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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 JUNE 30, 2002
COMMISSION FILE NUMBER 1-9371
ALLEGHANY CORPORATION
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EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER
DELAWARE
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STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION
51-0283071
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INTERNAL REVENUE SERVICE EMPLOYER IDENTIFICATION NUMBER
375 PARK AVENUE, NEW YORK NY 10152
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ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE
212-752-1356
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
NOT APPLICABLE
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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
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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:
7,288,952 SHARES AS OF JUNE 30, 2002
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ITEM 1. FINANCIAL STATEMENTS
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
JUNE 30, 2002 AND 2001
(dollars in thousands, except share and per share amounts)
(unaudited)
2002 2001
--------- ---------
REVENUES
Net fastener sales $28,953 $30,665
Interest, dividend and other income 10,990 14,149
Net insurance premiums earned 30,647 0
Net mineral and filtration sales 56,501 58,023
Gain (loss) on sale of subsidiary 0 (13)
Net gain on investment transactions 4,354 936
--------- ---------
Total revenues 131,445 103,760
--------- ---------
COSTS AND EXPENSES
Commissions and brokerage expenses 6,063 0
Salaries, administrative and other operating expenses 22,389 22,443
Loss and loss adjustment expenses 24,340 0
Cost of goods sold-fasteners 22,002 26,046
Cost of mineral and filtration sales 38,334 39,916
Interest expense 1,623 3,931
Corporate administration 3,251 8,976
--------- ---------
Total costs and expenses 118,002 101,312
--------- ---------
Earnings from continuing operations, before income taxes 13,443 2,448
Income taxes 4,547 (99)
--------- ---------
Earnings from continuing operations 8,896 2,547
DISCONTINUED OPERATIONS
(Loss) from discontinued operations, net of tax 0 (11,865)
--------- ---------
Net earnings (loss) $8,896 ($9,318)
========= =========
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK **
Continuing operations $1.21 $0.34
Discontinued operations 0.00 (1.60)
--------- ---------
Basic net earnings per share $1.21 ($1.26)
--------- ---------
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK **
Continuing operations $1.11 $0.34
Discontinued operations 0.00 (1.60)
--------- ---------
Diluted net earnings per share $1.11 ($1.26)
========= =========
Dividends per share of common stock * *
========= =========
Average number of outstanding shares of common stock ** 7,332,402 7,388,656
========= =========
* In March 2002, 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 2002.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE SIX MONTHS ENDED
JUNE 30, 2002 AND 2001
(dollars in thousands, except share and per share amounts)
(unaudited)
2002 2001
--------- ---------
REVENUES
Net fastener sales $56,885 $64,428
Interest, dividend and other income 19,997 29,831
Net insurance premiums earned 59,670 0
Net mineral and filtration sales 106,484 108,181
Gain on sale of subsidiary 0 775,810
Net gain on investment transactions 38,947 1,313
--------- ---------
Total revenues 281,983 979,563
--------- ---------
COSTS AND EXPENSES
Commissions and brokerage expenses 11,556 0
Salaries, administrative and other operating expenses 44,515 41,441
Loss and loss adjustment expenses 43,227 0
Cost of goods sold-fasteners 43,087 53,133
Cost of mineral and filtration sales 74,574 78,829
Interest expense 3,296 7,945
Corporate administration 9,014 32,707
--------- ---------
Total costs and expenses 229,269 214,055
--------- ---------
Earnings from continuing operations, before income taxes 52,714 765,508
Income taxes 17,990 296,764
--------- ---------
Earnings from continuing operations 34,724 468,744
DISCONTINUED OPERATIONS
(Loss) from discontinued operations, net of tax 0 (22,653)
--------- ---------
Net earnings $34,724 $446,091
========= =========
BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK **
Continuing operations $4.73 $63.53
Discontinued operations 0.00 (3.07)
--------- ---------
Basic net earnings per share $4.73 $60.46
========= =========
DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK **
Continuing operations $4.62 $62.70
Discontinued operations 0.00 (3.02)
--------- ---------
Diluted net earnings per share $4.62 $59.68
========= =========
Dividends per share of common stock * *
========= =========
Average number of outstanding shares of common stock ** 7,337,815 7,377,808
========= =========
* In March 2002, 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 2002.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2002 AND DECEMBER 31, 2001
