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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 MARCH 31, 1999
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:
7,328,294
(AS OF MARCH 31, 1999)
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
(dollars in thousands, except share and per share amounts)
(unaudited)
1999 1998
----------- -----------
REVENUES
Trust fees $ 39,373 $ 25,048
Net property and casualty premiums earned 144,237 94,050
Interest, dividend and other income 43,203 40,030
Net mineral and filtration sales 48,886 47,688
Net gain (loss) on investment transactions 363 (24)
----------- -----------
Total revenues 276,062 206,792
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COSTS AND EXPENSES
Commissions and brokerage expenses 37,134 25,110
Salaries, administrative and other operating expenses 69,171 51,912
Property and casualty losses and loss adjustment expenses 100,158 65,205
Cost of mineral and filtration sales 33,322 32,548
Interest expense 7,750 7,330
Corporate administration 4,658 6,839
----------- -----------
Total costs and expenses 252,193 188,944
----------- -----------
Earnings from continuing operations, before income taxes 23,869 17,848
Income taxes 7,915 4,889
Earnings from continuing operations 15,954 12,959
Earnings from discontinued operations, net of tax 0 21,241
----------- -----------
Net earnings $ 15,954 $ 34,200
=========== ===========
Basic earnings per share of common stock:**
Continuing operations $ 2.17 $ 1.73
Discontinued operations 0.00 2.82
----------- -----------
Basic earnings per share $ 2.17 $ 4.55
=========== ===========
Diluted earnings per share of common stock:**
Continuing operations $ 2.13 $ 1.70
Discontinued operations 0.00 2.79
----------- -----------
Diluted earnings per share $ 2.13 $ 4.49
=========== ===========
Dividends per share of common stock * *
=========== ===========
Average number of outstanding shares of common stock ** 7,358,605 7,523,232
=========== ===========
* In March 1999, 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 1999.
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ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
(dollars in thousands, except share and per share amounts)
March 31,
1999 December 31,
(Unaudited) 1998
---------- ----------
ASSETS
Available for sale securities:
Fixed maturities:
U.S. Government, government agency and
municipal obligations (amortized cost $518,468) $ 529,559 $ 537,937
Short-term investments (amortized cost 122,682) 122,682 76,015
Bonds, notes and other (amortized cost 622,833) 632,440 687,755
Equity securities (cost 327,966) 796,643 824,326
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2,081,324 2,126,033
Cash 36,532 25,441
Cash pledged to secure trust deposits 9,909 56,907
Premium trust funds 119,028 107,854
Notes receivable 91,536 91,536
Funds held, accounts and other receivables 474,690 502,721
Property and equipment - at cost, less accumulated depreciation and amortization 208,416 208,698
Reinsurance receivable 644,646 571,689
Other assets 599,518 591,565
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$4,265,599 $4,282,444
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LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Property and casualty losses and loss adjustment expenses $1,667,382 $1,554,818
Unearned premium reserve 340,879 389,603
Other liabilities 426,500 443,938
Long-term debt of parent company 39,500 18,200
Long-term debt of subsidiaries 416,329 421,595
Net deferred tax liability 136,481 150,218
Trust deposits secured by pledged assets 14,330 56,644
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Total liabilities 3,041,401 3,035,016
Common stockholders' equity 1,224,198 1,247,428
---------- ----------
$4,265,599 $4,282,444
========== ==========
Shares of common stock outstanding * 7,328,294 7,375,848
========== ==========
Common stockholders' equity per share * $ 167.06 $ 169.12
========== ==========
* Adjusted to reflect the common stock dividend declared in March
1999.
