions) Written Earned Written Earned
Branch office voluntary production:
Direct $1,038 $ 981 $ 985 $ 944
Ceded reinsurance (84) (76) (89) (73)
Net branch office voluntary 954 905 896 871
Discover Re and Victoria 40 38 38 36
Pools and associations 18 36 57 60
Other premium adjustments (8) 1 (11) (3)
Total primary 1,004 980 980 964
Assumed reinsurance:
Finite risk 98 80 84 74
Traditional risk 138 133 93 89
Total assumed 236 213 177 163
Total $1,240 $1,193 $1,157 $1,127
Premiums earned for the quarter ended June 30, 1995, increased $37 million, or 6
percent, compared with the same period in 1994, while premiums earned in the
first half of 1995 were $66 million, or 6 percent, higher than in the first half
of 1994. The increases are largely attributable to the increases in branch
office voluntary direct premiums and assumed reinsurance premiums. The first
half increases were offset somewhat by first quarter decreases in premiums from
voluntary and involuntary pools and associations as a result of reduced
participation in these markets.
Branch office direct voluntary premiums written in the second quarter of 1995
are over six percent higher when compared with the corresponding period of
1994. Premiums from new business increased 10 percent in the second quarter of
1995, and retention ratios for both commercial and personal lines improved when
compared to the same period in 1994.
The decline in premiums seen in previous years was largely the result of
management's efforts to eliminate unprofitable business. The growth in 1995 is
occurring in higher margin business segments, particularly middle market
commercial lines, fidelity/surety and assumed reinsurance, which have been
targeted by management to be expanded in a systematic and controlled manner.
The table below shows premiums earned and the statutory loss ratios by lines of
property/casualty insurance.
Three Months Ended June 30
1995 1994
Premiums Statutory Premiums Statutory
(dollars in millions) Earned Loss Ratio Earned Loss Ratio
Commercial Lines $296 77.8% $284 80.7%
Fidelity/Surety 35 33.6 30 32.9
Personal Lines 148 76.6 144 74.8
Discover Re 6 78.5 5 77.1
Victoria 13 75.1 14 65.5
Total primary 498 74.3 477 75.5
Assumed reinsurance 116 67.2 100 62.4
Total $614 73.0% $577 73.3%
Six Months Ended June 30
1995 1994
Premiums Statutory Premiums Statutory
(dollars in millions) Earned Loss Ratio Earned Loss Ratio
Commercial Lines $ 586 75.5% $ 585 77.7%
Fidelity/Surety 67 35.7 58 30.7
Personal Lines 289 78.0 285 86.5
Discover Re 12 78.0 10 77.3
Victoria 26 73.8 26 72.1
Total primary 980 73.5 964 77.3
Assumed reinsurance 213 71.2 163 60.9
Total $1,193 73.1% $1,127 74.9%
2.2. Underwriting results
Underwriting results generally represent premiums earned less incurred losses,
loss adjustment 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:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1995 1994 1995 1994
Commercial $(35) $(52) $(63) $ (82)
Fidelity/Surety 3 6 8 9
Personal (21) (14) (46) (60)
Discover Re - - - -
Victoria (1) - (2) (1)
Total primary (54) (60) (103) (134)
Assumed reinsurance 12 9 13 19
Net underwriting loss $(42) $(51) $ (90) $(115)
Consolidated property/casualty underwriting ratios, calculated based on
generally accepted accounting principles ("GAAP") and statutory accounting
practices, are as follows:
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
GAAP underwriting ratios:
Loss ratio 73.1% 76.9% 73.2% 76.7%
Expense ratio* 33.8 31.9 34.3 33.4
Combined ratio 106.9 108.8 107.5 110.1
Statutory underwriting ratios:
Loss ratio 73.0 73.3 73.1 74.9
Expense ratio 33.6 35.3 34.1 34.8
Combined ratio 106.6 108.6 107.2 109.7
*See Glossary of Terms
Underwriting results improved by $9 million in the second quarter and $25
million in the first six months of 1995 when compared with the same periods of
1994. The results continue to benefit from the overall improvement in the
quality and mix of business and continued emphasis on underwriting discipline.
The significant improvement in commercial lines underwriting performance in 1995
resulted from management's targeted business mix strategies, better quality
underwriting and disciplined pricing, particularly in the middle markets. In
personal lines, the comparison between second quarter and year-to-date
underwriting results for 1995 and 1994 are primarily effected by catastrophe
losses. Exclusive of catastrophe losses, personal lines incurred underwriting
losses of $13 million and $37 million in the second quarter and first half of
1995, compared with $9 million and $32 million in the same periods of 1994.
Underwriting results in the second quarter and first half of 1995 included $15
million and $37 million of net catastrophe losses, respectively, compared with
$10 million and $50 million in the same periods of 1994. The primary businesses
incurred catastrophe losses of $21 million in the first half of 1995,
primarily from various second quarter hailstorms, tornadoes and floods and
including an estimated $4 million for the April bombing of the federal building
in Oklahoma City. For the six months ended June 30, 1995, the assumed
reinsurance business incurred $12 million of catastrophe losses for the Kobe,
Japan earthquake in January and further development of $4 million in losses on
the February 1994 Los Angeles earthquake. The catastrophe losses in the first
half of 1994 were primarily incurred by the primary businesses and related to
severe winter snow and ice storms. Excluding catastrophe losses, the primary
businesses statutory loss ratio of 71.4 for the first six months of 1995 showed
an improvement over that of 72.3 for the first six months of 1994.
Underwriting results showed improvement despite continuing competitive
pressures, the inflationary claims environment, and the adverse impact of
involuntary markets. Competitive pressures continue to effect underwriting
results, especially in the pricing of commercial lines products.
2.3. Loss reserves
Reserves for unpaid losses and loss expenses totaled $6.1 billion at June 30,
1995, and approximate the December 31, 1994 position. Exclusive of claims from
catastrophe losses, pending claims have been reduced by 13 percent and the
number of new claims reported has decreased 12 percent since the second quarter
of 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.
The most significant common circumstance claim exposures include negligent
construction, environmental, and asbestos claims. Case reserves for these
exposures are less than two percent of total reserves for unpaid losses and
loss expenses at June 30, 1995. 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
table sets forth selected information for each of the three primary categories,
net of ceded reinsurance.
Negligent
(in millions) Construction Environmental Asbestos
Total case and bulk reserves
at December 31, 1994 $ 55 $329 $125
Losses incurred - 3 7
Claims (paid) recovered (8) (17) (3)
Total case and bulk reserves
at June 30, 1995 $ 47 $315 $129
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.
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.
3. Life Insurance Operations
Life insurance operations ("F&G Life") represent 14 percent of USF&G's total
revenues for the first six months of 1995 compared with 15 percent for the same
period of 1994. F&G Life also represents 32 percent of the assets at June 30,
1995 and 33 percent of the assets at December 31, 1994.
F&G Life's financial results were as follows:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1995 1994 1995 1994
Premiums $ 45 $ 31 $ 83 $ 68
Net investment income 77 81 154 164
Policy benefits (102) (92) (195) (193)
Underwriting and operating expenses (14) (16) (30) (31)
Income from operations before realized
gains, facilities exit costs, and
income taxes $ 6 $ 4 $ 12 $ 8
Premium increases are resulting from expanded sales and marketing strategies.
