SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 2005
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
7 TIMES SQUARE TOWER, 17TH FLOOR, NY, NY 10036
---------------------------------------------------------
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 SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS.
YES [X] NO [ ]
INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS
DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).
YES [X] NO [ ]
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LAST PRACTICABLE DATE.
7,889,636 SHARES AS OF JULY 31, 2005
ITEM 1. FINANCIAL STATEMENTS
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
JUNE 30, 2005 AND 2004
(dollars in thousands, except share and per share amounts)
(unaudited)
2005 2004
------------- -------------
REVENUES
Net premiums earned $ 218,654 $ 203,215
Interest, dividend and other income 21,574 11,648
Net gain on investment transactions 617 4,352
------------- -------------
Total revenues 240,845 219,215
------------- -------------
COSTS AND EXPENSES
Loss and loss adjustment expenses 114,305 92,016
Commissions and brokerage 55,378 42,750
Salaries, administrative and other operating expenses 7,050 7,594
Corporate administration 10,631 10,092
Interest expense 1,000 591
------------- -------------
Total costs and expenses 188,364 153,043
------------- -------------
Earnings from continuing operations, before income taxes 52,481 66,172
Income taxes 15,554 22,126
------------- -------------
Earnings from continuing operations 36,927 44,046
Discontinued operations
(Loss) earnings from operations (including loss on disposal
of $1,166 in 2005) (2,178) 8,282
Income taxes 3,347 3,605
------------- -------------
(Loss) earnings from discontinued operations, net (5,525) 4,677
------------- -------------
Net earnings $ 31,402 $ 48,723
============= =============
Basic earnings per share of common stock **
Continuing operations $ 4.68 $ 5.63
Discontinued operations (0.70) 0.60
------------- -------------
$ 3.98 $ 6.23
============= =============
Diluted earnings per share of common stock **
Continuing operations $ 4.67 $ 5.61
Discontinued operations (0.70) 0.60
------------- -------------
$ 3.97 $ 6.21
============= =============
Dividends per share of common stock * *
============= =============
Average number of outstanding shares of common stock ** 7,887,653 7,823,703
============= =============
* In March 2005 and 2004, Alleghany declared a stock dividend consisting of
one share of Alleghany common stock for every fifty shares outstanding.
** Adjusted to reflect the common stock dividend declared in March 2005.
See Notes to Unaudited Consolidated Financial Statements.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED
JUNE 30, 2005 AND 2004
(dollars in thousands, except share and per share amounts)
(unaudited)
2005 2004
------------- -------------
REVENUES
Net premiums earned $ 432,206 $ 392,883
Interest, dividend and other income 39,298 28,092
Net gain on investment transactions 47,844 37,535
------------- -------------
Total revenues 519,348 458,510
------------- -------------
COSTS AND EXPENSES
Loss and loss adjustment expenses 229,582 185,114
Commissions and brokerage 108,422 84,388
Salaries, administrative and other operating expenses 15,203 14,582
Corporate administration 19,712 18,894
Interest expense 1,665 1,123
------------- -------------
Total costs and expenses 374,584 304,101
------------- -------------
Earnings from continuing operations, before income taxes 144,764 154,409
Income taxes 46,614 52,452
------------- -------------
Earnings from continuing operations 98,150 101,957
Discontinued operations
(Loss) earnings from operations (including loss on disposal
of $1,166 in 2005) (653) 15,823
Income taxes 5,224 6,993
------------- -------------
(Loss) earnings from discontinued operations, net (5,877) 8,830
------------- -------------
Net earnings $ 92,273 $ 110,787
============= =============
Basic earnings per share of common stock **
Continuing operations $ 12.46 $ 13.05
Discontinued operations (0.74) 1.13
------------- -------------
$ 11.72 $ 14.18
============= =============
Diluted earnings per share of common stock **
Continuing operations $ 12.43 $ 13.00
Discontinued operations (0.74) 1.13
------------- -------------
$ 11.69 $ 14.13
============= =============
Dividends per share of common stock * *
============= =============
Average number of outstanding shares of common stock ** 7,875,171 7,814,222
============= =============
* In March 2005 and 2004, Alleghany declared a stock dividend consisting of
one share of Alleghany common stock for every fifty shares outstanding.
** Adjusted to reflect the common stock dividend declared in March 2005.
See Notes to Unaudited Consolidated Financial Statements.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)
JUNE 30,
2005 DECEMBER 31,
(UNAUDITED) 2004*
------------ ------------
ASSETS
Available for sale securities at fair value:
Equity securities (cost: 2005 $371,505; 2004 $290,597) $ 692,138 $ 645,184
Debt securities (cost: 2005 $1,493,085; 2004 $1,178,982) 1,491,203 1,179,210
Short-term investments 389,694 374,391
------------ ------------
2,573,035 2,198,785
Cash 74,135 267,760
Notes receivable 91,536 91,665
Accounts receivable, net 2,484 16,776
Premium balances receivable 217,976 203,141
Reinsurance recoverables 708,145 623,325
Ceded unearned premium reserves 292,952 286,451
Deferred acquisition costs 56,890 56,165
Property and equipment at cost, net of
accumulated depreciation and amortization 17,753 15,691
Goodwill and other intangibles, net of amortization 171,750 172,707
Deferred tax assets 101,869 98,753
Assets of discontinued operations 335,820 336,584
Other assets 63,967 59,922
------------ ------------
$ 4,708,312 $ 4,427,725
============ ============
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses $ 1,362,593 $ 1,232,337
Unearned premiums 761,407 751,131
Reinsurance payable 152,602 112,479
Deferred tax liabilities 186,500 206,250
Subsidiaries' debt 80,000 80,000
Current taxes payable 38,166 15,713
Liabilities of discontinued operations 146,957 136,397
Other liabilities 139,595 120,002
------------ ------------
Total liabilities 2,867,820 2,654,309
Common stockholders' equity 1,840,492 1,773,416
------------ ------------
$ 4,708,312 $ 4,427,725
============ ============
COMMON SHARES OUTSTANDING ** 7,889,136 7,829,721
============ ============
* Certain amounts have been reclassified to conform to the 2005
presentation.
** Adjusted to reflect the common stock dividend declared in March 2005.
See Notes to Unaudited Consolidated Financial Statements.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, 2005 AND 2004
(dollars in thousands)
(unaudited)
2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings from continuing operations $ 98,150 $ 101,957
Adjustments to reconcile net earnings to cash provided by operations:
Depreciation and amortization 12,632 13,654
Net gain on investment transactions (46,678) (37,535)
Tax benefit on stock options exercised 464 1,251
Decrease in accounts and notes receivable 13,254 11,178
(Increase) decrease in other assets (2,877) 12,185
(Increase) in reinsurance recoverables (44,697) (223,264)
(Increase) decrease in premium balances receivable (14,835) 87,196
(Increase) in ceded unearned premium reserves (6,501) (72,150)
(Increase) in deferred acquisition costs (725) (8,989)
Increase in other liabilities and current taxes 43,325 17,688
Increase in unearned premiums 10,276 96,400
Increase in losses and loss adjustment expenses 130,256 229,765
----------- -----------
Net adjustments 93,894 127,379
----------- -----------
Net cash provided by operations 192,044 229,336
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (718,948) (574,865)
Sales of investments 388,321 341,499
Purchases of property and equipment (5,521) (4,760)
Net change in short-term investments (799) (28,835)
Acquisition of insurance companies, net of cash acquired (25,574) (16,672)
Other, net (23,573) (20,581)
----------- -----------
Net cash used in investing activities (386,094) (304,214)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Other, net 425 4,203
----------- -----------
Net cash (used in) provided by financing activities 425 4,203
----------- -----------
Net decrease in cash (193,625) (70,675)
Cash at beginning of period 267,760 213,842
----------- -----------
Cash at end of period $ 74,135 $ 143,167
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,262 $ 1,394
Income taxes $ 30,611 $ 83,166
See Notes to Unaudited Consolidated Financial Statements.
