Annual Report (Form 10-K), fiscal year 1994

Item 1. Description of Business 1.1. GENERAL USF&G Corporation (the "Corporation") is a holding corporation organized in 1981 as a Maryland corporation. United States Fidelity and Guaranty Company ("USF&G Company"), organized in 1896 under Maryland law, is the predecessor registrant of the Corporation. The term "Corporation" as used in the Form 10-K refers to the Corporation and all of its subsidiaries. As of December 31, 1994, the Corporation had approximately 6,300 employees.
The Corporation, through its subsidiaries, is primarily engaged in the business of insurance. Property/casualty insurance is its primary business. USF&G Company, the Corporation's largest subsidiary, is the 24th largest property/casualty insurer among over 2,400 insurers in the United States based on 1993 statutory net premiums written. Life insurance and annuity products are sold by Fidelity and Guaranty Life Insurance Company ("F&G Life"). Noninsurance operations are composed of the parent company, asset management, and management consulting services.
1.2. BUSINESS SEGMENTS Financial information about the Corporation's business segments is set forth in Note 14 of the Notes to Consolidated Financial Statements in the Corporation's 1994 Annual Report to Shareholders (hereinafter referred to as "Consolidated Financial Statements") and incorporated herein by reference. A description of the Corporation's principal business segments begins with the Property/Casualty Insurance Segment on page 1, and continues with the Life Insurance Segment on page 4, and Parent and Noninsurance Operations on page 5 of this Form 10-K.
1.2a. Property/Casualty Insurance Segment USF&G Company currently underwrites most forms of property/casualty insurance. USF&G Company's property/casualty business is grouped into four business categories: commercial, personal, reinsurance, and fidelity/surety. In 1994, the property/casualty segment accounted for 84 percent of the Corporation's total revenues and 67 percent of its total assets. Selected financial data for the property/casualty insurance segment are as follows:
(dollars in millions) 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 Operating Results: Premiums earned $2,283 $2,327 $2,533 $3,018 $3,330 $3,532 $3,613 $3,746 $3,539 $2,962 Losses and loss expenses 1,691 1,758 2,088 2,545 2,763 2,732 2,648 2,734 2,765 2,623 Underwriting expenses 792 796 872 988 1,089 1,136 1,129 1,108 1,049 920 Underwriting loss $(200) $(227) $(427) $(515) $(522) $(336) $(164) $(96) $(275) $(581) Net investment income $423 $433 $475 $498 $576 $623 $621 $607 $565 $348 Net income (loss) 493 281 193 (40) (192) 200 318 331 310 (116) Financial Position: Investments $6,300 $6,916 $6,948 $7,599 $6,983 $7,479 $7,416 $6,649 $6,026 $4,997 Assets 9,281 9,565 8,253 9,353 8,959 9,443 9,294 8,483 7,772 6,775 Unpaid losses and loss expenses* 6,100 6,329 5,540 5,704 5,630 5,461 5,256 4,774 4,112 3,521
Operating Ratios-GAAP: Loss ratio 74.0 75.6 82.4 84.3 83.0 77.3 73.3 73.0 78.1 88.6 Expense ratio 34.7 34.2 34.4 32.7 32.7 32.2 31.2 29.6 29.6 31.0 Combined ratio 108.7 109.8 116.8 117.0 115.7 109.5 104.5 102.6 107.7 119.6 Statutory Data: Premiums written $2,312 $2,429 $2,420 $3,032 $3,631 $3,698 $3,892 $3,845 $3,696 $3,151 Policyholders' surplus (USF&G Company) 1,566 1,541 1,467 1,404 1,352 1,417 1,395 1,242 1,240 913
Operating Ratios-Statutory: Loss ratio 73.1 75.4 82.0 84.1 81.9 76.5 73.1 73.2 79.1 90.7 Expense ratio 35.0 33.7 34.9 33.1 32.9 32.8 31.1 30.1 29.1 30.0 Combined ratio 108.1 109.1 116.9 117.2 114.8 109.3 104.2 103.3 108.2 120.7
Policyholders' dividend ratio .3 .3 .3 .5 .5 .6 .6 .9 .8 1.0
*USF&G adopted SFAS No. 133 in 1993 which requires the effects of reinsurance activity to be reported on a gross basis. Prior to 1993 information presented for property/casualty insurance segment is net of applicable reinsurance amounts.
USF&G Company reinsures portions of its policy risks with other insurance companies or underwriters and remains contingently liable under these contracts (ceded reinsurance). In addition, it assumes policy risks from other insurance companies and through participation in pools and associations (assumed reinsurance). (Refer to the Assumed Reinsurance Category discussion on page 3 of this Form 10-K.)
Ceded reinsurance allows USF&G Company to obtain indemnification against losses associated with insurance contracts it has written by entering into a reinsurance contract with another insurance enterprise (the reinsurer). USF&G Company pays (cedes) an amount to the reinsurer who agrees to reimburse USF&G Company for a specified portion of any claims paid on business under the reinsured contracts. Reinsurance gives USF&G Company the ability to write certain individually large risks or groups of risks, and control its exposure to losses by ceding a portion of such large risks. USF&G Company's ceding reinsurance agreements are generally structured on a treaty basis whereby all risks meeting a certain criteria are automatically reinsured.
USF&G Company may also use supplemental facultative reinsurance based on an underwriter's evaluation of characteristics of a specific insured risk. The following table summarizes the approximate extent of the Company's reinsurance coverages.
Coverage Risk Type Percentage Retention Coverage Property Cat Program (a) 95% $75 million $140 million Property Per Risk (b) 100 Variable 50 million Fidelity 100 2 million 13 million Surety (c) 100 5 million 30 million Workers' Compensation (d) 100 1 million 525 million Commercial Umbrella 100 15 million 5 million
(a) Second Event Coverage purchased lowers retention to $50 million for second catastrophe. (b) Retention of individual property losses are $1 million, but can be increased to $4 million subject to underwriting criteria. (c) Represents limits at December 31, 1994. Fourth layer canceled for 1995, reducing limit to $25 million. (d) Represents limits at December 31, 1994. Accident and Health Workers' Compensation Catastrophe Coverage canceled for 1995, reducing limit to $425 million.