(dollars in thousands, except share and per share amounts)
(Unaudited)
June 30, December 31,
2002 2001
---------- ----------
Assets
6/30/02 12/31/01
Available for sale securities: -------- --------
Fixed maturities (cost $477,240 $0 ) $482,439 $0
Equity securities (cost $292,529 $226,226 ) 596,205 550,826
Short-term investments 274,846 796,511
---------- ----------
1,353,490 1,347,337
Cash 32,276 15,717
Notes receivable 92,289 91,536
Accounts receivables 95,966 57,161
Reinsurance receivable 155,849 0
Property and equipment - at cost, less accumulated depreciation and amortization 172,687 169,622
Inventory 68,568 71,169
Goodwill and other intangibles, net of amortization 112,060 49,708
Other assets 103,888 72,755
---------- ----------
$2,187,073 $1,875,005
========== ==========
Liabilities and Common Stockholders' Equity
Current taxes payable $32,203 $90,209
Losses and loss adjustment expenses 246,144 0
Other liabilities 130,624 103,595
Unearned premiums 65,812 0
Subsidiaries' debt 173,766 181,856
Net deferred tax liability 129,818 108,763
---------- ----------
Total liabilities 778,367 484,423
Common stockholders' equity 1,408,706 1,390,582
---------- ----------
$2,187,073 $1,875,005
========== ==========
Shares of common stock outstanding 7,288,952 7,350,006 *
========== ==========
Common stockholders' equity per share $193.27 $189.20 *
========== ==========
* Adjusted to reflect the common stock dividend declared in March 2002.
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED
JUNE 30, 2002 AND 2001
(dollars in thousands)
(unaudited)
2002 2001
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings from continuing operations $34,704 $468,744
Adjustments to reconcile net earnings to cash (used in) provided by operations:
Depreciation and amortization 10,065 8,523
Net gain on investment transactions (38,947) (476,119)
Tax benefit on stock options exercised 1,176 725
Other charges, net 9,997 (8,351)
Increase in other receivables (37,049) (2,269)
Decrease in other assets 24,597 11,449
(Decrease) increase in other liabilities and income taxes payable (44,493) 192,877
Increase in unearned premium reserve 7,838 0
Decrease in losses and loss adjustment expenses (20,542) 0
Decrease in reinsurance receivable 26,357 0
------- --------
Net adjustments (61,001) (273,165)
------- --------
Cash (used in) provided by operations (26,297) 195,579
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (561,331) (77,042)
Sales of investments 325,661 48,468
Purchases of property and equipment (5,579) (5,681)
Net change in short-term investments 544,167 (700,683)
Other, net (16,489) (6,146)
Acquisition of insurance companies, net of cash acquired (221,056) 0
Proceeds from sale of subsidiaries, net of cash disposed 0 531,477
------- --------
Net cash provided by (used in) investing activities 65,373 (209,607)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (90,641) (172,112)
Proceeds of long-term debt 82,316 181,628
Treasury stock acquisitions (18,360) (5,971)
Other, net 4,168 10,035
------- --------
Net cash (used in) provided by financing activities (22,517) 13,580
------- --------
Net increase (decrease) in cash 16,559 (448)
Cash at beginning of period 15,717 10,247
------- --------
Cash at end of period $32,276 $9,799
======= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $2,876 $8,002
Income taxes $48,873 $3,073
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, 2001 (the "2001 Form 10-K") and the
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (the "2002
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.
On January 4, 2002, the Company completed the acquisition of Capitol
Transamerica Corporation ("CATA") for a total purchase price of approximately
$182 million, of which $62.8 million was allocated to goodwill and intangibles.
Contemporaneous with the acquisition of CATA, the Company purchased a
Nebraska-domiciled insurance company for a total purchase price of approximately
$40 million, of which $8.3 million was allocated to goodwill and intangibles.
The Company applies the following significant accounting policies to its
insurance operations:
a. DEFERRED ACQUISITION COSTS
Acquisition costs that vary with, and are directly related to, the
production of premiums (principally commissions, premium taxes, compensation and
certain underwriting expenses) are deferred. Deferred acquisition costs are
amortized to expense as the related premiums are earned. Deferred acquisition
costs are periodically reviewed to determine their recoverability from future
income, including investment income, and if any such costs are determined not
recoverable they are charged to expense.
b. PREMIUMS
Premiums are recognized as revenue on a pro-rata basis over the term of
a contract. Unearned premiums represent the portion of premiums written which
are applicable to the unexpired terms of insurance policies in force.
