Document/Exhibit Description Pages Size
1: 10-K 12/31/96 Form 10-K 32± 149K
2: EX-3.(I) Charter of USF&G Corporation 68± 270K
3: EX-3.(II) Amended By-Laws of USF&G Corporation 12± 47K
4: EX-4 Documents Related to USF&G Capital I 189± 746K
5: EX-4 Documents Related to USF&G Capital Ii 141± 558K
7: EX-10 Amended and Restated 1993 Stock Plan 6± 25K
9: EX-10 Coinsurance Contract Dated as of July 26, 1996 69 155K
8: EX-10 Description of Executive Severance Plan 1 8K
6: EX-10 Stock Incentive Plan of 1997 5± 23K
10: EX-13 1996 Annual Report to Shareholders 101± 412K
11: EX-21 Exhibit 21 - Subsidiaries of the Registrant 1 6K
12: EX-23 Consent of Independent Auditors 1 9K
13: EX-27 12/31/96 Financial Data Schedule 2± 9K
14: EX-28 Combined Annual Statement Schedule P's 183± 1.14M
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, 1996 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 Smith Avenue, Baltimore, Maryland 21209
(Address of principal executive offices) (zip code)
Telephone: 410-547-3000
--------------------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act:
$4.10 Series A Convertible Exchangeable Registered-New York Stock Exchange
Preferred Stock, Par Value $50 Registered-Pacific Stock Exchange
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 stock held by non-affiliates of the
registrant as of March 21, 1997, was $2,564,848,780.
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 21,
1997:
Common Stock, Par Value $2.50; 113,363,482 shares outstanding.
Documents Incorporated by Reference:
Portions of the 1996 Annual Report to Shareholders are incorporated by
reference into Parts I and II.
Portions of the definitive proxy statement for the Annual Meeting of
Shareholders scheduled for May 21, 1997, are incorporated by reference into
Part III.
Exhibit Index begins on page 13.
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 8
1.8. Geographical Distribution 8
1.9. Executive Officers of the Registrant 9
Item 2. Business Properties 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Part II
Item 5. Market for Registrant's Common Equity and
Related Shareholder Matters 11
Item 6. Selected Financial Data 11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 8. Financial Statements and Supplementary Data 11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 11
Part III
Item 10. Directors and Executive Officers of the Registrant 12
Item 11. Executive Compensation 12
Item 12. Security Ownership of Certain Beneficial Owners
and Management 12
Item 13. Certain Relationships and Related Transactions 12
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 13
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 (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. 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 new 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 the
Corporation and all of its subsidiaries. As of December 31, 1996, the
Corporation had approximately 6,100 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 in the Corporation's 1996 Annual Report to Shareholders
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 property/casualty 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, 1996
and 70 percent of its total assets at Decemeber 31, 1996.
Coverages offered by CIG provide protection related to property loss, liability
claims and workers' compensation benefits to businesses and governmental
entities, and fidelity bonds for financial institutions. Property loss and
liability claims insurance protects against loss from damage to the insured's
covered properties and protects against legal liability for injuries to other
persons or damage to their property arising from the insured's business
operations. Workers' compensation provides benefits to employees, as mandated by
state laws, for employment-related accidents, injuries or illnesses. Fidelity
bonds indemnify employers against the dishonesty or default of persons in their
employ.
FBIG provides homeowners insurance and standard and nonstandard automobile
insurance, which include aspects of property loss and liability risks, as well
as small-size account commercial business. 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-size account commercial business includes 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 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). F&G Re recently established an office in Hong Kong
and expanded its presence in the Lloyd's of London markets through the
acquisition of Ashley Palmer, Ltd., a managing general agency. 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 in the
Corporation's 1996 Annual Report to Shareholders incorporated herein by
reference.)
Excess of loss reinsurance is used to limit USF&G Company's exposure to large
losses or catastrophic events. The following table summarizes USF&G Company's
most significant treaty placements as of December 31, 1996.
USF&G Reinsurance
Treaty Retention Limits*
---------------------------------
Property catastrophe $75 million $175 million
Property per risk 3 million 97 million
Surety 5 million 65 million
---------------------------------
*In excess of the retention level.
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 in the Corporation's 1996 Annual
Report to Shareholders 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, 1996 and 29 percent of its total assets at December 31, 1996.
Financial information and further descriptions of business and products
discussed above 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 in the Corporation's 1996 Annual Report to
Shareholders 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. In March 1996, the
Corporation sold its management consulting subsidiary. During 1994, the
Corporation committed to a plan to consolidate its home office operations in
Baltimore, Maryland at its Mount Washington facilities. Further information
about the plan and its progress is set forth in Section 1.2, "Facilities exit
costs/sublease income", of Management's Discussion and Analysis of Financial
Condition and Results of Operations in the 1996 Annual Report to Shareholders
incorporated herein by reference.
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 3,400 independent agencies in the United States on a commission
basis. In 1996, USF&G expanded its distribution channels to include retail,
wholesale and surplus lines brokers and agents.
As of December 31, 1996, USF&G Company maintained 43 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. In 1996, USF&G opened three Centers for Agency
Services dedicated to underwriting and policy processing for FBIG. The
Corporation also opened a centralized Claim Reception Center which provides
24-hour, seven-days-a-week claim reporting service to customers and agents
throughout the United States. In December 1996, USF&G acquired Afianzadora
Insurgentes, S.A. de C.V. ("Afianzadora"), the largest surety company in Mexico,
with 38 branch offices and a sales force of over 1,200 agents.
