Registration No. 33-65471
Filed Pursuant to
Rule 424(b)(4)
SUBJECT TO COMPLETION, DATED DECEMBER 31, 1996
PROSPECTUS SUPPLEMENT TO PROSPECTUS DATED FEBRUARY 21, 1996
100,000 Shares ___% Capital Securities, Series B
USF&G Capital II
(liquidation preference $1,000 per Capital Security)
guaranteed to the extent the Series B Issuer has funds as set forth herein by
USF&G Corporation
The ___% Capital Securities, Series B (the "Series B Capital
Securities"), offered hereby represent undivided preferred beneficial interests
in the assets of USF&G Capital II, a statutory business trust created under the
laws of the State of Delaware (the "Series B Issuer"). USF&G Corporation, a
Maryland corporation ("USF&G") will be the owner of all the beneficial interests
represented by Common Securities of the Series B Issuer. The Bank of New York is
the Property Trustee of the Series B Issuer. The Series B Issuer exists for the
sole purpose of issuing its trust interests and investing the proceeds thereof
in ___% Deferrable Interest Subordinated Debentures, Series B, Due 2027 (the
"Series B Debentures") to be issued by USF&G. The preferred interests
represented by the Series B Capital Securities will have a preference under
certain circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the trust interests represented by the
Common Securities of the Series B Issuer. See "Description of the Preferred
Securities--Subordination of Common Securities" in the accompanying Prospectus.
Capitalized terms not otherwise defined in this Prospectus Supplement are
defined in the accompanying Prospectus. The Series B Capital Securities are a
Preferred Security as defined and described in the accompanying Prospectus.
Holders of the Series B Capital Securities will be entitled to receive
cumulative cash Distributions accruing from the date of original issuance and
payable semi-annually in arrears on January __ and July __ of each year,
commencing ________, 1997, at the rate of ___% per annum, payable from amounts
received by the Series B Issuer as interest on the Series B Debentures. So long
as no Event of Default under the Indenture has occurred and is continuing, USF&G
has the right to defer payments of interest on the Series B Debentures by
extending the interest payment period thereon at any time for up to 10
consecutive semi-annual periods (each an "Extension Period"). Such Extension
Periods may not, however, extend beyond the maturity date or redemption date of
the Series B Debentures. If and for so long as interest payments are so
deferred, Distributions on the Series B Capital Securities will also be
deferred. During an Extension Period, Distributions will continue to accrue, and
holders of Series B Capital Securities will be required to accrue interest
income for United States federal income tax purposes. See "Certain Terms of the
Series B Debentures--Option to Extend Interest Payment Period" herein and
"United States Taxation--Potential Extension of Interest Payment Period and
Original Issue Discount" in the accompanying Prospectus.
The payment of Distributions and payments on liquidation of the Series B
Issuer or the redemption of the Series B Capital Securities, as set forth below,
in each case out of funds held by the Series B Issuer, are guaranteed by USF&G
under a Guarantee Agreement (the "Series B Guarantee") to the extent described
herein. If USF&G fails to make interest payments on the Series B Debentures held
by the Series B Issuer, the Series B Issuer will have insufficient funds to pay
Distributions on the Series B Capital Securities. The Series B Guarantee does
not cover payment of Distributions when the Series B Issuer does not have
sufficient funds on hand available to pay such Distributions. In such event, the
remedy of a holder of Series B Capital Securities is through enforcement of the
rights of the Series B Issuer under the Series B Debentures held by the Series B
Issuer. The obligations of USF&G under the Series B Guarantee are subordinate
and junior in right of payment to all liabilities of USF&G except those made
pari passu or subordinate to the Series B Guarantee expressly by their terms.
The Series B Capital Securities are subject to mandatory redemption upon
repayment of the Series B Debentures at maturity or their earlier redemption.
USF&G will have the option at any time on or after January __, 2007 to redeem,
in whole or in part, the Series B Debentures. USF&G also will have the right at
<PAGE>
any time, upon occurrence of a Special Event, to redeem, in whole but not in
part, the Series B Debentures. See "Certain Terms of the Series B
Debentures--Redemption". USF&G will have the right, upon the occurrence of
certain events, to shorten the maturity of the Series B Capital Securities to a
date not less than 19 1/2 years from the date of original issuance. See "Certain
Terms of the Series B Capital Securities--Right to Shorten Maturity".
The Series B Debentures are subordinate and junior in right of payment to
all Senior Indebtedness of USF&G. As of September 30, 1996, USF&G had
approximately $749 million of principal amount of Senior Indebtedness (including
$219 million of Intercompany Indebtedness). The terms of the Series B Debentures
do not limit USF&G's ability to incur additional Senior Indebtedness. See
"Description of the Debentures--Subordination" in the accompanying Prospectus.
In the event of a liquidation upon termination of the Series B Issuer, the
holders of the Series B Capital Securities will be entitled to receive a stated
liquidation preference of $1,000 per Series B Capital Security plus accrued and
unpaid Distributions thereon to the date of payment, unless, in connection with
such liquidation, Series B Debentures are distributed to the holders of the
Series B Capital Securities, subject to certain limitations. See "Description of
the Preferred Securities--Liquidation Distribution Upon Termination" in the
accompanying Prospectus.
The Series B Capital Securities will be represented by global certificates
registered in the name of DTC or its nominee. Beneficial interests in the Series
B Capital Securities will be shown on, and transfers thereof will be effected
only through, records maintained by participants in DTC. Except as described in
the accompanying Prospectus, Series B Capital Securities in certificated form
will not be issued in exchange for the global certificates. See "Description of
the Preferred Securities--Book-Entry-Only Issuance--The Depository Trust
Company" in the accompanying Prospectus.
See "Risk Factors" at page 5 of the accompanying Prospectus for certain
information relevant to an investment in the Series B Capital Securities,
including the period and circumstances during which payment of Distributions on
the Series B Capital Securities and Series B Debentures may be deferred and the
related federal income tax consequences.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS TO WHICH IT
RELATES. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C>
Initial Public Underwriting Proceeds to the
-------------- ------------ ---------------
Offering Price Discount(1) Series B Issuer(2)(3)
-------------- ----------- ---------------------
Per Series B Capital Security.. $1,000.00 (2) $1,000.00
Total (4)...................... $100,000,000 (2) $100,000,000
----------- -----------
<FN>
(1) The Series B Issuer and USF&G have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting".
(2) In view of the fact that the proceeds of the sale of the Series B Capital
Securities will be used to purchase the Series B Debentures, the
Underwriting Agreement provides that USF&G will pay to the Underwriters, as
compensation ("Underwriters' Compensation") for their arranging the
investment therein of such proceeds, $____ per Series B Capital Security
(or $________ in the aggregate). See "Underwriting".
(3) Expenses of the offering, which are payable by USF&G, are estimated to be
$_____.
(4) The Series B Issuer and USF&G have granted the Underwriters an option for
30 days to purchase up to an additional 15,000 Series B Capital Securities
at the initial public offering price per Series B Capital Security, solely
to cover over-allotments. USF&G will pay Underwriters' Compensation in the
amounts per Series B Capital Security set forth in Note 2 with respect to
such additional Series B Capital Securities. If such option is exercised in
full, the total Initial Public Offering Price, Underwriting Commission and
Proceeds to the Series B Issuer will be $115,000,000, $_________ and
$115,000,000, respectively. See "Underwriting".
</FN>
</TABLE>
The Series B Capital Securities offered hereby are offered severally by the
Underwriters, as specified herein and subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that delivery of the Series B Capital Securities will be made only in
book-entry form through the facilities of DTC on or about January __, 1997.
<PAGE>
Goldman, Sachs & Co. Merrill, Lynch & Co.
Lehman Brothers Legg Mason Wood Walker
Incorporated
The date of this Prospectus Supplement is January __, 1997.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES B
CAPITAL SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
FOR NORTH CAROLINA RESIDENTS: THE COMMISSIONER OF INSURANCE OF THE STATE OF
NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING NOR HAS THE
COMMISSIONER PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT
OR THE PROSPECTUS.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
In addition to those documents identified in the accompanying
Prospectus, USF&G's Annual Report on Form 10-K for the year ended December 31,
1995 and Quarterly Reports on Form 10-Q for the quarters ended March 31, June 30
and September 30, 1996, and Current Reports on Form 8-K dated July 24, November
20 and December 3, 1996 are incorporated herein by reference.
<PAGE>
PROSPECTUS SUMMARY
The following summary information is qualified in its entirety by the more
detailed information appearing elsewhere in the Prospectus, this Prospectus
Supplement and the consolidated financial statements, including the notes
thereto, incorporated herein by reference. Unless indicated otherwise, (i) the
information contained in this Prospectus Supplement assumes the Underwriters'
over-allotment option is not exercised and (ii) all financial data have been
prepared using generally accepted accounting principles, and have been restated
to reflect the acquisition during 1995 of Discover Re Managers, Inc. and
Victoria Financial Corporation using the pooling-of-interests method of
accounting.
The Offering
------------
Securities Offered.............100,000 Shares of ___% Capital Securities, Series
B liquidation preference $1,000 per Capital
Security).
Distribution Payment Dates.....January __ and July __, commencing __________,
1997, subject to deferral as described herein.