Commercial Category: Commercial coverages provide protection related to property loss, liability claims and workers' compensation benefits to businesses and other institutions. This type of insurance protects against loss from damage to the insured's covered properties and protects against legal liability for injuries to other persons or damage to their property arising from the insured's business operations. Workers' compensation provides benefits to employees, as mandated by state laws, for employment-related accidents, injuries or illnesses. Selected data for the commercial category are as follows:
(dollars in millions) 1994 1993 1992 Automobile: Premiums written $376 $391 $413 Statutory combined ratio 86.6 86.9 96.5 General Liability: Premiums written $352 $365 $366 Statutory combined ratio 133.3 118.9 137.6 Property: Premiums written $329 $326 $315 Statutory combined ratio 111.8 100.0 115.6 Workers' Compensation: Premiums written $142 $165 $261 Statutory combined ratio 151.6 232.2 150.0 Total Commercial: Premiums written $1,199 $1,247 $1,355 Underwriting loss* (186) (223) (343) Percent of total premiums written 52% 51% 56% GAAP Underwriting Ratios: Loss ratio 78.1 83.0 87.8 Expense ratio 37.5 35.3 35.4 Combined ratio 115.6 118.3 123.2 Statutory Underwriting Ratios: Loss ratio 78.1 83.0 86.9 Expense ratio 36.2 34.4 36.3 Combined ratio 114.3 117.4 123.2
*Reported in accordance with Generally Accepted Accounting Principles ("GAAP")
Personal Category: Personal coverages for automobile and homeowners insurance include aspects of property loss and liability risks. Automobile policies cover liability to third-parties for bodily injury and property damage, and cover physical damage to the insured's own vehicle resulting from collision and various other perils. Homeowners policies protect against loss of dwellings and contents arising from a variety of perils, as well as liability arising from ownership or occupancy. Selected data for the personal category are as follows:
(dollars in millions) 1994 1993 1992 Automobile: Premiums written $402 $493 $512 Statutory combined ratio 99.6 99.9 103.5 Homeowners: Premiums written $124 $139 $169 Statutory combined ratio 150.2 115.4 143.0 Other Property: Premiums written $38 $26 $45 Statutory combined ratio 105.2 131.4 110.0 Total Personal: Premiums written $564 $658 $726 Underwriting loss* (60) (28) (110) Percent of total premiums written 24% 27% 30% GAAP Underwriting Ratios: Loss ratio 74.2 70.6 80.9 Expense ratio 36.3 33.5 33.1 Combined ratio 110.5 104.1 114.0 Statutory Underwriting Ratios: Loss ratio 74.2 70.7 80.0 Expense ratio 36.8 33.7 33.2 Combined ratio 111.0 104.4 113.2 *Reported in accordance with GAAP
Assumed Reinsurance Category: USF&G Company operates a separate reinsurance division which underwrites treaty reinsurance and is composed of various wholly- owned subsidiaries. The lead company in this group, F&G Re, Inc., acts as the reinsurance underwriting manager and solicits and services assumed reinsurance for USF&G Company. F&G Re, Inc., writes reinsurance in North America and in specific foreign countries (mainly in Western Europe and Japan). Reinsurance prices and conditions are not normally subject to the same state regulation applicable to the primary insurance market because reinsurers contract solely with other insurance companies. Selected data for the reinsurance category are as follows:
(dollars in millions) 1994 1993 1992 Premiums written $415 $403 $243 Underwriting gain* 40 32 20 Percent of total premiums written 18% 17% 10% GAAP Underwriting Ratios: Loss ratio 73.2 66.7 75.0 Expense ratio 16.5 22.6 12.1 Combined ratio 89.7 89.3 87.1 Statutory Underwriting Ratios: Loss ratio 67.9 67.3 76.9 Expense ratio 22.7 24.6 17.0 Combined ratio 90.6 91.9 93.9 *Reported in accordance with GAAP
Fidelity/Surety Category: Fidelity bonds indemnify employers against the dishonesty or default of employees in their employment. These types of bonds are written for mercantile businesses, financial institutions, and public officials. Surety bonds guarantee the performance of a principal who undertakes contractual or statutory obligations, and indemnify third-party obligees for damages caused by the principal's failure to perform. Selected data for the fidelity/surety category are as follows:
(dollars in millions) 1994 1993 1992 Fidelity: Premiums written $21 $19 $18 Statutory combined ratio 74.5 108.8 75.8 Surety: Premiums written $113 $102 $91 Statutory combined ratio 93.8 105.8 100.1 Total Fidelity/Surety: Premiums written $134 $121 $109 Underwriting gain (loss)* 6 (8) 6 Percent of total premiums written 6% 5% 4% GAAP Underwriting Ratios: Loss ratio 36.7 50.2 32.3 Expense ratio 57.9 56.6 62.6 Combined ratio 94.6 106.8 94.9 Statutory Underwriting Ratios: Loss ratio 36.7 50.2 32.0 Expense ratio 54.2 56.0 64.0 Combined ratio 90.9 106.2 96.0 *Reported in accordance with GAAP
1.2b. Life Insurance Segment The life insurance segment ("F&G Life") sells many forms of annuity and life insurance products. In 1994, F&G Life segment accounted for 15 percent of the Corporation's total revenues and 33 percent of its total assets. Selected financial data for the life insurance segment are as follows:
(dollars in millions) 1994 1993 1992 1991 1990 1989 1988 1987 1986 1985 Operating Results: Premium income $152 $129 $104 $169 $186 $165 $178 $133 $79 $67 Net investment income 317 321 349 370 348 273 159 88 67 50 Net income (loss) 12 10 (5) 31 (16) 31 14 37 20 27 Life Insurance Sales: Annuities $274 $199 $144 $266 $1,032 $934 $962 $221 $67 $104 Permanent 9 4 9 12 17 20 106 51 10 9 Term and group 3 2 2 2 5 6 9 6 6 6 Total $286 $205 $155 $280 $1,054 $960 $1,077 $278 $83 $119 Financial Position: Investments $4,202 $4,540 $4,512 $4,672 $4,308 $3,372 $2,240 $1,086 $707 $535 Assets 4,575 4,848 4,856 5,012 4,721 3,645 2,471 1,194 784 607 Policy benefit reserves 3,804 3,973 3,896 3,773 3,924 2,838 1,875 795 501 402 Statutory surplus 326 316 310 283 254 245 169 107 82 56 Life Insurance in Force: Permanent $6,348 $6,733 $6,769 $6,937 $7,014 $6,038 $4,930 $3,979 $3,035 $2,228 Term 5,467 5,347 5,549 5,854 6,463 6,438 6,603 6,579 6,648 6,338 Group 27 30 42 586 4,373 4,605 4,058 2,834 2,687 2,737 Total $11,842 $12,110 $12,360 $13,377 $17,850 $17,081 $15,591 $13,392 $12,370 $11,303
F&G Life Products: Life insurance and annuity sales (premiums and deposits) by product type are as follows:
(in millions) 1994 1993 1992 Structured settlement annuities $88 $66 $37 Single premium deferred annuities 82 44 33 Tax-sheltered annuities 63 35 - Other annuities 41 54 74 Life insurance 12 6 11 Total $286 $205 $155
Single premium deferred annuities ("SPDAs") offer the owner the option of receiving a lump sum distribution at a future date or a series of fixed payments over a specified period. Tax-sheltered annuity ("TSA") products, which provide retirement income, are a type of deferred annuity. Other annuities consist of single premium immediate annuities ("SPIAs"), which provide for payments that begin within one year after the sale and continue over a fixed period or an individual's lifetime. Structured settlements are immediate annuities principally sold through the property/casualty company in settlement of insurance claims.
Other insurance products include recurring and single premium universal life and term insurance that generally provide a fixed benefit upon the death of the insured. These products were sold on an individual and group basis. However, F&G Life sold its group life business in 1991. Universal life insurance provides a death benefit for the life of the insured and accumulates cash values to which interest is credited. Term life insurance provides a fixed death benefit if the insured dies during the contractual period.