The increase in policy benefits for the second quarter is primarily attributable
to an increase in sales of structured settlements with life contingencies over
the same period in 1994, as well as higher mortality expense during the second
quarter of 1995. The increase is offset by a decline in interest credited due
to lower interest rates and a lower annuity policy base for the six months ended
June 30, 1995. Continued expense control efforts are resulting in generally
flat underwriting and operating expenses despite the significant increase in
sales. The second quarter and six month declines in net investment income are
generally affected by the declining asset base resulting from annuity surrender
activity. In addition, the six month 1994 amount includes $8 million of net
investment income from the sale of a timberland investment.
3.1. Sales
The following table shows life insurance and annuity sales (premiums and
deposits) by distribution system and product type.
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1995 1994 1995 1994
Distribution System:
Direct-structured settlements $ 30 $ 15 $ 53 $ 35
Property/casualty brokerage 21 12 36 23
National brokerage 12 7 26 17
National wholesaler 24 14 47 29
Senior distribution 4 - 6 -
Other 8 10 15 19
Total $ 99 $ 58 $183 $123
Product Type:
Structured settlement annuities $ 30 $ 15 $ 53 $ 35
Single premium deferred annuities 33 15 62 32
Tax sheltered annuities 22 13 43 25
Other annuities 9 13 19 27
Life insurance 5 2 6 4
Total $ 99 $ 58 $183 $123
Sales increased in the second quarter of 1995 by 71 percent over the same period
in 1994. This increase was led by structured settlement annuities, single
premium deferred annuities ("SPDAs") and tax sheltered annuities. F&G Life has
continued to develop and introduce new products in its structured settlement
and single premium deferred annuity lines as well as modifying current product
offerings to meet customer needs. F&G Life intends to continue to concentrate
on the expansion of its existing distribution channels while also creating and
developing other marketing networks. 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 $11.6 billion at
June 30, 1995 and $11.8 billion at December 31, 1994.
3.2. Policy surrenders
Deferred annuities and universal life products are subject to surrender. Nearly
all of F&G Life's surrenderable annuity policies allow a refund of the cash
value balance less a surrender charge. The surrender charge varies by product.
Single premium deferred annuities, which represent 63 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 and 1995 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 $166 million and $352 million for the quarter and six
months ended June 30, 1995, respectively. This compares with $86 million and
$217 million for the same periods in 1994. Surrender activity has increased as
a result of expiring surrender charges, primarily on the national brokerage
block of SPDAs, as policyholders seek other investment alternatives.
Management has implemented a policy conservation program that provides
policyholders with a competitive renewal option within F&G Life once their
surrender charge period has expired. Due to the fluctuating interest rate
environment, this option was suspended on January 1, 1995, and subsequently
reinstituted as of July 1, 1995. As of June 30, 1995, based on surrender
experience beginning in 1993, policyholders representing approximately 17
percent of the expiring block had elected this option. An additional 31 percent
of the expiring block was retained under the terms of the original contract,
free of surrender charges and at interest rates which are adjusted annually.
The total account value of F&G Life's deferred annuities is $2.1 billion, 22
percent of which is surrenderable at current account value (i.e., without
surrender charges). The surrender charge period on $1.1 billion of F&G Life's
single premium deferred annuity products expires through the end of 1997, of
which $364 million expires during the remainder of 1995. The experience thus
far for $1.1 billion of SPDAs where the surrender charge period expired in the
fourth quarter of 1993 through the second quarter of 1995 indicates that, on
average, 53 percent of the expiring block may surrender; however, in the future,
a larger percentage may surrender should interest rates trend upward. 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 policyholders surrender or
rollover to new products with lower rates. Management believes that F&G Life,
with a liquid assets to surrender value ratio of 131 percent at June 30, 1995,
continues to maintain a high degree of liquidity and has the ability to meet
surrender obligations for the foreseeable future.
4. Parent and Noninsurance Operations
Parent company interest and other unallocated expenses and net results from
noninsurance operations were as follows:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1995 1994 1995 1994
Parent Company Expenses:
Interest expense $ (11) $ (7) $ (21) $ (15)
Unallocated expense, net (12) (12) (24) (22)
Noninsurance Operations 3 (1) 2 (2)
Loss from operations before
realized gains, facilities exit
costs, and income taxes $ (20) $ (20) $ (43) $ (39)
The results for parent and noninsurance operations for the six months ended June
30, 1995 show an increase in loss from operations of $4 million when compared to
the six months ended June 30, 1994. This increase is primarily due to higher
interest expense as a result of the higher short-term interest rate environment
and the refinancing of corporate debt in 1994 and 1995 from floating rates to
fixed rates.
5. Investments
At June 30, 1995, USF&G's investment mix is comparable with year-end 1994.
Long-term fixed maturities comprise 84 percent and 83 percent of total
investments at June 30, 1995 and December 31, 1994, respectively. The table
below shows the distribution of USF&G's investment portfolio.
(dollars in millions) At June 30, 1995 At December 31, 1994
Total investments $10,767 $10,561
Fixed maturities:
Held to maturity 42% 44%
Available for sale 42 39
Total fixed maturities 84 83
Common and preferred stocks 1 1
Short-term investments 3 4
Mortgage loans and real estate 9 9
Other invested assets 3 3
Total 100% 100%
5.1. Net investment income
The following table shows the components of net investment income.
Three Months Ended Six Months Ended
June 30 June 30
(dollars in millions) 1995 1994 1995 1994
Net investment income from:
Fixed maturities $167 $169 $332 $340
Equity securities 1 - 2 1
Short-term investments 5 4 11 7
Real estate and mortgage loans 12 17 24 34
Other, less expenses (3) 3 (2) (5)
Total $182 $193 $367 $377
Average yields (annualized): 6.8% 7.0% 6.9% 6.8%
Investment income from fixed maturities has decreased due to an asset base which
declined in order to meet SPDA surrenders and other cash flow needs. Average
annualized yields on fixed maturities were 7.4 percent and 7.3 percent for the
six months ended June 30, 1995 and 1994, respectively. Interest on short-term
investments has increased due to higher short-term yields. Other income less
expenses declined for the second quarter due to a $6 million increase in
interest credited to funds withheld on assumed reinsurance contracts. Other
income less expenses improved for the six months ended June 30, 1995 primarily
due to USF&G's share of earnings from an equity interest in Renaissance Re.
USF&G recorded $15 million of net investment income from Renaissance Re during
the first half of 1995, compared with $6 million for the first half 1994.
Included in investment income on real estate and mortgage loans for the first
half of 1994 is $8 million related to timberland properties in F&G Life which
were sold in 1994.
