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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission
For the fiscal year ended December 31, 1993 File Number 1-9371
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ALLEGHANY CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 51-0283071
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Park Avenue Plaza, New York, New York 10055
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212/752-1356
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
- ---------------------------------- -----------------------
Common Stock, $1 par value New York Stock Exchange
6-1/2% Subordinated Exchangeable New York Stock Exchange
Debentures Due June 15, 2014
Securities registered pursuant to Section 12(g) of the Act:
Not applicable
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of March 1, 1994, 6,626,610 shares of Common Stock were outstanding, and the
aggregate market value (based upon the closing price of these shares on the New
York Stock Exchange) of the shares of Common Stock of Alleghany Corporation
held by non-affiliates was $737,801,949.
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference into the
indicated part(s) of this Report:
Part
Annual Report to Stockholders of Alleghany I and II
Corporation for the year 1993, dated
March 15, 1994
Proxy Statement dated March 28, 1994 relating III
to Annual Meeting of Stockholders of Alleghany
Corporation to be held on April 22, 1994
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ALLEGHANY CORPORATION
Annual Report on Form 10-K
for the year ended December 31, 1993
Table of Contents
Description Page
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PART I
Item 1. Business 5
Item 2. Properties 70
Item 3. Legal Proceedings 75
Item 4. Submission of Matters to a Vote
of Security Holders 80
Supplemental Executive Officers of Registrant 80
Item
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 82
Item 6. Selected Financial Data 82
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 82
Item 8. Financial Statements and Supple-
mentary Data 82
Item 9. Changes in and Disagreements With
Accountants on Accounting and
Financial Disclosure 82
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Description Page
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PART III
Item 10. Directors and Executive Officers
of Registrant 83
Item 11. Executive Compensation 83
Item 12. Security Ownership of Certain
Beneficial Owners and Management 83
Item 13. Certain Relationships and Related
Transactions 84
PART IV
Item 14. Exhibits, Financial Statement
Schedules and Reports on Form 8-K 85
Signatures 101
Index to Financial Statement Schedules
FINANCIAL STATEMENT SCHEDULES
INDEPENDENT AUDITORS' REPORT ON
FINANCIAL STATEMENT SCHEDULES
Index to Exhibits
EXHIBITS
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PART I
Item 1. Business.
Alleghany Corporation ("Alleghany") was incorporated in 1984 under
the laws of the State of Delaware. In December 1986, Alleghany succeeded to
the business of its parent company, Alleghany Corporation, a Maryland
corporation incorporated in 1929, upon the parent company's liquidation.
Alleghany's principal executive offices are located at Park Avenue
Plaza, New York, New York 10055 and its telephone number is (212) 752-1356.
Alleghany is engaged, through its subsidiaries Chicago Title and Trust Company
("CT&T"), Chicago Title Insurance Company ("CTI"), Security Union Title
Insurance Company ("Security Union") and Ticor Title Insurance Company ("Ticor
Title") and their subsidiaries, in the sale and underwriting of title insurance
and in certain other financial services businesses. Alleghany is also engaged,
through its subsidiary Underwriters Reinsurance Company ("Underwriters"), in
the property and casualty reinsurance business. In addition, Alleghany is
engaged through its subsidiary Sacramento Savings Bank ("Sacramento Savings")
in retail banking, and, through its subsidiaries World Minerals Inc. ("World
Minerals"), Celite Corporation ("Celite") and Harborlite Corporation
("Harborlite") and their subsidiaries, in the industrial minerals business.
Alleghany conducts a steel fastener importing and distribution business through
its Heads and Threads division.
Until December 31, 1991, Alleghany was also engaged, through its
subsidiary The Shelby Insurance Company ("Shelby"), in the property and
casualty insurance business. On that date, Shelby was sold to Associated
Insurance Companies, Inc., an Indiana corporation, for a purchase price of $125
million in cash.
On October 7, 1993, Alleghany acquired approximately 93 percent of
the issued and outstanding capital stock of a new holding company which owns
all of the issued and outstanding capital stock of Underwriters for a cash
purchase price of approximately $201 million. Alleghany acquired its 93
percent interest in the new holding company from a holding company formerly
owned by The Continental Corporation, Goldman, Sachs & Co. and certain
affiliated investment partnerships, and members of Underwriters management.
Prior to the acquisition by Alleghany, The Continental Corporation acquired the
interests of the Goldman, Sachs entities for cash and the interests of the
members of Underwriters management for cash and the remaining 7
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percent of the issued and outstanding capital stock of the new holding company
which owns Underwriters. Subsequent to the acquisition, Alleghany made capital
contributions to the new holding company so as to increase Alleghany's equity
interest to 94.6 percent of the issued and outstanding capital stock of the new
holding company as of 1993 year-end.
In 1993 Alleghany studied a number of potential acquisitions.
Alleghany intends to continue to expand its operations through internal growth
at its subsidiaries as well as through possible operating-company acquisitions.
Reference is made to Items 7 and 8 of this Report for further
information about the business of Alleghany in 1993. The consolidated
financial statements of Alleghany, incorporated by reference in Item 8 of this
Report, include the accounts of Alleghany and its subsidiaries for all periods
presented.
TITLE INSURANCE AND TRUST BUSINESS
CT&T, headquartered in Chicago, is engaged in the sale and
underwriting of title insurance and related services (including abstracting,
searches, and escrow, closing and disbursement services) through CTI, Security
Union, Ticor Title and other title insurance subsidiaries, collectively known
as the CT&T Family of Title Insurers. Organized as an Illinois corporation in
1912, CT&T was acquired by Alleghany in June 1985. CTI, a Missouri corporation
incorporated in 1961, succeeded to businesses conducted by predecessor
corporations since 1847. Security Union (acquired in 1987) and Ticor Title
(acquired in 1991) were incorporated in California in 1962 and 1965,
respectively, but both were a part of business organizations that had succeeded
to businesses conducted since around the turn of the century. CT&T is also a
qualified Illinois trust company and conducts certain other financial services
businesses through its Financial Services Group.
On March 8, 1991, CT&T acquired Ticor Title Insurance Company of
California (which was Ticor Title's immediate parent prior to its merger into
CTI in September 1992), from Westwood Equities Corporation for a total cash
purchase price of $55.6 million, subject to adjustment, and a promissory note
in the principal amount of $15 million, subject to adjustment. The cash
purchase price was required to be increased by up to $15 million based upon
changes in consolidated net worth. The amount of this adjustment was
determined to be zero by an arbitration decision rendered in February 1993.
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The principal amount of the promissory note issued by CT&T to
Westwood Equities Corporation, which will mature on March 31, 1995, is subject
to an increase to $20 million or a decrease to zero based on a re-evaluation of
the title loss reserves of Ticor Title Insurance Company of California and its
subsidiaries as of December 31, 1994. Alleghany believes that the principal
amount of the promissory note will be zero and, accordingly, has excluded this
note from the determination of the purchase price and from its consolidated
financial statements.
Since the acquisition of the Ticor Title organization by CT&T, CT&T
has substantially integrated Ticor Title into its own operations. As part of
that process, CT&T's title operations were reorganized into three geographic
divisions: Northeastern, Central and Western. A primary objective of the
integration was to create a system in which field and support personnel work
effectively and efficiently together to provide the highest-quality product and
best service in the industry.
The goal of improved effectiveness and efficiency also triggered
two other systematic, company-wide initiatives at CT&T. In 1992, Project
Nimble Leader was implemented to assess and, where possible, streamline staff
support activities. In 1993, CT&T initiated a customer-focused product quality
project entitled Quest for Excellence. This project seeks to identify issues
that are important to CT&T's customers in their business relationships with
CT&T, and to provide training and support to CT&T's personnel to enable them to
be more responsive to their customers' title insurance needs. CT&T plans an
aggressive schedule of implementation in branch offices in 1994 and 1995.
Streamlining activities at CT&T since the Ticor Title acquisition
extended to its own corporate structure. Effective September 30, 1992, CT&T
consolidated a number of the title insurance underwriters in its corporate
family by merging three title insurers into CTI. The merged companies were
Ticor Title Insurance Company of California, Chicago Title Insurance Company of
Maryland and Chicago Title Insurance Company of Idaho. Immediately after the
mergers, the ownership of Ticor Title, formerly a subsidiary of Ticor Title
Insurance Company of California, was transferred from CTI to CT&T.
Effective January 25, 1994, Richard P. Toft, who is a Senior Vice
President of Alleghany, President and Chief Executive Officer of CT&T, and
Chairman of CTI, assumed responsibility for Alleghany's liaison with Sacramento
Savings, stepped down as Chief Executive Officer of CTI and assumed the
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vacant office of Chairman of CT&T. Richard L. Pollay, who was President and
Chief Operating Officer of CTI, became Chief Executive Officer of CTI and Vice
Chairman of CT&T.
In mid-1993, CT&T acquired Heritage American Insurance Services,
which is a San Francisco-based limited general line insurance broker. Heritage
American was acquired to market mortgage layoff insurance, homeowners insurance
and mortgage life insurance through CT&T internal systems in California.
License applications have been submitted to expand Heritage American's business
to several adjacent states.
The CT&T Family of Title Insurers is the largest title insurance
organization in the world. Each of the principal title insurance subsidiaries
- -- CTI, Security Union and Ticor Title -- was assigned a claims-paying ability
rating of "A-" by Standard & Poor's Corporation in 1992 and again in 1993,
confirming the financial strength of the CT&T Family of Title Insurers. The
CT&T Family of Title Insurers has approximately 200 full-service offices and
3,500 policy-issuing agents in 49 states, Puerto Rico, the Virgin Islands and
Canada. CTI is headquartered in Chicago, and Security Union and Ticor Title
are headquartered in Rosemead, California.
The CT&T Family of Title Insurers insures a variety of interests in
real property. For a one-time premium, purchasers of residential and
commercial properties, mortgagees, lessees and others with an interest in real
property purchase insurance policies to insure against loss suffered as a
result of any encumbrances or other defects in title, as that title is defined
in the policy. Prior to the issuance of a policy, a title insurer conducts a
title search and examination of the property, a process by which it identifies
risks and defines the risks to be assumed by the insurer under the policy.
To conduct a title search and examination, an agent or employee of
the CT&T Family of Title Insurers reviews various records providing a history
of transfers of interests in the parcel of real estate with respect to which a
policy of title insurance is to be issued. These records are maintained by
local governmental entities, such as counties and municipalities. Title
records, known as title plants, owned by the CT&T Family of Title Insurers are
also used as a reference, allowing complete title searches without resorting to
governmental records. The CT&T Family of Title Insurers' title plants consist
of their own compilations of land title and deed information copied from public
records dating back many years on
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properties in various geographical locations. These title plants are updated
daily.
While most other forms of insurance provide for the assumption of
risk of loss arising out of unforeseen future events, title insurance serves to
protect the policyholder from the risk of loss from events that predate the
issuance of the policy. This distinction underlies the low claims loss
experience of title insurers as compared with other insurance underwriters.
Realized losses generally result from either judgment errors or mistakes made
in the title search and examination process or the escrow process, or from
other problems such as fraud or incapacity of persons transferring property
rights. Operating expenses, on the other hand, are higher for title insurance
companies than for other companies in the insurance industry. Most title
insurers incur considerable costs relating to the personnel required to process
forms, search titles, collect information on specific properties and prepare
title insurance commitments and policies. Many title insurers also face
ongoing costs associated with the establishment, operation and maintenance of
title plants.
CTI, Security Union and Ticor Title each have generally restricted
the size of any one risk of loss that they will retain to $70 million, $30
million and $50 million, respectively. The title insurers in the CT&T Family
of Title Insurers reinsure risks with each other and with other title insurance
companies in excess of what they are willing to retain. In addition, the title
insurers have purchased reinsurance coverage for individual losses in excess of
$12.5 million, subject to certain exclusions. This coverage will pay 90
percent of such losses up to $50 million. However, reinsurance arrangements do
not relieve a title insurance company that issues a policy from its legal
liability to the holder of the policy and, thus, the risk of nonperformance by
the assuming reinsurer is borne by the issuer of the policy.
The CT&T Family of Title Insurers issues title insurance policies
directly through its branch office operations as well as through policy-issuing
independent agents. The CT&T Family of Title Insurers also sometimes issues
policies of insurance in situations where the title search and examination
process is performed by approved attorneys working as independent contractors.
The primary sources of title insurance business are the major
participants in local real estate markets: attorneys, builders, commercial
banks, thrift institutions, mortgage banks
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and real estate brokers. Other significant sources of business are large
commercial developers and real estate brokerage firms operating on a national
scale. The title insurance business of the CT&T Family of Title Insurers is
not dependent on one or a few customers.
The title insurance industry is highly sensitive to the volume of
real estate transactions and to interest rate levels. Industry revenues have
tended to move cyclically with real estate sales and countercyclically to
mortgage interest rates. The title industry was adversely affected by the
recession and severely depressed real estate markets in 1990 and 1991.
However, interest rates began to drop in 1992 and in 1993 reached new
thirty-year lows. Driven by first-time buyers enticed into the market by the
low interest rates, home sales increased 11.1 percent in 1992, and 3.4 percent
in 1993. The 1993 home sales figures came within 5 percent of the all-time
high recorded in 1978, producing record levels of title operations revenues and
pre-tax earnings at CT&T. Low interest rates also resulted in a high volume of
refinancing orders, including a record number of such orders in the last three
quarters of 1993.
In addition to an active residential market, CT&T title operations
benefited from the beginnings of a recovery in the commercial sector in 1993.
Though traditional commercial lenders remained on the sidelines, renewed
interest in real estate-related investment vehicles, such as real estate
investment trusts and real estate mortgage investment conduits, brought new
sources of funds to the market and contributed to the first upturn in activity
in the commercial sector since 1989.
The business of the CT&T Family of Title Insurers is seasonal, as
housing activity is seasonal. The strongest quarter is typically the third
quarter because there are more home sales and commercial construction during
the summer; the first quarter is typically the weakest quarter. Revenues
generally are recognized by CT&T at the time of the closing of the real estate
transaction with respect to which a title insurance policy is issued;
accordingly, there is typically a lag of about two months between the time that
a title insurance order is placed, at which time work commences, and the time
that CT&T recognizes the revenues associated with the order.
Approximately 70.5 percent of the revenues of the CT&T Family of
Title Insurers in 1993 are estimated to have been generated by residential real
estate activity, consisting of
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resales (43.1 percent), refinancings (16.2 percent) and new housing (11.2
percent). Commercial and industrial real estate activity is estimated to
account for the remaining 29.5 percent of 1993 revenues, attributable to
initial sales and resales (21.6 percent) and refinancings (7.9 percent).
CT&T's National Business Group provides title insurance-related
services on a nationwide basis. One component of the National Business Group
is the network of National Business Units and National Title Services offices.
As a one-stop source of title services for both single-site and multi-site
commercial and industrial real estate ventures, CT&T's network had 21 offices
at 1993 year-end, and is the title industry's largest. The other two
components of CT&T's National Business Group are SAFETRANS, which services
executive relocation firms, and the National Accounts Unit, which services
national and regional residential lenders and low-liability commercial
accounts.
CT&T's Financial Services Group
CT&T's Financial Services Group comprises four businesses, as
follows:
-- The institutional investment management group manages equity
and fixed income institutional assets in excess of $3.0 billion, primarily
for employee benefit plans, foundations and insurance companies.
-- The employee benefits services group offers profit sharing
plans, matching savings plans, money purchase pensions and consulting
services, and has become one of the leading providers of 401(k) salary
deferral plans to mid-sized companies in the upper Midwest.
-- The personal trust and investment services group, with
approximately $1.1 billion under management, provides investment
management and trust and estate planning services primarily for accounts
in the $250,000 to $15 million range.
-- The real estate trust services group offers land trusts which
permit real estate to be conveyed to a trustee while reserving to the
beneficiaries the full management and control of the property. This group
also facilitates tax-deferred exchanges of income-producing real property.
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In connection with its financial services activities, CT&T competes
with national, regional and local providers of financial services. Such
competition is chiefly on the basis of service and investment performance. As
of December 31, 1993, CT&T held assets totalling $5 billion, of which $4
billion were actively managed. CT&T's financial services business is not
seasonal, and is not dependent on one or a few customers.
CT&T also owns Security Trust Company, a California corporation,
which is a full-service trust company.
In December 1993, CT&T received clearance from the Securities and
Exchange Commission to establish a new management company, CT&T Funds, to offer
four no-load, open-end mutual funds to the general public. The four funds are
the CT&T Growth and Income Fund, a fund invested mainly in common stocks, the
CT&T Intermediate Fixed Income Fund, a fund invested mainly in intermediate
taxable bonds, CT&T Intermediate Municipal Bond Fund, a fund invested mainly in
intermediate municipal bonds, and CT&T Money Market Fund, a fund invested
mainly in short-term investments. Initially, the new funds will be marketed to
individual investors to attract rollover funds from existing 401(k) and pension
fund programs managed by CT&T.
Competition
The title insurance industry is competitive throughout the United
States, with large firms such as CTI, Security Union and Ticor Title competing
on a national basis, while smaller firms have significant market shares on a
regional basis. During 1993, CTI, Security Union, Ticor Title, First American
Title Insurance Company, Commonwealth Land Title Insurance Company and Lawyers
Title Insurance Corporation, together accounted for approximately 70 percent of
the revenues generated by title insurance companies. The CT&T Family of Title
Insurers also competes with abstractors, attorneys issuing opinions and, in
some areas, state land registration systems. Competition in the title
insurance industry is primarily on the basis of service. In addition, the
financial strength of the insurer has become an increasingly important factor
in certain title insurance purchase decisions, particularly in multi-site
transactions and -- with the growing market for real estate-related investment
vehicles such as real estate investment trusts and real estate mortgage
investment conduits -- in investment decisions.
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Regulation
Title insurance companies are subject to regulation and supervision
by state insurance regulators under the insurance statutes and regulations of
states in which they are incorporated. CTI is incorporated in Missouri,
Security Union is incorporated in California and has a title insurance
subsidiary incorporated in Oregon, and Ticor Title is incorporated in
California and has a title insurance subsidiary incorporated in New York. Each
of these companies is also regulated in each jurisdiction in which it is
authorized to write title insurance. Regulation and supervision vary from
state to state, but generally cover such matters as the standards of solvency
which must be met and maintained, the nature of limitations on investments, the
amount of dividends which may be distributed to a parent corporation,
requirements regarding reserves for unearned premiums and losses, the licensing
of insurers and their agents, the approval of policy forms and premium rates,
periodic examinations of title insurers and annual and other reports required
to be filed on the financial condition of title insurance companies.
The Financial Services Group, which acts as a fiduciary, is
primarily regulated by the State of Illinois Commissioner of Banks and Trust
Companies. Regulation covers such matters as the fiduciary's management
capabilities, the soundness of its policies and procedures, the quality of the
services it renders to the public and the effect of its trust activities on its
financial soundness.
Employees
At December 31, 1993, CT&T and its subsidiaries had approximately
8,500 employees.
BANKING BUSINESS
In November 1989, a wholly owned subsidiary of Alleghany acquired
Sacramento Savings and two ancillary companies for a cash purchase price of
$150 million. Sacramento Savings is a California-licensed savings institution
that has been offering retail banking services since 1874. With headquarters
in Sacramento and 45 branch offices located in north central California,
Sacramento Savings is engaged principally in the business of attracting
deposits from the general public and using such deposits, together with
borrowings and other funds, to originate residential and commercial real estate
loans and consumer loans. In addition, through a subsidiary, Sacramento
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Savings offers its customers tax-deferred annuity plans and mutual funds.
Sacramento Savings operates in fourteen counties in north central
California. Its primary market area is the Sacramento Metropolitan Statistical
Area, covering Sacramento, El Dorado, Placer and Yolo counties. Sacramento
Savings is the leading thrift institution in that part of California, which has
experienced strong economic and population growth in recent years and is
expected to resume doing so as the northern California economy recovers. This
expected growth suggests a continued increase in retail deposits in the primary
market area of Sacramento Savings.
As of December 31, 1993, Sacramento Savings had total assets of $3.0
billion, total deposits of $2.8 billion and shareholder's equity of $200
million. Sacramento Savings' deposits are insured by the Savings Association
Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC").
Lending Activities
Earning assets represent about 89 percent of Sacramento Savings'
total assets. Real estate loans, the largest category, comprise about 67
percent of total assets. Nonmortgage loans represent less than 2 percent of
total assets. Investment securities comprise the remainder, or about 21
percent, of total assets.
Loan Portfolio Composition. The following table shows Sacramento
Savings' loan portfolio in dollar amounts and percentages for the past three
years (in thousands):
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Loan Portfolio
December 31,
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1993 1992 1991
------------------- ------------------ --------------------
Amount % Amount % Amount %
-------- ----- -------- ----- -------- ------
Real Estate
1-4 residential
properties $1,340,854 62.4% $1,394,203 61.5% $1,265,044 58.0%
Other residential
& commercial 766,575 35.7 830,062 36.6 873,565 40.1
---------- ----- ---------- ----- ---------- ------
Total real
estate loans 2,107,429 98.1 2,224,265 98.1 2,138,609 98.1
Consumer 40,647 1.9 43,227 1.9 42,300 1.9
---------- ----- ---------- ----- ---------- -----
Total loans
receivable 2,148,076 100.0% 2,267,492 100.0% 2,180,909 100.0%
========= ===== ========= ===== ========= =====
Less:
Allowance for
estimated loan
losses (22,442) (22,798) (18,323)
Undisbursed portion
of loans in
process (36,838) (59,777) (86,682)
Unamortized loan
fees (8,061) (9,185) (8,287)
---------- ---------- ----------
2,080,735 2,175,732 2,067,617
Less: Intercompany (8,139) (8,303) --
---------- ---------- ----------
Total loans
receivable, net $2,072,596 $2,167,429 $2,067,617
========== ========== ==========
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The following table shows the fixed and adjustable-rate
composition of Sacramento Savings' loan portfolio at December 31, 1993 (in
thousands):
Loan Classification Summary
December 31, 1993
Amount %
------ ----
Fixed-rate Loans:
Real estate:
1 - 4 residential properties $ 466,749 21.7%
Other residential & commercial 51,435 2.4
---------- -----
Total real estate loans 518,184 24.1
Consumer 33,217 1.6
---------- -----
Total fixed-rate loans 551,401 25.7
---------- -----
Adjustable Rate Loans:
Real estate:
1 - 4 residential properties 874,105 40.7
Other residential & commercial 715,140 33.3
---------- -----
Total real estate loans 1,589,245 74.0
Consumer 7,430 0.3
---------- -----
Total adjustable rate loans 1,596,675 74.3
---------- -----
Total loans receivable 2,148,076 100.0%
=====
Less:
Allowance for estimated
loan losses (22,442)
Undisbursed portion of loans
in process (36,838)
Unamortized loan fees (8,061)
----------
2,080,735
Less: Intercompany (8,139)
----------
Total loans receivable, net $2,072,596
==========
The following table shows, at December 31, 1993, dollar amounts
of loans in Sacramento Savings' portfolio based on their contractual maturity
dates (in thousands):
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Loan Maturity Summary
December 31, 1993
More than More than
One Year Weighted One Year Weighted Five Years Weighted
or Average to Five Average to Ten Average
Less Rate Years Rate Years Rate
-------- -------- --------- -------- ---------- --------
Real estate:
1-4 residential
properties $ 69,585 8.21% $ 57,129 7.39% $ 57,056 7.62%
Other residential
& commercial 67,215 9.98 61,440 9.69 82,581 7.42
-------- -------- --------
Total real estate
loans 136,800 9.08 118,569 8.58 139,637 7.50
Consumer 34,890 11.95 4,565 7.75 908 14.32
-------- -------- --------
Total loans $171,690 9.67% $123,134 8.55% $140,545 7.54%
======== ======== ========
(Table continues on next page)
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(continued)
Loan Maturity Summary
December 31, 1993
More than
Ten Years Weighted More than Weighted Weighted
to Twenty Average Twenty Average Average
Years Rate Years Rate Total Rate
--------- -------- --------- -------- ---------- --------
Real estate:
1-4 residential
properties $265,625 7.82% $ 891,459 6.99% $1,340,854 7.26%
Other residential
& commercial 376,047 7.11 179,292 6.92 766,575 7.56
-------- ---------- ----------
Total real estate
loans 641,672 7.41 1,070,751 6.98 2,107,429 7.37
Consumer 113 7.55 171 10.40 40,647 11.51
-------- ---------- ----------
Total loans $641,785 7.41% $1,070,922 6.98% $2,148,076 7.45%
========= ========== ==========
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Of the $1.976 billion of loans due after December 31, 1994, $463.1
million, or 23.4 percent, have fixed rates of interest and $1.513 billion, or
76.6 percent, have adjustable rates of interest.