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 24th in the industry based on 1995 statutory net premiums
written, 22nd based on 1995 statutory assets and 30th based on 1995 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 162nd based on
1995 statutory net premiums written, 110th based on 1995 statutory assets and
115th based on 1995 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 and, accordingly, there
is often a time lag between identifying the need for rate increases and securing
such increases. The effect of this lag is particularly severe in times of rising
claims and inflation.
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 in the 1996 Annual Report to Shareholders
incorporated herein by reference.
1.6. Property/casualty loss reserves
General
The reserve liabilities for property/casualty losses and loss expenses represent
estimates of the ultimate net cost of all unpaid losses and loss adjustment
expenses incurred through December 31 of each year. The reserves are determined
using adjusters' individual case estimates and actuarially-based statistical
projections.
USF&G Company's estimates of losses for reported claims are established
judgmentally on an individual case basis. Such estimates are based on a claim
adjuster's particular expertise with the type of risk involved and knowledge of
circumstances surrounding the individual claims. These estimates are reviewed on
a regular basis and updated as additional facts become known. The reserves
derived from statistical projections are subject to the effects of trends in
claim severity and frequency. Statistical projections are employed in three
specific areas: (1) to calculate bulk reserves for incurred but not reported
("IBNR") losses and provide for development of case basis loss reserves; (2) to
calculate allocated loss expense reserves; and (3) to calculate unallocated loss
expense reserves.
IBNR and Case Development Reserves: USF&G Company's estimates of IBNR and case
development reserves are derived from analyses of historical patterns of
development of paid and reported losses by accident year for each line of
business. 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, the legal system and internal claims settlement practices,
among other variables. In many cases, significant periods of time may lapse
between the occurrence of an insured event, the reporting of a claim to USF&G
Company, and USF&G Company's final settlement of the claim. Almost 50 percent of
USF&G Company's loss and loss expense reserves are provided for claims which
have been incurred but not reported and for future development on reported
claims. While USF&G Company reports a single amount as the estimate for unpaid
loss and loss expenses as of each valuation date, the reported reserves should
be considered the best estimate from a range of possible outcomes. It is
unlikely that future losses and loss expenses will develop exactly as projected
and may in fact vary significantly from projections. These estimates are
continually reviewed and updated as experience develops and new information
becomes known. Any resulting adjustments are reflected in current operating
results.
Discounted loss reserves
The reserves for permanent-total disability benefits and long-term medical care
benefits under workers' compensation insurance are discounted at rates of
interest generally ranging up to four percent. The carrying amount of such
workers' compensation reserves, net of reinsurance and net of discount, was $1.3
billion, $1.5 billion and $1.6 billion at December 31, 1996, 1995 and 1994,
respectively. The discount is amortized over the expected lives of the
claimants. Discounted reserves come from three primary sources: reserves assumed
from the Workers' Compensation Reinsurance Bureau ("WCRB"), reserves assumed
from residual market pools and reserves for USF&G Company's net retained
business.
(in millions) 1996 1995 1994
--------------------------------------------------------------
Discount, January 1 $394 $441 $508
Accrual (10) (21) (32)
Amortization (31) (26) (35)
----------------------
Discount, December 31 $353 $394 $441
----------------------
The negative discount accrual of $10 million in 1996 results from a reduction in
the estimate of ultimate incurred losses partially offset by an increase in the
discount assumed from residual market pools. A number of claim initiatives,
including managed medical care and structured settlements for workers'
compensation medical claims, are having a favorable impact on estimates of
ultimate incurred losses. The source of the negative discount accrual of $21
million in 1995 is also a result of a reduction in the estimate of ultimate
incurred losses and acceleration in the payment pattern. An acceleration in the
payment of workers' compensation primarily attributable to structured
settlements is responsible for the negative accrual of $32 million in 1994.
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) 1996 1995 1994
-----------------------
Total reserve at beginning of year, gross $6,097 $6,158 $6,370
Less reinsurance recoverables 984 1,016 1,054
-----------------------
Net balance at January 1 5,113 5,142 5,316
-----------------------
Incurred Related To:
Current year 2,030 1,856 1,752
Prior years (162) (54) (8)
-----------------------
Total incurred 1,868 1,802 1,744
-----------------------
Paid Related To:
Current year 764 635 634
Prior years 1,190 1,196 1,284
-----------------------
Total paid 1,954 1,831 1,918
-----------------------
Net balance at December 31 5,027 5,113 5,142
Plus reserves acquired 18 -- --
Plus reinsurance recoverables 987 984 1,016
-----------------------
Total reserve at end of year, gross $6,032 $6,097 $6,158
-----------------------
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 1996 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 1996 and reserve development of the 1993
through 1995 year-ends.
Conditions and trends that have affected reserve development in the past have
changed and may not necessarily occur in the future. Therefore, care should be
exercised in extrapolating future reserve redundancies or deficiencies from such
development.
