Document/Exhibit Description Pages Size
1: 10-K 12/31/97 Form 10-K 48± 225K
3: EX-4 364-Day Credit and Reimbursement Agreement 68± 272K
2: EX-4 Five-Year Credit and Reimbursement Agreement 76± 299K
5: EX-10 Dunton Letter Agreement 15± 56K
7: EX-10 Ingrey Consulting Agreement 4± 20K
6: EX-10 Ingrey Stock Appreciation Rights Agreement 4± 20K
4: EX-10 Stout Letter Agreement 5± 24K
8: EX-21 Exhibit 21 - Subsidiaries of the Registrant 1 5K
9: EX-23 Consent of Independent Auditors 1 8K
10: EX-27 Restated Financial Data Schedule (For Sfas No.128) 2± 8K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended Commission File Number
December 31, 1997 1-8233
USF&G CORPORATION
(Exact name of registrant as specified in its charter)
Maryland 52-1220567
(State of Incorporation) (IRS Employer Identification No.)
6225 Centennial Way, Baltimore, Maryland 21209
(Address of principal executive offices) (zip code)
Telephone: 410-205-3000
Securities registered pursuant to Section 12(b) of the Act:
Preferred Share Purchase Rights Registered-New York Stock Exchange
Registered-Pacific Stock Exchange
Common Stock, Par Value $2.50 Registered-New York Stock Exchange
Registered-Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve (12) months and (2) has been subject to such filing
requirements for the past 90 days. Yes x No.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
The aggregate market value of voting and non-voting stock held by non-affiliates
of the registrant as of March 13, 1998, was $2,957,380,238.
Voting stock held by any persons who may be deemed to be affiliates under Rule
405 would be immaterial.
The number of shares outstanding of the issuer's common stock as of March 13,
1998:
Common Stock, Par Value $2.50, 117,414,600 shares outstanding.
Documents Incorporated by Reference:
The Corporation's Form 8-K filed on February 26, 1998 is incorporated
by reference into Parts I and II.
Portions of the Joint Proxy Statement/Prospectus of the Corporation and
The St. Paul Companies, Inc., File No. 0-3021, is incorporated by reference into
Part III.
Exhibit Index begins on page 20.
USF&G CORPORATION Index
Part I
Item 1. Description of Business
1.1. General 1
1.2. Business segments 1
1.3. Distribution systems 2
1.4. Competition 3
1.5. Investments 3
1.6. Property/casualty loss reserves 3
1.7. Life benefit reserves 6
1.8. Geographical distribution 7
1.9. Executive officers of the Registrant 7
1.10. Government regulations 7
Item 2. Business Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for Registrant's Common Equity and Related
Shareholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 9
Item 8. Financial Statements and Supplementary Data 9
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 9
Part III
Item 10. Directors and Executive Officers of the Registrant 10
Item 11. Executive Compensation 11
Item 12. Security Ownership of Certain Beneficial Owners
and Management 18
Item 13. Certain Relationships and Related Transactions 19
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 20
USF&G CORPORATION Part I
In connection with, and because it desires to take advantage of, the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995,
USF&G Corporation ("USF&G" or the "Corporation") cautions readers regarding
certain forward-looking statements in the following discussion and elsewhere in
this Form 10-K and in any other statements made by, or on the behalf of, the
Corporation, whether or not in future filings with the Securities and Exchange
Commission. Forward-looking statements are statements not based on historical
information and which relate to future operations, strategies, financial results
or other developments. In particular, statements using verbs such as "expect",
"anticipate", "hope", "believe" or words of similar import generally involve
forward-looking statements.
Forward-looking statements are necessarily based upon estimates and
assumptions that are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond the
Corporation's control and many of which, with respect to future business
decisions, are subject to change, especially in light of the proposed merger
with The St. Paul Companies, Inc. ("St. Paul"), discussed in Section 1.5 of
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Corporation's Form 8-K filed on February 26, 1998,
incorporated herein by reference. These uncertainties and contingencies can
affect actual results and could cause actual results to differ materially from
those expressed in any forward-looking statements made by, or on behalf of, the
Corporation. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments, some of which may be national or international in scope,
such as general economic conditions and interest rates, some of which may be
related to the insurance industry generally, such as pricing competition,
industry consolidation and regulatory developments, and others of which may
relate to the Corporation specifically, such as risks with implementing business
realignment strategies and related agency plant or field organization
implications, adequacy of reserves, exposure to catastrophe losses,
technological risks inherent in developing its technological infrastructure,
adequacy of underwriting disciplines, credit and other risks associated with the
Corporation's investment portfolio, and other factors. The Corporation disclaims
any obligation to update forward-looking information.
Item 1. Description of Business
1.1. General
USF&G 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 this Form 10-K refers to USF&G
Corporation and all of its subsidiaries. As of December 31, 1997, the
Corporation had approximately 6,600 employees.
USF&G is primarily engaged in the business of insurance. Property/casualty
insurance is written primarily by USF&G Company. Life insurance and annuities
are written primarily by Fidelity and Guaranty Life Insurance Company ("F&G
Life"). Noninsurance operations are composed primarily of the parent company and
asset management services.
1.2. Business segments
Financial information about the Corporation's business segments is set
forth in Note 16, "Information on Business Segments", of the Notes to
Consolidated Financial Statements included in the Corporation's Form 8-K filed
on February 26, 1998, incorporated herein by reference. A description of the
Corporation's principal business segments begins below with the
property/casualty insurance segment, and continues on page 2 of this Form 10-K
with the life insurance segment and parent and noninsurance operations.
Property/casualty insurance segment
USF&G Company currently underwrites most forms of property/casualty
insurance. USF&G Company's operations are grouped into the following portfolio
of strategic businesses: the Commercial Insurance Group ("CIG"), the Family and
Business Insurance Group ("FBIG"), and Specialty Businesses, which include
Discover Re Managers, Inc. ("Discover Re"), F&G Re, Inc. ("F&G Re"), and the
Surety Group. The property/casualty segment accounted for 88 percent of USF&G's
revenues before net realized gains for the year ended December 31, 1997 and 71
percent of its total assets at December 31, 1997.
Insurance coverages offered by CIG provide protection related to property
loss, liability claims and workers' compensation benefits to businesses and
government entities, and fidelity bonds for financial institutions. Property
loss and liability claims insurance protects against loss from damage to the
insured's covered properties and protects against legal liability for injuries
to other persons or damage to their property arising from the insured's business
operations. Workers' compensation provides benefits to employees, as mandated by
state laws, for employment-related accidents, injuries or illnesses. Fidelity
bonds indemnify employers against the dishonesty or default of persons in their
employ.
FBIG provides homeowners insurance and standard and non-standard automobile
insurance, which include aspects of property loss and liability risks. FBIG also
provides insurance coverage to small commercial businesses. Homeowners policies
protect against loss of dwellings and contents arising from a variety of perils,
as well as liability arising from ownership or occupancy. 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. Small commercial business insurance covers property loss,
liability claims and workers' compensation, as well as automobile and other
coverages.
Discover Re provides insurance, reinsurance and related services to the
alternative risk transfer market, primarily in the municipalities,
transportation, education and retail markets. Through alternative risk transfer,
a company self-insures, or reinsures through a captive insurer, the predictable
frequency portion of its own losses and purchases insurance for the less
predictable, high-severity losses that could have a major financial impact on
the company.
USF&G Company also 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, acts as the reinsurance
underwriting manager and solicits and services assumed reinsurance for USF&G
Company. F&G Re markets reinsurance in North America and in specific foreign
countries (mainly in Western Europe and Japan). During 1997, F&G Re established
a representative office in Hong Kong and expanded its presence in the Lloyd's of
London markets through the acquisition of an 80 percent ownership interest in
Ashley Palmer, Ltd., a managing general agency, and investments in several
Lloyd's of London underwriting syndicates. 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.
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.
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 Section 4.2, "Reinsurance", of Management's Discussion
and Analysis of Financial Condition and Results of Operations and Note 12,
"Reinsurance", of the Notes to Consolidated Financial Statements included in the
Corporation's Form 8-K filed on February 26, 1998, incorporated herein by
reference.)
Financial information and further descriptions of the businesses and
products discussed above are set forth in Section 2, "Strategic Overview", and
Section 3.1, "Property/casualty insurance", of Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the
Corporation's Form 8-K filed on February 26, 1998, incorporated herein by
reference.
Life insurance segment
F&G Life sells many forms of annuity and life insurance products, including
single premium deferred annuities ("SPDAs"), structured settlement annuities,
tax sheltered annuities ("TSAs"), single premium immediate annuities and
universal life and term life insurance. The life insurance segment accounted for
12 percent of USF&G's revenues before net realized gains for the year ended
December 31, 1997 and 28 percent of its total assets at December 31,
1997.
Financial information and further descriptions of F&G Life's business and
products are set forth in Section 2, "Strategic Overview", and Section 3.2,
"Life insurance", of Management's Discussion and Analysis of Financial Condition
and Results of Operations included in the Corporation's Form 8-K filed on
February 26, 1998, incorporated herein by reference.
Parent and noninsurance operations
The parent company performs corporate functions including managing the
capital requirements of the Corporation and its subsidiaries. The noninsurance
operations consist primarily of asset management services.
1.3. Distribution systems
Property/casualty insurance
USF&G Company's products have been sold primarily by independent agents,
which generally represent multiple insurance companies, since its founding in
1896. USF&G Company's products are sold through approximately 2,900 independent
agencies in the United States on a commission basis. USF&G's distribution
channels include retail, wholesale and surplus lines brokers and agents.
As of December 31, 1997, USF&G Company maintained 40 production offices
located throughout the United States to service its agents and policyholders.
These offices support the administration of underwriting standards and the
delivery of policies, primarily for CIG. USF&G also operates three Centers for
Agency Services dedicated to underwriting and policy processing for FBIG, and a
centralized Claim Reception Center which provides 24-hour, seven-days-a-week
claim reporting service to customers and agents throughout the United States.
The Surety Group also maintains offices in Mexico and Canada, and F&G Re has
offices in London and Hong Kong.
In December 1997, USF&G acquired TITAN Holdings, Inc. ("Titan"), a
property/casualty insurance company located in San Antonio, Texas. Titan
specializes in the non-standard automobile and government entity insurance
markets. It distributes insurance through independent agencies and direct
response centers ("DRCs"). DRCs are operated from centralized call centers or
local retail locations and generate business through media and yellow pages
advertising and direct sales calls. At December 31, 1997, Titan had 85 DRCs
located in ten states.
Life insurance
SPDAs are sold primarily through independent agents and insurance brokers.
TSAs are sold through a national wholesaler. Structured settlements are
annuities sold predominantly to the property/casualty company in settlement of
certain of its insurance claims.
1.4. Competition
Property/casualty insurance
The property/casualty insurance industry is highly competitive with over
2,400 companies nationwide. These insurers are not only stock companies, but
also mutual companies and other underwriting organizations. USF&G Company ranked
22nd in the industry based both on 1996 statutory net premiums written and on
statutory assets, and 33rd based on 1996 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 1,200 companies nationwide in the industry
including stock and mutual companies. F&G Life ranked 148th based on 1996
statutory net premiums written, 121st based on 1996 statutory assets and 160th
based on 1996 statutory capital and surplus.
In the life insurance industry, interest crediting rates, underwriting
philosophy, 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. The life
insurance industry has experienced considerable competitive pressure in recent
periods as a result of fluctuating interest rates.
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. Rates for life insurance are generally not regulated. Some
states permit insurers to use rates without prior regulatory approval whereas
other states prohibit implementation of new rates without such approval. The
regulatory 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; 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.
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 in
Section 5, "Investments", of Management's Discussion and Analysis of Financial
Condition and Results of Operations and Note 2, "Investments", of the Notes to
Consolidated Financial Statements included in the Corporation's Form 8-K filed
on February 26, 1998, incorporated herein by reference.
1.6. Property/casualty loss reserves
General
The reserves for property/casualty losses and loss expenses represent
estimates of the ultimate net cost of all unpaid losses and loss adjustment
expenses incurred through the end of each period. 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. Further segmentation into the business group components of the current
accident year projected losses is evaluated and considered within the aggregate
line of business analysis. 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
circumstances and likely trends, is an appropriate basis for predicting future
events.