c. INVESTMENTS
The investment portfolio consists of equity securities, fixed maturity
instruments and short-term investments. The portfolio is classified as available
for sale and carried at its fair market value. Unrealized holding gains or
losses, net of the related tax effect, are excluded from earnings and reported
in comprehensive income as a separate component of stockholders' equity until
realized. A decline in the fair value of available for sale investments that is
deemed other than temporary is charged to earnings. The cost basis of
5
fixed maturity instruments is adjusted for the amortization of premiums and the
accretion of discounts to maturity. Realized gains and losses are determined on
the specific identification method.
d. LOSS RESERVES
The reserves for losses and loss adjustment expenses represent
management's best estimate of the ultimate cost of all reported and unreported
losses incurred through the balance sheet date and include: (i) the accumulation
of individual estimates for claims reported on direct business prior to the
close of the accounting period; (ii) estimates received from other insurers with
respect to reinsurance assumed; (iii) estimates for incurred but not reported
claims based on past experience modified for current trends and (iv) estimates
of expenses for investigating and settling claims based on past experience. The
liabilities recorded are based on estimates resulting from the continuing review
process, and differences between estimates and ultimate payments are reflected
as an expense in the statement of earnings in the period in which the estimates
are revised.
e. REINSURANCE
The Company follows the customary practice of reinsuring with other
companies the loss exposures on business it has written. This practice allows
the Company to diversify its business and write larger policies, while limiting
the extent of its primary maximum net loss. Reinsurance ceded contracts do not
relieve the Company from its obligations to policyholders. The Company remains
liable to its policyholders for the portion reinsured to the extent that any
reinsurer does not meet the obligations assumed under the reinsurance
agreements. To minimize its exposure to losses from reinsurer insolvencies, the
Company continually evaluates the financial condition of its reinsurers.
Comprehensive Income
The Company's total comprehensive income for the three and six months
ended June 30, 2002 and 2001 was $11.7 million and $3.2 million, and $31.7
million and $480.3 million, respectively. Comprehensive income includes the
Company's net earnings adjusted for changes in unrealized appreciation
(depreciation) of investments, which was $0.1 million and $1.8 million, and
$(5.5) million and $37.3 million, and cumulative translation adjustments, which
were $2.6 million and $(1.1) million, and $2.4 million and $(3.1) million, for
the three and six months ended June 30, 2002 and 2001, respectively.
Segment Information
Information concerning the Company's continuing operations by industry
segment is summarized below (in thousands):
6
For the three months ended For the six months ended
------------------------ ------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES
Property and casualty
insurance $ 33,221 $ 4,237 $ 63,895 $ 7,363
Mining and filtration 56,558 57,828 106,001 107,885
Industrial fasteners 28,953 30,665 56,885 64,428
Corporate activities 12,713 11,030 55,182 799,887
--------- --------- --------- ---------
Total $ 131,445 $ 103,760 $ 281,963 $ 979,563
========= ========= ========= =========
EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
Property and casualty
insurance $ (2,144) $ 4,237 $ (927) $ 7,363
Mining and filtration 7,736 7,020 10,665 8,099
Industrial fasteners 578 (8,781) 1,080 (12,669)
Corporate activities 7,273 (28) 41,876 762,715
--------- --------- --------- ---------
Total 13,443 2,448 52,694 765,508
Income taxes 4,547 (99) 17,990 296,764
--------- --------- --------- ---------
Earnings from continuing
operations $ 8,896 $ 2,547 $ 34,704 $ 468,744
========= ========= ========= =========
June 30, December 31,
2002 2001
-------- --------
IDENTIFIABLE ASSETS
Property and casualty
insurance $ 675.3 $ 143.0
Mining and filtration 324.3 310.1
Industrial fasteners 70.3 78.1
Corporate activities 1,117.2 1,343.8
-------- --------
Total $2,187.1 $1,875.0
======== ========
7
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 June 30, 2002.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
The following discussion and analysis presents a review of Alleghany
Corporation and its subsidiaries (collectively, the "Company") for the three and
six months ended June 30, 2002 and 2001, respectively. 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 2001 Form 10-K and
2002 First Quarter Form 10-Q.
The Company reported net earnings from continuing operations in the
second quarter of 2002 of $8.9 million on revenues of $131.4 million, compared
with net earnings from continuing operations of $2.5 million on revenues of
$103.8 million in the second quarter of 2001. The 2002 second quarter results
include net gains on investment transactions after taxes of $2.8 million,
compared with $0.6 million in the 2001 period. Net earnings including
discontinued operations were $8.9 million in the second quarter of 2002,
compared with net losses including million operations of $9.3 million in the
2001 second quarter. Discontinued operations consist of the operations of
Alleghany Asset Management prior to its disposition in February 2001 and the
operations of Alleghany Underwriting prior to its disposition in November 2001.