The following table shows, at December 31, 1993, the dollar
amounts and repricing periods of the adjustable rate loans with contractual
maturity dates beyond December 31, 1994 (in thousands):
Adjustable Rate Loan
Repricing Summary
December 31, 1993
More than More than
One Year One Year Five Years
or to Five to Ten
Less Years Years Total
-------- --------- ----------- -----
Real estate:
1-4 residential
properties $ 614,591 $75,813 $143,504 $ 833,908
Other residential
& commercial 663,033 362 14,229 677,624
---------- ------- -------- ----------
Total real estate
loans 1,277,624 76,175 157,733 1,511,532
Consumer 1,790 0 0 1,790
---------- ------- -------- ----------
Total adjustable rate
loans with contractual
maturity dates beyond
December 31, 1994 $1,279,414 $76,175 $157,733 $1,513,322
========== ======= ======== ==========
One- to Four-Family Residential Real Estate Lending.
Sacramento Savings presently offers a variety of residential real
estate loans secured by one- to four-family living units for the purpose of
purchase, refinance, or construction. Maximum loan-to-value ("LTV") ratios for
these
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products generally range from 60 percent to 95 percent, and there is a maximum
dollar limit of $750,000. These loans are secured by first deeds of trust.
Traditional single family residential real estate loans
historically were made only on a long-term, fixed-rate basis. The
characteristics of these types of loans exposed the lender to a greater level
of interest rate risk to the extent that its assets did not reprice as
frequently as its liabilities. As a part of its asset and liability management
strategy, Sacramento Savings has originated primarily adjustable rate mortgage
("ARM") loans for its portfolio in recent years. Sacramento Savings' ARM loans
are indexed to the monthly average cost of funds of Eleventh District Savings
Institutions ("11th COF"). Sacramento Savings offers numerous types of ARM
loans: as of December 31, 1993, initial rates ranged from 3.875 percent to
5.375 percent, and margins over the index ranged from 2.375 percent to 2.50
percent. All types of ARM loans offered by Sacramento Savings provide for
semi-annual adjustment caps of 1 percent and a lifetime ceiling of 11.95
percent. Loan origination fees generally approximate 1 percent of the loan
amount plus $250. Sacramento Savings requires loans secured by non-owner
occupied properties to have lower LTV ratios, lower maximum loan amounts
($400,000), higher initial interest rates and wider margins over the index.
Unlike many competitors, Sacramento Savings does not offer ARM
products permitting negative amortization. Negative amortization occurs when
the monthly payment under the terms of the note is insufficient to pay accrued
interest on the loan. The shortage is added to the principal balance of the
loan. In periods of rising interest rates and/or moderating to declining
collateral values, negative amortization loans can create an unsecured
extension of credit.
Sacramento Savings also offers a variety of fixed-rate loans
secured by owner-occupied one- to four-family units for the purpose of purchase
or refinance. While these loans are structured and underwritten to allow for
immediate sale in the secondary market, Sacramento Savings performs an
individual loan-by-loan review at the time of loan funding (after the loan
commitment is extended to the borrower). As a result of such review,
Sacramento Savings classifies its fixed-rate loans either as portfolio loans
(held until maturity) or as loans held for sale, depending on characteristics
such as contractual term, LTV ratio and borrower age. Loans held for sale are
reported at the lower of aggregate historical cost or market value. At
December 31, 1993 loans held for sale totalled $21.2 million. However, $16.6
million of such loans consisted of mortgages conforming to
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21
the requirements of the Federal Home Loan Mortgage Corporation ("FHLMC") or the
Federal National Mortgage Association ("FNMA"), which were originated and sold
by another area lender and temporarily owned by Sacramento Savings for the
purpose of generating additional income.
Fixed-rate loans held for sale are generally sold to either FHLMC
or FNMA. Sacramento Savings continues to service such loans after their sale.
At December 31, 1993, loans serviced for others totalled $192 million.
Sacramento Savings retains fixed-rate loans which exceed the FHLMC
or FNMA maximum dollar limits. These originations of one- to four-family unit
loans amounted to $19.8 million in 1993.
At December 31, 1993, the following rates and fees were effective
for Sacramento Savings' fixed-rate one- to four-family unit loans, which
conform to federal agency underwriting criteria:
Range
-----------------------------
Contractual Term Rates Fees
- ---------------- ----- ----
$250 plus
30-year amortization - interest
rate reset at 5th year 5.500% - 6.625% 2.75% to 0%
30-year amortization - interest
rate reset at 7th year 5.750% - 6.875% 4.00% to 0%
15-year amortization 6.125% - 7.250% 4.00% to 0%
30-year amortization 6.750% - 7.625% 4.00% to 0%
Loans secured by second deeds of trust amounted to less than $7.0
million at December 31, 1993.
Income Property Real Estate and Construction Lending. Long-term
loans to purchase or refinance income properties are offered at initial rates
that, as of December 31, 1993, ranged from 5.35 percent (prime apartment
properties) to 7.10 percent, adjustable semiannually with a margin over the
11th COF index of 2.375 percent to 3.50 percent. The maximum LTV ratio is 75
percent. Sacramento Savings also makes interim construction loans on these
properties with a maximum term of 24 months. As of December 31, 1993, the
initial rate on construction loans was the prime rate of a bank selected by
Sacramento Savings plus 200 basis points, adjusted after 12 months. In
addition, a substantial
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22
volume of interim construction loans is made on one- to four-family units,
primarily single-family detached homes.
Loan origination fees are higher on construction loans than on
residential real estate loans as compensation for the greater risks and
servicing costs inherent in this type of lending. In order to minimize the
construction loan credit risk, Sacramento Savings utilizes conservative
underwriting policies and employs construction loan inspectors who perform
regular on-site inspections, approve disbursements and monitor compliance with
the approved construction budget.
Construction loans net of undisbursed loan funds totalled $88.0
million, or 2.91 percent of assets, at December 31, 1993. This represents a
decline of approximately 33 percent from the prior year.
The following tables show locations and types of properties securing
Sacramento Savings' real estate loans at December 31, 1993, and the amount of
such loans which are non-performing (i.e., which are more than 60 days
delinquent, or with respect to which the collection of principal and/or
interest is otherwise doubtful):
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23
Real Estate Loans (excluding Construction Loans) as of December 31, 1993
Number of Balance Number of Balance of Total Total
Fixed-rate of Fixed Adjustable Adjustable Number Outstanding Amount Non-
Loans Rate Loans Rate Loans Rate Loans of Loans Balance Performing
---------- ---------- ---------- ---------- -------- ----------- -----------
Sacramento Area
1-4 residential 3,668 $254,949,663 2,765 $289,421,797 6,433 $544,371,460 $2,520,914
Other residential 55 14,984,478 123 147,731,534 178 162,716,012 0
Commercial real
estate 51 17,535,220 369 154,223,230 420 171,758,450 4,017,950
----- ------------ ----- ------------ ----- ------------ ----------
3,774 287,469,361 3,257 591,376,561 7,031 878,845,922 6,538,864
----- ------------ ----- ------------ ----- ------------ ----------
San Francisco Bay Area
1-4 residential 924 52,813,928 1,245 243,934,365 2,169 296,748,293 2,335,895
Other residential 17 4,462,086 114 81,068,060 131 85,530,146 630,605
Commercial real
estate 7 1,925,390 127 76,648,096 134 78,573,486 5,647,074
----- ------------ ----- ------------ ----- ------------ ----------
948 59,201,404 1,486 401,650,521 2,434 460,851,925 8,613,573
----- ------------ ----- ------------ ----- ------------ ----------
Chico Area
1-4 residential 810 59,400,531 1,314 100,171,843 2,124 159,572,374 1,363,178
Other residential 23 2,776,847 103 55,573,336 126 58,350,183 0
Commercial real
estate 7 588,709 100 33,607,185 107 34,195,894 815,180
----- ------------ ----- ------------ ----- ------------ ----------
840 62,766,087 1,517 189,352,364 2,357 252,118,451 2,178,359
----- ------------ ----- ------------ ----- ------------ ----------
Stockton/Modesto Area
1-4 residential 366 36,350,699 341 35,749,792 707 72,100,491 227,497
Other residential 5 2,823,983 48 42,672,748 53 45,496,731 1,357,989
Commercial real
estate 1 124,057 32 18,051,063 33 18,175,120 0
----- ------------ ----- ------------ ----- ------------ ----------
372 39,298,739 421 96,473,603 793 135,772,342 1,585,486
----- ------------ ----- ------------ ----- ------------ ----------
(Table continues on next page)
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24
(continued)
Real Estate Loans (excluding Construction Loans) as of December 31, 1993
Number of Balance Number of Balance of Total Total
Fixed-rate of Fixed Adjustable Adjustable Number Outstanding Amount Non-
Loans Rate Loans Rate Loans Rate Loans of Loans Balance Performing
---------- ---------- ---------- ---------- -------- ----------- -----------
Redding Area
1-4 residential 524 $ 47,833,285 580 $ 52,647,694 1,104 $ 100,480,979 $ 77,422
Other residential 8 2,698,454 38 30,552,659 46 33,251,113 2,186,993
Commercial real
estate 2 54,509 27 8,447,652 29 8,502,161 0
----- ------------ ----- -------------- ------ -------------- -----------
534 50,586,248 645 91,648,005 1,179 142,234,253 2,264,415
----- ------------ ----- -------------- ------ -------------- -----------
Southern California
1-4 residential 77 1,742,800 271 54,654,778 348 56,397,578 2,639,733
Other residential 1 1,130,934 31 24,576,700 32 25,707,634 733,109
Commercial real
estate 3 443,065 14 18,725,352 17 19,168,417 9,784,644
----- ------------ ----- -------------- ------ -------------- -----------
81 3,316,799 316 97,956,830 397 101,273,629 13,157,486
----- ------------ ----- -------------- ------ -------------- -----------
Out of State
1-4 residential 9 551,381 9 2,091,340 18 2,642,721 0
Other residential 1 375,199 1 6,918,858 2 7,294,057 0
Commercial real
estate 4 1,511,949 0 0 4 1,511,949 0
----- ------------ ----- -------------- ------ -------------- -----------
14 2,438,529 10 9,010,198 24 11,448,727 0
----- ------------ ----- -------------- ------ -------------- -----------
Total 6,563 $505,077,167 7,652 $1,477,468,082 14,215 $1,982,545,249 $34,338,184
===== ============ ===== ============== ====== ============== ===========
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Construction Loans as of December 31, 1993
Number of Balance Number of Balance of Total
Fixed Rate of Fixed Adjustable Adjustable Number
Loans Rate Loans Rate Loans Rate Loans of Loans
---------- ---------- ---------- ---------- --------
Sacramento Area
1-4 residential 13 $ 1,934,252 125 $ 32,505,305 138
Other residential 0 0 3 4,365,520 3
Commercial real
estate 0 0 1 650,000 1
-- ----------- --- ------------ ---
13 1,934,252 129 37,520,825 142
-- ----------- --- ------------ ---
San Francisco Bay Area
1-4 residential 21 7,343,718 99 40,965,084 120
Other residential 0 0 4 3,889,225 4
Commercial real
estate 0 0 0 0
-- ----------- --- ------------ ---
21 7,343,718 103 44,854,309 124
-- ----------- --- ------------ ---
Chico Area
1-4 residential 6 646,883 40 6,807,300 46
Other residential 0 0 2 7,153,550 2
Commercial real
estate 0 0 0 0
-- ----------- --- ------------ ---
6 646,883 42 13,960,850 48
-- --- ------------ ---
Stockton/Modesto Area
1-4 residential 9 2,116,435 45 10,238,347 54
Other residential 0 0 0 0
Commercial real
estate 0 0 0 0
-- ----------- --- ------------ ---
9 2,116,435 45 10,238,347 54
-- ----------- --- ------------ ---
Total Unfunded
Outstanding Loan Net Loan Amount Non-
Balance Amount Amount Performing
----------- -------- -------- ----------
Sacramento Area
1-4 residential $ 34,439,557 $11,662,197 $22,777,360 $ 338,412
Other residential 4,365,520 577,969 3,787,551 0
Commercial real
estate 650,000 302,194 347,806 0
------------ ----------- ----------- -----------
39,455,077 12,542,360 26,912,717 338,412
------------ ----------- ----------- -----------
San Francisco Bay Area
1-4 residential 48,308,802 15,202,899 33,105,903 9,390,952
Other residential 3,889,225 659,958 3,229,267 2,953,821
Commercial real
estate 0 0 0 0
------------ ----------- ----------- -----------
52,198,027 15,862,857 36,335,170 12,344,773
------------ ----------- ----------- -----------
Chico Area
1-4 residential 7,454,183 2,588,780 4,865,403 0
Other residential 7,153,550 669,101 6,484,449 5,972,629
Commercial real
estate 0 0 0 0
------------ ----------- ----------- -----------
14,607,733 3,257,881 11,349,851 5,972,629
------------ ----------- ----------- -----------
Stockton/Modesto Area
1-4 residential 12,354,782 3,530,187 8,824,595 282,206
Other residential 0 0 0 0
Commercial real
estate 0 0 0 0
------------ ----------- ----------- -----------
12,354,782 3,530,187 8,824,595 282,206
------------ ----------- ----------- -----------
(Table continues on next page)
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(continued)
Construction Loans as of December 31, 1993
Number of Balance Number of Balance of Total
Fixed Rate of Fixed Adjustable Adjustable Number
Loans Rate Loans Rate Loans Rate Loans of Loans
---------- ---------- ---------- ---------- --------
Redding Area
1-4 residential 8 $ 1,065,475 32 $ 4,917,795 40
Other residential 0 0 1 285,000 1
Commercial real
estate 0 0 0 0
-- ----------- --- ------------ ---
8 1,065,475 33 5,202,795 41
-- ----------- --- ------------ ---
Southern California
1-4 residential 0 $ 0 0 $ 0 0
Other residential 0 0 0 0 0
Commercial real
estate 0 0 0 0 0
-- ----------- --- ------------ ---
0 0 0 0 0
-- ----------- --- ------------ ---
Out of State
1-4 residential 0 $ 0 0 $ 0 0
Other residential 0 0 0 0 0
Commercial real
estate 0 0 0 0 0
-- ----------- --- ------------ ---
0 0 0 0 0
-- ----------- --- ------------ ---
Total 57 $13,106,763 352 $111,777,126 409
== =========== === ============ ===
Total Unfunded
Outstanding Loan Net Loan Amount Non-
Balance Amount Amount Performing
----------- -------- -------- -----------
Redding Area
1-4 residential $ 5,983,270 $ 1,583,545 $ 4,399,725 $ 281,965
Other residential 285,000 60,709 224,291 0
Commercial real
estate 0 0 0 0
------------ ----------- ----------- -----------
6,268,270 1,644,253 4,624,016 281,965
------------ ----------- ----------- -----------
Southern California
1-4 residential $ 0 $ 0 $ 0 $ 0
Other residential 0 0 0 0
Commercial real
estate 0 0 0 0
------------ ----------- ----------- -----------
0 0 0 0
------------ ----------- ----------- -----------
Out of State
1-4 residential $ 0 $ 0 $ 0 $ 0
Other residential 0 0 0 0
Commercial real
estate 0 0 0 0
------------ ----------- ----------- -----------
0 0 0 0
------------ ----------- ----------- -----------
Total $124,883,889 $36,837,539 $88,046,350 $19,219,985
============ =========== =========== ===========
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Lending Secured by Undeveloped Land. Until June 1992, Sacramento
Savings made loans secured by undeveloped land, frequently to developers who
planned to convert the land to building sites. Customarily such loans were
offered at a floating rate of 3 percent over the Bank of America prime rate,
with an origination fee of 3 percent. Since June 1992, Sacramento Savings has
elected to limit new land loans to credit extensions which facilitate the sale
and/or transfer of existing land loans held by Sacramento Savings, or the sale
of Sacramento Savings real estate investments or foreclosed property. Loans
secured by undeveloped land totalled $82.6 million at December 31, 1993,
representing a decline of approximately 27 percent from the prior year.
Consumer Lending. Nonmortgage loans represent less than 2 percent
of total assets. Such loans include VISA/Mastercard loans, loans on savings
accounts, education loans, mobile home loans, and automobile loans.
Originations, Purchases, Sales and Servicing of Real Estate Loans.
Sacramento Savings acquires loans primarily through originations. In 1993, new
loans totalling $582.1 million were generated, all of which were originated by
the internal lending staff of Sacramento Savings. Approximately 20.1 percent
of 1993 originations were construction loans. In 1992, loan production
totalled $829.5 million, with approximately $46.4 million acquired as a result
of Sacramento Savings' purchase of Butte Savings and Loan in January 1992;
approximately 23.5 percent of the originations were construction loans. In
1991, loan production totalled $555 million, with approximately 0.4 percent
purchases of loans originated by other parties and 99.6 percent originations;
approximately 46 percent of the originations were construction loans.
Sacramento Savings expanded its loan portfolio purchase program in
1985 as a means to increase its portfolio and to offset excess liquidity.
Since 1990, Sacramento Savings suspended its loan portfolio purchase program,
with the exception of purchases of multi-family residential real estate loans
in an aggregate principal amount of less than $5 million from institutions
which were previously identified by Sacramento Savings as possible candidates
for acquisition.
Non-Residential Lending Limits. The Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 ("FIRREA"), enacted on August 9, 1989,
placed limitations on the total amount of non-residential real estate loans
which a savings institution can maintain as portfolio assets. Generally,
non-residential real estate loans are limited to 400 percent of capital. As a
savings association subsidiary of a unitary savings and loan holding company,
Sacramento Savings is also limited by the "qualified thrift lender" ("QTL")
test in the amount of
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non-residential real estate loans it may have outstanding. Effective July 1,
1991, the QTL test required a savings association to invest at least 70 percent
of its tangible assets in qualified thrift investments. This requirement was
reduced to 65 percent pursuant to the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), which was enacted on December 19, 1991.
Sacramento Savings is in compliance with all non-residential lending
limitations. Its non-residential lending margin, the difference between the
total amount of non-residential real estate loans maintained by Sacramento
Savings and the lower of the QTL test limitation and the 400 percent of capital
limitation, decreased 2 percent from $278 million at year-end 1992 to $272
million at year-end 1993. The available non-residential lending margin far
exceeds the amount of non-residential real estate loans which Sacramento
Savings desires to maintain.
Loan Delinquencies, Troubled Debt Restructurings and Non-Performing
Assets. The following table shows delinquent mortgage and other loans at
December 31, 1993 in dollar amount and as a percentage of Sacramento Savings'
total loan portfolio:
Loans Delinquent for Total
-------------------------------------- Delinquent
31-60 days 61-90 days over 90 days Loans
---------- ---------- ------------ -----------
1-4 residential
real estate
Number of loans 38 12 61 111
Amount $3,851,337 $1,666,976 $16,914,887 $22,433,200
Percent 0.18% 0.08% 0.79% 1.04%
Other residential
real estate
Number of loans 3 3 10 16
Amount $1,097,630 $1,793,289 $12,041,848 $14,932,767
Percent 0.05% 0.08% 0.56% 0.70%
Commercial real estate
Number of loans 3 3 13 19
Amount $1,922,096 $6,066,161 $5,440,091 $13,428,348
Percent 0.09% 0.28% 0.25% 0.63%
Consumer loans
Number of loans 97 75 86 258
Amount $143,193 $112,410 $196,982 $452,585
Percent 0.01% 0.01% 0.01% 0.02%
Total
Number of loans 141 93 170 404
Amount $7,014,256 $9,638,835 $34,593,807 $51,246,899
Percent 0.33% 0.45% 1.61% 2.39%
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Loans that are more than 60 days delinquent and loans with respect to
which the collection of principal and/or interest otherwise becomes doubtful
are placed on non-accrual status. Such non-accruing loans and assets which
have been acquired by Sacramento Savings through foreclosure constitute
Sacramento Savings' non-performing assets. In addition, Sacramento Savings
restructures troubled debt from time to time, by forgiving a portion of
interest or principal on outstanding loans or by making new loans to borrowers
at rates of interest which are materially lower than market rates. The
following table shows the amounts and categories of non-performing assets and
troubled debt restructurings in Sacramento Savings' loan portfolio:
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30
Non-Performing Assets
and Troubled Debt Restructurings
Year Ended December 31,
1993 1992 1991
---- ---- ----
Non-accruing loans (not
reflecting specific
offsetting reserves)
1-4 residential $ 9,164,639 $ 9,668,965 $11,544,821
Other residential 4,908,696 5,380,958 7,421,441
Commercial real estate 20,264,848 22,482,445 10,680,216
Construction 19,219,985 12,284,746 8,580,000
Consumer 309,392 227,449 127,529
------------ ----------- -----------
Total 53,867,561 50,044,562 38,354,007
------------ ----------- -----------
Foreclosed assets net of
specific reserves
1-4 residential 5,515,822 3,255,004 2,135,508
Other residential 17,486,224 15,514,149 20,558,028
Commercial real estate 23,190,057 17,600,777 14,740,859
Construction 0 5,466,549 1,567,679
Consumer 34,139 110,592 51,415
------------ ----------- -----------
Total 46,226,242 41,947,071 39,053,489
------------ ----------- -----------
Total non-performing assets $100,093,803 $91,991,633 $77,407,496
============ =========== ===========
Total as a percentage of
average total assets 3.47% 3.29% 2.94%
============ =========== ===========
Troubled Debt
Restructurings
1-4 residential $ 409,091 $ 0 $ 129,929
Other residential 7,738,848 7,530,529 0
Commercial real estate 4,584,173 1,652,081 1,668,496
------------ ----------- -----------
Total $ 12,732,112 $ 9,182,610 $ 1,798,425
============ =========== ===========
Approximately $1.6 million of interest income on non-performing loans
was included in net income for the year ended December 31, 1993. An additional
$3.5 million of interest income would have been recorded on the non-accruing
and past due loans in the foregoing table if such loans had been current.