5.2. Realized gains (losses)
The components of net realized gains (losses) include the following:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 1995 1994 1995 1994
Net gains (losses) from sales:
Fixed maturities $ - $ 1 $ - $ 3
Equity securities - 1 2 -
Real estate and other 7 - 12 12
Total net gains 7 2 14 15
Impairments:
Fixed maturities - (1) - (1)
Equity securities - - - -
Real estate and other (6) - (9) (8)
Total impairments (6) (1) (9) (9)
Net realized gains $ 1 $ 1 $ 5 $ 6
Real estate and other realized gains of $12 million for the first half of 1995
primarily relate to USF&G's equity in the realized gains of certain limited
partnership investments. Realized gains on real estate and other investments
for the first half of 1994 resulted from F&G Life's sale of timberland
investments and USF&G's portion of realized gains from investments in limited
partnerships. Provisions for impairment relate to certain investments, declines
in the fair value of which are judged to be other than temporary.
5.3. Unrealized gains (losses)
The components of the changes in unrealized gains (losses) were as follows:
Six Months
Ended June 30
(dollars in millions) 1995
Fixed maturities available for sale $ 258
Deferred policy acquisition costs adjustment (53)
Equity securities 4
Other (6)
Total $ 203
Fixed maturity investments classified as "available for sale" are recorded at
market value with the unrealized gains (losses) reported as a component of
shareholders' equity. An average interest rate decrease of 171 basis points on
two to 30 year maturities during the first half of 1995 reduced the prior
year's unrealized loss on fixed maturities available for sale from $185 million
to an unrealized gain of $73 million at June 30, 1995. This was partially
offset by a related change in F&G Life's DPAC adjustment from the prior year's
unrealized gain of $33 million to an unrealized loss of $20 million at June 30,
1995. 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.
(dollars in millions) At June 30, 1995 At December 31, 1994
Corporate investment-grade bonds $5,196 57% $5,031 56%
Mortgage-backed securities 1,864 21 1,921 22
Asset-backed securities 987 11 942 11
U.S. Government bonds 308 3 286 3
High-yield bonds* 593 7 616 7
Tax-exempt bonds 64 1 122 1
Other 2 - 7 -
Total fixed maturities
at amortized cost 9,014 100% 8,925 100%
Total market value of
fixed maturities 9,099 8,365
Net unrealized gains (losses) $ 85 $ (560)
Percent market-to-amortized cost 101% 94%
*See Glossary of Terms
At June 30, 1995 At December 31, 1994
Net Net
Amortized Market Unrealized Amortized Market Unrealized
(in millions) Cost Value Gain Cost Value (Loss)
Fixed maturities:
Held to maturity $4,583 $4,595 $12 $4,659 $4,284 $(375)
Available for sale 4,431 4,504 73 4,266 4,081 (185)
Total $9,014 $9,099 $85 $8,925 $8,365 $(560)
Decreasing interest rates, which resulted in rising bond prices, were
responsible for the seven percentage point increase in the fixed maturity
portfolio's overall market-to-amortized cost ratio from December 31, 1994.
Debt obligations of the U.S. Government and its agencies and other investment-
grade bonds comprised 93 percent of the portfolio at June 30, 1995 and December
31, 1994. The following table shows the credit quality of the long-term fixed
maturity portfolio as of June 30, 1995.
Percent
Market-to-
Amortized Market Amortized
(dollars in millions) Cost Percent Value Cost
U.S. Government and
U.S. Government Agencies $2,053 23% $2,086 102%
AAA 1,445 16 1,461 101
AA 1,383 15 1,386 100
A 2,515 28 2,546 101
BBB 1,025 11 1,044 102
Below BBB 593 7 576 97
Total $9,014 100% $9,099 101%
USF&G's holdings in high-yield bonds comprised seven percent of the total fixed
maturity portfolio at June 30, 1995 and December 31, 1994. Of the total high-
yield bond portfolio, 71 percent is held by the life insurance segment,
representing 10 percent of F&G Life's total investments.
The table below illustrates the credit quality of USF&G's high-yield bond
portfolio as of June 30, 1995.
Percent
Market-to-
Amortized Market Amortized
(dollars in millions) Cost Percent Value Cost
BB $346 59% $336 97%
B 245 41 237 97
CCC and lower 2 - 3 125
Total $593 100% $576 97%
The information on credit quality in the preceding two tables is based upon the
higher of the rating assigned to each issue of fixed-income maturities by either
Standard & Poor's or Moody's. Where neither Standard & Poor's nor Moody's has
assigned a rating to a particular fixed maturity issue, classification is based
on 1) ratings available from other recognized rating services; 2) ratings
assigned by the NAIC; or 3) an internal assessment of the characteristics of the
individual security, if no other rating is available.
At June 30, 1995, USF&G's five largest investments in high-yield bonds totaled
$89 million in amortized cost and had a market value of $76 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.
(in millions) At June 30, 1995 At December 31, 1994
Mortgage loans $ 293 $ 349
Equity real estate 753 760
Reserves (95) (98)
Total $ 951 $ 1,011
The decrease in real estate from the prior year is primarily due to first
quarter 1995 sales of two properties.
The decrease in mortgage loans from the prior year is due to the prepayment of a
loan, and the foreclosure of a loan, which is now included in equity real
estate.
USF&G's real estate investment strategy emphasizes diversification by geographic
region and property type. The diversification of USF&G's mortgage loan and real
estate portfolio at June 30, 1995, is as follows:
Geographic Region Type of Property Development Stage
Pacific/Mountain 36% Office 35% Operating property 73%
Midwest 21 Land 27 Land packaging 16
Southeast 15 Apartments 25 Land development 11
Mid-Atlantic 14 Retail/other 7
Southwest 9 Industrial 6
Northeast 5
Real estate investments are generally appraised at least once every three years.
Appraisals are obtained more frequently under certain circumstances such as
significant changes in property performance or market conditions. All of these
appraisals are performed by professionally certified appraisers.
At June 30, 1995, USF&G's five largest real estate investments had a book value
of $326 million. The largest single investment was a land development project
located in San Diego, California with a book value of $94 million, or ten
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. The level of nonperforming real estate
investments at June 30, 1995 is consistent with December 31, 1994.
The book value of the components of nonperforming real estate are as follows:
(dollars in millions) At June 30, 1995 At December 31, 1994
Real estate acquired through
foreclosure or deed-in-lieu
of foreclosure* $117 $117
Land investments* 55 56
Nonperforming equity investments* 34 35
Total nonperforming real estate $206 $208
Real estate valuation allowance $(95) $(98)
Reserves/nonperforming real estate 46% 47%
*See Glossary of Terms
Valuation allowances are established for impairments of mortgage loans and real
estate equity values based on periodic evaluations of the operating performance
of the properties and their exposure to declines in value. The allowance totaled
$95 million, or ten percent of the net real estate portfolio at June 30, 1995,
and $98 million, or ten percent of the net real estate portfolio at December 31,
1994. In light of USF&G's current plans with respect to the portfolio,
management believes the allowance at June 30, 1995 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, or plans with respect to individual properties change, additional
reserves may be required. Prospectively, efforts will continue to reduce risk
and increase yields in the real estate portfolio by selling equity real estate
when it is advantageous to do so and reinvesting the proceeds in medium-term
mortgage loans.
6. Financial Condition
6.1. Assets
USF&G's assets totaled $14.2 billion at June 30, 1995, compared with $14.0
billion at December 31, 1994. The increase is primarily due to a $258 million
increase in the market value of fixed maturity investments available for sale.
