SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 2001
COMMISSION FILE NUMBER 1-9371
ALLEGHANY CORPORATION
EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
DELAWARE
STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION
51-0283071
INTERNAL REVENUE SERVICE EMPLOYER IDENTIFICATION NUMBER
375 PARK AVENUE, NEW YORK, NEW YORK 10152
ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE
212 / 752-1356
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
NOT APPLICABLE
FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT
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 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE
YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASS OF
COMMON STOCK, AS OF THE CLOSE OF THE PERIOD COVERED BY THIS REPORT:
7,213,019
(AS OF SEPTEMBER 30, 2001)
ITEM 1. FINANCIAL STATEMENTS
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000
(dollars in thousands, except share and per share amounts)
(unaudited)
2001 2000 ***
---- --------
REVENUES
Interest, dividend and other income $ 45,625 $ 49,579
Net mineral and filtration sales 55,725 54,199
Gain (loss) on sale of subsidiary (253,408) 0
Net gain (loss) on investment transactions 11,359 83
----------- -----------
Total revenues (140,699) 103,861
----------- -----------
COSTS AND EXPENSES
Salaries, administrative and other operating expenses 41,299 42,764
Cost of mineral and filtration sales 39,500 37,415
Interest expense 3,482 5,208
Corporate administration 7,536 5,173
----------- -----------
Total costs and expenses 91,817 90,560
----------- -----------
(Loss) earnings from continuing operations, before income taxes (232,516) 13,301
Income tax (benefit) expense (195,708) 4,424
----------- -----------
(Loss) earnings from continuing operations (36,808) 8,877
DISCONTINUED OPERATIONS
(Loss) earnings from discontinued operations, net of tax (184,010) 7,973
----------- -----------
Net (loss) earnings ($ 220,818) $ 16,850
=========== ===========
BASIC (LOSS) EARNINGS PER SHARE OF COMMON STOCK **
Continuing operations ($ 5.09) $ 1.20
Discontinued operations (25.44) 1.08
----------- -----------
Basic net (loss) earnings per share ($ 30.53) $ 2.28
=========== ===========
DILUTED (LOSS) EARNINGS PER SHARE OF COMMON STOCK **
Continuing operations ($ 5.09) $ 1.19
Discontinued operations (25.44) 1.06
----------- -----------
Diluted net (loss) earnings per share ($ 30.53) $ 2.25
=========== ===========
Dividends per share of common stock * *
=========== ===========
Average number of outstanding shares of common stock ** 7,233,440 7,403,280
=========== ===========
- ----------
* In March 2001, Alleghany declared a dividend consisting of one share of
Alleghany common stock for every fifty shares outstanding.
** Adjusted to reflect the common stock dividend declared in March 2001.
*** Amounts have been restated to reflect the elimination of the one-quarter
lag in the reporting of Alleghany Insurance Holdings' results.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000
(dollars in thousands, except share and per share amounts)
(unaudited)
2001 2000 ***
---- --------
REVENUES
Interest, dividend and other income $ 139,884 $ 130,337
Net mineral and filtration sales 163,906 154,395
Net gain on sale of subsidiary 522,402 158,521
Net gain on investment transactions 12,672 83
----------- -----------
Total revenues 838,864 443,336
----------- -----------
COSTS AND EXPENSES
Salaries, administrative and other operating expenses 135,873 139,114
Cost of mineral and filtration sales 118,329 107,714
Interest expense 11,427 13,136
Corporate administration 40,243 16,010
----------- -----------
Total costs and expenses 305,872 275,974
----------- -----------
Earnings from continuing operations, before income taxes 532,992 167,362
Income tax expense 101,056 18,222
----------- -----------
Earnings from continuing operations 431,936 149,140
DISCONTINUED OPERATIONS
(Loss) from discontinued operations, net of tax (206,663) (40,940)
----------- -----------
Net earnings $ 225,273 $ 108,200
=========== ===========
BASIC EARNINGS PER SHARE OF COMMON STOCK **
Continuing operations $ 59.72 $ 19.86
Discontinued operations (28.57) (5.45)
----------- -----------
Basic net earnings per share $ 31.15 $ 14.41
=========== ===========
DILUTED EARNINGS PER SHARE OF COMMON STOCK **
Continuing operations $ 59.03 $ 19.67
Discontinued operations (28.12) (5.40)
----------- -----------
Diluted net earnings per share $ 30.91 $ 14.27
=========== ===========
Dividends per share of common stock * *
=========== ===========
Average number of outstanding shares of common stock ** 7,232,597 7,509,391
=========== ===========
- ----------
* In March 2001, Alleghany declared a dividend consisting of one share of
Alleghany common stock for every fifty shares outstanding.
