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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, 2004
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) 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.
7,667,953 SHARES AS OF APRIL 30, 2004
ITEM 1. FINANCIAL STATEMENTS
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE MONTHS ENDED
MARCH 31, 2004 AND 2003
(dollars in thousands, except share and per share amounts)
(unaudited)
2004 2003
------------ ------------
REVENUES
Net fastener sales $ 37,803 $ 27,953
Interest, dividend and other income 16,352 11,980
Net insurance premiums earned 189,668 33,415
Net mineral and filtration sales 67,081 62,048
Net gain on investment transactions 33,183 3,264
------------ ------------
Total revenues 344,087 138,660
------------ ------------
COSTS AND EXPENSES
Underwriting expenses 41,638 13,362
Salaries, administrative and other operating expenses 24,243 17,606
Loss and loss adjustment expenses 93,098 19,853
Cost of goods sold - fasteners 27,906 20,759
Cost of mineral and filtration sales 51,378 47,920
Interest expense 1,244 1,278
Corporate administration 8,802 6,300
------------ ------------
Total costs and expenses 248,309 127,078
------------ ------------
Earnings before income taxes 95,778 11,582
Income taxes 33,714 3,858
------------ ------------
Net earnings $ 62,064 $ 7,724
============ ============
Basic earnings per share of common stock * $ 8.11 $ 1.02
============ ============
Diluted earnings per share of common stock * $ 8.08 $ 1.01
============ ============
Dividends per share of common stock ** **
============ ============
Average number of outstanding shares of common stock * 7,652,336 7,561,408
============ ============
* Adjusted to reflect the common stock dividend declared in March 2004.
** In March 2003 and 2004, Alleghany declared a stock dividend consisting of
one share of Alleghany common stock for every fifty shares outstanding
See Notes to Consolidated Financial Statements.
2
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2004 AND DECEMBER 31, 2003
(dollars in thousands, except share amounts)
MARCH 31,
2004 DECEMBER 31,
(UNAUDITED) 2003 *
------------ ------------
ASSETS
Available for sale securities at fair value: 3/31/2004 12/31/2003
Equity securities (cost: $ 311,413 $370,982) $ 532,520 $ 620,754
Debt securities (cost: $1,182,055 $910,307) 1,194,657 917,270
Short-term investments 149,918 135,079
------------ ------------
1,877,095 1,673,103
Cash 142,161 231,583
Notes receivable 91,933 92,082
Accounts receivable, net 74,271 75,154
Premium balances receivable 177,011 279,682
Reinsurance receivables 281,096 228,423
Ceded unearned premium reserves 320,537 264,038
Deferred acquisition costs 48,033 47,282
Property and equipment - at cost, net of
accumulated depreciation 174,823 177,708
Inventory 85,107 84,612
Goodwill and other intangibles, net of amortization 231,111 233,739
Deferred tax assets 90,550 85,736
Other assets 74,196 94,898
------------ ------------
$ 3,667,924 $ 3,568,040
============ ============
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current taxes payable $ 56,773 $ 49,605
Losses and loss adjustment expenses 573,447 454,664
Other liabilities 212,183 211,000
Reinsurance payable 130,382 255,117
Unearned premiums 732,270 676,940
Parent company debt 0 0
Subsidiaries' debt 164,667 167,050
Deferred tax liabilities 186,271 190,842
------------ ------------
Total liabilities 2,055,993 2,005,218
Common stockholders' equity 1,611,931 1,562,822
------------ ------------
$ 3,667,924 $ 3,568,040
============ ============
COMMON SHARES OUTSTANDING ** 7,663,517 7,644,232
============ ============
* Certain amounts have been reclassified to conform to the 2004
presentation.
** Adjusted to reflect the common stock dividend declared in March 2004.
See Notes to Consolidated Financial Statements.