Universal life products, which represent all the permanent life insurance sales in 1992 through 1994, and have been the majority of permanent life insurance sales since 1988, also include a cash value component that is credited with interest at competitive rates. The interest rates are applied to premiums for one year from receipt; new rates are declared quarterly on recurring premium policies and semi-monthly on single premium policies. Universal life cash values are charged for the cost of life insurance coverage and for administrative expenses. Additional information on the F&G Life's products is discussed on page 21 of Management's Discussion and Analysis of Financial Condition and Results of Operations.
1.2c. Parent and Noninsurance Operations Selected financial data for the parent company and noninsurance operations are as follows:
(in millions) 1994 1993 1992 Revenues before realized gains: Management consulting $32 $32 $30 Oil and gas - - 19 Other noninsurance investments 24 10 4 Parent 20 8 14 Total revenues before realized gains$76 $50 $67 Parent company expenses: Interest expense $(34) $(37) $(35) Unallocated expense, net (48) (35) (34) Noninsurance gains (losses): Management consulting 1 (2) (4) Oil and gas - - (18) Other noninsurance investments 2 (9) (13) Facilities exit costs (211) - - Realized gains (losses) on investments 14 (45) (50) Restructuring charges - - (2) Loss from discontinued operations - - (7) Other 3 2 3 Total parent/noninsurance net loss$(273) $(126) $(160)
The parent company performs corporate functions including managing the capital requirements of the Corporation and its subsidiaries. The noninsurance operations include management consulting services, asset management services, and discontinued operations. As a result of restructuring, there were no oil and gas operating losses in 1994 and 1993. During 1992, the investment in oil and gas properties was merged with another oil and gas exploration and production company. Discontinued operations included certain investment management, leasing, marketing, and travel services, and other noninsurance operations. During 1994, the Corporation committed to a plan to consolidate its home office operations in Baltimore, Maryland at its Mount Washington facility. The parent company recognized facilities exit costs of $211 million representing the present value of the rent and other operating expenses to be incurred under the lease on the Corporation's principal office building from the time USF&G vacates the building through the expiration of the lease in 2009. (Refer to Note 6 of the Notes to Consolidated Financial Statements in the Corporation's 1994 Annual Report to Shareholders.)
1.3. DISTRIBUTION SYSTEMS
The Corporation's subsidiaries market a full range of property/casualty insurance and life insurance products.
Property/Casualty Insurance: USF&G Company's products have been sold exclusively by independent agents since its founding in 1896. Independent agents generally represent multiple insurance companies. USF&G Company's products are sold through approximately 3,800 independent agencies in the United States on a commission basis.
As of December 31, 1994, USF&G Company maintained 5 regional offices and 30 branch offices to service its independent agents and policyholders. The regional offices are located in the Northeast, Southeast, Midwest, and Western areas, and in Mississippi. The branch offices are located throughout the United States. These offices support the administration of underwriting standards, the delivery of policies, and the supervision of the Company's claim offices. In the first quarter of 1995, the Company eliminated the Midwest regional office and consolidated its business into the other regional offices. This measure was taken to save expenses as well as increase efficiency of operations.
Life Insurance: F&G Life's sales by distribution system are as follows:
(in millions) 1994 1993 1992 Direct-structured settlements $88 $66 $37 Property/casualty brokerage 48 49 67 National brokerage 46 14 - National wholesaler 71 39 - Other 33 37 51 Total $286 $205 $155
Structured settlements are annuities sold predominantly through the property/casualty company in settlement of certain of its insurance claims. Tax-sheltered annuities are sold through a national wholesale distribution network primarily to teachers. SPDAs are sold primarily through independent agents and insurance brokers. Prior to 1992, most SPDAs were sold through securities brokerage firms (New York Stock Exchange member firms and other financial institutions).
1.4. COMPETITION Property/Casualty Insurance: The property/casualty insurance industry is highly competitive with about 2,400 companies nationwide. These insurers are not only stock companies, but also mutual companies and other underwriting organizations. USF&G Company ranked 24th in the industry, based on 1993 statutory net premiums written and 23rd based on 1993 statutory policyholders' surplus. USF&G Company competes with other property/casualty insurance companies whose products are distributed through national, regional and local independent agencies, direct sales and brokers. Consumers may also use self-insurance, which includes captive insurance subsidiaries.
Pricing is a primary means of competition in the property/casualty industry. The industry is currently in a period of significant price competition, which adversely affects USF&G Company's profitability. Availability and quality of products, quality and speed of service (including claims service), financial strength, distribution systems and technical expertise are also important elements of competition. In personal and other lines offered by USF&G Company, significant price competition is experienced from direct-writing companies that do not use independent agents and generally have lower policy acquisition costs.
Life Insurance: The Corporation's life insurance subsidiaries operate in a competitive environment, with approximately 1,300 companies in the industry including stock and mutual companies. F&G Life ranked 86th in the United States based on 1993 statutory assets and 97th based on 1993 statutory capital and surplus.
In the life insurance industry, interest crediting rates, policy features, financial stability and service quality are important competitive factors. F&G Life's products compete not only with those offered by other life insurance companies, but also with other income accumulation-oriented products offered by other financial institutions. F&G Life has experienced considerable competitive pressure in recent periods as a result of its relatively lower credit ratings. Competitive pressures for agency business also have intensified in recent years because of an increase in the variety of products available in the market and efforts of competitors to expand their market shares.
Premium Rates: Most states have laws requiring that rate schedules and other information be filed with a regulatory authority for substantially all property, casualty, and surety lines. Some states permit insurers to use rates without prior regulatory approval whereas other states prohibit implementation of new rates without such approval. The authority may disapprove a filing if it finds that the rates are inadequate, excessive, or unfairly discriminatory. Rates are not necessarily uniform for all insurers. In states that require prior approval of rates, regulators usually require the submission of historical data to justify rate increases and, accordingly, there is often a time lag between identifying the need for rate increases and securing such increases. The effect of this lag is particularly severe in times of rising claims and inflation. Rates for life insurance are generally not regulated.
1.5. INVESTMENTS Investing the net cash flows from operations is a major aspect of the property/casualty and life insurance businesses. The components of the Corporation's investment portfolio and investment performance are discussed on pages 23 through 27, 43 through 45, 48 and 49 of the 1994 Annual Report to Shareholders, which pages are incorporated herein by reference.
1.6. PROPERTY/CASUALTY LOSS RESERVES 1.6a. General The reserve liabilities for property/casualty losses and loss expenses represent estimates of the ultimate net cost of all unpaid losses and loss adjustment expenses incurred through December 31 of each year. The reserves are determined using adjusters' individual case estimates and actuarially based statistical projections.
USF&G Company's estimates of losses for reported claims are established judgmentally on an individual case basis. Such estimates are based on a claim adjuster's particular expertise with the type of risk involved and knowledge of circumstances surrounding the individual claims. These estimates are reviewed on a regular basis and updated as additional facts become known.
The reserves derived from statistical projections are subject to the effects of trends in claim severity and frequency. Statistical projections are employed in three specific areas: 1) to calculate bulk reserves for incurred but not reported ("IBNR") losses and provide for development of case basis loss reserves; 2) to calculate allocated loss expense reserves; and 3) to calculate unallocated loss expense reserves.