** Adjusted to reflect the common stock dividend declared in March 2001.
*** Amounts have been restated to reflect the elimination of the one-quarter
lag in the reporting of Alleghany Insurance Holdings' results.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2001 AND DECEMBER 31, 2000
(dollars in thousands, except share and per share amounts)
(Unaudited)
September 30, December 31,
2001 2000
---- ----
ASSETS
Available for sale securities: 9/30/01 12/31/00
------- --------
Equity securities (cost $221,006 $222,101) $ 508,426 $ 535,377
Other (cost $ 7,972 $ 8,882) 7,972 8,882
Short-term investments 1,078,338 339,244
---------- ----------
1,594,736 883,503
Cash 7,937 10,247
Notes receivable 92,156 92,156
Funds held, accounts and other receivables 68,222 69,298
Property and equipment - at cost, less
accumulated depreciation and amortization 169,955 165,103
Other assets 207,385 232,065
Net assets of discontinued operations 0 163,111
---------- ----------
$2,140,391 $1,615,483
========== ==========
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Other liabilities $ 464,966 $ 115,000
Long-term debt of subsidiaries 205,588 228,178
Net deferred tax liability 100,180 107,231
---------- ----------
Total liabilities 770,734 450,409
Common stockholders' equity 1,369,657 1,165,074
---------- ----------
$2,140,391 $1,615,483
========== ==========
Shares of common stock outstanding 7,213,019 7,211,820*
========== ==========
Common stockholders' equity per share $ 189.89 $ 161.55*
========== ==========
- ----------
* Adjusted to reflect the common stock dividend declared in March 2001.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2001 AND 2000
(dollars in thousands)
(unaudited)
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings from continuing operations $ 431,936 $ 149,140
Adjustments to reconcile net earnings to cash
provided by (used in) operations:
Depreciation and amortization 12,560 12,867
Net gain on investment transactions (233,975) (158,604)
Tax benefit on stock options exercised 816 3,127
Other charges, net (8,128) (29,863)
Increase in other receivables 1,076 (23,205)
Decrease (increase) in other assets 24,680 (29,328)
Increase in other liabilities (5,618) 102,902
--------- ---------
Net adjustments (208,589) (122,104)
--------- ---------
Cash provided by operations 223,347 27,036
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (77,193) (109,241)
Sales of investments 90,796 12,124
Purchases of property and equipment (8,660) (10,383)
Net change in short-term investments (740,600) (350,446)
Other, net 1,438 (91)
Proceeds from sale of subsidiaries, net of cash disposed 531,477 463,900
--------- ---------
Net cash (used in) provided by investing activities (202,742) 5,863
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (255,175) (36,484)
Proceeds of long-term debt 233,093 13,347
Treasury stock acquisitions (11,234) (52,056)
Net cash provided by discontinued operations 0 26,000
Other, net 10,401 5,499
--------- ---------
Net cash used in by financing activities (22,915) (43,694)
--------- ---------
Net (decrease) increase in cash (2,310) (10,795)
Cash at beginning of period 10,247 11,857
--------- ---------
Cash at end of period $ 7,937 $ 1,062
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 11,831 $ 11,939
Income taxes $ 5,737 $ 34,695
Notes to the Consolidated Financial Statements
This report should be read in conjunction with the Annual Report on Form
10-K for the year ended December 31, 2000 (the "2000 Form 10-K") and the
Quarterly Reports on Form 10-Q for the quarters ended March 31, 2001 and June
30, 2001 of Alleghany Corporation (the "Company").