Redemption.....................As set forth on the cover of this Prospectus
Supplement.
Use of Proceeds................To purchase the Series B Debentures. After paying
the expenses of the offering made hereby, USF&G
intends to use the net proceeds from the sale of
the Series B Debentures for general corporate
purposes, which may include funding investments
in, or extensions of credit to, USF&G's
subsidiaries, repayment of existing indebtedness,
redemption of preferred tock or other securities
and financing possible acquisitions. See "Use of
Proceeds."
The Company
-----------
Principal Business.............USF&G is a holding company whose principal
subsidiaries are engaged primarily in the
business of insurance, with property/casualty
insurance as its primary business.
<PAGE>
Selected Consolidated Financial Information
-------------------------------------------
The following table sets forth selected consolidated statement of
operations and financial position data for the periods indicated. The selected
consolidated statement of operations and financial position data, at or for each
of the periods presented below, were derived from the consolidated financial
statements of USF&G. Annual financial statements were audited and quarterly
financial statements were reviewed by Ernst & Young, LLP, independent auditors.
The table should be read in conjunction with the consolidated financial
statements, related notes and other financial information incorporated herein by
reference.
<TABLE>
<CAPTION>
9 Months
Ended
September 30, 1996 Year Ended December 31
------------------------ ----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Consolidated Statement of Operations:
Premiums Earned......................... $2,028 $2,666 $2,508 $2,521 $2,683 $3,213
Net Investment Income................... 537 733 749 753 820 880
Other................................... 15 53 48 43 61 71
----------- --------- --------- --------- ---------- -------
Revenues Before Realized Gains....... 2,580 3,452 3,305 3,317 3,564 4,164
Net Realized Gains on Investments....... 16 16 5 6 148 38
----------- --------- --------- --------- ---------- -------
Total Revenues....................... 2,596 3,459 3,310 3,323 3,712 4,202
----------- --------- --------- --------- ---------- -------
Losses, Loss Expenses, and Policy
Benefits................................ 1,640 2,178 2,132 2,200 2,497 2,999
Underwriting, Acquisition, and Operating
Expenses............................. 781 1,048 1,001 979 1,087 1,237
Interest Expense........................ 30 44 37 41 41 47
Restructuring Charges................... -- -- -- -- 51 60
Facilities Exit Costs................... (14) (6) 183 -- -- --
----------- --------- --------- --------- ---------- -------
Total Expenses....................... 2,437 3,264 3,353 3,220 3,676 4,343
----------- --------- --------- --------- ---------- -------
Income (Loss) From Continuing
Operations Before Income Taxes and
Cumulative Effect of Adopting New
Accounting Standard.................. 159 195
(43) 103 36 (141)
Provision for Income Taxes (Benefit).... -- (14) (280) (27) -- 4
----------- --------- --------- --------- ---------- -------
Income (Loss) From Continuing Operations
Before Cumulative Effect of Adopting New
Accounting Standards................. -- -- 237 130 36 (145)
Loss From Discontinued Operations....... -- -- -- -- (7) (32)
----------- --------- --------- --------- ---------- -------
Income (Loss) From Cumulative Effect of
Adopting New Accounting Standards.... -- -- -- 38 -- --
----------- --------- --------- --------- ---------- -------
Net Income (Loss)....................... 159 209 237 168 29 (177)
----------- --------- --------- --------- ---------- -------
Preferred Stock Dividends............... 14 28 46 48 48 37
----------- --------- --------- --------- ---------- -------
Net Income (Loss) Available to Common
Shareholders............................ $145 $181 $191 $120 ($19) ($214)
==== ==== ==== ==== ===== ======
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<PAGE>
Per Share Data:
Income (Loss) from Continuing Operations
Before Cumulative Effect of Adopting New
Accounting Standards................. $1.21 $1.63 $2.00 $0.90 ($0.14) ($2.06)
Loss from Discontinued Operations....... -- -- -- -- (0.08) (0.36)
Income (Loss) from Cumulative Effect of
Adopting New Accounting
Standards............................ -- -- -- 0.42 -- --
Net Income (Loss)....................... 1.21 1.63 2.00 1.32 (0.22) (2.42)
Dividends Declared...................... $0.15 $0.20 $0.20 $0.20 $0.20 $0.02
Ratio of Earnings to Fixed Charges...... 4.8 4.0 0.8(1) 2.5 1.4 (2)
Ratio of Consolidated Earnings to
Combined Fixed Charges and Preferred
Stock Dividends..................... 3.6 2.8 0.6(1) 1.5 0.8 (2)
Consolidated Statement of Financial Position:
Total Investments....................... $9,857 $11,107 $10,561 $11,474 $11,417 $12,216
Total Assets............................ 14,527 14,651 13,980 14,481 13,242 14,555
Unpaid Losses, Loss Expenses
and Policy Benefits..................... 9,648 9,816 9,962 10,343 9,460 9,488
Unearned Premiums....................... 1,189 1,055 968 950 797 996
Corporate Debt.......................... 530 591 586 574 574 617
Real Estate and Other Debt.............. 16 16 42 53 54 73
Total Liabilities....................... 12,761 12,667 12,539 12,925 11,942 13,209
Shareholders' Equity.................... 1,766 1,984 1,441 1,556 1,300 1,346
Statutory Surplus (USF&G Company)....... 1,310 1,341 1,621 1,577 1,498 1,432
<FN>
(1) USF&G's earnings were inadequate to cover fixed charges and combined
fixed charges and preferred stock dividends by $43 million and $89
million, respectively, for the year ended December 31, 1994. In 1994,
USF&G recorded facilities exit costs of $183 million relating to its
plan to consolidate its Baltimore headquarters facilities by relocating
all USF&G personnel currently located at its office building in
downtown Baltimore to other facilities owned by USF&G. The ratio of
consolidated earnings before facilities exit costs to fixed charges was
3.1 in 1994, and the ratio of consolidated earnings before facilities
exit costs to combined fixed charges and preferred stock dividends was
1.8 in 1994.
(2) USF&G had a net loss for the year ended December 31, 1991 and earnings
were inadequate to cover fixed charges and combined fixed charges and
preferred stock dividends by $150 million and $187 million,
respectively, for the year ended December 31, 1991.
</FN>
</TABLE>
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<PAGE>
The following information supplements and should be read in conjunction
with the information contained in the accompanying Prospectus. Each of the
capitalized terms used in this Prospectus Supplement has the meaning set forth
in this Prospectus Supplement or in the accompanying Prospectus. The Series B
Capital Securities are a Preferred Security as defined and described in the
accompanying Prospectus.
USF&G CORPORATION
General
USF&G is a holding corporation organized in 1981 as a Maryland corporation.
United States Fidelity and Guaranty Company ("USF&G Company"), organized in 1896
under Maryland law and a subsidiary of USF&G, is the predecessor of USF&G.
USF&G, through its subsidiaries, is engaged primarily in the business of
insurance, with property/casualty insurance as its primary business. USF&G
Company, USF&G's largest subsidiary, is the 24th largest property/casualty
insurer among over 2,400 insurers in the United States based on 1995 statutory
net premiums written. Life insurance and annuity products are sold by Fidelity
and Guaranty Life Insurance Company ("F&G Life"). Noninsurance operations are
comprised of the parent company and asset management services.
Property & Casualty
USF&G Company currently underwrites most forms of property/casualty
insurance. USF&G Company's property/casualty business is grouped into three
business categories: the Commercial Insurance Group ("CIG"), the Family and
Business Group ("FBIG"), and its specialty businesses, which include assumed
reinsurance, surety and alternative risk transfer. For the year ended December
31, 1995, the property/casualty segment accounted for 85 percent of USF&G's
total revenues and 68 percent of its total assets.
Coverages offered by CIG provide protection related to property loss,
liability claims and workers' compensation benefits to businesses and
governmental entities and fidelity bonds for financial institutions. Property
loss and liability claims insurance protects against loss from damage to the
insured's covered properties and protects against legal liability for injuries
to other persons or damage to their property arising from the insured's business
operations. Workers' compensation provides benefits to employees, as mandated by
state laws, for employment-related accidents, injuries or illnesses. Fidelity
bonds indemnify employers against the dishonesty or default of persons in their
employ. For the year ended December 31, 1995, coverages provided by CIG
accounted for 35 percent of total premiums written.
FBIG provides automobile and homeowner insurance, which includes
aspects of property loss and liability risks, as well as small-size account
commercial business. Automobile policies cover liability to third-parties for
bodily injury and property damage, and cover physical damage to the insured's
S-4
<PAGE>
own vehicle resulting from collision and various other perils. Homeowners
policies protect against loss of dwellings and contents arising from a variety
of perils, as well as liability arising from ownership or occupancy. During
1995, USF&G completed its merger with Victoria Financial Corporation
("Victoria"). Victoria is an insurance holding company which specializes in
nonstandard personal auto insurance. Small-size account commercial business
includes property loss, liability, claims and workers' compensation, as well as
automobile and other coverages. For the year ended December 31, 1995, coverages
provided by FBIG accounted for 39 percent of total premiums written.
