Back to GetFilings.com
1
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, 1997 File Number 1-9371
ALLEGHANY CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 51-0283071
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
375 Park Avenue, New York, New York 10152
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 212/752-1356
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
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
-- --
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 2, 1998, 7,373,739 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 $2,008,827,590.
2
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 1997
Proxy Statement relating to Annual Meeting III
of Stockholders of Alleghany Corporation
to be held on April 24, 1998
3
ALLEGHANY CORPORATION
Annual Report on Form 10-K
for the year ended December 31, 1997
Table of Contents
Description Page
----------- ----
PART I
Item 1. Business 5
Item 2. Properties 53
Item 3. Legal Proceedings 61
Item 4. Submission of Matters to a Vote of Security 62
Holders
Supplemental Item Executive Officers of Registrant 62
PART II
Item 5. Market for Registrant's Common Equity and 63
Related Stockholder Matters
Item 6. Selected Financial Data 63
Item 7. Management's Discussion and Analysis of 63
Financial Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 63
Item 9. Changes in and Disagreements With 63
Accountants on Accounting and Financial
Disclosure
-3-
4
Description Page
----------- ----
PART III
Item 10. Directors and Executive Officers of Registrant 64
Item 11. Executive Compensation 64
Item 12. Security Ownership of Certain Beneficial 64
Owners and Management
Item 13. Certain Relationships and Related 64
Transactions
PART IV
Item 14. Exhibits, Financial Statement Schedules and 65
Reports on Form 8-K
Signatures 78
Index to Financial Statement Schedules
FINANCIAL STATEMENT SCHEDULES
INDEPENDENT AUDITORS' REPORT ON
FINANCIAL STATEMENT SCHEDULES
Index to Exhibits
EXHIBITS
-4-
5
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 375 Park Avenue,
New York, New York 10152 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 other real
estate-related services business, and through CT&T's subsidiary, Alleghany Asset
Management, Inc. ("Alleghany Asset Management") and its subsidiaries, in the
financial services business. Alleghany is also engaged, through its subsidiary
Underwriters Re Group, Inc. ("Underwriters Re Group") and its subsidiaries, in
the property and casualty reinsurance and insurance businesses. In addition,
Alleghany is engaged, through its subsidiaries World Minerals Inc. ("World
Minerals"), Celite Corporation ("Celite"), Harborlite Corporation ("Harborlite")
and Europerlite Acquisition Corporation ("Europerlite") and their subsidiaries,
in the industrial minerals business. Alleghany conducts a steel fastener
importing and distribution business through its Heads and Threads division.
On December 17, 1997, Alleghany announced its intention to establish
the title insurance and real estate-related services businesses conducted by
CT&T as an independent, publicly traded company. This is to be accomplished by a
spin-off to Alleghany stockholders of shares of a newly formed holding company
for CT&T to be called Chicago Title Corporation. The spin-off, which is expected
to occur in the second quarter of 1998, is subject to, among other conditions,
the receipt of an IRS ruling to the effect that the spin-off will not be
taxable. The common stock of the Chicago Title Corporation is expected to be
listed on the New York Stock Exchange. The asset management business conducted
through Alleghany Asset Management, currently a subsidiary of CT&T, will not be
part of the distribution and will remain with Alleghany.
Until October 31, 1994, Alleghany was also engaged, through its
subsidiary Sacramento Savings Bank ("Sacramento Savings") in retail banking. On
that date, Alleghany completed the sale of Sacramento Savings and an ancillary
company to First Interstate Bank of California for a cash purchase price of $331
million. As part of the transaction, Alleghany, through its wholly owned
subsidiary Alleghany Properties, Inc.
-5-
6
("API"), purchased real estate and real estate-related assets of Sacramento
Savings for a purchase price of about $116 million.
During 1994 and early 1995, with temporary borrowings under Alleghany's
revolving credit agreement, the proceeds from the sale of Sacramento Savings and
cash on hand, Alleghany and its subsidiaries acquired a substantial number of
shares of common stock of Santa Fe Pacific Corporation ("Santa Fe"). On
September 22, 1995, Santa Fe and Burlington Northern, Inc. merged under a new
holding company named Burlington Northern Santa Fe Corporation ("BNSF"). As a
result of the merger, the shares of Santa Fe beneficially owned by Alleghany
were converted into about 7.43 million shares of BNSF, or about 4.8 percent of
BNSF's currently outstanding common stock. BNSF is engaged primarily in rail
transportation. BNSF owns one of the largest railroad networks in North America,
providing transportation services to shippers throughout the western two-thirds
of the United States as well as to Canada and Mexico.
In 1997, 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
and investments.
Reference is made to Items 7 and 8 of this Report for further
information about the business of Alleghany in 1997. 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. In light of the proposed spin-off of CT&T, Alleghany is required to
classify the operation to be spun-off as a "discontinued operation."
Accordingly, the financial statements incorporated by reference in Item 8 of
this Report report the results of CT&T (excluding Alleghany Asset Management) as
a single net number. More detailed information on CT&T's results is included in
Note 2 to the Consolidated Financial Statements of Alleghany, incorporated by
reference in Item 8 of this Report.
TITLE INSURANCE AND REAL ESTATE-RELATED SERVICES BUSINESS
CT&T provides, through its subsidiaries, title insurance and real
estate-related services which facilitate residential and commercial real estate
transactions. CT&T, headquartered in Chicago, was organized as an Illinois
corporation in 1912 and was acquired, along with CTI, by Alleghany in June 1985.
CTI, a Missouri corporation incorporated in 1961, succeeded to businesses
conducted by predecessor corporations since 1847, and is headquartered in
Chicago. Security Union (acquired in 1987) and Ticor Title (acquired in 1991)
were incorporated in California in 1962 and 1965, respectively. However, both
were a part of business organizations that had succeeded to
-6-
7
businesses conducted since around the turn of the century. Security Union and
Ticor Title are headquartered in Pasadena, California.
CT&T and its title subsidiaries, CTI, Security Union and Ticor Title,
constitute one of the largest title insurance organizations in the nation, based
upon revenues as disclosed in statutory filings. Confirming the organization's
financial strength, each of the principal title insurance subsidiaries -- CTI,
Security Union and Ticor Title -- carries a claims-paying ability rating of "A"
from Standard & Poor's Corporation and from Duff & Phelps Credit Rating Co. In
addition, Moody's Investors Service has assigned an insurance financial strength
rating of "A2" to CTI, "A3" to Ticor Title and "Baa1" to Security Union. CT&T
has approximately 300 full-service offices and more than 3,800 policy-issuing
agents in 49 states, Puerto Rico, the Virgin Islands, Guam, Canada and Mexico.
In 1995, CT&T acquired Chicago Title Flood Services Inc. (formerly
National Flood Information Services, Inc.), a Delaware corporation based in
Arlington, Texas and Chicago Title Credit Services Inc. (formerly Credit Data
Reporting Services, Inc.), a New York corporation headquartered in Kingston, New
York. Chicago Title Flood Services Inc. has provided flood certification
services since 1987. Chicago Title Credit Services Inc. has been in the credit
reporting business since 1941. In July 1996, CT&T acquired Chicago Title--Market
Intelligence, Inc. (formerly Market Intelligence, Inc.), a Massachusetts
corporation based in Hopkinton, Massachusetts. Chicago Title--Market
Intelligence, Inc. has been in the property evaluation business since 1989. In
1998, CT&T acquired Chicago Title Field Services Inc. (formerly Universal
Mortgage Services, Inc.) and Consolidated Reconveyance Company. Based in
Cleveland, Ohio, Chicago Title Field Services Inc. has provided field inspection
services since 1968. Based in Calabasas, California, Consolidated Reconveyance
Company has been furnishing foreclosure and reconveyance services since 1979.
Title Insurance
CT&T's title insurance subsidiaries insure 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, including the cost
of legal defense, as a result of 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 records relevant to the
property and its owners, a process by which it identifies 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 a
CT&T title insurance subsidiary reviews various records providing a history of
transfers of interests
-7-
8
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 title insurance subsidiaries are also used as a reference, allowing
complete title searches without resorting to governmental records. The title
plants consist of compilations of land title and deed information copied from
public records dating back many years on properties in various geographic
locations. These title plants are updated daily.
Closing, escrow and disbursement services are key elements in many real
estate transactions. CT&T's closing and escrow officers are responsible for
coordinating the activities of buyers, sellers, attorneys, lenders and real
estate agents. Responsibilities include managing escrow accounts; prorating and
adjusting insurance, taxes and rents; preparation, review and recording of
documents; ensuring that liens are properly cleared; disbursement of funds; and
transmittal of final documents.
In 1997, approximately 62 percent of CT&T's title revenues were
generated by residential real estate activity, consisting of resales (40
percent), refinancings (14 percent) and new housing (8 percent). Commercial and
industrial real estate activity accounted for the remaining 38 percent of 1997
revenues, consisting of initial sales and resales (31 percent) and refinancings
(7 percent).
Underwriting Operations
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 principally 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 types of insurers.
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, or, in the
case of smaller regional title insurers, access to title plants owned by others
or employment of abstractors to search public records on behalf of such regional
title insurers.
CT&T's title operations facilitate rapid communication between field
underwriters and the principal office underwriting staff for dealing with
difficult, large or unusual underwriting risks. Authority levels for field
underwriters are set based on their skills and
-8-
9
experience level. The most experienced field underwriters are required to be
involved in the decision to insure difficult, large or unusual risks. Risks with
very high potential liability require approval from higher levels of the title
insurer's management, which may include, depending upon the particular risk, the
Chief Underwriting Counsel, the General Counsel or senior executive officers of
the title insurer.
Geographic concentration of risk is less significant in underwriting
title insurance coverage than in casualty insurance lines. The title insurance
underwriting process reduces the number of perils which are covered to a minimum
through reliance on state public records acts. However, maintaining geographic
diversity spreads the risk of fraud which may result from regional economic
recession, and of claims which are not readily determinable from public records,
such as aboriginal title claims of Native Americans.
CTI, Ticor Title, and Security Union each have generally restricted the
size of any one risk of loss that they will retain to $70 million, $50 million
and $30 million, respectively. The title insurance subsidiaries of CT&T 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
excess loss 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.
Losses and Loss Adjustment Expenses
The largest single liability of CT&T is its reserve for title insurance
claims and associated legal defense costs. Historical experience with respect to
payments for claims and external legal defense costs made under title insurance
policies indicates that, for policies issued in a given year, approximately
two-thirds of the total projected payments with respect to such policies are
made within five years of the issuance of such policies. The reserve also covers
losses arising from the escrow, closing and disbursement functions due to fraud
or operational error, and includes the costs of external legal defense.