The information included in this report is unaudited but reflects all
adjustments which, in the opinion of management, are necessary to a fair
statement of the results of the interim periods covered thereby. All adjustments
are of a normal and recurring nature except as described herein.
Comprehensive Income
The Company's total comprehensive (loss) income for the three months and
nine months ended September 30, 2001 and 2000 was $(272,218) thousand and
$(7,666) thousand, and $208,098 thousand and $132,988 thousand, respectively.
Comprehensive income (loss) includes the Company's net earnings adjusted for
changes in unrealized appreciation (depreciation) of investments, which was
$(55,792) thousand and $(14,730) thousand, and $(18,483) thousand and $(10,011)
thousand, and cumulative translation adjustments, which was $1,492 thousand and
$(1,813) thousand, and $(1,592) thousand and $(6,141) thousand, for the three
months and nine months ended September 30, 2001 and 2000, respectively.
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Segment Information
Information concerning the Company's continuing operations by industry
segment is summarized below (in thousands):
For the three months ended For the nine months ended
September 30, September 30, September 30, September 30,
2001 2000 2001 2000
---- ---- ---- ----
REVENUES
Mining and filtration $ 56,062 $ 53,756 $ 163,947 $ 154,577
Industrial fasteners 29,721 36,373 94,149 99,349
Corporate activities (226,482) 13,732 580,768 189,410
--------- --------- --------- ---------
Total $(140,699) $ 103,861 $ 838,864 $ 443,336
========= ========= ========= =========
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
Mining and filtration $ 5,369 $ 6,249 $ 13,468 $ (4,365)
Industrial fasteners (1,481) 1,584 (14,150) 5,799
Corporate activities (236,404) 5,468 533,674 165,928
--------- --------- --------- ---------
Total (232,516) 13,301 532,992 167,362
Income taxes (195,708) 4,424 101,056 18,222
--------- --------- --------- ---------
(Loss) earnings from
continuing operations $ (36,808) $ 8,877 $ 431,936 $ 149,140
========= ========= ========= =========
September 30, December 31,
2001 2000
---- ----
IDENTIFIABLE ASSETS
Discontinued operations $ -- $ 163,111
Mining and filtration 316,482 301,390
Industrial fasteners 88,207 117,639
Corporate activities 1,735,702 1,033,343
---------- ----------
Total $2,140,391 $1,615,483
========== ==========
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Contingencies
The Company"s subsidiaries are parties to pending claims and litigation in
the ordinary course of their businesses. Each such operating unit makes
provisions on its books in accordance with generally accepted accounting
principles for estimated losses to be incurred as a result of such claims and
litigation, including related legal costs. In the opinion of management, such
provisions are adequate as of September 30, 2001.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The Company reported net losses from continuing operations in the third
quarter of 2001 of $36.8 million on revenues of $(140.7) million compared with
net earnings of $8.9 million on revenues of $103.9 million in the third quarter
of 2000. The 2001 results include an after-tax loss of $50.2 million on the
disposition of Alleghany Underwriting Holdings Ltd ("Alleghany Underwriting"),
which was sold on November 5, 2001.
Net losses including discontinued operations were $220.8 million in the
third quarter of 2001 compared with net earnings of $16.9 million in the third
quarter of 2000. Such discontinued operations for the third quarter of 2001
consist of the operations of Alleghany Underwriting, and for the third quarter
of 2000 consist of the operations of Alleghany Underwriting and Alleghany Asset
Management, Inc. ("Alleghany Asset Management").
In the first nine months of 2001, the Company's net earnings from
continuing operations were $431.9 million on revenues of $838.9 million compared
with $149.1 million on revenues of $443.3 million in the first nine months of
2000. Net earnings including discontinued operations were $225.3 million in the
first nine months of 2001, compared with $108.2 million in the 2000 period. Such
discontinued operations for the first nine months of 2001 consist of the
operations of Alleghany Underwriting and Alleghany Asset Management prior to its
disposition in February 2001, and for the first nine months of 2000 consist of
the operations of Alleghany Underwriting, Alleghany Asset Management and the
operations of Underwriters Re Group Inc. ("Underwriters Re Group") prior to its
disposition in May 2000.