USF&G's specialty businesses consist primarily of assumed reinsurance,
surety and alternative risk transfer. USF&G Company operates a separate
reinsurance division which underwrites treaty reinsurance and is composed of
various wholly-owned subsidiaries. The lead company in this group, F&G Re, Inc.,
acts as the reinsurance underwriting manager and solicits and services assumed
reinsurance for USF&G Company. F&G Re, Inc. markets reinsurance in North America
and in specific foreign countries (mainly in Western Europe and Japan). F&G Re,
Inc. recently established a branch in Hong Kong. Reinsurance prices and
conditions are not normally subject to the same state regulation applicable to
the primary insurance market because reinsurers contract solely with other
insurance companies. For the year ended December 31, 1995, reinsurance accounted
for 20 percent of total premiums written.
Surety bonds guarantee the performance of a principal who undertakes
contractual or statutory obligations, and indemnify third-party obligees for
damages caused by the principal's failure to perform. For the year ended
December 31, 1995, surety bonds accounted for 5 percent of total premiums
written.
In 1995, USF&G consummated its merger with Discover Re, Inc., a
provider of insurance, reinsurance and related services to the ART market,
primarily in the municipalities, transportation, education and retail sections.
Through alternative risk transfer, a company self-insures the predictable
frequency portion of its own losses and purchases insurance for the less
predictable, high-severity losses that could have a major financial impact on
the company. For the year ended December 31, 1995, alternative risk transfer
accounted for 1 percent of total premiums written.
USF&G Company's products have been sold exclusively by independent
agents since its founding in 1896. Independent agents generally represent
multiple insurance companies. USF&G Company's products are sold through
approximately 3,700 independent agencies in the United States on a commission
basis.
As of December 31, 1995, USF&G Company maintained 15 regional offices
and 30 branch offices to service its independent agents and policyholders. These
offices are located throughout the United States and support the administration
of underwriting standards, the delivery of policies, and the supervision of the
company's claim offices. In 1996, USF&G Company opened three "Centers for Agency
Service" dedicated to underwriting and policy processing for FBIG. The regional
and branch offices are being consolidated but will continue to serve the
Commercial Insurance Group. USF&G Company also opened a centralized claims
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<PAGE>
reception center in Tampa, Florida, which will provide 24-hour claim reporting
services to customers and agents throughout the United States.
Life Insurance
F&G Life sells many forms of annuity and life insurance products, including
single premium deferred annuities ("SPDAs"), structured settlement annuities,
tax sheltered annuities, single premium immediate annuities and universal life
and term life insurance. For the year ended December 31, 1995, the F&G Life
segment accounted for 14 percent of USF&G's total revenues and 31 percent of its
total assets.
SPDAs are sold primarily through independent agents and insurance brokers.
Structured settlements annuities are sold predominantly through the
property/casualty company in settlement of certain of its insurance claims.
Tax-sheltered annuities are sold through a national wholesale distribution
network primarily to teachers.
In August 1996, F&G Life entered into a coinsurance contract with an
unaffiliated life insurance company to cede all of the remaining block of SPDAs
that were originally sold through securities brokerage firms prior to 1992. The
block had a current account value of approximately $950 million. The transaction
did not have a material effect on USF&G's earnings.
Recent Developments
On December 17, 1996, USF&G Company completed its acquisition of
Afianzadora Insurgentes Serfin, S.A. de C.V. ("Afianzadora") for $65 million.
Afianzadora is the largest surety bond company in Mexico, writing approximately
27 percent of the Mexican surety market. USF&G also announced on December 20,
1996 its acquisition, subject to approval of Lloyd's of London, of Ashley Palmer
Limited, which manages specialty Lloyd's of London syndicates, including a
syndicate which USF&G established in 1995 as sole corporate member. The
transaction will allow USF&G to manage in 1997 approximately $300 million in
Lloyd's syndicate capacity.
USF&G, from time to time, considers other possible acquisitions,
restructurings and divestitures, some of which could be material Currently,
USF&G has made no final determination with respect to any such material
transactions.
On December 24, 1996, USF&G Capital I, a wholly-owned subsidiary of USF&G,
issued 100,000 shares of 8 1/2% Capital Securities, Series A. The $100 million
of proceeds from the sale of the 8 1/2% Capital Securities, Series A were used
to purchase 8 1/2% Deferrable Interest Junior Subordinated Debentures, Series A
of USF&G.
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<PAGE>
USF&G CAPITAL II
The Series B Issuer is a statutory business trust created under Delaware
law. The Series B Issuer's business and affairs are conducted by five Issuer
Trustees: The Bank of New York, as Property Trustee, The Bank of New York
(Delaware), an affiliate of the Property Trustee, as Delaware Trustee, and three
individual Administrative Trustees who are employees or officers of or
affiliated with USF&G. The exclusive business of the Series B Issuer is issuing
the Series B Capital Securities and the Common Securities representing undivided
beneficial interests in the assets of the Series B Issuer, using the proceeds of
the sale of the Series B Capital Securities and the Common Securities to acquire
the Series B Debentures, maintaining the status of the Series B Issuer as a
grantor trust for United States federal income tax purposes and engaging in only
those other activities that are necessary or incidental thereto. All of the
Common Securities of the Series B Issuer will be owned directly or indirectly by
USF&G. The Common Securities of the Series B Issuer will rank pari passu, and
payments will be made thereon pro rata, with the Series B Capital Securities,
except that upon the occurrence and continuance of a Debenture Event of Default
under the Series B Trust Agreement, the rights of USF&G, as holder of the Common
Securities of the Series B Issuer, to payment in respect of Distributions and
payments upon liquidation or redemption will be subordinated to the rights of
the holders of the Series B Capital Securities. See "Description of Preferred
Securities - Subordination of Common Securities" in the accompanying Prospectus.
The principal place of business of the Series B Issuer is c/o USF&G Corporation,
100 Light Street, Baltimore, Maryland 21202 and its telephone number is (410)
547-3000.
CAPITALIZATION
The following table sets forth the consolidated short-term debt and
capitalization of USF&G as of September 30, 1996 and as adjusted to give effect
to the issuance and sale of the Series B Capital Securities offered hereby and
the application of the estimated net proceeds therefrom and the issuance and
application of the net proceeds from the sale of the 8 1/2% Capital Securities,
Series A of USF&G Capital I issued on December 24, 1996. See "Use of Proceeds."
September 30, 1996
------------------
Actual As Adjusted
------ -----------
(in millions)
Short-Term Debt:
Corporate $ 55 $ --
Real estate and other -- --
---- ----
Total short-term debt 55 --
---- ----
Long-Term Debt
Corporate:
7% Senior Notes due 1998 145 145
8 1/2% Senior Notes due 2001 149 149
7 1/4% Senior NOtes due 2005 80 80
Zero Coupon Convertible Subordinated Notes
due 2009 101 101
---- ----
Subtotal 475 475
---- ----
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<PAGE>
Real estate and other
9.96% Secured note due 1999 11 11
Other 5 5
Subtotal 16 16
---- ----
Total long-term debt 491 491
---- ----
Total debt 546 491
---- ----
USF&G-obligated mandatorily redeemable preferred
securities ofsubsidiary trust holding solely
USF&G Debentures (1) -- 200
Shareholders' equity
Capital Stock
Preferred Stock, par value $50.00;
12,000,000 shares authorized
$4.10 Series B Convertible Exchangeable
Preferred Stock;
3,999,910 shares outstanding 200 200
$10.25 Series B Cumulative Convertible
Preferred Stock;
277,550 shares outstanding 13 13
Common Stock, par value $2.50; 240,000,000 shares
authorized; 116,008,813 outstanding 290 290
Paid-in capital 1,136 1,136
Net unrealized gain on investments (12) (12)
Minimum pension liability (100) (100)
Retained earnings 239 239
---- ----
Total shareholders' equity 1,766 1,766
----- -----
Total capitalization $ 2,312 $ 2,457
======= =======
- ----------
(1) As described herein, the assets of the Series B Issuer will include $100
million aggregate principal amount (or $115 million aggregate principal
amount if the Underwriters exercise their over-allotment option in full) of
___% Series B Debentures issued by USF&G which will be purchased with the
proceeds of the sale of the Series B Capital Securities and will constitute
approximately 97% of the total assets of the Series B Issuer. The remaining
3% of the assets of the Series B Issuer will consist of approximately $3.1
million aggregate principal amount (or approximately $___ million aggregate
principal amount if the Underwriters exercise their over-allotment option
in full) of Series B Debentures which will be purchased with the proceeds
of the sale of the Common Securities to USF&G.
USE OF PROCEEDS
The net proceeds from the sale of the Series B Capital Securities will be
used by the Series B Issuer to purchase Series B Debentures. The net proceeds of
the sale of the Series B Debentures by USF&G will be used for general corporate
purposes, which may include funding investments in, or extensions of credit to,
USF&G's subsidiaries, repayment of outstanding indebtedness, redemption of
preferred stock or other securities and financing possible acquisitions.
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CERTAIN TERMS OF THE SERIES B CAPITAL SECURITIES
General
The following summary of certain terms and provisions of the Series B
Capital Securities supplements the description of the terms and provisions of
the Preferred Securities set forth in the accompanying Prospectus under the
heading "Description of the Preferred Securities," to which description
reference is hereby made. This summary of certain terms and provisions of the
Series B Capital Securities does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the Series B Trust Agreement. The
form of the Trust Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus Supplement and accompanying Prospectus is a
part.