IBNR and Case Development Reserves: USF&G Company's estimates of IBNR and case development reserves are derived from analyses of historical patterns of development of paid and reported losses by accident year for each line of business. The loss projection procedures used in this analysis contain explicit provisions for quantifying the effect of inflation on loss payments expected to be made in the future. This process relies on the basic assumption that past experience adjusted for the effect of current developments and likely trends is an appropriate basis for predicting future events.
Loss Expense: USF&G Company's estimates of unpaid loss expenses are based on analyses of the long-term relationship of projected ultimate loss expense to projected ultimate losses for each line of business. By using incurred losses as a base, inflation assumptions applicable to loss reserves apply equally to allocated expense reserves.
Unallocated Loss Expense: Unallocated loss expense reserves are based on historical relationships of paid unallocated expenses to paid losses. As with allocated loss expenses, the inflation assumptions applicable to loss reserves are presumed to apply equally to unallocated expense reserves.
The process of estimating the liability for unpaid losses and loss expenses is inherently judgmental. The process is influenced by factors which are subject to significant variation. Possible sources of variation include changing rates of inflation (particularly medical cost inflation) as well as changes in other economic conditions, the legal system and internal claims settlement practices, among other variables. In many cases significant periods of time may lapse between the occurrence of an insured event, the reporting of a claim to USF&G Company and USF&G Company's final settlement of the claim. More than 46 percent of USF&G Company's loss and loss expense reserves are provided for claims which have been incurred but not reported and for future development on reported claims. While USF&G Company reports a single amount as the estimate for unpaid loss and loss expenses as of each valuation date, the reported reserves should be considered the best estimate from a range of possible outcomes. It is unlikely that future losses and loss expenses will develop exactly as projected and may in fact vary significantly from projections. These estimates are continually reviewed and updated as experience develops and new information becomes known. Any resulting adjustments are reflected in current operating results.
1.6b. Discounted Loss Reserves The reserves for permanent-total disability benefits and long-term medical care benefits under workers' compensation insurance are discounted at rates of interest generally ranging from 3 percent to 5 percent. The carrying amount of such workers' compensation reserves, net of reinsurance and net of discount, was $1.60 billion, $1.75 billion, and $1.80 billion at December 31, 1994, 1993, and 1992, respectively. The discount is amortized over the expected lifetimes of the claimants. Discounted reserves come from three sources: reserves assumed from the Workers' Compensation Reinsurance Bureau (WCRB), reserves assumed from residual market pools, and reserves for USF&G Company's net retained business.
(in millions) 1994 1993 1992 Estimated discount, January 1 $508 $680 $683 Estimated (reduction) additional discount accrued (32) (138) 29 Estimated discount amortized (35) (34) (32) Estimated discount, December 31 $441 $508 $680
The source of the negative discount accrual of $32 million in 1994 results from an acceleration in the underlying payment pattern of workers' compensation claims. An increase in the use of structured settlements to resolve claims is the primary factor affecting the change in the payment stream. The source of the negative discount accrual of $34 million in 1993 results from the WCRB commutation and the concurrent reduction in discount rates. Additionally, the discount was reduced by a redistribution of reserves to states and re-apportionment on reserves assumed from residual market pools.
1.6c. Roll-Forward of Liability for Loss and Loss Expenses The following table reconciles the changes in loss and loss expense reserves for the years presented.
(in millions) 1994 1993 1992 Net balance at January 1 $5,276 $5,540 $ 5,704 Related To: Current year 1,696 1,696 2,010 Prior years (5) 62 78 Total incurred 1,691 1,758 2,088 Paid Related To: Current year 613 562 684 Prior years 1,270 1,460 1,568 Total paid 1,883 2,022 2,252 Net balance at December 31 $5,084 $5,276 $5,540 Plus reinsurance recoverables 1,016 1,053 N/A Total reserve at end of year, gross$6,100 $6,329 $5,540
1.6d. Analysis of Loss and Loss Expense Reserve Development The following table shows property/casualty loss reserves net of ceded reinsurance as recorded in the indicated years, subsequent payments made with respect to such reserves and re-estimates of such reserves. The top line shows the estimated liability that was recorded at the end of each of the indicated years for all current and prior year unpaid losses and loss expenses. The upper portion of the table shows the cumulative amount subsequently paid in succeeding years. The lower portion of the table shows re-estimates of the original recorded reserve as of the end of each successive year. Such re-estimations result from development of additional facts and circumstances pertaining to unsettled claims. The bottom line shows the dollar amount of the cumulative change through 1994 that is attributable to the original recorded reserve for each prior year. Such change has been reflected in income of subsequent years.
A new table, added in 1994, provides data gross of ceded reinsurance for the carried reserve at year ends 1993 and 1994 and the development of the year end 1993 reserve. This information immediately follows the Analysis of Net Loss and Net Loss Expense Reserve Development Table. Additional years of development will be added to the gross of ceded reinsurance table until it reaches the dimensions of the original table.
Conditions and trends that have affected reserve development in the past have changed and may not necessarily occur in the future. Therefore, care should be exercised in extrapolating future reserve redundancies or deficiencies from such development.
Analysis of Net Loss and Net Loss Expense Reserve Development*
At December 31
(in millions) 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Liability for unpaid losses and loss expenses 2,817 3,510 4,089 4,741 5,204 5,461 5,630 5,704 5,540 5,276 5,084 Cumulative paid as of: One year later 1,027 1,251 1,347 1,373 1,537 1,719 1,650 1,568 1,460 1,270 Two years later 1,659 2,040 2,163 2,256 2,611 2,789 2,740 2,524 2,379 Three years later 2,131 2,557 2,777 3,030 3,347 3,587 3,411 3,214 Four years later 2,451 2,971 3,313 3,548 3,935 4,049 3,922 Five years later 2,708 3,362 3,639 3,990 4,261 4,429 Six years later 2,947 3,595 3,863 4,237 4,538 Seven years later 3,112 3,759 4,055 4,454 Eight years later 3,243 3,918 4,233 Nine years later 3,368 4,068 Ten years later 3,497 Liability reestimated: One year later 3,131 3,696 4,208 4,881 5,233 5,673 5,759 5,782 5,602 5,271 Two years later 3,249 3,914 4,443 4,941 5,481 5,794 5,899 5,911 5,623 Three years later 3,384 4,168 4,585 5,107 5,562 5,954 6,143 5,963 Four years later 3,563 4,341 4,721 5,285 5,757 6,239 6,209 Five years later 3,696 4,457 4,916 5,440 6,025 6,325 Six years later 3,778 4,631 5,048 5,698 6,121 Seven years later 3,932 4,743 5,278 5,786 Eight years later 4,039 4,954 5,364 Nine years later 4,220 5,032 Ten years later 4,288 Cumulative (deficiency) excess (1,471)(1,522)(1,275)(1,045) (917) (864) (579) (259) (83) 5
*Certain reserves are recorded on a discounted basis to reflect the value of timing differences between the recording of reserves and subsequent payment. The amortization of that discount is included in the reserve deficiencies shown above.
The net development table shows a $5 million decrease in the current year on prior year incurred loss and loss expenses net of ceded reinsurance. Although the overall development is flat, there are a number of offsetting occurrences. Adverse development resulted from discount amortization in workers' compensation and reserve strengthening in general liability for environmental and asbestos liabilities. The adverse development was offset by favorable development in both personal and commercial auto liability.