Title losses are reported to CT&T directly by its insured parties. When
a claim is reported, CT&T establishes a "case" reserve, based upon the best
estimate of the total amount necessary to settle the claim and to provide for
allocated loss adjustment expenses, including legal defense costs ("LAE"). These
reserves are periodically adjusted by CT&T based on its evaluation of subsequent
reports regarding the reported claim.
-9-
10
In addition to "case" reserves, CT&T also maintains reserves for losses
that are incurred but not yet reported ("IBNR reserves"). These reserves are
particularly significant in long tail lines of insurance, such as title
insurance, for which the claim and the circumstances causing the claim may be
separated by a long period of time. Unlike most other types of insurance, the
event giving rise to a possible future claim under a title insurance policy, the
defect in the title, occurred before issuance of the policy but may not be
discovered, if ever, until a future date.
CT&T establishes IBNR reserves by using actuarial principles and
procedures commonly used in the title insurance industry to estimate the
ultimate liability for losses and LAE. The actuarial procedures use historic
claims reporting patterns to predict likely future reporting of claims.
Projections are analyzed in the context of changing economic conditions,
including implicitly recognizing the impact of inflation, business mix and other
contingent variables, and the projections and related reserves are modified when
appropriate.
IBNR reserves are also established for very large or unusual claims
which might fall outside the normal distribution of expected claims experience.
Reserves for these claims are based on an analysis of the experience of both
CT&T and the title insurance industry generally.
CT&T's reserves are reviewed regularly by management and are certified
by an independent actuary on an annual basis. CT&T does not discount its
reserves for anticipated investment income. Initial reserve provisions are
derived directly from premium revenues, based upon anticipated loss ratios.
There are inherent uncertainties in estimating reserves primarily due to the
long-term nature of most title insurance business. Actual losses and LAE may
deviate, perhaps substantially, from reserves on CT&T's financial statements,
which could have a material adverse effect on CT&T's financial condition and
results of operations. Based on current information, CT&T believes reserves for
losses and LAE at December 31, 1997 are adequate.
Flood Certifications
Federal law requires lenders to determine whether a parcel of real
property pledged to secure a loan is in a flood hazard zone and, since 1995, to
monitor the flood zone status of a mortgaged property for the life of the loan.
Property found to be in a flood hazard zone is required to be covered by flood
insurance before it can be used to secure a loan. Chicago Title Flood Services
Inc. has the ability to check the flood zone status of any property located in
the United States and of many properties on an automated basis and is neither an
issuer nor an underwriter of flood insurance policies.
-10-
11
Credit Reporting
Mortgage credit reporting is a specialized task which usually requires
the obtaining and merging of credit information from at least two of the three
nationally recognized repositories of such information. Chicago Title Credit
Services Inc. has developed a state-of-the-art proprietary system which can
receive an order; obtain, edit and merge credit information from each of the
three national repositories; and report back to the lending institution in a
matter of seconds. Chicago Title Credit Services Inc. can also perform the
investigative work required to verify items appearing on a borrower's mortgage
loan application (e.g., employment, financial assets and disputed credit items).
In addition to mortgage credit reporting, Chicago Title Credit Services Inc.
also serves as a traditional credit bureau in a limited number of locations and
provides customers with retail and commercial collection services.
Property Valuation Services
Chicago Title--Market Intelligence, Inc. provides real estate property
evaluation services and alternatives to appraisals nationwide using database
research supplemented by a network of 15,000 real estate agents that verify
computer reports through physical property inspections. Chicago Title--Market
Intelligence, Inc. also maintains a network of state-licensed contract
appraisers offering a full array of property appraisal products for residential
mortgage loans throughout the United States. Property appraisals for commercial
properties are also available on a limited basis.
Field Inspection Services
Chicago Title Field Services Inc. performs on-site property inspections
and personal interviews through a nationwide network of independent field
agents, serving the first mortgage, residential loan and default servicing
markets.
Foreclosure and Reconveyance Services
Consolidated Reconveyance Company furnishes foreclosure and
reconveyance services for institutional lenders. It recently developed a
national reconveyance software package that improves the efficiency of
processing transactions and that will be available through CT&T nationwide.
Marketing
CT&T's title insurance subsidiaries issue title insurance policies
directly through its branch office operations as well as through policy-issuing
independent agents. CT&T's title insurance subsidiaries also issue insurance
policies where the title search
-11-
12
and examination process is performed by approved attorneys working as
independent contractors.
CT&T's primary customers are the major participants in the real estate
markets: attorneys, builders, commercial banks, thrift institutions, mortgage
banks, life insurance companies, pension funds and real estate brokers. CT&T's
sources of revenue are not concentrated with one or a few customers. Reflecting
the relatively fragmented nature of the real estate industry as a whole,
decision-making on the part of these customer groups has traditionally been
locally centered. Recently, a trend has emerged for customer groups to
consolidate into larger entities encompassing broader geographic areas. The
larger, consolidated customers are more centralized in their decision-making and
may use different criteria for making buying decisions than that employed by the
more traditional local businesses.
Recognizing this changing customer landscape, CT&T has organized its
distribution network to serve three distinct customer sectors:
Core Local--The largest of these sectors is the core local operation
which requires flexibility and responsiveness to local market needs.
Institutional Residential Lenders--This sector represents the emerging
large centralized customer that needs high volume, competitive cost
products. Key elements are a relentless cost focus, seamless
integration of all CT&T products, standardization and consistency, and
technology linkages.
Commercial and Industrial Businesses--This sector focuses on the
facilitation of large commercial transactions, which require service on
a nationwide basis. Success is dependent upon integrated relationship
management on a national basis, technical excellence, customization to
customer needs and seamless national service.
In addition, CT&T is developing an "electronic spine" or customer
interface to allow customers to order and receive electronically any of CT&T's
products from any location. In 1997, CT&T also created the CastleLink (SM)
division to market CT&T's title and real estate-related products and services,
allowing customers to order title, credit, flood, property valuation, escrow and
closing services through one single source.
Business Conditions; Seasonality
The title insurance industry is highly dependent upon the volume of
real estate transactions, which is highly sensitive to interest rate levels and
general economic conditions. Because these factors can be very volatile, revenue
levels for the title industry also can be very volatile. As business volume for
the real estate-related businesses are
-12-
13
correlated to mortgage loan origination volumes, revenue levels for these
businesses tend to be impacted by economic factors in a fashion similar to the
title industry.
High short-term interest rates reduced the volume of real estate
transactions in the first half of 1995. Lower interest rates in the second half
of 1995 prompted an increase in refinancing and commercial transactions. The
refinance volume remained strong in the first quarter of 1996 but diminished as
interest rates leveled off. Interest rates remained relatively stable for the
remainder of 1996 resulting in an increase in the volume of real estate
construction and resale activity. 1997, particularly the second half of the
year, was marked by low inflation, unemployment rates and interest rates in the
United States resulting in exceptional growth in the commercial and industrial
segment and a resurgence in the second half of 1997 in residential resale and
refinancing transactions.
The business of CT&T's title insurance subsidiaries is seasonal, as
real estate activity is seasonal. The fourth quarter is typically the strongest
due to the desire of commercial entities to complete transactions by year-end.
The first quarter is typically the weakest quarter as the volume of home sales
are generally at their low point in the winter.
CT&T generally recognizes revenues at the time of the closing of the
real estate transaction with respect to which a title insurance policy is
issued. As a result, 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.
Additionally, agency revenues are recognized by CT&T when reported by the agent
and typically lag two or three months from the time realized by the agent.
Competition
The title insurance industry is competitive throughout the United
States, with large title insurance firms such as the title insurance
subsidiaries of CT&T competing on a national basis, while smaller firms have
significant market shares on a regional basis. Based on 1996 revenues, CTI,
Security Union, Ticor Title, First American Title Insurance Company, Reliance
Group Holdings, Inc., Stewart Title Insurance Co., Fidelity National Title
Insurance Co., Lawyers Title Insurance Corporation and Old Republic Title
Insurance Group, Inc. together accounted for approximately 89 percent of all
title insurance revenues. CT&T's title insurance subsidiaries also compete with
abstractors, attorneys issuing opinions and, in some areas, state land
registration systems.
CT&T's flood certification, credit reporting, property valuation, field
inspection and foreclosure and reconveyance services businesses face significant
competition from
-13-
14
other similar real estate service providers. Mortgage lenders may choose to
produce these services internally rather than purchasing them from outside
vendors.
The basis of competition varies by the service provided by CT&T but
includes price, service, technical expertise, technological capabilities, and
the ability to integrate a wide range of products. In addition, the financial
strength of the insurer has become an increasingly important factor in title
insurance purchase decisions, particularly in multi- site transactions and
investment decisions regarding real estate-related investment vehicles such as
real estate investment trusts and real estate mortgage investment conduits.
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. 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 statutory 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. In addition, market
behavior of all entities involved in real estate transactions is governed by the
Real Estate Settlement Practices Act and related regulations.
As insurance holding companies, Alleghany and CT&T are also subject to
the insurance regulations of Missouri, California and Oregon. The acquisition of
CTI, Security Union and Ticor Title and their respective title insurance
subsidiaries by Alleghany and/or CT&T was subject to prior approval from the
insurance regulatory authorities in the states in which such title insurance
companies are incorporated. Alleghany, CT&T and their other subsidiaries,
however, are generally not subject to restrictions on their business activities
due to their affiliation with CT&T's title insurance subsidiaries.
CT&T, in its capacity as a non-depository trust company, is regulated
by the State of Illinois Office of Banks and Real Estate. Regulation covers such
matters as the fiduciary's management capabilities, the investment of funds held
for its own account, 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.
-14-
15
While Chicago Title Flood Services Inc., Chicago Title Credit Services
Inc., Chicago Title--Market Intelligence, Inc., Chicago Title Field Services
Inc. and Consolidated Reconveyance Company are not subject to direct regulatory
supervision, federal and state laws governing real estate settlement practices,
credit reporting and flood zone determinations significantly impact their
businesses.
Investment Operations
Investments held by CT&T or any of its title insurance subsidiaries
must comply with the insurance laws of the state of incorporation of the company
holding the investment; relevant states are Illinois, Missouri, California, and
Oregon, as applicable. 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.
CT&T's current investment policy is to minimize the cyclical volatility
of the portfolio to maintain stability of principal, consistency of cash flow
and liquidity, and earn a favorable total return.