Distributions
The Series B Capital Securities represent undivided beneficial interests in
the assets of the Series B Issuer. Distributions on each Series B Capital
Security will be payable at the annual rate of ___% of the stated liquidation
preference of $1,000, payable semi-annually in arrears on January __ and July __
of each year, except as otherwise described below. Distributions in arrears
after the semi-annual payment date therefor will accumulate additional
Distributions thereon (to the extent permitted by law) compounded semi-annually
at the rate per annum of ___% thereof. The term "Distributions" as used herein
shall include any such additional Distributions. Distributions will accrue from
January __, 1997, the date of original issuance. The first Distribution payment
date for the Series B Capital Securities will be _______, 1997, and such
Distributions will be cumulative from the date of original issuance. The amount
of Distributions payable for any period will be computed on the basis of a
360-day year of twelve 30-day months. If any Distribution is payable on a day
that is not a Business Day, such Distribution may be made on the next succeeding
Business Day (except that if such Business Day is in the next succeeding
calendar year, such Distribution shall be the immediately preceding Business
Day) with the same force and effect as though made on the day the Distribution
was payable.
USF&G has the right at any time and from time to time to extend the
interest payment period on the Series B Debentures, for not more than 10
consecutive semi-annual periods, provided that any such Extension Period shall
not extend beyond the maturity date or redemption date of the Series B
Debentures. As a consequence, quarterly Distributions on the Series B Capital
Securities would be deferred by the Series B Issuer during any Extension Period
(but would continue to accumulate additional Distributions thereon as set forth
above). In the event that USF&G exercises this right, USF&G will not, and will
not permit any subsidiary of USF&G to, declare or pay any dividend or
distribution on, or redeem, purchase, acquire, or make a liquidation or
guarantee payment (other than payments under a Guarantee Agreement) with respect
to, any shares of USF&G's capital stock or any security of USF&G (including
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other Debentures) ranking pari passu with or junior in interest to the Series B
Debentures, except in each case for (i) payments with securities junior in
interest to the Series B Debentures, (ii) payments made on any series of
Debentures upon the stated maturity of such Debentures or (iii) payments of
accrued dividends (and cash in lieu of fractional shares) upon conversion into
common stock of any convertible preferred stock of USF&G of any series now or
hereinafter outstanding, in accordance with the terms of such stock. As a
result, this covenant requires that an interest payment on one series of
Debentures may be extended only if the interest periods on all series of
Debentures are likewise extended. Prior to the termination of any such Extension
Period, USF&G may further extend the interest payment period, provided that such
Extension Period together with all such previous and further extensions thereof
may not exceed 10 consecutive semi-annual periods or extend beyond the maturity
or redemption date of the Series B Debentures. Upon the termination of any
Extension Period and the payment of all amounts then due, USF&G may select a new
Extension Period, subject to the above requirements. See "Certain Federal Income
Tax Consequences" and "Certain Terms of the Series B Debentures--Option to
Extend Interest Payment Period."
USF&G has no current intention of exercising its right to defer payments of
interest by extending the interest payment period on the Series B Debentures.
Redemption
Upon the payment of the Series B Debentures, whether at maturity or upon
earlier redemption as provided in the Indenture, the proceeds from such payment
will be applied by the Property Trustee to redeem a Like Amount (as defined
below) of the Common Securities of the Series B Issuer and the Series B Capital
Securities, upon not less than 20 nor more than 90 days' notice, at a Redemption
Price equal to the aggregate liquidation preference plus accumulated and unpaid
Distributions to the Redemption Date. See "Certain Terms of the Series B
Debentures--Redemption."
USF&G has the right to redeem the Series B Debentures (a) on or after
January __, 2007, in whole or in part, or (b) at any time, in whole but not in
part, on occurrence of a Tax Event or an Investment Company Event (each as
defined below, a "Special Event"), subject to the conditions described below
under "--Special Event Redemption."
The Redemption Price, in the case of a redemption under (a) above, shall
equal the following prices expressed in percentages of the Liquidation Amount
together with accrued Distributions to but excluding the Redemption Date. If
redeemed during the 12-month period beginning January __:
Redemption
Year Price
---- -----
2007
2008
2009
2010
2011
2012
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2013
2014
2015
2016
and at 100% on or after January __, 2017.
The Redemption Price, in the case of a redemption following a Special Event
as described under (b) above, shall equal for each Series B Capital Security the
Make-Whole Amount for a corresponding $1,000 principal amount of Series B
Debentures together with accrued Distributions to but excluding the Redemption
Date. The "Make-Whole Amount" shall be equal to the greater of (i) 100% of the
principal amount of such Series B Debentures or (ii) as determined by a
Quotation Agent (as defined below), the sum of the present values of the
principal amount and premium payable as part of the Redemption Price with
respect to an optional redemption of such Series B Debentures on January __,
2007, together with scheduled payments of interest from the Redemption Date to
January __, 2007 (the "Remaining Life"), in each case discounted to the
Redemption Date on a semi-annual basis (assuming a 360-day year consisting of
30-day months) at the Adjusted Treasury Rate (as defined below).
"Adjusted Treasury Rate" means, with respect to any Redemption Date, the
Treasury Rate plus (i) 1.25% if such Redemption Date occurs on or before January
1, 1998 or (ii) 0.50% if such Redemption Date occurs after January 1, 1998.
"Treasury Rate" means (i) the yield, under the heading which represents the
average for the immediately prior week, appearing in the most recently published
statistical release designated "H.15(519)" or any successor publication which is
published weekly by the Federal Reserve and which establishes yields on actively
traded United States Treasury securities adjusted to constant maturity under the
caption "Treasury Constant Maturities," for the Comparable Treasury Issue or
(ii) if such release (or any successor release) is not published during the week
preceding the calculation date or does not contain such yields, the rate per
annum equal to the semi-annual equivalent yield to maturity of the Comparable
Treasury Issue, calculated using a price for the Comparable Treasury Issue
(expressed as a percentage of its principal amount) equal to the Comparable
Treasury Price for such prepayment date. The Treasury Rate shall be calculated
on the third Business Day preceding the prepayment date.
"Comparable Treasury Issue" means with respect to any prepayment date the
United States Treasury security selected by the Quotation Agent as having a
maturity comparable to the Remaining Life that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the Remaining
Life. If no United States Treasury security has a maturity which is within a
period from three months before to three months after January 1, 2007, the two
most closely corresponding United States Treasury securities shall be used as
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the Comparable Treasury Issue, and the Treasury Rate shall be interpolated or
extrapolated on a straight-line basis, rounding to the nearest month using such
securities; provided, however, that if the Remaining Life is longer than the
longest United States Treasury security, the longest maturity United States
Treasury security shall be used as the Comparable Treasury Issue, without
extrapolation.
"Quotation Agent" means Goldman, Sachs & Co. and its respective successors;
provided, however, that if the foregoing shall cease to be a primary U.S.
Government securities dealer in New York City (a "Primary Treasury Dealer"),
USF&G shall substitute therefor another Primary Treasury Dealer. "Reference
Treasury Dealer" means (i) the Quotation Agent and (ii) any other Primary
Treasury Dealer selected by the Debenture Trustee after consultation with USF&G.
"Comparable Treasury Price" means (A) the average of five Reference
Treasury Dealer Quotations for such prepayment date, after excluding the highest
and lowest such Reference Treasury Dealer Quotations; or (B) if the Debenture
Trustee obtains fewer than three such Reference Treasury Dealer Quotations, the
average of all such Quotations.
"Reference Treasury Dealer Quotations" means, with respect to each
Reference Treasury Dealer and any prepayment date, the average, as determined by
the Debenture Trustee, of the bid and asked prices for the Comparable Treasury
Issue (expressed in each case as a percentage of its principal amount) quoted in
writing to the Debenture Trustee by such Reference Treasury Dealer at 5:00 p.m.,
New York City time, on the third Business Day preceding such prepayment date.
"Like Amount" means (i) with respect to a redemption of Series B Capital
Securities, Series A Capital Securities having a Liquidation Amount (as defined
below) equal to that portion of the principal amount of Series B Debentures to
be contemporaneously redeemed in accordance with the Junior Subordinated
Indenture, allocated to the Common Securities and to the Series B Capital
Securities based upon the relative Liquidation Amounts of such classes and the
proceeds of which will be used to pay the Redemption Price of the Series B
Capital Securities and (ii) with respect to a distribution of Series B
Debentures to holders of Series B Capital Securities in connection with a
dissolution or liquidation of the Series B Issuer, Series B Debentures having a
principal amount equal to the Liquidation Amount of the Series B Capital
Securities of the holder to whom such Series B Debentures are distributed.
"Liquidation Amount" means the stated amount of $1,000 per Capital
Security.
Payment of Additional Sums. In the event a Tax Event has occurred and is
continuing and the Series B Issuer is the holder of all of the Series B
Debentures, USF&G will pay Additional Sums, if any (as defined below), on the
Series B Debentures.
"Additional Sums" means the additional amounts as may be necessary in order
that the amount of Distributions then due and payable by the Series B Issuer on
the outstanding Series B Capital Securities and Common Securities of the Series
B Issuer shall not be reduced as a result of any additional taxes, duties and
other governmental charges to which the Series B Issuer has become subject as a
result of a Tax Event.