Allocated Loss Expense: USF&G Company's estimates of unpaid allocated loss
adjustment expenses are based on analyses of the long-term relationship of
projected ultimate allocated loss expense to projected ultimate losses for each
line of business. By using incurred losses as a base, inflation assumptions
applicable to loss reserves are applied equally to allocated expense
reserves.
Unallocated Loss Expense: Unallocated loss expense reserves are based on
historical relationships of paid unallocated expenses to paid losses by accident
year. 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, underwriting practices, the legal system and internal
claims-settlement practices, among other variables. In many cases, significant
periods of time may elapse 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. Approximately 40 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 losses 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.
Discounted loss reserves
The reserves for permanent-total disability benefits and long-term medical
care benefits under workers' compensation insurance, as well as certain reserves
for assumed reinsurance coverage, are discounted at rates of interest generally
ranging up to four percent. The carrying amount of such reserves, net of
reinsurance and net of discount, was $1.3 billion and $1.4 billion at December
31, 1997 and 1996, respectively. The discount is amortized over the expected
lives of the claimants. Discounted workers' compensation reserves come from
three primary sources: reserves assumed from the Workers' Compensation
Reinsurance Bureau ("WCRB"), certain F&G Re assumed reinsurance contracts and
reserves for USF&G Company's net retained business. The following table
reconciles the changes in the reserve discount for the years presented.
(in millions) 1997 1996 1995
------------------------
Discount, January 1 $401 $394 $441
Accrual 39 41 (21)
Amortization (39) (34) (26)
------------------------
Discount, December 31 $401 $401 $394
------------------------
The positive discount accruals in 1997 and 1996 resulted from the
initiation of new assumed reinsurance contracts on workers' compensation
business and were offset slightly by negative accruals in USF&G Company's
direct business. Reductions in the estimate of ultimate incurred losses in the
direct workers' compensation business resulted in negative discount accruals of
$9 million, $10 million and $21 million in 1997, 1996 and 1995, respectively. A
number of claim initiatives, including managed medical care, structured
settlements for workers' compensation medical claims and an acceleration in
payment patterns are having a favorable impact on estimates of ultimate incurred
losses.
Roll-forward of liability for losses and loss expenses
The following table reconciles the changes in loss and loss expense
reserves for the years presented.
(in millions) 1997 1996 1995
-----------------------
Total reserve at beginning of year, gross $6,032 $6,097 $6,158
Less reinsurance recoverables 987 984 1,016
-----------------------
Net balance at January 1 5,045 5,113 5,142
-----------------------
Incurred Related To:
Current year 1,933 2,030 1,856
Prior years (139) (162) (54)
-----------------------
Total incurred 1,794 1,868 1,802
-----------------------
Paid Related To:
Current year 726 764 635
Prior years 1,225 1,190 1,196
-----------------------
Total paid 1,951 1,954 1,831
-----------------------
Net balance at December 31 4,888 5,027 5,113
Plus net reserves acquired* 140 18 --
Plus reinsurance recoverables 1,172 987 984
-----------------------
Total reserve at end of year, gross $6,200 $6,032 $6,097
=======================
*Reserves acquired relate to the purchases of Titan in 1997 and Afianzadora
Insurgentes, S.A. de C.V. ("Afianzadora"), in 1996.
Analysis of loss and loss expense reserve development
The tables on the following page show property/casualty loss reserves
including (net) and excluding (gross) the effects 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-estimations 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 1997 that is attributable to the
original recorded reserve for each prior year.
The Analysis of Gross Loss and Gross Loss Expense Reserve Development was
added in 1994. The schedule provides data gross of ceded reinsurance for the
carried reserve at year-ends 1993 through 1997 and reserve development of the
1993 through 1996 year-ends.
Conditions and trends that have affected reserve development in the past
have changed and may not necessarily occur in the future. Care should be
exercised in extrapolating future reserve redundancies or deficiencies from such
development.
[Enlarge/Download Table]
Analysis of Net Loss and Net Loss Expense Reserve Development*
At December 31
(in millions) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996** 1997**
---------------------------------------------------------------------------------------------------------
Liability for unpaid losses
and loss expenses $ 4,744 $ 5,208 $ 5,467 $5,637 $5,716 $5,564 $5,316 $5,142 $5,113 $5,045 $5,028
Cumulative Paid As Of:
One year later 1,374 1,539 1,723 1,655 1,575 1,471 1,284 1,196 1,190 1,225
Two years later 2,258 2,614 2,795 2,746 2,534 2,394 2,091 1,947 1,919 --
Three years later 3,033 3,350 3,593 3,418 3,225 3,018 2,630 2,494 -- --
Four years later 3,550 3,939 4,055 3,929 3,692 3,428 3,034 -- -- --
Five years later 3,992 4,265 4,435 4,293 3,995 3,748 -- -- -- --
Six years later 4,240 4,542 4,714 4,528 4,246 -- -- -- -- --
Seven years later 4,456 4,773 4,899 4,738 -- -- -- -- -- --
Eight years later 4,648 4,924 5,075 -- -- -- -- -- -- --
Nine years later 4,776 5,077 -- -- -- -- -- -- -- --
Ten years later 4,905 -- -- -- -- -- -- -- -- --
Liability Re-estimated:
One year later 4,884 5,236 5,679 5,767 5,793 5,625 5,308 5,088 4,951 4,906
Two years later 4,943 5,485 5,800 5,907 5,923 5,645 5,264 5,005 4,871 --
Three years later 5,109 5,566 5,960 6,151 5,975 5,620 5,246 4,990 -- --
Four years later 5,287 5,761 6,246 6,216 5,959 5,589 5,252 -- -- --
Five years later 5,442 6,029 6,331 6,209 5,933 5,624 -- -- -- --
Six years later 5,700 6,125 6,319 6,214 5,994 -- -- -- -- --
Seven years later 5,789 6,124 6,352 6,326 -- -- -- -- -- --
Eight years later 5,790 6,175 6,508 -- -- -- -- -- -- --
Nine years later 5,842 6,373 -- -- -- -- -- -- -- --
Ten years later 6,067 -- -- -- -- -- -- -- -- --
Cumulative (deficiency)
excess (1,323) (1,165) (1,041) (689) (278) (60) 64 152 242 139
---------------------------------------------------------------------------------------------------------
[Enlarge/Download Table]
Analysis of Gross Loss and Gross Loss Expense Reserve Development*
At December 31
(in millions) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996** 1997**
---------------------------------------------------------------------------------------------------------
Liability for unpaid losses
and loss expenses $-- $-- $-- $-- $-- $-- $6,370 $6,158 $6,097 $6,032 $6,200
Cumulative Paid As Of:
One year later -- -- -- -- -- -- 1,571 1,431 1,387 1,305
Two years later -- -- -- -- -- -- 2,547 2,348 2,205 --
Three years later -- -- -- -- -- -- 3,217 2,953 -- --
Four years later -- -- -- -- -- -- 3,670 -- -- --
Liability Re-estimated:
One year later -- -- -- -- -- -- 6,354 6,103 5,977 5,922
Two years later -- -- -- -- -- -- 6,328 6,110 5,957 --
Three years later -- -- -- -- -- -- 6,417 6,145 -- --
Four years later -- -- -- -- -- -- 6,468 -- -- --
Cumulative (deficiency)
excess -- -- -- -- -- -- (98) 13 140 110
---------------------------------------------------------------------------------------------------------
<FN>
*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 1997 and 1996 amounts include reserves acquired in the purchase of
Afianzadora and subsequent development thereon. The 1997 amounts also include
reserves acquired in the purchase of Titan. The amounts for prior years have not
been restated to include Afianzadora's or Titan's reserve activity.
</FN>
Losses and loss expenses recorded in the current period financial statements are
affected by changes in estimates of insured events occurring in prior periods.
Losses incurred in 1997, 1996 and 1995 included $116 million, $110 million and
$77 million, respectively, of favorable development related to prior years'
experience in the assumed reinsurance business. Given the inherent uncertainty
in reserving for assumed reinsurance losses, current accident year reserves are
established on a conservative basis. Based on actuarial analysis in 1997 and
1996, the favorable development in assumed reinsurance from prior accident years
was substantially offset by the establishment of current accident year reserves.
The workers' compensation line was the key contributor of the remaining
favorable development of $23 million in 1997 and $52 million in 1996. These
favorable trends in older accident years are attributable to reform efforts by
various states in the early 1990s to contain workers' compensation loss costs,
the results of which are emerging in recent calendar years. In addition,
favorable development in 1996 included recognition of the effect on reserve
estimation models of the increased use of structured settlement annuities to
close workers' compensation claims. Prior years' loss reserve decreases in
workers' compensation were substantially offset by reserve increases in
liability lines for the current accident year. The loss development triangle is
also affected by a reallocation of environmental and asbestos bulk reserves
between accident years, which had no effect on the overall development.
The reserve development of $110 million on prior years' gross reserves is
$29 million less favorable than on a net basis. This is primarily driven by
approximately $30 million of amortization of discount on servicing carrier
workers' compensation business which is one hundred-percent ceded. Most of this
amortization occurred in accident years 1994 and prior; therefore, it affects
the net to gross difference in all years shown.
Loss portfolio transfers
Also included in the loss and loss expense reserve development tables 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) At December 31
----------------
1997 $ 18
1996 34
1995 52
1994 86
1993 110
1992 123
1991 279
1990 324
1989 397
1988 394
----------------
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 indemnity claims in 1987. Growth in the number of such
settlements accelerated in 1995 when USF&G began using them to resolve medical
claims in the workers' compensation lines of business. The growth has since
leveled off. USF&G Company continues to develop procedures to ensure that the
impact of structured settlements is given appropriate recognition in estimating
ultimate reserve liabilities.
Reconciliation of liability for losses and loss expenses from statutory
accounting practices to generally accepted accounting principles
The following table presents the differences between property/casualty
insurance claim reserves reported in the combined annual statement filed with
state insurance departments in accordance with statutory accounting practices
("SAP") and the reserves reported in accordance with generally accepted
accounting principles ("GAAP") in the consolidated financial statements included
in the Corporation's Form 8-K filed on February 26, 1998, incorporated herein by
reference.
At December 31
(in millions) 1997 1996
---------------------
SAP-basis property/casualty reserves $4,589 $4,637
Reserves of foreign subsidiaries
(consolidated for GAAP but not SAP) 439 408
---------------------
GAAP-basis property/casualty reserves, net 5,028 5,045
Reinsurance recoverables 1,172 987
---------------------
GAAP-basis property/casualty reserves, gross $6,200 $6,032
---------------------
1.7. Life benefit reserves
Financial information and further descriptions of life benefit reserves are
set forth in Note 1.7, "Unpaid losses, loss expenses and policy benefits", and
Note 3.2, "Life benefit reserves", of the Notes to Consolidated Financial
Statements included in the Corporation's Form 8-K filed on February 26, 1998,
incorporated herein by reference.
1.8. Geographical distribution
The risks insured by the Corporation's insurance subsidiaries are
geographically diversified primarily throughout the United States. The
Corporation has a subsidiary to market surety products in Canada, and in
December 1996 expanded its surety operations into Mexico with the acquisition of
Afianzadora. Reinsurance risks are incurred throughout North America and
specific foreign countries (mainly in Western Europe and Japan). Total assets
and revenues of foreign operations were not material in 1997. Property/casualty
voluntary direct premiums written and F&G Life sales are diversified throughout
the United States.
1.9. Executive officers of the Registrant
Positions and Office with Registrant or
Name Age Significant Subsidiaries
--------------------------------------------------------------------------------
Norman P. Blake, Jr. 56 Chairman of the Board, President, and Chief
Executive Officer
Glenn W. Anderson 45 Executive Vice President
Kenneth E. Cihiy 51 Executive Vice President-Claim
Dan L. Hale 53 Executive Vice President-Chief Financial Officer
Robert J. Lamendola 53 President-Surety Group
Thomas K. Lewis, Jr. 45 Executive Vice President-Chief Information Officer
Stephen W. Lilienthal 48 President-Commercial Insurance Group and Executive
Vice President-Chief Underwriting Officer
John A. MacColl 49 Executive Vice President-General Counsel and Human
Resources
Kim B. Rich 49 President-Family and Business Insurance Group
Andrew A. Stern 40 Executive Vice President-Strategic Planning and
Reinsurance Operations
Harry N. Stout 45 President-F&G Life and Executive Vice President
John C. Sweeney 53 Chairman-Falcon Asset Management, Inc., and Senior
Vice President-Chief Investment Officer
--------------------------------------------------------------------------------
All persons in the preceding table are executive officers of the Registrant
except Glenn W. Anderson, Kenneth E. Cihiy, Robert J. Lamendola, Stephen W.