6.2. Debt
USF&G's corporate debt totaled $602 million at June 30, 1995, compared with
$586 million at December 31, 1994. The increase in debt resulted primarily from
$13 million of foreign currency translation adjustments from non-U.S. dollar
denominated debt. As a result of entering into currency forward agreements,
there was no effect on net income from translation of non-U.S. dollar
denominated debt. USF&G's real estate and other debt totaled $30 million at
June 30, 1995 and $42 million at December 31, 1994. The decrease of $12 million
since year-end relates to Victoria's line of credit which was repaid in full
during the second quarter of 1995.
On May 11, 1995, USF&G issued $150 million of 7% Senior Notes due 1998, and on
June 5, 1995, issued $80 million of 7 1/8% Senior Notes due 2005. Interest on
these notes is payable semiannually. Proceeds from these issuances were used to
repay $215 million under the committed credit facility (see Section 7.2), and to
repurchase approximately $15 million of Swiss Franc bonds.
6.3. Shareholders' equity
USF&G's shareholders' equity totaled $1.7 billion at June 30, 1995, compared
with $1.4 billion at December 31, 1994. The increase is primarily the result of
approximately $258 million increase in unrealized gains on fixed maturity
investments available for sale less a $53 million change in the related life
insurance segment deferred policy acquisition costs adjustment. In addition,
shareholders' equity increased due to net income of $95 million less $26 million
in common and preferred stock dividends.
6.4. Capital transactions
At December 31, 1994, USF&G had outstanding 1.3 million shares of its Series C
Preferred Stock. In February 1995, these shares were converted into
approximately 5.5 million shares of common stock. During the second quarter of
1995, in exchange for all of the outstanding equity of Discover Re and Victoria,
respectively, USF&G issued another 5.4 million and 3.8 million shares of common
stock. In August 1995, 189,800 shares of Series B Preferred Stock were
converted into 1.6 million common shares.
7. Liquidity
7.1. Cash flow from operations
USF&G had cash flow from operations of $101 million and $156 million for the
quarter and six month periods ended June 30, 1995, compared with cash used in
operations of $18 million and $3 million for the same periods in 1994. Cash
flow improved over the six months ended June 30, 1995 primarily due to a $88
million improvement in net reinsurance activity which relates to an increase in
assumed reinsurance written premium of $59 million over the prior year. In
addition, the increase is due to favorable experience in losses, loss expenses,
and policy benefits paid over the quarter and six months ended June 30, 1995.
7.2. Credit facilities
At June 30, 1995, USF&G maintained a $250 million committed credit facility with
a group of foreign and domestic banks. This represents a reduction of the
credit facility from $400 million at December 31, 1994. Management elected to
reduce the size of the facility due to the reduction in borrowings against it
and USF&G's expanded access to capital markets. Borrowings outstanding under
the credit facility, which totaled $215 million at December 31, 1994, were
repaid in full during the second quarter of 1995. 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 June
30, 1995 and December 31, 1994.
In addition, at June 30, 1995, USF&G maintained a $100 million foreign currency
credit facility and a $50 million letter of credit facility. At June 30, 1995,
there were no borrowings on the foreign currency credit facility; the balance
outstanding on the letter of credit facility was $11 million.
7.3. Marketable securities
USF&G's fixed-income, equity security, and short-term investment portfolios are
liquid and represent substantial sources of cash. The market value of its
fixed-income securities was $9.1 billion at June 30, 1995, which represents 101
percent of its amortized cost. At June 30, 1995, equity securities, which are
reported at market value in the balance sheet, totaled $68 million. Short-term
investments totaled $287 million.
7.4. Liquidity restrictions
There are certain restrictions on payments of dividends by insurance
subsidiaries that may limit USF&G Corporation's ability to receive funds from
its subsidiaries. Under the Maryland Insurance Code, Maryland insurance
subsidiaries, such as United States Fidelity and Guaranty Company ("USF&G
Company") and F&G Life, must provide the Maryland Insurance Commissioner (the
"Commissioner") with not less than thirty days' prior written notice before
payment of an "extraordinary dividend" to its holding company. "Extraordinary
dividends" are dividends which, together with any dividends paid during the
immediately preceding twelve month period, would be in excess of 10% of the
subsidiary's statutory policyholders' surplus as of the prior calendar year end.
Extraordinary dividends may not be paid until such thirty day period has expired
and the Commissioner has not disapproved the payment, or the Commissioner has
approved the payment within such period. In addition, ten days' prior notice of
any dividend must be given to the 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.
Effective June 1, 1995 and with the consent of the Maryland Insurance
Commissioner, USF&G Company, the principal property/casualty subsidiary of
USF&G, declared an extraordinary dividend payable to USF&G Corporation
consisting of all of the issued and outstanding capital stock of F&G Life.
Prior to the payment of such dividend, F&G Life was a wholly-owned subsidiary of
USF&G Company. As a result of such dividend payment, F&G Life is now a direct,
wholly-owned subsidiary of USF&G Corporation. In addition, because any
dividends paid during the immediately preceding twelve month period are
considered when determining whether future dividends constitute extraordinary
dividends, any dividends which USF&G Company would propose to pay in the twelve
month period beginning June 1, 1995 would be deemed extraordinary dividends and
subject to the thirty-day notice period described above. During 1995,
approximately $33 million in dividends are available for payment to USF&G
Corporation from F&G Life without providing the notice required for
extraordinary dividends. The application of the thirty-day notice requirement
to any dividends of USF&G Company is not expected to materially affect the
liquidity of USF&G Corporation. In addition to the extraordinary dividend paid
on June 1, dividends of approximately $63 million have been paid as of June 30,
1995 to USF&G Corporation by USF&G Company.
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 9, "Legal Contingencies," to
the condensed consolidated financial statements, as well as in USF&G's Annual
Report to Shareholders for the year ended December 31, 1994.
8.1. Glass-Steagall reform
During the current session of Congress, legislative proposals to restructure the
U.S. financial services industry through repeal or modification of the Glass-
Steagall Act and the Bank Holding Company Act have been advanced in both Houses
of Congress and advocated by the Administration. The proposals would, to
varying degrees, allow banks to affiliate with other financial services
providers, including insurance companies. It is unclear whether or to what
extent any final legislation would address bank insurance authority, and no
reliable prediction can be made at this time as to the ultimate outcome of the
legislative deliberations regarding restructuring of the financial services
industry or the effect such legislation may have on USF&G.
9. 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: GAAP liquid assets (publicly traded bonds,
stocks, cash, and short-term investments) divided by surrenderable policy
liabilities, net of surrender charges. A measure of a life insurance company's
ability to meet liquidity needs in case of policy surrenders.
Loss ratio: The ratio of incurred losses and loss adjustment expenses to earned
premiums, determined in accordance with SAP or GAAP, as applicable. The
difference between SAP and GAAP relates to deposit accounting for GAAP related
to financial reinsurance assumed.
Nonperforming real estate: Mortgage loans and real estate investments that are
not performing in accordance with their contractual terms or that are performing
or projected to perform 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.
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.
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.
Underwriting results: Property/casualty pretax operating results excluding
investment results, policyholders' dividends, and noninsurance activities;
generally, premiums earned less losses and loss adjustment expenses incurred and
"underwriting" expenses incurred.