[Enlarge/Download Table]
Analysis of Net Loss and Net Loss Expense Reserve Development*
At December 31
(in millions) 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996**
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Liability for unpaid losses
and loss expenses $4,090 $4,744 $5,208 $5,467 $5,637 $5,716 $5,564 $5,316 $5,142 $5,113 $5,027
Cumulative paid as of:
One year later 1,348 1,374 1,539 1,723 1,655 1,575 1,471 1,284 1,196 1,190
Two years later 2,164 2,258 2,614 2,795 2,746 2,534 2,394 2,091 1,947 -
Three years later 2,778 3,033 3,350 3,593 3,418 3,225 3,018 2,630 - -
Four years later 3,313 3,550 3,939 4,055 3,929 3,692 3,428 - - -
Five years later 3,640 3,992 4,265 4,435 4,293 3,995 - - - -
Six years later 3,864 4,240 4,542 4,714 4,528 - - - - -
Seven years later 4,056 4,456 4,773 4,899 - - - - - -
Eight years later 4,234 4,648 4,924 - - - - - - -
Nine years later 4,401 4,776 - - - - - - - -
Ten years later 4,514 - - - - - - - - -
Liability re-estimated:
One year later 4,210 4,884 5,236 5,679 5,767 5,793 5,625 5,308 5,088 4,951
Two years later 4,444 4,943 5,485 5,800 5,907 5,923 5,645 5,264 5,005 -
Three years later 4,586 5,109 5,566 5,960 6,151 5,975 5,620 5,246 - -
Four years later 4,722 5,287 5,761 6,246 6,216 5,959 5,589 - - -
Five years later 4,917 5,442 6,029 6,331 6,209 5,933 - - - -
Six years later 5,049 5,700 6,125 6,319 6,214 - - - - -
Seven years later 5,279 5,789 6,124 6,352 - - - - - -
Eight years later 5,365 5,790 6,175 - - - - - - -
Nine years later 5,385 5,842 - - - - - - - -
Ten years later 5,428 - - - - - - - - -
Cumulative (deficiency)
excess (1,338) (1,098) (967) (885) (577) (217) (25) 70 137 162
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[Enlarge/Download Table]
Analysis of Gross Loss and Gross Loss Expense Reserve Development*
At December 31
(in millions) 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996**
----------------------------------------------------------------------------------------
Liability for unpaid losses
and loss expenses $ - $ - $ - $ - $ - $ - $ - $6,370 $6,158 $6,097 $6,014
Cumulative paid as of:
One year later - - - - - - - 1,571 1,431 1,387
Two years later - - - - - - - 2,547 2,348 -
Three years later - - - - - - - 3,217 - -
Liability re-estimated:
One year later - - - - - - - 6,354 6,103 5,977
Two years later - - - - - - - 6,328 6,110 -
Three years later - - - - - - - 6,417 - -
Cumulative (deficiency)
excess - - - - - - - (47) 48 120
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*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 liability for unpaid losses and loss expenses at December 31, 1996
excludes reserves acquired through the 1996 acquisition of Afianzadora.
Loss 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 1996 and 1995 included $111 million and $77 million,
respectively, of favorable development on prior years' experience in the assumed
reinsurance business. Given the significant uncertainty in reserving for assumed
reinsurance, favorable development from loss reserves established in prior years
is generally applied to establish reserves in the current accident year. Another
$52 million of favorable development in 1996 related to the workers'
compensation line, which resulted primarily from the recognition of the effect
on reserve estimation models of the increased use of structured settlements to
close claims. Loss reserve decreases in workers' compensation were substantially
offset by reserve increase in general liability, commercial auto and surety
lines for the current accident year.
The reserve development of $120 million on prior years' gross reserves is
$42 million less favorable than on a net basis. This is primarily driven by
adverse development on primary Surety business which was ceded to reinsurers.
[Enlarge/Download Table]
Effect of Reserve Re-estimations on Calendar Year Operations
(Increase) Decrease in Reserves
Total by
Accident
(in millions) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Year
----------------------------------------------------------------------------------------
Accident Years:
1986 & Prior $(120) $(234) $(142) $(136) $(195) $(132) $(230) $(86) $(20) $(43) $(1,338)
1987 - 94 83 (30) 17 (23) (28) (3) 19 (9) 120
1988 - - 31 (83) 97 (40) (10) (7) 2 1 (9)
1989 - - - 37 (40) 35 (18) 11 11 18 54
1990 - - - - (9) 20 42 20 (5) 28 96
1991 - - - - - 63 114 13 9 31 230
1992 - - - - - - 69 32 9 5 115
1993 - - - - - - - 28 19 (13) 34
1994 - - - - - - - - 10 65 75
1995 - - - - - - - - - 79 79
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Total by calendar
year $(120) $(140) $ (28) $(212) $(130) $ (77) $(61) $ 8 $54 $162 $ (544)
----------------------------------------------------------------------------------------
In the table above, all entries are shown net of ceded reinsurance. Each column
total shows reserve re-estimates made in the indicated calendar year for each
accident year. Adverse development on accident years prior to 1986 is primarily
attributable to reinsurance assumed on workers' compensation residual market
pools and a change in the allocation of general liability reserves from accident
years in the late 1980s to the earlier period. Favorable development in the more
recent accident years is attributable to assumed reinsurance business.