The following table reflects investment results for CT&T (excluding
Alleghany Asset Management) for the years ended December 31, 1997, 1996 and 1995
(dollars in thousands):
Investment Results
Net
Pre-Tax
Pre-Tax After-Tax Realized After
Average Investment Investment Gains Effective Tax
Period Investments (1) Income (2) Income (3) (Losses) Yield (4) Yield (5)
- ---------------------------------------------------------------------------------------------------------------------------------
Year Ended $947,210 $67,897 $48,316 $1,469 7.2% 5.1%
December 31, 1997
Year Ended $820,230 $60,787 $42,997 $1,436 7.4% 5.2%
December 31, 1996
Year Ended $829,521 $57,245 $40,601 $3,697 6.9% 4.9%
December 31, 1995
(1) Average of amortized cost of fixed maturities plus cost of equity
securities at beginning and end of period, excluding operating cash.
(2) Excludes realized gains or losses from sale of investments.
(3) Pre-tax investment income less appropriate income taxes.
(4) Pre-tax investment income for the period divided by average investments
for the same period.
(5) After-tax investment income for the period divided by average
investments for the same period.
-15-
16
The following table summarizes the investments of CT&T (excluding
Alleghany Asset Management), excluding cash, as of December 31, 1997, with all
investments carried at fair value in its financial statements prepared in
accordance with generally accepted accounting principles (dollars in thousands):
Investments
Amortized
Cost or Cost Fair Value
--------------------------- ---------------------------
Amount Percentage Amount Percentage
Short-term investments ............. $180,710 17.22% $180,710 16.94%
Corporate bonds..................... 120,045 11.44% 122,037 11.44%
United States government and
government agency bonds ......... 243,173 23.17% 248,262 23.28%
Mortgage-and asset-backed
securities....................... 186,276 17.74% 189,508 17.77%
Municipal bonds..................... 267,914 25.52% 272,182 25.52%
Foreign bonds....................... 2,714 .26% 2,777 .26%
Redeemable preferred stock 15,613 1.49% 16,613 1.56%
Equity securities................... 33,233 3.16% 34,489 3.23%
Total............................ $1,049,678 100.00% $1,066,578 100.00%
========== ====== ========== ======
-16-
17
The following table indicates the composition of the long-term fixed
maturity portfolio, including preferred stock, as of December 31, 1997 by the
rating system of the National Association of Insurance Commissioners ("NAIC")
(dollars in thousands):
Long-Term Fixed Maturity Portfolio by NAIC Rating
Fair Value Percentage
---------- ----------
NAIC 1............................... $784,937 92.20%
NAIC 2............................... 42,724 5.07%
NAIC 3............................... 4,570 .54%
NAIC 4............................... 2,534 .30%
NAIC L & P3 (Preferred
stock-redeemable)............... 16,613 1.95%
------ -----
Total........................... $851,378 100.00%
======== =======
-17-
18
The following table indicates the composition of the long-term fixed
maturity portfolio, including preferred stock, by years until contractual
maturity as of December 31, 1997 (dollars in thousands). Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Long-Term Fixed Maturity Portfolio by Years Until Maturity
Fair Value Percentage
---------- ----------
One year or less*...................... $ 98,878 11.61%
Over one through five years 399,362 46.91%
Over five through ten years 57,022 6.70%
Over ten years......................... 106,608 12.52%
Mortgage- and asset-backed 189,508 22.26%
------- ------
Total........................... $851,378 100.0%
======== ======
* Included in this category are $16,613 of preferred stock-redeemable.
The principal tangible asset of CT&T and its subsidiaries is the
investment portfolio. The entire investment portfolio is classified as available
for sale. CT&T has a conservative investment philosophy with respect to both
asset quality and maturity distribution. CT&T maintains a short-term investment
portfolio ranging from approximately $60 million to $250 million, consisting of
top rated commercial paper (A-1/P-1), highest rated bank certificates of
deposit, and institutional money market funds. The average maturity period of
securities in the short-term portfolio is typically less than 30 days. CT&T's
long-term portfolio consists of top rated tax-exempt bonds, United States
Treasury securities, corporate bonds of United States issuers, mortgage backed
securities, and a limited amount of publicly traded common stocks. Average
quality of the long-term portfolio is maintained at a Moody's rating of "Aa3" or
higher, with over 98 percent of all securities rated investment grade by Moody's
and less than 1 percent in derivative instruments as of 1997 year-end. The
duration of the short term and fixed income securities in CT&T's portfolio is
approximately 2.2 years, and is managed within a duration range of 1.9 to 3.1
years. Duration measures a portfolio's sensitivity to change in interest rates;
a change within a range of plus or minus 1 percent in interest rates would be
expected to result in an inverse change of approximately 2.2 percent in the
value of CT&T's portfolio. This relatively short portfolio maturity structure is
maintained so that investment income responds to changes in the level of
interest rates, offsetting to some degree the cyclicality of title insurance
operations.
-18-
19
CT&T does not specifically match particular assets to related
liabilities, but instead holds the investment portfolio to a shorter maturity
than liabilities. However, CT&T regularly re-examines its portfolio strategies
and periodically modifies asset allocation and bond portfolio maturity, based on
the market outlook, interest rates and/or title insurance operating conditions.
Employees
At December 31, 1997, CT&T and its subsidiaries, exclusive of Alleghany
Asset Management, had approximately 8,100 employees, including full-time and
part-time employees.
FINANCIAL SERVICES BUSINESS
Alleghany Asset Management, conducts a financial services business
through its subsidiaries, The Chicago Trust Company ("Chicago Trust"), a
Chicago-based independent investment firm with trust powers, Montag & Caldwell,
Inc. ("Montag & Caldwell"), an Atlanta-based investment counseling firm, and
Chicago Deferred Exchange Corporation ("CDEC"), which facilitates certain
tax-deferred property exchanges. CT&T's financial services group was
restructured in 1995 under Alleghany Asset Management, a Delaware corporation
and a newly-formed subsidiary of CT&T. The financial services businesses
conducted directly by CT&T were transferred to Chicago Trust. Also transferred
to Alleghany Asset Management were Montag & Caldwell, which was acquired in July
1994, and CDEC. In 1996, Chicago Trust acquired Security Trust Company
("Security Trust"), a California trust company, from a subsidiary of CT&T.
As described above, Alleghany Asset Management and its subsidiaries
will not be part of the spin-off of CT&T and will remain with Alleghany.
Alleghany Asset Management provides distribution and marketing services
to its investment managers through the 401(k) services offered by Chicago Trust
and the Alleghany Funds (formerly CT&T Funds), a mutual funds family offering
eight no-load mutual funds. Chicago Trust's full service 401(k) administration
group provides trustee, plan design, investment management and other
administrative services to companies primarily in the Midwest and South. Such
services are marketed through internal sales forces in Chicago and Atlanta as
well as consultants and brokerage sources. The Alleghany Funds had approximately
$1.9 billion in assets under management at December 31, 1997. The mutual funds
are marketed primarily through registered investment advisers, broker-dealers
and direct sales to institutional clients.
-19-
20
Montag & Caldwell
Founded in 1945, Montag & Caldwell, one of the Southeast's oldest
investment management firms, concentrates on managing large capitalization
growth equity and balanced portfolios for institutional, mutual fund and high
net worth clients. Montag & Caldwell believes that success in the institutional
investment business is dependent upon a disciplined and consistently applied
investment process translating into outstanding investment results. Montag &
Caldwell's equity results have consistently placed the firm among the top money
managers in its category.
Montag & Caldwell targets separate accounts of $40 million and higher,
accessed through independent consultants or direct calls to prospective clients.
Its investment expertise is also available through the Alleghany Funds. Montag &
Caldwell advises two of the Alleghany Funds' mutual funds.
Chicago Trust
Chicago Trust, and its predecessors, has managed assets for investors
since 1887. Chicago Trust is an independent investment firm with full trust
powers and is engaged in the following lines of business: institutional
investment management, full service 401(k) administration, personal trust and
investment services and administration of the Alleghany Funds.
Chicago Trust specializes in fixed income and equity money management
for institutional clients. Chicago Trust's fixed income results have
consistently placed Chicago Trust among the top money managers in its category.
Chicago Trust markets its fixed income and equity products through pension
consultants and directly to plan sponsors. Chicago Trust also advises six of the
Alleghany Funds' mutual funds.
Chicago Trust's personal trust and investment services business serves
the investment and estate planning needs of individuals and families, mainly in
the greater Chicago area. Chicago Trust believes that the business is
well-positioned to benefit from growth in family wealth and the demographics of
an aging baby boom generation.
Chicago Trust also provides, through Security Trust, trust and
tax-deferred property exchange services in California.
-20-
21
CDEC
CDEC was established in 1989 and facilitates, with the assistance of
Chicago Trust, tax-deferred exchanges of like-kind property. In 1997, CDEC
facilitated more than 2,000 exchanges. CDEC acts as a qualified intermediary,
holding and investing the cash proceeds from the sale of property relinquished
by a taxpayer in a qualified trust account, of which Chicago Trust acts as
trustee, until replacement property is acquired.
Marketing
Growth in profitability of Alleghany Asset Management is largely
dependent on growth in assets under management, which results from market
appreciation of existing assets and new business. Approximately 80 percent of
Alleghany Asset Management's assets under management are for institutional
clients where competition is intense and success is driven by investment
performance. Both Montag & Caldwell and Chicago Trust have strong investment
records and have received high ratings in various consultant and mutual fund
informational service data bases. As of December 31, 1997, Alleghany Asset
Management, through its subsidiaries, managed assets totaling about $23.1
billion. None of the clients of Alleghany Asset Management accounted for 10
percent or more of the revenues of Alleghany Asset Management. The business of
Alleghany Asset Management is not seasonal.
Investment Operations
Investments held by Chicago Trust and Security Trust must comply with
the banking laws of the states of Illinois and California. These laws prescribe
the kind, quality and concentration of investments which may be made by trust
companies. In general, these laws permit investments, within specified limits
and subject to certain qualifications, in federal, state and municipal
obligations, corporate bonds, common stocks.
Chicago Trust's and Security Trust's 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.
Competition
Alleghany Asset Management and its subsidiaries compete with national,
regional and local providers of financial services. Such competition is chiefly
on the basis of service and investment performance.