Notes to the Unaudited Consolidated Financial Statements
This report should be read in conjunction with the Annual Report on Form
10-K for the year ended December 31, 2004 (the "2004 Form 10-K") and the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2005 (the "2005
First Quarter Form 10-Q") 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.
Stock-Based Compensation Accounting
In December 2002, the Financial Accounting Standards Board issued SFAS No.
148, "Accounting for Stock-Based Compensation Transition and Disclosure" ("SFAS
148"). SFAS 148 amended FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123") to provide alternative methods of transition for
enterprises that elect to change to the SFAS 123 fair value method of accounting
for stock-based employee compensation and to amend the disclosure requirements
of SFAS 123.
The Company maintains fixed option plans and a performance-based stock
plan. Effective January 1, 2003, the Company adopted the fair value recognition
provisions of SFAS 123 prospectively for all employee and/or director awards
granted, modified or settled under any of its stock-based compensation plans
after January 1, 2003. Fair value is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions: no cash dividend yield for all years; expected volatility ranging
from 17 to 19 percent; risk-free interest rates ranging from 3.21 percent to
4.40 percent; and expected lives of seven and eight years. Prior to 2003, the
Company accounted for its fixed option plans and performance-based stock plan
under the recognition and measurement provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25").
During the second quarters of 2005 and 2004, stock options to acquire
3,500 shares of common stock and 7,000 shares of common stock, respectively,
were granted under the Company's fixed option plans. The expense relating to
options issued in prior periods was $64,000 in the second quarter of 2005 and
$45,000 in the second quarter of 2004. With respect to its performance-based
stock plan, the Company recognized after-tax compensation expense of $3.2
million in the 2005 second quarter and $2.7 million in the 2004 second quarter
(in each case calculated pursuant to the prospective method under SFAS 123). Had
the Company applied SFAS 123 to all option awards outstanding under its fixed
option plans during the 2005 and 2004 second quarters, the Company would have
recognized after-tax expense of $71,000 in the 2005 second quarter and $93,000
in the 2004 second quarter. Had the Company applied SFAS 123 to all outstanding
stock-based
-6-
awards during the same periods, the Company would have recognized after-tax
expense of $2.6 million in the 2005 second quarter and $2.7 million in the 2004
second quarter.
In December 2004, SFAS 123 (revised) "Share-Based Payment," ("Revised SFAS
123") was issued. Revised SFAS 123 requires that the cost resulting from all
stock-based payment transactions be recognized in the financial statements,
establishes fair value as the measurement objective in accounting for
stock-based payment arrangements and requires the application of a fair
value-based measurement method in accounting for stock-based payment
transactions with employees. Revised SFAS 123 is effective as of the beginning
of the first interim or annual reporting period that begins after December 15,
2005. The Company's present method of accounting for stock-based payments is
described above. The Company must adopt Revised SFAS 123 in the first quarter of
2006.
The following table illustrates the effect on net earnings and earnings
per share if the fair value-based method of SFAS 123 or Revised SFAS 123 had
been applied to all outstanding and unvested awards under all of the Company
plans in each period.
For the three months ended For the six months ended
(dollars in thousands, except per June 30, June 30, June 30, June 30,
share amounts) 2005 2004 2005 2004
------------- ------------- ------------- -------------
Net earnings, as reported $ 31,402 $ 48,723 $ 92,273 $ 110,787
Add: stock-based employee
compensation expense included
in reported net earnings, net
of related tax 3,251 2,721 5,798 4,460
Less: stock-based compensation
expense determined under fair
value method for all
stock-based awards, net of
related tax 2,556 2,712 4,729 4,574
------------- ------------- ------------- -------------
Pro forma net earnings $ 32,097 $ 48,732 $ 93,342 $ 110,673
============= ============= ============= =============
Earnings per share
Basic - as reported $ 3.98 $ 6.23 $ 11.72 $ 14.18
Basic - pro forma $ 4.07 $ 6.23 $ 11.85 $ 14.16
Diluted - as reported $ 3.97 $ 6.21 $ 11.69 $ 14.13
Diluted - pro forma $ 4.05 $ 6.20 $ 11.81 $ 14.11
-7-
Employee Benefit Plans
The Company has two unfunded noncontributory defined benefit pension plans
for executives and a funded noncontributory defined benefit pension plan for
employees. Under the executive plans, defined benefits are based on years of
service and the employee's highest average annual base salary over a consecutive
three-year period during the last ten years or, if applicable, shorter period of
employment, plus one-half of the highest average annual bonus over a consecutive
five-year period during the last ten years, or, if applicable, shorter period of
employment. With respect to the funded employee plan, the Company's policy is to
contribute annually the amount necessary to satisfy the Internal Revenue
Service's funding requirements. Contributions are intended to provide not only
for benefits attributed to service to date but also for those expected to be
earned in the future. Additional details regarding the Company's noncontributory
defined benefit pension plans can be found in Note 12 to the Consolidated
Financial Statements in the Company's 2004 Form 10-K. The Company plans to
contribute $0.3 million to the funded employee plan in 2005, compared with
contributions of $0.5 million in 2004.
The components of net periodic benefit cost for the three and six months
ended June 30, 2005 and 2004 consisted of the following:
For the three months For the six months
ended ended
June 30, June 30, June 30, June 30,
(dollars in millions) 2005 2004 2005 2004
--------- --------- --------- ---------
Net periodic pension cost included the following
expense (income) components:
Service cost-benefits earned during the
quarter $ 0.3 $ 0.3 $ 0.6 $ 0.7
Interest cost on projected benefit obligation 0.2 0.2 0.3 0.3
Expected return on plan assets (0.1) (0.1) (0.1) (0.1)
Net amortization 0.3 0.3 0.6 0.6
--------- --------- --------- ---------
Net periodic pension cost $ 0.7 $ 0.7 $ 1.4 $ 1.5
========= ========= ========= =========
Comprehensive Income
The Company's total comprehensive income for the three months ended June
30, 2005 and 2004 was $10.1 million and $62.1 million, and $61.8 million and
$107.4 million for the six months ended June 30, 2005 and 2004. Comprehensive
income includes the Company's net earnings adjusted for changes in unrealized
appreciation (depreciation) of investments, which were $(18.1) million and $14.3
million for the three months ended June 30, 2005 and 2004, and $(24.3) million
and $(0.4) million for the six months ended June 30, 2005 and 2004, and
cumulative translation adjustments, which
-8-
were $(3.2) million and $(0.9) million for the three months ended June 30, 2005
and 2004, and $(6.2) million and $(3.0) million, for the six months ended June
30, 2005 and 2004.