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
------------------
1996 $ 34
1995 52
1994 86
1993 110
1992 123
1991 279
1990 324
1989 397
1988 394
1987 355
------------------
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. The number of such settlements has grown
steadily and they are having an impact on claim payment patterns. USF&G Company
continues to develop procedures to ensure that the impact of structured
settlements is given appropriate recognition in estimating ultimate reserve
liabilities. In 1996, reserves were reduced by $30 million recognizing the
effect on reserve estimation models of the increased use of structured
settlements to close such claims.
Reconciliation of liability for loss and loss expenses from SAP to GAAP
The following table presents the differences between property/casualty insurance
claim reserves reported in accordance with GAAP in the consolidated financial
statements in the 1996 Annual Report to Shareholders, and the combined annual
statement filed with state insurance departments in accordance with statutory
accounting practices ("SAP"):
At December 31
(in millions) 1996 1995 1994
-----------------------
SAP basis property/casualty reserves $4,637 $4,739 $4,875
Reserves of foreign subsidiaries
(consolidated for GAAP but not SAP) 408 374 267
-----------------------
GAAP basis property/casualty reserves, net 5,045 5,113 5,142
Reinsurance receivable 987 984 1,016
-----------------------
GAAP basis property/casualty
reserves, gross $6,032 $6,097 $6,158
-----------------------
1.7. Life benefit reserves
Financial information and further descriptions of life benefit reserves are set
forth in Note 1.6, "Unpaid losses, loss expenses and policy benefits", and Note
3.2, "Life benefit reserves", of the Notes to Consolidated Financial Statements
in the Corporation's 1996 Annual Report to Shareholders 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 insurance in Canada, and in December 1996 expanded
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 1996. Property/casualty voluntary direct premiums written are
diversified throughout the United States. The following table shows the
composition of statutory premium income of the Corporation's life insurance
operations by region for the year ended 1996.
1996
----------
Region:
Northeast 35%
Northwest 26
South 14
Southwest 13
Midwest 12
----------
Total 100%
----------
1.9. Executive officers of the Registrant
--------------------------------------------------------------------------------
Name Age Positions and Office with Registrant or
Significant Subsidiaries
--------------------------------------------------------------------------------
Norman P. Blake, Jr. 55 Chairman of the Board, President, and
Chief Executive Officer
Glenn W. Anderson 44 President-Commercial Insurance Group
John R. Berger 44 President-F&G Re, Inc.
Kenneth E. Cihiy 50 Executive Vice President-Claim
Gary C. Dunton 41 President-Family and Business Insurance Group
Dan L. Hale 52 Executive Vice President-Chief Financial Officer
Robert J. Lamendola 52 President-Surety Group
Thomas K. Lewis, Jr. 44 Executive Vice President-
Chief Information Officer
Stephen W. Lilienthal 47 Executive Vice President-
Field Development and Operations
John A. MacColl 48 Executive Vice President-
General Counsel and Human Resources
Andrew A. Stern 39 Executive Vice President-
Strategic Planning and Reinsurance Operations
Harry N. Stout 44 President-F&G Life
John C. Sweeney 52 Chairman-Falcon Asset Management, Inc., and
Senior Vice President-Chief Investment Officer
--------------------------------------------------------------------------------
All persons in the preceding table are officers of the Registrant except Glenn
W. Anderson, Gary C. Dunton, Kenneth E. Cihiy, Robert J. Lamendola and Stephen
W. Lilienthal, who are executive officers of USF&G Company; John R. Berger who
is an executive officer of F&G Re, Inc.; and Harry N. Stout who is 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. Berger was Assistant
Secretary of General Reinsurance Company, an insurance and financial services
company, and joined the Corporation in November 1983. 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. Dunton was Vice President and Division Manager of Standard
Lines with Aetna Life and Casualty Company and joined the Corporation in
December 1992. Mr. Hale was President and Chief Executive Officer of Chase
Manhattan Leasing Company, an international leasing company, and joined the
Corporation in February 1991. Mr. 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. MacColl was
previously a partner in the Baltimore office of the law firm of Piper & Marbury,
and joined the Corporation in January 1989. Mr. Stern was Partner and Vice
President of Booz Allen & Hamilton, a national business consulting firm, and
joined the Corporation in May 1993. Mr. Stout was Senior Vice President of
United Pacific Life Insurance Company, and joined the Corporation in May 1993.
Mr. Sweeney was a Principal and Practice Director with Tillinghast/Towers
Perrin, an asset management and consulting company, and joined the Corporation
in November 1992.
ITEM 2. 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 130 offices 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 in Baltimore, Maryland 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 in the Corporation's 1996 Annual Report to Shareholders
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 in the 1996 Annual Report to Shareholders, 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 1996.
USF&G CORPORATION Part II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market and dividend information for the Corporation's common stock on page 64 of
the 1996 Annual Report to Shareholders is incorporated herein by reference.