-21-
22
Regulation
Acting as fiduciaries, Chicago Trust is regulated by the State of
Illinois Office of Banks and Real Estate, and Security Trust is regulated by the
California Department of Banking. Regulation covers such matters as the
fiduciary's management capabilities, the investment of funds held for its own
account, 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. Montag & Caldwell is a registered investment advisor and is
therefore subject to regulation by the Securities and Exchange Commission, the
state of Georgia, its domiciliary jurisdiction, and all other states in which it
is licensed to act in the capacity of investment advisor.
Employees
At December 31, 1997, Alleghany Asset Management and its subsidiaries
had approximately 275 employees, including full-time and part-time employees.
PROPERTY AND CASUALTY REINSURANCE AND INSURANCE BUSINESSES
Underwriters Re Group, Inc., formerly known as URC Holdings Corp.
("URG"), headquartered in Woodland Hills, California, is engaged in the property
and casualty reinsurance and insurance businesses, through Underwriters
Reinsurance Company ("Underwriters") and its primary insurance subsidiaries
(collectively, "Underwriters Re Group"). 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. Underwriters operates
throughout the United States, including Puerto Rico and the District of
Columbia, and Canada, either as a licensed carrier or accredited reinsurer, and
has branch offices in Chicago, Houston, New York and Woodland Hills.
In October 1993, Alleghany acquired approximately 93 percent of URG,
and thereafter contributed about $51 million in 1993 and $100 million in 1994 to
the capital of Underwriters Re Group. The capital contribution in 1994 was in
the form of about 6 million shares of Santa Fe common stock, which was
subsequently converted into approximately 2.5 million shares of BNSF common
stock. As of December 31, 1997, Underwriters' statutory surplus was $659
million. On October 3, 1997, Alleghany exchanged pursuant to its offer shares of
common stock of URG, representing 2.7 percent of the outstanding common stock of
URG, held by ten employees of URG for shares of
-22-
23
Alleghany common stock. Alleghany now owns all of the issued and outstanding
shares of common stock of URG.
Since 1995, Underwriters has been rated "A+ (Superior)" by A.M. Best
Company, Inc., an independent insurance industry rating organization ("Best's").
Best's publications indicate that such rating is assigned to companies which
Best's believes have achieved superior overall performance and have a very
strong ability to meet their obligations over a long period of time. According
to Best's, the rating reflects Underwriters' strong operating earnings, solid
internal capital generation and forward market momentum.
Additionally, since 1995 Underwriters received a claims-paying ability
rating of "AA-(Excellent)" from Standard & Poor's. Standard & Poor's
publications indicate that this rating is assigned to companies with strong
capacity to meet policyholders' obligations under a variety of economic and
underwriting conditions.
Underwriters Re Group established Commercial Underwriters Insurance
Company ("CUIC") at the end of 1992, acquired Underwriters Insurance Company
("UIC"), an inactive Nebraska insurance company in 1994, and established
Newmarket Underwriters Insurance Company ("NUIC") in 1996 to capitalize on
advantageous market conditions for certain primary insurance business lines.
CUIC, UIC and NUIC are rated "A+ (Superior)" by Best's because Underwriters
reinsures a significant share of their business.
CUIC is a California property and casualty insurance company that
focuses on specialized primary commercial insurance, individual commercial
excess liability insurance, commercial surplus lines, and specialized personal
lines liability insurance, including excess private passenger liability and
comprehensive personal liability insurance. CUIC conducts its business in
California and New York on an admitted basis and in 44 other states, Guam and
the District of Columbia on an approved nonadmitted basis. In 1997, CUIC
generated $113.3 million in direct written premiums and retained net written
premiums of $33.5 million representing 8.1 percent of Underwriters Re Group's
consolidated net written premiums in 1997.
UIC has licenses to write primary property and casualty insurance in 48
states and the District of Columbia and focuses on marine insurance, primary
liability policies for medium- to large-sized businesses and certain
professional liability coverages. In connection with the acquisition of UIC,
Underwriters was indemnified for all losses that occurred prior to the
acquisition date. In 1997, UIC generated $28.2 million in direct written
premiums and retained net written premiums of $11.7 million, constituting 2.8
percent of Underwriters Re Group's consolidated net written premiums in 1997.
-23-
24
NUIC is licensed to write property and casualty insurance in New
Hampshire, and is qualified on a non-admitted basis in California and New York.
It will focus on general liability policies for medium to large-sized
businesses.
The Center Insurance Services, Inc. ("The Center"), was established in
1995 as a wholly owned subsidiary of URG to capitalize on the considerable
expertise of certain individuals in handling specialized classes of primary
business. The Center's four subsidiaries act as agents and underwrite business
on behalf of CUIC, UIC, NUIC and at present, to a lesser extent, non-affiliated
insurers. Business underwritten by The Center includes marine insurance,
products liability insurance and general liability insurance for certain
insureds with self-insured retentions. During 1997 approximately $66.1 million
of gross written premiums was underwritten by The Center. The Center's
subsidiaries has offices in Kennesaw and Roswell, Georgia and New York, New
York.
Representative offices were established in Barbados at the end of 1995
and in London, England in 1996 to capitalize on international underwriting
opportunities. In addition, Underwriters Re Group made strategic investments in
reinsurance and insurance companies in Barbados and Bermuda.
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
"cedent" or "ceding company," for all or part of the insurance risks
underwritten by the ceding company. Reinsurance provides ceding companies with
three major benefits: (i) it reduces net liability on individual risks, (ii) it
protects against catastrophic losses, and (iii) it helps to maintain acceptable
surplus and reserve ratios. In addition, reinsurance provides the ceding company
with additional underwriting capacity. Ordinarily, a ceding company will enter
into a reinsurance agreement only if it will receive credit for the reinsurance
ceded on its statutory financial statements. In general, such credit is allowed
if the reinsurer meets the licensing and accreditation requirements of the
ceding company's domicile, or the reinsurance obligations are collateralized by
letters of credit, funds withheld or pledged trust agreements.
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
the insured's obligation to others for loss or damage to persons or property.
While both property and casualty reinsurance may involve a high degree of loss
volatility, property losses are generally reported within a relatively short
time period after the event; in contrast, there tends to be a significant time
lag in the reporting and payment of casualty claims. Consequently, an insurer
generally
-24-
25
knows of the losses associated with property risks in a shorter time than losses
associated with casualty risks.
Underwriters provides reinsurance on both a treaty and a facultative
basis. Treaty reinsurance is based on a standing arrangement (a "treaty"),
usually for a year, between a cedent and a reinsurer for the cession and
assumption of a certain class of risk specified in such treaty. Under most
treaties, the cedent is obligated to offer, and the reinsurer is obligated to
accept, a specified portion of a class of risk underwritten by the cedent.
Reinsurers assume classes of risk under treaties without having reviewed each
individual risk. Alternatively, facultative certificate reinsurance is the
reinsurance of individual risks. Unlike treaty reinsurance, in the case of
facultative reinsurance contracts, a reinsurer separately rates and underwrites
each individual risk and is free to accept or reject each risk offered by the
cedent. Facultative reinsurance is normally purchased by insurance companies for
risks not otherwise covered or covered only in part by their reinsurance
treaties, and for unusual risks.
Underwriters writes treaty and facultative reinsurance on both a pro
rata and excess of loss basis. Under pro rata reinsurance contracts, the ceding
company and reinsurer share the premiums as well as the losses and expenses of
any single risk, or an entire group of risks, based upon contractually defined
rates. Under excess of loss reinsurance contracts, the reinsurer agrees to
reimburse the ceding company for all losses in excess of a predetermined amount
(commonly referred to as the cedent's "retention"), generally up to a
predetermined limit. Excess of loss reinsurance is often written in "layers" or
levels, with one reinsurer assuming the risk of loss on the primary insurance
policy in excess of the cedent's retention level up to a predetermined level,
above which the risk of loss is assumed by another reinsurer or reverts to the
cedent. Excess of loss reinsurance allows the reinsurer to better control the
relationship of the premium charged to the related exposure assumed by it. The
reinsurer assuming the risk immediately above the cedent's retention level is
said to write "working layer" or "low layer" excess of loss reinsurance. A loss
that reaches just beyond a cedent's retention level would create a loss for such
cedent's low layer reinsurers but would not adversely affect the reinsurers on
higher layers.
Marketing
Reinsurance
An important element of Underwriters' strategy is to respond quickly to
market opportunities (such as increased demand or more favorable pricing) by
adjusting the mix of property and casualty business it writes. In recent years,
Underwriters has taken advantage of such market opportunities by increasing its
writings of marine and aviation,
-25-
26
property catastrophe, clash, homeowners and workers compensation coverages and
certain excess and surplus lines.
Underwriters concentrates on coverages which require a relatively high
degree of underwriting or actuarial expertise, including certain excess and
surplus lines programs, umbrella liability and directors and officers'
liability. Such expertise is also required for certain business that
Underwriters has developed in nontraditional areas, such as providing capital in
combination with reinsurance and providing reinsurance to alternative risk
markets, including risk retention groups, captives, underwriting syndicates and
self-insured funds and associations. Nontraditional reinsurance may also refer
to reinsurance contracts which limit exposure to loss through the use of
aggregate loss limits, loss ratio caps or other loss containment features.
Underwriters believes that coverages which require high levels of underwriting
or actuarial expertise offer greater potential for favorable results than more
general coverages, based on current market conditions.
In 1997, Underwriters wrote 67% of its treaty business and all of its
facultative certificate business through reinsurance brokers. The remaining
treaty business was principally reinsurance of portions of the primary insurance
underwritten by subsidiaries of Underwriters. By working primarily through
brokers, Underwriters does not need to maintain a large sales organization
which, during periods of reduced premium volume, could result in significant
non-productive overhead. In addition, management believes that submissions from
the broker market, including those for certain targeted specialty coverages, are
more numerous and diverse than would be available through a salaried sales
organization. Consequently, Underwriters is able to exercise greater selectivity
than would usually be possible in dealing directly with ceding companies. As a
result of certain of Underwriters' subsidiaries placing reinsurance on their
primary business through reinsurance brokers, management believes that such
brokers may also bring more reinsurance opportunities to Underwriters.
Reinsurance brokers regularly approach Underwriters for quotations on
reinsurance being placed on behalf of ceding companies. In 1997, Underwriters
paid brokers $10.3 million in commissions, which represents approximately 2% of
its gross written premiums of $461.3 million. Underwriters' five leading
brokers, AON, Inc. and its subsidiaries, Sedgwick Re, Inc., E.W. Blanch Company,
Jardine Thompson Graham Limited and Preferred Reinsurance Intermediaries,
accounted for 41% of Underwriters' gross written premiums in 1997. Over this
period, AON, Inc. and its subsidiaries accounted for 18% of such premiums and no
other broker accounted for more than 10% of such premiums. The brokers that
account for relatively large percentages of gross written premiums tend to vary
from year to year. Management does not believe that the termination of its
business with any one broker would have a material effect on Underwriters Re
Group's financial condition or results of operations.