Lilienthal and Kim B. Rich, who are executive officers of USF&G Company. Harry
N. Stout is both an officer of the Registrant and an executive officer of F&G
Life.
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. 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. Hale was President and Chief Executive Officer of Chase
Manhattan Leasing Company, an international leasing company, and joined the
Corporation in February 1991. Mr. Lamendola was Managing Director of Marsh &
McLennan, Inc., and joined the Corporation in June 1992. Mr. Lewis was Vice
President and General Manager for Europe, Middle East and Africa for Seer
Technologies, and joined the Corporation in November 1993. Mr. Lilienthal was
Vice President at Travelers Insurance Company, an insurance and financial
services company, and joined the Corporation in 1993. Mr. MacColl was previously
a partner in the Baltimore office of the law firm of Piper & Marbury, and joined
the Corporation in January 1989. Mr. Rich was Senior Vice President, Western
Region, of EBI Companies, and joined the Corporation in 1992. 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.
1.10. Government regulations
USF&G's insurance subsidiaries are subject to extensive regulatory
oversight in the various jurisdictions where they conduct business. From time to
time, the insurance regulatory framework has been the subject of increased
scrutiny. At any one time there may be numerous initiatives within state
legislatures of state insurance departments to alter and, in many cases,
increase state authority to regulate insurance companies and their businesses.
It is not possible to predict the future impact of increasing regulation on
USF&G's operations. For a description of various state initiatives and
regulations affecting the insurance industry, refer to Section 9, "Regulation",
of Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Corporation's Form 8-K filed on February 26, 1998,
incorporated herein by reference.
Item 2. Business Properties
Real estate owned and used in the regular conduct of business consists of
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 property/casualty
insurance operations, and the location of the executive offices, information
systems, administrative services, and training and development complexes.
In addition, the Corporation leases approximately 150 offices and 85 DRCs
in various cities in the regular course of business. The principal leased
property is an office building in Baltimore, Maryland, which was sold in 1984
and leased back by the Corporation. During 1994, the Corporation developed and
committed to a plan to consolidate its home office operations at its Mount
Washington facility. (Refer to Section 1.2, "Facilities exit costs/sublease
income", of Management's Discussion and Analysis of Financial Condition and
Results of Operations included in the Corporation's Form 8-K filed on February
26, 1998, incorporated herein by reference.)
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 insurers, they defend third-party claims brought
against their insureds, as well as defend themselves against first-party
coverage claims.
In the opinion of management, such litigation and the litigation described
in Note 14, "Legal Contingencies", of the Notes to Consolidated Financial
Statements included in the Corporation's Form 8-K filed on February 26, 1998,
incorporated herein by reference, is not expected to have a material adverse
effect on USF&G Corporation's consolidated financial position, although it is
possible that the results of operations in a particular quarter or annual period
would be materially affected by an unfavorable outcome.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of 1997.
USF&G CORPORATION Part II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Common stock
USF&G Corporation's common stock (ticker: FG) is listed on the New York
Stock Exchange ("NYSE"). The common stock appears in the NYSE Composite Listing
as USFG. The common stock is also listed on the Pacific Stock Exchange, the
London Stock Exchange, and the Swiss Stock Exchanges.
Stock and dividend information
The following table presents 1996 and 1997 data on the sale prices of USF&G
Corporation's common stock on the NYSE Composite Listing by quarter, and the
dividends paid per share of common stock. At March 13, 1998, there were 18,931
registered shareholders and the closing price was $25 3/16 per share.
Sale Price Dividends
High Low Paid
-------------------------------------------
1996
First quarter $17 1/2 $14 1/4 $.05
Second quarter 16 5/8 15 .05
Third quarter 18 5/8 15 .05
Fourth quarter 21 3/4 17 3/4 .05
-------------------------------------------
1997
First quarter $23 1/8 $20 $.05
Second quarter 25 18 1/4 .05
Third quarter 25 1/2 21 1/2 .07
Fourth quarter 23 1/2 17 5/8 .07
-------------------------------------------
Item 6. Selected Financial Data
Selected financial data of the Corporation on page 5 of the Form 8-K filed
on February 26, 1998 is incorporated herein by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis on pages 30 through 46 of the Form 8-K
filed on February 26, 1998 is incorporated herein by reference.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements of the Corporation and notes to such
financial statements on pages 6 through 29 of the Form 8-K filed on February 26,
1998 are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
USF&G CORPORATION Part III
Item 10. Directors and Executive Officers of the Registrant
Information regarding the Corporation's executive officers can be found on
page 7 of this Form 10-K. The following paragraphs present information
concerning directors of the Corporation, including their time served as a
director of the Corporation (or its predecessor), current membership on
committees of the Board of Directors, principal occupations or affiliations
during the last five years, and certain other directorships held.
H. Furlong Baldwin
Mr. Baldwin, age 66, has been a director of the Corporation since 1968, and
is a member of the Executive, Finance and Nominating Committees. Mr. Baldwin is
Chairman of the Board and Chief Executive Officer of Mercantile Bankshares
Corporation. Mr. Baldwin is also a director of Mercantile Bankshares
Corporation, GRC International, Inc., Baltimore Gas & Electric Company and
Conrail, Inc.
Michael J. Birck
Mr. Birck, age 60, has been a director of the Corporation since 1993, and
is a member of the Audit and Compensation Committees. Mr. Birck is President and
Chief Executive Officer of Tellabs, Inc., a designer and manufacturer of voice
and data equipment. Mr. Birck is also a director of Tellabs, Inc., Molex, Inc.,
and Illinois Tool Works, Inc.
Norman P. Blake, Jr.
Mr. Blake, age 56, has been a director of the Corporation since 1990, and
is a member of the Executive Committee. Mr. Blake is Chairman of the Board,
President and Chief Executive Officer of the Corporation and USF&G Company, the
Corporation's principal subsidiary. Mr. Blake is also a director of Enron
Corporation and Owens-Corning Fiberglass Corporation.
George L. Bunting, Jr.
Mr. Bunting, age 57, has been a director of the Corporation since 1978, and
is a member of the Executive, Compensation and Nominating Committees. Mr.
Bunting is President and Chief Executive Officer of Bunting Management Group, a
private financial management company, and is the former Chairman of the Board
and Chief Executive Officer of Noxell Corporation, a consumer products
manufacturer. Mr. Bunting is also a director of Crown Central Petroleum
Corporation, Mercantile Bankshares Corporation and Guilford Pharmaceuticals,
Inc.
Robert E. Davis
Mr. Davis, age 66, has been a director of the Corporation since 1990, and
is a member of the Audit, Compensation and Nominating Committees. Mr. Davis is
Managing Director of Axess Corporation, a manufacturer of quality control
instrumentation and specialty polymers. Mr. Davis is also a director of H&R
Block, Inc.
Kenneth M. Duberstein
Mr. Duberstein, age 53, has been a director of the Corporation since 1996.
Mr. Duberstein is Chairman and Chief Executive Officer of The Duberstein Group,
a consulting firm, and is the former Chief of Staff to President Reagan, the
former Assistant to the President for Legislative Affairs, and the former Deputy
Under Secretary of the Department of Labor. Mr. Duberstein is also a director of
the Boeing Corporation and Cinergy Corporation.
Dale F. Frey
Mr. Frey, age 65, has been a director of the Corporation since 1991, and is
a member of the Executive, Audit and Finance Committees. Mr. Frey is the former
Vice President of General Electric Company and Chairman of the Board and
President of General Electric Investment Corporation and GE Investment
Management Incorporated. Mr. Frey is also a director of Praxair, Inc., Promus
Hotel Corporation, First American Financial Corporation, Roadway Express, Inc.,
and After Market Technology Corporation.
Robert E. Gregory, Jr.
Mr. Gregory, age 55, has been a director of the Corporation since 1988, and
is a member of the Executive, Audit and Compensation Committees. Mr. Gregory is
Chairman and Chief Executive Officer of London Fog Corporation, an apparel
manufacturer, and is the former Chairman and Chief Executive Officer of The
Gitano Group, Inc., an apparel marketer, and the former President of VF
Corporation, an apparel manufacturer and distributor.
Robert J. Hurst
Mr. Hurst, age 52, has been a director of the Corporation since 1988, and
is a member of the Executive and Nominating Committees. Mr. Hurst is an
Executive Committee partner and head of the Investment Banking Division at
Goldman, Sachs & Co., an investment banking firm. Mr. Hurst is also a director
of VF Corporation.
Paul B. Ingrey
Mr. Ingrey, age 58, has been a director of the Corporation since 1997, and
is a member of the Audit and Finance Committees. Mr. Ingrey formerly served as
President of F&G Re from 1983 through 1996. Mr. Ingrey is also a director of E.
W. Blanch Holdings, Inc.
Wilbur G. Lewellen
Dr. Lewellen, age 60, has been a director of the Corporation since 1992,
and is a member of the Compensation and Finance Committees. Dr. Lewellen is the
Herman C. Krannert Distinguished Professor of Management at the Graduate School
of Management at Purdue University.
Larry P. Scriggins
Mr. Scriggins, age 61, has been a director of the Corporation since 1979,
and is a member of the Finance and Nominating Committees. Mr. Scriggins is a
partner and member of the Executive Committee of the law firm of Piper &
Marbury, L.L.P.
Anne Marie Whittemore
Ms. Whittemore, age 52, has been a director of the Corporation since 1993,
and is a member of the Finance and Nominating Committees. She is a partner in
the law firm of McGuire, Woods, Battle & Boothe, L.L.P. Ms. Whittemore is also a
director of Albemarle Corporation, Owens & Minor, Inc., Fort James Corporation
and T. Rowe Price Associates, Inc.
R. James Woolsey
Mr. Woolsey, age 56, has been a director of the Corporation since 1995, and
is a member of the Audit and Finance Committees. Mr. Woolsey is a partner of the
law firm of Shea & Gardner, and is the former Director of Central Intelligence,
and the former Ambassador and U.S. Representative to the Negotiation on
Conventional Armed Forces in Europe. Mr. Woolsey is also a director of Sun
Healthcare Group, Inc., and Yurie Systems, Inc.
Item 11. Executive Compensation
11.1. Summary compensation table
The following table reflects the compensation for the year 1997 of the
Chief Executive Officer and the four highest paid persons who were executive
officers of the Registrant at the end of 1997.
[Enlarge/Download Table]
Annual Compensation Long-Term Compensation
Number of
Securities
Name and Principal Underlying LTIP All Other
Position Year Salary Bonus Other (b) Options Granted Payouts (c) Compensation (d)
----------------------------------------------------------------------------------------------------------------------------
Norman P. Blake, Jr. 1997 $907,614 $1,250,000 $ -- 120,100 $1,032,651 $175,495
President and Chief 1996 858,815 1,100,000 16,901 252,900 952,525 153,223
Executive Officer 1995 805,769 1,499,983(a) 13,970 125,000 -- 154,358
Dan L. Hale 1997 434,112 346,516 -- 25,800 425,118 47,520
Executive Vice President 1996 414,287 287,000 8,100 49,500 371,142 44,860
- Chief Financial Officer 1995 395,034 479,359(a) 10,065 35,000 -- 42,446
John C. Sweeney 1997 421,739 280,000 -- 24,700 327,150 43,164
Senior Vice President - 1996 394,486 250,000 -- 22,300 185,394 40,221
Chief Investment Officer 1995 367,769 357,789(a) -- 29,700 -- 37,394
John A. MacColl 1997 309,171 215,836 -- 12,900 218,438 22,132
Executive Vice President 1996 295,987 173,000 6,808 25,000 187,607 21,016
and General Counsel 1995 285,262 265,182(a) 3,227 15,000 -- 19,732
Harry N. Stout 1997 294,116 223,263 -- 11,000 170,789 21,643
Executive Vice President, 1996 248,939 135,000 7,097 15,000 144,009 19,869
and President - F&G Life 1995 234,520 194,667(a) 5,953 15,000 -- 18,781
--------------------------------------------------------------------------------------------------
Notes to summary compensation table:
(a) Includes cash payments earned for 1995 under the Corporation's
Long-Term Cash Incentive Plan of $499,983, $210,759, $118,789, $110,182 and
$63,367, respectively, for Messrs. Blake, Hale, Sweeney, MacColl and Stout.