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31
Allowance for Estimated Loan Losses. The following table shows an
analysis of Sacramento Savings' allowance for estimated loan losses for the
past three years:
Allowance for Estimated Loan Losses
Year Ended December 31,
1993 1992 1991
---- ---- ----
Balance at beginning of the year $22,798,333 $18,323,120 $18,458,000
Charge-offs (5,403,192) (4,850,883) (2,122,642)
Recoveries 102,210 44,372 --
----------- ----------- -----------
Net charge-offs (5,300,982) (4,806,511) (2,122,642)
Allowance acquired in a
business combination -- 200,000 --
Provision for losses 4,944,962 9,081,724 1,987,762
----------- ----------- -----------
Balance at end of the year $22,442,313 $22,798,333 $18,323,120
=========== =========== ===========
Ratio of net charge-offs to
average loans outstanding 0.25% 0.22% 0.10%
=========== =========== ===========
Sacramento Savings periodically reviews its allowance for loan losses
considering numerous factors, including, but not necessarily limited to,
general economic conditions, loan portfolio composition, classified asset
levels, prior loss experience, and independent appraisals. Specific loss
allowances are established when Sacramento Savings determines that the value of
the collateral is less than the amount of the unpaid principal of the related
loan plus estimated costs of the acquisition and sale. The allowance for loan
losses is maintained at an amount considered adequate to provide for potential
losses.
Allowance for Losses on Real Estate Owned. The following table shows
an analysis of Sacramento Savings' allowance for losses on real estate owned
(property obtained through foreclosure, deeds obtained in lieu of foreclosure
and loans designated by Sacramento Savings as "in substance" foreclosed) for
the past three years:
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32
Allowance for Losses on Real Estate Owned
Year Ended December 31,
1993 1992 1991
---- ---- ----
Balance at beginning of the year $3,436,000 $8,465,000 $3,074,000
Provisions charged to real
estate operations 5,364,000 5,761,000 6,092,000
Charge-offs and recoveries, net (3,014,000) (10,790,000) (701,000)
---------- ----------- ----------
Balance at end of the year $5,786,000 $3,436,000 $8,465,000
========== =========== ==========
Investment Activities
Investment Portfolio. Sacramento Savings' investment portfolio
totalled $634.9 million, or approximately 21 percent of total assets, as of
December 31, 1993. The size of the investment portfolio reflects liquidity
needs, asset/liability management strategies and the extent to which deposit
flows exceed Sacramento Savings' capacity to acquire loans with yield and
credit characteristics that meet its portfolio requirements. The resulting
excess liquidity is invested primarily in money market instruments, short-term
U.S. Treasury and Agency securities and U.S. Agency-guaranteed short-term
mortgage-backed derivative securities or adjustable rate U.S. Agency
mortgage-backed securities. To facilitate asset/liability management, and
because of the volatile nature of interest rates and new regulations affecting
the leveraging of capital, Sacramento Savings has deemed it prudent to purchase
only low risk-weighted short-term securities because the maturities on these
investments are short and the yields tend to respond quickly to the level of
interest rates in the money markets. The weighted average maturity of the
current portfolio is 63 months, and its weighted average yield to maturity is
4.73 percent. However, contractual maturities of the U.S. Agency-guaranteed
short-term mortgage-backed derivative securities and adjustable rate U.S.
Agency mortgage-backed securities overstate the likely portfolio duration.
Moreover, Sacramento Savings estimates that 50 percent of the portfolio
reprices in one year and the weighted average portfolio repricing frequency
equals 26.2 months.
The following table shows the carrying and market values of
investment securities for the past three years (in thousands):
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33
December 31,
--------------------------------------------------------------------------------------
1993 1992 1991
---- ---- ----
Carrying Carrying Carrying
Value Market Value Market Value Market
--------- --------- --------- --------- --------- ----------
Overnight Fed
Funds $ 0 $ 0 $ 0 $ 0 $ 8,000 $ 8,000
U.S. Government
and U.S.
Government Agency
Securities1 559,808 560,403 387,617 390,042 344,928 352,377
Certificates
of Deposit 0 0 0 0 17,981 18,000
Securities
Purchased Under
Agreements to
Resell 75,091 75,091 34,950 34,950 10,000 10,000
Bonds, Notes
and Other 0 0 0 0 2,996 2,999
-------- -------- -------- -------- -------- --------
Total $634,899 $635,494 $422,567 $424,992 $383,905 $391,376
======== ======== ======== ======== ======== ========
1 Includes mortgage-backed securities issued by U.S. Government Agencies.
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34
The following table shows the contractual maturities and weighted
average yields of investment securities at December 31, 1993 (in thousands)1:
More Than
One Year Through More Than
One Year or Less Five Years Five Years
--------------------- ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Amount Yield Amount Yield Amount Yield
------ ------- ------ ------- ------ -------
Overnight Fed Funds -- -- -- -- -- --
U.S. Government and
U.S. Government
Agency Securities2 $ 96,296 5.0133% $221,281 4.7664% $242,231 5.0128%
Certificates
of Deposit -- -- -- -- -- --
Securities
Purchased Under
Agreements to
Resell 75,091 3.3629
Bonds, Notes
and Other -- -- -- -- -- --
-------- ------- -------- ------- -------- -------
Total $171,387 4.2875% $221,281 4.7664% $242,231 5.0128%
======== ======= ======== ======= ======== =======
1 This table does not reflect the impact of principal paydowns of any
mortgage-backed security.
2 Includes mortgage-backed securities issued by U.S. Government Agencies.
Real Estate Investment. Sacramento Savings began investing in real
estate in the late 1960s as a diversification strategy. Since then, Sacramento
Savings has concentrated its investments within the Sacramento Metropolitan
Statistical Area, where economics, engineering, marketing, and political
concerns are best understood by it; in fact, all of Sacramento Savings' real
estate investments are located within a 25-mile radius of Sacramento. As of
December 31, 1993, Sacramento Savings held real estate investments with an
aggregate net book value of $37.6 million, representing 18.8 percent of its
total capital (based on generally accepted accounting principles).
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35
Sacramento Savings is distinguished from many savings institutions
that have pursued real estate activities by the strict policy constraints that
have guided its activities. It has consistently limited the scope of its real
estate activities so that such investments have never exceeded 5 percent of
assets, and are currently 1.24 percent of assets. In most cases, Sacramento
Savings acquired undeveloped land and developed it through the construction of
infrastructure and the creation of a final parcel map. The property was then
sold, predominantly to builders or users. Many of Sacramento Savings'
investments are held in joint ventures with established local developers. As
of December 31, 1993, $34.5 million, or 90 percent, of Sacramento Savings' real
estate portfolio was held in joint venture arrangements (although Sacramento
Savings is seeking to terminate a joint venture arrangement holding
approximately $25.6 million of Sacramento Savings' real estate portfolio to
comply with FDIC divestiture requirements as described below).
FIRREA, however, imposes significant restrictions on investing
activities of federal- and state-chartered savings associations. FIRREA
generally prohibits state-chartered savings associations from directly
acquiring or retaining any equity investment of a type or in an amount that is
not permissible for a federal savings association. Such impermissible
investments include equity investments in real estate, investments in equity
securities and any other equity investment. Pursuant to a transition rule
promulgated under FIRREA, the FDIC must require divestiture of these
impermissible investments as quickly as can be prudently done, and in any event
not later than July 1, 1994.
In response to the required divestiture of equity investments, the
Office of Thrift Supervision (the "OTS") promulgated capital regulations for
savings associations requiring the phase-out of all impermissible equity
investments from capital calculations by July 1, 1994. (Although the Housing
and Community Development Act of 1992 ("HCDA") permitted an extension of the
capital phase-out to July 1, 1996 for certain real estate investments held in
subsidiaries or in-substance subsidiaries such as joint venture arrangements,
the benefits to Sacramento Savings that would have resulted therefrom are
offset by reductions in regulatory capital required by the FDIC, as described
below).
Sacramento Savings submitted a divestiture plan to the FDIC providing
for complete divestiture of its real estate investments and related business by
year-end 1993. In approving Sacramento Savings' plan, the FDIC stipulated that
Sacramento Savings write off certain real estate investment ("REI") assets,
regardless of the fair value of the assets to be divested, if the assets were
not sold by the sale date set forth in Sacramento Savings divestiture plan.
Sacramento Savings added $13.5 million to reserves in respect of REI assets in
1991. In response to the relaxation of FIRREA restrictions effected by HCDA,
Sacramento
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Savings entered into negotiations with the FDIC in late 1992 for relief from
the write-off requirements in its divestiture plan, and no comparable addition
to reserves was made in that year. In early 1993, Sacramento Savings reached
an understanding with the FDIC (in which the OTS acquiesced) pursuant to which
the write-off requirements were rescinded. In lieu of the write-off
requirements, Sacramento Savings makes a quarterly adjustment to its regulatory
capital in an amount equal to such write-off requirements. In 1993, Sacramento
Savings booked direct charges to its regulatory capital of $23.1 million in
accordance with this understanding. It is expected that, if none of its REI
assets are divested, Sacramento Savings will make additional charges of $15
million to its regulatory capital in the first half of 1994. By July 1, 1994,
Sacramento Savings will have fully written off its REI assets for regulatory
purposes.
Notwithstanding such relief, until all of its REI assets are removed
from the balance sheet, Sacramento Savings is following conservative accounting
practices with respect to such assets. These practices include the expensing
of all carrying costs and the deferral of income recognition until the entire
portfolio is liquidated.
Sources of Funds
During the years 1983 to 1988, Sacramento Savings' assets doubled
from $1.1 billion to more than $2.3 billion. As of December 31, 1993,
Sacramento Savings' assets totalled $3.0 billion. The slowed rate of increase
was due in part to recessionary pressures and Sacramento Savings' decision to
limit asset growth to maintain a well-capitalized regulatory status.
Sacramento Savings has pursued predominately traditional strategies with
respect to both its funding sources and its investment mix. Its funding comes
predominantly from retail deposits, and its investments are concentrated in
real estate loans.
Deposits. Deposits totalled about $2.8 billion and funded
approximately 91 percent of Sacramento Savings' total assets as of December 31,
1993. Approximately 26 percent of total deposits were represented by passbook
and transaction accounts, and 16 percent were in deferred compensation plan
accounts. Another 4 percent of all deposits were time deposits of public
entities, which have provided a readily available source of funds without
disrupting Sacramento Savings' regular pricing structure. The remainder of
total deposits was represented by retail certificates of deposit. Sacramento
Savings has never accepted brokered deposits.
Among all banking institutions in the 14-county region constituting
Sacramento Savings' primary deposit market, Sacramento Savings has over 10
percent of all deposits, ranking
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third in deposits both in the 14 counties overall and in Sacramento County
itself. Sacramento Savings ranks first in deposits among all savings
institutions in Sacramento County, with a market share of more than 40 percent.
Its market share of deposits held by all financial institutions in Sacramento
County, including banks and thrifts, is about 12 percent.
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The following table shows the dollar amount of deposits, by interest
rate range, in the various types of deposit programs offered by Sacramento
Savings (in thousands):
December 31,
--------------------------------------------------------------------------------
1993 1992
------------------------------------ -------------------------------------
Interest % Interest %
Rates Balance of Total Rates Balance of Total
-------- ------- -------- -------- ------- --------
Demand accounts 1.00-1.15 $ 223,394 8.10% 1.50-1.90 $ 229,138 8.85%
Passbook accounts 2.05-2.20 242,317 8.78 2.55-2.75 214,887 8.30
Insured money
market accounts 1.00-2.35 212,091 7.69 1.50-2.90 231,566 8.95
Non-interest
bearing accounts None 28,049 1.02 None 7,693 0.30
Certificates of deposit:
1 Month Savers Choice 2.30-2.55 15,412 0.56 2.65-3.05 26,937 1.04
3 Month Savers Choice 2.50-3.15 40,333 1.46 2.90-4.05 75,507 2.91
4 Month Savers Choice 2.55-3.00 5,971 0.22 3.00-3.60 15,183 0.59
6 Month Savers Choice 2.80-4.45 323,974 11.74 3.25-4.80 354,369 13.68
1 Year Savers Choice 3.11-6.50 439,766 15.94 3.75-8.35 331,211 12.79
30 Month Savers Choice 3.85-12.00 108,387 3.93 4.30-11.25 99,010 3.82
60 Month Savers Choice 4.85-12.00 121,022 4.39 4.90-12.00 85,891 3.32
Market Advantage 2.90-3.00 31,672 1.15 -- -- --
Portfolio Plans 3.25-7.50 115,889 4.20 3.40-7.50 116,528 4.50
IRA 2.05-12.60 217,493 7.88 2.55-11.97 218,906 8.45
Jumbo 2.20-9.35 66,806 2.42 2.75-9.35 108,816 4.20
Loan to Lender -- -- -- 8.625-9.00 9,255 0.36
Public Funds 2.40-10.25 118,347 4.29 2.60-10.25 151,611 5.85
Deferred
Compensation 3.05-10.00 447,685 16.23 3.04-10.00 314,074 12.12
---------- ------- ---------- ------
2,052,757 74.41 1,907,268 73.62
---------- ------- ---------- ------
2,758,608 100.00% 2,590,552 100.00%
Less: Intercompany (8,035) ======= (8,905) ======
---------- ----------
$2,750,573 $2,581,647
========== ==========
December 31,
-------------------------------------
1991
-------------------------------------
Interest %
Rates Balance of Total
------- ------- --------
Demand accounts 3.25-3.75 $ 200,128 8.15%
Passbook accounts 4.00-4.30 166,704 6.79
Insured money
market accounts 3.25-4.55 177,225 7.23
Non-interest
bearing accounts None 6,494 0.26
Certificates of deposit:
1 Month Savers Choice 4.00-5.05 33,682 1.37
3 Month Savers Choice 4.35-5.90 88,518 3.61
4 Month Savers Choice 4.55-6.65 36,381 1.48
6 Month Savers Choice 4.60-8.25 399,591 16.28
1 Year Savers Choice 4.70-9.30 387,743 15.79
30 Month Savers Choice 5.50-11.25 91,854 3.74
60 Month Savers Choice 5.45-12.00 62,629 2.55
Market Advantage --
Portfolio Plans 4.80-7.50 70,508 2.87
IRA 4.70-8.40 134,335 5.47
Jumbo 4.00-9.50 136,607 5.56
Loan to Lender 8.38-9.00 12,770 0.52
Public Funds 4.05-10.25 191,637 7.81
Deferred
Compensation 5.40-10.00 258,176 10.52
---------- ------
1,904,431 77.57
---------- ------
2,454,982 100.00%
Less: Intercompany (13,200) ======
----------
$2,441,782
==========
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The following table shows the savings flows of Sacramento Savings (in
thousands):
Year Ended December 31,
-----------------------------------------
1993 1992 1991
-------- -------- --------
Balance at beginning of year $2,590,552 $2,454,982 $2,302,146
Deposits 3,858,495 3,794,469 3,529,469
Withdrawals (3,788,510) (3,771,594) (3,521,425)
Interest credited 98,071 113,255 145,336
---------- ---------- ----------
Net increase 168,056 136,130 153,380
Accretion of premium 0 (560) (544)
---------- ---------- ----------
$2,758,608 $2,590,552 $2,454,982
---------- ---------- ----------
Less: Intercompany (8,035) (8,905) (13,200)
---------- ---------- ----------
Balance at end of year $2,750,573 $2,581,647 $2,441,782
========== ========== ==========
Percent increase 6.54% 5.73% 6.49%
========== ========== ==========
The following table shows maturity information for Sacramento
Savings' certificates of deposit as of December 31, 1993 (in thousands):
Maturity Schedule
December 31, 1993
Over 3 Over 6
3 Months to 6 to 12 Over
or Less Months Months 12 Months Total
-------- ------ ------- --------- -----
Certificates of
Deposit (less than
$100,000) $384,815 $335,444 $379,866 $425,845 $1,525,970
Certificates of
Deposit ($100,000
or more) 75,238 198,872 126,386 7,944 408,440
Public Funds* 38,936 43,623 29,439 6,349 118,347
-------- -------- -------- -------- ----------
498,989 577,939 535,691 440,138 2,052,757
Less: Intercompany (2,253) (5,483) -- -- (7,736)
-------- -------- -------- -------- -----------
Total Certificates
of Deposit $496,736 $572,456 $535,691 $440,138 $2,045,021
======== ======== ======== ======== ===========
* Certificates of deposit from governmental and other public entities.
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Deferred Compensation Deposits. State and local governmental
employees may contribute up to 25 percent of their annual compensation (not
exceeding $7,500) to approved deferred compensation plans, and these deferred
compensation deposits are another funding source for Sacramento Savings. Such
deposits are long-term in nature, and have fixed interest rates. At present,
over 60 plans covering 64,000 participants are being administered by Sacramento
Savings, with total deposits of over $447 million. However, $190 million of
such amount earns a fixed rate of interest of 10 percent until 1994 year-end,
substantially higher than current market rates.
Return on Equity and Assets. In 1993, Sacramento Savings' return on
average total assets was 0.57 percent and its return on equity was 8.52
percent. Its dividend payout ratio (dividends declared per share divided by
net income per share) was 58.09 percent, and its equity to assets ratio
(average equity divided by average total assets) was 6.71 percent.
Borrowings. As a member of the FHLBank of San Francisco, Sacramento
Savings is required to own capital stock in the FHLBank of San Francisco and is
authorized to apply for advances from the FHLBank of San Francisco. The
FHLBank of San Francisco may prescribe the permissible uses for such advances,
as well as limitations on the interest rates and repayment provisions. FIRREA
requires that all long-term FHLBank advances be for the purpose of financing
residential housing, and that members meet established community lending
standards in order to have continued access to long-term FHLBank advances.
Sacramento Savings meets these standards and does not expect that these
requirements will have a significant impact on its access to long-term
advances. Sacramento Savings did not apply for any long-term FHLBank advances
in 1993.
Subsidiary and Affiliates
Sacramento Savings has one subsidiary, a service corporation. SSB
Financial Services, a California corporation, was organized in April 1987 to
market to Sacramento Savings' customers tax-deferred annuity plans provided
principally by various insurance companies and mutual funds.
Two ancillary companies of Sacramento Savings which were also
acquired by Alleghany are Superior California Insurance Agency ("Superior") and
Central Valley Securities Company ("Central Valley"). Superior, a California
corporation, handles "forced placed" casualty insurance for Sacramento Savings'
mortgage loans, which provides casualty coverage on the
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security of those loans with respect to which the borrower has failed to do so.
Central Valley, also a California corporation, acts as the assigned trustee for
Sacramento Savings' deeds of trust.
Competition
Sacramento Savings' primary competitors for deposit funds are the
major thrifts, commercial banks, brokerage and insurance firms in the region.
Regulation
Sacramento Savings is a California-licensed savings association,
deposits of which are federally insured by the Savings Association Insurance
Fund of the FDIC. Accordingly, Sacramento Savings is subject to broad state and
federal regulation and oversight extending to all of its operations.
As a California-licensed savings association, Sacramento Savings
derives its authority from, and is governed by, the provisions of the
California Savings Association Law and regulations of the Savings and Loan
Commissioner of the State of California.
Sacramento Savings is also subject to regulation by the OTS, pursuant
to FIRREA. The OTS has extensive authority over the operations of savings
institutions such as Sacramento Savings. Sacramento Savings is required to
file periodic reports with the OTS and is subject to periodic examinations by
the OTS. Furthermore, pursuant to FIRREA, the OTS was required to issue new
capital standards for all savings associations, which included a tangible
capital requirement (minimum ratio of tangible capital to adjusted total
assets), a leverage, or core capital, ratio requirement (minimum ratio of core
capital to adjusted total assets) and a risk-based capital requirement (minimum
ratio of capital to total assets adjusted for the risk associated with
individual assets). The various definitions of capital and adjusted total and
risk-weighted assets are set forth in FIRREA and in rules and regulations of
the OTS and the Comptroller of the Currency. FIRREA mandated that these new
capital requirements be generally as stringent as comparable capital
requirements established by the Comptroller of the Currency for national banks.
Also pursuant to the new capital requirements and as further described above
under the heading "Real Estate Investment," equity investments must be phased
out from capital calculations over a five-year period. The new
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capital requirements became effective December 7, 1989, but were further
modified by FDICIA.
FDICIA established five new capital categories and, as implemented by
federal banking regulatory agencies, established new "relevant capital
measures" for those new capital categories. The new capital categories are:
(i) "well capitalized," describing an institution which significantly exceeds
the required minimum level for each relevant capital measure; (ii) "adequately
capitalized," describing an institution which meets the required minimum level
for each relevant capital measure; (iii) "undercapitalized," describing an
institution which fails to meet the required minimum level for each relevant
capital measure; (iv) "significantly undercapitalized," describing an
institution which is significantly below the required minimum level for any
relevant capital measure; and (v) "critically undercapitalized," describing an
institution which fails to meet a ratio of "tangible equity" to total assets
established by the appropriate federal banking agency, which ratio may not be
less than 2 percent or greater than 65 percent of the required minimum level of
capital under the leverage limit specified by the appropriate federal banking
agency.
The OTS will determine the capital category of each savings
institution it regulates. The assignment of a capital category will have
various consequences to the institution. For example, in addition to other
requirements, an "under-capitalized" institution must file a capital
restoration plan with the OTS. A "significantly undercapitalized" institution
is subject to restrictions on transactions with affiliates, limitations on the
interest rates paid on deposits, asset growth limitations and restrictions on
the payment of any bonus to a senior executive officer of the institution
without prior regulatory approval. Federal regulators may also order a
"significantly undercapitalized" institution to hold a new election of
directors, to terminate any director or senior executive officer employed more
than 180 days prior to the time the institution became "significantly
undercapitalized" or to hire qualified senior executive officers approved by
the regulators.
Under certain circumstances, the OTS may reclassify a "well
capitalized" institution as "adequately capitalized," may require an
"adequately capitalized" institution to comply with one or more requirements as
if it were "undercapitalized," and may take action with respect to an
"undercapitalized" institution as if it were "significantly undercapitalized."