USF&G Corporation
Part II. Other Information
Item 1. Legal Proceedings
See Notes 9.2 and 9.6 of the Notes to Condensed Consolidated Financial
Statements regarding dismissal of the Texas workers' compensation litigation and
resolution of issues relating to the Maine "Fresh Start" litigation.
Item 4. Submission of Matters to a Vote of Shareholders
(a) The 1995 annual meeting of shareholders was held May 17, 1995.
(b) and (c) The shareholders elected all proposed nominees for directors to a
term of one year. The elections were uncontested and, except for R. James
Woolsey, all nominees were currently directors of USF&G Corporation. The
following table provides the voting tabulation for each nominee:
For Withheld
H. Furlong Baldwin 88,904,986 1,313,614
Michael J. Birck 89,082,474 1,136,126
Norman P. Blake, Jr. 88,412,116 1,806,484
George L. Bunting, Jr. 88,954,050 1,264,550
Robert E. Davis 88,948,868 1,269,732
Dale F. Frey 88,478,276 1,740,324
Robert E. Gregory, Jr. 88,976,008 1,242,592
Robert J. Hurst 88,395,795 1,822,805
Wilbur G. Lewellen 89,043,230 1,175,370
Henry A. Rosenberg, Jr. 88,877,252 1,341,348
Larry P. Scriggins 87,252,355 2,966,245
Anne Marie Whittemore 87,346,342 2,872,258
R. James Woolsey 88,837,661 1,380,939
(d) Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit 4A. Form of 7% Senior Notes due 1998.
Exhibit 4B. Form of 7 1/8% Senior Notes due 2005.
Exhibit 11. Computation of Earnings per Share.
Exhibit 12. Computation of Ratio of Consolidated Earnings to Fixed Charges and
Preferred Stock Dividends.
Exhibit 15. Letter Regarding Unaudited Interim Financial Information.
(b) Reports on Form 8-K.
The Registrant filed no reports on Form 8-K in the quarter ended June 30, 1995.
USF&G Corporation
Exhibit 11 - Computation of Earnings Per Share (Unaudited)
Six Months Ended June 30
(dollars in millions except per share data) 1995 1994*
Net Income Available to Common Stock
Primary:
Net income $ 95 $ 98
Less preferred stock dividend requirements (15) (24)
Net income available to common stock $ 80 $ 74
Fully Diluted:
Net income $ 95 $ 98
Less preferred stock dividend requirements (8) (8)
Add interest expense on convertible notes 3 2
Net income available to common stock $ 90 $ 92
Weighted Average Shares Outstanding
Primary Common Shares 108,869,519 94,420,476
Fully Diluted:
Common shares 108,869,519 94,420,476
Assumed conversion of preferred stock 12,615,617 26,611,211
Assumed exercise of stock options 1,283,417 1,081,965
Assumed conversion of zero coupon
convertible subordinated notes 7,227,255 4,818,170
Total 129,995,808 126,931,822
Earnings Per Common Share
Primary (A) $ .73 $ .78
Fully Diluted (B) $ .69 $ .72
* 1994 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 required due to the
application of the pooling-of-interests method of accounting.
(A) Shares issuable under stock options (861,463 shares in 1995 and 1,081,965 in
1994) have not been used as common stock equivalents in the computation of
primary earnings per common share presented on the face of the Condensed
Consolidated Statement of Operations because the dilutive effect is not
material.
(B) Fully diluted earnings per common share amounts are calculated assuming the
conversion of all securities whose contingent issuance would have a dilutive
effect on earnings. The calculations assume the conversion of preferred stock
series B and C and the zero coupon convertible subordinated notes, as well as
shares issuable under stock options.
USF&G Corporation
Exhibit 12 - Computation of Ratio of Consolidated Earnings to Fixed Charges and
Preferred Stock Dividends
Six Months Ended June 30
(dollars in millions) 1995 1994*
Fixed Charges
Interest expense $ 22 $ 17
Portion of rents representative
of interest 10 14
Total fixed charges 32 31
Preferred stock dividend requirements (A) 15 24
Combined Fixed Charges and Preferred
Stock Dividends $ 47 $ 55
Consolidated Earnings Available for Fixed Charges and Preferred
Stock Dividends
Income from operations before income taxes $ 95 $ 63
Adjustment:
Fixed charges 32 31
Consolidated earnings available for fixed charges and
preferred stock dividends $ 127 $ 94
Ratio of Consolidated Earnings to Fixed Charges 4.0 3.1
Ratio of Consolidated Earnings to Combined Fixed
Charges and Preferred Stock Dividends 2.7 1.7
* 1994 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 required due to the
application of the pooling-of-interests method of accounting.
(A) Preferred stock dividends of $15 million in 1995 and $24 million in 1994
divided by 100% less the effective income tax rate of 0.6% in 1995 and 0% in
1994.
USF&G Corporation
Exhibit 15 - Letter Regarding Unaudited Interim Financial Information
USF&G Corporation
We are aware of the incorporation by reference in the Registration Statement
Numbers 33-20449, 33-9405, 33-33271, 33-21132, and 33-51859 on Form S-3 and
Numbers 2-61626, 2-72026, 2-98232, 33-16111, 33-35095, 33-38113, 33-43132, 33-
45664, 33-45665, 33-61965, 33-55667, 33-55669, 33-55671 and 33-59535 on Form S-8
of our report on the unaudited condensed consolidated interim financial
statements of USF&G Corporation which is included in its Form 10-Q for the
quarter ended June 30, 1995.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
ERNST & YOUNG LLP
Baltimore, Maryland
August 9, 1995
USF&G Corporation
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
USF&G Corporation
By DAN L. HALE
Dan L. Hale
Executive Vice President and
Chief Financial Officer
Dated at Baltimore, Maryland
August 14, 1995
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO FORM 10-Q
USF&G CORPORATION
For the Quarter Ended Commission File Number
June 30, 1995 1-8233
A copy of all other of the Corporation's Exhibits to the June 30, 1995
Form 10-Q 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> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 4504
<DEBT-CARRYING-VALUE> 4583
<DEBT-MARKET-VALUE> 4595
<EQUITIES> 68
<MORTGAGE> 293
<REAL-ESTATE> 658
<TOTAL-INVEST> 10767
<CASH> 97
<RECOVER-REINSURE> 649
<DEFERRED-ACQUISITION> 476
<TOTAL-ASSETS> 14242
<POLICY-LOSSES> 9807
<UNEARNED-PREMIUMS> 1005
<POLICY-OTHER> 8
<POLICY-HOLDER-FUNDS> 92
<NOTES-PAYABLE> 632
<COMMON> 276
0
265
<OTHER-SE> 1171
<TOTAL-LIABILITY-AND-EQUITY> 14242
1276
<INVESTMENT-INCOME> 367
<INVESTMENT-GAINS> 5
<OTHER-INCOME> 26
<BENEFITS> 1069
<UNDERWRITING-AMORTIZATION> 345
<UNDERWRITING-OTHER> 149
<INCOME-PRETAX> 95
<INCOME-TAX> 0
<INCOME-CONTINUING> 95
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.69
<RESERVE-OPEN> 5142
<PROVISION-CURRENT> 979
<PROVISION-PRIOR> (105)
<PAYMENTS-CURRENT> 195
<PAYMENTS-PRIOR> 717
<RESERVE-CLOSE> 5104
<CUMULATIVE-DEFICIENCY> (105)
</TABLE>
<EXHIBIT 4>
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME
OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE
TRANSFERRED TO, OR REGISTERED OR EXCHANGED FOR SECURITIES
REGISTERED IN THE NAME OF, ANY PERSON OTHER THAN THE DEPOSITARY
OR A NOMINEE THEREOF AND NO SUCH TRANSFER MAY BE REGISTERED,
EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
EVERY SECURITY AUTHENTICATED AND DELIVERED UPON REGISTRATION OF
TRANSFER OF, OR IN EXCHANGE FOR OR IN LIEU OF, THIS SECURITY
SHALL BE A GLOBAL SECURITY SUBJECT TO THE FOREGOING, EXCEPT IN
SUCH LIMITED CIRCUMSTANCES.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT
IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS
AN INTEREST HEREIN.