Pursuant to the USF&G Executive Deferred Bonus Payment Plan, a participant may
elect to defer all or a portion of the annual cash bonus or payments under the
Long-Term Cash Incentive Plan, with interest credited on such deferred amounts
based on a composite five-year U.S. Treasury rate plus 1%. The Long-Term Cash
Incentive Plan was replaced with the stock-based Long-Term Incentive Program
(the "LTIP"). Payments under the LTIP are reported under the column entitled
"LTIP Payouts".
(b) Includes tax reimbursements related to the taxable income reported for
the executive in cases where the spouse accompanied the executive on a business
trip.
(c) Beginning with the three-year cycle started January 1, 1994, the
Corporation initiated the Long-Term Incentive Program, which is a stock-based
plan approved by shareholders under which payments are based upon three-year
cumulative operating income targets established at the beginning of each cycle.
The payments reported in this column are the dollar value of the stock awards as
of December 31 distributed or to be distributed for the three-year performance
cycle.
(d) Includes matching contributions made by the Corporation during 1997 to
the Corporation's Capital Accumulation Plan (a 401(k) plan) of $4,750 each. Also
includes premiums paid for split dollar life insurance policies for Messrs.
Blake, Hale, Sweeney, MacColl and Stout, which in 1997 were $170,745, $42,770,
$38,414, $17,382 and $16,893, respectively.
11.2. Stock option grants in 1997
The following table provides information on option grants in 1997 to the named
executive officers.
[Enlarge/Download Table]
Number of
Securities Percent of Total
Underlying Options Granted to Exercise or Base
Options Granted Employees Price Grant Date
Name in 1997 (a) in Fiscal Year Per Share Expiration Date Present Value (b)
------------------------------------------------------------------------------------------------------------------------------
Norman P. Blake, Jr. 120,100 5.0% $22.50 03/14/07 $776,700
Dan L. Hale 25,800 1.1 22.50 03/14/07 166,400
John C. Sweeney 24,700 1.0 22.50 03/14/07 159,300
John A. MacColl 12,900 0.5 22.50 03/14/07 83,200
Harry N. Stout 11,000 0.5 22.50 03/14/07 71,000
------------------------------------------------------------------------------------------------------
Notes to stock option grants table:
(a) Options are exercisable for shares of the Corporation's common stock.
One third of the options are exercisable after one year, two thirds are
exercisable after two years, and all of the granted options are exercisable
after three years. All options vest immediately if any person acquires 30
percent or more of the outstanding shares, if the Corporation's shareholders
approve a merger, consolidation or sale of substantially all of the
Corporation's assets, or if any shares are acquired pursuant to a tender offer
(so-called "fundamental changes"). All of the options granted were non-qualified
options and were granted at exercise prices equal to the fair market value of
the Corporation's common stock on the date of grant.
(b) Based on the Black-Scholes option pricing model assuming expected
volatility equal to the one-year average volatility of 0.2113, expected dividend
yield equal to the average three-year dividend yield of 1.13%, a risk free
interest rate of 6.52%, and an expected option term of five years. The actual
value, if any, an executive may realize will depend upon the excess of the stock
price over the exercise price on the date the option is exercised; accordingly,
there is no assurance that the executive will realize the values set forth
above.
11.3. Aggregate option exercises and year-end values
The following table provides information on option exercises in 1997 by the
named executive officers and the value of such officers' unexercised options.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Options at 12/31/97 at 12/31/97 (a)
Name Exercisable Unexercisable Exercisable Unexercisable
------------------------------------------------------------------------
Norman P.
Blake, Jr. 825,980 630,375 $8,600,821 $3,846,320
Dan L. Hale 211,578 70,469 2,173,171 345,870
John C.
Sweeney 65,733 49,467 553,542 194,960
John A.
MacColl 104,068 34,567 1,002,108 167,152
Harry N.
Stout (b) 35,301 9,300 55,125 117,158
-----------------------------------------------------------
Notes to exercised/unexercised options table:
(a) The value of in-the-money options was determined by taking the
difference between $22.06 per share, which was the closing price of the
Corporation's common stock on the last business day of the year, and the
exercise price of each option.
(b) None of the officers named above exercised any stock options during
1997 except for Mr. Stout who exercised 20,599 options during 1997 realizing a
value of $156,032.
11.4. Long-Term Incentive Program awards in 1997
Performance
Period Until Estimated Future Payment (a)
Name Payout Threshold Target Maximum
---------------------------------------------------------------------
Norman P. Blake, Jr. 3 years 11,032 22,064 41,370
Dan L. Hale 3 years 4,522 9,043 16,956
John C. Sweeney 3 years 4,326 8,652 16,223
John A. MacColl 3 years 3,223 6,446 12,086
Harry N. Stout 3 years 3,207 6,414 12,026
--------------------------------------------------
Note to Long-Term Incentive Program awards table:
(a) Number of share units awarded depends upon adjusted three-year
cumulative operating income for the period 1997 - 1999, and may be zero if the
minimum target is not reached, or, if such threshold is reached, between the
threshold and maximum shown. Each share unit is the equivalent of one share of
the Corporation's common stock.
The Long-Term Incentive Program was established in 1994 by the Compensation
Committee of the Board of Directors and approved by the shareholders. The LTIP
provides for granting of performance awards that are payable in the
Corporation's common stock. Awards are payable based upon performance goals
established by the Compensation Committee at the beginning of each successive
and overlapping three-year performance period. Performance goals consist of an
adjusted three-year cumulative operating income target. The actual award is
determined at the end of each three-year cycle based upon actual corporate
performance. If actual performance falls below 85 percent of the targeted
performance, then no awards will be paid out for that three-year cycle. The
maximum award may be paid if actual performance equals or exceeds 115 percent of
the three-year target performance. Participants will only receive the designated
units, which are payable in shares of the Corporation's common stock, at the end
of the three-year cycle (unless there is a "fundamental change", in which case
they are prorated). The actual award received at the end of the three-year cycle
may be reduced, but not increased, for the participants listed in the table, due
to individual performance, business unit performance or overall corporate
performance.
11.5. Pension plans
The Corporation has a non-contributory, defined benefit pension plan which
provides employees of the Corporation and designated subsidiaries with
retirement benefits beginning at the normal retirement age of 65. The
Corporation also maintains a supplemental retirement plan for senior executives
that provides benefits that would otherwise be paid to them under the pension
plan but for certain limitations imposed by the Internal Revenue Code. The
following table shows the estimated benefits that would be payable at normal
retirement age under the pension plan and the supplemental retirement plan if an
individual had the specified years of service with the Corporation or designated
subsidiaries and levels of average compensation covered by the plans.
Estimated Annual Benefit for Years of
Average Service Indicated
Compensation 15 Years 20 Years 25 Years 30 Years 35 Years
-------------------------------------------------------------------
$ 150,000 $ 32,000 $ 43,000 $ 53,000 $ 64,000 $ 74,000
175,000 38,000 50,000 63,000 75,000 87,000
200,000 43,000 58,000 72,000 86,000 101,000
225,000 49,000 65,000 81,000 97,000 114,000
250,000 55,000 73,000 91,000 109,000 127,000
300,000 66,000 88,000 109,000 131,000 153,000
350,000 77,000 103,000 128,000 154,000 179,000
400,000 88,000 118,000 147,000 176,000 206,000
450,000 100,000 133,000 166,000 199,000 232,000
500,000 111,000 148,000 184,000 221,000 258,000
600,000 133,000 178,000 222,000 266,000 311,000
700,000 156,000 208,000 259,000 311,000 363,000
800,000 178,000 238,000 297,000 356,000 416,000
900,000 201,000 268,000 335,000 401,000 468,000
1,000,000 223,000 298,000 372,000 446,000 521,000
-------------------------------------------------------------------
Compensation for purposes of computing benefits under these plans is
generally an employee's base salary, plus commissions, overtime and annual
incentive bonuses paid during an employee's service with the Corporation and its
designated subsidiaries. Benefits are computed on the basis of a straight life
annuity and are not subject to any deduction or offset for Social Security or
other benefits. Mr. Blake is effectively covered under a separate plan described
below. For purposes of calculating average annual compensation under these
plans, 1997 compensation is as reported under the "Annual Compensation--Salary"
and "Bonus" columns in the summary compensation table (refer to Item 11.1),
except that payments under the Long-Term Cash Incentive Plan reported under the
"Bonus" column for 1995 are excluded. Accordingly, 1997 compensation for
calculating benefits for Messrs. Hale, Sweeney, MacColl and Stout was $780,628,
$701,739, $525,007 and $517,379, respectively. The estimated credited years of
service for each of such individuals is as follows: Mr. Hale, six years; Mr.
Sweeney, four years; Mr. MacColl, nine years; and Mr. Stout, four years.
A supplemental retirement contract with Mr. Blake provides a retirement
benefit which, when combined with benefits from the Corporation's pension plan
and his prior employer's pension plan, equals a life annuity beginning at age 65
of 60 percent of his highest consecutive three-year average annual covered
compensation. Prior to November 26, 1993, covered compensation was equal to his
salary plus annual incentive bonus. Although Mr. Blake voluntarily agreed to
waive a substantial portion of his base salary payable after that date as
described under Item 11.6, "Employment agreements; special severance
arrangements", salary for purposes of the supplemental retirement contract will
be determined without regard to that waiver and will be based on his "salary of
record" described below. The Long-Term Cash Incentive Plan and the LTIP are
excluded for purposes of calculating pension benefits. Estimated annual
retirement benefits payable to Mr. Blake at age 65 would be $1,511,220 based
upon 1997 covered compensation of $2,518,700, and $1,813,464 if average annual
covered compensation increased to $3,022,440.
11.6. Employment agreements; special severance arrangements
The Corporation entered into a five-year employment agreement with Mr.
Blake in November 1990. In November 1993, the Corporation and Mr. Blake entered
into a second employment agreement which extended the term of Mr. Blake's
employment until November 1998. At the same time, Mr. Blake agreed to waive
salary in excess of $750,000 and $800,000, respectively, for 1994 and 1995 in
connection with an overall shift from fixed compensation to compensation tied to
the Corporation's performance as measured by its stock price. The new employment
agreement continues the effect of the base salary waiver and provides for base
salary of $850,000 in 1996, which is the first year of the new term, and
$900,000 and $950,000, respectively, in the second and final years. In the event
Mr. Blake's employment is terminated by the Corporation for reasons other than
serious cause, he is nevertheless entitled to be paid his base salary for the
remainder of the extended term and receive benefits under all incentive, profit
sharing, certain bonus and other executive and employee benefit plans.
Provisions concerning health and other insurance and similar benefits as well as
noncompetition arrangements are included in both the initial and the new
employment contracts. All other benefits, including bonuses, stock option
grants, insurance and retirement benefits, will be determined in accordance with
the Corporation's regular programs and policies but will be based on the base
salary he would have received without regard to the waiver ("salary of record").
The salary of record for 1997 was $1,268,700.
In February 1997, the Board of Directors approved severance arrangements
covering Messrs. Blake, Hale, Sweeney, MacColl and Stout and other executive
officers in the event of a "change in control". The Corporation also approved
separate arrangements for other senior officers in the event of involuntary
separation following a change in control. The arrangements for executive
officers provide for payments of between 1.5 and 3 times the sum of such
executive's base salary and certain annual bonus and long-term incentive
compensation amounts. The purpose of these arrangements is to promote stability
despite widespread industry consolidation, provide an incentive for executives
to stay before, during and after a change in control, and promote objectivity in
evaluating strategic alternatives to maximize long-term shareholder value. The
payments are made if the executive is terminated without cause or if he or she
resigns for "good reason" (as defined in the severance agreement), in each case
within two years following a change in control, or if the executive elects to
leave within a sixty-day period beginning on the first anniversary of the change
in control. For certain executives, these arrangements also provide for
continuation of medical benefits for up to three years or until subsequently
employed by another employer and for reimbursement of certain excise taxes.