On December 24, 1996, USF&G Capital I, a subsidiary controlled by the
Corporation, completed the issuance of $100 million of 8 1/2% Capital
Securities, Series A (the "Capital Securities"). The Capital Securities were
offered by Goldman, Sachs & Co., Merrill Lynch & Co., Lehman Brothers and Legg
Mason Wood Walker, Incorporated (the "Initial Purchasers") to qualified
institutional buyers (as defined in Rule 144A under the Securities Act of 1933,
as amended (the "Securities Act")) in reliance on Rule 144A and to a limited
number of institutional investors that were accredited investors within the
meaning of Rule 501 (a) under the Securities Act. The offering and sale was
conducted without registration pursuant to exemption to the registration
requirements under the Securities Act, including Rule 144A and Regulation D. The
aggregate offering price was $100,000,000. The Corporation paid the Initial
Purchasers $1,000,000 as compensation for arranging the investment in the
Capital Securities and the related purchase by USF&G Capital I of Junior
Subordinated Debentures issued by USF&G. Refer to Note 6, "Capital Securities of
Subsidiary Trusts", of the Notes to Consolidated Financial Statements in the
Corporation's 1996 Annual Report to Shareholders incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data of the Corporation on pages 32 and 33 of the 1996 Annual
Report to Shareholders 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 14 through 31 of the 1996 Annual
Report to Shareholders is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Corporation and notes to such
financial statements on pages 34 through 58 of the 1996 Annual Report to
Shareholders 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
9 of this Form 10-K. Information regarding the Corporation's directors is
incorporated herein by reference to the Election of Directors section of the
Corporation's definitive proxy statement for its Annual Meeting of Shareholders
to be held May 21, 1997.
ITEM 11. EXECUTIVE COMPENSATION
See the Compensation of Executive Officers and Directors section of the
Corporation's definitive proxy statement for its Annual Meeting of Shareholders
to be held May 21, 1997, which section is incorporated herein by reference. To
the best of the Corporation's knowledge, there were no late filings under
Section 16(a) of the Securities Exchange Act of 1934.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the Stock Ownership of Certain Beneficial Owners, Directors and Management
section of the Corporation's definitive proxy statement for its Annual Meeting
of Shareholders to be held May 21, 1997, which section is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the Other Information-Certain Business Relationships section of the
Corporation's definitive proxy statement for its Annual Meeting of Shareholders
to be held May 21, 1997, which section is incorporated herein by reference.
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 1996 Annual Report to
Shareholders, 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 18 Schedule I. Summary of Investments--Other
than Investments in Related Parties
19-21 Schedule II. Condensed Financial Information of
Registrant
22 Schedule III. Supplementary Insurance
Information
23 Schedule IV. Reinsurance
24 Schedule VI. Supplemental Information
Concerning Consolidated
Property/Casualty Insurance
Operations
All other schedules specified by Article 7 of Regulation S-X are not
required pursuant to the related instructions or are inapplicable and,
therefore, have been omitted.
(3) Exhibits
The following exhibits are included in Item 14:
Page 25 Exhibit 11 Computation of Earnings Per Share
26 Exhibit 12 Computation of Ratio of
Consolidated Earnings to Fixed
Charges and Preferred Stock
Dividends
A copy of all other exhibits not included with this Form 10-K may be
obtained without charge upon written request to the corporate secretary at
the address shown on page 27 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 3A
Charter of USF&G Corporation.
Exhibit 3B
Amended By-laws of USF&G Corporation.
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 as filed on March 13, 1997, 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
Credit and Reimbursement Agreement dated as of March 29, 1996 among USF&G
Corporation and Morgan Guaranty Trust Company of New York as agent. Incorporated
by reference to Exhibit 4A to the Registrant's Form 10-Q for the quarter ended
March 31, 1996, File No. 1-8233.
Exhibit 4G
Credit Agreement dated as of March 29, 1996 among USF&G Corporation and Deutsche
Bank AG, as agent. Incorporated by reference to Exhibit 4B to the Registrant's
Form 10-Q for the quarter ended March 31, 1996, File No. 1-8233.
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:
Amended and Restated Trust Agreement dated as of December 24, 1996 among
USF&G Corporation, The Bank Of New York, The Bank Of New York (Delaware),
the Administrators and the Holders.
Junior Subordinated Indenture dated as of December 24, 1996 between USF&G
Corporation and The Bank Of New York.
Guarantee Agreement Between USF&G Corporation and The Bank Of New York dated
as of December 24, 1996.
Form of Global Certificate Evidencing Capital Securities of USF&G Capital I.
Agreement as to Expenses and Liabilities dated as of December 24, 1996
between USF&G Corporation and USF&G Capital I.
USF&G Corporation 8 1/2% Deferrable Interest Junior Subordinated Debenture,
$103,093,000.
Exhibit 4L
Documents related to USF&G Capital II:
Amended and Restated Trust Agreement dated as of January 10, 1997 among
USF&G Corporation, The Bank Of New York, The Bank of New York (Delaware),
the Administrators and the Holders.
Indenture dated as of January 10, 1997 between USF&G Corporation and The
Bank Of New York.
Guarantee Agreement dated as of January 10, 1997 by USF&G Corporation and
The Bank Of New York.
Form of Global Certificate Evidencing Capital Securities of USF&G
Capital II.
Agreement as to Expenses and Liabilities dated as of January 10, 1997
between USF&G Corporation and USF&G Capital II.
USF&G Corporation 8.47% Deferrable Interest Junior Subordinated Debenture,
$103,093,000.
Exhibit 10A*
Stock Option Plan of 1987. Incorporated by reference to Exhibit 4.1 to the
Registrant's Form S-8 dated July 28, 1987, File No. 33-16111.
Exhibit 10B*
Employment Agreement dated November 20, 1990 between the Registrant and
Norman P. Blake, Jr. Incorporated by reference to Exhibit 10A to the
Registrant's Form 10-K for the year ended December 31, 1990, File No. 1-8233.