A decrease of $15 million in the current year on prior year incurred loss and loss expenses gross of ceded reinsurance is shown on the gross development table. The gross development table shows more favorable development than the net development table due to favorable development on losses ceded to reinsurers.
Effect of Reserve Reestimations on Calendar Year Operations (increase) decrease in reserves
Total by (in millions) Accident 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 Year Accident Years 1984 & Prior(314) (118) (135) (179) (133) (82) (154) (107) (181) (68)(1,471) 1985 - (68) (83) (75) (40) (34) (21) (5) (30) (10) (366) 1986 - - 99 19 31 (20) (20) (20) (19) (8) 62 1987 - - - 95 82 (30) 17 (23) (28) (2) 111 1988 - - - - 31 (82) 97 (40) (10) (8) (12) 1989 - - - - - 36 (40) 35 (17) 10 24 1990 - - - - - - (7) 21 41 20 75 1991 - - - - - - - 61 115 14 190 1992 - - - - - - - - 67 31 98 1993 - - - - - - - - - 26 26 Total by calendar year (314) (186) (119) (140) (29) (212) (128) (78) (62) 5 (1,263)
In the table above all entries are shown net of ceded reinsurance. Each column total shows reserve reestimates made in the indicated calendar year for each accident year. Adverse development on accident years prior to 1986 is primarily attributable to workers' compensation discount amortization and environmental and asbestos reserve strengthening is concentrated in the older accident years. Ongoing review of automobile liability reserves indicates more favorable projections of ultimate incurred loss than previously recognized on accident years 1991 and subsequent.
1.6e. Loss Portfolio Transfers Also included in the table "Analysis of Net Loss and Net Loss Expense Reserve Development" are various loss portfolio transfer transactions. These transactions are reinsurance contracts that do not involve the same type of risk as traditional reinsurance. In a loss portfolio reinsurance contract, USF&G Company assumes another insurer's outstanding loss reserves for a price equal to their discounted value plus a fee. These contracts generally provide for fixed loss payments at specified future dates. The financial risk involved is whether the investment income earned on the cash received will cover the discount associated with the losses assumed. This financial risk is controlled by the Corporation's asset/liability management techniques, which involve matching the maturities of the investment portfolio to expected patterns of future claim and benefit payments.
Loss portfolio transfers have had no impact on reported reserve deficiencies and no future loss development, either adverse or favorable, is anticipated. Loss portfolio transfers included in outstanding reserves were as follows:
(in millions) 1994 $86 1993 110 1992 123 1991 279 1990 324 1989 397 1988 394 1987 355
1.6f. Structured Settlements Structured settlements represent the settlement of claims through the purchase of annuities. While they result in accelerated claim payments, structured settlements generally reduce the ultimate amount of losses paid. Structured settlements are used primarily in the third-party liability and workers' compensation lines of business. These types of settlements were not used extensively on liability lines until 1985. Their use was extended to workers' compensation claims in 1987. The number of such settlements has grown steadily and they appear to be having an impact on claim payment patterns. USF&G Company has developed procedures to ensure that the impact of structured settlements is given appropriate recognition in estimating ultimate reserve liabilities.
1.6g. Reconciliation of Liability for Loss and Loss Expenses from SAP to GAAP The following table presents the differences between property/casualty insurance claim reserves reported in the Consolidated Financial Statements in accordance with generally accepted accounting principles ("GAAP"), and the consolidated annual statement filed with state insurance departments in accordance with statutory accounting practices ("SAP"):
At December 31 (in millions) 1994 1993 1992 SAP basis property/casualty reserves $4,817 $4,961 $5,361 Reserves of foreign subsidiaries (consolidated for GAAP but not SAP) 267 315 240 Estimated salvage and subrogation recoveries (primarily on property and surety lines, cash basis for SAP but accrual basis for GAAP until 1993), plus other material items - - (61) GAAP basis property/casualty reserves, net 5,084 5,276 5,540 Reinsurance receivable 1,016 1,053 N/A GAAP basis property/casualty reserves, gross 6,100 6,329 5,540 Reserves of life insurance subsidiaries, net 3,798 3,969 3,896 Reinsurance receivable 6 4 N/A Reserves of life insurance subsidiaries, gross 3,804 3,973 3,896 Total liability on GAAP basis $9,904 $10,302 $9,436
1.7. LIFE BENEFIT RESERVES Ordinary life insurance future policy benefit reserves are computed under the net level premium method using assumptions for future investment yields, mortality, and withdrawal rates. These assumptions reflect F&G Life's experience, modified to reflect anticipated trends, and provide for possible adverse deviation. Reserve interest rate assumptions are graded and range from 4.25 percent to 8.25 percent.
Universal life and annuity reserves are computed on the retrospective deposit method, which produces reserves equal to the cash value of the contracts. Such reserves are not reduced for charges that would be deducted from the cash value of policies surrendered. Reserves on single premium annuities with guaranteed payments are computed on the prospective deposit method, which produces reserves equal to the present value of future benefit payments.
The table below shows F&G Life's benefit reserves by policy type.
At December 31 (in millions) 1994 1993 1992 Single premium annuities: Deferred $1,860 $2,138 $2,077 Immediate 867 815 788 Other annuities 492 462 508 Universal life/term/group life 579 554 523 Total, net $3,798 $3,969 $3,896 Reinsurance receivable 6 4 N/A Total, gross $3,804 $3,973 $3,896
1.8. GEOGRAPHICAL DISTRIBUTION The risks insured by the Corporation's insurance subsidiaries are geographically diversified primarily throughout the United States. The Corporation has established a subsidiary to market fidelity/surety insurance in Canada. Reinsurance risks are incurred throughout North America and specific foreign countries (mainly in Western Europe and Japan). The products marketed by the Corporation's management consulting subsidiary, a part of noninsurance operations, are distributed throughout the world. Total assets and revenues of foreign operations are not material. The tables below show the composition of statutory voluntary direct premiums written for the Corporation's property/casualty operations and statutory premium income of its life insurance operations by region for the year ended 1994.
Property/Casualty Voluntary Direct Premiums Written Northeast 29% Southeast 24 Midwest 21 West 18 Mississippi 8 Total 100%
Life Statutory Premium Income Northeast 41% Northwest 21 South 14 Southwest 13 Midwest 11 Total 100%
1.9. EXECUTIVE OFFICERS OF THE REGISTRANT
Positions and Office with Registrant or Name Age Significant Subsidiaries
Norman P. Blake, Jr. 53 Chairman of the Board, President, Chief Executive Officer, and Director
Glenn W. Anderson 42 Executive Vice President-Commercial Lines
Gary C. Dunton 39 Executive Vice President-Field Operations
Dan L. Hale 50 Executive Vice President-Chief Financial Officer
Kenneth E. Cihiy 48 Senior Vice President-Claim
Paul B. Ingrey 55 President-F&G Re, Inc.