Participation in these arrangements is conditioned on the effected executive
officers agreeing at the time of a change in control to continue their
employment for not less than one year. Severance benefits payable under any of
these arrangements are in lieu of any severance which would otherwise be
payable.
On January 19, 1998, the Corporation signed a definitive merger agreement
with St. Paul. The merger contemplated by such agreement will, upon its
completion, constitute a change in control for purposes of these severance
arrangements. The information provided under the caption "Interests of Certain
Persons in the Merger" in the Joint Proxy Statement/Prospectus of the
Corporation and St. Paul relating to the merger is incorporated herein by
reference, except that the following two sentences should be substituted for the
last two sentences under the sub-caption entitled "1993 Stock Plan for
Non-Employee Directors": As of February 25, 1998, the non-employee directors
held in the aggregate 143,065 Vested Stock Units. Based on a price of St. Paul
Common Stock equal to $87.375 and an exchange ratio of .2821, the estimated
value of such Vested Stock Units to be paid to the non-employee directors is
approximately $3,526,300.
By letter agreement dated December 3, 1996, the Corporation entered into a
Retention Agreement with Mr. Harry N. Stout. The terms of the agreement provide
that, on December 31, 1998, Mr. Stout will be entitled to receive an amount
equal to twenty-four months of base salary less withholding taxes. In the event
of a sale or change in control of F&G Life, the retention bonus would be
accelerated and paid upon the completion of the change in control of F&G Life.
In addition, the agreement provides for accelerated vesting of outstanding stock
options and LTIP stock awards and a gross-up for any golden parachute excise
tax. By letter agreement dated December 1, 1997, the Corporation and Harry Stout
confirmed that the retention agreement would not be triggered by a change in
control of USF&G Corporation.
11.7. Directors' fees
Directors who are not officers of the Corporation or its affiliates
("Directors") are paid $800 per committee meeting attended and $1,000 for
attending Board meetings. Annual retainers have been established as follows:
Directors of the Corporation, $23,000 each; Chairperson of the Audit Committee,
$7,500; Chairperson of the Compensation, Nominating and Finance Committees,
$5,000 each; other members of the Audit, Finance, Nominating and Compensation
Committees, $3,000 each; and any member of the Executive Committee not serving
as Chairperson of any other committee, $3,000 each.
Under the 1993 Stock Plan for Non-Employee Directors (the "Stock Plan"),
directors receive shares of common stock in lieu of one-half of the regular
$23,000 retainer. The number of shares credited per year is the lesser of 1,000
or the number of shares equal to $23,500 divided by the fair market value of the
Corporation's common stock on the award date. Directors may elect to defer
receipt of these shares, in which event the shares will be credited to the
Director's account as stock units which are payable in shares at a later date.
Directors may also elect to defer receipt of the remaining portion of the cash
retainer and, as a result of amendments adopted in 1996, meeting fees. Deferral
amounts are credited to the Director's account as stock units based on the fair
market value of the Corporation's common stock on the date the deferred amounts
would have otherwise been paid. The amendment also permitted Directors to make a
one-time election to transfer amounts previously deferred under the cash
deferred plan into stock units based on the fair market value of the
Corporation's common stock on the transfer date.
The Stock Plan also provides a retirement benefit payable to Directors in
stock. The retirement benefit vests incrementally over ten years and the number
of shares payable upon retirement after full vesting is equal to $50,000 divided
by the fair market value of the stock on the date the Director is first elected
to the Board. Directors who elected to waive their right to participate in a
prior retirement arrangement will instead receive upon retirement a number of
shares valued at the actuarial equivalent of the benefit otherwise payable under
the prior arrangement.
Under the Stock Incentive Plan of 1997, Directors are eligible to receive
stock option grants. On March 13, 1998, each Director was granted 3,000 stock
options. The exercise price was $25 3/16 per share, the fair market value of the
Corporation's common stock on that date. The stock options vest ratably over
three years and the term is ten years.
Effective January 1, 1997, the Corporation entered into an Executive
Consulting Agreement and Stock Appreciation Rights Plan and Agreement with Paul
Ingrey, a director of the Corporation. The term of the Executive Consulting
Agreement (the "Consulting Period") is five years unless earlier terminated by
either party upon not less than six months prior notice by written agreement of
the parties, by the death or disability of Mr. Ingrey, by the Corporation for
good cause or upon violation of certain provisions of the Agreement. Under the
Executive Consulting Agreement, Mr. Ingrey provides certain consulting services
with respect to reinsurance and other matters and agrees not to compete with or
solicit or hire any employees of the Corporation during the Consulting Period
and further agrees to keep confidential certain trade secrets and other
confidential and proprietary information of the Corporation. Under the Stock
Appreciation Rights Plan and Agreement, Mr. Ingrey was granted 128,500 stock
appreciation rights in consideration of the cancellation of stock options
previously granted to him as an employee of the Corporation. Each stock
appreciation right entitles Mr. Ingrey to receive a cash payment upon exercise
equal to the difference between (i) the closing price of one share of the
Corporation's common stock on the New York Stock Exchange for the last business
day immediately preceding the date of exercise and (ii) the price specified in
the Stock Appreciation Rights Plan and Agreement. The specified price ranges
between $13.63 and $14.56. On March 9, 1998, 110,300 stock appreciation rights
became fully vested and exercisable and the remaining 18,200 stock appreciation
rights will become vested and exercisable on and after March 8, 1999. However,
all stock appreciation rights become vested upon a change in control, which
would include the pending merger with St. Paul. The stock appreciation rights,
once vested, may be exercised at any time during the Consulting Period and for a
period of ninety days thereafter provided Mr. Ingrey complies with the
noncompetition, nonsolicitation and confidentiality provisions of the Executive
Consulting Agreement.
11.8. Compensation Committee report
Compensation philosophy
It is the philosophy of the Corporation to link executive compensation to
sustained improvements in corporate performance and increases in shareholder
value as measured by the Corporation's stock price. The following objectives
have been adopted by the Compensation Committee as guidelines for compensation
decisions:
Provide a competitive total compensation package that enables the
Corporation to attract and retain the key executive talent needed to
accomplish its corporate goals.
Integrate compensation programs with the Corporation's annual and
long-term business objectives and strategy, and focus executive behavior on
the fulfillment of those objectives.
Provide variable compensation opportunities that are directly linked
with the performance of the Corporation and that align executive
remuneration with the interests of the shareholders.
In addition, the Compensation Committee also considers the impact of
Section 162(m) of the Internal Revenue Code of 1986, which in certain
circumstances disallows compensation deductions in excess of $1,000,000. This
disallowance provision does not apply to performance-based compensation,
commissions and certain other forms of compensation. The Compensation Committee
has determined that in the normal course of business the Corporation's incentive
compensation plans should comply, to the extent practicable, with the Internal
Revenue Code's requirements for performance-based compensation with a view
toward ensuring that the Corporation will be entitled to full deductibility of
all compensation paid under those plans.
Compensation program
The Compensation Committee is responsible for reviewing the Corporation's
compensation program to ensure that pay levels and incentive opportunities are
competitive and reflect the performance of the Corporation. The components of
the compensation program for executives are described below.
Base Salary: The factors considered in determining the appropriate salary
are level of responsibility, prior experience and accomplishments, and the
relative importance of the job in terms of achieving corporate objectives. Each
executive's salary is reviewed annually. Adjustments may be recommended based
upon individual performance, inflationary and competitive factors, and overall
corporate results.
Annual Incentive Compensation: Cash bonuses are paid annually based upon
individual performance and relevant corporate performance measures, including
operating income, and loss and expense ratios for the property/casualty and life
insurance segments. These performance measures vary depending upon the executive
and the related line of business. Bonuses are paid relative to the Corporation's
performance as compared to certain performance targets established by the
Compensation Committee at the beginning of the year. Target awards are
established for each position as a percentage of base salary, and performance is
assessed at the end of the year. For the executives named in the summary
compensation table, operating income was the principal corporate performance
measure used to determine bonus amounts. In addition, the named executives
responsible for property/casualty or life insurance business units are also
evaluated on additional performance targets such as the combined ratio, direct
premiums, after-tax operating income, expenses and other factors for the
business unit for which they are responsible. The Compensation Committee has
established targets of 35 percent of base salary for possible bonus amounts for
senior vice presidents and 40 percent of base salary for possible bonus amounts
for executive vice presidents. These amounts are subject to adjustment depending
upon actual corporate performance relative to the targets established at the
beginning of the year and on individual performance measured against certain
objectives tailored to the individual at the beginning of the year. The
Compensation Committee awarded bonuses at the high end of the target ranges
based on their evaluation of the achievement of performance goals, achievement
of important strategic initiatives and individual performance for the named
executive officers.
Stock Options: Stock options granted under the Corporation's stock
incentive plans for executive officers, all of which have previously been
approved by shareholders, provide incentive to executives by giving them a
strong economic interest in maximizing stock price appreciation, thereby better
aligning their interests with the interests of the Corporation's shareholders.
Accordingly, each executive's total compensation is highly dependent upon stock
performance. Option exercise prices are set at 100 percent of fair market value
on the date of grant and the options expire after ten years. The annual options
granted by the Compensation Committee generally vest over a period of three
years in order to encourage management continuity and to better tie compensation
to long-term stock value, although vesting is accelerated in the event of
certain events which constitute a "change of control". Executives are generally
granted stock options annually. The value of stock options granted to executive
officers is fixed at a percentage of salary, using the Black-Scholes option
valuation model and the assumptions specified in the notes to the table in this
Form 10-K entitled "Stock option grants in 1997" (refer to Item 11.2). This
percentage is between 25 and 35 percent of salary for senior vice presidents and
50 percent of salary for executive vice presidents. These percentages are
subject to adjustment to as low as zero or as high as 150 percent of the target,
depending upon the executive's performance in the prior year and his/her
potential for future contribution. The stock option grants made in 1997 were
within these target ranges.
Long-Term Incentive Program: Beginning with the three-year cycle starting
in 1994, and each three-year cycle beginning on each year thereafter, awards are
made annually under the Long-Term Incentive Program which was approved by
shareholders in 1994. The LTIP ties compensation to three-year cumulative
operating income targets established at the beginning of each cycle.
Compensation under the LTIP is payable only at the end of each three-year cycle
and then payable in shares of the Corporation's common stock. A target amount to
be paid to each participant is established as a percentage of the participant's
salary. The targeted value is based on the then current value of the
Corporation's common stock; accordingly, the ultimate value of the award varies
directly with the market price for such shares. For the senior executives named
in the summary compensation table (refer to Item 11.1), other than the Chief
Executive Officer, the targets range from 35 to 50 percent of salary. The LTIP
grants made in 1997 were within these target ranges.
Compensation of Chief Executive Officer
The Compensation Committee attempts to establish base salary levels
consistent with the median base salary for executives in similar positions
within a peer group of approximately thirty major insurance companies. Total
compensation, however, is weighted more heavily toward incentive compensation by
attempting to establish annual bonuses, stock options and long-term compensation
at levels within the top quartile of this peer industry group. The increased
weighting toward incentive and stock-based compensation reinforces the
connection between shareholder interests and executive pay.
Mr. Blake joined the Corporation on November 27, 1990. The selection by the
Board of Mr. Blake was made in light of the Corporation's circumstances,
requiring significant redirection and restructuring of the Corporation, and in
light of Mr. Blake's experience, record and reputation in the financial services
industry.
Mr. Blake's base salary for 1997 was $907,614. This base salary reflects a
voluntary waiver of a substantial portion of the salary of record otherwise
payable under his employment agreement. The waiver occurred in 1993 in exchange
for stock options and other stock-based compensation. In recognition of this
waiver and emphasis on stock-based compensation, other components of
compensation, including his annual stock option awards, continue to be based on
the salary of record. Mr. Blake's salary of record for these purposes was
$1,268,700 for 1997. Mr. Blake's employment agreement, including the waiver, is
discussed more fully in Item 11.6, "Employment agreements; special severance
arrangements".