USF&G CORPORATION
7.0% Senior Notes due 1998
CUSIP No. 903290 AE4
No. R-1
$150,000,000
USF&G CORPORATION, a Maryland corporation (herein called the
"Company", which term includes any successor Person under the
Indenture hereinafter referred to), for value received, hereby
promises to pay to Cede & Co., or registered assigns, the
principal sum of One Hundred Fifty Million dollars on May 15,
1998, at the office or agency of the Company referred to below,
and to pay interest thereon on November 15, 1995 and semi-
annually thereafter on May 15 and November 15 in each year,
accruing from May 18, 1995, at the rate of 7.0% per annum until
the principal hereof is paid or made available for payment. The
interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in such Indenture, be
paid to the Person in whose name this Security (or one or more
Predecessor Securities) is registered at the close of business on
the Regular Record Date for such interest, which shall be the May
1 or November 1 (whether or not a Business Day), as the case may
be, next preceding such Interest Payment Date. Any such interest
not so punctually paid or duly provided for will forthwith cease
to be payable to the Holder on such Regular Record Date and may
either be paid to the Person in whose name this Security (or one
or more Predecessor Securities) is registered at the close of
business on a Special Record Date for the payment of such
Defaulted Interest to be fixed by the Trustee, notice whereof
shall be given to Holders of the Securities of this series not
less than 10 days prior to such Special Record Date, or be paid
at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Securities
of this series may be listed, and upon such notice as may be
required by such exchange, all as more fully provided in said
Indenture.
Payment of the principal of, and interest on, this Security
will be made at the office or agency of the Company maintained
for that purpose in Baltimore, Maryland, in such coin or currency
of the United States of America as at the time of payment is
legal tender for payment of public and private debts; provided,
however, that at the option of the Company payment of interest
may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register.
Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof, which further
provisions shall for all purposes have the same effect as if set
forth at this place.
Unless the certificate of authentication hereon has been
executed by the Trustee referred to on the reverse hereof by
manual signature, this Security shall not be entitled to any
benefit under the Indenture or be valid or obligatory for any
purpose.
IN WITNESS WHEREOF, the Company has caused this instrument
to be duly executed under its corporate seal.
Dated: May 18, 1995
USF&G
CORPORATION
By___________________________________
Richard P. Campagna
Vice President - Treasurer
Attest:
___________________________________
John F. Hoffen, Jr.
Secretary
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated
therein referred to in the within-mentioned Indenture.
Signet Trust Company, As Trustee
By
Authorized Officer
REVERSE OF SECURITY
This Security is one of a duly authorized issue of
securities of the Company (herein called the "Securities"),
issued and to be issued in one or more series under an Indenture,
dated as of January 28, 1994 (herein called the "Indenture"),
between the Company and Signet Trust Company, as Trustee (herein
called the "Trustee", which term includes any successor trustee
under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of
the respective rights, limitations of rights, obligations, duties
and immunities thereunder of the Company, the Trustee and the
Holders of the Securities and of the terms upon which the
Securities are, and are to be, authenticated and delivered. This
Security is one of the series designated on the face hereof,
limited in aggregate principal amount to $150,000,000.
The Indenture contains provisions for defeasance at any time
of (1) the entire indebtedness of this Security or (2) certain
restrictive covenants and Events of Default with respect to this
Security, in each case upon compliance with certain conditions
set forth in the Indenture. In addition to the foregoing, if the
Company elects to have Section 1303 of the Indenture applied to
this Security, (i) the Company shall be released from its
obligations set forth in the third paragraph of the reverse of
this Security and (ii) the occurrence of any event specified in
the fourth paragraph of the reverse of this Security shall be
deemed not to be or result in an Event of Default, and the
Company may omit to comply with, and shall have no liability in
respect of, any term, condition or limitation set forth in either
of such paragraphs.
In addition to the covenants contained in the Indenture, the
Company will not, nor will it permit any Principal Insurance
Subsidiary to, issue, sell or otherwise dispose of any shares of
Capital Stock (other than non-voting Preferred Stock) of any
Principal Insurance Subsidiary, except for (i) directors
qualifying shares; (ii) sales or other dispositions to the
Company or to one or more Principal Insurance Subsidiaries; (iii)
the disposition of all or any part of the Capital Stock of any
Principal Insurance Subsidiary for consideration which is at
least equal to the fair value of such Capital Stock as determined
by the Company's board of directors (acting in good faith); or
(iv) any issuance, sale, assignment, transfer or other
disposition made in compliance with an order of a court or
regulatory authority of competent jurisdiction, other than an
order issued at the request of the Company or any Principal
Insurance Subsidiary. As used in this Security, (i) "Capital
Stock" means any and all shares, interests, rights to purchase,
warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock, including any
Preferred Stock, and (ii) "Preferred Stock," as applied to the
Capital Stock of any Principal Insurance Subsidiary, means
Capital Stock of any class or classes (however designated) which
is preferred as to the payment of dividends, or as to the
distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such corporation, over shares of
Capital Stock of any other class of such Principal Insurance
Subsidiary.