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Special Event Redemption or Distribution
If a Special Event shall occur and be continuing with respect to the Series
B Issuer or the Series B Capital Securities, USF&G has the right to (i) redeem
the Series B Debentures in whole (but not in part) and therefore cause a
mandatory redemption of the Series B Capital Securities in whole (but not in
part) at the Redemption Price within 90 days following the occurrence of such
Special Event, or (ii) terminate the Series B Issuer and cause the Series B
Debentures to be distributed to the holders of the Series B Capital Securities
in liquidation of the Series B Issuer. If at any time the Series B Issuer is not
or will not be taxed as a grantor trust for United States federal income tax
purposes but a Tax Event has not occurred (a "Grantor Trust Event"), the
Depositor has the right to terminate the Series B Issuer and cause the Series B
Debentures to be distributed to the holders of the Series B Capital Securities
in liquidation of the Series B Issuer. Under current United States federal
income tax law and interpretations and assuming the Series B Issuer is treated
as a grantor trust, such a distribution would not be a taxable event to holders
of the Series B Capital Securities. However, should there be a change in law or
a change in legal interpretation or a liquidation due to a Grantor Trust Event,
the termination and distribution could be a taxable event to holders of the
Series B Capital Securities. See "Certain Federal Income Tax Consequences." If
USF&G does not elect either option (i) or (ii) above, the Series B Capital
Securities will remain outstanding and USF&G will be obligated to pay any
applicable Additional Interest (as defined below). See "Certain Terms of the
Series B Debentures--Additional Interest."
"Tax Event" means that USF&G shall have received an opinion of counsel
(which may be counsel to USF&G or an affiliate but not an employee thereof and
which must be acceptable to the Property Trustee) experienced in such matters to
the effect that, as a result of any amendment to, or change (including any
announced prospective change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision or taxing authority thereof or
therein affecting taxation, or as a result of any official administrative
pronouncement or judicial decision interpreting or applying such laws or
regulations, which amendment or change is effective or such pronouncement or
decision is announced on or after the date of original issuance of the Series B
Capital Securities, there is more than an insubstantial risk that (i) the Series
B Issuer is, or will be, subject to United States federal income tax with
respect to income accrued or received on the Series B Debentures, (ii) interest
payable by USF&G on the Series B Debentures is not, or will not be, deductible
by USF&G for United States federal income tax purposes or (iii) the Series B
Issuer is, or will be, subject to more than a de minimis amount of other taxes,
duties, assessments or other governmental charges.
"Investment Company Event" means the occurrence of a change in law or
regulation or a change in interpretation or application of law or regulation by
any legislative body, court, governmental agency or regulatory authority (a
"Change in 1940 Act Law") to the effect that the Series B Issuer is or will be
considered an "investment company" that is required to be registered under the
Investment Company Act of 1940, as amended, which Change in 1940 Act Law becomes
effective on or after the date of original issuance of the Series B Capital
Securities.
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Right to Shorten Maturity
If, upon the occurrence of a Tax Event relating to the deductibility of
interest by USF&G on the Series B Debentures, the opinion of counsel referred to
in the definition of Tax Event states that the risk of non-deductibility would
be avoided if the maturity of the Series B Debentures were shortened, USF&G
shall have the right to shorten the maturity of the Series B Debentures by the
amount stated in such opinion to be the minimum extent required in order to
avoid such risk, but in no event may USF&G shorten the maturity to a Stated
Maturity of less than 19 1/2 years from the date of original issuance. In such
event, the Stated Maturity of the Capital Securities will be modified in the
same manner as the Stated Maturity of the Series B Debentures.
Liquidation Distribution Upon Termination
The amount payable on the Series B Capital Securities in the event of any
liquidation of the Series B Issuer is $1,000 per Series B Capital Security plus
accumulated and unpaid Distributions, unless, in connection with such
liquidation, the Series B Debentures are distributed to the holders of the
Series B Capital Securities.
The holders of all of the outstanding Common Securities have the right at
any time to terminate the Series B Issuer and, after satisfaction of the
liabilities and amounts owed to creditors of the Series B Issuer as provided by
applicable law, cause the Series B Debentures to be distributed to the holders
of the Series B Capital Securities and Common Securities in liquidation of the
Series B Issuer, subject to the Property Trustee having received an opinion of
counsel to the effect that such distribution will not be a taxable event to the
holders of the Series B Capital Securities.
USF&G also has a right to terminate the Series B Issuer and distribute the
Series B Debentures under the circumstances described above under Special Event
Redemption or Distribution.
CERTAIN TERMS OF THE SERIES B DEBENTURES
General
The following summary of certain terms and provisions of the Series B
Debentures supplements the description of the terms and provisions of the
Debentures set forth in the accompanying Prospectus under the heading
"Description of the Debentures," to which description reference is hereby made.
The summary of certain terms and provisions of the Series B Debentures set forth
below does not purport to be complete and is subject to, and qualified in its
entirety by reference to, the Indenture. The form of Indenture has been filed as
an exhibit to the Registration Statement of which this Prospectus Supplement and
accompanying Prospectus is a part.
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Concurrently with the issuance of the Series B Capital Securities, the
Series B Issuer will invest the proceeds thereof and the consideration paid by
USF&G for the Common Securities in the corresponding Series B Debentures issued
by USF&G to the Series B Issuer. The Series B Debentures will bear Interest (as
defined below) at the annual rate of ___% of the principal amount thereof,
payable semi-annually in arrears on January __ and June __ of each year
commencing __________, 1997, except as otherwise described below. Interest which
is accrued and unpaid after the semi-annual payment date therefor will bear
additional interest on the amount thereof (to the extent permitted by law) at
the rate per annum of ___% thereof, compounded semi-annually. The term
"Interest" as used herein shall include semi-annual interest payments, interest
on semi-annual interest payments in arrears and Additional Interest (as defined
below), as applicable. The Series B Debentures' other Interest payment
provisions correspond to the Distribution provisions of the Series B Capital
Securities.
The Series B Debentures will be issued as a series of Debentures under the
Indenture. The Series B Debentures will mature on January __, 2027. The Series B
Debentures will be unsecured and will rank junior and be subordinate in right of
payment to all Senior Indebtedness of USF&G. See "Description of the
Debentures--Subordination" in the accompanying Prospectus.
Option to Extend Interest Payment Period
USF&G has the right at any time and from time to time to extend the
interest payment period for the Series B Debentures for up to 10 consecutive
semi-annual periods; provided that USF&G may not defer any Additional Interest
that may be payable during such Extension Period; and provided further that no
Extension Period shall extend beyond the stated maturity date or date of
redemption of the Series B Debentures. At the end of the Extension Period, USF&G
is obligated to pay all interest then accrued and unpaid (together with interest
thereon to the extent permitted by applicable law). During any Extension Period,
USF&G will not, and will not permit any subsidiary of USF&G to, declare or pay
any dividend or distribution on, or redeem, purchase, acquire, or make a
liquidation or guarantee payment (other than payments under a Guarantee) with
respect to, any shares of USF&G's capital stock or any security of USF&G
(including other Debentures) ranking pari passu with or junior in interest to
the Debentures, except in each case for (i) payments with securities junior in
interest to the Series B Debentures, (ii) payments made on any series of
Debentures upon the stated maturity of such Debentures or (iii) payments of
accrued dividends (and cash in lieu of fractional shares) upon conversion into
common stock of any convertible preferred stock of USF&G of any series now or
hereinafter outstanding, in accordance with the terms of such stock. As a
result, this covenant requires that an interest payment on one series of
Debentures may be extended only if the interest periods on all series of
Debentures are likewise extended. Prior to the termination of any Extension
Period, USF&G may further extend the interest payment period, provided that such
Extension Period, together with all such previous and further extensions
thereof, may not exceed 10 consecutive semi-annual periods or extend beyond the
maturity or redemption date of the Series B Debentures. Upon the termination of
any Extension Period and the payment of all amounts then due, USF&G may select a
new Extension Period subject to the above requirements. So long as the Property
Trustee shall be the sole holder of the Series B Debentures, USF&G is required
to give the Property Trustee and the Debenture Trustee notice of its selection
of such Extension Period at least three Business Days prior to the date the
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Property Trustee or USF&G is required to give notice to any applicable
self-regulatory organization or to holders of the Series B Capital Securities of
the record date for the next stated maturity of an installment of interest or
the date distributions on the Series B Capital Securities are redeemable, but in
any event not less than three Business Days prior to such record date. The
Property Trustee will be required to give such notice of USF&G's selection of
such Extension Period to the holders of the Series B Capital Securities affected
thereby. If the Property Trustee has ceased to be the sole holder of the Series
B Debentures, USF&G is required to give the Debenture Trustee and the holders of
the Series B Debentures notice of its selection of such Extension Period at
least three Business Days prior to the earlier of: (i) the date the Property
Trustee or USF&G is required to give notice to any applicable self-regulatory
organization, or (ii) the next stated maturity of an installment of interest.