For 1997, Mr. Blake received total cash payments of $2,157,614 in salary
and bonus, as well as 46,811 shares of common stock under the 1995-1997 cycle of
the LTIP, all as shown in the summary compensation table (refer to Item 11.1).
The Compensation Committee considers this level of payment appropriate in view
of Mr. Blake's leadership of the Corporation in terms of earnings growth,
balance sheet strength, creation of shareholder value and improvement in
management processes at the Corporation.
In 1997, the Compensation Committee also granted Mr. Blake 120,100 stock
options which, in the ordinary course, vest ratably over a three-year period,
subject to accelerated vesting in the event of a change of control.
The Compensation Committee established Mr. Blake's target annual cash bonus
for 1997 at 50 percent of his salary of record, subject to reduction to as
little as zero or increase to as much as 100 percent of his salary of record.
The Compensation Committee awarded Mr. Blake a cash bonus of $1,250,000 for
1997, representing approximately 99 percent of his salary of record. In
determining Mr. Blake's 1997 annual bonus, the Compensation Committee reviewed
the Corporation's performance and Mr. Blake's individual performance against a
detailed set of performance objectives which were approved by the Compensation
Committee. These objectives set forth five principal categories of
responsibility, as well as objectives under each category, as briefly described
below.
Financial Performance: This responsibility consisted of achieving targeted
financial objectives without compromising the financial integrity or long-term
profit performance of the Corporation. Targets were set for consolidated
revenues of $3.4 billion, consolidated after-tax operating income of $194
million, consolidated net income of $183 million, net earnings per share
(diluted) of $1.50 and return on equity on a net income basis of 9.7%.
Strategy and Business Development: This responsibility consisted of
developing and implementing business strategies to leverage the strengths and
knowledge base of the Corporation, enhance shareholder value, and provide
long-term viability and improved profitability. Targets related to, among other
things, reviewing strategic alternatives for mergers and acquisitions and
implementation of strategies to emphasize high-margin lines of business and
improve marginal lines, including, specifically, increases in the percentage of
small commercial business for FBIG and growth in certain aspects of the
Specialty Businesses.
Strategic Resource Development: This responsibility consisted of developing
critical resources to support overall business strategies, and was divided into
the categories of financial resources and information systems. Financial
resource targets included calling for redemption the Corporation's $4.10 Series
A Convertible Exchangeable Preferred Stock ("Series A Preferred Stock"),
implementing a stock repurchase program or dividend increase, and improving F&G
Life's investment performance through the sale of lower-yield, aged structured
settlements. Information systems targets included completing development and
implementation of systems to support FBIG and the Claim Reception Center, and
full implementation of agency interface capability in the non-standard
automobile business and underwriter workstations.
Organization and Human Resource Development: This responsibility consisted
of developing a plan to ensure the continued strength of management, including a
review of existing management strengths, succession plans and incentive and
retention plans.
Investor, Regulatory and Public Relations: This responsibility consisted of
strengthening relationships with constituencies outside of the Corporation,
particularly investor groups, financial analysts and regulators.
The Corporation's actual performance met or exceeded all targets under the
1997 financial performance objectives. Evaluations of Mr. Blake's performance of
the remaining responsibilities were less quantitative, but the Compensation
Committee determined that Mr. Blake met or exceeded virtually all of the other
targeted objectives. Of major importance, the Compensation Committee noted that
significant Strategy and Business Development objectives and Organization and
Human Resource Development objectives were realized by virtue of the acquisition
of Titan and the pursuit and negotiation of the pending merger with St. Paul.
Each of these transactions is expected to result in synergistic value to the
Corporation's businesses and enhanced value for the Corporation's shareholders.
The Compensation Committee noted significant improvement in the Corporation's
overall business mix, with significant growth and expansion of the Corporation's
Specialty Businesses. Development and implementation of technology support
systems were completed on a timely basis, resulting in improved productivity and
service. In addition, the Corporation completed its significant share repurchase
program, modestly increased its dividend and improved its balance sheet by
calling for redemption the remaining balance of the Series A Preferred Stock and
issuing capital securities, significantly reducing the Corporation's financial
leverage and improving its liquidity. The Compensation Committee also noted the
long-term increase in shareholder value created under Mr. Blake's leadership
during his tenure and as reflected in the stock performance graph below.
Although the Compensation Committee did not assign specific weights to any
of the categories or targeted objectives, it did place greater weight on
financial performance and accomplishment of strategic responsibilities,
especially the pursuit and negotiation of the pending merger with St. Paul. The
Compensation Committee's review and the basis for determining Mr. Blake's
compensation was based on an overall assessment of Mr. Blake's performance and
contributions to the Corporation. The Compensation Committee concluded that Mr.
Blake's compensation was appropriate in light of his performance as Chief
Executive Officer.
Compensation Committee members
George L. Bunting, Jr., Chairperson
Michael J. Birck
Robert E. Davis
Kenneth M. Duberstein
Robert E. Gregory, Jr.
Wilbur G. Lewellen
Stock performance graph
The following graph compares cumulative total return of the Corporation's
common stock, the S&P 500 Index, and the S&P Property-Casualty Insurance Group
over a five-year period beginning December 31, 1992. The companies included in
the S&P Property-Casualty Insurance Group are: Allstate Corporation, Chubb
Corporation, Cincinnati Financial, General Re Corporation, Progressive
Corporation, SAFECO Corporation, St. Paul and USF&G. The cumulative total return
is calculated assuming reinvestment of dividends. The stock price performance on
this graph is not necessarily indicative of future performance.
[GRAPH (caption) Comparison of Five-Year Cumulative Total Return Among USF&G,
S&P 500 Index and S&P Property-Casualty Insurance Index
(data points are the same as those disclosed in the following table)]
December December December December December December
1992 1993 1994 1995 1996 1997
-------------------------------------------------------
USF&G Corporation $100 $121 $113 $142 $177 $189
S&P 500 Index 100 110 112 153 189 252
S&P P-C Insurance Index 100 98 103 140 170 247
-------------------------------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table shows the number of shares of the Corporation's common
stock beneficially owned by (i) each person known to the Corporation to
beneficially own more than five percent of the outstanding common stock, (ii)
each director, (iii) each executive named in the summary compensation table
shown in Item 11.1, and (iv) all directors and executive officers as a group.
None of the beneficial holdings of common stock listed below represents in
excess of 1 percent of the total issued and outstanding shares. The directors
and executive officers as a group own 1.9 percent of the total issued and
outstanding shares. The information set forth below has been calculated as of
February 20, 1998. The number of shares beneficially owned is determined under
rules of the Securities and Exchange Commission and the information is not
necessarily indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares as to which the person has the
sole or shared voting or investment power and also any shares which the person
has the right to acquire within 60 days through the exercise of any stock option
or other right. Unless otherwise indicated, each person has sole investment and
voting power (or shares such powers with his or her spouse) with respect to the
shares set forth in the following table.
Amount and Nature
of Beneficial
Name of Beneficial Owner Ownership
--------------------------------------------------------
H. Furlong Baldwin 9,000 (a)(b)
Michael J. Birck 8,000 (b)
Norman P. Blake, Jr. 1,127,060 (c)
George L. Bunting, Jr. 16,900 (b)
Robert E. Davis 1,500 (b)
Kenneth M. Duberstein 2,000 (b)
Dale F. Frey 8,762 (d)
Robert E. Gregory, Jr. 6,000 (b)
Dan L. Hale 285,740 (e)
Robert J. Hurst 10,324 (b)(f)
Paul B. Ingrey 17,814
Wilbur G. Lewellen 6,800 (b)
John A. MacColl 141,246 (g)
Larry P. Scriggins 3,234 (b)
Harry N. Stout 56,664 (h)
John C. Sweeney 63,531 (i)
Anne Marie Whittemore 1,500 (b)
R. James Woolsey 2,236 (b)
All directors and executive
officers as a group (25 persons) 2,284,609 (j)
-----------------------
Notes to security ownership table:
(a) Excludes shares held in various fiduciary capacities by the trust
department of Mercantile Safe-Deposit and Trust Company, a wholly-owned
subsidiary of Mercantile Bankshares Corporation, of which Mr. Baldwin is a
director and executive officer.
(b) Includes 1,000 shares subject to outstanding stock options which are
exercisable within 60 days. Under the 1993 Stock Plan for Non-Employee
Directors, Directors receive a portion of their annual retainer fees and certain
retirement benefits in the form of common stock units or shares of common stock
of the Corporation. The shareholdings listed in the table do not include the
following fully vested common stock units: Mr. Baldwin, 27,130; Mr. Birck,
9,999; Mr. Bunting, 17,539; Mr. Davis, 15,515; Mr. Duberstein, 3,578; Mr.
Gregory, 11,306; Mr. Hurst, 18,650; Mr. Lewellen, 6,071; Mr. Scriggins, 25,452;
Ms. Whittemore, 6,225; and Mr. Woolsey, 1,600.
(c) Includes 83,214 shares directly owned, 991,985 shares subject to
outstanding stock options which are exercisable within 60 days, 5,050 shares
owned by children of Mr. Blake and 46,811 shares to be issued within 60 days
under the LTIP.
(d) Excludes shares acquired by Trustees of General Electric Pension Trust
and other entities advised by affiliates of General Electric Company pursuant to
the Stock Purchase Agreement dated June 3, 1991.
(e) Includes 248,347 shares subject to outstanding stock options which are
exercisable within 60 days and 19,271 shares to be issued within 60 days under
the LTIP.
(f) Includes 3,324 shares beneficially owned in charitable trust.
(g) Includes 124,700 shares subject to outstanding stock options which are
exercisable within 60 days and 9,902 shares to be issued within 60 days under
the LTIP.
(h) Includes 43,566 shares subject to outstanding stock options which are
exercisable within 60 days and 7,742 shares to be issued within 60 days under
the LTIP.
(i) Includes 41,299 shares subject to outstanding stock options which are
exercisable within 60 days and 14,830 shares to be issued within 60 days under
the LTIP.
(j) Subject to the notes set forth above. Includes 1,905,304 shares subject
to outstanding stock options which are exercisable within 60 days and 135,240
shares to be issued within 60 days under the LTIP. Excludes a total of 143,065
fully vested common stock units held by Directors pursuant to the 1993 Stock
Plan for Non-Employee Directors.
Item 13. Certain Relationships and Related Transactions
In the ordinary course of business, USF&G Company has written fidelity,
surety, fire and casualty, liability, or other insurance for certain companies
of which Directors are officers, and surety bonds on projects that may be
financed in whole or in part by loans made by banks of which Directors are
officers. All these writings involve insurance premiums for which rate filings
are made and premium rates are approved as required by applicable insurance
regulations. In addition, the Corporation, in the ordinary course of business,
utilizes bank depository, lending, trustee and other banking services provided
by banks of which Directors may be officers or directors.
Robert J. Hurst, a Director of the Corporation, is a partner of Goldman,
Sachs & Co., which performed investment banking services for the Corporation in
1997.
Larry P. Scriggins, a Director of the Corporation, is a member of the law
firm of Piper & Marbury, L.L.P., which performed legal services for the
Corporation in 1997.
USF&G CORPORATION Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
The following consolidated financial statements of USF&G Corporation and
its subsidiaries, included in the Registrant's Form 8-K filed on February 26,
1998, 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.
Page 25 Schedule I. Summary of Investments - Other than Investments in Related
Parties
26-28 Schedule II. Condensed Financial Information of Registrant
29 Schedule III. Supplementary Insurance Information
30 Schedule IV. Reinsurance
31 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; therefore,
they have been omitted.
(3) Exhibits
The following exhibits are included in Item 14.
Page 32 Exhibit 11 Computation of Earnings Per Share
33 Exhibit 12 Computation of Ratio of Consolidated Earnings to Fixed
Charges, Distributions on Capital Securities 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 corporate secretary at the
address shown on page 34 of this Form 10-K. Management contracts or compensatory
plans or arrangements required to be filed as an exhibit are denoted with an
asterisk.
Exhibit 2
Agreement and Plan of Merger Among USF&G Corporation, The St. Paul
Companies, Inc., and SP Merger Corporation. Incorporated by reference to Annex A
to the Joint Proxy Statement/Prospectus filed February 27, 1998, File No.
0-3021.