No
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institution may make any capital distribution or pay management fees if, as a
result of such payments, such institution would become "undercapitalized."
As directed by FDICIA, the OTS promulgated regulations defining the
relevant capital measures for the new capital categories. Such measures
consist of a "risk-based capital ratio" defined as the ratio of total capital
to risk-weighted assets, a "Tier 1 risk-based capital ratio" defined as the
ratio of Tier 1 capital, or core capital, to risk-weighted assets, and a
"tangible capital ratio" defined as the ratio of total capital to adjusted
total assets.
At December 31, 1993, Sacramento Savings Bank met the requirements
for inclusion in the highest, or "well capitalized" category, which is reserved
for institutions that significantly exceed the required minimum level with
respect to each of three specified capital measures. Sacramento Savings'
capital ratios at December 31, 1993, compared with such capital measures for an
"adequately capitalized" institution and a "well capitalized" institution, were
as follows:
Federal Requirement Federal Requirement
for "Adequately for "Well Capitalized" Sacramento
Capitalized" Institution Institution Savings
------------------------ ---------------------- ----------
Risk-Based
Capital Ratio 8.0% 10.0% 10.7%
Tier 1 Risk-Based
Capital Ratio 4.0% 6.0% 9.6%
Tangible Capital
Ratio 2.0% 5.0% 5.3%
Sacramento Savings' short-term liquidity ratio (the ratio of
short-term liquid assets to withdrawable accounts) was 7.31 percent on December
31, 1993, far exceeding the federal requirement of 1 percent.
As a savings and loan holding company, Alleghany is also subject to
regulations of the California Savings and Loan
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Commissioner and the OTS. Pursuant to the California Savings Association Law
and the Regulations For Savings and Loan Holding Companies promulgated by the
OTS, Alleghany may be required to file periodic reports with, and is subject to
examination by, the California Savings and Loan Commissioner and the OTS.
As a condition to the approval of the acquisition of Sacramento
Savings, in 1989 Alleghany entered into a voting and disposition
rights/dividend agreement with the OTS. Pursuant to such agreement, if the
core capital of Sacramento Savings were to fall below 1.5 percent of total
assets, the OTS would be entitled to control and/or cause the disposition of
Sacramento Savings. Alleghany's agreement with the OTS also sets forth limits
relating to the amount of dividends that may be paid by Sacramento Savings.
Such dividend limits have been superseded by stricter limits imposed by
subsequent OTS regulations and FDICIA. Sacramento Savings believes that it is
in compliance with such dividend regulations. At December 31, 1993,
substantially all of Sacramento Savings' stockholder's equity was restricted as
to dividend payment pursuant to OTS regulations and FDICIA.
In addition, the board of Sacramento Savings has adopted a Capital
Adequacy Policy Statement relating to the payment of dividends. Pursuant to
such Statement, Sacramento Savings will be permitted to pay a quarterly
dividend of 1.25 percent of its capital as measured by generally accepted
accounting principles if its capital position after payment of such dividend
exceeds the requirements for a "well capitalized" institution.
Alleghany, as a unitary savings and loan holding company, and its
subsidiaries other than Sacramento Savings, are generally not subject to
restrictions on their business activities due to their affiliation with
Sacramento Savings, so long as Sacramento Savings continues to be a "qualified
thrift lender". Sacramento Savings anticipates that it will continue to exceed
the QTL requirement and intends to take such action as may be appropriate to
maintain compliance.
Employees
At December 31, 1993, Sacramento Savings, its ancillary companies and
subsidiary had approximately 903 employees. Because of the extensive use of
part-time service professionals, primarily in its retail operations, these were
equivalent to 820 full-time employees.
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PROPERTY AND CASUALTY REINSURANCE BUSINESS
Underwriters, headquartered in Woodland Hills, California, provides
reinsurance to property and casualty insurers and reinsurers. Underwriters
initially was organized in 1867 as a primary insurer in New York under the name
"Buffalo German Insurance Company." By 1970, Underwriters had become
principally a reinsurer, and in 1977 it changed its corporate domicile to New
Hampshire.
Although it writes many lines of business, Underwriters concentrates
on coverages requiring specialized underwriting expertise, including certain
excess and surplus lines programs, umbrella liability, and directors' and
officers' liability. Underwriters is licensed or authorized to engage in
business in 41 states, the District of Columbia and Canada, and has branch
offices in Atlanta, Chicago, Houston, Woodland Hills and New York.
Underwriters experienced substantial losses in the mid-1980's as a
result of a strategy of increasing writings of treaty casualty business with
pricing and terms which later proved to be inadequate. In early 1987, members
of current management joined Underwriters and shortly thereafter began a
program to restructure its reinsurance portfolio and operations. Among other
steps, the restructuring undertaken by new management included (i)
strengthening Underwriters' reserves for pre-1987 business and the purchase
from The Continental Corporation of two reinsurance contracts providing
coverage for pre-1987 business up to an aggregate limit of $200 million, (ii)
tightening Underwriters' underwriting standards by initiating a program of
pre-underwriting audits of prospective treaty business, (iii) expanding claims
audits to improve monitoring of reported and unreported claims, (iv) employing
actuaries to oversee Underwriters' underwriting activities and reserve
practices and (v) adopting Underwriters' current business strategy. The
restructuring contributed to an increase in the statutory surplus of
Underwriters from $130.0 million at 1987 year-end to $185.0 million at
September 30, 1993, after payment of more than $139.5 million in dividends over
such period to its parent company.
Underwriters was acquired by Alleghany in October 1993, and
thereafter Alleghany, through a new holding company which owns Underwriters,
contributed approximately $51 million to the capital of Underwriters, which
increased Underwriters' statutory surplus to $247.7 million as of 1993
year-end. Underwriters'
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management currently owns about 5.4 percent of the capital stock of the new
holding company which owns Underwriters.
A.M. Best Company, Inc., an independent insurance industry rating
organization ("Best's"), recently upgraded its rating of Underwriters to "A
(Excellent)," from "A- (Excellent)." Best's publications indicate that the new
rating is assigned to companies which Best's believes have achieved excellent
overall performance and have a strong ability to meet their obligations over a
long period of time. According to Best's, the new rating reflects
Underwriters' strong capital base, reduced debt service obligations and
operating performance.
Alleghany's acquisition of Underwriters was accounted for as a
purchase and, therefore, the accounts of Underwriters and its results of
operations included in Alleghany's financial statements reflect purchase
accounting adjustments and are not comparable to Underwriters' prior reported
results. Furthermore, most of the information given about Underwriters herein
relates to pre-acquisition periods.
To capitalize on advantageous market conditions and on Underwriters'
expertise in specialized coverages, Underwriters established Commercial
Underwriters Insurance Company ("CUIC") at year-end 1992. CUIC, a California
corporation, is a property and casualty insurance company that focuses on
specialized insurance lines. In 1993, CUIC generated $19.4 million in gross
written premiums. Underwriters or CUIC retained $8.8 million of such amount,
constituting 5 percent of Underwriters' consolidated net written premiums in
1993.
General Description of Reinsurance
Reinsurance is an agreement between two insurance companies in which
one company, the "reinsurer," agrees to indemnify the other company, the
"reinsured" or "ceding company," for all or part of the insurance risks
underwritten by the reinsured. Reinsurance provides reinsureds with three
major benefits: it reduces net liability on individual risks, protects against
catastrophic losses and helps to maintain acceptable surplus and reserve
ratios.
In general, property insurance protects the insured against financial
loss arising out of loss of property or its use, caused by an insured peril.
Casualty insurance protects the insured against financial loss arising out of
its obligation to others for loss or damage to persons or property. Property
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and casualty reinsurance such as that provided by Underwriters protects the
ceding company against loss to the extent of the reinsurance coverage provided.
While both property and casualty reinsurance involve a high degree of
volatility, property losses are generally reported within a relatively short
time period after the event, while there tends to be a greater lag in the
reporting and payment of casualty claims. Consequently, the ultimate losses
associated with property risks are generally known in a shorter time than
losses associated with casualty risks.
The financial condition of property and casualty insurers and
reinsurers can be adversely affected by volatile and unpredictable natural
disasters, such as hurricanes, windstorms, earthquakes, floods, fires and
periods of severely cold weather. Between 1989 and 1993, the worldwide
reinsurance industry experienced unusual catastrophic losses, in terms of both
frequency and severity, from a variety of natural disasters, including
Hurricanes Hugo, Andrew and Iniki. This extended period of unusual
catastrophic losses has caused many reinsurers to reduce significantly the
amount of property catastrophe reinsurance they are prepared to write. The
significant reduction in capacity has led to increased rates for such
catastrophe coverage. Underwriters has increased its writings and retentions
of this business because it believes that substantial increases in premium
rates for property catastrophe coverage, combined, in certain instances, with
higher deductibles retained by reinsureds, have significantly improved the
risk/reward relationship on such coverage.
Underwriters provides reinsurance on both a treaty and facultative
basis. Treaty reinsurance is reinsurance based on a standing arrangement (a
"treaty"), usually for a year or longer, between a reinsured and reinsurer for
the cession and assumption of risks defined in the treaty. Under most
treaties, the reinsured is obligated to offer and the reinsurer is obligated to
accept a specified portion of all such risks originally underwritten by the
reinsured. Facultative reinsurance is the reinsurance of individual risks.
Rather than agreeing to reinsure all or a portion of a class of risk, the
reinsurer separately rates and underwrites each individual risk and is free to
accept or reject each risk offered by the reinsured. Facultative reinsurance
is normally purchased by insurance companies for risks not covered or covered
only in part by their reinsurance treaties. The demand for facultative
reinsurance is normally inversely related to the supply of treaty reinsurance.
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Underwriters writes both of the two major forms of reinsurance, pro
rata reinsurance and excess of loss reinsurance. The pro rata form is an
agreement in which the reinsured and reinsurer share the premiums as well as
the losses and expenses of a single risk, or an entire group of risks, based
upon an established percentage. Under excess of loss reinsurance, the
reinsurer agrees to reimburse the primary insurance company for all losses in
excess of a predetermined amount (commonly referred to as the insurer's
"retention"), generally up to a predetermined limit. Excess of loss
reinsurance is often written in layers or levels, with one reinsurer taking the
risk from the primary insurer's retention level up to an established level,
above which another reinsurer assumes, or the primary insurer retains, the
risk. Excess of loss reinsurance allows the reinsurer to control better the
relationship of the premium charged to the exposures assumed. The reinsurer
assuming the risk immediately above the primary insurer's retention level is
said to write "working layer" or "low layer" excess of loss reinsurance. A
loss that reaches just beyond the primary insurer's retention level would
create a loss for the lower level reinsurers but not for the reinsurers on
higher levels.
Underwriting Operations
Underwriters maintains a disciplined underwriting strategy with a
focus on generating profitable business rather than on increasing market share.
In response to the increased competition and lower premium rates which have
characterized the industry in recent years, Underwriters has maintained a
defensive underwriting posture by no longer writing those lines of business
that it considers to be inadequate in terms of pricing or contract terms.
Underwriters' underwriting discipline is enhanced by its focus on excess of
loss casualty reinsurance with low level attachment points (i.e., dollar-levels
at which risk is assumed). Such layers are characterized by greater loss
frequency, lower loss severity and quicker loss settlement than layers with
higher attachment points. Underwriters believes that these factors result in
greater predictability of losses, which improves Underwriters' ability to
analyze its exposure and price them appropriately.
Another important element of Underwriters' underwriting strategy is
to seek to respond quickly to market opportunities (such as increased demand or
more favorable pricing) by adjusting the mix of business it writes. Recently,
Underwriters has taken advantage of such market opportunities by increasing its
writings of marine and aviation, property catastrophe, clash
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coverages (in which the primary insurer has insured more than one party in a
single incident) and certain excess and surplus lines programs. Underwriters'
business is not seasonal.
Within the lines of business that Underwriters writes, including
general liability, automobile liability, workers' compensation and commercial
multiperil, Underwriters focuses on coverages requiring specialized
underwriting expertise. These specialized coverages, which require a
relatively high degree of underwriting and actuarial analysis, include certain
excess and surplus lines programs, umbrella liability, and directors' and
officers' liability. Underwriters believes that these risks offer greater
potential for favorable results than more general risks.
As part of its strategy, Underwriters seeks to serve as lead or
co-lead underwriter on its treaties. As lead or co-lead underwriter,
Underwriters believes that it is able to influence more effectively the pricing
and terms of the treaties and achieve better underwriting results. During
1993, Underwriters was a lead or co-lead reinsurer on a majority of its treaty
business.
Treaty operations generated approximately $132.2 million or 72
percent of Underwriters' consolidated net written premiums in 1993. Casualty
lines treaties represented approximately 64 percent of total treaty net written
premiums with the remainder represented by property lines treaties.
Approximately 64 percent of total treaty net written premiums represented
treaty reinsurance written on an excess of loss basis and the balance
represented treaty reinsurance written on a pro rata basis. In 1993, treaty
net written premiums increased 23 percent from 1992 due to the increased
writing of marine and aviation, property catastrophe, clash coverage and
certain excess and surplus lines.
Since July 1, 1987, Underwriters' treaty department has generally
written up to $1.0 million per risk on a net basis and in certain circumstances
has accepted more. The largest net risk assumed in 1993 was $2.5 million.
Facultative operations generated approximately $41.5 million or 23
percent of Underwriters' consolidated net written premiums in 1993. Casualty
risks represented 94 percent of total facultative net written premiums with
property risks comprising the remainder. Approximately 80 percent of total
facultative net written premiums represented facultative reinsurance written on
an excess of loss basis and the balance
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represented facultative reinsurance written on a pro rata basis. Facultative
net written premiums increased slightly in 1993 from $40.9 million in 1992.
Since November 30, 1987, Underwriters has offered gross casualty
facultative underwriting capacity of $2.5 million, with a net retention of $1.4
million. Underwriters has a $2.0 million gross property facultative
underwriting capacity with a net retention of $500,000.
Marketing
Underwriters writes almost all of its treaty business and 80 percent
of its facultative business through reinsurance brokers. The remainder of its
facultative business is written directly with ceding companies. By working
primarily through brokers, Underwriters does not need to maintain a large sales
organization which, during periods of reduced premium volume, can comprise a
significant and nonproductive part of overhead. In addition, Underwriters
believes that submissions from the broker market, including certain targeted
specialty coverages, are more numerous and diverse than would be available
through a salaried sales organization, and Underwriters is able to exercise
greater selectivity than would be possible in dealing directly with ceding
companies.
Reinsurance brokers regularly approach Underwriters and others for
quotations on reinsurance being placed for the brokers' customers. In 1993,
Underwriters paid brokers $8.2 million in commissions, which represents 4
percent of its gross written premiums of $225.9 million. Transactions arranged
by BEP International Corporation accounted for 14 percent of Underwriters'
gross written premiums in 1993. Transactions arranged by Underwriters' five
leading brokers (including BEP International Corporation) accounted for 42
percent of gross written premiums in 1993. Loss of all or a substantial
portion of the business provided by any of its five leading brokers could have
a material adverse effect on the results of operations of Underwriters.
A significant percentage of Underwriters' gross written premiums are
generally obtained from a relatively small number of ceding companies. In
1993, approximately 41 percent of gross written premiums were obtained from
Underwriters' ten largest ceding companies. Due to the nature of Underwriters'
business, the identity of ceding companies accounting for relatively large
percentages of gross written premiums tends to vary from year to year. While
Underwriters has generally been successful in
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replacing accounts that have not been renewed, there can be no assurance that
it will be able to do so in the future. Underwriters does not believe that the
loss of the account of any one ceding company would have a material adverse
effect on Underwriters' financial condition or results of operations.
Outstanding Losses and Loss Adjustment Expenses
In many cases, significant periods of time may elapse between the
occurrence of an insured loss, the reporting of the loss to the insurer and the
reinsurer and the insurer's payment of that loss and subsequent payments by the
reinsurer. To recognize liabilities for unpaid losses, insurers and reinsurers
establish "reserves," which are balance sheet liabilities representing
estimates of future amounts needed to pay claims and related expenses with
respect to insured events which have occurred, including events which have not
been reported to the insurer.
When a claim is reported by the ceding company, Underwriters' claims
department establishes a "case" reserve for the estimated amount of
Underwriters' ultimate payment. Such reserves are based upon the amount of
reserves recommended by the ceding company and are supplemented by additional
amounts as deemed necessary by Underwriters' claims department, after an
evaluation of numerous factors including coverage, liability, severity of
injury or damage, jurisdiction and ability of the ceding company to evaluate
and handle the claim properly. In many cases Underwriters establishes case
reserves even when the ceding company believes there is no liability of the
reinsurer. In no instance is the case reserve established by Underwriters less
than that suggested by the ceding company. These reserves are periodically
adjusted by Underwriters' claims department based on its evaluation of
subsequent reports from and audits of the ceding company.
"Bulk" reserves or "incurred but not reported" reserves are established on
an aggregate basis to provide for losses incurred but not yet reported to the
insurer and to supplement the overall adequacy of reported case reserves and
estimated expenses of settling such claims, including legal and other fees and
general expenses of administering the claims adjustment process. Underwriters
establishes bulk reserves by using generally accepted actuarial reserving
techniques to estimate the ultimate net liability for losses and loss
adjustment expenses ("LAE"). The process provides implicit recognition of the
impact of inflation and other factors affecting claims
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reporting by taking into account changes in historic loss reporting patterns
and perceived probable trends.
Underwriters' actuarial department performs reviews of aggregate loss
reserves at least twice each year. Between the semi-annual reviews,
Underwriters uses an updating system which applies the loss ratios determined
in the previous review to earned premiums to date, less incurred losses
reported. Underwriters does not discount any of its reserves for reported or
unreported claims in any line of its business for anticipated investment
income. There are inherent uncertainties in estimating reserves primarily due
to the long-term nature of most reinsurance business, the diversity of
development patterns among different lines of business and types of
reinsurance, and the necessary reliance on the ceding insurer for information
regarding claims. Actual losses and LAE may deviate, perhaps substantially,
from reserves on Underwriters' financial statements, which could have a
material adverse effect on Underwriters' financial condition and results of
operations. However, Underwriters believes that its reserves are being
calculated in accordance with sound actuarial practices and, based upon current
information, that Underwriters' reserves for losses and LAE at December 31,
1993 are adequate.
Asbestos-related liability and environmental impairment have been
recognized as industry-wide problems. In 1993, Underwriters paid $3.2 million
in asbestos-related claims and $1.6 million in environmental impairment claims.
Its net case and bulk reserves for asbestos-related liabilities totalled about
$30.3 million, involving approximately 750 open claims, as of December 31,
1993. Additionally, ceding companies have reported 1,627 asbestos-related
cases in which Underwriters may be subject to possible exposure. Underwriters
did not write reinsurance during periods prior to 1970, when asbestos was most
frequently used, and it has received very few property damage claims relating
to asbestos. Underwriters' net case and bulk reserves for environmental
impairment claims totalled about $22.3 million, involving approximately 412
open claims, as of December 31, 1993. Ceding companies have reported an
additional 9,213 environmental impairment cases in which Underwriters may be
subject to possible exposure.
Underwriters' case reserves for individual asbestos-related and
environmental impairment claims reflect amounts beyond those reserves
recommended by its ceding companies. In addition to the case and bulk reserves
for asbestos-related and environmental impairment claims reported on a
statutory basis as of December 31, 1993, Underwriters
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carried an additional $35.8 million in reserves for such exposures. Taking
into consideration these additional reserves, Underwriters believes that its
total asbestos-related and environmental impairment reserves are adequate.
The table below shows changes in historical net loss and LAE reserves
for Underwriters for each year since 1983. Reported reserve development is
derived primarily from information included in Underwriters' statutory
financial statements. The first line of the upper portion of the table shows
the net reserves at December 31 of each of the indicated years, representing
the estimated amounts of net outstanding losses and LAE for claims arising
during that year and in all prior years that are unpaid, including losses that
have been incurred but not yet reported to Underwriters. The upper portion of
the table shows the reestimated amount of the previously recorded net reserves
for each year based on experience as of the end of each succeeding year. The
estimate changes as more information becomes known about claims for individual
years. The lower portion of the table shows the cumulative net amounts paid as
of December 31 of successive years with respect to the net reserve liability
for each year.
In evaluating the information in the table below, it should be noted
that a reserve amount reported in any period includes the effect of any
subsequent change in such reserve amount. For example, if a loss was first
reserved in 1987 at $100,000 and was determined in 1990 to be $150,000, the
$50,000 deficiency would be included in the Cumulative Redundancy (Deficiency)
row shown below for each of the years 1987 through 1989. Conditions and trends
that have affected the development of liability in the past may not necessarily
occur in the future. Accordingly, it may not be appropriate to extrapolate
future redundancies or deficiencies based on this table. During the mid-1980s,
the reinsurance industry, including Underwriters, experienced substantial
underwriting losses. Such losses are reflected in the table, beginning with
the comparatively high cumulative deficiencies in the years 1983-86.
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Changes in Historical Net Reserves for Losses and LAE
(in millions)
Year Ended December 31,
-----------------------------------------------------------------------------------------------
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net liability as of
the end of year* . . . . $ 156 $ 179 $ 279 $ 359 $ 470 $ 461 $ 453 $ 411 $ 411 $437 $ 509
Cumulative amount
of net liability
paid as of:
One year later . . . . . $ 42 $ 63 $ 80 $ 94 $ 116 $ 119 $ 137 $ 101 $ 84 $ 98 -
Two years later . . . . . 86 130 161 193 208 242 227 173 161 - -
Three years later . . . . 127 192 258 277 330 306 285 239 - - -
Four years later . . . . 159 260 341 375 380 348 342 - - - -
Five years later . . . . 199 318 389 407 416 394 - - - - -
Six years later . . . . . 228 359 404 423 458 - - - - - -
Seven years later . . . . 249 373 413 460 - - - - - - -
Eight years later . . . . 262 381 445 - - - - - - - -
Nine years later . . . . 269 404 - - - - - - - - -
Ten years later . . . . . 285 - - - - - - - - - -
Net liability
reestimated
as of:
One year later . . . . 170 237 341 439 481 454 457 414 412 483 -
Two years later . . . . 205 314 426 449 473 457 460 421 455 - -
Three years later . . . 238 394 432 441 476 462 474 465 - - -
Four years later . . . 282 400 428 444 478 492 520 - - - -
Five years later . . . 289 396 426 445 516 538 - - - - -
Six years later . . . . 284 394 427 484 562 - - - - - -
Seven years later . . . 282 395 454 531 - - - - - - -
Eight years later . . . 282 410 495 - - - - - - - -
Nine years later . . . 290 447 - - - - - - - - -
Ten years later . . . . 320 - - - - - - - - - -
Cumulative Redundancy
(Deficiency) . . . . . $(164) $(268) $(216) $(172) $ (92) $ (77) $ (69) $ (54) $ (44) $(46) -
Gross Liability - End of Year $739 $ 861
Reinsurance Recoverable 352 352
---- -----
Net Liability - End of Year 437 509
==== =====
Gross Re-estimated Liability -
Latest 833 -
Re-estimated Recoverable -
Latest 370 -
---- -----
Net Re-estimated Liability -
Latest $483 -
==== =====
- ----------------
* Amounts for 1983-86 were determined in accordance with statutory accounting
principles.
