Annual Report (Form 10-K), fiscal year 1993

Item 1. Description of Business 1.1. General 1 1.2. Business Segments 1 1.3. Distribution Systems 5 1.4. Competition 6 1.5. Investments 6 1.6. Property/Casualty Loss Reserves 7 1.7. Life Benefit Reserves 11 1.8. Geographical Distribution 11 1.9. Executive Officers of the Registrant 12 Item 2.



Item 2. Business Properties Real estate owned and used in the regular conduct of business consists of 12 business properties located in various cities throughout the United States. The Corporation's Mount Washington Center, located in Baltimore, Maryland, is the principal owned property. This is the headquarters for the life insurance operations, and the location of the information systems and training and development complexes.
In addition, the Corporation leases approximately 120 offices in various cities in the regular course of business. See Note 5 of Notes to the Consolidated Financial Statements. The principal leased property is a 40-story home office building in Baltimore, Maryland, sold in 1984 and leased back by the Corporation.
Item 3.

Item 3. Legal Proceedings The Corporation's insurance subsidiaries are routinely engaged in litigation in the normal course of their business, including defending claims for punitive damages. As a liability insurer, they defend third-party claims brought against their insureds. As an insurer, they defend themselves against coverage claims.
In the opinion of management the litigation described herein is not expected to have a material adverse effect on USF&G Corporation's consolidated financial position, although it is possible that the results of operations in a particular quarter or annual period would be materially affected by an unfavorable outcome.
3.1. Shareholder Class Action Suits During 1990 and 1991, twelve class action complaints were filed against the Corporation in the United States District Court for the District of Maryland and the United States District Court for the Eastern District of Pennsylvania. The Corporation moved to dismiss all twelve complaints. The complaints refer to the Corporation's public announcement on November 7, 1990, concerning a reduction in its dividend and related matters. All class action suits were consolidated for all purposes, under the caption IN RE USF&G CORPORATION SECURITIES LITIGATION in the United States District Court for the District of Maryland. By an order dated February 11, 1993, the court dismissed eleven of the class action complaints and on April 23, 1993, the court dismissed the remaining action. The plaintiffs have appealed these rulings and on January 6, 1994, the Fourth Circuit of Appeals affirmed the dismissal of all twelve suits. The plaintiffs have not yet indicated whether they will seek review from the United States Supreme Court. While the outcome cannot be predicted with any certainty, management believes the lawsuits are without merit and the outcome is unlikely to have a material adverse effect on the Corporation's financial position.
3.2. Maine "Fresh Start" litigation. In 1987, the State of Maine adopted workers compensation reform legislation which was intended to rectify historic rate inadequacies and encourage insurance companies to reenter the Maine voluntary workers compensation market. This legislation, which was popularly known as "Fresh Start," required the Maine Superintendent of Insurance to annually determine whether the premiums collected for policies written in the involuntary market and related investment income were adequate on a policy-year basis. The Superintendent was required to assess a surcharge on policies written in later policy years if it was determined that rates were inadequate. Assessments were to be borne by workers compensation policyholders, except that for policy years beginning in 1989 the Superintendent could require insurance carriers to absorb up to 50 percent of any deficits if the Superintendent found that insurance carriers failed to make good faith efforts to expand the voluntary market and depopulate the residual market. Insurance carriers which served as servicing carriers for the involuntary market would be obligated to pay 90 percent of the insurance industry's share. The Maine Fresh Start statute requires the Superintendent to annually estimate each year's deficit for seven years before making a final determination with respect to that year.
In March 1993, the Superintendent affirmed a prior Decision and Order (known as "1992 Fresh Start Order") in which he, among other things, found that there were deficits for the 1988, 1989, and 1990 policy years, and that insurance carriers had not made a good faith effort to expand the voluntary market and consequently were required to bear 50 percent of any deficits relating to the 1989 and 1990 policy years. The Superintendent further found that a portion of these deficits were attributable to servicing carrier inefficiencies and poor investment practices and ordered that these costs be absorbed by insurance carriers. Also, in May 1993 the Superintendent found that insurance carriers would be liable for 50 percent of any deficits relating to the 1991 policy year (the "1993 Fresh Start Order"), but indicated that he would make no further determinations regarding the portions of any deficits attributable to alleged servicing carrier inefficiencies and poor investment practices until his authority to make such determinations was clarified in the various suits involving prior Fresh Start orders.
USF&G Company was a servicing carrier for the Maine residual market in 1988, 1989, 1990, and 1991. The Corporation withdrew from the Maine voluntary market and as a servicing carrier effective December 31, 1991. The Corporation has joined in an appeal of the 1992 Fresh Start Order which was filed April 5, 1993, in a case captioned THE HARTFORD ACCIDENT AND INDEMNITY COMPANY, ET AL., V. SUPERINTENDENT OF INSURANCE filed in Superior Court, State of Maine, Kennebec. In addition to The Hartford Accident and Indemnity Company and USF&G Company, the National Council of Compensation Insurance ("NCCI") and seven other insurance companies which were servicing carriers during this time frame have instituted similar appeals. These appeals will be heard on a consolidated basis, in a case captioned, NATIONAL COUNCIL OF COMPENSATION INSURANCE, ET AL., V. ATCHINSON. USF&G Company is seeking, among other things, to have the court set aside the Superintendent's findings that the industry did not make a good faith effort to expand the voluntary market and is responsible for deficiencies resulting from alleged poor servicing and investments. Similar appeals of the Superintendent's 1993 Fresh Start Order have been filed by USF&G Company, the NCCI, and several other servicing carriers in the same court. The appeals of the 1993 Fresh Start Order will be heard on a consolidated basis in a case captioned THE NATIONAL COUNCIL OF COMPENSATION INSURANCE, ET AL., V. ATCHINSON.