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ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND 1998
(dollars in thousands)
(unaudited)
1999 1998
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CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 15,954 $ 12,959
Adjustments to reconcile net earnings to cash
provided by (used in) operations:
Depreciation and amortization 5,226 6,193
Net (gain) loss on investment transactions (363) 24
Other charges, net 3,012 (15,757)
Decrease (increase) in funds held, accounts and other receivables 28,031 (13,089)
Increase in reinsurance receivable (72,957) (8,515)
Increase in property and casualty losses and loss adjustment expenses 112,564 35,427
(Decrease) increase in unearned premium reserves (48,724) 13,619
Increase in premium trust funds (11,174) --
Increase in other assets (7,953) (456)
(Decrease) increase in other liabilities (17,438) 9,578
Decrease (increase) in cash pledged to secure trust deposits 46,998 (15,109)
(Decrease) increase in trust deposits (42,314) 10,928
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Net adjustments (5,092) 22,843
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Cash provided by operations 10,862 35,802
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (218,855) (50,382)
Maturities of investments 16,994 21,228
Sales of investments 183,909 26,857
Purchases of property and equipment (6,704) (4,926)
Other, net 18,802 (41,885)
--------- ---------
Net cash used in investing activities (5,854) (49,108)
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CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (19,800) (12,000)
Proceeds of long-term debt 35,834 12,000
Treasury stock acquisitions (14,172) --
Net cash provided to discontinued operations -- (3,607)
Other, net 4,221 6,019
--------- ---------
Net cash provided by financing activities 6,083 2,412
--------- ---------
Net increase (decrease) in cash 11,091 (10,894)
Cash at beginning of period 25,441 45,772
--------- ---------
Cash at end of period $ 36,532 $ 34,878
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 3,354 $ 4,087
Income taxes $ 6,746 $ 9,766
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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, 1998 (the "1998 Form 10-K") 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.
Spin-off of Chicago Title Corporation
On June 17, 1998, the Company completed the spin-off of the title
insurance and real estate-related services business conducted by Chicago Title
and Trust Company ("CT&T"). The spin-off was effected by a distribution to the
Company's stockholders of shares of a newly formed holding company for CT&T
called Chicago Title Corporation ("Chicago Title"). The common stock of Chicago
Title is traded on the New York Stock Exchange under the symbol "CTZ." The
financial services business conducted through Alleghany Asset Management, Inc.
("Alleghany Asset Management") was not a part of the distribution and remains
with the Company.
The unaudited consolidated financial statements of the Company include
the accounts of the Company and its subsidiaries for all periods presented. In
light of the spin-off of Chicago Title, the spun-off operation is classified as
a "discontinued operation" through the date of the spin-off.
Comprehensive Income
The Company's total comprehensive (loss) income for the three months
ended March 31, 1999 and 1998 was $(14,014) thousand and $92,364 thousand,
respectively. Comprehensive income includes the Company's net earnings adjusted
for changes, net of tax, in unrealized appreciation of investments, which was
$(28,485) thousand and $58,557 thousand, and cumulative translation adjustments,
which was $(1,483) thousand and $(393) thousand, for the three months ended
March 31, 1999 and 1998, respectively.
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Segment Information
Information concerning the Company's continuing operations by industry
segment is summarized below:
March 31, March 31,
1999 1998
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REVENUES
Asset management $ 39,937 $ 25,459
Property and casualty
insurance 165,623 113,610
Mining and filtration 48,600 47,655
Corporate activities 21,902 20,068
----------- -----------
Total $ 276,062 $ 206,792
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EARNINGS FROM CONTINUING
OPERATIONS BEFORE TAX
Asset management $ 14,428 $ 8,022
Property and casualty
insurance 11,056 9,765
Mining and filtration 4,344 3,578
Corporate activities (5,959) (3,517)
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Total 23,869 17,848
Income taxes (7,915) (4,889)
Discontinued operations 0 21,241
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Net income $ 15,954 $ 34,200
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March 31, December 31,
1999 1998
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IDENTIFIABLE ASSETS
Asset management $ 69,574 $ 118,458
Property and casualty
insurance 3,124,471 3,064,155
Mining and filtration 337,055 331,714
Corporate activities 734,499 768,117
----------- -----------
Total $ 4,265,599 $ 4,282,444
=========== ===========
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Contingencies
The Company's subsidiaries and division 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 March 31, 1999.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The Company reported net earnings from continuing operations of $16.0
million on revenues of $276.1 million during the first quarter of 1999, compared
with net earnings from continuing operations of $13.0 million on revenues of
$206.8 million during the first quarter of 1998.
Net earnings including discontinued operations were $34.2 million in
the first quarter of 1998. Chicago Title, which, as described in the notes
above, is classified as a "discontinued operation," contributed net earnings of
$21.2 million in the first quarter of 1998. No discontinued operations were
recorded in the first quarter of 1999.