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The reconciliation between reserves determined in accordance with
statutory accounting principles ("SAP") and reserves determined in accordance
with generally accepted accounting principles ("GAAP") for the last three years
is shown below (in thousands):
Reconciliation of Reserves for Losses and LAE
from SAP Basis to GAAP Basis
December 31,
---------------------------------------------
1993 1992 1991
------ ------ ------
Statutory Reserves . . . . . . . . . . . . . . . . . . . $473,625 $424,205 $407,848
Reinsurance Deposits(1) . . . . . . . . . . . . . . . . . 0 12,396 2,957
Additional mass action
reserves(2) . . . . . . . . . . . . . . . . . . . . . . 35,750 0 0
-------- -------- --------
Net Reserves--GAAP Basis . . . . . . . . . . . . . . . . 509,375 436,601 410,805
Ceded Reserves--GAAP Basis(3) . . . . . . . . . . . . . . 351,829 352,073 329,024
-------- -------- --------
Gross Reserves--GAAP Basis . . . . . . . . . . . . . . . $861,207 $788,674 $739,829
======== ======== ========
(1) Amounts which relate to multiple-year retrospectively-rated contracts
(i.e., contracts that provide for premium adjustments or changes in future
coverage based on loss experience) are classified as ceded reserves on a
statutory basis. A recent interpretation of GAAP, as promulgated by the
FASB Emerging Issues Task Force, requires that such contracts be accounted
for as deposits.
(2) Amount represents additional reserves recorded by Underwriters for
possible asbestos-related and environmental impairment claims exposure.
(3) Amounts represent ceded outstanding losses and LAE reclassified to
reinsurance receivables in accordance with Statement of Financial
Accounting Standards No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts."
The reconciliation of reserves for the last three years on a GAAP
basis is shown below (in thousands):
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Reconciliation of Reserves for Losses and LAE
1993 1992 1991
------ ------ ------
Reserve as of January 1* . . . . . . . . . . . . . . . . $436,601 $410,805 $411,024
Incurred related to:
Current year . . . . . . . . . . . . . . . . . . 143,723 121,504 101,807
Prior years . . . . . . . . . . . . . . . . . . 46,404 1,376 3,213
-------- -------- --------
Total Incurred . . . . . . . . . . . . . . . . . . . . . 190,127 122,880 105,020
-------- -------- --------
Paid related to:
Current year . . . . . . . . . . . . . . . . . . (19,640) (12,954) (4,482)
Prior years . . . . . . . . . . . . . . . . . . (97,713) (84,130) (100,757)
-------- -------- --------
Total Paid . . . . . . . . . . . . . . . . . . . . . . . (117,353) (97,084) (105,239)
-------- -------- --------
Reserve as of December 31* . . . . . . . . . . . . . . . $509,375 $436,601 $410,805
======== ======== ========
* Reserves as presented represent GAAP basis losses and LAE net of ceded
losses and LAE.
Retrocessional Arrangements
A reinsurer often reinsures some of its business with other
reinsurers ("retrocessionaires") pursuant to retrocession agreements, and pays
to its retrocessionaires a portion of the premiums it receives. Reinsurance
companies enter into retrocession agreements for reasons similar to those that
cause primary insurers to purchase reinsurance.
Underwriters' has long-term retrocessional agreements with a number
of domestic and international reinsurance companies. Retrocessional contracts
do not relieve Underwriters from its obligations to ceding companies and
Underwriters remains liable to its ceding companies for the portion reinsured
to the extent that any retrocessionaire does not meet the obligations assumed
under the retrocessional agreements. Consequently, the most important factor
in Underwriters' selection of retrocessionaires is financial stability.
Underwriters utilizes several retrocessional arrangements to reduce its net
liability on individual risks, protect against catastrophic losses and
facilitate the maintenance of various financial ratios. Underwriters would be
adversely affected to the extent of any defaulted amounts in the event any
retrocessionaire is unable to meet its contractual obligations.
Underwriters currently has reinsurance contracts in force which cede
to retrocessionaires risks in excess of Underwriters' net risk retention,
ceding up to $1.1 million per
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casualty facultative risk and up to $1.5 million per property facultative risk.
Underwriters also has an aggregate reinsurance contract to cover losses, up to
$30 million, incurred during the period July 1, 1993 through June 30, 1994 in
excess of a 77 percent loss and LAE ratio. The contract covers essentially all
lines of business written by Underwriters; however, property catastrophe losses
are subject to a sublimit of $26 million. Also, Underwriters from time to time
purchases retrocessional reinsurance in varying amounts for specific assumed
treaties.
As of December 31, 1993, Underwriters had reported reinsurance
receivables of $353.9 million through retrocession agreements, including $200
million under two reinsurance contracts, with a subsidiary of Continental
Insurance Group. The $200 million reinsurance receivable is secured by a
combination of letters of credit and a trust fund dedicated solely to payments
under the two reinsurance contracts. As of December 31, 1993, Underwriters had
an allowance for estimated unrecoverable reinsurance of $1.8 million.
Investment Operations
Underwriters' investments must comply with the insurance laws of New
Hampshire, the domiciliary state of Underwriters, California, the domiciliary
state of CUIC, and the other states in which they are licensed. These laws
prescribe the kind, quality and concentration of investments which may be made
by insurance companies. In general, these laws permit investments, within
specified limits and subject to certain qualifications, in federal, state and
municipal obligations, corporate bonds, preferred and common stocks and real
estate mortgages.
Underwriters' current investment strategy is to maximize after-tax
investment income through a high quality diversified investment portfolio,
consisting primarily of taxable and tax-exempt fixed maturity securities, while
maintaining an adequate level of liquidity.
For the purpose of managing its investment portfolio, Underwriters
has estimated that the average duration of its policy liabilities is
approximately five years. The average duration of the investment portfolio has
generally approximated five years. Underwriters may adjust the duration of its
investment portfolio from time to time as necessary to maintain a reasonable
relationship between the duration of its liabilities and its portfolio assets.
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The following table reflects investment results for Underwriters for
the three months ended December 31, 1993 (in thousands except percentages):
Investment Results
Net Net
Pre-Tax After-Tax Pre-Tax After-
Average Investment Investment Realized Effective Tax
Investments(1) Income(2) Income(3) Losses Yield(4) Yield(5)
-------------- ---------- ---------- --------- --------- --------
$737,693 $10,390 $7,943 $2,381 5.6 4.3
(1) Average of amortized cost of fixed maturities plus cost of equity
securities at beginning and end of period, excluding operating cash.
(2) After investment expenses, excluding realized gains or losses from sale of
investments.
(3) Net pre-tax investment income less appropriate income taxes.
(4) Annualized net pre-tax investment income for the period divided by average
investments for the same period.
(5) Annualized net after-tax investment income for the period divided by
average investments for the same period.
The following table summarizes the investments of Underwriters,
excluding cash, as of December 31, 1993, with all investments carried at market
value (in thousands except percentages):
Investments
Amortized Cost or Cost Market Value
---------------------- --------------------
Amount Percentage Amount Percentage
Short term investments . . . . . . . . . . . . . . . . 63,602 8.3% 63,602 8.3%
Corporate bonds . . . . . . . . . . . . . . . . . . . . 93,305 12.1 92,326 12.0
U.S. government and government
agency bonds . . . . . . . . . . . . . . . . . . . . 35,000 4.5 34,940 4.5
Mortgage and asset backed securities . . . . . . . . . 172,093 22.3 171,874 22.3
Foreign bonds . . . . . . . . . . . . . . . . . . . . . 32,770 4.3 32,172 4.2
Redeemable preferred stocks . . . . . . . . . . . . . . 16,292 2.1 16,247 2.1
Municipal bonds . . . . . . . . . . . . . . . . . . . . 338,601 44.0 339,379 44.1
------- ----- ------- -----
Equity securities . . . . . . . . . . . . . . . . . . . 18,577 2.4 19,552 2.5
Total . . . . . . . . . . . . . . . . . . . . . 770,240 100.0% 770,092 100.0%
======= ===== ======= =====
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The following table indicates the composition of the long-term fixed
maturity portfolio by Moody's rating as of December 31, 1993 (in thousands
except percentages):
Long-Term Fixed Maturity Portfolio by Moody's Rating
Market
Value Percentage
------ ----------
Aaa . . . . . . . . . . . . . . . . . . . . . . 402,165 58.5%
Aa . . . . . . . . . . . . . . . . . . . . . . 136,582 19.9
A . . . . . . . . . . . . . . . . . . . . . . . 123,606 18.0
Baa . . . . . . . . . . . . . . . . . . . . . . 24,585 3.6
------- ------
Total . . . . . . . . . . . . . . . . . . 686,938 100.0%
======= ======
The following table indicates the composition of the long-term fixed
maturity portfolio by years until maturity as of December 31, 1993 (in
thousands except percentages):
Long-Term Fixed Maturity Portfolio by Years Until Maturity
Market
Value Percentage
------ ----------
One year or less . . . . . . . . . . . . . . . 13,942 2.0
Over one through five years . . . . . . . . . . 58,403 8.5
Over five through ten years . . . . . . . . . . 148,038 21.6
Over ten years . . . . . . . . . . . . . . . . 294,682 42.9
Mortgage and asset backed securities . . . . . 171,873 25.0
------- -----
Total . . . . . . . . . . . . . . . . . . 686,938 100.0%
======= ======
Competition
Competition in the property and casualty reinsurance industry has
historically been cyclical in nature. Typically, a cycle begins with
attractive premium rates for reinsurance, which cause increased writing by
existing reinsurers and the entrance into the market of new reinsurers.
Competition within the market continues to grow, resulting in a decline in
premium rates. As the cycle continues, these decreased premium rates, in
conjunction with a combination of fluctuations in interest rates, catastrophic
events and general economic conditions, usually result in a period of
underwriting losses. Such losses in turn cause reinsurers to slow or stop
writing reinsurance or to withdraw from the market altogether, which results in
decreased competition and a subsequent increase in premium rates. Underwriters
believes this competitive cycle, which may affect particular market segments at
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different times, is a critical factor affecting reinsurance profitability over
time. There are no assurances that historical trends in the property and
casualty reinsurance industry will continue or that Underwriters will be able
to accurately anticipate any such trends.
The property and casualty reinsurance business is highly competitive.
Underwriters competes primarily in the United States reinsurance market with
numerous foreign and domestic reinsurers, many of which have greater financial
resources than Underwriters. Competition in the types of reinsurance in which
Underwriters is engaged is based on many factors, including the perceived
overall financial strength of the reinsurer, premiums charged, contract terms
and conditions, services offered, speed of claims payment, reputation and
experience.
Underwriters' competitors include independent reinsurance companies,
subsidiaries or affiliates of established worldwide insurance companies,
reinsurance departments of certain primary insurance companies and domestic,
European and Asian underwriting syndicates.
According to the Reinsurance Association of America, at December 31,
1993, there were 54 domestic professional reinsurers, and Underwriters was the
nation's sixteenth-largest in terms of net premiums written.
Regulation
Underwriters and CUIC are subject to regulation and supervision by
state insurance regulators under the insurance statutes and regulations of
states in which they are incorporated (New Hampshire and California,
respectively). In addition, each of these companies is regulated in each
jurisdiction in which it conducts business. Among other things, insurance
statutes and regulations typically limit the amount of dividends that can be
paid without prior regulatory notification and approval, impose restrictions on
the amounts and types of investments Underwriters and CUIC may each hold,
prescribe solvency standards that must be met and maintained, require filing of
annual or other reports with respect to financial condition and other matters
and provide for periodic examinations of Underwriters and CUIC.
The terms and conditions of reinsurance agreements generally are not
subject to regulation by any governmental authority with respect to rates or
policy terms. These agreements contrast with primary insurance policies and
agreements, the rates and policy terms of which are generally closely regulated
by state
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insurance departments. As a practical matter, however, the rates charged by
primary insurers do have an effect on the rates that can be charged by
reinsurers.
As an insurance holding company, Alleghany is also subject to the
insurance regulations of New Hampshire and California. Each state required
prior regulatory approval of Alleghany's acquisition of Underwriters and CUIC,
respectively. Alleghany and its other subsidiaries, however, are generally not
subject to restrictions on their business activities due to their affiliation
with Underwriters.
Employees
Underwriters employed 153 persons as of December 31, 1993.
INDUSTRIAL MINERALS BUSINESS
On July 31, 1991, a holding company subsidiary of Alleghany acquired
all of Manville Corporation's worldwide industrial minerals business, now
conducted principally through World Minerals, at a cost of about $144 million,
including capitalized expenses. The present chief executive officer of World
Minerals currently owns an equity interest of about 6.2 percent of World
Minerals' immediate parent company.
On September 16, 1991, certain assets of the Inorganic Specialties
Division of Witco Corporation, including a diatomaceous earth mine and plant in
Quincy, Washington, were acquired by World Minerals' subsidiary Celite.
On November 16, 1992, New Harborlite Corporation ("Harborlite"), a
newly formed subsidiary of World Minerals, acquired all of the outstanding
capital stock of Harborlite Corporation ("Old Harborlite"), a privately owned
perlite filter-aid company, for cash and non-voting preferred stock of
Harborlite. All of World Minerals' pre-existing perlite operations were
transferred to Harborlite, and Old Harborlite was merged into Harborlite, which
was then renamed Harborlite Corporation. In 1993, Harborlite enhanced its
position in the domestic perlite business through the acquisition of additional
reserves near its perlite mine in Superior, Arizona and an additional perlite
expansion plant in Fort Worth, Texas.
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Accordingly, World Minerals currently conducts its industrial
minerals business through its subsidiaries Celite and Harborlite:
Celite
Celite is believed to be the world's largest producer of diatomite,
which it markets under the Celite and Kenite brand names. Diatomite is a
silica-based mineral consisting of the fossilized remains of microscopic
freshwater or marine plants. Celite also produces calcium and magnesium
silicate products.
Diatomite's primary applications are in filtration and as a filler.
Filtration accounts for the majority of the worldwide diatomite market and
for over 50 percent of Celite's diatomite sales. Diatomite is used as a
filter aid in the production of beer, food, juice, wine, water, sweeteners,
fats and oils, pharmaceuticals, chemicals, lubricants and petroleum.
Diatomite is used as a filler mainly in paints. Diatomite is also used as
an anti-block agent in plastic film.
Celite's calcium and magnesium silicate products, which have high
surface area and adsorption and absorption capabilities, are used to
convert liquid, semi-solid and sticky ingredients into dry, free-flowing
powders. Celite's calcium and magnesium silicate products are used in the
production of rubber, sweeteners, flavorings and pesticides.
Harborlite
Harborlite, which began operations on November 16, 1992, carries on
the business of Old Harborlite and the perlite production businesses
formerly conducted by Celite. These products are marketed under the
Harborlite brand name. Harborlite is a world leader in the production and
sale of perlite, a volcanic mineral.
Perlite ore is mined at Harborlite's No Agua, New Mexico mine and is
sold primarily to companies that will expand it in their own expansion
plants and use it in the manufacture of roofing board, formed pipe
insulation and acoustical ceiling tile. Perlite ore for filter-aid and
filler applications is mined at Harborlite's Superior, Arizona mine and is
expanded at one of Harborlite's five expansion plants located within the
United States. Expanded perlite is also produced at Harborlite's expansion
plants in
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Europe from perlite ore obtained from European and Middle Eastern
suppliers. Most of Harborlite's expanded perlite is used as a filter aid
in the brewing, food, wine, sweetener, pharmaceutical, chemical and
lubricant industries, and as a filler and insulating medium in various
construction applications.
World Minerals directs its business from its world headquarters in
Lompoc, California. Its Celite subsidiary also has its world headquarters in
Lompoc, California and owns, directly or through wholly owned subsidiaries,
diatomite mines and processing plants in Lompoc, California; Quincy,
Washington; Murat, France; Alicante, Spain; and Guadalajara, Mexico. Celite
also owns 48.6 percent of Kisilidjan, h.f., a joint venture with the Government
of Iceland which mines and processes diatomite from Lake Myvatn in Iceland.
Harborlite has its world headquarters in Vicksburg, Michigan and owns
a perlite mine and mill in No Agua, New Mexico, a perlite-loading facility in
Antonito, Colorado, a perlite mine and a mill in Superior, Arizona and perlite
expansion facilities in Escondido, California; Green River, Wyoming; Fort
Worth, Texas; Vicksburg, Michigan; Quincy, Florida; Wissembourg, France; and
Hessle, England.
Since World Minerals conducts certain of its operations in foreign
countries, it is subject to the risk of currency fluctuation. In 1993,
approximately 31 percent of World Minerals' revenues (equal to 2.4 percent of
Alleghany's consolidated revenues) were generated by foreign operations, and an
additional 15 percent of World Minerals' revenues were generated by export
sales from the United States.
Celite's largest diatomite mine and plant are located near Lompoc,
California. All additional diatomite supplies are obtained by Celite from its
mines in the state of Washington, France, Spain, Mexico and from the Lake
Myvatn mine in Iceland (although environmental regulations and seismic
activities may adversely affect future production at Lake Myvatn). Celite
believes that its diatomite reserves are generally sufficient to last for at
least 20 more years at the current rate of utilization.
Harborlite obtains perlite ore from its No Agua and Superior mines,
and believes that its perlite ore reserves are sufficient to last at least 20
more years at the current rate of utilization. The perlite used by Harborlite
for expansion in
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Europe is obtained from third parties in Europe and the Middle East.
Celite's silicate products are produced from purchased magnesium and
calcium compounds and internally produced diatomite.
World Minerals experienced no interruption in raw material
availability in 1993, and barring unforeseen circumstances anticipates no such
interruption in 1994. While there can be no assurance that adequate supplies
of all raw materials will be available in the future, Celite and Harborlite
believe that they have taken reasonable precautions for the continuous supply
of their critical raw materials.
Many of Celite's and Harborlite's operations use substantial amounts
of energy, including electricity, fuel oil, natural gas, and propane. Celite
and Harborlite have supply contracts for most of their energy requirements.
Most of such contracts are for one year or less. Celite and Harborlite have
not experienced any energy shortages and they believe that they have taken
reasonable precautions to ensure that their energy needs will be met, barring
any unusual or unpredictable developments.
From the time World Minerals began operations in 1991, none of its
customers accounted for 10 percent or more of World Minerals' annual sales.
World Minerals presently owns, controls or holds licenses either
directly or through its subsidiaries to approximately 22 United States and 40
foreign patents and patent applications. While World Minerals considers all of
its patents and licenses to be valuable, World Minerals believes that none of
its patents or licenses is by itself material to its business.
World Minerals normally maintains approximately a one- to three-week
supply of inventory on certain products due to production lead times. Although
diatomite mining operations at Celite's principal mine in Lompoc, California
must be suspended during periods of heavy rainfall, World Minerals believes
that, because of the stockpiling of ore during dry periods, such suspension
does not materially affect the supply of inventory. Barring unusual
circumstances, World Minerals does not experience backlogs of orders. World
Minerals' business is not seasonal.
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World Minerals acts as the sales agent for both Celite and Harborlite
in the United States and procures orders from customers and distributors on
their behalf. Celite distributes Harborlite's products in Europe to dealers,
distributors and end users on Harborlite's behalf.
World Minerals has research and development, environmental control
and quality control laboratories at its Lompoc production facilities and
quality control laboratories at each of its other production facilities. In
1993, World Minerals spent approximately $1.1 million on company-sponsored
research and technical services (in addition to amounts spent on engineering
and exploration) related to the development and improvement of its products and
services.
Competition
Celite believes that it is the world's largest producer of diatomite.
The remainder of the market is shared by Celite's four major competitors:
Eagle-Picher (United States), Grefco (United States), CECA (France) and Showa
(Japan), and a number of smaller competitors. Celite's silicates compete with
a wide variety of other synthetic mineral products. Harborlite has two large
competitors in the expanded perlite market, Grefco and CECA, and many smaller
competitors. Competition is principally on the basis of service, product
quality and performance, warranty terms, speed and reliability of delivery,
availability of the product and price.
Celite's and Harborlite's filter-aid products compete with other
filter aids, such as cellulose, and other filtration technologies, such as
crossflow and centrifugal separation.
Regulation
All of Celite's and Harborlite's domestic operations are subject to a
variety of federal, state and local environmental laws and regulations. The
most significant of these are the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Federal Clean Air Act, the Federal
Clean Water Act, the Toxic Substances Control Act and the Resource Conservation
and Recovery Act, and the regulations promulgated thereunder, all of which are
administered by the United States Environmental Protection Agency ("EPA").
These laws and regulations establish potential liability for costs incurred in
cleaning up waste sites and impose limitations on atmospheric emissions,
discharges to domestic waters, and disposal of hazardous materials. Certain
state and local
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jurisdictions have adopted regulations that may be more stringent than
corresponding federal regulations. Moreover, federal and state laws governing
disposal of wastes impact customers who must dispose of used filter-aid
materials. Due to their environmental compliance programs, Celite and
Harborlite believe that the impact of these environmental requirements on their
respective operating results has been minimal; however, the exact nature of the
environmental problems which Celite or Harborlite may encounter in the future
cannot be predicted, primarily because of the increasing number and complexity
and the changing character of the standards relating thereto.
The operations of Celite and certain operations of Harborlite are
also subject to regulation by the Mine Safety and Health Administration
("MSHA"). This agency establishes health and safety standards for employee
work environments in the mining industry. MSHA's activity includes regulations
relating to noise, respiratory protection and dust. Because of their ongoing
programs of occupational health and safety surveillance, Celite and Harborlite
believe that the impact of these regulations on their respective operating
results is limited.
Certain products of Celite and Harborlite are subject to the Hazard
Communication Standard promulgated by the Occupational Safety and Health
Administration ("OSHA"), which requires Celite and Harborlite, respectively, to
disclose the hazards of their plants and products to employees and customers.
Such requirements also mandate that customers who purchase diatomite or perlite
for use as a filler in their products label such products to disclose hazards
which may result from the inclusion of crystalline silica-based fillers, if any
of such products contain in excess of 0.1% of crystalline silica by volume.
Therefore, some manufacturers of paint may be considering the use of other
fillers in place of Celite's products. However, Celite believes that the loss
of these customers would not have a material adverse effect on its operating
results. Several states have also enacted or adopted "right to know" laws or
regulations, which seek to expand the federal Hazard Communication Standard to
include providing notice of hazards to the general public, as well as to
employees and customers.