Exhibit 10C*
USF&G Supplemental Executive Retirement Agreement between the Registrant and
Norman P. Blake, Jr., dated November 20, 1990. Incorporated by reference to
Exhibit 10B to the Registrant's Form 10-K for the year ended December 31, 1990,
File No. 1-8233.
Exhibit 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.
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.
Exhibit 10J*
Employment Agreement dated November 10, 1993 between the Registrant and
Norman P. Blake, Jr. Incorporated by reference to Exhibit 10K to the
Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10K*
Stock Option Agreement dated November 10, 1993 between the Registrant and
Norman P. Blake, Jr. Incorporated by reference to Exhibit 10L to the
Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10L*
Stock Option Agreement dated November 10, 1993 between the Registrant and
Norman P. Blake, Jr. Incorporated by reference to Exhibit 10M to the
Registrant's Form 10-K for the year ended December 31, 1993, File No. 1-8233.
Exhibit 10M*
Waiver dated November 10, 1993 between the Registrant and Norman P. Blake, Jr.
Incorporated by reference to Exhibit 10N to the Registrant's Form 10-K for the
year ended December 31, 1993, File No. 1-8233.
Exhibit 10N*
First Amendment to USF&G Supplemental Executive Retirement Agreement between
the Registrant and Norman P. Blake, Jr. dated November 10, 1993. Incorporated
by reference to Exhibit 10O to the Registrant's Form 10-K for the year ended
December 31, 1993, File No. 1-8233.
Exhibit 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 Plan. 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.
Exhibit 10U
Coinsurance Contract dated as of July 26, 1996 among Fidelity and Guaranty Life
Insurance Company and Keyport Life Insurance Company.
Exhibit 11
Computation of earnings per share.
Exhibit 12
Computation of ratio of consolidated earnings to fixed charges and preferred
stock dividends.
Exhibit 13
1996 Annual Report to Shareholders.
Exhibit 21
Subsidiaries of the Registrant.
Exhibit 23
Consent of Independent Auditors.
Exhibit 28
Information from reports furnished to state insurance regulatory authorities.
All other exhibits specified by Item 601 of Regulation S-K are not required
pursuant to the related instructions or are inapplicable and, therefore, have
been omitted.
(b) Reports on Form 8-K
The Registrant filed a Form 8-K on November 20, 1996, reporting under Item 5,
Other Events, the call for redemption of all remaining outstanding shares of its
$10.25 Series B Cumulative Convertible Preferred Stock.
The Registrant filed a Form 8-K on December 3, 1996, reporting under Item 5,
Other Events, the Corporation's acquisition of Afianzadora Insurgentes, S.A. de
C.V., for $65 million.
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 31, 1997
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
Chief Financial Officer:
/s/DAN L. HALE
Dan L. Hale
Executive Vice President and
Chief Financial Officer
Dated at Baltimore, Maryland
March 31, 1997
USF&G CORPORATION Signatures
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/WILBUR G. LEWELLEN
Wilbur G. Lewellen
/s/HENRY A. ROSENBERG, JR.
Henry A. Rosenberg, Jr.
/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. Summary of Investments-Other Than Investments
in Related Parties
At December 31, 1996
Amount at which shown
Market in the Statement of
(in millions) Cost Value Financial Position
---------------------------------------
Fixed Maturities:
Available for sale:
United States Government agencies
and authorities $1,767 $1,791 $ 1,791
States, municipalities and
political subdivisions 425 430 430
Foreign governments 230 234 234
Public utilities 359 360 360
All other corporate bonds 5,285 5,349 5,349
---------------------------------------
Total fixed maturities
available for sale 8,066 8,164 8,164
---------------------------------------
Total fixed maturities 8,066 8,164 8,164
---------------------------------------
Equity Securities:
Common stocks:
Banks, trust and insurance
companies 1 1 1
Industrial, miscellaneous and
all other 14 14 14
---------------------------------------
Total common stocks 15 15 15
Nonredeemable preferred stocks 1 1 1
---------------------------------------
Total equity securities 16 16 16
---------------------------------------
Short-term investments 535 535 535
Mortgage Loans 406 423 406
Real estate acquired in satisfaction
of debt (A) 286 286
Other real estate (A) 268 268
Other invested assets (A) 401 401
---------------------------------------
Total investments $9,978 $10,076
---------------------------------------
(A) Market value not readily available.
USF&G CORPORATION Schedule II. Condensed Financial Information of Registrant -
Statement of Financial Position (Parent Company)
At December 31
(in millions) 1996 1995 1994
-------------------------
Assets
Cash $ -- $ -- $ 1
Short-term investments 4 -- --
Investment in subsidiaries, at equity 3,021 3,130 2,503
Due from subsidiaries 99 57 131
Other assets 8 13 24
-------------------------
Total assets $3,132 $3,200 $2,659
-------------------------
Liabilities
Debt (short-term, 1996, $--;1995, $80; 1994, $215) $ 477 $ 591 $ 586
Dividends payable to shareholders 10 11 14
Due to insurance subsidiaries 36 136 203
Due to noninsurance subsidiaries 386 107 107
Other liabilities 154 371 308
-------------------------
Total liabilities 1,063 1,216 1,218
-------------------------
USF&G-obligated mandatorily redeemable capital
securities of subsidiary trust holding solely junior
subordinate deferrable interest debentures of USF&G 100 -- --
-------------------------
Shareholders' Equity
Preferred stock 200 213 331
Common stock 286 299 262
Paid-in capital 1,091 1,188 1,104
Net unrealized gains (losses) on investments
and foreign currency 62 271 (147)
Minimum pension liability -- (100) (63)
Retained earnings (deficit) 330 113 (46)
-------------------------
Total shareholders' equity 1,969 1,984 1,441
-------------------------
Total liabilities, capital securities
and shareholders' equity $3,132 $3,200 $2,659
-------------------------
See Note to Condensed Financial Statements.