Net gains on investment transactions before taxes in the first quarter
of 1999 totalled $363 thousand, compared with net losses of $24 thousand in the
first quarter of 1998.
Underwriters Re Group, Inc. ("Underwriters Re Group") contributed
pre-tax earnings of $11.1 million on revenues of $165.6 million in the first
three months of 1999, compared with $9.8 million on revenues of $113.6 million
in the first three months of 1998. The improved results of Underwriters Re Group
primarily reflect growth in investment income resulting from an increase in
invested assets. The results of Underwriters Re Group include the results of
Venton Holdings Ltd. for the period following its acquisition on October 23,
1998 through December 31, 1998. The results of Venton Holdings Ltd. are reported
on a one quarter lag due to the complexity of converting Lloyd's accounting
information to U.S. accounting principles.
Alleghany Asset Management contributed pre-tax earnings of $14.4
million on revenues of $39.9 million in the 1999 first quarter, compared with
$8.0 million on revenues of $25.5 million in the 1998 first quarter. The
improved results of Alleghany Asset Management from the prior year are primarily
due to an increase in assets under management. As of March 31, 1999, Alleghany
Asset Management had $40.4 billion of assets under management, compared with
$28.8 billion as of the same date in 1998.
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World Minerals Inc. ("World Minerals") contributed pre-tax earnings of
$4.3 million on revenues of $48.6 million in the 1999 first quarter, compared
with $3.6 million on revenues of $47.7 million in the 1998 first quarter. World
Minerals' results increased slightly despite increased competitive pressure, an
unfavorable product mix, and a decrease in net sales in Latin America. 1998
first quarter results reflect, among other things, the effects of severe El
Nino storms and rail car shortages on World Minerals' Lompoc, California
diatomite operations.
As of March 31, 1999, the Company beneficially owned approximately
22.29 million shares, or 4.7 percent, of the outstanding common stock of
Burlington Northern Santa Fe Corporation, which had an aggregate market value on
that date of approximately $732.8 million, or $32.875 per share, compared with a
market value on December 31, 1998 of $763.4 million, or $34.25 per share. The
aggregate cost of such shares is approximately $253.7 million, or $11.38 per
share.
The Company's common stockholders' equity per share (adjusted for the
March 1999 stock dividend) at March 31, 1999 was $167.06 per share, a 1%
decrease from common stockholders' equity per share of $169.12 as of December
31, 1998, reflecting a decline in market prices of the Company's securities
holdings.
Year 2000
The Year 2000 issue arises from computer programs that use two digits
rather than four digits to define the applicable year. This could result in a
failure of information technology systems ("IT systems") and other equipment
containing imbedded technology ("non-IT systems") to correctly read the year
2000, which could cause significant disruption in business operations. Each of
the Company and its subsidiaries has undertaken a four-phase program to
determine the extent of Year 2000 issues within each of its significant IT
systems and non-IT systems and to take appropriate remedial action. The four
phases of the program are assessment, planning, execution and testing. The
assessment and planning phases were completed in early 1998 and execution and
testing began thereafter. Non-compliant systems were reprogrammed or replaced,
and then tested. The execution and testing phases were largely completed by
year-end 1998, but some testing is continuing in 1999. The cost of remediation
(including replacement software and hardware), testing and outside consultant
fees is currently expected to total $4.7 million, of which about $3.9 million
has been incurred.
Management presently believes that it will be able to timely resolve
the Year 2000 issues affecting the computer systems of the Company and its
subsidiaries and that the cost of addressing such matters will not have a
material impact on the business, operations, or financial condition of the
Company and its subsidiaries. However, the extent to which third party computer
systems are adversely affected could materially
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adversely affect the business, operations or financial condition of the Company
and its subsidiaries.
A more detailed report of the state of readiness of each of the
Company's operating units and with respect to potential claims under insurance
and reinsurance policies is incorporated in the Company's 1998 Form 10-K, which
report is updated as follows:
Underwriters Re Group
Venton is scheduled to replace its non-compliant IT systems with a new
system. The new system has attained Lloyd's markets Year 2000 certification and
was scheduled to be put in operation by the end of the 1999 first quarter, but
has been delayed to the end of the 1999 second quarter. In light of these
delays, Venton is updating its contingency plans to make the existing IT system
Year 2000 compliant and to attain Lloyd's certification of such system by June
30, 1999.