Estimates of the potential deficits vary widely and are continuously revised as loss and claims data matures. If the Superintendent were to prevail on all issues, then the range of liability for USF&G Company, based on the most recent estimates provided by the Superintendent and the NCCI, respectively, could range from approximately $12 million to approximately $19 million. However, USF&G Company believes that it has meritorious defenses and has determined to defend the actions vigorously.
3.3. Arkansas Servicing Carrier Litigation On September 14, 1993, Interstate Contractors, Inc. and two other Arkansas corporations filed a class action in the U.S. District Court for the Eastern District of Arkansas, Little Rock, against the National Council on Compensation Insurance ("NCCI"), USF&G and ten other insurance companies which served as servicing carriers for the Arkansas involuntary workers compensation market. The case, which is captioned INTERSTATE CONTRACTORS, INC., ET AL. V. NATIONAL COUNCIL ON COMPENSATION INSURANCE, ET AL., alleges that the defendants failed to provide safety and loss control services, claim management services, and assistance in moving insureds from the involuntary market to the voluntary market. The plaintiffs are pursuing their claims under various legal theories, including breach of contract, breach of fiduciary duty, and negligence. The plaintiffs seek unspecified compensatory damages based on the premiums attributable to services allegedly not performed and damages allegedly incurred as a result of the alleged failure to provide such services. USF&G Company believes that it has meritorious defenses and has determined to defend the action vigorously. Management believes that it is unlikely such claims will have a material adverse effect on USF&G Corporation's financial position.
3.4. North Carolina workers compensation Litigation On November 24, 1993, N.C. Steel, Inc. and six other North Carolina employers filed a class action in the General Court of Justice, Superior Court Division, Wake County, North Carolina, against the NCCI, North Carolina Rate Bureau, USF&G Company and eleven other insurance companies which served as servicing carriers for the North Carolina involuntary workers compensation market. On January 20, 1994, the plaintiffs filed an amended complaint seeking to certify a class of all employers who purchased workers compensation insurance in the State of North Carolina after November 24, 1989. The amended complaint, which is captioned N.C. STEEL INC. ET AL., V. NATIONAL COUNCIL ON COMPENSATION INSURANCE, ET AL., alleges that the defendants conspired to suppress competition with respect to the North Carolina voluntary and involuntary workers compensation business, thereby artificially inflating the rates in such markets and the fees payable to the insurers. The complaint also alleges that the carriers agreed to improperly deny qualified companies from acting as servicing carriers, improperly encouraged agents to place employers in the assigned risk pool, and improperly promoted inefficient claims handling. USF&G Company has acted as a servicing carrier in North Carolina since 1990. The plaintiffs are pursuing their claims under various legal theories, including violations of the North Carolina antitrust laws, unlawful conspiracy, breach of fiduciary duty, breach of implied covenant of good faith and fair dealing, unfair competition, constructive fraud, and unfair and deceptive trade practices. The plaintiffs seek unspecified compensatory damages, punitive damages for the alleged construction fraud, and treble damages under the North Carolina antitrust laws. USF&G Company believes that it has meritorious defenses and has determined to defend the action vigorously. Management believes that it is unlikely such claims will have a material adverse effect on USF&G Corporation's financial position.
3.5. Proposition 103 In November 1988, California voters passed Proposition 103, which required insurers doing business in that state to rollback property/ casualty premium prices in effect between November 1988 and November 1989 to 1987 levels, less an additional 20 percent discount, unless an insurer could establish that such rate levels threatened its solvency. As a result of a court challenge, the California Supreme Court ruled in May 1989 that an insurer does not have to face insolvency in order to qualify for exemption from the rollback requirements and is entitled to a "fair and reasonable return." Significant controversy has surrounded the numerous regulations proposed by the California Insurance Department, which would be used to determine whether rate rollbacks and premium refunds are required by insurers. Some of the Insurance Department's proposals were disapproved by the California Office of Administrative Law ("OAL"), which is responsible for the review and approval of such regulations. The most recent regulations proposed by the Insurance Department have not yet been reviewed by the OAL, pending a recent court challenge by various insurers to the Department's authority to issue such regulations. On February 25, 1993, the trial judge presiding over that court challenge voided substantial parts of the regulations proposed by the Insurance Department. The court held that the Insurance Department's regulations exceeded the Department's authority by setting rates based upon an across-the-board formula. The court indicated that rates and what constitutes a reasonable return would have to be determined individually for each insurer and that the Department's authority was to approve or disapprove rates proposed by insurers rather than setting rates which cannot vary from a prescribed formula. An appeal is currently pending before the California Supreme Court.
During 1989, less than five percent of USF&G's total premiums were written in the State of California. USF&G believes that the returns it received, both during and since the one-year rollback period, have not exceeded the "fair and reasonable return" standard. Additionally, based on the long history of events and the significant uncertainty about the Insurance Department's regulations, management does not believe it is probable that the revenue recognized during the rollback period will be subject to a material refund. Management believes that no premium refund should be required for any period after November 8, 1988, but that any rate rollbacks and premium refunds, if ultimately required, would not have a material adverse effect on USF&G Corporation's financial position.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 1993.
USF&G Corporation Part II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters Market and dividend information for the Corporation's common stock on page 88 of the Annual Report to Shareholders for 1993 is incorporated herein by reference.
Item 6.