-26-
27
A significant percentage of Underwriters' gross written premiums are
generally obtained from a relatively small number of ceding companies. In 1997,
approximately 39% of gross written premiums were obtained from Underwriters' ten
largest unaffiliated ceding companies. One of the ceding companies accounted for
12% of such premiums and no other unaffiliated ceding company accounted for more
than 10% of such premiums. The ceding companies that account for relatively
large percentages of gross written premiums tend to vary from year to year.
Management does not believe that the loss of any one ceding company account
would have a material effect on Underwriters Re Group's financial condition or
results of operations.
Primary Insurance
Insurance is purchased from the primary insurance companies of
Underwriters Re Group through retail and wholesale agents and brokers. These
professional intermediaries are acquainted with the product lines and custom
coverage capabilities of Underwriters Re Group's primary insurance companies,
which generally concentrate on hard to place risks and markets neglected by the
industry. The custom capabilities offered include access to nonadmitted
companies that operate under Underwriters Re Group and carry Underwriters'
Best's rating.
Underwriting Operations
Reinsurance
Underwriters maintains a disciplined underwriting program with a focus
on generating profitable business rather than on increasing market share.
Underwriters has maintained a defensive underwriting posture by reducing
writings in lines of business that it considers offer inadequate contract terms.
Another factor supporting Underwriters' underwriting discipline is its focus on
low level attachment points (i.e., dollar-levels at which risk is assumed).
While such layers are generally characterized by greater loss frequency, they
are also characterized by lower loss severity and quicker loss settlement than
layers with higher attachment points. Management believes that these factors
result in greater predictability of losses, which improves Underwriters' ability
to analyze its exposure on each contract and to price such exposure
appropriately.
In addition, Underwriters seeks to serve as lead or co-lead underwriter
on its treaties. Management believes that, as lead or co-lead underwriter,
Underwriters, is able to influence more effectively the pricing and terms of the
treaties into which it enters and thereby achieve better underwriting results.
During 1997, Underwriters acted as lead or co-lead underwriter on a majority of
its treaty business.
Treaty reinsurance generated approximately $350.4 million, or 95%, of
Underwriters' net written premiums in 1997 and facultative certificate
reinsurance
-27-
28
generated the remainder. Casualty lines represented approximately 64% of
Underwriters Re Group's net written premiums, with the remainder represented by
property lines. Reinsurance written on an excess of loss basis represented
approximately 50% of Underwriters' net reinsurance written premiums, with
reinsurance written on a pro rata basis representing the balance. In 1997,
Underwriters' net written premiums increased $34.0 million, or 10%, from 1996. A
significant part of this growth was in treaty business considered by
Underwriters to be nontraditional. Management believes that the increase in such
premiums is attributable, in part, to its increased statutory surplus level and
upgraded Best's rating, which enabled it to attract more desirable reinsurance
opportunities, and also to growth in its primary insurance operations.
Underwriters generally wrote up to $2.0 million per reinsurance risk in
1997 on a net basis. In the case of reinsurance of certain clash coverage,
Underwriters has written up to $2.5 million on a net basis and in limited
circumstances has accepted more. The largest net risk assumed in 1997 was $12.0
million.
Primary Insurance
Underwriters Re Group's underwriting strategy is to identify insurance
opportunities that can be profitably underwritten. Such business is generally in
less competitive segments of the overall insurance marketplace because they
frequently require a higher level of underwriting expertise or are not viewed as
acceptable in conventional markets for some other reason. Many of the classes
and risks underwritten are in otherwise normally accepted categories but are
viewed as nonstandard due to past loss history. Business written that is viewed
as requiring special expertise would include marine insurance, professional
liability and errors and omissions insurance. Risks are underwritten by
employees of the primary companies and by both affiliated and unaffiliated
underwriting agents. Underwriters Re Group wrote up to $1.5 million per primary
insurance risk in 1997 on a net basis.
Retrocessional and Reinsurance Arrangements
A reinsurer often reinsures some of its risk with other reinsurers
("retrocessionaires") pursuant to retrocessional agreements, and pays such
retrocessionaires a portion of the premiums it receives. Reinsurance companies
enter into retrocessional agreements for the same reasons that primary insurers
purchase reinsurance.
Underwriters has retrocessional agreements with a number of domestic
and international reinsurance companies. In the event that a retrocessionaire is
unable to meet its obligations assumed under the retrocessional agreement,
Underwriters remains liable
-28-
29
to its ceding companies for the portion reinsured. Consequently, the most
important factors in Underwriters' selection of retrocessionaires are financial
strength and stability.
Underwriters carefully evaluates potential retrocessionaires, which
must meet the approval of several members of senior management before being
engaged. Once engaged, Underwriters monitors the financial condition of its
retrocessionaires and takes appropriate actions to eliminate or minimize bad
debt exposure. Generally, Underwriters requires that unpaid losses and loss
adjustment expenses for non-admitted reinsurers that are not regulated by
domestic insurance regulatory authorities be collateralized by letters of
credit, funds withheld or pledged trust agreements. Additionally, commutations
may be taken to reduce or eliminate credit exposure when necessary. Although
there can be no assurance that such will be the case in future years,
Underwriters' write-offs for unrecoverable reinsurance were negligible in 1997
and 1996. As of December 31, 1997, Underwriters had an allowance for estimated
unrecoverable reinsurance of $3.4 million.
Underwriters currently has reinsurance contracts in force which cede to
retrocessionaires risks in excess of Underwriters' net risk retention.
Underwriters cedes up to $1.5 million per casualty facultative risk and up to
$1.1 million per property facultative risk. Underwriters also has an aggregate
reinsurance contract to cover losses up to $100.0 million incurred during the
period July 1, 1997 through June 30, 1998 in excess of a 98.3% net loss and loss
adjustment expense ratio. Such net loss ratio is calculated by dividing losses
by premiums net of commissions and brokerage. The contract covers essentially
all lines of business written by Underwriters; however, property catastrophe
losses are subject to a sublimit of $75.0 million. Upon its expiration,
management expects to renew this contract or to enter into a new contract
providing similar coverage. In addition, Underwriters from time to time
purchases retrocessional reinsurance in varying amounts for specific assumed
treaties.
Underwriters has two reinsurance contracts with Continental Casualty
Company (the "Continental Contracts") that provide coverage for pre-1987
business up to an aggregate limit of $200.0 million. Underwriters received
payments under these contracts totaling $37.6 million in 1996 and $23.7 million
in 1997, reducing the reinsurance receivable attributable to such contracts from
$111.5 million at year-end 1996 to $87.8 million at year-end 1997. Such
receivable is secured by a trust fund dedicated solely to payments under the
Continental Contracts.
As of December 31, 1997, Underwriters had reported reinsurance
receivables of $387.6 million through retrocessional agreements, including $87.8
million of reinsurance receivables under the Continental Contracts, which was
fully secured as described above, and $133.0 million due from another reinsurer,
which was fully secured with a combination of letters of credit and funds
withheld.
-29-
30
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 such loss to the insurer and the
reinsurer, the insurer's payment of such loss and the subsequent payment by the
reinsurer. To recognize liabilities for unpaid losses, insurers and reinsurers
establish "reserves." These reserves 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 reinsurance claim is reported by the ceding company,
Underwriters establishes a "case" reserve for the estimated amount of
Underwriters' ultimate payment. Such reserves are based upon the amounts
recommended by the ceding company and are often supplemented by additional
amounts as deemed necessary by Underwriters after Underwriters has evaluated
such claim on the basis 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 if the ceding company believes that Underwriters will have no
ultimate liability. Underwriters always establishes a case reserve in an amount
at least equal to that recommended by the ceding company. Case reserves are
periodically adjusted by Underwriters based on its evaluation of subsequent
reports from and audits of the ceding companies.
When a primary claim is reported, Underwriters Re Group personnel
establish a "case" reserve based on evaluation of the claim and estimation of
the ultimate payment amount. All primary claims are supervised by Underwriters
Re Group personnel who at times may engage outside counsel or adjusting firms,
if necessary.
Additional reserves are established on an aggregate basis to provide
for losses incurred but not yet reported ("IBNR") to the reinsurer 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 Re Group establishes
IBNR reserves by using accepted loss reserving standards and principles to
estimate the ultimate liability for LAE. The process implicitly recognizes the
impact of inflation and other factors that affect claims reporting by taking
into account changes in historic loss reporting patterns and perceived probable
trends.
Underwriters Re Group reviews its aggregate loss reserves at least
twice each year. Between the semi-annual reviews, Underwriters Re Group updates
its loss reserves by applying the loss ratios determined in the previous review
to earned premiums to date, less incurred losses reported. Underwriters Re Group
does not discount its reserves for
-30-
31
anticipated investment income. There are inherent uncertainties in estimating
reserves primarily due to the significant periods of time that may elapse
between occurrence of an insured or reinsured loss and reporting and ultimate
settlement of such loss, the diversity of development patterns among different
lines of business and types of reinsurance, and the necessary reliance on the
ceding company for information regarding reinsurance claims. Actual losses and
loss expenses may deviate, perhaps substantially, from reserves in Underwriters
Re Group financial statements, which could have a material adverse effect on
Underwriters Re Group financial condition and results of operations. Based on
current information, management believes reserves for losses and loss expenses
at December 31, 1997 are adequate.
Asbestos and Environmental Impairment Claims Reserves
Underwriters' reserve for losses and loss expenses includes amounts for
various liability coverages related to asbestos and environmental impairment
claims that arose from certain general liability and commercial multiple-peril
coverages. Restrictive asbestos and environmental impairment exclusions were
introduced in late 1986 on both primary and reinsurance contracts, significantly
reducing these exposures for accidents occurring after 1986. Reserves for
asbestos and environmental impairment claims cannot be estimated with
traditional loss reserving techniques because of uncertainties that are greater
than those associated with other types of claims. Factors contributing to those
uncertainties include a lack of historical data, the significant period of time
that has elapsed between the occurrence of the loss and the reporting of that
loss to the ceding company and the reinsurer, uncertainty as to the number and
identity of insureds with potential exposure to such risks, unresolved legal
issues regarding policy coverage, and the extent and timing of any such
contractual liability. Such uncertainties are not likely to be resolved in the
near future.