Segment Information
Information related to the Company's reportable business operating
segments is shown in the tables below. The Company's reportable segments are
reported in a manner consistent with the way management evaluates the
businesses. As such, insurance underwriting activities are evaluated separately
from investment activities. Realized investment gains are not considered
relevant in evaluating investment performance on an annual basis.
-9-
For the three
months ended For the six months ended
June 30, June 30, June 30, June 30,
(dollars in millions) 2005 2004 2005 2004
---------- ---------- ---------- ----------
REVENUES FROM CONTINUING OPERATIONS
AIHL insurance group
Net premiums earned
RSUI $ 158.2 $ 154.0 $ 313.7 $ 302.3
CATA 40.5 39.5 79.8 74.0
Darwin 20.0 9.7 38.7 16.6
---------- ---------- ---------- ----------
218.7 203.2 432.2 392.9
Interest, dividend and other income 14.7 9.4 29.0 19.7
Net gain on investment transactions 0.6 4.4 25.8 35.8
---------- ---------- ---------- ----------
Total insurance group 234.0 217.0 487.0 448.4
Corporate activities 6.8 2.3 10.3 8.4
Net gain on investment transactions --- --- 22.0 1.7
---------- ---------- ---------- ----------
Total $ 240.8 $ 219.3 $ 519.3 $ 458.5
========== ========== ========== ==========
EARNINGS FROM CONTINUING OPERATIONS
AIHL insurance group
Underwriting profit (loss)
RSUI $ 43.8 $ 67.1 $ 87.0 $ 121.9
CATA 4.8 1.3 6.4 1.8
Darwin 0.4 -- 0.8 (0.4)
---------- ---------- ---------- ----------
49.0 68.4 94.2 123.3
Interest, dividend and other income 14.7 9.4 29.0 19.7
Net gain on investment transactions 0.6 4.4 25.8 35.8
Other expenses (6.3) (6.9) (13.8) (12.9)
---------- ---------- ---------- ----------
Total insurance group 58.0 75.3 135.2 165.9
Corporate activities
Interest, dividend and other income 6.8 2.2 10.3 8.4
Net gain on investment transactions --- --- 22.0 1.7
Other expenses (11.3) (10.7) (21.1) (20.5)
---------- ---------- ---------- ----------
Interest expense (1.0) (0.6) (1.7) (1.1)
Corporate activities (5.5) (9.1) 9.5 (11.5)
---------- ---------- ---------- ----------
Total 52.5 66.2 144.7 154.4
Income taxes 15.6 22.1 46.6 52.4
---------- ---------- ---------- ----------
Earnings from continuing operations $ 36.9 $ 44.1 $ 98.1 $ 102.0
========== ========== ========== ==========
June 30, Dec. 31,
2005 2004
---------- ----------
IDENTIFIABLE ASSETS
AIHL Insurance group $ 3,689.0 $ 3,388.7
Corporate activities 1,019.3 1,039.0
---------- ----------
Total $ 4,708.3 $ 4,427.7
========== ==========
Segment accounting policies are the same as the Consolidated Accounting
Policies described in Note 17 to the Consolidated Financial Statements in the
2004 Form 10-K. Property and casualty insurance operations are the Company's
primary business,
-10-
conducted by Alleghany Insurance Holdings LLC ("AIHL") and its subsidiaries RSUI
Group, Inc. ("RSUI"), Capitol Transamerica Corporation ("CATA") and Darwin
Professional Underwriters, Inc. ("Darwin"). The primary components of "corporate
activities" are Alleghany Properties, Inc. and corporate activities at the
parent level.
Sale of World Minerals Inc.
On July 14, 2005, the Company completed the sale of its world-wide
industrial minerals business, World Minerals Inc. ("World Minerals"), to Imerys
USA, Inc. (the "Purchaser"), a wholly owned subsidiary of Imerys, S.A., pursuant
to a Stock Purchase Agreement, dated as of May 19, 2005 by and among Imerys USA,
Inc., Imerys, S.A. and Alleghany (the "Stock Purchase Agreement"). Under the
terms of the Stock Purchase Agreement, the purchase price was $230.0 million,
which was reduced by $13.2 million reflecting contractual obligations to be paid
by the purchaser after the closing, resulting in an adjusted purchase price of
$216.8 million (the "Adjusted Purchase Price"). $206.8 million of the Adjusted
Purchase Price was paid in cash by the Purchaser to Alleghany on the closing
date, with the remaining $10.0 million being held by the Purchaser as security
for certain indemnification obligations undertaken by Alleghany pursuant to the
Stock Purchase Agreement. The $10.0 million holdback will bear interest at the
U.S. Treasury 10-year note rate and is scheduled to be released to Alleghany (to
the extent not applied toward such indemnification obligations) during the
period covering the fifth through the tenth anniversaries of the closing date.
The Company is carrying a receivable in the amount of $9.1 million on its
balance sheet in respect of the holdback, equal to the $10.0 million face amount
less an interest rate discount of $0.9 million. The sale of World Minerals
produced a modest after-tax gain which will be reported in the 2005 third
quarter.
The Company has classified the operations of World Minerals as a
"discontinued operation" in its financial statements for all periods presented.
Historical balance sheet information* relating to the discontinued operation is
set forth in the following table:
-11-
June 30, Dec. 31,
(dollars in thousands) 2005 2004
-------- --------
ASSETS
Short-term investments $ 17,221 $ 4,061
Cash 7,809 20,676
Accounts receivable, net 56,798 53,771
Inventory 40,840 41,521
Property and equipment at cost, net 144,616 152,625
Goodwill 52,539 50,999
Deferred tax assets 9,121 5,810
Other assets 6,876 7,121
-------- --------
$335,820 $336,584
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank debt $ 65,996 $ 58,258
Other liabilities 58,159 59,542
Deferred tax liabilities 22,802 18,597
-------- --------
146,957 136,397
-------- --------
Common stockholders' equity 188,863 200,187
-------- --------
$335,820 $336,584
======== ========
* The balance sheet accounts shown above are before inter-company eliminations
made in the preparation of the Company's Consolidated Balance Sheets.
Historical information relating to the results of operations of the discontinued
operation is as follows:
For the three months ended For the six months ended
June 30, June 30, June 30, June 30,
(dollars in thousands) 2005 2004 2005 2004
------------- ------------- ------------- -------------
Revenues $ 70,855 $ 71,265 $ 140,431 $ 138,254
Costs and expenses
Salaries, administration and other expenses 11,165 10,063 21,575 19,864
Cost of mineral and filtration sales 59,833 55,065 116,787 106,443
Interest expense 869 573 1,556 1,129
------------- ------------- ------------- -------------
Total cost and expenses 71,867 65,701 139,918 127,436
------------- ------------- ------------- -------------
(Loss) earnings before taxes (1,012) 5,564 513 10,818
Income taxes 3,755 2,525 5,632 4,994
------------- ------------- ------------- -------------
Net (loss) earnings from discontinued operations $ (4,767) $ 3,039 $ (5,119) $ 5,824
============= ============= ============= =============
World Minerals was unprofitable in the second quarter of 2005 due to
competitive pricing pressures, as well as rising energy and other operating
costs, a $5.7 million after-tax write-off related to foreign tax credits that
will not be used as a result of the sale of World Minerals and a $2.8 million
after-tax write-off related to the termination of a major systems project in
connection with the sale of World Minerals.