Item 6. Selected Financial Data Selected financial data of the Corporation on pages 56 and 57 of the Annual Report to Shareholders for 1993 is incorporated herein by reference.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's Discussion and Analysis on pages 34 through 55 of the Annual Report to Shareholders for 1993 is incorporated herein by reference.
Item 8.


Item 8. Financial Statements and Supplementary Data The consolidated financial statements of the Corporation and notes to such financial statements on pages 58 through 82 of the Annual Report to Shareholders for 1993 are incorporated herein by reference.
Item 9.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.
USF&G Corporation Part III
Item 10.



Item 10. Executive Officers and Directors of the Registrant Information regarding the Corporation's executive officers can be found on page 12 of this Form 10-K. Information regarding the Corporation's directors is incorporated herein by reference to the Election of Directors section of the Corporation's definitive proxy statement for its annual meeting of shareholders to be held May 4, 1994.
Item 11.

Item 11. Executive Compensation See the Compensation of Executive Officers and Directors section of the Corporation's definitive proxy statement for its annual meeting of shareholders to be held May 4, 1994, which is incorporated herein by reference. To the best of the Corporation's knowledge, there were no late filings under Section 16(a) of the Securities Exchange Act of 1934.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management See the Stock Ownership of Certain Beneficial Owners, Directors and Management section of the Corporation's definitive proxy statement for its annual meeting of shareholders to be held May 4, 1994, which is incorporated herein by reference.
Item 13.

Item 13. Certain Relationships and Related Transactions See the Other Information-Certain Business Relationships section of the Corporation's definitive proxy statement for its annual meeting of shareholders to be held May 4, 1994, which is incorporated herein by reference.
USF&G Corporation Part IV
Item 14.