This Security shall be subject to the Events of Default set
forth in the Indenture, except that it shall be an Event of
Default with respect to this Security in the event of the due
acceleration of any indebtedness for borrowed money in a
principal amount in excess of $10,000,000 ($25,000,000 in the
case of Non-Recourse Indebtedness) for which the Company or any
Principal Insurance Subsidiary is liable, including Securities of
another series, or a default by the Company or any Principal
Insurance Subsidiary in the payment at final maturity of
outstanding indebtedness for borrowed money in a principal amount
in excess of $10,000,000 ($25,000,000 in the case of Non-Recourse
Indebtedness), and such acceleration or default at maturity shall
not be waived, rescinded or annulled within 30 days after written
notice thereof, stating that such notice is a "Notice of Default"
hereunder, shall have been given to the Company by the Trustee
(if such event be known to it), or to the Company and the Trustee
by the Holders of at least 25% in aggregate principal amount of
the Securities of this series; provided, however, that if such
acceleration or default at maturity shall be remedied or cured by
the Company or any Principal Insurance Subsidiary, or rescinded,
annulled or waived by the holders of such indebtedness, such
acceleration or default at maturity shall not constitute an Event
of Default under this provision and any acceleration relating
thereto shall be rescinded; and provided further, that, subject
to the provisions of Sections 601 and 602 of the Indenture, the
Trustee shall not be charged with knowledge of any such default
unless written notice thereof shall have been given to the
Trustee by the Company, by the holder of any such indebtedness or
any agent of the holder of any such indebtedness, by the trustee
then acting under any such indenture or other instrument under
which such default shall have occurred, or by the Holders of at
least 25% in aggregate principal amount of the Securities of this
series. "Non-Recourse Indebtedness" means any indebtedness for
borrowed money for which the liability and obligation of the
Company and any Principal Insurance Subsidiary is limited solely
to property or assets pledged to secure such indebtedness for
borrowed money, without any liability or obligation, direct or
indirect, on the part of the Company or any Principal Insurance
Subsidiary for any deficiency in the amount realized from such
property or assets.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the
rights and obligations of the Company and the rights of the
Holders of the Securities of each series to be affected under the
Indenture at any time by the Company and the Trustee with the
consent of the Holders of a majority in principal amount of the
Securities at the time Outstanding of each series to be affected.
The Indenture also contains provisions permitting the Holders of
specified percentages in principal amount of the Securities of
each series at the time Outstanding, on behalf of the Holders of
all Securities of such series, to waive compliance by the Company
with certain provisions of the Indenture and certain past
defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Security shall be
conclusive and binding upon such Holder and upon all future
Holders of this Security and of any Security issued upon the
registration of transfer hereof or in exchange hereof or in lieu
hereof, whether or not notation of such consent or waiver is made
upon this Security.
No reference herein to the Indenture and no provision of
this Security or of the Indenture shall alter or impair the
obligation of the Company, which is absolute and unconditional,
to pay the principal of and any premium and interest on this
Security at the times, place and rates, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Security is
registerable in the Security Register, upon surrender of this
Security for registration of transfer at the office or agency of
the Company in any place where the principal of and any premium
and interest on this Security are payable, duly endorsed by, or
accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly
executed by, the Holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Securities of this series
and of like tenor, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated
transferee or transferees.
The Securities of this series are issuable only in
registered form without coupons in denominations of $1,000.00 and
any integral multiple thereof. As provided in the Indenture and
subject to certain limitations therein set forth, Securities of
this series are exchangeable for a like aggregate principal
amount of Securities of this series and of like tenor of a
different authorized denomination, as requested by the Holder
surrendering the same.
No service charge shall be made for any such registration of
transfer or exchange, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
Prior to due presentment of this Security for registration
of transfer, the Company, the Trustee and any agent of the
Company or the Trustee may treat the Person in whose name this
Security is registered as the owner hereof for all purposes,
whether or not this Security is overdue, and neither the Company,
the Trustee nor any such agent shall be affected by notice to the
contrary.
No recourse shall be had for the payment of the principal of
(and premium, if any) or interest on this Security, or for any
claim based hereon, or otherwise in respect hereof, or based on
or in respect of the Indenture or any indenture supplemental
thereto, against any incorporator, stockholder, officer or
director, as such, past, present or future, of the Company or of
any successor corporation, whether by virtue of any constitution,
statute or rule of law, or by the enforcement of any assessment
or penalty or otherwise, all such liability being, by the
acceptance hereof and as part of the consideration for the issue
hereof, expressly waived and released.
All terms used in this Security which are defined in the
Indenture shall have the meanings assigned to them in the
Indenture.
<EXHIBIT 4>
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME
OF A DEPOSITARY OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE
TRANSFERRED TO, OR REGISTERED OR EXCHANGED FOR SECURITIES
REGISTERED IN THE NAME OF, ANY PERSON OTHER THAN THE DEPOSITARY
OR A NOMINEE THEREOF AND NO SUCH TRANSFER MAY BE REGISTERED,
EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
EVERY SECURITY AUTHENTICATED AND DELIVERED UPON REGISTRATION OF
TRANSFER OF, OR IN EXCHANGE FOR OR IN LIEU OF, THIS SECURITY
SHALL BE A GLOBAL SECURITY SUBJECT TO THE FOREGOING, EXCEPT IN
SUCH LIMITED CIRCUMSTANCES.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK
CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION
OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS
REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER NAME AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT
IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY
AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR
OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS
AN INTEREST HEREIN.
USF&G CORPORATION
7 1/8% Senior Notes due 2005
CUSIP No. 903290 AF1
No. R-1
$80,000,000
USF&G CORPORATION, a Maryland corporation (herein called the
"Company", which term includes any successor Person under the
Indenture hereinafter referred to), for value received, hereby
promises to pay to Cede & Co., or registered assigns, the
principal sum of Eighty Million dollars on June 1, 2005, at the
office or agency of the Company referred to below, and to pay
interest thereon on December 1, 1995 and semi-annually thereafter
on June 1 and December 1 in each year, accruing from June 9,
1995, at the rate of 7 1/8% per annum until the principal hereof
is paid or made available for payment. The interest so payable,
and punctually paid or duly provided for, on any Interest Payment
Date will, as provided in such Indenture, be paid to the Person
in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular
Record Date for such interest, which shall be the May 15 or
November 15 (whether or not a Business Day), as the case may be,
next preceding such Interest Payment Date. Any such interest not
so punctually paid or duly provided for will forthwith cease to
be payable to the Holder on such Regular Record Date and may
either be paid to the Person in whose name this Security (or one
or more Predecessor Securities) is registered at the close of
business on a Special Record Date for the payment of such
Defaulted Interest to be fixed by the Trustee, notice whereof
shall be given to Holders of the Securities of this series not
less than 10 days prior to such Special Record Date, or be paid
at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Securities
of this series may be listed, and upon such notice as may be
required by such exchange, all as more fully provided in said
Indenture.
Payment of the principal of, and interest on, this Security
will be made at the office or agency of the Company maintained
for that purpose in Baltimore, Maryland, in such coin or currency
of the United States of America as at the time of payment is
legal tender for payment of public and private debts; provided,
however, that at the option of the Company payment of interest
may be made by check mailed to the address of the Person entitled
thereto as such address shall appear in the Security Register.
Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof, which further
provisions shall for all purposes have the same effect as if set
forth at this place.
Unless the certificate of authentication hereon has been
executed by the Trustee referred to on the reverse hereof by
manual signature, this Security shall not be entitled to any
benefit under the Indenture or be valid or obligatory for any
purpose.
IN WITNESS WHEREOF, the Company has caused this instrument
to be duly executed under its corporate seal.
Dated: June 9, 1995
USF&G
CORPORATION
By___________________________________
Dan L. Hale
Executive Vice President -Chief Financial Officer
Attest:
___________________________________
John F. Hoffen, Jr.
Secretary
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated
therein referred to in the within-mentioned Indenture.