Alleghany Asset Management
Alleghany Asset Management utilizes four third-party service providers
for critical business services, including custody, security receipt and
delivery, and income collection services. Alleghany Asset Management has
prepared contingency plans for each such third-party system, pursuant to which
Alleghany Asset Management plans to retrieve customer account data at multiple
dates prior to January 1, 2000, and, in the event of a third party failure, will
maintain on an interim basis ongoing account activity on internally maintained
systems that have been tested as Year 2000 compliant. Alleghany Asset Management
is in the process of testing its contingency plans, which it plans to complete
by June 30, 1999.
World Minerals
With respect to its non-IT systems (such as plant and mining equipment
containing embedded chips or programmable logic controllers), with the exception
of three (previously two) plant processing systems which are being replaced or
upgraded in the first half of 1999, World Minerals' assessment, planning and
execution phases are complete. World Minerals believes that, for all internal IT
and non-IT systems, it will have all four phases of its Year 2000 project
completed by June 30, 1999.
Heads and Threads
Heads and Threads has assessed, planned, executed and now completed the
testing of its internal IT systems.
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The Company's results in the first three months of 1999 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.
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 1998 Form 10-K provides a more detailed discussion of the
market risks affecting its operations. Based on the Company's estimates as of
March 31, 1999, no material change has occurred in its market risks, as compared
to amounts disclosed in its 1998 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 and 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 activities; the complexity of
integrated computer systems; the success and expense of the remediation efforts
of the Company, its subsidiaries and third parties in achieving Year 2000
compliance 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.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities.
On January 20, 1999, the Company issued an aggregate of 7,175 shares of
common stock to Paul F. Woodberry, 1,847 shares upon the 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 of Chicago Title, at an exercise price of
$51.8921 per share, or $95,875.00 in the aggregate, and 1,811 shares upon the
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 of Chicago Title, at
an exercise price of $68.1810 per share, or $123,500.00 in the aggregate, and
1,776 shares upon the 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 of Chicago Title, at an exercise price of $82.7778 per share, or
$147,000.00 in the aggregate, and 1,741 shares upon the 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 of Chicago Title, at an exercise price of
$81.4179 per share, or $141,750.00 in the aggregate, granted to Mr. Woodberry on
April 29, 1991, April 27, 1992, April 26, 1993 and April 25, 1994 respectively,
pursuant to the Alleghany Corporation Amended and Restated Directors' Stock
Option Plan. The sale of common stock was exempt from registration under the
Securities Act, pursuant to Section 4(2) thereof, as a transaction not involving
a public offering.
The above does not include unregistered issuances of the Company's
common stock that did not involve a sale, consisting of issuances of common
stock and other securities pursuant to employee incentive plans.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number Description
10.1 Credit Agreement dated as of March
17, 1999 among Mineral Holdings
Inc., World Minerals Inc., the
Banks named therein and The Chase
Manhattan Bank, as Administrative
Agent and Collateral Agent (the
"World Minerals Credit
Agreement").
10.2 List of Contents of Exhibits,
Annexes and Schedules to the World
Minerals Credit Agreement. The
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Company agrees to furnish
supplementally a copy of any
omitted exhibit, annex or schedule
to the Securities and Exchange
Commission upon request.
10.3 Subordination Agreement dated as
of March 17, 1999, among Alleghany
Corporation and The Chase
Manhattan Bank.
27 Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the first quarter of 1999.
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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: May 10, 1999 /s/ David B. Cuming
----------------------------------------
David B. Cuming
Senior Vice President
(and principal financial officer)
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EXHIBIT INDEX
Exhibit Number Description
10.1 Credit Agreement dated as of March
17, 1999 among Mineral Holdings
Inc., World Minerals Inc., the
Banks named therein and The Chase
Manhattan Bank, as Administrative
Agent and Collateral Agent (the
"World Minerals Credit
Agreement").
10.2 List of Contents of Exhibits,
Annexes and Schedules to the World
Minerals Credit Agreement. The
Company agrees to furnish
supplementally a copy of any
omitted exhibit, annex or schedule
to the Securities and Exchange
Commission upon request.
10.3 Subordination Agreement dated as
of March 17, 1999, among Alleghany
Corporation and The Chase
Manhattan Bank.
27 Financial Data Schedule