3
ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED
MARCH 31, 2004 AND 2003
(dollars in thousands)
(unaudited)
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings from continuing operations $ 62,064 $ 7,724
Adjustments to reconcile net earnings to cash provided by (used in) operations:
Depreciation and amortization 10,632 4,923
Net gain on investment transactions (33,183) (3,264)
Tax benefit on stock options exercised 375 48
Decrease (increase) in accounts and notes receivable 1,277 (9,204)
(Increase) decrease in inventory (495) 13,035
Decrease (increase) in other assets 15,464 (2,015)
Increase (decrease) in reinsurance receivables (176,537) 2,242
Increase (decrease) in premium balances receivable 102,671 (262)
Increase in ceded unearned premium reserves (56,497) (546)
Increase (decrease) in deferred acquisition costs (750) 297
Increase (decrease) in other liabilities and current taxes 28,298 (2,402)
Increase (decrease) in unearned premiums 55,329 (862)
Increase in losses and loss adjustment expenses 118,728 695
------------ ------------
Net adjustments 65,312 2,685
------------ ------------
Net cash provided by operations 127,376 10,409
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (474,840) (210,367)
Sales of investments 294,088 192,549
Purchases of property and equipment (3,646) (3,047)
Net change in short-term investments (14,839) (14,314)
Other, net (17,349) 5,683
------------ ------------
Net cash used in investing activities (216,586) (29,496)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt (6,383) (33,026)
Proceeds of long-term debt 4,000 49,305
Other, net 2,171 2,032
------------ ------------
Net cash (used in) provided by financing activities (212) 18,311
------------ ------------
Net decrease in cash (89,422) (776)
Cash at beginning of period 231,583 27,423
------------ ------------
Cash at end of period $ 142,161 $ 26,647
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,158 $ 774
Income taxes $ 30,222 $ 2,511
See Notes to Consolidated Financial Statements.
4
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, 2003 (the "2003 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.
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 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 of 19 percent for all years;
risk-free interest rates ranging from 2.92 to 3.59 percent; and expected lives
of seven 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 first quarter of 2004 and 2003, no stock options were granted
under the Company's fixed option plans. The expense relating to options issued
in prior periods was $20,000 in the 2004 first quarter and $0 in the 2003 first
quarter. With respect to its performance-based stock plan, the Company
recognized after-tax compensation expense of approximately $1.7 million in the
2004 first quarter and approximately $0.6 million in the 2003 first 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 2004 and 2003 first quarters, the Company
would have recognized after-tax expense of $48,000 in the 2004 first quarter and
$52,000 in the 2003
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first quarter. Had the Company applied SFAS 123 to all awards outstanding under
its performance-based stock plan during the same periods, the Company would have
recognized additional after-tax expense of approximately $1.8 million in the
2004 first quarter and approximately $0.9 million in the 2003 first quarter.
The following table illustrates the effect on net earnings and earnings
per share if the fair value based method had been applied to all outstanding and
unvested awards under all of the Company plans in each period.
For the three months ended
March 31, 2004 March 31, 2003
(in thousands, except per share amounts)
Net earnings, as reported $ 62,064 $ 7,724
Add: stock-based employee compensation expense included in reported net
earnings, net of related tax 1,739 583
Less: stock-based compensation expense determined under fair value method
for all stock options, net of related tax (1,862) (925)
--------------- ---------------
Pro forma net earnings $ 61,941 $ 7,382
=============== ===============
Earnings per share
Basic - as reported $ 8.11 $ 1.02
Basic - pro forma $ 8.09 $ 0.98
Diluted - as reported $ 8.08 $ 1.01
Diluted - pro forma $ 8.06 $ 0.97
Employee Benefit Plans
The Company has several noncontributory defined benefit pension plans. The
defined benefits are based on years of service and the employee's 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
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employment. The Company's funding 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 11 to the Consolidated Financial Statements
in the Company's 2003 Form 10-K.
The components of net periodic benefit cost for the three months ended
March 31, 2004 and 2003 consisted of the following:
For the three months ended
March 31, 2004 March 31, 2003
(in millions)
Net periodic cost included to following expense
(income) components:
Service cost-benefits earned during the quarter $ 0.9 $ 0.8
Interest cost on projected benefit obligation 1.1 1.0
Expected return on plan assets (0.9) (0.8)
Net amortization 0.6 0.7
--------------- ---------------
Net periodic pension cost $ 1.7 $ 1.7
=============== ===============
The Company plans to contribute approximately $7.4 million to the plans in 2004
compared to contributions of approximately $6.9 million in 2003.
7
Comprehensive Income (Loss)
The Company's total comprehensive income (loss) for the three months ended
March 31, 2004 and 2003 was $45.3 million and $(1.9) million. Comprehensive
income (loss) includes the Company's net earnings adjusted for changes in
unrealized (depreciation) appreciation of investments, which were $(14.6)
million and $9.8 million, and cumulative translation adjustments, which were
$(2.2) million and $0.2 million, for the three months ended March 31, 2004 and
2003, respectively.