Robert J. Lamendola 50 Senior Vice President-Fidelity/Surety
James R. Lewis 46 Senior Vice President-Personal Lines
Thomas K. Lewis, Jr. 42 Senior Vice President-Chief Information Officer
John A. MacColl 46 Senior Vice President-General Counsel and Senior Vice President-Human Resources
Andrew A. Stern 37 Senior Vice President-Strategic Planning, Corporate Marketing
Harry N. Stout 42 President-F&G Life
John C. Sweeney 50 Chairman-Falcon Asset Management, Inc. and Senior Vice President-Chief Investment Officer
All persons in the preceding table are officers of the Registrant except Glenn W. Anderson, Gary C. Dunton, Kenneth E. Cihiy, Robert J. Lamendola and James R. Lewis, who are executive officers of United States Fidelity and Guaranty Company (a wholly owned subsidiary of the Registrant); Paul B. Ingrey who is an executive officer of F&G Re, Inc.; and Harry N. Stout who is an executive officer of Fidelity and Guaranty Life Insurance Company.
Mr. Blake was Chairman and Chief Executive Officer of Heller International Corporation, a world-wide commercial financial services organization, and joined the Corporation in November 1990. Mr. Anderson was Vice President of Strategic Target Marketing with Fireman's Fund Insurance Company, a domestic insurance company, and joined the Corporation in December 1992. Mr. Dunton was Vice President and Division Manager of Standard Lines with Aetna Life and Casualty Company and joined the Corporation in December 1992. Mr. Hale was President and Chief Executive Officer of Chase Manhattan Leasing Company, an international leasing company, and joined the Corporation in February 1991. Mr. Cihiy was Resident Vice President of Sacramento Field Operations with Aetna Life and Casualty Company, an insurance and financial services company, and joined the Corporation in May 1993. Mr. Ingrey was Resident Vice President and Director of Prudential Reinsurance Company and joined the Corporation in October 1983. Mr. Lamendola was Managing Director of Marsh & McLennan, Inc. and joined the Corporation in June 1992. Mr. James R. Lewis was Senior Vice President and General Manager of CIGNA and joined the Corporation in October 1992. Mr. Thomas K. Lewis, Jr. was Vice President and General Manager for Europe, Middle East, and Africa for Seer Technologies, a joint venture of CS First Boston and IBM, and joined the Corporation in November 1993. Mr. MacColl was previously a partner in the Baltimore office of the law firm of Piper and Marbury, and joined the Corporation in January 1989. Mr. Stern was Partner and Vice President of Booz Allen & Hamilton, a national business consulting firm, and joined the Corporation in May 1993. Mr. Stout was Senior Vice President of United Pacific Life Insurance Company and joined the Corporation in May 1993. Mr. Sweeney was a Principal and Practice Director with Tillinghast/Towers Perrin, an asset management and consulting company, and joined the Corporation in November 1992.
Item 2.



Item 2. Business Properties
Real estate owned and used in the regular conduct of business consists of 12 business properties located in various cities throughout the United States. The Corporation's Mount Washington Center, located in Baltimore, Maryland, is the principal owned property. This is the headquarters for the life insurance operations, and the location of the information systems, and training and development complexes.
In addition, the Corporation leases approximately 120 offices in various cities in the regular course of business. See Note 6 of Notes to the Consolidated Financial Statements. The principal leased property is a 40-story home office building in Baltimore, Maryland, sold in 1984 and leased back by the Corporation. During 1994, the Corporation committed to a plan to consolidate its home office operations in Baltimore, Maryland at its Mount Washington facility. The facilities exit costs of $183 million represent the present value of the rent and other operating expenses to be incurred under the lease on the Corporation's principal office building from the time USF&G vacates the building through the expiration of the lease in 2009. (Refer to Note 6 of the Notes to Consolidated Financial Statements in the Corporation's 1994 Annual Report to Shareholders.)
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, such litigation and the litigation described in Section 8.1 and 8.2 of Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 13 of the Notes to Consolidated Financial Statements of the 1994 Annual Report to Shareholders, which section and note are herein incorporated by reference, is not expected to have a material adverse effect on USF&G Corporation's consolidated financial position, although it is possible that the results of operations in a particular quarter or annual period would be materially affected by an unfavorable outcome.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 1994.
USF&G Corporation Part II
Item 5.

Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market and dividend information for the Corporation's common stock on page 66 of the Annual Report to Shareholders for 1994 is incorporated herein by reference.
Item 6.

Item 6. Selected Financial Data
Selected financial data of the Corporation on pages 34 and 35 of the Annual Report to Shareholders for 1994 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 12 through 33 of the Annual Report to Shareholders for 1994 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 36 through 59 of the Annual Report to Shareholders for 1994 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. Directors and Executive Officers 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 17, 1995.
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 17, 1995, which section is incorporated herein by reference. To the best of the Corporation's knowledge, there were no late filings under Section 16(a) of the Securities Exchange Act of 1934.
Item 12.

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 17, 1995, which section 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 17, 1995, which section 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, 1994, 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 22 Schedule I. Summary of Investments-Other than Investments in Related Parties 23-25 Schedule II. Condensed Financial Information of Registrant 26 Schedule III. Supplementary Insurance Information 27 Schedule IV. Reinsurance 28 Schedule VI. Supplemental Information Concerning Consolidated Property/Casualty Insurance Operations
All other schedules specified by Article 7 of Regulation S-X are not required pursuant to the related instructions or are inapplicable and, therefore, have been omitted.
(3) Exhibits The following exhibits are included in Item 14:
Page 29 Exhibit 11 Computation of Earnings Per Share 30 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 34 of this Form 10-K.
Exhibit 3A
Charter of USF&G Corporation. Incorporated by reference to Exhibit 3A to the Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 3B
Amended By-laws of USF&G Corporation.
Exhibit 4A
Rights agreement dated as of September 18, 1987, between USF&G Corporation and First Chicago Trust Company of New York (successor to Morgan Shareholder's Service Trust Company) including Form of Rights Certificate. Incorporated by reference to Exhibits 1 and 2 to the Registrant's Form 8-A filed September 31, 1987, File No. 1-8233.
Exhibit 4B
Bond issuance and payment agreement dated November 16, 1987, for Swiss Franc Public Issue of 5 1/2% Bonds 1988-1996 of Swiss Francs 120,000,000. Incorporated by reference to Exhibit 4M to the Registrant's Form 10-K for the year ended December 31, 1987, File No. 1-8233.
Exhibit 4C
Indenture dated January 28, 1994 between USF&G Corporation and Chemical Bank. Incorporated by reference to Exhibit 4E to the Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 4D
Indenture dated January 28, 1994 between USF&G Corporation and Signet Bank.
Exhibit 4E
Form of Note dated March 3, 1994, for Zero Coupon Convertible Subordinated Notes due 2009. Incorporated by reference to Exhibit 4 to the Registrant's Form 8-K dated March 3, 1994, File No. 1-8233.
Exhibit 4F
Form of Note dated June 30, 1994, for 8 3/8% Senior Notes due 2001. Incorporated by reference to Exhibit 4 to the Registrant's Form 8-K dated June 30, 1994, File No. 1-8233.
Exhibit 4G
Credit Agreement dated as of September 30, 1994 among USF&G Corporation and Morgan Guaranty Trust Company of New York as agent. Incorporated by reference to Exhibit 10 to the Registrant's Form 10-Q for the quarter ended September 30, 1994, File No. 1-8233.