USF&G CORPORATION Schedule II. Condensed Financial Information of Registrant -
Statement of Operations (Parent Company)
At December 31
(in millions) 1996 1995 1994
------------------------
Revenues
Net investment income:
Dividends from subsidiaries $282 $114 $125
Interest expense on loans from subsidiaries (11) (12) (8)
Other (1) (3) (1)
Other revenues:
From subsidiaries 6 7 7
From others -- 1 5
------------------------
Revenues before net realized losses 276 107 128
Net realized losses on investments (3) (4) --
------------------------
Total revenues 273 103 128
------------------------
Expenses
Facilities exit costs/(sublease income) (69) (6) 211
Interest expense 38 42 34
Lease expense 18 21 30
Other operating expense 9 15 24
Foreign currency losses -- 1 --
------------------------
Total expenses (4) 73 299
------------------------
Income (loss) from operations before income taxes
and equity in undistributed earnings
of subsidiaries 277 30 (171)
Provision for income taxes (benefit) (3) (15) --
------------------------
Income (loss) from operations before equity in
undistributed earnings of subsidiaries 280 45 (171)
Equity in undistributed earnings of subsidiaries (19) 164 408
------------------------
Net income $261 $209 $237
------------------------
See Note to Condensed Financial Statements.
USF&G CORPORATION Schedule II. Condensed Financial Information of Registrant -
Statement of Cash Flows (Parent Company)
At December 31
(in millions) 1996 1995 1994
------------------------
Net Cash Provided from Operating Activities $ 227 $ 40 $129
------------------------
Net Cash Used in Investing Activities (4) 2 (4)
------------------------
Financing Activities
Repayments of short-term borrowings -- (215) (160)
Intercompany advances, net (21) 21 (51)
Long-term borrowings -- 228 270
Repayments of long-term borrowings (114) (30) (120)
Issuance of capital securities 98 -- --
Issuances of common stock 11 6 14
Repurchases of common stock (150) -- --
Redemption of preferred stock (2) -- (13)
Cash dividends paid to shareholders (45) (53) (66)
-----------------------
Net cash used in financing activities (223) (43) (126)
-----------------------
Decrease in cash -- (1) (1)
Cash at beginning of year -- 1 2
-----------------------
Cash at end of year $ -- $ -- $ 1
-----------------------
See Note to Condensed Financial Statements.
Note to Condensed Financial Statements
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of the 1996 Annual
Report to Shareholders incorporated herein by reference. Certain amounts have
been reclassified to conform to the 1996 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 the undistributed earnings
of 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
Deferred Unpaid losses, Other Net Losses,loss Amortization
policy loss expenses policy- investment expenses of deferred Other
acquisition and policy Unearned holder Premium income and policy policy acqui- operating Premiums
(in millions) costs benefits premiums funds(A) revenue (A) benefits sition costs expenses written
----------------------------------------- -------------------------------------------------------------
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 82 480 306 120 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 (B) $122 $2,531 $ 382 $ 876 $ 662 $252 $ 71 $ 921
FBIG (B) 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
----------------------------------------- -------------------------------------------------------------
1994
Property/casualty insurance:
Commercial $167 $3,903 $ 468 $1,206 $ 934 $366 $ 88 $1,220
Personal 77 496 275 626 463 165 64 614
Surety 24 41 52 107 41 48 14 113
Discover Re 3 34 15 22 17 1 8 27
F&G Re 9 668 41 395 289 67 27 415
Reinsurance receivable -- 1,016 117 -- -- -- -- --
----------------------------------------- -------------------------------------------------------------
Property/casualty 280 6,158 968 $ 7 2,356 $429 1,744 647 201 2,389
Life insurance 224 3,804 -- 79 152 317 388 21 45 N/A
----------------------------------------- -------------------------------------------------------------
Total $504 $9,962 $ 968 $86 $2,508 $746 $2,132 $668 $246 $2,389
----------------------------------------- -------------------------------------------------------------
(A) Other policyholders' funds and net investment income are not allocated to property/casualty categories.
(B) Prior to the creation of CIG and FBIG in 1995, information regarding insurance operations were segregated along product lines
for commercial and personal property/casualty insurance. Comparative amounts for 1995 were as follows:
Commercial $172 $3,732 $ 520 $1,223 $ 910 $353 $117 $1,272
Personal 72 479 266 635 484 167 80 623
----------------------------------------- -------------------------------------------------------------
N/A - Not applicable to life insurance pursuant to Rule 12-16 of Regulation S-X.