As with all reinsurance claims, Underwriters establishes case reserves
for both asbestos and environmental impairment excess of loss reinsurance claims
by applying reinsurance contract terms to losses reported by ceding companies,
and analyzing from the first dollar of loss incurred by the primary insurer.
Additionally, ceding companies often report potential losses on a precautionary
basis (a "precautionary notice") to protect their rights under reinsurance
contracts, which generally call for prompt notice to the reinsurer. Ceding
companies, at the time they report such potential losses, advise Underwriters of
the ceding companies' current estimate of the amount of such loss. Underwriters
reviews each of these precautionary notices and, based upon current information,
assesses the likelihood of loss to Underwriters. Such assessment is one of the
factors used in determining the adequacy of IBNR reserves.
For asbestos claims, Underwriters closely reviews precautionary notices
which concern any named insured previously linked to large asbestos exposure (a
"target
-31-
32
defendant"). If the named insured is a "target defendant," Underwriters assumes
there is a probability of loss even if the named ceding company has not itself
reported reserves. IBNR reserves are recorded based on this review, as well as
an additional subjective evaluation of the aggregate reported losses
(approximately $3.7 million per year) losses for the last three years. The per
year figures are net of reinsurance, including the Continental Contracts.
For environmental impairment claims, Underwriters establishes case
reserves and reviews precautionary notices as described above. Ultimate
environmental impairment claims exposure is especially uncertain because of the
problematic apportionment of clean-up costs under federal and state laws, the
uncertain enforceability of contract exclusions and the lack of specific "target
defendants." IBNR reserves are recorded based on Underwriters' assessment of
precautionary notices and a review of aggregate reported losses (approximately
$2.6 million per year) for the last three years. The per year figures are net of
reinsurance, including the Continental Contracts.
During the three years ended December 31, 1997, the average net loss
payment per claim (open and settled) for asbestos and environmental impairment
exposures (excluding cessions to the Continental Contracts) was $21,000 and
$35,700, respectively, and the highest paid loss was $2.0 million for an
asbestos claim and $0.4 million for an environmental impairment claim, in each
case net of ceded reinsurance (excluding cessions to the Continental Contracts).
All loss payments for asbestos and environmental impairment exposures for the
last three years have been recovered through cessions to the Continental
Contracts. Most claims paid to date have been paid under contracts with varying
levels of retention by the ceding company or insurer. Although the range of
losses paid by Underwriters has been wide, most losses paid have involved dollar
amounts at the lower end of such range.
As of December 31, 1997, Underwriters' case and IBNR reserves (net of
reinsurance, including cessions to the Continental Contracts) totaled
approximately $21.2 million for asbestos liabilities, which includes reserves
for approximately 618 open claims where cedents have advised Underwriters that
they currently expect to recover from Underwriters. As of December 31, 1997,
Underwriters' case and IBNR reserves (net of reinsurance, including cessions to
the Continental Contracts) totaled about $23.9 million for environmental
impairment claims, which includes reserves for approximately 473 open claims
where cedents have advised Underwriters that they currently expect to recover
from Underwriters. Additionally, ceding companies have submitted 1,804
precautionary notices for asbestos claims and 5,663 precautionary notices for
environmental impairment claims to Underwriters; however, based on information
provided by the ceding companies and Underwriters' assessment of such claims,
Underwriters does not currently expect the losses with respect to such claims to
grow large enough to reach Underwriters' layer of reinsurance coverage.
-32-
33
The reconciliation of the beginning and ending reserves for unpaid
losses and LAE related to asbestos and environmental impairment claims for the
last three years (net of cessions to the Continental Contracts, but excluding an
additional $18.9 million provision for such claims, discussed in the text
following the tables), is shown below (dollars in thousands):
Reconciliation of Asbestos-Related Claims Reserve for Losses and LAE
1997 1996 1995
---- ---- ----
Reserve, net of reinsurance recoverables, as of
January 1........................................... $17,494 $14,494 $10,136
Incurred loss, net of reinsurance....................... 3,678 3,000 4,358
Paid loss, net of reinsurance........................... 0 0 0
------- ------- -------
Reserve, net of reinsurance recoverables, as of
December 31......................................... 21,172 17,494 14,494
Reinsurance recoverables, as of December 31............. 14,726 15,176 17,506
------- ------- -------
Reserve, gross of reinsurance recoverables, as of
December 31......................................... $35,898 $32,670 $32,000
======= ======= =======
Type of Reserve, net of reinsurance recoverables:
Case................................................ $ 3,172 $ 4,494 $ 4,494
IBNR................................................ 18,000 13,000 10,000
------- ------- -------
Total................................................... $21,172 $17,494 $14,494
======= ======= =======
-33-
34
Reconciliation of Environmental Impairment Claims Reserve for Losses and LAE
1997 1996 1995
---- ---- ----
Reserve, net of reinsurance recoverables, as of
January 1........................................... $22,600 $19,600 $16,198
Incurred loss, net of reinsurance....................... 1,322 3,000 3,402
Paid loss, net of reinsurance........................... 0 0 0
------- ------- -------
Reserve, net of reinsurance recoverables, as of
December 31......................................... 23,922 22,600 19,600
Reinsurance recoverables, as of December 31............. 4,640 4,939 12,896
------- ------- -------
Reserve, gross of reinsurance recoverables, as of
December 31......................................... $28,562 $27,539 $32,496
======= ======= =======
Type of Reserve, net of reinsurance recoverables:
Case................................................ $10,922 $ 9,600 $ 9,600
IBNR................................................ 13,000 13,000 10,000
------- ------- -------
Total................................................... $23,922 $22,600 $19,600
======= ======= =======
Increases to asbestos and environmental impairment claims reserves, if
any, may be covered to varying degrees by Underwriters' existing reinsurance
contracts with its retrocessionaires.
In addition to the case and IBNR reserves for asbestos and
environmental impairment claims reported in the tables above, Underwriters
carries an additional reserve for such exposures in its financial statements
prepared in accordance with generally accepted accounting principles ("GAAP").
The amount of such reserve was $18.9 million as of December 31, 1997, compared
with $27.4 million as of December 31, 1996. While there can be no assurance that
such total reserves will be adequate, management believes that Underwriters'
total asbestos and environmental impairment
-34-
35
reserves, taking into consideration the additional GAAP reserves, are a
reasonable provision for such claims.
Changes in Historical Net Loss and LAE Reserves
The following table shows changes in historical net loss and LAE
reserves for Underwriters Re Group for each year since 1987. Reported reserve
development is derived primarily from information included in statutory
financial statements of Underwriters, CUIC and UIC. 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 Re Group. The upper (paid) 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. The lower portion of the table shows
the re-estimated 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. In
evaluating the information in the table, 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 the net
reserve liability in the past may not necessarily occur in the future.
Accordingly, it is not appropriate to extrapolate future redundancies or
deficiencies based on this table. During the mid-1980s, the reinsurance
industry, including Underwriters Re Group, experienced substantial underwriting
losses. Such losses are reflected in the table, beginning with the comparatively
high cumulative deficiencies in the year 1987. The cumulative reserve
deficiencies in the years 1987 through 1992 primarily resulted from prior
increases to asbestos and environmental impairment claims reserves and includes
the $35.8 million reserve strengthening in 1993.
-35-
36
Changes in Historical Net Reserves for Losses and LAE
(in millions)
Year Ended December 31,
1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ----
Net liability as of the end of
year* ................................. $470 $461 $453 $411 $411 $437 $509 $536
Cumulative amount of net
liability paid as of:
One year later ..................... $116 $119 $137 $101 $84 $98 $112 $102
Two years later .................... 208 242 227 173 161 178 189 167
Three years later .................. 330 306 285 239 214 236 236 220
Four years later ................... 380 348 342 274 254 266 265 --
Five years later ................... 416 394 370 294 276 287 -- --
Six years later .................... 458 414 384 311 287 -- -- --
Seven years later .................. 475 425 396 319 -- -- -- --
Eight years later .................. 483 434 403 -- -- -- -- --
Nine years later ................... 489 440 -- -- -- -- -- --
Ten years later .................... 490 -- -- -- -- -- -- --
Net liability re-estimated as of:
One year later ..................... 481 454 457 414 412 483 516 539
Two years later .................... 473 457 460 421 455 487 518 538
Three years later .................. 476 462 474 465 460 491 523 531
Four years later ................... 478 492 520 472 469 496 519 --
Five years later ................... 516 538 528 485 469 493 -- --
Six years later .................... 562 548 545 483 468 -- -- --
Seven years later .................. 572 568 544 479 -- -- -- --
Eight years later .................. 591 567 541 -- -- -- -- --
Nine years later ................... 591 567 -- -- -- -- -- --
Ten years later .................... 590 -- -- -- -- -- -- --
Cumulative Redundancy
(Deficiency) ....................... $(120) $(106) $(88) $(68) $(57) $(56) $(10) $5
Gross Liability-End of Year $861 $940
Reinsurance Recoverable 352 404
---- ----
Net Liability - End of Year $509 $536
==== ====
Gross Re-estimated Liability-Latest $959 $939
Re-estimated Recoverable-Latest 440 408
---- ----
Net Re-estimated Liability-Latest $519 $531
==== ====
1995 1996 1997
---- ---- ----
Net liability as of the end of
year* ................................. $628 $732 $ 784
Cumulative amount of net
liability paid as of:
One year later ..................... $117 $175 --
Two years later .................... 214 -- --
Three years later .................. -- -- --
Four years later ................... -- -- --
Five years later ................... -- -- --
Six years later .................... -- -- --
Seven years later .................. -- -- --
Eight years later .................. -- -- --
Nine years later ................... -- -- --
Ten years later .................... -- -- --
Net liability re-estimated as of:
One year later ..................... 629 727 --
Two years later .................... 622 -- --
Three years later .................. -- -- --
Four years later ................... -- -- --
Five years later ................... -- -- --
Six years later .................... -- -- --
Seven years later .................. -- -- --
Eight years later .................. -- -- --
Nine years later ................... -- -- --
Ten years later .................... -- -- --
Cumulative Redundancy
(Deficiency) ....................... $6 $5 --
Gross Liability-End of Year $1,014 $1,110 $1,159
Reinsurance Recoverable 386 378 375
------ ------ ------
Net Liability - End of Year $ 628 $ 732 $ 784
====== ====== ======
Gross Re-estimated Liability-Latest $1,058 $1,139
Re-estimated Recoverable-Latest 436 412
------ ------
Net Re-estimated Liability-Latest $ 622 $ 727
====== ======
-36-
37
The reconciliation between the reserves reported in the annual
statements filed with state insurance departments in accordance with statutory
accounting practices ("SAP") and those reported in Underwriters Re Group's
consolidated financial statements prepared in accordance with 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
1997 1996 1995
---- ---- ----
Statutory Reserves................................... $765,418 $705,105 $596,070
Additional Mass Action Reserves (1) 18,850 27,350 32,350
Reinsurance Recoverables............................. 374,802 377,565 385,580
---------- ---------- ----------
GAAP Reserves........................................ $1,159,070 $1,110,020 $1,014,000
========== ========== ==========
(1) Amount represents additional reserves recorded by Underwriters in 1993
for probable asbestos-related and environmental impairment claims
exposure.