Segment Information
Information concerning the Company's operations by industry segment is
summarized below:
For the three months ended
March 31, March 31,
(in millions) 2004 2003
------------ ------------
REVENUES
Property and casualty insurance $ 231.4 $ 38.7
Mining and filtration 67.0 62.1
Corporate activities 45.7 37.9
------------ ------------
Total $ 344.1 $ 138.7
============ ============
EARNINGS (LOSSES) BEFORE INCOME TAXES
Property and casualty insurance $ 90.6 $ 4.9
Mining and filtration 5.3 4.9
Corporate activities (0.1) 1.8
------------ ------------
Total 95.8 11.6
------------ ------------
Income taxes 33.7 3.9
------------ ------------
Net earnings $ 62.1 $ 7.7
============ ============
March 31, December 31,
(in millions) 2004 2003
------------ ------------
IDENTIFIABLE ASSETS
Property and casualty insurance $ 2,725.8 $ 975.0
Mining and filtration 333.7 310.1
Corporate activities 608.4 861.2
------------ ------------
Total $ 3,667.9 $ 2,146.3
============ ============
8
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 March 31, 2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
The following discussion and analysis presents a review of the Company and
its subsidiaries for the three months ended March 31, 2004 and 2003. 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 2003
Form 10-K.
The Company reported net earnings in the first quarter of 2004 of $62.1
million, compared with net earnings of $7.7 million in the first quarter of
2003. Net gains on investment transactions after taxes in the first quarter of
2004 totalled $21.6 million, compared with $2.1 million in the corresponding
2003 period. The Company's common stockholders' equity per share at March 31,
2004 was $210.33, an increase from common stockholders' equity per share of
$204.44 as of December 31, 2003 (both as adjusted for the stock dividend
declared in March 2004).
Alleghany Insurance Holdings LLC ("AIHL") recorded pre-tax earnings of
$90.6 million on revenues of $231.4 million in the 2004 first quarter, compared
with pre-tax earnings of $4.9 million on revenues of $38.7 million in the first
quarter of 2003. AIHL's 2004 first quarter net earnings include after-tax
investment income of $7.1 million and a realized after-tax net gain on
investment transactions of $20.4 million, compared with after-tax investment
income of $3.0 million and a realized after-tax net gain on investment
transactions of $0.6 million in the corresponding 2003 period. AIHL's 2004 first
quarter after-tax investment income reflects a larger invested asset base,
principally due to capital contributions by the Company and the acquisition of
the operations of RSUI Group, Inc. ("RSUI") in July 2003.
The comparative pre-tax contributions to AIHL's results made by its
operating units RSUI, Capitol Transamerica Corporation ("CATA") and Darwin
Professional Underwriters, Inc. ("Darwin") were as follows (in thousands, except
ratios):
9
For the three months ended March 31
RSUI(1) CATA(2) Darwin(3) Total
---------- ---------- ---------- ----------
2004
Gross premiums written $ 294.4 $ 41.7 $ 20.6 $ 356.7
Net premiums earned $ 148.4 $ 34.4 $ 6.9 $ 189.7
Loss and loss adjustment expenses 70.0 18.8 4.3 93.1
Underwriting expenses 23.5 15.2 3.0 41.7
---------- ---------- ---------- ----------
Underwriting profit (loss) (4) $ 54.9 $ 0.4 $ (0.4) $ 54.9
========== ========== ========== ==========
Loss ratio (5) 47.2% 54.6% 62.3% 49.1%
Expense ratio (6) 15.8% 44.1% 43.5% 22.0%
Combined ratio (7) 63.0% 98.7% 105.8% 71.1%
2003
Gross premiums written -- $ 36.4 -- $ 36.4
Net premiums earned -- $ 33.4 -- $ 33.4
Loss and loss adjustment expenses -- 19.8 -- 19.8
Underwriting expenses -- 13.2 -- 13.2
---------- ---------- ---------- ----------
Underwriting profit (4) -- $ 0.4 -- $ 0.4
========== ========== ========== ==========
Loss ratio (5) -- 59.4% -- 59.4%
Expense ratio (6) -- 39.5% -- 39.5%
Combined ratio (7) -- 98.9% -- 98.9%
(1) Since July 1, 2003.
(2) Includes the results of Platte River Insurance Company, which was acquired
contemporaneously with CATA in January 2002 and operates in conjunction
with CATA.
(3) Since May 2003. Although Darwin is an underwriting manager for Platte
River and certain subsidiaries of CATA, the results of business generated
by Darwin have been separated from CATA's results for purposes of this
table.
(4) Represents net premiums earned less loss and loss adjustment expenses and
underwriting expenses, all as determined in accordance with generally
accepted accounting principles ("GAAP"), and does not include income
derived from investments. Underwriting profit (loss) does not replace net
income (loss) determined in accordance with GAAP as a measure of
profitability; rather, it provides a basis for management to evaluate the
underwriting performance of its insurance operating units.