In 1987, the International Agency for Research on Cancer ("IARC")
issued a report, which was supplemented in 1988, designating crystalline silica
as "probably carcinogenic to humans," which is a tentative classification
falling between "probably not carcinogenic to humans" and "sufficient evidence
of human carcinogenicity." Crystalline silica is one of the
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earth's most abundant minerals, appearing in such forms as quartz, sandstone,
gravel and sand. Celite's products contain varying amounts of crystalline
silica ranging from less than 0.1 percent to 65 percent or more. Harborlite's
No Agua-mined perlite generally contains less than 1 percent crystalline
silica. Harborlite's Superior-mined perlite contains no detectable crystalline
silica. Celite and Harborlite provide warning labels on their products
containing in excess of 0.1 percent respirable crystalline silica, advising
customers of the IARC designation and providing recommended safety precautions.
The 1987 IARC designation has been the subject of controversy and
continued study. Celite, through the industry-sponsored International
Diatomite Producers Association ("IDPA"), has participated in funding several
studies to examine in more detail the cancer risk to humans from crystalline
silica. One such study, conducted by the University of Washington, is a cohort
mortality study of approximately 2,570 workers in the diatomaceous-earth mining
and processing industry. The cohort includes only workers who were employed
for at least twelve months' cumulative service and were employed at some time
between January 1942 and December 1986. Because employment records for the
earlier periods of the study were often missing or incomplete, this cohort, at
present, is comprised of workers from only a limited number of employers and
work locations in the industry. A large number of the workers included in the
cohort worked at Celite's Lompoc, California plant prior to the acquisition of
its business by a holding company subsidiary of Alleghany.
The final University of Washington report was issued in October 1992.
The study found a modest increase in lung cancer deaths in the cohort compared
with national rates (indicated by a standardized mortality ratio ("SMR") equal
to 1.43). The standardized mortality ratio compares the number of cancer
deaths in the cohort with 1, representing the number of cancer deaths in the
population at large. The study also found an increase in non-malignant
respiratory disease ("NMRD") (SMR equal to 2.59); this finding was expected
because the NMRD category included silicosis resulting from exposures in past
decades. With regard to the excesses over national rates of mortality as they
relate to the present workforce, the authors of the study stated:
The results for lung cancer and NMRD indicate
that the excesses were most likely attributable
to relatively intense exposures encountered
during the 1930s and 1940s, before dust control
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measures were implemented on a wide-scale basis
in the industry. At present it cannot be said
with certainty that lung cancer and NMRD risks
have been reduced to baseline levels
experienced by the population at large.
However, it is noteworthy that there has been
no excess risk of lung cancer among Lompoc
cohort workers hired since 1960, and there have
been no deaths attributed to silicosis among
cohort members since 1950. These trends are
strongly suggestive of reduced hazards,
probably related to improved environmental dust
control and the increased use of respiratory
protective devices by the workforce.
After the publication of the Washington study, Celite conducted its own review
of the portion of the cohort representing the Lompoc plant and found that more
workers in this portion of the cohort may have been exposed to asbestos than
originally thought. Since exposure to asbestos has been found to cause lung
cancer and respiratory disease, this finding has raised some concern that the
Washington study may overstate the adverse health effects of exposure to
crystalline silica. IDPA has engaged an epidemiologist and an industrial
hygienist to examine the cohort to determine whether asbestos exposure was
fully accounted for in the Washington study's results. Certain other cohort
mortality studies of workers occupationally exposed to crystalline silica,
including a study of gold miners in North Dakota, have found no statistically
significant increases in lung cancer compared with national populations. The
issue remains subject to considerable debate.
The various agreements covering the purchase of the business of
Celite in 1991 provide for the indemnification of the holding company
subsidiary of Alleghany which acquired Celite by the various selling Manville
entities in respect of any environmental and health claims arising from the
operations of the business of Celite prior to its acquisition by the holding
company subsidiary.
Employees
As of December 31, 1993, World Minerals had 7 employees, all located
in the United States, Celite had a total of about 970 employees worldwide, and
Harborlite had a total of about 165 employees worldwide. Approximately 399 of
Celite's employees and 34 of Harborlite's employees in the United States are
covered by collective bargaining agreements. All of the
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collective bargaining agreements covering workers at Celite and Harborlite are
in full force and effect and none are scheduled to expire in 1994.
STEEL FASTENER BUSINESS
The Heads and Threads division of Alleghany, headquartered in
Northbrook, Illinois, is believed to be the nation's leading distributor of
imported steel fasteners. Heads and Threads imports and sells commercial
fasteners - nuts, bolts, screws and washers - for resale to fastener
manufacturers and distributors through a network of sales offices and
warehouses located in fourteen states. The strength of Heads and Threads lies
in its five major warehouses and thirteen regional satellite warehouses, long
years of association with suppliers and customers, and ability to control
operating costs.
Since Heads and Threads imports virtually all of its fasteners, it is
necessary to forecast inventory requirements from six months to a year in
advance to allow time for shipments to reach their destinations in the U.S. In
addition, Heads and Threads' costs are subject to foreign currency fluctuations
and increases in import duties, which may result from determinations by U.S.
federal agencies that foreign countries are violating U.S. laws or intellectual
property rights, or are following restrictive import policies. Rules that have
been proposed to implement the Fastener Quality Assurance Act, which became law
in late 1990, also may increase costs.
Heads and Threads has about 169 employees.
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Item 2. Properties.
Alleghany's headquarters is located in leased office space of about
10,000 square feet at Park Avenue Plaza in New York City.
CT&T and CTI lease about 278,000 square feet for their headquarters
operations in the Chicago Title and Trust Center, a 50-story office complex at
171 North Clark Street in Chicago, Illinois.
Ticor Title's and Security Union's headquarters are in company-owned
premises of about 180,000 square feet in Rosemead, California. CT&T and its
subsidiaries own or lease buildings or office space in approximately 425
locations throughout the United States, primarily for CTI, Security Union and
Ticor Title branch office operations.
Underwriters leases about 27,000 square feet of office space for its
headquarters operations in Woodland Hills, California. All of its five branch
office locations are also in leased spaces, ranging in size from about 3,200
square feet to 6,200 square feet. CUIC leases about 9,400 square feet of
office space.
Sacramento Savings owns its principal office in Sacramento,
California, which has approximately 50,000 square feet of floor space.
Sacramento Savings owns 30 of its 45 branch offices and leases the remainder.
It also owns about 385 acres of improved and unimproved land in the Sacramento
area, and is a party to joint ventures which own an additional 837 acres of
such land.
World Minerals' headquarters is located in leased premises of
approximately 17,300 square feet in Lompoc, California, which it shares with
Celite. Harborlite's headquarters is located at its Vicksburg, Michigan plant.
A description of the major plants and properties owned and operated
by Celite and Harborlite is set forth below. All of the following properties
are owned, with the exception of Plant # 1 at Quincy, Washington, the
headquarters offices at Lompoc, California, the Rueil, France office and the
plant at Wissembourg, France, which are leased.
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Location and Approximate Product
Nature of Property Square Footage or Use
- ------------------ -------------- -------
CELITE:
- ------
Lompoc, CA 961,410 Diatomite filter
Mine; 17 multi- aids, fillers,
story production silicates and
buildings; 5 one- specialty
story warehouse products
buildings; 6 one-
story laboratory
buildings; 4 multi-
story bulk handling
buildings; 6 one-
story office buildings;
2 one-story lunch and
locker-room buildings;
and 10 one-story shops.
Lompoc, CA 17,300 Headquarters
1 one story building; offices
3 units within
1 one-story building.
Quincy, WA 60,941 Diatomite filter
Mine; Plant #1-1 multi- aids and fillers
story production
building and 7 one-
story buildings.
Plant #2-1 multi-
story production
building and 6 one-
story buildings.
Murat, Department
of Cantal, France 77,000 Diatomite filter
Mine; 1 one-story aids
manufacturing
building; 2 one-
story warehouses;
and 1 one-story
office building.
Rueil, France 10,000 Sales and
1 single floor. administrative offices
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Location and Approximate Product
Nature of Property Square Footage or Use
- ------------------ -------------- -------
Guadalajara, Mexico 116,610 Diatomite filter
Mine; 2 multi-story aids and fillers
production buildings;
2 multi-story
pollution-control
buildings; and 20
one-story buildings.
Mexico City, Mexico 2,700 Offices
1 single floor
condominium.
Alicante, Spain 69,410 Diatomite filter
Mine; 2 multi- aids and fillers
story manufac-
turing buildings;
3 one-story ware-
houses; 2 one-story
office buildings;
and 3 miscellaneous
buildings.
HARBORLITE:
Antonito, CO 9,780 Warehouse
1 one-story manu- facilities for
facturing building perlite
and warehouse; 1 one-
story office building;
and 1 one-story ware-
house.
No Agua, NM 40,550 Perlite ore
Mine; 1 six-story mill
building; 1 one-
story office and
shop building; and
8 miscellaneous one-
story buildings.
Superior, AZ 6,900 Perlite ore
Mine; 1 one-story
warehouse building; and
1 one-story office
building.
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Location and Approximate Product
Nature of Property Square Footage or Use
- ------------------ -------------- -------
Escondido, CA 8,450 Perlite filter
1 one-story aids
warehouse building;
and 1 one-story office
building.
Green River, WY 17,300 Perlite filter
1 one-story aids
warehouse building;
and 1 one-story office
building.
Vicksburg, MI 25,050 Perlite filter
2 one-story aids
warehouse buildings;
and 1 one-story office
building.
Fort Worth, TX 15,000 Perlite filter
1 one-story warehouse aids
building; 1 one-story
manufacturing building;
and 1 one-story office
building.
Quincy, FL 18,450 Perlite filter
1 one-story warehouse aids
building; 1 one-story
manufacturing building;
and 1 one-story office
building.
Wissembourg, France 50,000 Perlite filter
1 multi-story aids and fillers
production and ware-
house building.
Hessle, Humberside,
United Kingdom 36,700 Perlite filter
1 one-story aids and fillers
manufacturing
building; and 1
two-story office
building.
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World Minerals' largest mine is located on Celite-owned property
immediately adjacent to the City of Lompoc, California, and is the site of one
of the most unusual marine diatomite deposits in the world. The mine
celebrated its 100th anniversary of production in 1993 and has been in
continuous operation for more than 60 years. Reserves are believed to be
sufficient for the operation of the plant for at least 20 more years at the
current rate of utilization. The Lompoc production facility has a rated
capacity in excess of 200,000 tons annually and currently supplies more than 25
different grades of products to the filtration and filler markets. The
facility also houses World Minerals' research and development, and health,
safety and environmental departments and Celite's quality control laboratories.
Celite and Harborlite also lease warehouses, office space and other
facilities in the United States and abroad. A joint venture between Celite and
the Government of Iceland has mining rights to mine diatomaceous earth in
sections of Lake Myvatn, Iceland.
The operations of Alleghany's Heads and Threads division are
conducted in 15 states at 18 locations, which serve as both sales offices and
warehouses, two of which are owned and the rest of which are leased. Its
headquarters in Northbrook, Illinois is owned by Alleghany.
Alleghany also owns two truck terminal properties in Ohio which are
being held for sale, and which have been leased from time to time on an interim
basis.
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Item 3. Legal Proceedings.
A. On January 7, 1985, the Federal Trade Commission (the "FTC")
filed a complaint alleging that six of the largest title insurance companies,
including CTI, Security Union and Ticor Title, violated Section 5 of the
Federal Trade Commission Act. The violation was asserted with respect to the
participation of those companies in rating bureaus in thirteen states to the
extent that the bureaus had proposed for state approval rates related to search
and examination services and settlement services performed by those companies
in connection with the issuance of title insurance policies. The FTC action
sought injunctive relief. During adjudicative hearings, the Bureau of
Competition of the FTC determined not to proceed with respect to five of the
thirteen states. In an initial decision filed on December 22, 1986, an
administrative law judge found that five of the companies (the sixth company
having withdrawn due to a separate settlement) violated Section 5 in two
states, Connecticut and Wisconsin, and recommended that the companies be
ordered not to participate in rating bureaus in those states in the future.
The administrative law judge found no violation of Section 5 in the remaining
six states.
Following cross appeals, on September 19, 1989 the FTC held that
violations had occurred in four additional states: Arizona, Montana, New Jersey
and Pennsylvania. On January 9, 1991, the United States Court of Appeals for
the Third Circuit unanimously reversed the decision of the FTC and found in
favor of the title insurance companies with respect to all states at issue,
holding that the rating-bureau activity at issue was entitled to immunity from
the antitrust laws under the state-action immunity doctrine. Under this
doctrine, a state law or regulatory scheme can be the basis for antitrust
immunity if the state (i) has articulated a clear and affirmative policy to
allow the anticompetitive conduct and (ii) provides active supervision of
anticompetitive conduct undertaken by private actors. On February 21, 1991,
the FTC filed a petition for rehearing, which was denied on March 12, 1991.
On October 7, 1991, upon petition of the FTC, the United States
Supreme Court granted a writ of certiorari to review the decision of the Third
Circuit Court of Appeals in favor of the title insurance companies. On June
12, 1992, the United States Supreme Court issued its decision in favor of the
FTC, holding that rating-bureau activity in Montana and Wisconsin had not been
sufficiently active to permit the title insurers to invoke the state-action
immunity doctrine. The case was remanded to the Court of Appeals for further
analysis by
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that court of the application of the state-action immunity doctrine in Arizona
and Connecticut and for further consideration of general defenses, including
the exemption provided by the McCarran Ferguson Act, which exempts the business
of insurance from the antitrust laws.
On July 15, 1993, a three-judge panel of the Court of Appeals issued
a decision in favor of the FTC, with one judge dissenting. The Court held that
the state-action immunity doctrine was not applicable in either Arizona or
Connecticut due to a lack of active state supervision, and that other general
defenses were unavailable, including the exemption provided by the
McCarran-Ferguson Act. On August 29, 1993, the Third Circuit Court of Appeals
dismissed the title insurers' petition for a rehearing en banc. The title
insurers filed a petition for a writ of certiorari to the United States Supreme
Court on November 29, 1993, and the FTC filed a brief in opposition on February
25, 1994. The title insurers' petition was denied on March 21, 1994.
The FTC action was for injunctive relief only. Several federal and
state actions involving the same issues as the FTC action were filed against
the same title insurance companies, seeking damages and injunctive relief. One
such action, a class action filed in state court in Wisconsin challenging
rating-bureau activity in that state, was dismissed on June 9, 1993 by the
Wisconsin Supreme Court, which held that the filed-rate defense applied,
prohibiting plaintiffs from challenging in the courts rates that had been filed
with and approved by a regulatory agency. On August 17, 1993, the Wisconsin
Supreme Court denied plaintiffs' motion for reconsideration. On December 8,
1993, plaintiffs filed a petition for a writ of certiorari to the United States
Supreme Court, seeking review of the Wisconsin Supreme Court decision; this
petition was denied on February 22, 1994.
The only other currently pending action involving the same issues as
the FTC action is a federal case filed in the United States District Court for
the District of Arizona challenging rating-bureau activity in Arizona and
Wisconsin. That case was decided on motion in favor of the title insurers, but
the decision was reversed by the Ninth Circuit Court of Appeals, which held
that the defenses of res judicata and state-action immunity and the filed-rate
defense did not apply. A petition by the title insurers for rehearing en banc
was denied on March 17, 1993.
On June 15, 1993, the title insurers filed a petition for a writ of
certiorari to the United States Supreme Court,
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seeking review of the Ninth Circuit Court of Appeals decision. On October 1,
1993, the parties to the litigation entered into a memorandum of understanding
which outlined the terms of a settlement of such litigation. The memorandum of
understanding provided for a definitive written agreement and application for
the necessary approval of the District Court. On that date, the parties also
submitted a request to the United States Supreme Court that any action with
respect to the title insurers' petition for a writ of certiorari be deferred to
allow the District Court to consider the settlement reached by the parties.
Despite such request, the United States Supreme Court granted the title
insurers' petition on October 4, 1993. Thereafter, plaintiffs moved to defer
briefing and argument and, on October 22, 1993, the title insurers filed a
motion in opposition to plaintiffs' motion for such deferral. On November 1,
1993, the United States Supreme Court denied plaintiffs' motion, thus allowing
Supreme Court review to proceed. Argument before the Supreme Court took place
on March 1, 1994, and a decision is expected by the end of the current term of
the Court in early summer 1994. On March 3, 1994, the Ninth Circuit Court of
Appeals issued a limited mandate, in response to the parties' motion, to allow
the District Court to consider the fairness of the settlement.
The Stock Purchase Agreement between Alleghany and Lincoln National
Corporation, among other parties, dated as of June 18, 1985 (the "CT&T Stock
Purchase Agreement"), provides for the indemnification of Alleghany by Lincoln
National Corporation in respect of a portion of any liability resulting from
the foregoing FTC and private actions and in respect of certain other pending
or potential claims against CT&T and its subsidiaries.
B. Alleghany entered into a consent agreement with the FTC effective
July 22, 1991, which settled certain antitrust objections raised by the FTC in
respect of the acquisition of Ticor Title Insurance Company of California
("Ticor Title of California") by CT&T. The consent agreement provides for the
divestiture by CT&T after its acquisition of Ticor Title of California of (i)
one of the two title plants owned by subsidiaries of CT&T serving each of three
Illinois counties, three Indiana counties, two Washington counties and one
California county; and (ii) one of the two back plants owned by subsidiaries of
CT&T serving each of six California counties and one county in each of
Illinois, Indiana and Tennessee. A back plant is a title plant that is no
longer being updated on a daily or regular basis. For a period of ten years
from its effective date, the consent agreement prohibits Alleghany or any
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of its subsidiaries from acquiring an ownership interest or assets in certain
named title insurance companies, or in any entity that has a direct or indirect
ownership interest in a title plant or back plant that services the counties
with respect to which divestiture of such a plant was ordered, without the
prior approval of the FTC. For the same period, Alleghany or any of its
subsidiaries is required to give prior notification to the FTC of any
acquisitions of an ownership interest in a title plant or back plant serving
the same county as a plant already owned by Alleghany or any of its
subsidiaries. There is an exception to the prior approval or notice
requirements which generally would apply to acquisitions solely for the purpose
of investment of up to 3 percent of the shares of a publicly traded
corporation. Also, acquisitions of shares of a publicly traded corporation are
not subject to the prior approval or notice requirements solely by reason of
the ownership by such corporation of less than 5 percent of the shares of the
named title companies.
The consent agreement required divestiture of the plants by July 23,
1992, and provides that the FTC may appoint a trustee and seek civil penalties
and other relief if Alleghany failed to accomplish the divestitures by such
date. As of July 21, 1992, Alleghany had received the FTC's approval for
divestiture in four markets and had applications pending with respect to the
remaining fourteen markets. On that date, Alleghany submitted a motion to the
FTC to extend the time within which to complete the divestitures. On September
24, 1992, the FTC denied Alleghany's motion, advising that it had "not
determined whether, or what, enforcement action would be warranted for
[Alleghany's] failure to meet the July 23 deadline." As of the date hereof,
applications with respect to all markets have been approved by the FTC, and all
divestiture transactions have closed. On September 28, 1993, the staff of the
Bureau of Competition of the FTC invited Alleghany to "address why [the Bureau]
should not recommend that the [FTC] seek civil penalties, or what an
appropriate penalty might be. . . ." On December 10, 1993, Alleghany submitted
a response demonstrating its good faith in the fulfillment of its divestiture
obligations to support its position that no penalties should be imposed. The
staff of the Bureau of Competition subsequently informally advised Alleghany
that it will not recommend that the FTC seek any penalties.
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C. Alleghany's subsidiaries and division are parties to pending
litigation and claims in connection with the ordinary course of their
businesses. Each such operating unit makes provision on its books, in
accordance with generally accepted accounting principles, for estimated losses
to be incurred in such litigation and claims, including legal costs. In the
opinion of management, such provision is adequate under generally accepted
accounting principles as of December 31, 1993.
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Item 4. Submission of Matters to a Vote of Security Holders.
No matter was submitted to a vote of security holders during the
fourth quarter of 1993.
Supplemental Item.Executive Officers of Registrant.
The name, age, current position, date elected and five-year business
history of each executive officer of Alleghany are as follows:
Current Business Experience
Name Age Position During Last 5 Years
- ---- --- -------- -------------------
F.M. Kirby 74 Chairman of Chairman of the
the Board Board, Alleghany;
Chairman of the
Board and chief
executive officer,
Alleghany, prior
to July 1992.
John J. 62 President, President, chief
Burns, Jr. chief executive officer
executive and chief operating
officer officer, Alleghany
and chief since July 1992;
operating President and
officer chief operating
officer, Alleghany,
prior thereto.
David B. 61 Senior Vice Senior Vice
Cuming President President and
and chief chief financial
financial officer, Alleghany,
officer since December 1989;
Vice President,
Alleghany, prior
thereto.
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Current Business Experience
Name Age Position During Last 5 Years
- ---- --- -------- -------------------
Richard P. 57 Senior Vice Senior Vice
Toft President; President, Alleghany,
Chairman, since March 1990;
President and Chairman, President
Chief Executive and Chief Executive
Officer, CT&T; Officer, CT&T, since
Chairman, Chicago January 1994;
Title Insurance President and Chief
Company Executive Officer,
CT&T, prior thereto;
Chairman, Chicago
Title Insurance
Company, since January
1994; Chairman and
Chief Executive
Officer, Chicago Title
Insurance Company,
prior thereto.
Theodore E. 53 Vice President Vice President and
Somerville and General General Counsel,
Counsel Alleghany.
John E. Conway 62 Vice President, Vice President,
Secretary and Secretary and
Treasurer Treasurer, Alleghany.
Peter R. Sismondo 38 Vice President, Vice President,
Controller, Controller,
Assistant Assistant Secretary
Secretary and and principal
principal accounting officer,
accounting Alleghany, since
officer December 1989;
Controller and
Assistant Secretary,
Alleghany, prior
thereto.
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The information required by this Item 5 is incorporated by reference
from page 21 of Alleghany's Annual Report to Stockholders for the year 1993,
dated March 15, 1994, filed as Exhibit 13 hereto.
Item 6. Selected Financial Data.
The information required by this Item 6 is incorporated by reference
from page 21 of Alleghany's Annual Report to Stockholders for the year 1993,
dated March 15, 1994, filed as Exhibit 13 hereto.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The information required by this Item 7 is incorporated by reference
from pages 2 and 3, from pages 6 through 16, and from pages 22 and 23, of
Alleghany's Annual Report to Stockholders for the year 1993, dated March 15,
1994, filed as Exhibit 13 hereto.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item 8 is incorporated by reference
from pages 24 through 45 of Alleghany's Annual Report to Stockholders for the
year 1993, dated March 15, 1994, filed as Exhibit 13 hereto.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
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PART III
Item 10. Directors and Executive Officers of Registrant.