-37-
38
The reconciliation of reserves for the last three years on a GAAP basis
is shown below (in thousands):
Reconciliation of Reserves for Losses and LAE
1997 1996 1995
---- ---- ----
Reserve, net of reinsurance recoverables, as
of January 1......................................... $ 732,455 $ 628,420 $ 536,317
Incurred Loss, net of reinsurance, related to:
Current year.............................................. 267,530 242,332 200,543
Prior years............................................... (5,702) 1,393 2,565
---------- ---------- ----------
Total Incurred Loss, net of reinsurance .................. 261,828 243,725 203,108
---------- ---------- ----------
Paid Loss, net of reinsurance, related to:
Current year......................................... (35,033) (23,342) (9,239)
Prior years.......................................... (174,982) (116,348) (101,766)
---------- ---------- ----------
Total Paid Loss, net of reinsurance ...................... (210,015) (139,690) (111,005)
---------- ---------- ----------
Reserve, net of reinsurance recoverables, as
of December 31....................................... 784,268 732,455 628,420
Reinsurance recoverables, as of December 31............... 374,802 377,565 385,580
---------- ---------- ----------
Reserve, gross of reinsurance recoverables,
as of December 31.................................... $1,159,070 $1,110,020 $1,014,000
========== ========== ==========
Investment Operations
Investments of Underwriters Re Group must comply with the insurance
laws of New Hampshire, California and Nebraska, the domiciliary states of
Underwriters and NUIC, CUIC, and UIC, respectively, 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.
-38-
39
Underwriters Re Group's investment strategy is to match the average
duration of its high-quality diversified fixed maturity portfolio to the average
adjusted duration of its liabilities and to provide sufficient cash flow to meet
its obligations while maximizing its after-tax rate of return. The average
adjusted duration of liabilities is estimated by adjusting the average duration
of liabilities to reflect anticipated cash flows from writings of future
business. Underwriters Re Group's average adjusted duration of liabilities is
currently estimated to be four years and is re-estimated from time to time.
Securities may be sold from time to time to take advantage of investment
opportunities created by changing interest rates, prepayments, tax and credit
considerations or other factors. Underwriters Re Group's entire fixed maturity
portfolio has been designed to enable management to react to such opportunities
or to circumstances that could result in a mismatch between the duration of such
portfolio assets and the duration of liabilities and, as such, is classified as
available for sale.
The following table reflects investment results for the fixed maturity
portfolio of Underwriters Re Group for the years ended December 31, 1997, 1996
and 1995 (dollars in thousands):
Investment Results
Net Net
Pre-Tax After-Tax Pre-Tax
Average Investment Investment Realized Effective After-Tax
Period Investments (1) Income (2) Income (3) Losses Yield (4) Yield (5)
- --------------------------------------------------------------------------------------------------------------------------------
Year Ended
December 31, 1997 $1,147,064 $69,229 $50,239 $ (855) 6.0% 4.4%
Year Ended
December 31, 1996 $984,345 $59,542 $42,971 $ (94) 6.0% 4.4%
Year Ended
December 31, 1995 $797,132 $50,173 $36,113 $ (5,476) 5.9% 4.5%
(1) Average of amortized cost of fixed maturities 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) Net pre-tax investment income for the period divided by average
investments for the same period.
(5) Net after-tax investment income for the period divided by average
investments for the same period.
-39-
40
As of December 31, 1997, the equity portfolio of Underwriters Re Group
was carried at a market value of approximately $302.0 million with an original
cost of approximately $166.0 million, and consisted primarily of approximately
2.5 million shares of BNSF common stock. The cost of equities listed in the
table below, $140.2 million, includes the cost paid by Alleghany for the BNSF
common stock prior to being contributed to Underwriters Re Group. In 1997,
Underwriters Re Group realized a gain of $1.8 million related to the sale of
equity securities and had dividend income of $5.6 million therefrom.
The following table summarizes the investments of Underwriters Re
Group, excluding cash, as of December 31, 1997, with all investments carried at
fair value (dollars in thousands):
Investments
Amortized Cost or Cost Fair Value
Amount Percentage Amount Percentage
------ ---------- ------ ----------
Short-term investments ........................ $ 92,989 7% $ 92,989 6%
Corporate bonds ............................... 256,066 19 259,217 17
United States government and
government agency bonds ................... 102,422 8 103,149 7
Mortgage- and asset-backed
securities ................................ 328,657 25 337,241 22
Foreign bonds ................................. 19,264 1 19,337 1
Redeemable and auction
preferred stocks .......................... 33,917 3 34,956 3
Municipal bonds ............................... 355,287 27 363,252 24
Equity securities (1) ......................... 140,186 10 302,037 20
---------- ---- ---------- ----
Total ..................................... $1,328,788 100% $1,512,178 100%
========== ==== ========== ====
(1) Includes 2,474,823 shares of BNSF common stock at the original cost to
Alleghany.
-40-
41
The following table indicates the composition of the long-term fixed
maturity portfolio by Moody's rating as of December 31, 1997 (dollars in
thousands):
Long-Term Fixed Maturity Portfolio by Moody's Rating
Fair Value Percentage
---------- ----------
Aaa............................................. $ 618,857 55%
Aa.............................................. 165,606 15
A............................................... 229,560 21
Baa............................................. 80,534 7
Ba.............................................. 22,595 2
---------- ----
Total .................................. $1,117,152 100%
========== ====
The following table indicates the composition of the long-term fixed
maturity portfolio by years until contractual maturity as of December 31, 1997
(dollars in thousands):
Long-Term Fixed Maturity Portfolio by Years Until Maturity
Fair Value Percentage
---------- ----------
One year or less................................ $ 46,901 4%
Over one through five years..................... 268,696 24
Over five through ten years..................... 312,897 28
Over ten years.................................. 151,417 14
Mortgage- and asset-backed securities .......... 337,241 30
---------- ----
Total ................................. $1,117,152 100%
========== ====
Competition
Underwriters competes primarily in the United States reinsurance market
with numerous domestic and foreign reinsurers, many of which have greater
financial resources than Underwriters. Underwriters' competitors include
independent reinsurance companies, subsidiaries or affiliates of worldwide
insurance companies, reinsurance departments of certain primary insurance
companies and domestic, European and Asian underwriting syndicates. 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.
-41-
42
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 decrease in premium rates.
As the cycle continues, assuming loss experience is consistent, these declining
premium rates eventually 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. Management believes this competitive cycle, which may
affect particular market segments at different times, is a critical factor
affecting reinsurance profitability over time. There can be no assurance that
historical trends in the property and casualty reinsurance industry will
continue or that Underwriters will be able to accurately anticipate any such
trends.
To enhance Underwriters' financial strength, Alleghany, through URG,
contributed approximately $51 million in cash and equity securities in 1993 and
$100 million in equity securities in 1994 to the capital of Underwriters.
Underwriters' enhanced financial strength has allowed it to benefit from the
continuing trend toward consolidation in the domestic reinsurance market,
resulting from the tendency of reinsurance buyers to purchase coverage from
larger and more financially secure reinsurers. In 1996, URG issued $200 million
principal amount of 7-7/8% Senior Notes due 2006. Of the net proceeds of the
offering, $120 million was contributed to the capital of Underwriters, $50
million was used to repay indebtedness under URG's credit agreement and the
remainder is being used for general corporate purposes. According to the
Reinsurance Association of America, at December 31, 1997 there were 43 domestic
professional reinsurers, and Underwriters was the nation's ninth-largest in
terms of statutory surplus and fifteenth-largest in terms of net written
premiums.
The commercial property and casualty insurance industry is highly
competitive on the basis of price and service. CUIC's, UIC's and NUIC's
competitors include other primary insurers and new forms of insurance
organizations such as alternative self-insurance mechanisms. Many such
competitors have considerably greater financial resources, greater experience in
the insurance industry and offer a broader line of insurance products than CUIC,
UIC and NUIC.
Regulation
Underwriters, CUIC, UIC and NUIC are subject to regulation and supervision
by state insurance regulatory authorities under the insurance statutes and
regulations of states in which they are incorporated (New Hampshire for
Underwriters and NUIC, California for CUIC, and Nebraska for UIC). In addition,
each of these companies is regulated in each jurisdiction in which it conducts
business. Among other things, insurance statutes
-42-
43
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 that may be held, 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
company examinations.
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 insurance departments. As a practical matter, however, the rates
charged by primary insurers have an effect on the rates that can be charged by
reinsurers.
Each of the operating subsidiaries of The Center is subject to regulation
and supervision by state insurance regulators in the states in which its
subsidiary is licensed as an insurance agency. Such regulations address the
solicitation and effectuation of insurance in such states and impose certain
requirements relating to, among other things, countersignatures, continuing
education and maintenance of trust accounts.
State insurance holding company statutes provide a regulatory mechanism
designed to protect the financial condition of domestic insurance companies
operating as subsidiaries of holding companies. All holding company statutes
require disclosure and, in some instances, prior approval of significant
transactions between a domestic insurance company and its affiliates. Holding
company statutes also may require, among other things, prior approval of any
acquisition of control of a domestic insurance company. As an insurance holding
company, Alleghany is subject to such regulations in New Hampshire, California
and Nebraska. The acquisition of Underwriters, CUIC and UIC by Alleghany was
subject to prior approval from the insurance regulatory authorities in the
states in which such companies are incorporated. Alleghany and its other
subsidiaries, however, generally are not otherwise subject to restrictions on
their business activities due to their affiliation with Underwriters, CUIC, UIC
and NUIC.