-12-
Obligations under Guarantees
In connection with the sale of World Minerals Inc., the Company undertook
certain indemnification obligations pursuant to the Stock Purchase Agreement
including a general indemnification provision for breaches of representations
and warranties set forth in the Stock Purchase Agreement (the "Contract
Indemnification") and a special indemnification provision related to products
liability claims arising from events occurring during pre-closing periods (the
"Products Liability Indemnification"). The representations and warranties to
which the Contract Indemnification applies survive for a two-year period (with
the exception of certain representations and warranties such as those related to
environmental, real estate and tax matters, which survive for periods longer
than two years) and generally, except for tax and certain other matters, apply
only to aggregate losses in excess of $2.5 million, up to a maximum of
approximately $123.0 million.
The Products Liability Indemnification is divided into two parts, the
first relating to products liability claims arising in respect of events
occurring during the period prior to the Company's acquisition of the World
Minerals business from Johns Manville Corporation, Inc. (f/k/a Manville Sales
Corporation) ("Manville") in July 1991 (the "Manville Period") and the second
relating to products liability claims arising in respect of events occurring
during the period of Company ownership (the "Alleghany Period"). Under the terms
of the Stock Purchase Agreement, the Company will provide indemnification at a
rate of 100% for the first $100.0 million of losses arising from products
liability claims relating to the Manville Period and at a rate of 50% for the
next $100.0 million of such losses, so that the Company's maximum
indemnification obligation in respect of products liability claims relating to
the Manville Period is $150.0 million. This indemnification obligation in
respect of Manville Period products liability claims will expire on July 31,
2016. The Stock Purchase Agreement states that it is the intention of the
parties that, with regard to losses incurred in respect of products liability
claims relating to the Manville Period, recovery should first be sought from
Manville, and that the Company's indemnification obligation in respect of
products liability claims relating to the Manville Period is intended to
indemnify the Purchaser for such losses which are not recovered from Manville
within a reasonable period of time after recovery is sought from Manville. In
connection with World Minerals' acquisition of the assets of the industrial
minerals business of Manville in 1991, Manville agreed to indemnify World
Minerals for certain product liability claims, in respect of products of the
industrial minerals business manufactured during the Manville Period, asserted
against World Minerals through July 31, 2006. World Minerals did not assume in
the acquisition liability for product liability claims to the extent that such
claims relate, in whole or in part, to the Manville Period, and Manville should
continue to be responsible for such claims, notwithstanding the expiration of
the Manville indemnity in 2006.
For products liability claims relating to the Alleghany Period, the
Company will provide indemnification for up to $30.0 million in the aggregate.
The $10.0 million holdback from the Adjusted Purchase Price paid at the closing
secures performance of this indemnification obligation relating to the Alleghany
Period, and, unless and until the holdback amount is exhausted, will be charged
for any claim for payment in respect of
-13-
this indemnification obligation that would otherwise be made to the Company. In
addition to the indemnification obligation undertaken by the Company in respect
of products liability claims relating to the Alleghany Period, the Stock
Purchase Agreement provides that, after the closing, the Company will continue
to make available to World Minerals $30.0 million per policy period of the
Company umbrella insurance coverage in effect on a Company group-wide basis for
policy periods beginning on April 1, 1996 (prior to April 1, 1996, World
Minerals had its own umbrella insurance coverage). This portion of the Company
umbrella insurance coverage will be available to World Minerals for general
liability claims as well as for products liability claims. The Stock Purchase
Agreement states that it is the intention of the parties that, with regard to
losses incurred in respect of products liability claims relating to the
Alleghany Period, recovery should first be sought under any available World
Minerals insurance policies and second under the portion of the Company umbrella
insurance coverage made available to World Minerals after the closing, and that
the Company's indemnification obligation in respect of products liability claims
relating to the Alleghany Period is intended to indemnify the Purchaser for such
losses in respect of which coverage is not available under either the World
Minerals insurance policies or under such portion of the Company umbrella
insurance coverage. The Company's indemnification obligation in respect of
Alleghany Period products liability claims will expire on July 14, 2015, which
is the tenth anniversary of the closing date.
The Stock Purchase Agreement provides that the Company has no
responsibility for products liability claims arising in respect of events
occurring after the closing, and that any products liability claims involving
both pre-closing and post-closing periods will be apportioned on an equitable
basis.
During the Alleghany Period, World Minerals was named in approximately 30
lawsuits which included product liability claims, many of which have been
voluntarily dismissed by the plaintiffs. In most cases, plaintiffs claimed
various medical problems allegedly stemming from their exposure to a wide
variety of allegedly toxic products at their place of employment, and World
Minerals was one among dozens of defendants that had allegedly supplied such
products to plaintiffs' employers. To date, World Minerals has not incurred any
significant expense in respect of such cases. Based on the Company's experience
to date and other analyses, the Company has established a $0.6 million reserve
in connection with the Products Liability Indemnification for the Alleghany
Period.
Reinsurance
Effective April 1, 2005, Darwin modified its reinsurance treaty covering
medical professional liability insurance for physicians and medical professional
liability for medical facilities. As part of such modification, Darwin is
reinsured for individual losses in excess of $250,000 for medical professional
liability insurance for physicians,
-14-
compared with $500,000 under the previous treaty, and is reinsured in excess of
$500,000 for medical professional liability for medical facilities, compared
with $1.0 million under the previous treaty. In addition, the treaty was
modified so that Darwin has a 30.0 percent participation on medical professional
liability losses up to $1.0 million in excess of $1.0 million, compared with no
such co-participation under the previous treaty. Darwin's 15.0 percent
co-participation on losses in excess of $2.0 million remains unchanged from the
previous treaty, and the modified treaty continues to provide $2.0 million of
"clash" protection (offering protection in the event that multiple policies
written by Darwin are involved in the same loss occurrence) for losses in excess
of $1.0 million.
Letter of Credit Obligations Relating to Former Subsidiary
As previously reported in the 2004 Form 10-K, on November 5, 2001, AIHL
completed the disposition of its wholly owned subsidiary Alleghany Underwriting
Holdings Ltd., which was engaged in the global property and casualty insurance
and reinsurance business at Lloyd's of London, to Talbot Holdings Ltd.
("Talbot"). Since the disposition, AIHL has provided letters of credit to
support business written by a syndicate of Talbot, including a $10.0 million
letter of credit for the 2005 Lloyd's year of account. Pursuant to an agreement
between AIHL and Talbot, such $10.0 million letter of credit was extinguished as
of June 29, 2005, and AIHL has no further contractual commitments to Talbot.