(5) Loss and loss adjustment expenses divided by net premiums earned, all as
determined in accordance with GAAP.
(6) Underwriting expenses divided by net premiums earned, all as determined in
accordance with GAAP.
(7) 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 has to spend on losses (including loss adjustment
expenses) and underwriting expenses.
10
RSUI's 2004 first quarter results reflect favorable underwriting
conditions in RSUI's lines of business and the absence of any significant
catastrophe losses during such period. RSUI's commercial property business is
exposed to catastrophe losses which have historically occurred more frequently
during the second and third quarters. RSUI has experienced increased competition
across all of its lines of business since the 2003 third quarter, particularly
with respect to its property lines of business. Rates at RSUI in the 2004 first
quarter as compared with the 2003 third and fourth quarters reflected overall
industry trends, with marginal increases or flat rates in RSUI's casualty lines
of business and decreased rates in its property lines of business. The
continuation of such trends may result in lower levels of gross premiums written
by RSUI during the remainder of 2004, since RSUI is expected to write more
business when it considers prices adequate to support acceptable profit margins
and less business when it considers prices inadequate to support acceptable
profit margins.
CATA's 2004 first quarter results reflect an increase in gross premiums
written from the 2003 first quarter, primarily reflecting rate increases in its
casualty lines of business as well as premiums generated with respect to
expansion of business into the excess and surplus markets. CATA experienced
increased competition across all of its admitted lines of business in the 2004
first quarter from the 2003 first quarter, particularly with respect to its
property and contract surety lines of business. Rates at CATA for the 2004 first
quarter as compared with the 2003 first quarter reflect overall industry trends,
with lower levels of rate increases in its casualty lines of business and rate
decreases in property and contract surety lines of business. A.M. Best Company,
Inc. recently notified AIHL that it had downgraded its ratings of CATA's
subsidiaries Capitol Indemnity Corporation and Capitol Specialty Insurance
Company Platte River Insurance Company from A+ (Superior) to A (Excellent). It
is not expected that such downgrade will have a material impact on the business
of those AIHL subsidiaries.
Darwin's first quarter results reflect the incurrence of expenses for
organizational build-up to support expected future premium levels, as well as
increased competition across all of its lines of business, particularly with
respect to its directors and officers liability line of business.
World Minerals recorded pre-tax earnings of $5.3 million on revenues of
$67.0 million in first quarter 2004, compared with pre-tax earnings of $4.9
million on revenues of $62.1 million in the corresponding period in 2003. The
2004 first quarter results primarily reflect the continuing favorable impact of
the strong euro versus the U.S. dollar (had foreign exchange rates remained
constant with those in the first three months of 2003, World Minerals' revenues
would have increased approximately 3% instead of 8%) and a modest increase in
net shipments.
As of March 31, 2004, the Company beneficially owned 8.0 million shares,
or approximately 2.1 percent, of the outstanding common stock of Burlington
Northern
11
Santa Fe Corporation, which had an aggregate market value on that date of
approximately $252.0 million, or $31.50 per share. The aggregate cost of such
shares is approximately $96.6 million, or $12.07 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 first quarter
of 2004, the Company did not purchase any shares of its common stock. As of
March 31, 2004, the Company had 7,663,517 shares of common stock outstanding
(which includes the stock dividend declared in March 2004).
The Company's results in the first three months of 2004 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.
Information regarding the Company's accounting policies is included in the
Company's 2003 Form 10-K 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.
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 +/- 200 basis point range of
change in interest rates to measure the hypothetical change in fair value of the
financial instruments included in the analysis. The change in fair value is
determined by calculating hypothetical March 31, 2004 ending prices based on
yields adjusted to reflect a +/- 200 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.
12
SENSITIVITY ANALYSIS
At March 31, 2004
(dollars in millions)
Interest Rate Shifts -200 -100 0 100 200
- -------------------- ---------- ---------- ---------- ---------- ----------
ASSETS
Debt securities, fair value $ 1,281.8 $ 1,239.8 $ 1,194.7 $ 1,158.1 $ 1,118.5
Estimated change in fair value $ 87.1 $ 45.1 -- $ (36.6) $ (76.2)
LIABILITIES
Subsidiaries' debt, fair value $* $ 164.6 $ 165.2 $ 165.9 $ 166.5
Estimated change in fair value $* $ (0.6) -- $ 0.7 $ 1.3
*The weighted average interest rate for subsidiaries' debt is 2.5%, of which
approximately $80.0 million bears interest at 1.5%. Therefore, the results
of interest rate shifts in excess of 150 basis points is not meaningful.