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, 1996, File No.
1-8233.
Exhibit 3B
Amended By-laws of USF&G Corporation. Incorporated by reference to Exhibit
3B to the Registrant's Form 10-K for the year ended December 31, 1996, File No.
1-8233.
Exhibit 4A
Amended and Restated Rights Agreement dated as of March 11, 1997 between
USF&G Corporation and The Bank Of New York. Incorporated by reference to the
Registrant's Form 8-K and Form 8-A/A as filed on March 13, 1997 and February 25,
1998, respectively, File No. 1-8233.
Exhibit 4B
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 4C
Indenture dated January 28, 1994 between USF&G Corporation and Signet Bank.
Incorporated by reference to Exhibit 4D to the Registrant's Form 10-K for the
year ended December 31, 1994, File No. 1-8233.
Exhibit 4D
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 4E
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 4F
Form of $250 Million Five-Year Credit and Reimbursement Agreement dated as
of December 18, 1997 among USF&G Corporation, the banks listed therein, Morgan
Guaranty Trust Company of New York, as administrative agent, and Deutsche Bank
AG, New York Branch, as document agent.
Exhibit 4G
Form of $200 Million 364-Day Credit and Reimbursement Agreement dated as of
December 18, 1997 among USF&G Corporation, the banks listed therein, Morgan
Guaranty Trust Company of New York, as administrative agent, and Deutsche Bank
AG, New York Branch, as documentation agent.
Exhibit 4H
Letter of Credit Agreement dated as of October 25, 1994 among USF&G
Corporation and The Bank Of New York, as agent. Incorporated by reference to
Exhibit 4I to the Registrant's Form 10-K for the year ended December 31, 1994,
File No. 1-8233.
Exhibit 4I
Form of 7% Senior Notes due 1998. Incorporated by reference to Exhibit 4A
to the Registrant's Form 10-Q for the quarter ended June 30, 1995, File No.
1-8233.
Exhibit 4J
Form of 7 1/8% Senior Notes due 2005. Incorporated by reference to Exhibit
4B to the Registrant's Form 10-Q for the quarter ended June 30, 1995, File No.
1-8233.
Exhibit 4K
Documents related to USF&G Capital I. Incorporated by reference to Exhibit
4K to the Registrant's Form 10-K for the year ended December 31, 1996, File No.
1-8233.
Exhibit 4L
Documents related to USF&G Capital II. Incorporated by reference to Exhibit
4L to the Registrant's Form 10-K for the year ended December 31, 1996, File No.
1-8233.
Exhibit 4M
Documents related to USF&G Capital III. Incorporated by reference to
Exhibit 4 to the Registrant's Form 10-Q for the quarter ended June 30, 1997,
File No. 1-8233.
Exhibit 10A*
Stock Option Plan of 1987. Incorporated by reference to Exhibit 4.1 to the
Registrant's Form S-8 Registration Statement dated July 28, 1987, File No.
33-16111.
Exhibit 10B*
Employment Agreement dated November 20, 1990 between USF&G Corporation 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 10C*
USF&G Supplemental Executive Retirement Agreement dated November 20, 1990
between USF&G Corporation and Norman P. Blake, Jr. 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 10D*
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 10E*
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 10F*
Stock Incentive Plan of 1997. Incorporated by reference to Exhibit 10F to
the Registrant's Form 10-K for the year ended December 31, 1996, File No.
1-8233.
Exhibit 10G*
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 10H*
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 10I*
Amended and Restated 1993 Stock Plan for Non-Employee Directors.
Incorporated by reference to Exhibit 10I to the Registrant's Form 10-K for the
year ended December 31, 1996, File No. 1-8233.
Exhibit 10J*
Employment Agreement dated November 10, 1993 between USF&G Corporation 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 10K*
Stock Option Agreement dated November 10, 1993 between USF&G Corporation
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 10L*
Stock Option Agreement dated November 10, 1993 between USF&G Corporation
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 10M*
Waiver dated November 10, 1993 between USF&G Corporation 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 10N*
First Amendment to USF&G Supplemental Executive Retirement Agreement dated
November 10, 1993 between USF&G Corporation and Norman P. Blake, Jr.
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 10O*
USF&G Supplemental Retirement Plan. Incorporated by reference to Exhibit
10Q to the Registrant's Form 10-K for the year ended December 31, 1993, File No.
1-8233.
Exhibit 10P*
Amended and Restated Stock Incentive Plan of 1991. Incorporated by
reference to Exhibit 10R to the Registrant's Form 10-K for the year ended
December 31, 1994, File No. 1-8233.
Exhibit 10Q*
Long-Term Incentive Program. Incorporated by reference to Exhibit 10S to
the Registrant's Form 10-K for the year ended December 31, 1994, File No.
1-8233.
Exhibit 10R*
USF&G Executive Deferred Bonus Payment Plan. Incorporated by reference to
Exhibit 10T to the Registrant's Form 10-K for the year ended December 31, 1995,
File No. 1-8233.
Exhibit 10S*
Unfunded Deferred Compensation Plan for Non-Employee Directors of USF&G
Corporation. Incorporated by reference to Exhibit 10U to the Registrant's Form
10-K for the year ended December 31, 1994, File No. 1-8233.
Exhibit 10T*
Description of Executive Severance Plan in the Event of a Change in
Control. Incorporated by reference to Exhibit 10T to the Registrant's Form 10-K
for the year ended December 31, 1996, File No. 1-8233.
Exhibit 10U
Coinsurance Contract dated as of July 26, 1996 among Fidelity and Guaranty
Life Insurance Company and Keyport Life Insurance Company. Incorporated by
reference to Exhibit 10U to the Registrant's Form 10-K for the year ended
December 31, 1996, File No. 1-8233.
Exhibit 10V
Material Contracts related to Titan Holdings, Inc. Incorporated by
reference to Exhibit 10A to the Registrant's Form 10-Q for the quarter ended
June 30, 1997, File No. 1-8233.
Exhibit 10W*
Material Contracts regarding USF&G executive severance. Incorporated by
reference to Exhibit 10B to the Registrant's Form 10-Q for the quarter ended
June 30, 1997, File No. 1-8233.
Exhibit 10X
Stock Option Agreement between The St. Paul Companies, Inc., and USF&G
Corporation. Incorporated by reference to Annex B to the Joint Proxy
Statement/Prospectus filed February 27, 1998, File No. 0-3021.
Exhibit 10Y*
Letter Agreements dated December 3, 1996 and December 1, 1997 between Harry
N. Stout and USF&G Corporation.
Exhibit 10Z*
Letter Agreement dated October 14, 1997 between Gary C. Dunton and USF&G
Corporation.
Exhibit 10AA*
Stock Appreciation Rights Agreement dated July 24, 1996 between Paul B.
Ingrey and USF&G Corporation.
Exhibit 10BB*
Consulting Agreement dated July 24, 1996 between Paul B. Ingrey and USF&G
Corporation.
Exhibit 11
Computation of earnings per share.
Exhibit 12
Computation of ratio of consolidated earnings to fixed charges,
distributions on capital securities and preferred stock dividends.
Exhibit 21
Subsidiaries of the Registrant.
Exhibit 23
Consent of Independent Auditors.
Exhibit 99
The "Interests of Certain Persons in the Merger" section of the Joint Proxy
Statement/Prospectus of USF&G Corporation and The St. Paul Companies, Inc.,
dated February 27, 1998, File No. 0-3021. Incorporated by reference, except for
the modifications noted in Part III, Item 11.6 of this Form 10-K.
All other exhibits specified by Item 601 of Regulation S-K are not required
pursuant to the related instructions or are inapplicable; therefore, they have
been omitted.
(b) Reports on Form 8-K
The Registrant filed no reports on Form 8-K during the fourth quarter of
1997.
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
/s/ NORMAN P. BLAKE, JR.
Norman P. Blake, Jr.
Chairman of the Board, President,
and Chief Executive Officer
Dated at Baltimore, Maryland
March 30, 1998
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:
/s/ NORMAN P. BLAKE, JR.
Norman P. Blake, Jr.
Chairman of the Board, President,
and Chief Executive Officer
Principal Financial Officer and Principal Accounting Officer:
/s/ DAN L. HALE
Dan L. Hale
Executive Vice President and
Chief Financial Officer
Dated at Baltimore, Maryland
March 30, 1998
Directors
/s/ H. FURLONG BALDWIN
H. Furlong Baldwin
/s/ MICHAEL J. BIRCK
Michael J. Birck
/s/ GEORGE L. BUNTING, JR.
George L. Bunting, Jr.
/s/ ROBERT E. DAVIS
Robert E. Davis
/s/ KENNETH M. DUBERSTEIN
Kenneth M. Duberstein
/s/ DALE F. FREY
Dale F. Frey
/s/ ROBERT E. GREGORY, JR.
Robert E. Gregory, Jr.
/s/ ROBERT J. HURST
Robert J. Hurst
/s/ PAUL B. INGREY
Paul B. Ingrey
/s/ WILBUR G. LEWELLEN
Wilbur G. Lewellen
/s/ LARRY P. SCRIGGINS
Larry P. Scriggins
/s/ ANNE MARIE WHITTEMORE
Anne Marie Whittemore
/s/ R. JAMES WOOLSEY
R. James Woolsey
USF&G CORPORATION Schedule I. Schedule of Investments - Other than
Investments in Related Parties
[Enlarge/Download Table]
At December 31, 1997
Amount at which
shown in the
Market Consolidated Statement
(in millions) Cost Value of Financial Position
-------------------------------------------------
Fixed Maturities Available for Sale:
United States Government agencies and authorities $ 1,872 $1,912 $ 1,912
States, municipalities and political subdivisions 1,209 1,261 1,261
Foreign governments 172 182 182
Public utilities 320 332 332
All other corporate bonds 4,610 4,808 4,808
-------------------------------------------------
Total fixed maturities available
for sale 8,183 8,495 8,495
-------------------------------------------------
Total fixed maturities 8,183 8,495 8,495
-------------------------------------------------
Equity Securities:
Common Stocks:
Banks, trusts and insurance companies 2 3 3
Industrial, miscellaneous and all other 19 16 16
-------------------------------------------------
Total common stocks 21 19 19
Nonredeemable preferred stocks 30 30 30
-------------------------------------------------
Total equity securities 51 49 49
-------------------------------------------------
Short-term investments 571 571 571
Mortgage loans 641 658 641
Real estate acquired in satisfaction of debt (A) 94 94
Other real estate (A) 242 242
Other invested assets (A) 852 852
-------------------------------------------------
Total investments $10,634 $10,944
-------------------------------------------------
<FN>
(A) Market value not readily available.
</FN>
USF&G CORPORATION Schedule II. Condensed Financial Information of
Registrant - Statement of Financial Position (Parent
Company)
At December 31
(in millions) 1997 1996
---------------------------------
Assets
Cash $ 5 $ --
Short-term investments -- 4
Investment in subsidiaries, at equity 3,396 3,021
Due from subsidiaries 94 99
Other assets 10 8
---------------------------------
Total assets $3,505 $3,132
---------------------------------
Liabilities
Debt (short-term and current maturities
of long-term, 1997, $180; 1996, $--) $ 812 $ 577
Dividends payable to shareholders 14 10
Due to insurance subsidiaries 44 36
Due to noninsurance subsidiaries 366 386
Other liabilities 192 154
---------------------------------
Total liabilities 1,428 1,163
---------------------------------
Shareholders' Equity
Preferred stock -- 200
Common stock 291 286
Paid-in capital 1,126 1,091
Net unrealized gains on investments and
foreign currency 167 62
Retained earnings 493 330
---------------------------------
Total shareholders' equity 2,077 1,969
---------------------------------
Total liabilities and shareholders'
equity $3,505 $3,132
---------------------------------
See Note to Condensed Financial Information.