Acquisition of Ulico Indemnity Company
On May 2, 2005, Darwin National Assurance Company purchased Ulico
Indemnity Company, an insurance company domiciled in Arkansas, from Ulico
Casualty Company to support future business underwritten by Darwin for cash
consideration of $25.3 million, $22.3 million of which represented consideration
for Ulico's investment portfolio and $3.0 million of which represented
consideration for licenses.
Contingencies
The Company's subsidiaries are parties to pending claims and litigation in
the ordinary course of their businesses. Each such subsidiary 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 June 30, 2005.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis presents a review of the Company and
its subsidiaries for the three and six months ended June 30, 2005 and 2004. This
review should be read in conjunction with the consolidated financial statements
and other data presented herein as well as Management's Discussion and Analysis
of Financial Condition and Results of Operation contained in the Company's 2004
Form 10-K and 2005 First Quarter Form 10-Q.
The Company reported net earnings from continuing operations in the second
quarter of 2005 of $36.9 million, compared with $44.0 million in the second
quarter of 2004. Discontinued operations consist of the operations of Heads &
Threads International LLC prior to its disposition in December 2004 and the
operations of World Minerals, Inc. prior to its disposition in July 2005.
Additional information regarding the results of discontinued operations can be
found in the Notes to the Consolidated Financial Statements included in this
report on Form 10-Q. The Company's 2005 second quarter net earnings included net
gains on investment transactions after tax of $0.4 million, compared with $2.8
million in the 2004 second quarter, and net catastrophe losses after tax of $3.6
million, compared with $1.7 million in the corresponding 2004 period. Alleghany
common stockholders' equity per share at June 30, 2005 was $233.29, an increase
of 3.0% from common stockholders' equity per share of $226.50 as of December 31,
2004 (as adjusted for the stock dividend declared in March 2005). On a
consolidated basis, cash and invested assets were approximately $2.65 billion at
June 30, 2005, an increase of 7.3% from approximately $2.47 billion at December
31, 2004. In the first six months of 2005, the Company's net earnings from
continuing operations were $98.2 million, compared with $102.0 million in the
corresponding 2004 period. The 2005 six-month net earnings results include net
gains on investment transactions after tax of $31.1 million, compared with $24.4
million in the first six months of 2004 and net catastrophe losses after tax of
$9.1 million, compared with $2.0 million in the corresponding 2004 period.
Alleghany Insurance Holdings LLC ("AIHL") recorded pre-tax earnings of
$58.0 million on revenues of $234.0 million in the 2005 second quarter, compared
with pre-tax earnings of $75.3 million on revenues of $217.0 million in the
second quarter of 2004, and pre-tax earnings of $135.2 million on revenues of
$487.0 million in the first six months of 2005, compared with pre-tax earnings
of $165.9 million on revenues of $448.3 million in the first six months of 2004.
AIHL's 2005 second quarter pre-tax earnings include investment income before tax
of $14.7 million and net gains on investment transactions before tax of $0.6
million, compared with $9.4 million and $4.4 million, respectively, in the
corresponding 2004 period. AIHL's net earnings for the first six months in 2005
include investment income before tax of $29.0 million and net gains on
investment transactions before tax of $25.8 million, compared with $19.7 million
and $35.8 million, respectively, in the corresponding 2004 period.
-16-
The comparative pre-tax contributions to AIHL's results made by its
operating units RSUI, CATA and Darwin were as follows (in millions, except
ratios):
Three Months Ended June 30,
-------------------------------------------------------------------
RSUI CATA Darwin(1) AIHL
------ ------ --------- ------
2005
Gross premiums written (2) $325.3 $ 45.7 $ 36.7 $407.7
Net premiums written (2) 168.2 43.7 20.8 232.7
Net premiums earned $158.2 $ 40.5 $ 20.0 $218.7
Loss and loss adjustment expenses 83.0 17.8 13.5 114.3
Underwriting expenses 31.4 17.9 6.1 55.4
------ ------ --------- ------
Underwriting profit (3) $ 43.8 $ 4.8 $ 0.4 49.0
====== ====== =========
Interest, dividend and other income 14.7
Net gain on investment transactions 0.6
Other expenses (6.3)
------
Earnings before income taxes $ 58.0
======
Loss ratio (4) 52.5% 44.0% 67.6% 52.3%
Expense ratio (5) 19.8% 44.1% 30.9% 25.3%
Combined ratio (6) 72.3% 88.1% 98.5% 77.6%
2004
Gross premiums written (2) $308.1 $ 46.7 $ 20.2 $375.0
Net premiums written (2) 171.8 42.2 14.6 228.6
Net premiums earned $154.0 $ 39.5 $ 9.7 $203.2
Loss and loss adjustment expenses 63.4 22.6 6.0 92.0
Underwriting expenses 23.5 15.6 3.7 42.8
------ ------ --------- ------
Underwriting profit (3) $ 67.1 $ 1.3 $ -- 68.4
====== ====== =========
Interest, dividend and other income 9.4
Net gain on investment transactions 4.4
Other expenses (6.9)
------
Earnings before income taxes $ 75.3
======
Loss ratio (4) 41.2% 57.2% 62.3% 45.3%
Expense ratio (5) 15.2% 39.4% 38.0% 21.0%
Combined ratio (6) 56.4% 96.6% 100.3% 66.3%
-17-
Six Months Ended June 30,
--------------------------------------------------------------
RSUI CATA Darwin(1) AIHL
------ ------ --------- ------
2005
Gross premiums written (2) $596.3 $ 88.9 $ 70.5 $755.7
Net premiums written (2) 309.8 84.8 41.4 436.0
Net premiums earned $313.7 $ 79.8 $ 38.7 $432.2
Loss and loss adjustment expenses 165.4 37.8 26.4 229.6
Underwriting expenses 61.3 35.6 11.5 108.4
------ ------ --------- ------
Underwriting profit (3) $ 87.0 $ 6.4 $ 0.8 94.2
====== ====== =========
Interest, dividend and other income 29.0
Net gain on investment transactions 25.8
Other expenses (13.8)
------
Earnings before income taxes $135.2
======
Loss ratio (4) 52.7% 47.4% 68.2% 53.1%
Expense ratio (5) 19.6% 44.6% 29.7% 25.1%
Combined ratio (6) 72.3% 92.0% 97.9% 78.2%
2004
Gross premiums written (2) $602.5 $ 88.4 $ 40.8 $731.7
Net premiums written (2) 309.5 79.0 28.6 417.1
Net premiums earned $302.3 $ 74.0 $ 16.6 $392.9
Loss and loss adjustment expenses 133.4 41.4 10.4 185.2
Underwriting expenses 47.0 30.8 6.6 84.4
------ ------ --------- ------
Underwriting profit (loss) (3) $121.9 $ 1.8 $ (0.4) 123.3
====== ====== =========
Interest, dividend and other income 19.7
Net gain on investment transactions 35.8
Other expenses (12.9)
------
Earnings before income taxes $165.9
======
Loss ratio (4) 44.1% 56.0% 62.4% 47.1%
Expense ratio (5) 15.5% 41.6% 40.0% 21.5%
Combined ratio (6) 59.6% 97.6% 102.4% 68.6%
(1) Although Darwin is an underwriting manager for Platte River and certain
subsidiaries of CATA, Darwin is managed on an operating unit basis and,
therefore, the results of business generated by Darwin have been separated from
CATA's results for purposes of this table.