Additional Interest
If the Series B Issuer is required to pay any taxes, duties, assessments or
other governmental charges of whatever nature (other than withholding taxes)
imposed by the United States, or any other taxing authority, USF&G also will pay
as additional interest on the Series B Debentures ("Additional Interest") such
amounts as shall be required so that the net amounts received and retained by
the Series B Issuer after paying any such taxes, duties, assessments or
governmental charges will be not less than the amounts the Series B Issuer would
have received had no such taxes, duties, assessments or governmental charges
been imposed. USF&G may not defer payment of Additional Interest and must pay
Additional Interest if any such taxes, duties, assessments or governmental
charges are payable by the Series B Issuer during any Extension Period.
Redemption
The Series B Debentures are redeemable prior to maturity at the option of
USF&G (i) at any time on or after January __, 2007, in whole or in part, and
(ii) prior to January __, 2007, in whole (but not in part), if a Special Event
occurs and is continuing, within 90 days following the Special Event, in each
case at the Redemption Price described below.
The Redemption Price, in the case of a redemption under (a) above, shall
equal the following prices expressed in percentages of the Liquidation Amount
together with accrued Distributions to but excluding the Redemption Date. If
redeemed during the 12-month period beginning January __:
Redemption
Year Price
---- -----
2007
2008
2009
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2010
2011
2012
2013
2014
2015
2016
and at 100% on or after January __, 2017.
The Redemption Price, in the case of a redemption following a Special Event
as described under (b) above, shall equal the Make-Whole Amount (as defined
under "Certain Terms of the Series B Capital Securities Redemption"), together
with accrued interest to but excluding the Redemption Date.
The Series B Debentures will be subject to optional redemption in whole
(but not in part) upon the termination and liquidation of the Series B Issuer
pursuant to an order for the dissolution, termination or liquidation of the
Series B Issuer entered by a court of competent jurisdiction. For so long as the
Series B Issuer is the holder of all Series B Debentures outstanding, the
proceeds of any redemption described in this section shall be used by the Series
B Issuer to redeem the Series B Capital Securities and the Common Securities in
accordance with their terms. USF&G shall not redeem the Series B Debentures in
part unless all accrued and unpaid Interest (including any Additional Interest)
has been paid in full on all Series B Debentures outstanding for all semi-annual
interest periods on or prior to the Redemption Date and no Extension Period for
the Series B Debentures is in effect.
Right to Shorten Maturity
The maturity of the Series B Debentures may be shortened at the option
of USF&G under the circumstances described under "Description of Series B
Capital Securities--Right to Shorten Maturities".
Distributions of Series B Debentures
Under certain circumstances involving the termination of the Series B
Issuer (including if a Special Event or Grantor Trust Event occurs), Series B
Debentures may be distributed to the holders of the Series B Capital Securities
in liquidation of the Series B Issuer after satisfaction of liabilities to
creditors of the Series B Issuer as provided by applicable law. If distributed
to holders of Series B Capital Securities in liquidation, the Series B
Debentures will initially be issued in the form of one or more global securities
so long as the Series B Capital Securities were represented by global
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certificates immediately prior to such distribution and DTC, or any successor
depositary for the Series B Capital Securities, will act as depositary for the
Series B Debentures. It is anticipated that the depositary arrangements for the
Series B Debentures would be substantially identical to those in effect for the
Series B Capital Securities. Neither USF&G, The Bank of New York, as Debenture
Trustee, any paying agent nor any other agent of USF&G or the Debenture Trustee
will have any responsibility or liability for any aspect of the records relating
to or payments made on account of beneficial ownership interests in a global
security for such Series B Debentures or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests. For a
description of DTC and the terms of the depositary arrangements relating to
payments, transfers, voting rights, redemption and other notices and other
matters, see "Description of the Preferred Securities--Book-Entry-Only
Issuance--The Depository Trust Company" in the accompanying Prospectus.
A global security shall be exchangeable for Series B Debentures registered
in the names of persons other than DTC or its nominee only if (i) DTC notifies
USF&G that it is unwilling or unable to continue as a depositary for such global
security and no successor depositary shall have been appointed, or if at any
time DTC ceases to be a clearing agency registered under the Exchange Act at a
time when DTC is required to be so registered to act as such depositary, (ii)
USF&G in its sole discretion determines that such global security shall be so
exchangeable, or (iii) there shall have occurred and be continuing a Debenture
Event of Default with respect to such global security. Any global security that
is exchangeable pursuant to the preceding sentence shall be exchangeable for
definitive certificates registered in such names as DTC shall direct. It is
expected that such instructions will be based upon directions received by DTC
from its Participants with respect to ownership of beneficial interests in such
global security. In the event that Series B Debentures are issued in definitive
form, such Series B Debentures will be in denominations of $1,000 and integral
multiples thereof and may be transferred or exchanged at the offices described
below.
Payments on Series B Debentures represented by a global security will be
made to DTC, as the depositary for the Series B Debentures. In the event Series
B Debentures are issued in definitive form, principal and interest will be
payable, the transfer of the Series B Debentures will be registrable, and Series
B Debentures will be exchangeable for Series B Debentures of other denominations
of a like aggregate principal amount, at the principal corporate trust office of
the Debenture Trustee in New York, New York, or at the offices of any paying
agent or transfer agent appointed by USF&G, provided that payment of interest
may be made at the option of USF&G by check mailed to the address of the persons
entitled thereto or by wire transfer. In addition, if the Series B Debentures
are issued in certificated form, the record dates for payment of interest will
be the 15th day preceding each Interest Payment Date. For a description of DTC
and the terms of the depositary arrangements relating to payments, transfers,
voting rights, redemptions and other notices and other matters, see "Description
of the Preferred Securities--Book-Entry-Only Issuance--The Depository Trust
Company" in the accompanying Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the principal United States federal income
tax consequences of the purchase, ownership and disposition of Series B Capital
Securities. This summary supplements, updates and, in certain respects,
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supercedes the discussion contained in "United States Taxation" in the
accompanying Prospectus. This summary only addresses the tax consequences to a
person that acquires Series B Capital Securities on their original issue at
their original offering price and that is (i) an individual citizen or resident
of the United States, (ii) a corporation or partnership organized in or under
the laws of the United States or any state thereof or the District of Columbia
(iii) an estate the income of which is subject to United States federal income
tax regardless of source or (iv) a trust (a) over the administration of which a
court within the United States is able to exercise primary supervision and (b)
all substantial decisions of which one or more United States fiduciaries have
the authority to control (a "United States Person"). This summary does not
address all tax consequences that may be applicable to a United States Person
that is a beneficial owner of Series B Capital Securities, nor does it address
the tax consequences to (i) persons that are not United States Persons, (ii)
persons that may be subject to special treatment under United States federal
income tax law, such as banks, insurance companies, thrift institutions,
regulated investment companies, real estate investment trusts, tax-exempt
organizations and dealers in securities or currencies, (iii) persons that will
hold Series B Capital Securities as part of a position in a "straddle" or as a
part of a "hedging," "conversion" or other integrated investment transaction for
federal income tax purposes, (iv) persons whose functional currency is not the
United States dollar or (v) persons that do not hold Series B Capital Securities
as capital assets.
The statements of law or legal conclusion set forth in this summary
constitute the opinion of Piper & Marbury L.L.P., special tax counsel to USF&G
and the Series B Issuer. This summary is based upon the Internal Revenue Code of
1986, as amended (the "Code"), Treasury Regulations, Internal Revenue Service
rulings and pronouncements and judicial decisions now in effect, all of which
are subject to change at any time. Such changes may be applied retroactively in
a manner that could cause the tax consequences to vary substantially from the
consequences described below, possibly adversely affecting a beneficial owner of
Series B Capital Securities. In particular, legislation has been proposed that
could adversely affect USF&G's ability to deduct interest on the Series B
Debentures, which may in turn permit USF&G to cause a redemption of the Series B
Capital Securities. See "--Possible Tax Law Changes". An opinion of counsel is
not binding on the Internal Revenue Service or the courts, and the authorities
on which this summary is based are subject to various interpretations. It is
therefore possible that the federal income tax law treatment of the purchase,
ownership and disposition of Series B Capital Securities may differ from the
treatment described below.
PROSPECTIVE INVESTORS ARE ADVISED TO CONSULT WITH THEIR OWN TAX ADVISORS IN
LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES AS TO THE FEDERAL TAX CONSEQUENCES
OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF CAPITAL SECURITIES, AS WELL AS THE
EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
Classification of Series B Issuer
In connection with the issuance of the Series B Capital Securities, Piper &
Marbury L.L.P. will render its opinion to the effect that, under then current
law and assuming compliance with the terms of the Trust Agreement, and based on
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certain facts and assumptions contained in such opinion, the Series B Issuer
will be classified as a grantor trust and not as an association taxable as a
corporation for United States federal income tax purposes. As a result, each
beneficial owner of Series B Capital Securities (a "Securityholder") will be
required to include in its gross income its pro rata share of the interest
income, including original issue discount, paid or accrued with respect to the
Series B Debentures whether or not cash is actually distributed to the
Securityholders. See "--Interest Income and Original Issue Discount". No amount
included in income with respect to the Series B Capital Securities will be
eligible for the dividends-received deduction.