In the first six months of 2002, the Company's net earnings from
continuing operations were $34.7 million on revenues of $282.0 million, compared
with net earnings from continuing operations of $468.7 million on revenues of
$979.6 million in the first six months of 2001. Net earnings including
discontinued operations were $34.7 million in the first six months of 2002,
compared with $446.1 million in the first six months of 2001. The 2002 results
from continuing operations include net gains on investment transactions after
taxes of $25.3 million, primarily resulting from the disposition of 1.9 million
shares of common stock of Burlington Northern Santa Fe for aggregate cash
proceeds of $55.3 million. The 2001 results from continuing operations include
an after-tax gain from the disposition of Alleghany Asset Management of
approximately $474.8 million, excluding certain expenses relating to the closing
of the transaction.
8
Effective January 1, 2002, the Company adopted Financial Accounting
Standards Board Statement 142, "Goodwill and Other Intangible Assets." In
general, SFAS 142 provides that goodwill and other intangible assets with
indefinite lives are no longer amortized, but are regularly tested, for
impairment. At June 30, 2002, the Company had on its books $112.1 million of
goodwill and other intangibles that may no longer be amortized pursuant to
provisions of SFAS 142.
World Minerals Inc. ("World Minerals") recorded pre-tax earnings of
$7.7 million on revenues of $56.6 million in the 2002 second quarter, compared
with pre-tax earnings of $7.0 million on revenues of $57.8 million in the 2001
second quarter, and pre-tax earnings of $10.7 million on revenues of $106.0
million in the first six months of 2002, compared with pre-tax earnings of $8.1
million on revenues of $107.9 million in the first six months of 2001. The 2002
first half results reflect the results of businesses acquired in April 2001 and
January 2002, cost controls, and net reductions of approximately $1.8 million in
energy costs, primarily natural gas, at U.S. and Latin American plants, $1.1
million in interest expense and $0.8 million in amortization expense (primarily
due to requirements of SFAS 142). Such factors more than offset a decline in net
sales due to reduced demand both in the U.S. and in the European and Asian
export markets for its U.S.-produced products. The 2001 revenues include energy
surcharges on certain of World Minerals' sales due to higher energy costs in the
first half of 2001.
World Minerals is currently in the early stages of a periodic strategic
review of its business processes, overhead costs, sales strategies and plant
operations. As part of such review, which will be in process during the second
half of 2002, World Minerals will consider, among other things, the possibility
of consolidating or closing certain plants.
Alleghany Insurance Holdings ("AIHL"), a holding company for CATA and
other insurance operations of the Company, recorded a pre-tax loss of $2.1
million on revenues of $33.2 million in the second quarter of 2002, and a
pre-tax loss of $0.9 million on revenues of $63.9 million in the first six
months of 2002. AIHL recorded pre-tax earnings of $4.2 million from continuing
operations in the second quarter of 2001, and pre-tax earnings of $7.4 million
from continuing operations in the first six months of 2001, primarily reflecting
investment income in those periods. The 2002 second quarter loss primarily
reflects $1.6 million of adverse loss development on CATA's fidelity and surety
lines of business and an increase in loss reserves of $3.5 million. The increase
in loss reserves followed an independent actuarial review.
Following the Company's acquisition of CATA in January, under the
Company's direction, CATA commenced a review of its insurance products,
underwriting guidelines and controls, investment policies and reserving
methodology. With respect to its reserving methodology, CATA immediately
implemented the practice of establishing loss and loss adjustment expense
reserves ("case reserves") for newly reported claims on the basis of its
estimate of such costs through the expected resolution of the claim. CATA
9
also commenced a review of each of the claim files that was open as of December
31, 2001 to increase, where appropriate, the case reserves for such claim to the
claim's estimated ultimate cost of resolution. The increases in case reserves
resulting from such review through June 30, 2002 did not result in an increase
in aggregate loss reserve levels but rather a refinement of the allocation of
reserves between case reserves and incurred but not reported losses. CATA
expects to complete its review of the claim files in August 2002, prior to its
next scheduled independent actuarial review of loss reserves, and will make
appropriate adjustments in case reserves for all claims reviewed since June 30,
2002 in the third quarter of 2002. Should the review result in the need for an
increase in the aggregate loss reserves, such increase would be reflected as an
expense in the statement of earnings in the period in which the determination is
made.