USF&G CORPORATION Schedule IV. Reinsurance
[Enlarge/Download Table]
Years Ended December 31
Ceded to Assumed Percentage of
Gross other from other Net assumed amount
(in millions) amount companies companies amount assumed to net*
----------------------------------------------------------------
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%
----------------------------------------------------------------
1994
Life insurance in force $11,683 $1,350 $160 $10,493 1.5%
----------------------------------------------------------------
Premiums earned:
Life insurance $ 155 $ 4 $ -- $ 151 --%
Accident/health insurance -- -- 1 1 98.5
Property/casualty insurance 2,284 516 588 2,356 25.0
----------------------------------------------------------------
Total $ 2,439 $ 520 $589 $ 2,508 23.5%
----------------------------------------------------------------
*Certain percentages are calculated from amounts in thousands and may not equal the percentage
calculated from amounts reported in millions.
USF&G CORPORATION Schedule VI. Supplemental Information Concerning Consolidated
Property/Casualty Insurance Operations
At December 31
(in millions) 1996 1995 1994
------------------------
Deferred policy acquisition costs $ 290 $ 288 $ 280
Reserves for unpaid losses and loss expenses 6,032 6,097 6,158
Discount deducted from reserves (A) 353 394 441
Unearned premiums 1,113 1,055 968
------------------------
Years Ended December 31
(in millions) 1996 1995 1994
------------------------
Earned premiums $2,586 $2,492 $2,356
Net investment income 441 438 429
Losses and loss expenses incurred related to:
Current year 2,030 1,856 1,752
Prior years (162) (54) (8)
Amoritization of deferred policy acquisition costs 699 684 647
Paid losses and loss expenses 1,954 1,831 1,918
Premiums written 2,639 2,563 2,389
------------------------
(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) 1996 1995 1994
------------------------------------------
Net Income Available to Common Stock
Primary:
Net income $261 $209 $237
Less preferred stock dividend requirements (20) (28) (46)
------------------------------------------
Net income available to common stock $241 $181 $191
------------------------------------------
Fully diluted:
Net Income $261 $209 $237
Less preferred stock dividend requirements (16) (16) (16)
Add interest expense on zero coupon bonds 5 6 5
------------------------------------------
Net income available to common stock $250 $199 $226
------------------------------------------
Weighted-Average Shares Outstanding
Primary common shares (A) 117,674,384 111,474,129 95,796,671
------------------------------------------
Fully diluted (B):
Common shares 117,674,384 111,474,129 95,796,671
Common stock equivalents 3,880,400 1,553,773 1,038,214
Assumed conversion of preferred stock 2,150,892 9,931,329 24,950,202
Assumed conversion of zero coupon bonds 5,784,211 7,227,255 6,022,712
------------------------------------------
Total fully diluted 129,489,887 130,186,486 127,807,799
------------------------------------------
Earnings Per Common Share
Primary (A) $2.05 $1.63 $2.00
Fully diluted (B) 1.93 1.53 1.77
------------------------------------------
(A) Shares issuable under common stock equivalents (2,416,755 shares in 1996;
1,295,767 shares in 1995; 1,021,230 shares in 1994) have not been used in the
computation of primary earnings per common share presented on the face of the
Consolidated Statement of Operations because the dilutive effect is not
material.
(B) Fully diluted earnings per common share amounts are calculated assuming the
conversion of all securities whose contingent issuance would have a dilutive
effect on earnings.
USF&G CORPORATION Exhibit 12 - Computation of Ratio of Consolidated Earnings to
Fixed Charges and Preferred Stock Dividends
Years Ended December 31
(dollars in millions) 1996 1995 1994
------------------------
Fixed charges
Interest expense $ 39 $ 44 $ 37
Portion of rents representative of interest (A) 17 20 159
------------------------
Total fixed charges 56 64 196
Preferred stock dividend requirements (B) 20 28 46
------------------------
Combined Fixed Charges and Preferred Stock Dividends $ 76 $ 92 $242
------------------------
Consolidated Earnings Available for Fixed Charges
and Preferred Stock Dividends
Income (loss) from operations before income taxes $259 $195 $(43)
Adjustment:
Fixed charges 56 64 196
------------------------
Consolidated earnings available for fixed charges
and preferred stock dividends $315 $259 $153
------------------------
Ratio of Consolidated Earnings to Fixed Charges (C)(D) 5.7 4.0 0.8
Ratio of Consolidated Earnings to Combined Fixed Charges
and Preferred Stock Dividends (C)(D) 4.1 2.8 0.6
------------------------
(A) Includes approximately $130 million net present value of rents
representative of interest included in facilities exit costs in 1994.
(B) Preferred stock dividend requirements of $20 million, $28 million and $46
million in 1996, 1995 and 1994, respectively, divided by 100% less the
effective income tax rate of 0% in 1996, 1995 and 1994.
(C) The ratio of consolidated earnings before facilities exit costs to fixed
charges was 3.1 for 1994. The ratio of consolidated earnings before facilities
exit costs to combined fixed charges and preferred stock dividends was 1.8 for
1994.
(D) In 1994, earnings were inadequate to cover fixed charges by $43 million
and combined fixed charges and preferred stock dividends by $89 million.
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, 1996 1-8233
A copy of all other of the Corporation's Exhibits to the 1996
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 Smith Avenue
Baltimore, Maryland 21209
Dates Referenced Herein and Documents Incorporated by Reference
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