The first nine months 2001 results include an after-tax gain of about
$474.8 million on the disposition of Alleghany Asset Management, which was
merged with a wholly owned subsidiary of ABN AMRO North America Holding Company
on February 1, 2001, the after-tax loss of $50.2 million on the disposition of
Alleghany Underwriting, and after-tax losses of $201.6 million on the operations
of Alleghany Underwriting. The first nine months 2000 results include an
after-tax gain of $143.8 million on the sale of Underwriters Re Group, and
pre-tax losses of $44.6 million on the operations of
8
Underwriters Re Group (excluding Alleghany Underwriting) through the close of
the sale in May 2000.
On November 5, 2001, Alleghany Insurance Holdings LLC completed the sale
of Alleghany Underwriting to Talbot Holdings Ltd., a new Bermuda-based insurance
holding company formed by the senior management of Alleghany Underwriting and an
investor group led by Heidi Hutter (former President and CEO of Swiss Re
America). Consideration for the sale includes a warrant which will entitle
Alleghany Insurance Holdings LLC to recover a portion of any residual capital of
Alleghany Underwriting as determined upon the closure of the 2001 Lloyd's year
of account. The Company has ascribed a nominal value to the warrant in computing
the loss on the sale of Alleghany Underwriting.
The sale of Alleghany Underwriting reflects a strategic decision by the
Company to reduce the risk profile of its insurance operations. Talbot Holdings
intends to continue the business on a new capital base, which it will seek to
raise from investors who wish to participate in the current hardening insurance
market. In order to bridge Talbot Holdings' capital needs while it seeks new
capital, the Company has agreed to provide a $25 million loan or letter of
credit facility to support business written for the 2002 Lloyd's year of
account.
Alleghany Underwriting recorded after-tax losses of $184.0 million in the
2001 third quarter, compared with after-tax losses of $348 thousand in the
corresponding 2000 period, and after-tax losses of $201.6 million in the first
nine months of 2001, compared with after-tax losses of $15.4 million in the
first nine months of 2000. The 2001 losses reflect $112.4 million of losses from
the September 11th terrorist attacks, $33 million for estimated costs of closing
its property treaty line of business as a result of the September 11th losses
and reserve strengthening of $23 million in respect of the 2000 and prior years
of account. The 2000 losses reflect reserve strengthening of $44 million in
respect of the 2000 and prior years of account following the completion of a
reserve study. These losses are reported in earnings (losses) from discontinued
operations.
World Minerals Inc. ("World Minerals") recorded pre-tax earnings of $5.4
million on revenues of $56.1 million in the 2001 third quarter, compared with
pre-tax earnings of $6.2 million on revenues of $53.8 million in the 2000 third
quarter, and pre-tax earnings of $13.5 million on revenues of $163.9 million in
the first nine months of 2001, compared with pre-tax losses of $4.4 million on
revenues of $154.6 million in the first nine months of 2000. The 2001 results
reflect an increase in net sales, primarily from World Minerals' European
operations, offset by the continued high North American energy costs,
particularly in California, and a lower level of production due to the softening
of the U.S. economy. The 2000 results include non-recurring charges of $20.2
million pre-tax for the write-off of certain joint venture investments and
assets no longer used in production, and expenses relating to changes in World
Minerals' senior
9
management. Excluding such non-recurring charges, World Minerals would have
contributed pre-tax earnings of $15.8 million in the first nine months of 2000.
Heads & Threads International LLC ("Heads & Threads") recorded pre-tax
losses of $1.5 million on revenues of $29.7 million in the 2001 third quarter,
compared with pre-tax earnings of $1.6 million on revenues of $36.4 million in
the 2000 third quarter, and pre-tax losses of $14.2 million on revenues of $94.1
million in the first nine months of 2001, compared with pre-tax earnings of $5.8
million on revenues of $99.4 million in the first nine months of 2000. The 2001
periods reflect a material slowdown in the markets for its products, a
strengthening of its inventory reserves, costs of assimilating acquisitions made
in 2000, $2.5 million of pre-tax charges for write-offs relating to its computer
system and the closure of certain branches and sales offices, and expenses
relating to changes in Heads & Threads' senior management. The 2000 results
include the gain on the sale of a warehouse property.