As part of CATA's review of its insurance products and underwriting
guidelines, CATA is considering whether to exit or re-underwrite certain
property and casualty product lines. CATA expects that, as a result, there will
be a decline in gross premiums written in the property and casualty product
lines in the second half of 2002, but such decline is expected to be offset by
increases in gross premium written in the fidelity and surety lines.
In connection with the acquisition by the Company of AIHL's
Nebraska-domiciled insurance company subsidiary, the seller, an A+ insurer,
contractually retained through a reinsurance agreement all of the liabilities in
existence at the time of such acquisition. At June 30, 2002, AIHL's loss
reserves reflected $151.0 million of such liabilities, compared with $181.3
million at March 31, 2002, and AIHL's reinsurance receivables included a
corresponding obligation of the seller. Such loss reserves and reinsurance
receivable amounts are expected to continue to decline over time as losses are
paid.
Heads & Threads International LLC ("Heads & Threads") recorded pre-tax
earnings of $0.6 million on revenues of $29.0 million in the 2002 second
quarter, compared with a pre-tax loss of $8.8 million on revenues of $30.7
million in the 2001 second quarter, and pre-tax earnings of $1.1 million on
revenues of $56.9 million in the first six months of 2002, compared with a
pre-tax loss of $12.7 million on revenues of $64.4 million in the first six
months of 2001. The 2002 first half results reflect net reductions of $3.9
million in operating expenses (primarily due to lower salary expenses as a
result of its restructuring efforts), $1.8 million in interest expense and $0.2
million in amortization expense (pursuant to requirements of SFAS 142), which
offset a decline in net sales primarily due to reduced demand in the U.S.
economy. The 2001 first half results include $2.5 million of pre-tax charges for
write-offs relating to Heads & Threads' computer system and the closure of
certain branches and sales offices, and expenses relating to changes in its
senior management.
10
As of June 30, 2002, the Company beneficially owned approximately 16.0
million shares, or 4.2 percent, of the outstanding common stock of Burlington
Northern Santa Fe Corporation, which had an aggregate market value on that date
of approximately $480.0 million, or $30.00 per share, compared with a market
value on March 31, 2002 of $482.9 million, or $30.18 per share. The aggregate
cost of such shares is approximately $181.8 million, or $11.36 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 second
quarter of 2002, the Company purchased an aggregate of 78,186 shares of its
common stock for approximately $14.5 million, at an average cost of about
$185.44 per share. As of June 30, 2002, the Company had 7,288,952 shares of
common stock outstanding (which includes the stock dividend declared in March
2002).
The Company's common stockholders' equity per share at June 30, 2002 was
$193.27 per share, a 2.1 percent increase from common stockholders' equity per
share of $189.20 as of December 31, 2001 (both as adjusted for the stock
dividend declared in March 2002).
The Company's results in the first six months of 2002 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 believes that the accounting policies it applies to the loss
and loss adjustment expense reserves of its insurance operations are critical to
an investor's understanding of the Company's consolidated financial results and
condition. In applying such policies, management makes subjective and complex
judgments that frequently require estimates about matters that are inherently
uncertain.
The Company establishes reserves for losses and loss adjustment expenses
for unpaid claims and claims expenses arising out of its insurance operations.
Pricing of such operations' insurance products takes into account the expected
frequency and severity of losses, the costs of providing coverage, competitive
factors, characteristics of the property covered and the insured and profit
considerations. Liabilities for property and casualty insurance are dependent on
actuarial estimates of amounts payable for claims reported but not settled and
claims incurred but not reported. These estimates are influenced by historical
experience and actuarial assumptions of current developments, anticipated trends
and risk management strategies. The Company continually evaluates the potential
for changes in loss estimates, both positive and negative, and uses the results
of these evaluations both to adjust recorded provisions and to adjust
underwriting criteria. Additionally, the Company has engaged an outside actuary
to evaluate on a quarterly basis the adequacy of CATA's loss reserves. Because
setting reserves is inherently
11
uncertain, the Company cannot assure that its insurance operations' current
reserves will prove adequate in light of subsequent events. Should such reserves
need to be adjusted in any future period, such adjustments will be reflected as
an expense in the statement of earnings in the period they are adjusted.