As permitted by General Instruction G(3), information concerning the
executive officers of Alleghany is set forth as a supplemental item included in
Part I of this Form 10-K Report under the caption "Executive Officers of
Registrant." Information concerning the directors of Alleghany is incorporated
by reference from pages 5 through 8 of Alleghany's Proxy Statement dated March
28, 1994, filed or to be filed in connection with its Annual Meeting of
Stockholders to be held on April 22, 1994. Information concerning compliance
with the reporting requirements under Section 16 of the Securities Exchange Act
of 1934, as amended, is incorporated by reference from page 3 of Alleghany's
Proxy Statement dated March 28, 1994, filed or to be filed in connection with
its Annual Meeting of Stockholders to be held on April 22, 1994.
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated by reference
from pages 11 through 24 of Alleghany's Proxy Statement dated March 28, 1994,
filed or to be filed in connection with its Annual Meeting of Stockholders to be
held on April 22, 1994. The information set forth beginning on page 25 through
the first paragraph on page 33 of Alleghany's Proxy Statement dated March 28,
1994, filed or to be filed in connection with its Annual Meeting of Stockholders
to be held on April 22, 1994, is not "filed" as a part hereof.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by this Item 12 is incorporated by reference
from pages 1 through 4, and from pages 9 and 10, of Alleghany's Proxy Statement
dated March 28, 1994, filed or to be filed in connection with its Annual
Meeting of Stockholders to be held on April 22, 1994.
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Item 13. Certain Relationships and Related Transactions.
The information required by this Item 13 is incorporated by reference
from page 24 of Alleghany's Proxy Statement dated March 28, 1994, filed or to
be filed in connection with its Annual Meeting of Stockholders to be held on
April 22, 1994.
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PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.
(a) 1. Financial Statements.
The consolidated financial statements of Alleghany and subsidiaries,
together with the report thereon of KPMG Peat Marwick, independent certified
public accountants, are incorporated by reference from the Annual Report to
Stockholders for the year 1993, dated March 15, 1994, into Item 8 of this
Report.
2. Financial Statement Schedules.
The schedules relating to the consolidated financial statements of
Alleghany and subsidiaries, together with the report thereon of KPMG Peat
Marwick, independent certified public accountants, are detailed in a separate
index herein.
3. Exhibits.
The following are filed as exhibits to this Report:
Exhibit Number Description
3.01 Restated Certificate of Incorporation of Alleghany, as
amended by Amendment accepted and received for filing
by the Secretary of State of the State of Delaware on
June 23, 1988, filed as Exhibit 20 to Alleghany's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1988, is incorporated herein by reference.
3.02 By-Laws of Alleghany as amended July 1, 1992, filed as
Exhibit 3.02 to Alleghany's Quarterly Report on Form
10-Q for the quarter ended June 30, 1992, is
incorporated herein by reference.
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4.01 Indenture dated as of June 15, 1989 between Alleghany
and Pittsburgh National Bank, as Trustee, relating to
the 6-1/2% Subordinated Exchangeable Debentures due
June 15, 2014 (the "Debentures"), including the form of
Debenture, filed as Exhibit 4.1 to Alleghany's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989, is incorporated herein by reference.
4.02 Escrow Agreement dated as of June 15, 1989 between
Alleghany and Pittsburgh National Bank, as Escrow
Agent, for the escrow of common shares of American
Express Company for which the Debentures are
exchangeable, filed as Exhibit 4.2 to Alleghany's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1989, is incorporated herein by reference.
*10.01 Description of Alleghany Management Incentive Plan.
*10.02(a) Agreement dated as of December 22, 1993 between
Alleghany and David B. Cuming. Agreements dated as of
December 22, 1993 between Alleghany and each of F.M.
Kirby, John J. Burns, Jr., Richard P. Toft, Theodore E.
Somerville, John E. Conway and Peter R. Sismondo are
omitted pursuant to Instruction 2 of Item 601 of
Regulation S-K.
*10.02(b) Agreement dated as of December 15, 1993 between CT&T
and Richard P. Toft.
*10.03 Alleghany Corporation Deferred Compensation Plan as
amended and restated as of December 15, 1992, filed as
Exhibit 10.03 to Alleghany's Annual Report on Form 10-K
for the year ended December 31, 1992, is incorporated
herein by reference.
- ----------------------
* Compensatory plan or arrangement.
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*10.04(a) Alleghany 1983 Long-Term Incentive Plan as adopted on
March 16, 1983, filed as Exhibit 10.24 to the Annual
Report on Form 10-K of Alleghany Corporation, a
Maryland corporation and the predecessor of Alleghany
("Old Alleghany"), for the year ended December 31,
1982, is incorporated herein by reference.
*10.04(b) Description of amendments to the Alleghany 1983
Long-Term Incentive Plan as adopted on December 30,
1986, filed as Exhibit 10.05(b) to Alleghany's Annual
Report on Form 10-K for the year ended December 31,
1986, is incorporated herein by reference.
*10.05 Alleghany 1993 Long-Term Incentive Plan adopted and
effective as of January 1, 1993, filed as Exhibit 10.05
to Alleghany's Annual Report on Form 10-K for the year
ended December 31, 1992, is incorporated herein by
reference.
*10.06 Alleghany Supplemental Death Benefit Plan dated as of
May 15, 1985 and effective as of January 1, 1985, filed
as Exhibit 10.08 to Old Alleghany's Annual Report on
Form 10-K for the year ended December 31, 1985, is
incorporated herein by reference.
*10.07(a) Alleghany Retirement Plan effective as of January 1,
1989, as adopted on April 18, 1989, filed as Exhibit
10.2 to Alleghany's Quarterly Report on Form 10-Q for
the quarter ended March 31, 1989, is incorporated
herein by reference.
10.07(b) Trust Agreement dated as of January 1, 1989 between
Alleghany and Bankers Trust Company, filed as Exhibit
10.5(b) to Alleghany's Annual Report on Form 10-K for
the year ended December 31, 1991, is incorporated
herein by reference.
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* Compensatory plan or arrangement.
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*10.08 Alleghany Retirement COLA Plan dated and effective as
of January 1, 1992, as adopted on March 17, 1992, filed
as Exhibit 10.7 to Alleghany's Annual Report on Form
10-K for the year ended December 31, 1991, is
incorporated herein by reference.
*10.09(a) Alleghany Directors' Stock Option Plan dated as of June
17, 1987 and effective as of April 22, 1988, filed as
Exhibit 10.07 to Alleghany's Annual Report on Form 10-K
for the year ended December 31, 1987, is incorporated
herein by reference.
*10.09(b) Amendment to Alleghany Directors' Stock Option Plan
effective as of April 29, 1991, filed as Exhibit 10.3
to Alleghany's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1991, is incorporated herein by
reference.
*10.09(c) Alleghany Amended and Restated Directors' Stock Option
Plan effective as of April 20, 1993 (provided that
options granted thereunder prior to the approval of
Alleghany's stockholders are conditioned upon such
approval), filed as Exhibit 10.1 to Alleghany's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993, is incorporated herein by reference.
*10.10 Alleghany Non-Employee Directors' Retirement Plan
effective July 1, 1990, filed as Exhibit 10.1 to
Alleghany's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1990, is incorporated herein by
reference.
- --------------------
* Compensatory plan or arrangement.
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*10.11(a) Employment Agreement dated as of January 1, 1992, and
Amendment to Employment Agreement dated as of January
1, 1993, among CT&T, Alleghany and Richard P. Toft,
filed as Exhibit 10.12 to Alleghany's Annual Report on
Form 10-K for the year ended December 31, 1992, is
incorporated herein by reference.
*10.11(b) Second Amendment to Employment Agreement dated as of
January 1, 1994, among CT&T, Alleghany and Richard P.
Toft.
*10.12 Split/Owner "Split Dollar" Life Insurance Plan
Assignment dated March 19, 1986 by and between Richard
P. Toft and CT&T, filed as Exhibit 10.10(c) to
Alleghany's Annual Report on Form 10-K for the year
ended December 31, 1991, is incorporated herein by
reference.
*10.13 Description of CT&T Presidents' Plan, adopted and
effective as of July 1, 1985 and as amended as of
January 26, 1993, filed as Exhibit 10.14 to Alleghany's
Annual Report on Form 10-K for the year ended December
31, 1992, is incorporated herein by reference.
*10.14 CT&T Performance Unit Incentive Plan, adopted and
effective as of July 1, 1985, restated as the CT&T
Performance Unit Incentive Plan of 1989, effective as
of July 1, 1990, filed as Exhibit 10.12 to Alleghany's
Annual Report on Form 10-K for the year ended December
31, 1990, is incorporated herein by reference.
*10.15 CT&T Executive Performance Unit Incentive Plan of 1992,
adopted and effective as of January 1, 1992, as amended
and restated effective January 1, 1993.
- -------------------
* Compensatory plan or arrangement.
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*10.16 Description of CT&T Quality Business Management
Incentive Program for the Presidents of CT&T and
Chicago Title Insurance Company, effective as of
January 1, 1989, as amended as of January 1, 1992.
*10.17 CT&T Stock Purchase Plan for Key Employees effective as
of April 6, 1989, as adopted on March 17, 1989, filed
as Exhibit 10.13 to Alleghany's Annual Report on Form
10-K for the year ended December 31, 1990, is
incorporated herein by reference.
*10.18 CT&T Executive Salary Continuation Plan effective as of
January 1, 1979, as adopted on August 23, 1978, filed
as Exhibit 10.15 to Alleghany's Annual Report on Form
10-K for the year ended December 31, 1990, is
incorporated herein by reference.
*10.19(a) Description of compensatory arrangement between
Alleghany Financial Inc. and Paul F. Woodberry filed as
Exhibit 10.19(a) to Alleghany's Annual Report on Form
10-K for the year ended December 31, 1992, is
incorporated herein by reference.
*10.19(b) Description of compensatory arrangement between
Alleghany and Paul F. Woodberry.
10.20 Revolving Credit Loan Agreement dated as of July 9,
1991 among Alleghany, Chemical Bank and Manufacturers
Hanover Trust Company, filed as Exhibit 10.1 to
Alleghany's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1991, is incorporated herein by
reference.
- --------------------
* Compensatory plan or arrangement.
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10.21(a) Stock Purchase Agreement dated as of June 18, 1985 by
and among Old Alleghany, Alleghany, Alleghany Capital
Corporation and Lincoln National Corporation (the CT&T
Stock Purchase Agreement"), filed as Exhibit (2)(i) to
Old Alleghany's Current Report on Form 8-K dated July
11, 1985, is incorporated herein by reference.
10.21(b) List of Contents of Schedules to the CT&T Stock
Purchase Agreement, filed as Exhibit (2)(ii) to Old
Alleghany's Current Report on Form 8-K dated July 11,
1985, is incorporated herein by reference.
10.21(c) Amendment No. 1 dated December 20, 1985 to the CT&T
Stock Purchase Agreement, filed as Exhibit 10.12(c) to
Old Alleghany's Annual Report on Form 10-K for the year
ended December 31, 1985, is incorporated herein by
reference.
10.22 Distribution Agreement dated as of May 1, 1987 between
Alleghany and MSL Industries, Inc., filed as Exhibit
10.21 to Alleghany's Annual Report on Form 10-K for the
year ended December 31, 1987, is incorporated herein by
reference.
10.23 Amendment to Distribution Agreement dated June 29,
1987, effective as of May 1, 1987, between Alleghany
and MSL Industries, Inc., filed as Exhibit 10.22 to
Alleghany's Annual Report on Form 10-K for the year
ended December 31, 1987, is incorporated herein by
reference.
10.24 Tax Sharing Agreement dated as of May 1, 1987 between
Alleghany and MSL Industries, Inc., filed as Exhibit
10.24 to Alleghany's Annual Report on Form 10-K for the
year ended December 31, 1987, is incorporated herein by
reference.
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10.25 Voting and Disposition Rights/Dividend Agreement dated
November 1, 1989 by and between Alleghany, Alleghany
Financial Inc. and the Office of Thrift Supervision in
connection with the acquisition of Sacramento Savings,
filed as Exhibit 10.25 to Alleghany's Annual Report on
Form 10-K for the year ended December 31, 1989, is
incorporated herein by reference.
10.26(a) Loan Agreement dated as of April 30, 1990 between
Alleghany Financial Inc. and The Chase Manhattan Bank
(National Association), filed as Exhibit 10.1 to
Alleghany's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1990, is incorporated herein by
reference.
10.26(b) Amendment No. 1 to Loan Agreement dated as of May 1,
1993, between Alleghany Financial Inc. and The Chase
Manhattan Bank (National Association), filed as Exhibit
10.2(a) to Alleghany's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993, is incorporated
herein by reference.
10.26(c) Pledge Agreement dated as of April 30, 1990 between
Alleghany Financial Inc. and The Chase Manhattan Bank
(National Association), filed as Exhibit 10.2 to
Alleghany's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1990, is incorporated herein by
reference.
10.26(d) Amendment No. 1 to Pledge Agreement dated as of May 1,
1993 between Alleghany Financial Inc. and The Chase
Manhattan Bank (National Association), filed as Exhibit
10.2(b) to Alleghany's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993, is incorporated
herein by reference.
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10.26(e) Collateral Account Agreement dated as of May 1, 1993
between Alleghany Financial Inc. and the Chase
Manhattan Bank (National Association), filed as Exhibit
10.2(c) to Alleghany's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993 is incorporated
herein by reference.
10.27(a) Installment Sales Agreement dated December 8, 1986 by
and among Alleghany, Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Merrill Lynch & Co., Inc., filed
as Exhibit 10.10 to Alleghany's Annual Report on Form
10-K for the year ended December 31, 1986, is
incorporated herein by reference.
10.27(b) Intercreditor and Collateral Agency Agreement dated as
of August 1, 1990 among Manufacturers Hanover Trust
Company, Barclays Bank PLC and Alleghany Funding
Corporation, filed as Exhibit 10.1 to Alleghany's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1990, is incorporated herein by
reference.
10.27(c) Interest Rate and Currency Exchange Agreement dated as
of August 14, 1990 between Barclays Bank PLC and
Alleghany Funding Corporation, and related Confirmation
dated August 13, 1990 between Barclays Bank PLC and
Alleghany Funding Corporation, filed as Exhibit 10.2 to
Alleghany's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1990, are incorporated
herein by reference.
10.27(d) Indenture dated as of August 1, 1990 between Alleghany
Funding Corporation and Manufacturers Hanover Trust
Company, filed as Exhibit 10.3 to Alleghany's Quarterly
Report on Form 10-Q for the quarter ended September 30,
1990, is incorporated herein by reference.
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10.28(a) Acquisition Agreement dated as of November 29, 1990 by
and between CT&T and Westwood Equities Corporation (the
"Ticor Acquisition Agreement"), filed as Exhibit (2)(i)
to Alleghany's Current Report on Form 8-K dated
December 21, 1990, is incorporated herein by reference.
10.28(b) List of Contents of Schedules to the Ticor Acquisition
Agreement, filed as Exhibit 2(ii) to Alleghany's
Current Report on Form 8-K dated December 21, 1990, is
incorporated herein by reference.
10.28(c) Amendment to the Ticor Acquisition Agreement dated as
of January 9, 1991 by and between CT&T and Westwood
Equities Corporation, filed as Exhibit (2)(iii) to
Alleghany's Current Report on Form 8-K dated March 21,
1991, is incorporated herein by reference.
10.28(d) Amended and Restated Credit Agreement dated as of
December 30, 1993 among CT&T, certain commercial
lending institutions and Continental Bank, N.A. as
agent.
10.28(e) Letter Agreement dated May 2, 1991 between CT&T and
Continental Bank, N.A. relating to an interest rate
swap effective May 6, 1991, filed as Exhibit 10.2 to
Alleghany's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1991, is incorporated herein by
reference.
10.29(a) Stock Purchase Agreement dated as of July 1, 1991 among
Celite Holdings Corporation, Celite Corporation and
Manville International, B.V. (the "Celite Stock
Purchase Agreement"), filed as Exhibit 10.2(a) to
Alleghany's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1991, is incorporated herein by
reference.
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10.29(b) List of Contents of Exhibits and Schedules to the
Celite Stock Purchase Agreement, filed as Exhibit
10.2(b) to Alleghany's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1991, is incorporated
herein by reference.
10.30(a) Joint Venture Stock Purchase Agreement dated as of July
1, 1991 among Celite Holdings Corporation, Celite
Corporation and Manville Corporation (the "Celite Joint
Venture Stock Purchase Agreement"), filed as Exhibit
10.3(a) to Alleghany's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1991, is incorporated
herein by reference.
10.30(b) List of Contents of Exhibits and Schedules to the
Celite Joint Venture Stock Purchase Agreement, filed as
Exhibit 10.3(b) to Alleghany's Quarterly Report on Form
10-Q for the quarter ended June 30, 1991, is
incorporated herein by reference.
10.31(a) Asset Purchase Agreement dated as of July 1, 1991 among
Celite Holdings Corporation, Celite Corporation and
Manville Sales Corporation (the "Celite Asset Purchase
Agreement"), filed as Exhibit 10.4(a) to Alleghany's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1991, is incorporated herein by reference.
10.31(b) List of Contents of Exhibits and Schedules to the
Celite Asset Purchase Agreement, filed as Exhibit
10.4(b) to Alleghany's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1991, is incorporated
herein by reference.
10.31(c) Amendment No. 1 dated as of July 31, 1991 to the Celite
Asset Purchase Agreement, filed as Exhibit 10.32(c) to
Alleghany's Annual Report on Form 10-K for the year
ended December 31, 1991, is incorporated herein by
reference.
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10.32(a) Acquisition Related Agreement dated as of July 1, 1991,
by and between Celite Holdings Corporation, Celite
Corporation and Manville Corporation (the "Celite
Acquisition Related Agreement"), filed as Exhibit
10.5(a) to Alleghany's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1991, is incorporated
herein by reference.
10.32(b) List of Contents of Exhibits to the Celite Acquisition
Related Agreement, filed as Exhibit 10.5(b) to
Alleghany's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1991, is incorporated herein by
reference.
10.32(c) Amendment dated as of July 31, 1991 to Celite
Acquisition Related Agreement, filed as Exhibit
10.33(c) to Alleghany's Annual Report on Form 10-K for
the year ended December 31, 1991, is incorporated
herein by reference.
10.33(a) Credit Agreement dated as of December 20, 1991 among
Celite Holdings Corporation, Celite, Bank of America
National Trust and Savings Association and Chemical
Bank (the "Celite Credit Agreement"), filed as Exhibit
10.35(a) to Alleghany's Annual Report on Form 10-K for
the year ended December 31, 1991, is incorporated
herein by reference.
10.33(b) List of Contents of Exhibits and Annexes to the Celite
Credit Agreement which are not being filed herewith,
filed as Exhibit 10.35(b) to Alleghany's Annual Report
on Form 10-K for the year ended December 31, 1991, is
incorporated herein by reference.
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10.33(c) Amendment No. 1 dated January 24, 1992 to the Celite
Credit Agreement, filed as Exhibit 10.36 to Alleghany's
Annual Report on Form 10-K for the year ended December
31, 1991, is incorporated herein by reference.
10.33(d) Letter Agreement dated January 23, 1992 between Celite
and Bank of America National Trust and Savings
Association relating to an interest rate swap effective
January 16, 1992, filed as Exhibit 10.37 to Alleghany's
Annual Report on Form 10-K for the year ended December
31, 1991, is incorporated herein by reference.
10.33(e) Letter Agreement dated January 13, 1992 between Celite
and Chemical Bank relating to an interest rate swap
effective January 13, 1992, filed as Exhibit 10.38 to
Alleghany's Annual Report on Form 10-K for the year
ended December 31, 1991, is incorporated herein by
reference.
10.34(a) Note Purchase Agreement dated September 24, 1991 among
Armco Inc., Alleghany and certain of its subsidiaries
(the "Note Purchase Agreement"), filed as Exhibit
10.39(a) to Alleghany's Annual Report on Form 10-K for
the year ended December 31, 1991, is incorporated
herein by reference.
10.34(b) Amendment dated as of March 17, 1992 to the Note
Purchase Agreement, filed as Exhibit 10.39(b) to
Alleghany's Annual Report on Form 10-K for the year
ended December 31, 1991, is incorporated herein by
reference.
10.34(c) Agreement dated as of September 24, 1991 among Armco
Inc., Cyac Inc. and Alleghany (the "Voting Agreement"),
filed as Exhibit 10.39(c) to Alleghany's Annual Report
on Form 10-K for the year ended December 31, 1991, is
incorporated herein by reference.
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10.34(d) Amendment dated as of March 17, 1992 to the Voting
Agreement, filed as Exhibit 10.39(d) to Alleghany's
Annual Report on Form 10-K for the year ended December
31, 1991, is incorporated herein by reference.
10.34(e) Standstill Agreement dated as of September 24, 1991
between Armco Inc. and Alleghany (the "Standstill
Agreement"), filed as Exhibit 10.39(e) to Alleghany's
Annual Report on Form 10-K for the year ended December
31, 1991, is incorporated herein by reference.
10.34(f) Amendment dated as of March 17, 1992 to the Standstill
Agreement, filed as Exhibit 10.39(f) to Alleghany's
Annual Report on Form 10-K for the year ended December
31, 1991, is incorporated herein by reference.
10.34(g) Amendment No. 2 dated as of April 24, 1992 to the
Standstill Agreement, as amended as of March 17, 1992,
filed as Exhibit 10.1 to Alleghany's Quarterly Report
on Form 10-Q for the quarter ended March 31, 1992, is
incorporated herein by reference.
10.35(a) Stock Purchase Agreement dated as of October 31, 1991
among Associated Insurance Companies, Inc., Alleghany
and The Shelby Insurance Group, Inc. (the "Shelby Stock
Purchase Agreement"), filed as Exhibit 10.1(a) to
Alleghany's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1991, is incorporated
herein by reference.
10.35(b) List of Contents of Exhibits and Schedules to the
Shelby Stock Purchase Agreement, filed as Exhibit
10.1(b) to Alleghany's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1991, is
incorporated herein by reference.
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10.36(a) Stock Purchase Agreement dated as of July 28, 1993 (the
"Underwriters Reinsurance Stock Purchase Agreement")
among Alleghany, The Continental Corporation, Goldman,
Sachs & Co. and certain funds which Goldman, Sachs &
Co. either control or of which they are general
partner, Underwriters Re Holdings Corp. and
Underwriters Re Corporation, filed as Exhibit 10.3(a)
to Alleghany's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1993, is incorporated herein by
reference.
10.36(b) List of Contents of Exhibits and Schedules to the
Underwriters Reinsurance Stock Purchase Agreement,
filed as Exhibit 10.3(b) to Alleghany's Quarterly
Report on Form 10-Q for the quarter ended June 30,
1993, is incorporated herein by reference.
10.36(c) Stock Purchase Related Agreement dated as of July 28,
1993 (the "Underwriters Re Stock Purchase Related
Agreement") among certain persons named therein and
Alleghany, filed as Exhibit 10.3(c) to Alleghany's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1993, is incorporated herein by reference.