Net gains on investment transactions from continuing operations after
taxes in the third quarter of 2001 totalled $7.4 million compared with a gain of
$54 thousand in the 2000 period.
As of September 30, 2001, the Company beneficially owned approximately
17.95 million shares, or 4.6 percent, of the outstanding common stock of
Burlington Northern Santa Fe Corporation, which had an aggregate market value on
that date of approximately $480.1 million, or $26.75 per share, compared with a
market value on December 31, 2000 of $508.2 million, or $28.3125 per share. The
aggregate cost of such shares is approximately $201.3 million, or $11.21 per
share.
The Company has previously announced that it may purchase shares of its
common stock in open market transactions from time to time. In the third quarter
of 2001, the Company purchased an aggregate of 28,977 shares of its common stock
for about $5.3 million, for an average cost of about $181.60 per share. As of
September 30, 2001, the Company had 7,213,019 shares of its common stock
outstanding.
The Company's common stockholders' equity per share at September 30, 2001
was $189.89 per share, an 18 percent increase from common stockholders' equity
per share of $161.55 as of December 31, 2000 (adjusted for the March 2001 stock
dividend).
As previously reported, on July 20, 2001, the Company announced the
signing of a definitive merger agreement under which the Company will acquire
Capitol Transamerica Corporation ("Capitol Transamerica"), an insurance holding
company based in Madison, Wisconsin (Nasdaq: CATA), at an aggregate price of
about $182 million in cash. Capitol Transamerica writes specialty lines of
property and casualty insurance as well as fidelity and surety coverages,
primarily through its subsidiary Capitol Indemnity Corporation. The Capitol
Transamerica Group is rated A+ (Superior)
10
by A.M. Best Company, Inc., an independent organization that analyzes the
insurance industry. A closing is expected to occur around the end of the year.
The Company's results in the first nine months of 2001 are not indicative
of operating results in future periods. The Company and its subsidiaries have
adequate internally generated funds and unused credit facilities to provide for
the currently foreseeable needs of its and their businesses.
11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk is the risk of loss from adverse changes in market prices and
rates, such as interest rates, foreign currency exchange rates and commodity
prices. The primary market risk related to the Company's non-trading financial
instruments is the risk of loss associated with adverse changes in interest
rates.
The Company's 2000 Form 10-K provides a more detailed discussion of the
market risks affecting its operations. Based on the Company's estimates as of
September 30, 2001, no material change has occurred in its market risks, as
compared to amounts disclosed in its 2000 Form 10-K.
Forward-Looking Statements
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Quantitative and Qualitative Disclosures About
Market Risk" contain disclosures which are forward-looking statements.
Forward-looking statements include all statements that do not relate solely to
historical or current facts, and can be identified by the use of words such as
"may," "will," "expect," "project," "estimate," "anticipate," "plan" or
"continue." These forward-looking statements are based upon the Company's
current plans or expectations and are subject to a number of uncertainties and
risks that could significantly affect current plans, anticipated actions and the
Company's future financial condition and results. The uncertainties and risks
include, but are not limited to, those relating to conducting operations in a
competitive environment; acquisition and disposition activities; and general
economic conditions. As a consequence, current plans, anticipated actions and
future financial condition and results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company.
12
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number Description
-------------- -----------
10.1 Purchase Agreement dated as of October 31,
2001 by and between Alleghany Insurance
Holdings LLC and Talbot Holdings Ltd.
10.2 Fourth Amendment to Credit Agreement dated
as of August 14, 2001, and Waiver by and
between Heads & Threads International LLC,
various lending institutions, and American
National Bank and Trust Company of Chicago,
as Agent.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the third quarter of 2001.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ALLEGHANY CORPORATION
Registrant
Date: November 14, 2001 /s/ David B. Cuming
--------------------
David B. Cuming
Senior Vice President
(and principal financial officer)
14