(2) Amounts do not reflect the impact of an inter-company pooling agreement.
(3) Represents net premiums earned less loss and loss adjustment expenses and
underwriting expenses, all as determined in accordance with U.S. generally
accepted accounting principles ("GAAP"), and does not include interest, dividend
and other income or net gains on investment transactions. Underwriting profit
(loss) does not replace net earnings (loss) determined in accordance with GAAP
as a measure of profitability; rather, Alleghany believes that underwriting
profit (loss) enhances the understanding of AIHL's insurance operating units'
operating results by highlighting net earnings attributable to their
underwriting performance. With the addition of interest, dividend and other
income and net gains on
-18-
investment transactions, reported pre-tax net earnings (a GAAP measure) may show
a profit despite an underlying underwriting loss. Where such underwriting losses
persist over extended periods, an insurance company's ability to continue as an
ongoing concern may be at risk. Therefore, Alleghany views underwriting profit
(loss) as an important measure in the overall evaluation of the performance of
its insurance operations.
(4) Loss and loss adjustment expenses divided by net premiums earned, all as
determined in accordance with GAAP.
(5) Underwriting expenses divided by net premiums earned, all as determined in
accordance with GAAP.
(6) The sum of the Loss Ratio and Expense Ratio, all as determined in accordance
with GAAP, representing the percentage of each premium dollar an insurance
company spends on losses (including loss adjustment expenses) and underwriting
expenses.
The decrease in RSUI's underwriting profit in the second quarter and first
half of 2005 compared with the corresponding 2004 periods primarily reflects an
increase in the percentage of total business written by RSUI attributable to
casualty lines of business as such business is recorded at a higher loss ratio
compared with property lines of business; an increase in loss and loss
adjustment expenses in property due primarily to one large non-catastrophe
weather-related loss; and higher underwriting expenses mainly due to the absence
of profit sharing payments under certain property reinsurance treaties resulting
from catastrophe losses in 2004. RSUI's gross written premiums increased in the
2005 second quarter from the 2004 second quarter and were essentially flat in
the first half of 2005 from the corresponding 2004 period, primarily reflecting
price increases in directors and officers and professional liability lines of
business offset by price decreases in RSUI's property, general liability and
umbrella lines due to market competition. Although RSUI believes that rates are
still adequate to support acceptable profit margins, rates in the first half of
2005 continued to reflect overall industry trends, with decreased rates in its
property lines of business and flat or decreased rates in casualty lines of
business (except for professional liability which experienced increases in
rates). The continuation of these rate trends during the second half of 2005 may
result in lower levels of gross premiums written by RSUI during 2005, as premium
per policy may decrease and RSUI is expected to write less business when it
considers prices inadequate to support acceptable profit margins.
RSUI's net premiums earned increased in the second quarter and first half
of 2005 from the corresponding 2004 periods primarily reflecting the impact on
RSUI's casualty lines of business of increased retentions under its reinsurance
programs and growth in its professional liability lines of business, partially
offset by a decrease in property net premiums earned due to a decrease in
property gross premiums written. Loss and loss adjustment expenses increased in
the first quarter and first half of 2005 from the corresponding 2004 periods,
primarily reflecting increased losses in certain property lines of business as
well as an increase in the percentage of total business written by RSUI
attributable to casualty lines of business as such business is recorded at a
higher loss ratio compared with property lines of business. In the first half of
2005, casualty net earned premium was 53.4% of total net earned premium,
compared with 43.4% in the first half of 2004.
-19-
The increase in CATA's underwriting profit in the second quarter and first
half of 2005 compared with the corresponding 2004 periods primarily reflects a
$2.4 million pre-tax reduction in prior year loss reserves in the 2005 second
quarter (compared with a $2.9 million increase in prior year loss reserves in
the 2004 second quarter) and a decrease in reinsurance costs. Gross premiums
written in the second quarter and first half of 2005 were essentially flat from
the corresponding 2004 periods reflecting the loss of premiums attributable to
the contract surety lines of business that CATA exited in the 2005 first
quarter, partially offset by the continued expansion of CATA's business into the
excess and surplus markets. The increase in net premiums earned at CATA in the
first half of 2005 from the 2004 first half primarily reflects growth in both
excess and surplus markets and commercial surety lines and lower reinsurance
costs partially offset by the loss of premiums attributable to the exit from
contract surety. The decrease in loss and loss adjustment expenses in the second
quarter and first half of 2005 from the corresponding 2004 periods reflects the
$2.4 million pre-tax reduction in prior year loss reserves in the 2005 second
quarter (compared with a $2.9 million increase in prior year loss reserves in
the 2004 second quarter), partially offset by additional reserves relating to
the increase in net premiums earned in the first quarter and first half of 2005.
CATA experienced lower levels of rate increases in its property and
casualty lines of business, primarily due to increased competition, and
generally unchanged commercial surety rates for the 2005 second quarter and
first half of 2005 as compared with the second quarter and first half of 2004
second quarter.
Darwin reported an increase in underwriting profit in the second quarter
and first half of 2005 from the corresponding 2004 periods, primarily reflecting
a significant increase in net premiums earned due to increased levels of gross
premiums written across all lines of business, partially offset by increased
loss and loss adjustment expenses and underwriting expenses primarily
attributable to such premium growth. As Darwin commenced operations in May 2003,
it does not have any meaningful claims experience on which to base its reserves.
In the absence of such history, Darwin's management and outside actuaries have
used industry data related to the lines of business underwritten by Darwin to
establish reserves until sufficient claims experience exists.
-20-
The following table presents the reserves established in connection with
the losses and loss adjustment expense liabilities of AIHL's insurance operating
units on a gross and net basis by line of business. Such loss reserve amounts
represent the accumulation of estimates of ultimate losses (including losses
incurred but not reported) and loss adjustment expenses.
PROPERTY CASUALTY CMP SURETY ALL OTHER TOTAL
---------- ---------- ---------- ---------- ---------- ----------
AT JUNE 30, 2005
Gross Loss and LAE Reserves $ 344.0 $ 800.8 $ 85.8 $ 17.0 $ 115.0 $ 1,362.6
Reinsurance recoverables on unpaid (236.4) (317.0) (1.0) (1.8) (89.6) (645.8)
losses
---------- ---------- ---------- ---------- ---------- ----------
Net Loss and LAE Reserves $ 107.6 $ 483.8 $ 84.8 $ 15.2 $ 25.4 $ 716.8
========== ========== ========== ========== ========== ==========
AT DECEMBER 31, 2004
Gross Loss and LAE Reserves $ 449.7 $ 563.2 $ 82.6 $ 15.8 $ 121.0 $ 1,232.3
Reinsurance recoverables on unpaid (276.5) (217.3) (1.0) (1.0) (95.6) (591.4)
losses
---------- ---------- ---------- ---------- ---------- ----------
Net Loss and LAE Reserves $ 173.2 $ 345.9 $ 81.6 $ 14.8 $ 25.4 $ 640.9
========== ========== ========== ========== ========== ==========
-21-
Changes in Loss and Loss Adjustment Expense Reserves between June 30, 2005 and
December 31, 2004
Gross and net loss and loss adjustment expense reserves increased at June
30, 2005 from December 31, 2004, primarily reflecting an increase in casualty
loss and loss adjustment expense reserves partially offset by a decrease in
property loss and loss adjustment expense reserves.