10.36(d) List of Exhibits and Schedules to the Underwriters Re
Stock Purchase Related Agreement, filed as Exhibit
10.3(d) to Alleghany's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1993, is incorporated
herein by reference.
10.36(e) Supplement to Underwriters Re Stock Purchase Related
Agreement dated as of August 12, 1993 among certain
persons named therein and Alleghany, filed as Exhibit
10.1(a) to Alleghany's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993, is
incorporated herein by reference.
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10.36(f) Amendment to Underwriters Re Stock Purchase Related
Agreement made as of October 7, 1993 among certain
persons named therein and Alleghany, filed as Exhibit
10.1(b) to Alleghany's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1993, is
incorporated herein by reference.
13 Pages 2 and 3, pages 6 through 16, and pages 21 through
45 of the Annual Report to Stockholders of Alleghany
for the year 1993, dated March 15, 1994.
21 List of subsidiaries of Alleghany.
23 Consent of KPMG Peat Marwick, independent certified
public accountants, to the incorporation by reference
of their reports relating to the financial statements
and related schedules of Alleghany and subsidiaries in
the prospectus contained in the Registration Statement
on Form S-8 of Alleghany (Registration No. 27598).
28 Information from reports furnished to state regulatory
authorities by Underwriters Reinsurance Company and
Commercial Underwriters Insurance Company.
(b) Reports on Form 8-K.
Alleghany filed a report on Form 8-K dated October 22, 1993, and an
amendment thereto dated December 20, 1993, to report in Item 2 that, on October
7, 1993, Alleghany acquired approximately 93 percent of the issued and
outstanding capital stock of a holding company which owns all of the issued and
outstanding capital stock of Underwriters, and to furnish pursuant to Item 7
the required financial statements relating to such acquisition.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 28, 1994 By /s/ John J. Burns, Jr.
-------------- ---------------------------
John J. Burns, Jr.
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 28, 1994 By /s/ John J. Burns, Jr.
-------------- ---------------------------
John J. Burns, Jr.
President and Director
(principal executive
officer)
Date: March 28, 1994 By /s/ Dan R. Carmichael
-------------- --------------------------
Dan R. Carmichael
Director
Date: March 28, 1994 By /s/ David B. Cuming
-------------- ---------------------------
David B. Cuming
Senior Vice President
(principal financial
officer)
Date: March 28, 1994 By /s/ Allan P. Kirby, Jr.
-------------- ---------------------------
Allan P. Kirby, Jr.
Director
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Date: March 28, 1994 By /s/ F.M. Kirby
-------------- ---------------------------
F.M. Kirby
Chairman of the Board
and Director
Date: March 28, 1994 By /s/ William K. Lavin
-------------- ---------------------------
William K. Lavin
Director
Date: March 28, 1994 By /s/ Peter R. Sismondo
-------------- ---------------------------
Peter R. Sismondo
Vice President, Controller
and Assistant Secretary
(principal accounting
officer)
Date: March 28, 1994 By /s/ John E. Tobin
-------------- ---------------------------
John E. Tobin
Director
Date: March 28, 1994 By /s/ James F. Will
-------------- ---------------------------
James F. Will
Director
Date: March 28, 1994 By /s/ Paul F. Woodberry
-------------- ---------------------------
Paul F. Woodberry
Director
Date: March 28, 1994 By /s/ S. Arnold Zimmerman
-------------- ---------------------------
S. Arnold Zimmerman
Director
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103
ALLEGHANY CORPORATION
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
I MARKETABLE SECURITIES
III CONDENSED FINANCIAL INFORMATION OF
REGISTRANT
V SUPPLEMENTARY INSURANCE INFORMATION
VI REINSURANCE
XIV SUPPLEMENTAL PROPERTY AND CASUALTY
INSURANCE INFORMATION
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES
All other schedules are omitted since they are not required, are not
applicable, or the required information is set forth in the financial
statements or notes thereto.
104
SCHEDULE I
ALLEGHANY CORPORATION AND SUBSIDIARIES
MARKETABLE SECURITIES
DECEMBER 31, 1993
(in thousands)
Face Value Market Carrying
or Shares Cost Value Value
-----------------------------------------------
U.S. GOVERNMENT AND GOVERNMENT AGENCY OBLIGATIONS:
Chicago Title and Trust Company $222,343 $219,323 $226,177 $226,177
Sacramento Savings Bank 555,868 559,343 560,403 559,808
Underwriters Re 173,413 187,249 187,210 187,210
-----------------------------------------------
Total U.S. Government and Government Agency Obligations 951,624 965,915 973,790 973,195
-----------------------------------------------
MUNICIPAL OBLIGATIONS:
Chicago Title and Trust Company 95,345 96,356 97,491 97,491
Underwriters Re
California 22,510 22,992 23,079 23,079
Florida 19,300 20,223 20,230 20,230
Illinois 14,750 15,668 15,722 15,722
Louisiana 11,805 13,071 13,028 13,028
Minnesota 10,500 11,783 11,742 11,742
New Jersey 12,000 12,947 12,898 12,898
New York 27,105 28,612 28,694 28,694
North Carolina 10,040 10,118 10,041 10,041
Texas 52,465 56,097 56,295 56,295
Virginia 11,280 11,703 11,838 11,838
Washington 24,165 25,036 25,179 25,179
Other 103,755 110,351 110,633 110,633
------------------------------------------------
Total Municipal Bonds 415,020 434,957 436,870 436,870
-----------------------------------------------
Total U.S. Government, Government Agency and Municipal Obligations $1,366,644 1,400,872 1,410,660 1,410,065
=============----------------------------------
EQUITY SECURITIES:
Chicago Title and Trust Company 5,551 50,908 50,680 50,680
Sacramento Savings Bank 947 5,209 5,799 5,799
Underwriters Re 1,669 18,577 19,552 19,552
Alleghany Corporation 2,702 38,384 68,585 68,585
-----------------------------------------------
Total Equity Securities 10,869 113,078 144,616 144,616
============-----------------------------------
CERTIFICATES OF DEPOSIT:
Chicago Title and Trust Company
Maturing January 1, 1994 through August 15, 1995 at 2.27% to 5.75% $2,243 $2,243 $2,243 $2,243
Heads and Threads division
Maturing January 3, 1994 at 2.75% 1,035 1,035 1,035 1,035
-----------------------------------------------
Total Certificates of Deposit $3,278 3,278 3,278 3,278
============-----------------------------------
COMMERCIAL PAPER:
Chicago Title and Trust Company $76,950 $76,950 $76,950 $76,950
Underwriters Re 63,602 63,602 63,602 63,602
-----------------------------------------------
Total Commercial Paper $140,552 140,552 140,552 140,552
============-----------------------------------
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL:
Sacramento Savings Bank $75,091 75,091 75,091 75,091
============-----------------------------------
BONDS, NOTES AND OTHER:
Chicago Title and Trust Company
Redeemable Preferred Stock 655,400 9,837 10,276 10,276
Foreign Bonds 334 340 330 330
Corporate Bonds
Albertsons, Inc. Medium Term Note 4,000 4,000 4,014 4,014
Bankamerica Corporation Medium Term Note 3,500 3,485 3,576 3,576
Beneficial Corporation Medium Term Note 4,000 4,014 4,088 4,088
Chrysler Financial Corporation 3,750 3,768 3,840 3,840
Daimler-Benz Auto Tr Serial 93-A CL 4,125 4,120 4,099 4,099
Dean Witter Discover Note 4,000 4,005 4,064 4,064
Dresser Industries Deben Note 4,500 4,500 4,597 4,597
GM Hughes Electronics 5,000 5,000 5,020 5,020
Phillip Morris Corporation 4,500 4,654 4,816 4,816
Sara Lee Corporation Medium Term Notes 4,750 4,835 4,718 4,718
Shell Oil Company Note 4,000 4,133 4,160 4,160
Transamerica Financial Group Subordinated Note 4,750 4,750 5,129 5,129
Union Pacific Railroad Equipment trust 4,500 4,645 4,711 4,711
U.S. Leasing Debentures 4,500 4,476 4,722 4,722
Other 118,240 120,969 124,689 124,689
Underwriters Re
Preferred Sinking Fund Stock 16,337 16,292 16,247 16,247
Corporate Bonds 19,258 113,148 111,930 111,930
Foreign Bonds 30,328 32,770 32,171 32,171
World Minerals Inc.
Other 6,562 6,562 6,562 6,562
Alleghany Corporation
Other 11,630 11,630 11,630 11,630
Alleghany Capital Corporation
Other 5,432 5,432 5,432 5,432
-----------------------------------------------
Total Bonds, Notes and Other $923,396 377,365 380,821 380,821
============-----------------------------------
TOTAL MARKETABLE SECURITIES $2,110,236 $2,155,018 $2,154,423
===================================
105
SCHEDULE III
ALLEGHANY CORPORATION
CONDENSED BALANCE SHEETS
DECEMBER 31, 1993 AND 1992
(in thousands)
1993 1992
--------- ---------
ASSETS
Investment securities
(Cost: 1993, $51,049; fair value: 1992, $128,351) $81,250 $107,438
Cash 2,456 2,154
Accounts and other receivables, less allowances 11,828 6,668
Property and equipment - at cost, less accumulated depreciation 2,523 2,629
Other assets 28,141 30,141
Investment in Sacramento Savings 200,338 189,645
Investment in other consolidated subsidiaries 741,509 609,894
----------- ------------
$1,068,045 $948,569
=========== ============
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Other liabilities $73,588 $73,578
Long-term debt 78,723 78,723
----------- ------------
Total liabilities 152,311 152,301
Commitments and contingent liabilities
Common stockholders' equity 915,734 796,268
----------- ------------
$1,068,045 $948,569
=========== ============
See accompanying Notes to Condensed Financial Statements.
106
SCHEDULE III
ALLEGHANY CORPORATION
CONDENSED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 1993
(in thousands)
1993 1992 1991
---------- ---------- ----------
Revenues:
Interest, dividend and other income $55,305 $55,526 $56,351
Net gain (loss) on investment transactions 13,376 4,864 (7,132)
---------- ---------- ----------
Total revenues 68,681 60,390 49,219
---------- ---------- ----------
Costs and Expenses:
Interest expense 6,401 6,922 13,592
General and administrative 64,888 59,143 57,865
---------- ---------- ----------
Total costs and expenses 71,289 66,065 71,457
---------- ---------- ----------
Operating income (loss) (2,608) (5,675) (22,238)
Equity in earnings of consolidated subsidiaries 121,735 125,308 58,638
---------- ---------- ----------
Earnings from continuing operations, before income taxes 119,127 119,633 36,400
Income taxes 21,575 55,941 14,675
---------- ---------- ----------
Earnings from continuing operations 97,552 63,692 21,725
Discontinued operations:
Earnings from discontinued operations, net of tax in 1990 0 0 11,180
Gain on sale of Shelby, net of tax 0 0 31,068
---------- ---------- ----------
Earnings before cumulative effect of a change in
accounting for income taxes 97,552 63,692 63,973
Cumulative effect on prior years of a change in
accounting for income taxes 0 3,760 0
Equity in cumulative effect on prior years of a change in
accounting for income taxes of consolidated subsidiaries 0 5,385 0
---------- ---------- ----------
Net earnings $97,552 $72,837 $63,973
========== ========== ==========
See accompanying Notes to Condensed Financial Statements.
107
SCHEDULE III
ALLEGHANY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1993
(in thousands)
1993 1992 1991
---------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Earnings from continuing operations $97,552 $63,692 $21,725
Adjustments to reconcile earnings from continuing operations
to cash provided by (used in) continuing operations:
Depreciation and amortization 731 696 666
Net (gain) loss on investment transactions (13,376) (4,864) 7,132
(Increase) decrease in accounts and other receivables,
less allowances (5,160) (522) 7,219
Decrease (increase) in other assets 1,573 637 (3,436)
Decrease (increase) in other liabilities (20,407) (16,905) 9,535
Equity in net earnings of consolidated subsidiaries (79,679) (77,249) (35,476)
---------------------------------
Net adjustments (116,318) (98,207) (14,360)
---------------------------------
Cash (used in) provided by continuing operations (18,766) (34,515) 7,365
Earnings from discontinued operations 0 0 11,180
---------------------------------
Net cash (used in) provided by operations (18,766) (34,515) 18,545
---------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (190,482) (358,945) (589,022)
Maturities of investments 160,670 288,410 513,644
Sales of investments 79,103 119,865 79,108
Purchases of property and equipment (243) (283) (88)
Disposition of property and equipment 45 39 4
Purchase of Celite Corporation 0 0 (144,386)
Purchase of Witco 0 0 (10,000)
Purchase of Underwriters Re (203,865) 0 0
Sale of Shelby 0 0 125,000
---------------------------------
Net cash (used in) provided by investing activities (154,772) 49,086 (150,740)
---------------------------------
Cash flows from financing activities:
Decrease in notes receivable 0 0 429
Principal payments on long-term debt 0 (16,000) (177,000)
Proceeds of long-term debt 0 0 125,000
Purchase of treasury shares (7,897) (1,240) 0
Common stock distributions 1,753 489 645
Capital contributions to consolidated subsidiaries (57,498) 0 (79,800)
Cash dividends from consolidated subsidiaries 237,482 2,237 138,159
---------------------------------
Net cash provided by (used in) financing activities 173,840 (14,514) 7,433
---------------------------------
Net increase in cash 302 57 (124,762)
Cash at beginning of year 2,154 2,097 1,859
---------------------------------
CASH AT END OF YEAR $2,456 $2,154 ($122,903)
=================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $6,401 $6,868 $13,480
Income taxes $46,236 $33,949 $3,616
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
In 1993, Alleghany made a noncash capital contribution of $16,315 to its
consolidated subsidiaries by contributing a partnership interest with a cost
basis of $2,525 and investment securities with a cost of $13,790.
In 1991, Alleghany received a noncash dividend of $20,433 from its
consolidated subsidiaries by receiving preferred stock with a cost of $17,000
and investment securities with a cost of $3,433.
See accompanying Notes to Condensed Financial Statements.
108
SCHEDULE III
ALLEGHANY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands)
1. INVESTMENT IN CONSOLIDATED SUBSIDIARIES. Reference is made to Notes 2 and
3 of the Notes to Consolidated Financial Statements incorporated herein by
reference for information regarding the acquisitions of Underwriters Re, Ticor
Title and World Minerals and the sale of The Shelby Insurance Company.
2. LONG-TERM DEBT. Reference is made to Note 9 of the Notes to Consolidated
Financial Statements incorporated herein by reference for information regarding
the significant provisions of long-term debt of Alleghany. Included in
long-term debt in the accompanying condensed balance sheets is $19,123 in 1993
and 1992 of intercompany notes payable due to Alleghany Funding.
3. INCOME TAXES. Reference is made to Note 10 of the Notes to Consolidated
Financial Statements incorporated herein by reference regarding the Company's
adoption of FASB Statement No. 109.
4. COMMITMENTS AND CONTINGENCIES. Reference is made to Note 14 of the Notes
to Consolidated Financial Statements incorporated herein by reference.
5. STOCKHOLDERS' EQUITY. Reference is made to Note 11 of the Notes to
Consolidated Financial Statements incorporated herein by reference with respect
to stockholders' equity and surplus available for dividend payments to
Alleghany from its subsidiaries.
109
SCHEDULE V
ALLEGHANY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
AT DECEMBER 31
-----------------------------------------------------------------
FUTURE
POLICY OTHER
BENEFITS, POLICY
DEFERRED LOSSES, CLAIMS
POLICY CLAIMS AND
ACQUISITION AND LOSS UNEARNED BENEFITS
YEAR SEGMENT COST EXPENSES PREMIUMS PAYABLE
- ---- ------- -----------------------------------------------------------------
1993 Title $0 $523,123 $0 $0
=================================================================
Property
and casualty
reinsurance *** $10,363 $861,204 $49,078 $0
=================================================================
1992 Title $0 $512,452 $0 $0
=================================================================
1991 ** Title $0 $503,136 $0 $0
=================================================================
FOR THE YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------------
BENEFITS,
CLAIMS, AMORTIZATION
LOSSES OF DEFERRED
NET AND POLICY OTHER
PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS
YEAR SEGMENT REVENUE * INCOME * EXPENSES * COSTS EXPENSES * WRITTEN
----------------------------------------------------------------------------------------------------
1993 Title $1,236,165 $37,736 $121,864 $0 $1,177,507 $0
====================================================================================================
Property
and casualty
reinsurance *** $32,703 $10,390 $25,131 $1,194 $5,309 $36,172
====================================================================================================
1992 Title $1,125,906 $41,022 $109,235 $0 $1,075,259 $0
====================================================================================================
1991 ** Title $874,481 $41,060 $84,338 $0 $875,997 $0
====================================================================================================
* Does not include Alleghany Corporation or Chicago Title and Trust
Company's trust and escrow operations.
** On December 31, 1991, the Company sold The Shelby Insurance Company
("Shelby"). Accordingly, the operations of Shelby and its net assets have been
designated as discontinued operations and amounts related to Shelby are not
reflected in this schedule.
*** On October 7, 1993, the Company acquired URC Holdings Corp., whose
principal subsidiary is Underwriters Reinsurance Company. The acquisition for
accounting purposes was effective as of October 1, 1993. Accordingly, results
of operations are from October 1, 1993.
110
SCHEDULE VI
ALLEGHANY CORPORATION AND SUBSIDIARIES
REINSURANCE
THREE YEARS ENDED DECEMBER 31, 1993
(in thousands)
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
---------- ---------- ----------- --------- ------------
1993 Title premiums $1,236,165 $5,547 $1,865 $1,232,483 0.15%
========== ========== =========== ========== ============
Property and casualty $4,218 $9,994 $38,479 $32,703 117.66%
reinsurance premiums ** ========== ========== =========== ========== ============
1992 Title premiums $1,125,906 $7,079 $2,116 $1,120,943 0.19%
========== ========== =========== ========== ============
1991 * Title premiums $874,481 $4,792 $3,748 $873,437 0.4%
========== ========== =========== ========== ============
* On December 31, 1991, the Company sold The Shelby Insurance Company
("Shelby"). Accordingly, the operations of Shelby and its net assets have been
designated as discontinued operations and amounts related to Shelby are not
reflected in this schedule.
** On October 7, 1993, the Company acquired URC Holdings Corp., whose
principal subsidiary is Underwriters Reinsurance Company. The acquisition for
accounting purposes was effective as of October 1, 1993. Accordingly, results
of operations are from October 1, 1993.
111
SCHEDULE XIV
ALLEGHANY CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL PROPERTY AND CASUALTY INSURANCE INFORMATION
(in thousands)
DISCOUNT,
IF ANY,
RESERVES DEDUCTED
FOR IN RESERVES
UNPAID FOR UNPAID
DEFERRED CLAIMS CLAIMS
AFFILIATION POLICY AND CLAIM AND CLAIM NET
WITH ACQUISITION ADJUSTMENT ADJUSTMENT UNEARNED EARNED INVESTMENT
REGISTRANT COST EXPENSES EXPENSES PREMIUMS PREMIUMS INCOME
- ------------- ------------------------------------------------------------------------------------------------
1993
Consolidated
property-
casualty
entities * $10,363 $861,204 $0 $49,078 $32,703 $10,390
================================================================================================
CLAIMS AND CLAIM
ADJUSTMENT EXPENSES
INCURRED RELATED TO AMORTIZATION
------------------- OF DEFERRED PAID CLAIMS
AFFILIATION (1) (2) POLICY AND CLAIM
WITH CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT YEAR YEAR COSTS EXPENSES WRITTEN
- ------------- --------------------------------------------------------------------------
1993
Consolidated
property-
casualty
entities * $25,131 $0 $1,194 $27,876 $36,172
==========================================================================
* On October 7, 1993, the Company acquired URC Holdings Corp., whose
principal subsidiary is Underwriters Reinsurance Company. The acquisition for
accounting purposes was effective as of October 1, 1993. Accordingly, results
of operations are from October 1, 1993.
112
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ALLEGHANY CORPORATION:
Under date of February 23, 1994, we reported on the consolidated balance sheets
of Alleghany Corporation and subsidiaries as of December 31, 1993 and 1992, and
the related consolidated statements of earnings, changes in common
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1993 as contained in the 1993 annual report to
stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10- K for the year
1993. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedules as listed in the accompanying index. These financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statement schedules
based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company
adopted the provisions of Financial Accounting Standards Board's Statement of
Financial Accounting Standards No. 115 "Accounting for Certain Investments in
Debt and Equity Securities" and No. 109 "Accounting for Income Taxes" at
December 31, 1993 and in 1992 respectively.
/s/ KPMG Peat Marwick
KPMG PEAT MARWICK
New York, New York
February 23, 1994
113
ALLEGHANY CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
Exhibit Number Description
*10.01 Description of Alleghany Management Incentive Plan.
*10.02(a) Agreement dated as of December 22, 1993 between
Alleghany and David B. Cuming. Agreements dated as
of December 22, 1993 between Alleghany and each of
F.M. Kirby, John J. Burns, Jr., Richard P. Toft,
Theodore E. Somerville, John E. Conway and Peter R.
Sismondo are omitted pursuant to Instruction 2 of
Item 601 of Regulation S-K.
*10.02(b) Agreement dated as of December 15, 1993 between CT&T
and Richard P. Toft.
*10.11(b) Second Amendment to Employment Agreement dated as of
January 1, 1994, among CT&T, Alleghany and Richard
P. Toft.
*10.15 CT&T Executive Performance Unit Incentive Plan of
1992, adopted and effective as of January 1, 1992,
as amended and restated effective January 1, 1993.
- ---------------------
* Compensatory plan or arrangement.
114
Exhibit Number Description
*10.16 Description of CT&T Quality Business Management
Incentive Program for the Presidents of CT&T and
Chicago Title Insurance Company, effective as of
January 1, 1989, as amended as of January 1, 1992.
*10.19(b) Description of compensatory arrangement between
Alleghany and Paul F. Woodberry.
10.28(d) Amended and Restated Credit Agreement dated as of
December 30, 1993 among CT&T, certain commercial
lending institutions and Continental Bank, N.A. as
agent.
13 Pages 2 and 3, pages 6 through 16, and pages 21
through 45 of the Annual Report to Stockholders of
Alleghany for the year 1993, dated March 15, 1994.
21 List of subsidiaries of Alleghany.
23 Consent of KPMG Peat Marwick, independent certified
public accountants, to the incorporation by
reference of their reports relating to the
financial statements and related schedules of
Alleghany and subsidiaries in the prospectus
contained in the Registration Statement on Form
S-8 of Alleghany (Registration No. 27598).
28 Information from reports furnished to state
regulatory authorities by Underwriters Reinsurance
Company and Commercial Underwriters Insurance
Company.
- -----------------------
* Compensatory plan or arrangement.