Interest Income and Original Issue Discount
Final Treasury Regulations issued on June 11, 1996 generally provide that
stated interest on a debt instrument is not "qualified stated interest" and,
therefore, will give rise to original issue discount ("OID") unless such
interest is unconditionally payable in cash or in property (other than a debt
instruments of the issuer) at least annually at a single fixed rate. Interest is
considered to be unconditionally payable only if reasonable legal remedies exist
to compel timely payment or the debt instrument otherwise provides terms and
conditions that make the likelihood of late payment (other than payment that
occurs within a reasonable grace period) or non-payment a "remote contingency".
Under the Series B Indenture, USF&G has the right, at any time and from
time to time during the term of the Series B Debentures to defer payments of
interest by extending the interest payment period for a period not exceeding 10
consecutive semi-annual periods with respect to each Extension Period. Unless
the likelihood of exercise of such right to defer is remote, the Series B
Debentures would be issued with OID. During any Extension Period, (a) USF&G will
not be permitted to declare or pay any dividends or distributions on, or redeem,
purchase, acquire, or make a liquidation payment with respect to, any of its
capital stock, and (b) USF&G will not be permitted to make any payment of
principal, interest or premium, if any, on or repay, repurchase or redeem any
debt securities (including guarantees) issued by USF&G that rank pari passu with
or junior the Series B Debentures (although these restrictions will not apply to
dividends or distributions in common stock of USF&G and in certain other limited
situations). See "Description of Series B Debentures--Option to Extend Interest
Payment Period". USF&G currently believes that the adverse impact that the
imposition of such restrictions would have on USF&G and value of the equity
securities of USF&G makes the likelihood of USF&G exercising its right to defer
payments of interest on the Series B Debentures remote. Accordingly, USF&G
believes that the stated interest on the Series B Debentures should be
considered unconditionally payable for purposes of the OID provisions of the
Code and that the Series B Debentures should not be considered to have been
issued with OID. As a result, each Securityholder will be required to include
interest payments in taxable income at the time accrued or received in
accordance with its own method of accounting. There can be no assurance,
however, that the Internal Revenue Service will agree with such determination.
However, if USF&G does exercise its right to defer payments of interest
thereon, the Series B Debentures will be considered to be retired and reissued
for their adjusted issue price at such time, and the Series B Debentures
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thereafter will be considered to have been issued with OID. In such case, all of
the interest payments thereafter payable will be treated as OID. If the payments
were treated as OID (either because USF&G exercises the right to defer interest
payments or because the exercise of such right was not remote at the time of
issuance), the holder must include that discount in income on an economic
accrual basis before the receipt of cash attributable to the interest,
regardless of their method of tax accounting. The amount of OID that accrues in
any semi-annual period will approximately equal the amount of the interest that
accrues in that semi-annual period at the stated interest rate. In the event
that the interest payment period is extended, holders will continue to accrue
OID approximately equal to the amount of interest payment due at the end of the
extended interest payment period on an economic accrual basis over the length of
the extended interest period. A Securityholder that disposes of the Series B
Capital Securities during an Extension Period may suffer a loss because the
market value of the Series B Capital Securities likely will fall if USF&G
exercises its option to defer payments of interest on the Series B Debentures.
To the extent the selling price is less than the Securityholder's adjusted tax
basis (which will include all accrued but unpaid interest), a Securityholder
will recognize a capital loss.
Distribution of Series B Debentures to Holders of Series B Capital Securities
Under current law, a distribution of the Series B Issuer of the Series B
Debentures as described under the caption "Description of Series B Capital
Securities - Liquidation Distribution Upon Termination" will be non-taxable and
will result in the Securityholder receiving directly its pro rata share of the
Series B Debentures previously held indirectly through the Series A Issuer, with
a holding period and aggregate tax basis equal to the holding period and
aggregate tax basis such Securityholder had in its Series B Capital Securities
before such distribution. If, however, the liquidation of the Series B Issuer
were to occur because the Series B Issuer is subject to United States federal
income tax with respect to income accrued or received on the Series B
Debentures, the distribution of Series B Debentures to Securityholders by the
Series B Issuer would be a taxable event to the Series B Issuer and each
Securityholder, and the Securityholder would recognize gain or loss as if the
Securityholder had exchanged its Series B Capital Securities for the Series B
Debentures it received upon the liquidation of the Series B Issuer. A
Securityholder will include interest in income in respect of Series B Debentures
received from the Series B Issuer in the manner described above under "Interest
Income and Original Issue Discount".
Sales or Redemption of Series B Capital Securities
Gain or loss will be recognized by a Securityholder on the sale of Series B
Capital Securities (including a redemption for cash) in an amount equal to the
difference between the amount realized and the Securityholder's adjusted tax
basis in the Series B Capital Securities sold or redeemed. A Securityholder's
adjusted tax basis in the Series B Capital Securities generally will be
increased by any OID included in gross income and decreased by any interest
payments not treated as "qualified stated interest" (as defined above). See
"-Interest Income and Original Issue Discount". Gain or loss recognized by a
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Securityholder on Series B Capital Securities held for more than one year
generally will be taxable as long-term capital gain or loss. Amounts
attributable to accrued interest with respect to a Securityholder's pro rata
shares of the Series B Debentures not previously included in income will be
taxable as ordinary income.
Backup Withholding Tax and Information Reporting
The amount of interest paid or accrued on the Series B Capital Securities
held of record by United States Persons (other than corporations and other
exempt Securityholders) will be reported to the IRS. "Backup" withholding at a
rate of 31% will apply to payments of interest to non-exempt United States
Persons unless the Securityholder furnishes its taxpayer identification number
in the manner prescribed in applicable Treasury Regulations, certifies that such
number is correct, certifies as to no loss of exemption from backup withholding
and meets certain other conditions.
Payment of the proceeds from the disposition of Series B Capital Securities
to or through the United States office of a broker is subject to information
reporting and backup withholding unless the holder or beneficial owner
establishes an exemption from information reporting and backup withholding.
Any amounts withheld from a Securityholder under the backup withholding
rules will be allowed as a refund or a credit against such Securityholder's
United States federal income tax liability, provided the required information is
furnished to the Internal Revenue Service.
It is anticipated that income on the Series B Capital Securities will be
reported to holders on Form 1099 and mailed to holders of the Series B Capital
Securities by January 31 following each calendar year.
Possible Tax Law Changes
On March 19, 1996, the Revenue Reconciliation Bill of 1996 (the "Bill"),
the revenue portion of President Clinton's budget proposal, was released. The
Bill would, among other things, generally deny interest deductions for interest
on an instrument issued by a corporation that has a maximum weighted average
maturity of more than 40 years. The Bill would also generally deny interest
deductions for interest on an instrument issued by a corporation that has a
maximum term of more than 20 years and that is not shown as indebtedness on the
separate balance sheet of the issuer or, where the instrument is issued to a
related party (other than a corporation), and the holder or some other related
party issues a related instrument that is not shown as indebtedness on the
issuer's consolidated balance sheet. For purposes of determining the weighted
average maturity or the term of an instrument, any right to extend would be
treated as exercised. The above-described provisions of the Bill were proposed
to be effective generally for instruments issued on or after December 7, 1995.
If either provision were to apply to the Series B Debentures, USF&G would be
unable to deduct interest on the Series B Debentures. However, on March 29, 1996
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the Chairmen of the Senate Finance and House Ways and Means Committees issued a
joint statement to the effect that it was their intention that the effective
date of the President's legislative proposals, if adopted, will be no earlier
than the date of appropriate Congressional action. Under current law, USF&G will
be able to deduct interest on the Series B Debentures. There can be no
assurance, however, that current or future legislative proposals or final
legislation will not affect the ability of USF&G to deduct interest on the
Series B Debentures. Such a change could give rise to a Tax Event, which would
permit USF&G to cause a redemption of the Series B Capital Securities or shorten
the maturity of the Series B Capital Securities. See "Description of Series B
Capital Securities--Redemption" and "Description of Series B Capital
Securities-Right to Shorten Maturity".
CERTAIN ERISA CONSIDERATIONS
Each fiduciary of a pension, profit-sharing or other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA") (a "Plan"), should consider the fiduciary standards of ERISA in the
context of the Plan's particular circumstances before authorizing an investment
in the Series B Capital Securities. Accordingly, among other factors, the
fiduciary should consider whether the investment would satisfy the prudence and
diversification requirements of ERISA and would be consistent with the documents
and instruments governing the Plan.
Section 406 of ERISA and Section 4975 of the Code prohibit Plans, as well
as individual retirement accounts and Keogh plans subject to Section 4975 of the
Code (also "Plans"), from engaging in certain transactions involving "plan
assets" with persons who are "parties in interest" under ERISA or "disqualified
persons" under the Code ("Parties in Interest") with respect to such Plan. A
violation of these "prohibited transaction" rules may result in the imposition
of an excise tax or other liabilities under ERISA and/or Section 4975 of the
Code for such persons, unless exemptive relief is available under an applicable
statutory or administrative exemption. Employee benefit plans that are
governmental plans (as defined in Section 3(32) of ERISA), certain church plans
(as defined in Section 3(33) of ERISA) and foreign plans (as described in
Section 4(b)(4) of ERISA) are not subject to the requirements of ERISA or
Section 4975 of the Code.
Under a regulation (the "Plan Assets Regulation") issued by the U.S.