With respect to property lines of business, the decrease in gross and net
loss and loss adjustment expense reserves primarily reflects payments made in
the first half of 2005 relating to losses attributable to the 2004 third quarter
catastrophe losses. The increase in loss and loss adjustment expense reserves
for casualty lines of business (which include, among others, excess and umbrella
liability, directors and officers' liability, professional liability, general
liability and workers' compensation) primarily reflects increased net earned
premiums for general liability, umbrella and professional liability exposures
and limited paid loss activity for the current and prior casualty accident
years. With respect to commercial multiple peril ("CMP") lines of business,
which include both property and casualty exposures, the increase in gross and
net loss and loss adjustment expense reserves primarily reflects an increase in
CMP premiums earned in the first half of 2005.
The decrease in gross loss and loss adjustment expense reserves in "All
Other" lines of business (which primarily consist of loss and loss adjustment
expense reserves for lines of business discontinued and loss and loss adjustment
expense reserves acquired in connections with the acquisition of companies in
which the seller provided loss reserve guarantees) primarily reflects a decrease
in loss and loss adjustment expense reserves acquired in connection with the
acquisition of Platte River Insurance Company in January 2002 for which the
seller provided loss reserve guarantees, partially offset by an increase in loss
and loss adjustment expense reserves resulting from the acquisition on May 2,
2005 of Ulico by Darwin National Assurance Company. Ulico loss and loss
adjustment expense reserves at June 30, 2005, for which the seller provided loss
reserve guarantees, were approximately $6.2 million.
Additional information regarding the assumptions and estimates used in the
establishment of liabilities for unpaid losses and loss adjustment expenses, and
the techniques involved in making such assumptions and estimates, can be found
in the Company's 2004 Form 10-K.
Corporate activities recorded a pre-tax loss of $5.5 million on revenues
of $6.8 million in the 2005 second quarter, compared with a pre-tax loss of $9.1
million on revenues of $2.2 million in the corresponding period in 2004, and
pre-tax earnings of $9.5 million on revenues of $32.3 million in the first six
months of 2005, compared with a pre-tax loss of $11.5 million on revenues of
$10.1 million in the corresponding 2004 period. Corporate activities' 2005 and
2004 second quarter results include no gains on
-22-
investment transactions before tax, and corporate activities' 2005 first half
results include $22.0 million of net gains on investment transactions before
tax, compared with $1.7 million in the first six months of 2004.
As of June 30, 2005, Alleghany beneficially owned 8.0 million shares, or
2.1 percent, of the outstanding common stock of Burlington Northern Santa Fe
Corporation, which had an aggregate market value on that date of $376.6 million,
or $47.08 per share. The aggregate cost of such shares is $96.6 million, or
$12.07 per share.
As of June 30, 2005, Alleghany had 7,889,136 shares of common stock
outstanding (which includes the stock dividend declared in March 2005).
The Company's results in the second quarter and first half of 2005 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.
The Company and its subsidiaries have certain obligations to make future
payments under contracts and credit-related financial instruments and
commitments. At June 30, 2005, certain long-term contractual obligations and
credit-related financial commitments were as follows (in thousands):
MORE THAN MORE THAN MORE
WITHIN 1 YEAR BUT 3 YEARS BUT THAN 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR WITHIN 3 WITHIN 5 YEARS
- ---------------------------------------- ---------- ---------- ---------- ----------- ----------
Long-Term Debt Obligations $ 80,000 $ -- $ 80,000 $ -- $ --
Operating Lease Obligations 43,879 6,490 13,948 12,160 11,281
Other Long-Term Liabilities
Reflected on
Consolidated Balance Sheet under GAAP* 7,669 981 1,962 1,462 3,264
Losses and loss adjustment expenses 1,362,593 284,985 412,575 320,957 344,076
---------- ---------- ---------- ----------- ----------
TOTAL $1,494,141 $ 292,456 $ 508,485 $ 334,579 $ 358,621
========== ========== ========== =========== ==========
* Other long-term liabilities primarily reflect pension and long-term incentive
obligations.
The Company's insurance operations have obligations to make certain
payments for losses and loss adjustment expenses pursuant to insurance policies
they issue. These future payments are reflected as reserves on the Company's
financial statements. With respect to loss and loss adjustment expenses, there
is typically no minimum contractual commitment associated with insurance
contracts and the timing and ultimate amount of actual claims related to these
reserves is uncertain.
Information regarding the Company's accounting policies is included in the
Company's 2004 Form 10-K, 2005 First Quarter Form 10-Q and the Notes to the
Consolidated Financial Statements included in this report on Form 10-Q.
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 investment portfolios of the Company and its insurance subsidiaries
may contain, from time-to-time, debt securities with fixed maturities that
expose them to risk related to adverse changes in interest rates, as well as
equity securities which are subject to fluctuations in market value. The Company
holds its equity securities and debt securities as available for sale. Any
changes in the fair value in these securities, net of tax, would be reflected in
the Company's accumulated other comprehensive income as a component of
stockholders' equity.
The table below presents a sensitivity analysis of the debt securities of
the Company and its insurance subsidiaries that are sensitive to changes in
interest rates. Sensitivity analysis is defined as the measurement of potential
changes in future earnings, fair values or cash flows of market sensitive
instruments resulting from one or more selected hypothetical changes in interest
rates over a selected time. In this sensitivity analysis model, the Company uses
fair values to measure its potential change, and a +/- 300 basis point range of
change in interest rates to measure the hypothetical change in
-23-
fair value of the financial instruments included in the analysis. The change in
fair value is determined by calculating hypothetical June 30, 2005 ending prices
based on yields adjusted to reflect a +/ - 300 basis point range of change in
interest rates, comparing such hypothetical ending price to actual ending
prices, and multiplying the difference by the par outstanding.
SENSITIVITY ANALYSIS
At June 30, 2005
(dollars in millions)
INTEREST RATE SHIFTS -300 -200 -100 0 100 200 300
- ------------------------------ -------- -------- -------- -------- -------- -------- --------
ASSETS
Debt securities, fair value $1,600.8 $1,566.4 $1,529.9 $1,491.2 $1,447.9 $1,403.4 $1,358.8
Estimated change in fair value $ 109.6 $ 75.2 $ 38.7 $ --- $ (43.3) $ (87.8) $ (132.4)
LIABILITIES
Subsidiaries' debt, fair value $ 80.8 $ 81.8 $ 82.8 $ 82.8 $ 83.8 $ 84.8 $ 85.8
Estimated change in fair value $ (2.0) $ (1.0) $ --- $ --- $ 1.0 $ 2.0 $ 3.0
The Company's 2004 Form 10-K provides a more detailed discussion of the
market risks affecting its operations.