Exhibit 4H
Credit Agreement dated as of December 1, 1994, among USF&G Corporation and Deutsche Bank AG, as agent.
Exhibit 4I
Letter of Credit Agreement dated as of October 25, 1994, among USF&G Corporation and The Bank of New York, as agent.
Exhibit 10A
1994 Stock Plan For Employees of USF&G.
Exhibit 10B
Stock Option Plan of 1987. Incorporated by reference to Exhibit 4.1 to the Registrant's Form S-8 dated July 28, 1987, File No. 33-16111.
Exhibit 10C
Employment Agreement dated November 20, 1990, between the Registrant and Norman P. Blake, Jr. Incorporated by reference to Exhibit 10A to the Registrant's Form 10-K for the year ended December 31, 1990, File No. 1-8233.
Exhibit 10D
USF&G Supplemental Executive Retirement Agreement between the Registrant and Norman P. Blake, Jr., dated November 20, 1990. Incorporated by reference to Exhibit 10B to the Registrant's Form 10-K for the year ended December 31, 1990, File No. 1-8233.
Exhibit 10E
Stock Option Plan of 1990. Incorporated by reference to Exhibit 4 to the Registrant's Form S-8 Registration Statement as filed December 7, 1990, File No. 33-38113. Certified Copy of the Board Resolution adopted on December 6, 1990, amending the Stock Option Plan of 1990. Incorporated by reference to Exhibit 10G to the Registrant's Form 10-K for the year ended December 31, 1990, File No. 1-8233.
Exhibit 10F
Description of Management Incentive Plan. Incorporated by reference to Exhibit 10J to the Registrant's Form 10-K for the year ended December 31, 1990, File No. 1-8233.
Exhibit 10G
Description of Long-Term Cash Incentive Compensation Plan. Incorporated by reference to Exhibit 10K to the Registrant's Form 10-K for the year ended December 31, 1990, File No. 1-8233.
Exhibit 10H
Stock Incentive Plan of 1991. Incorporated by reference to Exhibit 4(a) to the Registrant's Form S-8 Registration Statement as filed February 11, 1992, File No. 33-45664.
Exhibit 10I
Form of Stock Option Agreement used in connection with the Stock Option Plan of 1987, Stock Option Plan of 1990, and Stock Incentive Plan of 1991. Incorporated by reference to Exhibit 10I to the Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10J
1993 Stock Plan for Non-Employee Directors. Incorporated by reference to Exhibit 10N to the Registrant's Form 10-K for the year ended December 31, 1992, File No. 1-8233.
Exhibit 10K
Employment Agreement dated November 10, 1993, between the Registrant and Norman P. Blake, Jr. Incorporated by reference to Exhibit 10K to the Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10L
Stock Option Agreement dated November 10, 1993, between the Registrant and Norman P. Blake, Jr. Incorporated by reference to Exhibit 10L to the Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10M
Stock Option Agreement dated November 10, 1993, between the Registrant and Norman P. Blake, Jr. Incorporated by reference to Exhibit 10M to the Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10N
Waiver dated November 10, 1993, between the Registrant and Norman P. Blake, Jr. Incorporated by reference to Exhibit 10N to the Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10O
First Amendment to USF&G Supplemental Executive Retirement Agreement between the registrant and Norman P. Blake, Jr. dated November 10, 1993. Incorporated by reference to Exhibit 10O to the Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10P
Letter dated November 19, 1992, describing Employment Arrangement between the Registrant and Gary C. Dunton. Incorporated by reference to Exhibit 10K to the Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10Q
USF&G Supplemental Retirement Plan. Incorporated by reference to Exhibit 10-Q to the Registrant's Form 10-K for the year ended December 31, 1994, File No. 1-8233.
Exhibit 10R
Amended and Restated Stock Incentive Plan of 1991.
Exhibit 10S
Long-Term Incentive Plan.
Exhibit 11
Computation of earnings per share.
Exhibit 12
Computation of ratio of consolidated earnings to fixed charges and preferred stock dividends.
Exhibit 13
1994 Annual Report to Shareholders.
Exhibit 21
Subsidiaries of the registrant.
Exhibit 23
Consent of Independent auditors.
Exhibit 28
Information from reports furnished to state insurance regulatory authorities.
All other exhibits specified by Item 601 of Regulation S-K are not required pursuant to the related instructions or are inapplicable and, therefore, have been omitted.
(b) Reports on Form 8-K The registrant filed a Form 8-K on October 28, 1994, reporting under Item 5, Other Events, a press release announcing call of shares of Series C Cumulative Convertible Preferred Stock. The registrant filed Form 8-K on December 21, 1994, reporting under Item 5, Other Events, press release announcing the signing of a definitive agreement by which USF&G will acquire all of the outstanding Victoria Financial Corporation ("Victoria") stock for approximately $55.3 million of USF&G common stock. The registrant filed a Form 8-K on January 12, 1995, reporting under Item 5, Other Events, a press release announcing the signing of a definitive agreement by which USF&G will acquire all of the outstanding Discover Re equity for approximately $78.5 million of USF&G common stock and options. The registrant filed a Form 8-K on January 20, 1995, reporting under Item 5, Other Events, a press release announcing information as to fourth quarter earnings expectations in addition to an announcement relating to plans to consolidate its Baltimore facilities. The registrant filed a Form 8-K on January 25, 1995, reporting under Item 5, Other Events, a press release announcing its call for redemption of all outstanding shares of Series C Cumulative Convertible Preferred Stock.
USF&G Corporation Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
USF&G CORPORATION
NORMAN P. BLAKE, JR. Norman P. Blake, Jr.
Chairman of the Board, President, and Chief Executive Officer
Dated at Baltimore, Maryland March 31, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Principal Executive Officer:
NORMAN P. BLAKE, JR. Norman P. Blake, Jr.
Chairman of the Board, President, Chief Executive Officer, and Director
Principal Financial and Accounting Officer:
DAN L. HALE Dan L. Hale
Executive Vice President and Chief Financial Officer
Dated at Baltimore, Maryland March 31, 1995
Directors
H. FURLONG BALDWIN H. Furlong Baldwin
MICHAEL J. BIRCK Michael J. Birck
GEORGE L. BUNTING, JR. George L. Bunting, Jr.
ROBERT E. DAVIS Robert E. Davis
DALE F. FREY Dale F. Frey
ROBERT E. GREGORY, JR. Robert E. Gregory, Jr.
ROBERT J. HURST Robert J. Hurst
WILBUR G. LEWELLEN Wilbur G. Lewellen
HENRY A. ROSENBERG, JR. Henry A. Rosenberg, Jr.