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) (1) Financial Statements The following consolidated financial statements of USF&G Corporation and its subsidiaries, included in the annual report of the registrant to its shareholders for the year ended December 31, 1993, are incorporated by reference in Item 8:
Consolidated Statement of Operations Consolidated Statement of Financial Position Consolidated Statement of Cash Flows Consolidated Statement of Shareholders' Equity Notes to Consolidated Financial Statements Report of Independent Auditors
(2) Schedules The following consolidated financial statement schedules of USF&G Corporation and its subsidiaries are included in Item 14(d):
Page 24 Schedule I. Summary of Investments-Other than Investments in Related Parties 25-27 Schedule III. Condensed Financial Information of Registrant 28 Schedule V. Supplementary Insurance Information 29 Schedule VI. Reinsurance 30 Schedule IX. Short-term Borrowings 31 Schedule X. Supplemental Information Concerning Consolidated Property/Casualty Insurance Operations
All other schedules specified by Article 7 of Regulation S-X are not required pursuant to the related instructions or are inapplicable and, therefore, have been omitted.
(3) Exhibits The following exhibits are included in Item 14:
Page __ Exhibit 11 Computation of Earnings Per Share __ Exhibit 12 Computation of Ratio of Consolidated Earnings to Fixed Charges and Preferred Stock Dividends
A copy of all other exhibits not included with this Form 10-K may be obtained without charge upon written request to the Secretary at the address shown on page ___ of this Form 10-K.
Exhibit 3A Charter of USF&G Corporation.
Exhibit 3B Amended By-laws of USF&G Corporation. Incorporated by reference to Exhibit 3B, 1985 Annual Report on Form 10-K.
Exhibit 4A Rights agreement dated as of September 18, 1987, between USF&G Corporation and First Chicago Trust Company of New York (successor to Morgan Shareholder's Service Trust Company) including Form of Rights Certificate. Incorporated by reference to Exhibits 1 and 2 to the Registrant's Form 8-A filed September 31, 1987, File No. 1-8233.
Exhibit 4B Indenture dated as of October 15, 1986, between USF&G Corporation and Chemical Bank (Delaware). Incorporated by reference to Exhibit 4.1 to the Registrant's Form 10-Q for the quarter ended September 30, 1986, File No. 1-8233.
Exhibit 4C Officer's certificate dated November 19, 1986, classifying 8 7/8% Notes of USF&G Corporation. Incorporated by reference to Exhibit 4.1 to the Registrant's Form 8-K dated November 19, 1986, File No. 1-8233.
Exhibit 4D Bond issuance and payment agreement dated November 16, 1987, for Swiss Franc Public Issue of 5 1/2% Bonds 1988-1996 of Swiss Francs 120,000,000. Incorporated by reference to Exhibit 4M to the Registrant's Form 10-K for the year ended December 31, 1987, File No. 1-8233.
Exhibit 4E Indenture dated as of January 28, 1994, between USF&G Corporation and Chemical Bank.
Exhibit 4F Form of Note dated March 3, 1994, for Zero Coupon Convertible Subordinated Notes due 2009. Incorporated by reference to Exhibit 4 to the Registrant's Form 8-K dated March 3, 1994, File No. 1-8233.
Exhibit 10A Credit Agreement dated as of March 20, 1990, as amended on April 15, 1991, among USF&G Corporation, Morgan Guaranty Trust Company of New York, and Swiss Bank Corporation as agents. Incorporated by reference to Exhibit 4F to the Registrant's Form 10-K for the year ended December 31, 1991, File No. 1-8233.
Exhibit 10B Stock Option Plan of 1987. Incorporated by reference to Exhibit 4.1 to the Registrant's Form S-8 dated July 28, 1987, File No. 33-16111.
Exhibit 10C Employment Agreement dated November 20, 1990, between the Registrant and Norman P. Blake, Jr. Incorporated by reference to Exhibit 10A to the Registrant's Form 10-K for the year ended December 31, 1990, File No. 1-8233.
Exhibit 10D USF&G Supplemental Executive Retirement Agreement between the Registrant and Norman P. Blake, Jr., dated November 20, 1990. Incorporated by reference to Exhibit 10B to the Registrant's Form 10-K for the year ended December 31, 1990, File No. 1-8233.
Exhibit 10E Stock Option Plan of 1990. Incorporated by reference to Exhibit 4 to the Registrant's Form S-8 Registration Statement as filed December 7, 1990, File No. 33-38113. Certified Copy of the Board Resolution adopted on December 6, 1990, amending the Stock Option Plan of 1990. Incorporated by reference to Exhibit 10G to the Registrant's Form 10-K for the year ended December 31, 1990, File No. 1-8233.
USF&G Corporation Part IV
Exhibit 10F Description of Management Incentive Plan. Incorporated by reference to Exhibit 10J to the Registrant's Form 10-K for the year ended December 31, 1990, File No. 1-8233.