The Company's 2003 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, 2004, no material change has occurred in its liabilities, as compared
with amounts disclosed in the 2003 Form 10-K.
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 design and operation 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 material information required to be included in the Company's
periodic reports required to be filed with the Securities and Exchange
Commission. It should be noted that the design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions, regardless of how remote.
There have been no significant changes in internal control over financial
reporting that have materially affected, or are reasonably likely to materially
affect, the Company's internal control over financial reporting subsequent to
the date of such evaluation, including any corrective actions with regard to
significant deficiencies or material weaknesses.
13
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. 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. 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, those
relating to conducting operations in a competitive environment and conducting
operations in foreign countries, effects of acquisition and disposition
activities, adverse loss development for events insured by the Company's
insurance operations in either the current year or prior years, 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 or
recessionary or expansive trends, changes in market prices of the Company's
significant equity investments, tax, legal and regulatory changes, extended
labor disruptions, significant weather-related or other natural or human-made
disasters, especially with respect to their impact on losses at the Company's
insurance subsidiaries, 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.
14
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES.
(c) Recent Sales of Unregistered Securities.
On January 6, 2004, the Company issued 1,884 shares of common stock to
William K. Lavin in exchange for a payment in cash of $155,206 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 by the Company of Chicago Title
Corporation in 1998, at an exercise price of $82.3811 per share, granted to Mr.
Lavin on April 25, 1995 pursuant to the Alleghany Corporation Amended and
Restated Directors' Stock Option Plan.
On January 20, 2004, the Company issued 1,922 shares of common stock to
Dan R. Carmichael in exchange for a payment in cash of $141,733 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 by the Company of
Chicago Title Corporation in 1998, at an exercise price of $73.7427 per share,
granted to Mr. Carmichael on April 25, 1994 pursuant to the Alleghany
Corporation Amended and Restated Directors' Stock Option Plan.
On February 6, 2004, the Company issued 1,061 shares of common stock to
William J. Hegg in exchange for a payment in cash of $175,094 upon the exercise
of an option to purchase 1,000 shares of the Company's common stock, subject to
adjustment for stock dividends, at an exercise price of $165.00 per share,
granted to Mr. Hegg on July 18, 2000 pursuant to the Subsidiary Directors' Stock
Option Plan.
On March 1, 2004, the Company issued an aggregate of 2,165 shares of
common stock to Dana G. Leavitt in exchange for a payment in cash of $410,594
upon the exercise of an option to purchase 1,000 shares of the Company's common
stock, subject to adjustment for stock dividends, at an exercise price of
$213.29 per share granted to Mr. Leavitt on July 21, 1998, and an option to
purchase 1,000 shares of the Company's common stock, subject to adjustment for
stock dividends, at an exercise price of $165.00 per share, granted to Mr.
Leavitt on July 18, 2000, in each case pursuant to the Subsidiary Directors'
Stock Option Plan.
Each of the foregoing sales of common stock was exempt from registration
under the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof,
as a transaction not involving a public offering.
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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 5. OTHER INFORMATION
Acquisition of U.S. AEGIS Energy Insurance Company.
On May 3, 2004, AIHL purchased U.S. AEGIS Energy Insurance Company (to be
renamed Darwin National Assurance Company), an admitted insurance company
domiciled in Delaware, to support future business underwritten by Darwin for
cash consideration of approximately $20.4 million, $17.1 million of which
represented consideration for AEGIS's investment portfolio and approximately
$3.3 million of which represented consideration for licenses.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit Number Description
10.1 First Amendment and Waiver to Credit Agreement dated as of
April 30, 2003, by and between Heads & Threads International
LLC and LaSalle Bank National Association, dated as of March
30, 2004.
10.2 Closing Agreement, dated May 3, 2004, by and among Darwin
Group, Inc., Aegis Holding Inc. and Associated Electric & Gas
Insurance Services Limited.
31.1 Certification of the Chief Executive Officer of the Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer of the Company
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
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(b) Reports on Form 8-K.
On February 26, 2004, the Company furnished a report on Form 8-K under
Item 12 thereof regarding a press release reporting on the Company's financial
results for the year ended December 31, 2003.
On April 22, 2004, the Company furnished a report on Form 8-K under Item
12 thereof regarding a press release reporting on the Company's financial
results as of and for the quarter ended March 31, 2004.
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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 7, 2004 /s/ David B. Cuming
--------------------
David B. Cuming
Senior Vice President
(and chief financial officer)
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