LARRY P. SCRIGGINS Larry P. Scriggins
ANNE MARIE WHITTEMORE Anne Marie Whittemore
Schedule I. Summary of Investments - Other Than Investments in Related Parties
At December 31, 1994 Amount at which shown in the Statement of Market Financial (in millions) Cost Value Position Fixed Maturities Bonds: Held to maturity: United States Government and government agencies and authorities $1,291 $1,211 $1,291 States, municipalities, and political subdivisions 98 93 98 Foreign governments 15 14 15 Public utilities 265 240 265 All other corporate bonds 2,981 2,717 2,981 Total fixed maturities held to maturity 4,650 4,275 4,650
Available for sale: United States Government agencies and authorities 763 732 732 States, municipalities, and political subdivisions 190 188 188 Foreign governments 108 92 92 Public utilities 143 136 136 All other corporate bonds 2,956 2,833 2,833 Total fixed maturities available for sale 4,160 3,981 3,981 Total fixed maturities $8,810 $8,256 $ 8,631 Equity securities Common stocks: Banks, trust, and insurance companies $ 2 $ 1 $ 1 Industrial, miscellaneous, and all other 49 43 43 Total common stocks 51 44 44 Nonredeemable preferred stocks 26 26 26 Total equity securities $ 77 $ 70 $ 70 Short-term investments 421 421 421 Mortgage loans 349 331 349 Real estate 662 662 Other invested assets 288 288 Total investments $10,607 $10,421
USF&G Corporation Schedule II. Condensed Financial Information of Registrant - Statement of Financial Position (Parent Company)
At December 31 (in millions) 1994 1993 1992 Assets Cash $1 $2 $10 Investment in subsidiaries, at equity 2,431 2,354 2,097 Due from subsidiaries 131 127 135 Other assets 24 23 34 Total assets $2,587 $2,506 $2,276 Liabilities Debt (short-term, 1994, $215; 1993, $395; 1992, $375) $586 $574 $574 Dividends payable to shareholders 14 16 16 Due to subsidiaries 310 322 335 Other liabilities 308 83 81 Total liabilities 1,218 995 1,006 Shareholders' Equity Preferred stock 331 455 455 Common stock 239 212 211 Paid-in capital 1,062 963 957 Net unrealized gains (losses) on investments (144) 190 (29) Minimum pension liability (63) (85) - Retained earnings (deficit) (56) (224) (324) Total shareholders' equity 1,369 1,511 1,270 Total liabilities and shareholders' equity $2,587 $2,506 $2,276 See Note to Condensed Financial Statements
USF&G Corporation Schedule II. Condensed Financial Information of Registrant - Statement of Operations (Parent Company)
At December 31 (in millions) 1994 1993 1992 Revenues Net investment income: Dividends from subsidiaries $125 $125 $125 Interest expense on loans from subsidiaries (8) (6) (7) Other (1) - - Other revenues: From subsidiaries 7 7 9 From others 5 5 22 Total revenues 128 131 149 Expenses Facilities exit costs 211 - - Interest expense 34 37 43 Lease expense 30 21 21 Other operating expense 24 19 20 299 77 84 Foreign currency losses - - 1 Total expenses 299 77 85 Income (loss) from continuing operations before income taxes and equity in earnings of subsidiaries and cumulative effect of adopting new accounting standards (171) 54 64 Provision for income taxes - - - Income (loss) from continuing operations before equity in earnings of subsidiaries and cumulative effect of adopting new accounting standards (171) 54 64 Equity in undistributed earnings of subsidiaries: Continuing operations 403 73 (29) Discontinued operations - - (7) Income from cumulative effect of adopting new accounting standards - 38 - Net income $232 $165 $28 See Note to Condensed Financial Statements
USF&G Corporation Schedule II. Condensed Financial Information of Registrant - Statement of Cash Flows (Parent Company)
For the Years Ended December 31
(in millions) 1994 1993 1992 Net Cash Provided From Operating Activities $129 $58 $71 Investing Activities Purchases of short-term investments - - (23) Sales or maturities of short-term investments - - 23 Other, net (4) (4) (12) Net cash used in investing activities (4) (4) (12) Financing Activities Repayments of short-term borrowings (160) - - Intercompany advances, net (51) (2) 49 Long-term borrowings 270 - - Repayments of long-term borrowings (120) - (36) Issuances of common stock 14 6 3 Redemption of preferred stock (13) - - Cash dividends paid to shareholders (66) (66) (66) Net cash provided from (used in) financing activities (126) (62) (50) Increase (decrease) in cash (1) (8) 9 Cash at beginning of year 2 10 1 Cash at end of year $1 $2 $10 See Note to Condensed Financial Statements
Note to Condensed Financial Statements
The accompanying condensed financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto of the 1994 Annual Report to Shareholders incorporated herein by reference. Certain amounts have been reclassified to conform to the 1994 presentation. The parent company's provision for income taxes is based on the Corporation's consolidated federal income tax allocation policy.
USF&G Corporation Schedule III. Supplementary Insurance Information
N/A - Not applicable to life insurance pursuant to Rule 12-16 of Regulation S-X. (a) Other policyholders' funds, net investment income, and other operating expenses are not allocated to property/casualty categories. (b) Unpaid losses and loss expenses reflect the implementation of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," which increased liabilities by $1.2 billion with a corresponding increase in assets at December 31, 1993. This standard requires reinsurance receivables and prepaid reinsurance premiums to be reported separately as assets instead of the previous practice of netting such receivables against the related loss and unearned premium liabilities.
USF&G Corporation Schedule IV. Reinsurance
For the Years Ended December 31
(in millions) Ceded to Assumed Percentage Gross other from other Net of amount companies companies amount amount assumed to net Life insurance in force $11,683 $1,350 $160 $10,493 1.5% Premiums earned: Life insurance 155 4 - 151 -% Accident/health insurance - - 1 1 98.5 Property/casualty insurance 2,232 515 566 2,283 24.8 Total 2,387 519 567 2,435 23.3% Life insurance in force $11,955 $1,404 $155 $10,706 1.4% Premiums earned: Life insurance $133 $5 $- $128 -% Accident/health insurance - - 1 1 99.1 Property/casualty insurance 2,338 517 506 2,327 21.7 Total $2,471 $522 $507 $2,456 20.6% Life insurance in force $12,228 $1,444 $132 $10,916 1.2% Premiums earned: Life insurance $107 $5 $1 $103 .3% Accident/health insurance - - 1 1 94.0 Property/casualty insurance 2,692 535 376 2,533 14.8 Total $2,799 $540 $378 $2,637 14.3%
USF&G Corporation Schedule VI. Supplemental Information Concerning Consolidated Property/Casualty Insurance Operations
At December 31 (in millions) 1994 1993 1992 Deferred policy acquisition costs $271 $271 $277 Reserves for unpaid losses and loss expenses (a) 6,100 6,329 5,540 Discount deducted from reserves (b) 441 508 680 Unearned premiums (a) 931 917 770
(a) Reserves for unpaid claims and claim adjustments reflect the implementation of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," which increased liabilities by $1.2 billion with a corresponding increase in assets at December 31, 1993. This standard requires reinsurance receivables and prepaid reinsurance premiums to be reported separately as assets instead of the previous practice of netting such receivables against the related loss and unearned premium liabilities. (b) Certain long-term disability payments for workers' compensation are discounted at rates ranging from 3% to 5%.
At December 31 (in millions) 1994 1993 1992 Earned premiums $2,283 $2,327 $2,533 Net investment income 423 433 475 Losses and loss expenses incurred related to: Current year 1,696 1,696 2,010 Prior years (5) 62 78 Amortization of deferred policy acquisition costs 632 664 713 Paid losses and loss expenses 1,883 2,022 2,252 Premiums written 2,312 2,429 2,420