Information regarding the Company's other accounting policies is included
in the Company's 2001 Form 10-K and the Notes to the Consolidated Financial
Statements included in this report on Form 10-Q and the Company's 2002 First
Quarter 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. In connection with its acquisition of CATA on January 4, 2002 and the
Company's purchase of securities with fixed maturities of one to three years
during the 2002 second quarter, the Company acquired fixed maturity securities
that expose it to risk related to adverse changes in interest rates as set forth
in the table below.
For fixed maturity securities, the change in fair value is determined by
calculating a hypothetical June 30, 2002 ending price based on yields adjusted
to reflect a +/-300 basis point range of change in interest rates, comparing
such hypothetical ending price to actual ending price and multiplying the
difference by the par outstanding.
SENSITIVITY ANALYSIS
At June 30, 2002
(dollars in millions)
Interest Rate Shifts -300 -200 -100 0 100 200 300
-------------------- ---- ---- ---- - --- --- ---
FIXED MATURITY SECURITIES
-------------------------
Estimated Portfolio Value $525.4 $512.6 $500.4 $482.4 $474.8 $460.8 $445.5
Projected Change in
Portfolio Value $ 43.0 $ 30.2 $ 18.0 0 $(7.6) $(21.6) $(36.9)
The Company's 2001 Form 10-K provides a more detailed discussion of the
market risks affecting its operations. Based on the Company's estimates as of
June 30, 2002, no material change has occurred in its long-term debt
obligations, as compared to amounts disclosed in its 2001 Form 10-K.
12
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, conducting operations in foreign countries, effects of
acquisition and disposition activities, 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, inflation rates, recessionary or
expansive trends, tax changes, legal and regulatory changes, 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 the Company's 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.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES.
(c) Recent Sales of Unregistered Securities.
On April 2, 2002, the Company issued 1,960 shares of common stock to Allan
P. Kirby, Jr. 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 $62.99 per share, or
$123,460.40 in the aggregate, granted to Mr. Kirby on April 28, 1992 pursuant 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 May 1, 2002, the Company issued an aggregate of 483 shares of the
Company's common stock to seven non-employee directors of the Company pursuant
to the Alleghany Corporation Directors' Equity Compensation Plan. Such shares
represent one-half of the value of each director's retainer for the following
twelve months' service as a director, exclusive of any per meeting fees,
committee fees or expense reimbursements. 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company's 2002 Annual Meeting of Stockholders was held on April 26,
2002. 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
--- --------
Three-Year Term:
---------------
F.M. Kirby 5,794,607 419,736
Roger Noall 6,093,977 120,366
Rex D. Adams 6,093,977 120,366
The Alleghany Corporation 2002 Long-Term Incentive Plan was approved by a
vote of 4,710,945 shares in favor and 394,297 shares opposed. A total of 260,288
shares abstained from voting.
The selection of KPMG LLP as auditors for the Company for the year 2002
was ratified by a vote of 6,143,163 shares in favor and 62,744 shares opposed. A
total of 8,436 shares abstained from voting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number Description
-------------- -----------
10.1(a) 364-Day Revolving Credit Agreement, dated as of
June 14, 2002, by and between Alleghany
Corporation, the banks which are signatories
thereto, and U.S Bank National Association, as
agent for the banks (the "364-Day Revolving
Credit Agreement").
10.1(b) List of Contents of Exhibits and Schedules to the
364-Day Revolving Credit Agreement. The Company
agrees to furnish supplementally a copy of any
omitted exhibit or schedule to the Securities and
Exchange Commission upon request.
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10.2(a) Three-Year Revolving Credit Agreement, dated as
of June 14, 2002, by and between Alleghany
Corporation, the banks which are signatories
thereto, and U.S Bank National Association, as
agent for the banks (the "Three-Year Revolving
Credit Agreement").
10.2(b) List of Contents of Exhibits and Schedules to the
Three-Year Revolving Credit Agreement. The
Company agrees to furnish supplementally a copy
of any omitted exhibit or schedule to the
Securities and Exchange Commission upon request.
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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: August 8, 2002 /s/ David B. Cuming
--------------------------------------
David B. Cuming
Senior Vice President
(and principal financial officer)
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