Signet Trust Company, As Trustee
By
Authorized Officer
REVERSE OF SECURITY
This Security is one of a duly authorized issue of
securities of the Company (herein called the "Securities"),
issued and to be issued in one or more series under an Indenture,
dated as of January 28, 1994 (herein called the "Indenture"),
between the Company and Signet Trust Company, as Trustee (herein
called the "Trustee", which term includes any successor trustee
under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of
the respective rights, limitations of rights, obligations, duties
and immunities thereunder of the Company, the Trustee and the
Holders of the Securities and of the terms upon which the
Securities are, and are to be, authenticated and delivered. This
Security is one of the series designated on the face hereof,
limited in aggregate principal amount to $80,000,000.
The Indenture contains provisions for defeasance at any time
of (1) the entire indebtedness of this Security or (2) certain
restrictive covenants and Events of Default with respect to this
Security, in each case upon compliance with certain conditions
set forth in the Indenture. In addition to the foregoing, if the
Company elects to have Section 1303 of the Indenture applied to
this Security, (i) the Company shall be released from its
obligations set forth in the third paragraph of the reverse of
this Security and (ii) the occurrence of any event specified in
the fourth paragraph of the reverse of this Security shall be
deemed not to be or result in an Event of Default, and the
Company may omit to comply with, and shall have no liability in
respect of, any term, condition or limitation set forth in either
of such paragraphs.
In addition to the covenants contained in the Indenture, the
Company will not, nor will it permit any Principal Insurance
Subsidiary to, issue, sell or otherwise dispose of any shares of
Capital Stock (other than non-voting Preferred Stock) of any
Principal Insurance Subsidiary, except for (i) directors
qualifying shares; (ii) sales or other dispositions to the
Company or to one or more Principal Insurance Subsidiaries; (iii)
the disposition of all or any part of the Capital Stock of any
Principal Insurance Subsidiary for consideration which is at
least equal to the fair value of such Capital Stock as determined
by the Company's board of directors (acting in good faith); or
(iv) any issuance, sale, assignment, transfer or other
disposition made in compliance with an order of a court or
regulatory authority of competent jurisdiction, other than an
order issued at the request of the Company or any Principal
Insurance Subsidiary. As used in this Security, (i) "Capital
Stock" means any and all shares, interests, rights to purchase,
warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock, including any
Preferred Stock, and (ii) "Preferred Stock," as applied to the
Capital Stock of any Principal Insurance Subsidiary, means
Capital Stock of any class or classes (however designated) which
is preferred as to the payment of dividends, or as to the
distribution of assets upon any voluntary or involuntary
liquidation or dissolution of such corporation, over shares of
Capital Stock of any other class of such Principal Insurance
Subsidiary.
This Security shall be subject to the Events of Default set
forth in the Indenture, except that it shall be an Event of
Default with respect to this Security in the event of the due
acceleration of any indebtedness for borrowed money in a
principal amount in excess of $10,000,000 ($25,000,000 in the
case of Non-Recourse Indebtedness) for which the Company or any
Principal Insurance Subsidiary is liable, including Securities of
another series, or a default by the Company or any Principal
Insurance Subsidiary in the payment at final maturity of
outstanding indebtedness for borrowed money in a principal amount
in excess of $10,000,000 ($25,000,000 in the case of Non-Recourse
Indebtedness), and such acceleration or default at maturity shall
not be waived, rescinded or annulled within 30 days after written
notice thereof, stating that such notice is a "Notice of Default"
hereunder, shall have been given to the Company by the Trustee
(if such event be known to it), or to the Company and the Trustee
by the Holders of at least 25% in aggregate principal amount of
the Securities of this series; provided, however, that if such
acceleration or default at maturity shall be remedied or cured by
the Company or any Principal Insurance Subsidiary, or rescinded,
annulled or waived by the holders of such indebtedness, such
acceleration or default at maturity shall not constitute an Event
of Default under this provision and any acceleration relating
thereto shall be rescinded; and provided further, that, subject
to the provisions of Sections 601 and 602 of the Indenture, the
Trustee shall not be charged with knowledge of any such default
unless written notice thereof shall have been given to the
Trustee by the Company, by the holder of any such indebtedness or
any agent of the holder of any such indebtedness, by the trustee
then acting under any such indenture or other instrument under
which such default shall have occurred, or by the Holders of at
least 25% in aggregate principal amount of the Securities of this
series. "Non-Recourse Indebtedness" means any indebtedness for
borrowed money for which the liability and obligation of the
Company and any Principal Insurance Subsidiary is limited solely
to property or assets pledged to secure such indebtedness for
borrowed money, without any liability or obligation, direct or
indirect, on the part of the Company or any Principal Insurance
Subsidiary for any deficiency in the amount realized from such
property or assets.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the
rights and obligations of the Company and the rights of the
Holders of the Securities of each series to be affected under the
Indenture at any time by the Company and the Trustee with the
consent of the Holders of a majority in principal amount of the
Securities at the time Outstanding of each series to be affected.
The Indenture also contains provisions permitting the Holders of
specified percentages in principal amount of the Securities of
each series at the time Outstanding, on behalf of the Holders of
all Securities of such series, to waive compliance by the Company
with certain provisions of the Indenture and certain past
defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Security shall be
conclusive and binding upon such Holder and upon all future
Holders of this Security and of any Security issued upon the
registration of transfer hereof or in exchange hereof or in lieu
hereof, whether or not notation of such consent or waiver is made
upon this Security.
No reference herein to the Indenture and no provision of
this Security or of the Indenture shall alter or impair the
obligation of the Company, which is absolute and unconditional,
to pay the principal of and any premium and interest on this
Security at the times, place and rates, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Security is
registerable in the Security Register, upon surrender of this
Security for registration of transfer at the office or agency of
the Company in any place where the principal of and any premium
and interest on this Security are payable, duly endorsed by, or
accompanied by a written instrument of transfer in form
satisfactory to the Company and the Security Registrar duly
executed by, the Holder hereof or his attorney duly authorized in
writing, and thereupon one or more new Securities of this series
and of like tenor, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated
transferee or transferees.
The Securities of this series are issuable only in
registered form without coupons in denominations of $1,000.00 and
any integral multiple thereof. As provided in the Indenture and
subject to certain limitations therein set forth, Securities of
this series are exchangeable for a like aggregate principal
amount of Securities of this series and of like tenor of a
different authorized denomination, as requested by the Holder
surrendering the same.
No service charge shall be made for any such registration of
transfer or exchange, but the Company may require payment of a
sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
Prior to due presentment of this Security for registration
of transfer, the Company, the Trustee and any agent of the
Company or the Trustee may treat the Person in whose name this
Security is registered as the owner hereof for all purposes,
whether or not this Security is overdue, and neither the Company,
the Trustee nor any such agent shall be affected by notice to the
contrary.
No recourse shall be had for the payment of the principal of
(and premium, if any) or interest on this Security, or for any
claim based hereon, or otherwise in respect hereof, or based on
or in respect of the Indenture or any indenture supplemental
thereto, against any incorporator, stockholder, officer or
director, as such, past, present or future, of the Company or of
any successor corporation, whether by virtue of any constitution,
statute or rule of law, or by the enforcement of any assessment
or penalty or otherwise, all such liability being, by the
acceptance hereof and as part of the consideration for the issue
hereof, expressly waived and released.
All terms used in this Security which are defined in the
Indenture shall have the meanings assigned to them in the
Indenture.