Department of Labor (the "DOL"), the assets of the Series B Issuer would be
deemed to be "plan assets" of a Plan for purposes of ERISA and Section 4975 of
the Code if "plan assets" of the Plan were used to acquire an equity interest in
the Series B Issuer and no exceptions were applicable under the Plan Assets
Regulation. An "equity interest" is defined under the Plan Assets Regulation as
any interest in an equity other than an instrument which is treated as
indebtedness under applicable local law and which has no substantial equity
features. A beneficial interest in a trust is specifically defined under the
Plan Assets Regulation as an "equity interest."
Pursuant to an exception contained in the Plan Assets Regulation, the
assets of the Series B Issuer would not be deemed to be "plan assets" of
investing Plans if, immediately after the most recent acquisition of any equity
interest in the Series B Issuer, less than 25% of the value of each class of
equity interests in the Series B Issuer were held by Plans, other employee
benefit plans not subject to ERISA or Section 4975 of the Code (such as
governmental, church and foreign plans), and entities holding assets deemed to
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be "plan assets" of any Plan (collectively, "Benefit Plan Investors"), or if the
Series B Capital Securities were "publicly-offered securities" for purposes of
the Plan Assets Regulation. No assurance can be given that the value of the
Series B Capital Securities held by Benefit Plan Investors will be less than 25%
of the total value of such Series B Capital Securities at the completion of the
initial offering or thereafter, and no monitoring or other measures will be
taken with respect to the satisfaction of the conditions to this exception. In
addition, no assurance can be given that the Series B Capital Securities would
be considered to be "publicly-offered securities" under the Plan Asset
Regulation. All of the Common Securities will be purchased and held by USF&G.
Certain transactions involving the Series B Issuer could be deemed to
constitute direct or indirect prohibited transactions under ERISA and Section
4975 of the Code with respect to a Plan if the Series B Capital Securities were
acquired with "plan assets" of such Plan and assets of the Series B Issuer were
deemed to be "plan assets" of Plans investing in the Series B Issuer. For
example, if USF&G is a Party in Interest with respect to an investing Plan,
extensions of credit between USF&G and the Series B Issuer (as represented by
the Series B Subordinated Debentures and the Guarantee) would likely be
prohibited by Sections 406(a)(1)(B) and 406(a)(1)(D) of ERISA and Sections
4975(c)(1)(B) and 4975(c)(1)(D) of the Code, unless exemptive relief were
available under an applicable administrative exemption (see below). In addition,
if USF&G were considered to be a fiduciary with respect to the Series B Issuer
as a result of certain powers it holds (such as the powers to remove and replace
the Property Trustee and the Administrative Trustees), the optional redemption
or acceleration of the Series B Subordinated Debentures could be considered to
be prohibited transactions under Section 406(b) of ERISA and Section
4975(c)(1)(E) of the Code. In order to avoid such prohibited transactions, each
investing Plan, by purchasing or holding the Series B Capital Securities, will
be deemed to have directed the Series B Issuer to invest in the Series B
Subordinated Debentures and to have appointed the Property Trustee.
The DOL has issued five prohibited transaction class exemptions ("PTCEs")
that may provide exemptive relief if required for direct or indirect prohibited
transactions that may arise from the purchase or holding of the Series B Capital
Securities if assets of the Series B Issuer were deemed to be "plan assets" of
Plans investing in the Series B Issuer as described above. Those class
exemptions are PTCE 96-23 (for certain transactions determined by in-house asset
managers), PTCE 95-60 (for certain transactions involving insurance company
general accounts), PTCE 91-38 (for certain transactions involving bank
collective investment funds), PTCE 90-1 (for certain transactions involving
insurance company pooled separate accounts), and PTCE 84-14 (for certain
transactions determined by independent qualified professional asset managers).
Because the Series B Capital Securities may be deemed to be equity
interests in the Series B Issuer for purposes of applying ERISA and Section 4975
of the Code, the Series B Capital Securities may not be purchased or held by any
Plan or any entity whose underlying assets include "plan assets" by reason of
any Plan's investment in the entity (a "Plan Asset Entity") or any person
investing "plan assets" of any Plan, unless such purchaser or holder is eligible
for the exemptive relief available under PTCE 96-23, 95-60, 91-38, 90-1 or
84-14, or another applicable exemption. Any purchaser or holder of the Series B
Capital Securities or any interest therein will be deemed to have represented by
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its purchase and holding thereof that it either (a) is not a Plan or a Plan
Asset Entity and is not purchasing such securities on behalf of or with "plan
assets" of any Plan or (b) is eligible for the exemptive relief available under
PTCE 96-23, 95-60, 91-38, 90-1 or 84-14 or another applicable exemption with
respect to such purchase or holding. If a purchaser or holder of the Series B
Capital Securities that is a Plan or a Plan Asset Entity elects to rely on an
exemption other than PTCE 96-23, 95-60, 91-38, 90-1 or 84-14, USF&G and the
Series B Issuer may require a satisfactory opinion of counsel or other evidence
with respect to the availability of such exemption for such purchase and
holding.
Due to the complexity of these rules and the penalties that may be
imposed upon persons involved in non-exempt prohibited transactions, it is
particularly important that fiduciaries or other persons considering purchasing
the Series B Capital Securities on behalf of or with "plan assets" of any Plan
consult with their counsel regarding the potential consequences if the assets of
the Series B Issuer were deemed to be "plan assets" and the availability of
exemptive relief under PTCE 96-23, 95-60, 91-38, or 84-14 or any other
applicable exemption.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, USF&G
and the Series B Issuer have agreed that the Series B Issuer will sell to each
of the Underwriters named below, for whom Goldman, Sachs & Co., Merrill Lynch,
Pierce Fenner & Smith Incorported, Lehman Brothers, Inc. and Legg Mason Wood
Walker, Incorporated are acting as Representatives, and each of the Underwriters
has severally agreed to purchase from the Series B Issuer the respective number
of Series B Capital Securities set forth opposite its name below:
Underwriter Number of Series B
------------
Capital Securities
------------------
Goldman, Sachs & Co............................................ 30,000
Merrill Lynch, Pierce, Fenner & Smith, Incorporated............ 30,000
Lehman Brothers, Inc........................................... 30,000
Legg Mason Wood Walker, Incorporated........................... 10,000
=================
Total.................................................. 100,000
=================
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all such Series B Capital
Securities offered hereby, if any are taken.
The Underwriters propose to offer the Series B Capital Securities in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus Supplement, and in part to certain securities
dealers at such price less a concession of $__ per Series B Capital Security.
The Underwriters may allow, and such dealers may reallow, a concession not in
excess of $__ per Series B Capital Security to certain brokers and dealers.
After the Series B Capital Securities are released for sale to the public, the
offering price and other selling terms may from time to time be varied by the
Representatives.
The Series B Issuer and USF&G have granted the Underwriters an option
exerciseable for 30 days after the date of this Prospectus Supplement to
purchase up to 15,000 additional Series B Capital Securities to cover
over-allotments, if any, at the initial public offering price (with additional
Underwriters' Compensation), as set forth on the cover page of this Prospectus
Supplement. If the Underwriters exercise their over-allotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of Series B Capital
Securities to be purchased by each of them, as shown in the foregoing table,
bears to the number of Series B Capital Securities initially offered hereby.
In view of the fact that the proceeds from the sale of the Series B Capital
Securities will be used to purchase the Series B Debentures issued by USF&G, the
Underwriting Agreement provides that USF&G will pay as Underwriters'
Compensation for the Underwriters arranging the investment therein of such
proceeds an amount of $___ per Series B Capital Security for the accounts of the
several Underwriters.
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The Series B Capital Securities are a new issue of securities with no
established trading market. USF&G and the Series B Issuer have been advised by
the Representatives that they intend to make a market in the Series B Capital
Securities. However, the Representatives are not obligated to do so and such
market making may be interrupted or discontinued without notice.
USF&G and the Series B Issuer have agreed, during the period beginning from
the date of the Underwriting Agreement and continuing to and including the
earlier of (i) the date on which the distribution of the Series B Capital
Securities ceases, as determined by the Underwriters, or (ii) 30 days after the
closing date, not to offer, sell, contract to sell or otherwise dispose of any
Series B Capital Securities, any other beneficial interest in the Series B
Issuer, any Series B Debentures or any Series B Capital Securities or any other
securities of the Series B Issuers USF&G or any similar trust which are
substantially similar to the Series B Capital Securities, including any
guarantee of the Series B Capital Securities, or the Series B Debentures, or any
securities convertible into or exchangeable for, or that represent the right to
receive, Series B Capital Securities, preferred stock or such substantially
similar securities of either an Issuer or USF&G or any similar trust, without
the prior written consent of the Representatives.
USF&G and the Series B Issuer have agreed to indemnify the Representatives
against certain liabilities including liabilities under the Securities Act.
Certain of the Representatives or their affiliates have provided from time
to time, and expect to continue to provide in the future, investment banking
services to USF&G and its affiliates, for which such Representatives or their
affiliates have received or will receive customary fees and commissions. Robert
J. Hurst, a Director of USF&G, is a limited partner of Goldman, Sachs Group,
L.P. and a managing director of Goldman, Sachs & Co.
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