ITEM 4. CONTROLS AND PROCEDURES.
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Chief Executive Officer
(the "CEO") and the Chief Financial Officer (the "CFO"), of the effectiveness of
the Company's disclosure controls and procedures as of the end of the period
covered by this report on Form 10-Q pursuant to Rule 13a-15 promulgated under
the Securities Exchange Act of 1934. Based on that evaluation, the Company's
management, including the CEO and CFO, concluded that the Company's disclosure
controls and procedures are effective in timely alerting them to information
required to be included in the Company's periodic reports required to be filed
with the U.S. Securities and Exchange Commission. Additionally, as of the end of
the period covered by this report on Form 10-Q, the Company's CEO and CFO have
concluded that there have been no changes in internal control over financial
reporting that have occurred during the period covered by this report on Form
10-Q that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting.
FORWARD-LOOKING STATEMENTS
"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 as defined in the
Private Securities
-24-
Litigation Reform Act of 1995. 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," "believe," "potential," "should," "continue" or the
negative versions of those words or other comparable words. 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. These statements are not guarantees of future
performance, and the Company has no specific intention to update these
statements. The uncertainties and risks include, but are not limited to risks
relating to the Company's insurance subsidiaries such as
- the cyclical nature of the property casualty industry;
- the long-tail and potentially volatile nature of certain casualty
lines of business written by such subsidiaries;
- the availability of reinsurance;
- exposure to terrorist acts;
- the willingness and ability of such subsidiaries' reinsurers to pay
reinsurance recoverables owed to such subsidiaries;
- changes in the ratings assigned to such subsidiaries;
- claims development and the process of estimating reserves;
- legal and regulatory changes;
- the uncertain nature of damage theories and loss amounts;
- increases in the levels of risk retention by such subsidiaries;
- adverse loss development for events insured by such subsidiaries in
either the current year or prior years; and
- significant weather-related or other natural or human-made
catastrophes and disasters.
Additional risks and uncertainties include general economic and political
conditions, including the effects of a prolonged U.S. or global economic
downturn or recession; changes in costs, including changes in labor costs,
energy costs and raw material prices; variations in political, economic or other
factors such as currency exchange rates; risks relating to conducting operations
in a competitive environment and conducting operations in foreign countries;
effects of acquisition and disposition activities, inflation rates or
recessionary or expansive trends, changes in market prices of the Company's
significant equity investments; extended labor disruptions, civil unrest or
other external factors over which the Company has no control; and changes in the
Company's plans, strategies, objectives, expectations or intentions, which may
happen at any time at its discretion. 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.
-25-
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
(a) Recent Sales of Unregistered Securities.
On April , 2005, the Company issued 1,960 shares of common stock to Allan
P. Kirby, Jr., a director of the Company, upon his exercise of an option to
purchase 1,000 shares of the Company's common stock, subject to adjustment for
stock dividends and the spin-off by the Company of Chicago Title Corporation in
1998, at an exercise price of $79.18 per share, or $155,192.80 in the aggregate,
granted to Mr. Kirby on April 29, 1995 under to the Alleghany Corporation
Amended and Restated Directors' Stock Option Plan. The sale of the common stock
was exempt from registration under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to Section 4(2) thereof, as a transaction not
involving a public offering.
On April 25, 2005, the Company issued an aggregate of 1,750 shares of
restricted stock of the Company to seven non-employee directors of the Company
under the Alleghany Corporation 2005 Directors' Stock Plan. These transactions
were exempt from registration under the Securities Act pursuant to Section 4(2)
thereof, as transactions not involving a public offering.
The above does not include issuances of unregistered securities of the
Company that did not involve a sale, consisting of issuances of common stock and
other securities pursuant to employee incentive plans.
(c) Issuer Purchases of Equity Securities.
The following table summarizes the Company's common stock repurchases for
the quarter ended June 30, 2005.
-26-
TOTAL NUMBER MAXIMUM
OF SHARES NUMBER OF
PURCHASED AS SHARES THAT MAY
PART OF PUBLICLY YET BE
TOTAL NUMBER AVERAGE PRICE PAID ANNOUNCED PURCHASED
OF SHARES PER PLANS OR UNDER THE PLANS
PERIOD PURCHASED SHARE PROGRAMS OR PROGRAMS
- --------------------------- ------------ ------------------ ---------------- ---------------
April 1, 2005 through
April 30, 2005 568(1) $ 273.115 -- --
May 1, 2005 through
May 31, 2005 -- -- -- --
June 1, 2005 through
June 30, 2005 -- -- -- --
--- ----------- --- ---
Total 568(1) $ 273.115 -- --
(1) Represents the tender to the Company by a director of the Company of
already-owned common stock as payment of the exercise price in connection with
his exercise of an option to purchase 1,960 shares of the Company's common stock
(as adjusted for stock dividends and the spin-off by the Company of Chicago
Title Corporation in 1998) under the Alleghany Corporation Amended and Restated
Directors' Stock Option Plan.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's 2005 Annual Meeting of Stockholders was held on April 22,
2004. At the Annual Meeting, three directors were elected to serve for
three-year terms on the Company's Board of Directors, by the following votes:
FOR WITHHELD
--------- --------
F.M. Kirby 6,788,152 95,355
Rex D. Adams 6,842,399 41,108
Weston M. Hicks 6,826,406 57,101
In addition, one director was elected to serve for a one-year term on the
Company's Board of Directors, by the following vote:
FOR WITHHELD
--------- --------
Roger Noall 6,567,094 316,413
-27-
The Alleghany Corporation 2005 Directors' Stock Plan was approved by a
vote of 5,606,893 shares in favor and 529,707 shares opposed. A total of 20,320
shares abstained from voting.
The Alleghany Corporation 2005 Management Incentive Plan was approved by a
vote of 6,780,218 shares in favor and 54,078 shares opposed. A total of 25,943
shares abstained from voting.
The selection of KPMG LLP, independent registered public accounting firm,
as auditors for the Company for the year 2005 was ratified by a vote of
6,832,216 shares in favor and 33,100 shares opposed. A total of 18,191 shares
abstained from voting.
ITEM 6. EXHIBITS.
Exhibit Number Description
10.1 Summary description of outside directors' cash
compensation.
10.2 Form of Option Agreement under the Alleghany Corporation
2005 Directors' Stock Plan.
31.1 Certification of the Chief Executive Officer of the
Company pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
of the Securities Exchange Act of 1934, as amended.
31.2 Certification of the Chief Financial Officer of the
Company pursuant to Rule 13a-14(a) or Rule 15(d)-14(a)
of the Securities Exchange Act of 1934, as amended.
32.1 Certification of the Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. This exhibit
shall not be deemed "filed" as a part of this Report on
Form 10-Q.
32.2 Certification of the Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. This exhibit
shall not be deemed "filed" as a part of this Report on
Form 10-Q.
-28-
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: August 9, 2005 /s/ Roger B. Gorham
-------------------
Roger B. Gorham
Senior Vice President
(and chief financial officer)
-29-