Exhibit 10G Description of Long-Term Incentive Compensation Plan. Incorporated by reference to Exhibit 10K to the Registrant's Form 10-K for the year ended December 31, 1990, File No. 1-8233.
Exhibit 10H Stock Incentive Plan of 1991. Incorporated by reference to Exhibit 4(a) to the Registrant's Form S-8 Registration Statement as filed February 11, 1992, File No. 33-45664.
Exhibit 10I Form of Stock Option Agreement used in connection with the Stock Option Plan of 1987, Stock Option Plan of 1990, and Stock Incentive Plan of 1991.
Exhibit 10J 1993 Stock Plan for Non-Employee Directors. Incorporated by reference to Exhibit 10N to the Registrant's Form 10-K for the year ended December 31, 1992, File No. 1-8233.
Exhibit 10K Employment Agreement dated November 10, 1993, between the Registrant and Norman P. Blake, Jr.
Exhibit 10L Stock Option Agreement dated November 10, 1993, between the Registrant and Norman P. Blake, Jr.
Exhibit 10M Stock Option Agreement dated November 10, 1993, between the Registrant and Norman P. Blake, Jr.
Exhibit 10N Waiver dated November 10, 1993, between the Registrant and Norman P. Blake, Jr.
Exhibit 10O First Amendment to USF&G Supplemental Executive Retirement Agreement between the registrant and Norman P. Blake, Jr. dated November 10, 1993.
Exhibit 10P Letter dated November 19, 1992, describing Employment Arrangement between the Registrant and Gary C. Dunton.
Exhibit 10Q USF&G Supplemental Retirement Plan.
Exhibit 11 Computation of ratio of consolidated earnings to fixed charges and preferred stock dividends.
Exhibit 12 Computation of earnings per share.
Exhibit 13 1993 Annual Report to Shareholders.
Exhibit 21 Subsidiaries of the registrant.
Exhibit 23 Consent of independent auditors.
Exhibit 28 Information from reports furnished to state insurance regulatory authorities.
All other exhibits specified by Item 601 of Regulation S-K are not required pursuant to the related instructions or are inapplicable and, therefore, have been omitted.
(b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter 1993. The registrant filed a Form 8-K on February 14, 1994, reporting under Item 5, Other Events, audited financial statements for the year ended December 31, 1993, and a related Management's Discussion and Analysis, and other related financial information. The registrant filed a Form 8-K March 3, 1994, reporting under Item 5, Other Events, related to the sale of Zero Coupon Subordinated Notes.
USF&G Corporation Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
USF&G CORPORATION
BY NORMAN P. BLAKE, JR. Norman P. Blake, Jr.
Chairman of the Board, President, and Chief Executive Officer
Dated at Baltimore, Maryland March 30, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Principal Executive Officer:
NORMAN P. BLAKE, JR. Norman P. Blake, Jr.
Chairman of the Board, President, Chief Executive Officer, and Director
Principal Financial and Accounting Officer:
DAN L. HALE Dan L. Hale
Executive Vice President and Chief Financial Officer
Dated at Baltimore, Maryland March 30, 1994
Directors
H. FURLONG BALDWIN ROBERT J. HURST H. Furlong Baldwin Robert J. Hurst
MICHAEL J. BIRCK WILBUR G. LEWELLEN Michael J. Birck Wilbur G. Lewellen
GEORGE L. BUNTING, JR. HENRY A. ROSENBERG, JR. George L. Bunting, Jr. Henry A. Rosenberg, Jr.
ROBERT E. DAVIS LARRY P. SCRIGGINS Robert E. Davis Larry P. Scriggins
RHODA M. DORSEY ANNE MARIE WHITTEMORE Rhoda M. Dorsey Anne Marie Whittemore
DALE F. FREY GEORGE S. WILLS Dale F. Frey George S. Wills
ROBERT E. GREGORY, JR. Robert E. Gregory, Jr.
USF&G Corporation Schedule I. Summary of Investments - Other Than Investments in Related Parties
USF&G Corporation Schedule III. Condensed Financial Information of Registrant - Statement of Financial Position (Parent Company)
USF&G Corporation Schedule III. Condensed Financial Information of Registrant - Statement of Operations (Parent Company)
USF&G Corporation Schedule III. Condensed Financial Information of Registrant - Statement of Cash Flows (Parent Company)
Note to Condensed Financial Statements The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto of the 1993 Annual Report to Shareholders incorporated herein by reference. Certain amounts have been reclassified to conform to the 1993 presentation. The parent company's provision for income taxes is based on the Corporation+s consolidated federal income tax allocation policy.
USF&G Corporation Schedule V. Supplementary Insurance Information
USF&G Corporation Schedule VI. Reinsurance
USF&G Corporation Schedule IX. Short-Term Borrowings
USF&G Corporation Schedule X. Supplemental Information Concerning Consolidated Property/Casualty Insurance Operations