USF&G CORPORATION Schedule II. Condensed Financial Information of
Registrant - Statement of Operations (Parent Company)
[Enlarge/Download Table]
Years Ended December 31
(in millions) 1997 1996 1995
----------------------------
Revenues
Net investment income:
Dividends from subsidiaries $200 $282 $114
Interest expense on loans from subsidiaries (20) (11) (12)
Other 1 (1) (3)
Other revenues:
From subsidiaries -- 6 7
From others -- -- 1
----------------------------
Revenues before net realized gains (losses) 181 276 107
Net realized gains (losses) on investments 4 (3) (4)
----------------------------
Total revenues 185 273 103
----------------------------
Expenses
Facilities exit costs/(sublease income) -- (69) (6)
Interest expense 47 38 42
Lease expense -- 18 21
Other operating expense 49 9 15
Foreign currency losses -- -- 1
----------------------------
Total expenses 96 (4) 73
----------------------------
Income from operations before income taxes and equity
in undistributed earnings of subsidiaries 89 277 30
Provision for income taxes (benefit) 1 (3) (15)
----------------------------
Income from operations before equity in undistributed
earnings of subsidiaries 88 280 45
Equity in undistributed earnings of subsidiaries 106 (19) 164
----------------------------
Net income $194 $261 $209
----------------------------
<FN>
See Note to Condensed Financial Information.
</FN>
USF&G CORPORATION Schedule II. Condensed Financial Information of
Registrant - Statement of Cash Flows (Parent Company)
[Enlarge/Download Table]
Years Ended December 31
(in millions) 1997 1996 1995
----------------------------
Net Cash (Used in) Provided from Operating Activities $ (45) $ 227 $ 40
----------------------------
Net Cash (Used in) Provided from Investing Activities (7) (4) 2
----------------------------
Financing Activities
Net borrowings (repayments) of short-term debt 2 -- (215)
Intercompany advances, net 164 (21) 21
Long-term borrowings -- -- 228
Repayments of long-term borrowings -- (114) (30)
Issuance of junior subordinated deferrable
interest debentures 204 98 --
Issuances of common stock 21 11 6
Repurchases of common stock (101) (150) --
Redemption of preferred stock (200) (2) --
Cash dividends paid to shareholders (33) (45) (53)
----------------------------
Net cash provided from (used in) financing activities 57 (223) (43)
----------------------------
Increase (decrease) in cash 5 -- (1)
Cash at beginning of year -- -- 1
----------------------------
Cash at end of year $ 5 $ -- $ --
----------------------------
<FN>
See Note to Condensed Financial Information.
</FN>
Note to Condensed Financial Information
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Corporation's Form 8-K filed on February 26, 1998, incorporated
herein by reference. Certain amounts have been reclassified to conform to the
1997 presentation. The parent company's provision for income taxes is based on
the Corporation's consolidated federal income tax allocation policy.
Effective June 1, 1995, USF&G Company declared an extraordinary dividend
payable to USF&G Corporation for the amount of its equity in F&G Life. This
dividend is excluded from "Dividends from Subsidiaries" in the condensed
statement of operations since the transaction represented a change in ownership
structure rather than a distribution of earnings from a subsidiary.
USF&G CORPORATION Schedule III. Supplementary Insurance Information
[Enlarge/Download Table]
At December 31 Years Ended December 31
Unpaid
losses,
loss Other Losses, Amortization
Deferred expenses policy- Net loss of deferred
policy and holders' investment expenses policy Other
acquisition policy Unearned funds Premium income and policy acquisition operating Premiums
(in millions) costs benefits premiums (A) revenue (A) benefits costs expenses written
--------------------------------------------------------------------------------------------------------------
1997
Property/Casualty Insurance:
CIG $113 $ 2,349 $ 368 $ 936 $ 714 $236 $ 79 $ 923
FBIG 103 1,580 404 932 699 237 74 860
Surety 49 92 117 189 67 64 35 210
Discover Re 6 70 103 29 20 3 3 45
F&G Re 10 937 39 459 294 135 5 414
Reinsurance receivable -- 1,172 117 -- -- -- -- --
--------------------------------------------------------------------------------------------------------------
Property/casualty 281 6,200 1,148 $13 2,545 $443 1,794 675 196 2,452
Life insurance 187 3,816 -- 61 137 253 277 12 34 N/A
--------------------------------------------------------------------------------------------------------------
Total $468 $10,016 $1,148 $74 $2,682 $696 $2,071 $687 $230 $2,452
--------------------------------------------------------------------------------------------------------------
1996
Property/Casualty Insurance:
CIG $105 $ 2,508 $ 354 $ 954 $ 708 $249 $100 $ 964
FBIG 122 1,526 436 990 782 265 120 989
Surety 40 79 100 141 55 63 19 160
Discover Re 2 61 72 22 17 2 2 27
F&G Re 21 871 82 479 306 120 2 499
Reinsurance receivable -- 987 69 -- -- -- -- --
-------------------------------------------------------------------------------------------------------------
Property/casualty 290 6,032 1,113 $12 2,586 $441 1,868 699 243 2,639
Life insurance 166 3,552 -- 79 145 269 313 8 43 N/A
--------------------------------------------------------------------------------------------------------------
Total $456 $ 9,584 $1,113 $91 $2,731 $710 $2,181 $707 $286 $2,639
--------------------------------------------------------------------------------------------------------------
1995
Property/Casualty Insurance:
CIG $122 $ 2,531 $ 382 $ 876 $ 662 $252 $ 71 $ 921
FBIG 122 1,680 404 982 732 268 126 974
Surety 30 44 61 119 44 53 9 129
Discover Re 2 50 36 25 20 4 5 27
F&G Re 12 808 57 490 344 107 5 512
Reinsurance receivable -- 984 115 -- -- -- -- --
--------------------------------------------------------------------------------------------------------------
Property/casualty 288 6,097 1,055 $ 9 2,492 $438 1,802 684 216 2,563
Life insurance 146 3,719 -- 80 174 306 376 30 41 N/A
--------------------------------------------------------------------------------------------------------------
Total $434 $ 9,816 $1,055 $89 $2,666 $744 $2,178 $714 $257 $2,563
--------------------------------------------------------------------------------------------------------------
<FN>
(A) Other policyholders' funds and net investment income are not allocated
to property/casualty categories.
N/A - Not applicable to life insurance pursuant to Rule 12-16 of Regulation
S-X.
</FN>
USF&G CORPORATION Schedule IV. Reinsurance
[Enlarge/Download Table]
Years Ended December 31
Ceded Assumed Percentage
Gross to other from other Net of amount
(in millions) amount companies companies amount assumed to net*
-----------------------------------------------------------------
1997
Life insurance in force $10,613 $1,785 $134 $ 8,962 1.5%
-----------------------------------------------------------------
Premiums Earned:
Life insurance $ 143 $ 7 $ 1 $ 136 .4%
Accident/health insurance -- -- 1 1 99.1
Property/casualty insurance 2,386 414 573 2,545 22.5
-----------------------------------------------------------------
Total $ 2,529 $ 421 $575 $ 2,682 21.4%
-----------------------------------------------------------------
1996
Life insurance in force $10,580 $1,220 $149 $ 9,509 1.6%
-----------------------------------------------------------------
Premiums Earned:
Life insurance $ 153 $ 9 $ -- $ 144 .3%
Accident/health insurance -- -- 1 1 102.1
Property/casualty insurance 2,346 369 609 2,586 23.5
-----------------------------------------------------------------
Total $ 2,499 $ 378 $610 $ 2,731 22.3%
-----------------------------------------------------------------
1995
Life insurance in force $11,237 $1,305 $154 $10,086 1.5%
-----------------------------------------------------------------
Premiums Earned:
Life insurance $ 178 $ 5 $ -- $ 173 .2%
Accident/health insurance -- -- 1 1 98.4
Property/casualty insurance 2,253 398 637 2,492 25.6
-----------------------------------------------------------------
Total $ 2,431 $ 403 $638 $ 2,666 23.9%
-----------------------------------------------------------------
<FN>
*Certain percentages are calculated from amounts in thousands and may not
equal the percentage calculated from amounts reported in millions.
</FN>
USF&G CORPORATION Schedule VI. Supplemental Information Concerning
Consolidated Property/Casualty Insurance Operations
At December 31
(in millions) 1997 1996
----------------------------
Deferred policy acquisition costs $ 281 $ 290
Reserves for unpaid losses and loss expenses 6,200 6,032
Discount deducted from reserves (A) 401 353
Unearned premiums 1,148 1,113
----------------------------
Years Ended December 31
(in millions) 1997 1996 1995
---------------------------------------------
Premiums earned $2,545 $2,586 $2,492
Net investment income 443 441 438
Losses and Loss Expenses
Incurred Related To:
Current year 1,933 2,030 1,856
Prior years (139) (162) (54)
Amortization of deferred policy
acquisition costs 675 699 684
Paid losses and loss expenses 1,951 1,954 1,831
Premiums written 2,452 2,639 2,563
---------------------------------------------
(A) Certain long-term disability payments for workers' compensation are
discounted at rates of up to 4%.
USF&G CORPORATION Exhibit 11 - Computation of Earnings Per Share
[Enlarge/Download Table]
Years Ended December 31
(dollars in millions except per share) 1997 1996 1995
------------------------------------------
Net Income Available to Common Stock
Basic:
Net income $ 194 $ 261 $ 209
Less preferred stock dividend requirements (2) (20) (28)
------------------------------------------
Net income available to common stock $ 192 $ 241 $ 181
------------------------------------------
Diluted:
Net income $ 194 $ 261 $ 209
Less preferred stock dividend requirements (2) (16) (16)
Add interest expense on zero coupon bonds 3 5 6
------------------------------------------
Net income available to common stock $ 195 $ 250 $ 199
------------------------------------------
Weighted-Average Shares Outstanding
Basic common shares 111,688,100 117,674,384 111,474,129
------------------------------------------
Diluted (A) (B):
Common shares 111,688,100 117,674,384 111,474,129
Common stock equivalents 3,239,470 2,124,569 1,431,267
Assumed conversion of preferred stock -- 2,150,892 9,931,329
Assumed conversion of zero coupon bonds 5,181,588 5,784,211 7,227,255
------------------------------------------
Total diluted 120,109,158 127,734,056 130,063,980
------------------------------------------
Earnings Per Share
Basic $1.72 $2.05 $1.63
Diluted (A) (B) 1.63 1.95 1.53
------------------------------------------
<FN>
(A) Diluted earnings per share amounts are calculated assuming the
conversion of all securities whose contingent issuance would have a dilutive
effect on earnings.
(B) Diluted earnings per share amounts for 1996 and 1995 have been restated
in compliance with SFAS No. 128, "Earnings Per Share", which the Corporation
adopted effective December 31, 1997.
</FN>
USF&G CORPORATION Exhibit 12 - Computation of Ratio of Consolidated Earnings
to Fixed Charges, Distributions on Capital Securities and
Preferred Stock Dividends
[Enlarge/Download Table]
Years Ended December 31
(dollars in millions) 1997 1996 1995
------------------------------
Fixed Charges
Interest expense $ 34 $ 39 $ 44
Portion of rents representative of interest 9 17 20
------------------------------
Total fixed charges 43 56 64
Distributions on capital securities 21 -- --
Preferred stock dividend requirements (A) 2 20 28
------------------------------
Combined fixed charges, distributions on capital
securities and preferred stock dividends 66 $ 76 $ 92
------------------------------
Consolidated Earnings Available
Income from operations before income taxes
and distributions on capital securities $292 $259 $195
Adjustment:
Fixed charges 43 56 64
------------------------------
Consolidated earnings available for fixed
charges, distributions on capital securities
and preferred stock dividends $335 $315 $259
------------------------------
Ratio of consolidated earnings to fixed charges 7.8 5.7 4.0
Ratio of consolidated earnings to combined fixed
charges, distributions on capital securities and
preferred stock dividends 5.1 4.1 2.8
------------------------------
<FN>
(A) Preferred stock dividend requirements of $2 million, $20 million and
$28 million in 1997, 1996 and 1995, respectively, divided by 100% less the
effective tax rate of 28.9% in 1997 and 0% in 1996 and 1995.
</FN>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS TO ANNUAL REPORT ON FORM 10-K
USF&G CORPORATION
For the Fiscal Year Ended Commission File Number
December 31, 1997 1-8233
A copy of all other of the Corporation's Exhibits to the 1997 Form 10-K
report not included herein may be obtained without charge upon written request
to John F. Hoffen, Jr., corporate secretary, at the corporate headquarters:
6225 Centennial Way
Baltimore, Maryland 21209
Dates Referenced Herein and Documents Incorporated by Reference
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