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DUFF & PHELPS RATES UNITED STATES FIDELITY AND GUARANTY C Rating Co. has rated the claims paying ability of the United States Fidelity and Guaranty Company (USF&G) 'A' (Single-A). This high claims paying ability reflects the company's moderate level of operating leverage, an improved level of loss reserve adequacy, and a low underwriting risk profile

Offsetting these positives are the company's poor profitability results in recent years, and the relatively high level of financial leverage at the parent holding company. In addition to establishing the claims paying ability for USF&G, the `A' (Single-A) claims paying ability rating of the Fidelity and Guaranty Life Insurance Company is reaffirmed, as are the `BBB' (Triple-B) senior debt rating, `BB+' (Double-B-Plus) preferred stock rating, and the Duff 3 commercial paper rating of the USF&G Corporation.
 USF&G is one of the 25 largest property and casualty companies in the United States, with $2.2 billion of net written premium during 1992. The company is a Maryland-domiciled company and is licensed to write insurance in all 50 states. USF&G writes business principally through 4,000 independent agents located primarily in small suburban and rural communities. The company is the largest operating subsidiary of the USF&G Corporation, a publicly owned company with shares listed on the New York Stock Exchange. The Fidelity and Guaranty Life Insurance Company, whose claims paying ability is rated `A' (Single-A) by Duff & Phelps Credit Rating Co., is wholly owned by USF&G.
 Of the $2.2 billion of net premium written by USF&G in 1992, commercial lines represented 56 percent, personal lines 30 percent, and specialty lines 14 percent. The company's primary line of business is commercial multi-peril, which represented 25.9 percent of total net written premium in 1992. Personal auto represented 21.2 percent of the total 1992 premium, while commercial auto represented 17.1 percent. Workers' compensation represented 11.6 percent of net written premium in 1992, down from 16.2 percent in 1991. Reinsurance is USF&G's largest specialty line, representing 10.0 percent of 1992 total written premium.
 USF&G recorded net income of $210.2 million on earned premium of $2.5 billion during 1992, compared to a net loss of $167.5 million on earned premium of $3.0 billion in 1991. The company's combined ratio was 121.0 percent, down slightly from 121.4 percent in the previous year. While the company's underlying operations continue to show improvement, overall results were adversely impacted by catastrophe losses which represented 5.5 percent of premium earned in 1992 compared to 2.4 percent for 1991. During 1992 USF&G realized $210.2 million of capital gains compared to realized losses of $41.8 million in 1991.
 At the end of 1992 USF&G's net written premium to policyholders' surplus ratio was 1.5 to 1, an improvement from the 2.1 to 1 ratio at the end of the prior year. The driving factors behind this improvement were a 22.1 percent decrease in net written premium and a $63.5 million increase in policyholders' surplus. The increase in policyholders' surplus was due to retention of earnings after recording net income of $210.2 million and paying dividends to shareholders of $125.3 million. The company's net leverage also declined in 1992 to 6.20 to 1, compared to 7.51 to 1 at the end of the previous year.
 At the end of 1992, USF&G Corporation's capitalization mix was 32.7 percent debt, 27.6 percent preferred stock (at liquidation value), and 39.8 percent common equity. Consolidated GAAP earnings were 1.4 times fixed charges before preferred dividends, and .8 times fixed charges after dividends in 1992. It is not anticipated that USF&G Corporation will increase its financial leverage in the foreseeable future. Assuming no increase in capitalization and a return to more normalized levels of catastrophes, it is anticipated fixed charge coverage ratios will improve in the near term.
 Part of USF&G's strategy for restructuring the property and casualty operations has been to strengthen the loss and loss adjustment expense reserve posi?on. Upward development in loss and loss adjustment expense reserves as a percent of beginning of period policyholders' surplus were 13.7 percent, 8.1 percent, and 1.1 percent in 1990, 1991, and 1992, respectively. USF&G's loss and loss reserves are reviewed annually by two independent actuarial consulting firms. As of year-end 1992, the carried reserves of USF&G appear to be within an acceptable range of adequacy.
 USF&G has repositioned its investment portfolio over the last two years with the intent of improving overall portfolio quality by reducing its exposure to what the company considers to be risky assets; equities, real estate, and non-investment grade bonds. Bonds and short-term investments represented 87.9 percent of unaffiliated investments at the end of 1992, as compared to 67.0 percent at the end of 1990. Non- investment grade bonds represented 2.4 percent of the fixed income portfolio at the end of 1992 down from 6.5 percent at the end of 1990. Mortgage loans and real estate investments represented 7.3 percent of unaffiliated invested assets at the end of 1992, down from 9.5 percent at the end of 1990. Common equities have been reduced from 13.4 percent of the portfolio at the end of 1990, to less than 1 percent at the end of 1992.
 The company has in place a comprehensive ceded reinsurance program to protect its policyholders' surplus from significant impacts due to large or catastrophic losses. The company limits its retention to a maximum of $5 million for its casualty, surety, and fidelity lines of insurance and its large property risks. USF&G reinsures catastrophe losses with several excess of loss layers, with funded covers supplementing lower layers that are not completely filled. The company also has an aggregate excess treaty that attaches at a predetermined loss ratio.
 At the end of 1992, the company's total reinsurance recoverable was 170.3 percent of policyholders' surplus. If the recoverables from affiliates, and pools and associations is excluded this ratio declines to 13.1 percent. The companies providing reinsurance to USF&G appear financially sound and the company does not appear to be exposed to any material credit risk.
 -0- 4/19/93
 /CONTACT: Timothy A. Bienek of Duff & Phelps Credit Rating Co., 312-368-3192/


CO: USF&G Corporation ST: New York IN: INS SU: RTG

CK -- NY079 -- 7366 04/19/93 12:03 EDT
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Date:Apr 19, 1993
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