Beginning with the 1994 year-end statutory financial statements, the
insurance laws of New Hampshire, California and Nebraska imposed risk-based
capital ("RBC") requirements on property and casualty insurers and reinsurers,
based on a model adopted by the National Association of Insurance Commissioners.
The RBC requirements attempt to assess a property and casualty company's
statutory capital and surplus needs, taking into account the risk
characteristics of the companies' investments and products, by measuring the
following risks: (i) underwriting, which encompasses the risk of adverse loss
developments and inadequate pricing, (ii) declines in asset values arising from
credit risks and (iii) declines in asset values arising from investment risks.
The ratio of a company's total adjusted capital to its risk-based capital
provides regulators with an early
-43-
44
warning tool to identify weakly capitalized companies for purposes of initiating
corrective action. At December 31, 1997, each of Underwriters, CUIC, UIC and
NUIC had surplus well in excess of the risk-based capital thresholds that would
require any corrective action.
Employees
Underwriters Re Group employed 248 persons as of December 31, 1997.
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. The present chief executive officer of World
Minerals currently owns an equity interest, including outstanding options, of
about 6.6 percent of World Minerals' immediate parent company.
World Minerals, headquartered in Santa Barbara, California, is principally
engaged in the mining, production and sale of two industrial minerals, diatomite
and perlite:
Diatomite
World Minerals conducts its diatomite business through Celite.
In 1995, World Minerals, through various subsidiaries of Celite, acquired
controlling interests in three joint ventures which are engaged in the mining
and processing of diatomite in Jilin Province, Peoples Republic of China
("PRC").
Celite is believed to be the world's largest producer of filter-aid grade
diatomite, which it markets worldwide under the Celite(R) and Kenite(R) brand
names; Celite also markets filter-aid grade diatomite in Europe under the
Primisil(R) brand name and in Latin America and other areas under the Diactiv(R)
brand name.
Diatomite is a silica-based mineral consisting of the fossilized remains
of microscopic freshwater or marine plants. Diatomite's primary applications are
in filtration and as a functional 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, and as an
anti-block agent in plastic film.
In addition to diatomite, Celite also produces calcium silicate products
and magnesium silicate products, which are sold worldwide under the MicroCel(R)
and
-44-
45
Celkate(R) brand names (except in portions of Europe where calcium silicate
products are sold under the Calflo(R) brand name). These 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
in the production of rubber, sweeteners, flavorings and pesticides.
Celite has its world headquarters in Lompoc, California and owns, directly
or through wholly owned subsidiaries, diatomite mines and/or processing plants
in Lompoc, California; Quincy, Washington; Murat, France; Alicante, Spain;
Arica, Chile; Arequipa, Peru; 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 and owns
controlling interests in three joint ventures which mine and process diatomite
in Jilin Province, PRC.
Perlite
World Minerals conducts its perlite business through Harborlite and
Europerlite.
World Minerals believes that its Harborlite and Europerlite subsidiaries
are, in the aggregate, the world's largest producers of perlite filter aids and
that Harborlite, which is also engaged in the business of selling perlite ore,
is one of the world's largest merchant producers of perlite ore. These products
are marketed worldwide under the Harborlite(R) and Europerl(R) brand names.
Perlite is a volcanic rock which contains between 2 percent and 5 percent
natural combined water. When heated rapidly, the natural combined water turns
explosively to steam and the perlite ore "pops" in a manner similar to popcorn,
expanding up to twenty times its original volume and creating a soft material
with large surface area and correspondingly low density.
Perlite ore is mined at Harborlite's No Agua, New Mexico mine and is sold
primarily to companies that 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 certain filler applications is
mined at Harborlite's Superior, Arizona mine and is expanded at Harborlite's six
expansion plants located within the United States. Expanded perlite is also
produced at Harborlite's European expansion plants at Hessle, United Kingdom and
Wissembourg, France and Europerlite's expansion plants at Barcelona, Spain and
Milan, Italy, from perlite ore obtained from Harborlite's Turkish perlite mine
at Dikili, Turkey and from merchant ore producers in Europe. Most of the
expanded perlite is used as a filter aid in the brewing, food, wine, sweetener,
pharmaceutical, chemical and lubricant industries, or as a filler and insulating
medium in various construction applications.
-45-
46
On October 31, 1995, World Minerals, through Europerlite, acquired control
of all of the outstanding capital stock of two privately owned perlite filter
aid companies with operations in Italy and Spain, respectively, and a privately
owned perlite sales company in Spain. The perlite sales company has since been
merged into the Spanish filter aid company.
Harborlite has its world headquarters in Lompoc, California 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, a perlite
mine and mill in Dikili, Turkey, a perlite deposit in Central Mexico, and
perlite expansion facilities in Escondido, California; Green River, Wyoming;
Laporte, Texas; Youngsville, North Carolina; Vicksburg, Michigan; Quincy,
Florida; Wissembourg, France; and Hessle, England.
Europerlite also has its world headquarters in Lompoc, California and owns
perlite expansion plants in Barcelona, Spain and Milan, Italy.
World Minerals conducts its business on a worldwide basis, with mining and
processing operations in eleven countries. In 1997, approximately 43 percent of
World Minerals' revenues (equal to 11.0 percent of Alleghany's consolidated
revenues) were generated by foreign operations, and an additional 12.2 percent
of World Minerals' revenues were generated by export sales from the United
States. While World Minerals believes that the international scope of its
operations gives it unique competitive advantages, international operations can
be subject to additional risks, such as currency fluctuations, changes in
foreign legal requirements and political instability. World Minerals closely
monitors its methods of operating in each country and adopts strategies
responsive to changing economic and political environments.
World Minerals minimizes its exposure to the risk of foreign currency
fluctuation by, among other things, causing its subsidiaries to declare and pay
dividends whenever feasible, and having its foreign subsidiaries invoice their
export customers in United States dollars or other "hard currencies." World
Minerals' foreign operations do not subject Alleghany to a material risk from
foreign currency fluctuation. It is not currently expected that the currency
turmoil in Asia will have a material adverse impact on World Minerals' earnings
in 1998.
Celite's largest diatomite mine and plant is located near Lompoc,
California. All additional diatomite supplies are currently obtained by Celite
from its mines in the state of Washington, in France, Spain, Mexico, Chile,
Peru, and PRC, and from the Lake Myvatn mine in Iceland (although environmental
regulations and seismic activity may adversely affect future production at Lake
Myvatn). Celite believes that diatomite reserves at each site are generally
sufficient to last for at least 20 more years at the current rate of
utilization, except at its Quincy, Washington mine where reserves are estimated
to
-46-
47
last for another 15 years at current utilization rates. Celite is conducting
drilling activities to identify additional quality reserves in the area and
expects to be able to increase reserve estimates for Quincy by the end of 1998.
Harborlite obtains perlite ore in the United States from its No Agua and
Superior mines, and believes that its perlite ore reserves at each site are
sufficient to last at least 20 more years at the current rate of utilization.
The perlite used by Harborlite and Europerlite for expansion in Europe is
obtained from Harborlite's Dikili mine and from third parties in Europe. Ore
reserves at Harborlite's Dikili mine are believed to be sufficient to last at
least 20 more years at the current rate of utilization.
Celite's silicate products are produced from purchased magnesium and
calcium compounds and internally supplied diatomite.
World Minerals' operating subsidiaries experienced no interruption in raw
material availability in 1997, and barring unforeseen circumstances anticipate
no such interruption in 1998. While there can be no assurance that adequate
supplies of all raw materials will be available in the future, Celite,
Harborlite and Europerlite believe that they have taken reasonable precautions
for the continuous supply of their critical raw materials.
Many of Celite's, Europerlite's and Harborlite's operations use
substantial amounts of energy, including electricity, fuel oil, natural gas, and
propane. Celite, Europerlite and Harborlite have supply contracts for most of
their energy requirements. Most of such contracts are for one year or less.
Celite, Europerlite 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 21 United States and 43 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 four-week supply
of inventory on certain products due to production lead times. Although
diatomite mining activities at Celite's principal mine in Lompoc, California may
be suspended during periods of heavy rainfall, World Minerals believes that,
because of the stockpiling of ore during dry periods, such suspensions do not
materially affect the supply of inventory. In anticipation of forecasted severe
"El Nino" wet weather conditions along the California
-47-
48
coast this winter, Celite has increased its product inventories as well. Barring
unusual circumstances, World Minerals does not experience backlogs of orders.
World Minerals' business is not seasonal to any material degree.
World Minerals' domestic and international operations have been
consolidated into a single, centrally managed worldwide business under the
direction of a highly capable management team. Since 1993, financial systems and
controls have been upgraded, and the Celite, Europerlite and Harborlite sales,
operations and financial groups have been consolidated to improve efficiency and
take advantage of synergies. 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. World Minerals also distributes Celite's,
Harborlite's and Europerlite's products in Europe to dealers, distributors and
end users on Celite's, Harborlite's and Europerlite'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 1997, World
Minerals spent approximately $2.2 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
World Minerals believes that Celite is the world's largest producer of
filter-aid grade diatomite. The remainder of the market is shared by Celite's
four major competitors: Eagle-Picher Minerals (United States), Grefco (United
States), CECA (France) and Showa (Japan), and a number of smaller competitors.
World Minerals believes that Harborlite and Europerlite are, in the
aggregate, the world's largest producer of perlite filter aids and that
Harborlite, which is also engaged in the business of selling perlite ore, is one
of the world's largest merchant producers of perlite ore. Harborlite and
Europerlite each have two large competitors in the expanded perlite market,
Grefco and CECA, and many smaller competitors. Harborlite has two large
competitors in the merchant perlite ore market, Grefco and Silver & Baryte, and
numerous smaller companies.
The filter aid products of Celite, Europerlite and Harborlite compete with
other filter aids, such as cellulose, and other filtration technologies, such as
crossflow and centrifugal separation. Celite's silicates compete with a wide
variety of other synthetic mineral products.
-48-
49
In all of World Minerals' businesses, 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.
Regulation
All of Celite's and Harborlite's domestic operations are subject to a
variety of federal, state and local environmental laws and regulations. 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 jurisdictions have adopted regulations that may be more
stringent than corresponding federal regulations. Celite and Harborlite believe
that the impact of environmental regulation on their respective operating
results has been minimal due to their environmental compliance programs;
however, Celite and Harborlite cannot predict the potential future impact of
such regulations, given the increasing number and complexity, and changing
character, of such regulations.
Moreover, federal and state laws governing disposal of wastes impact
customers who must dispose of used filter-aid materials. World Minerals works
with its customers to implement disposal strategies to minimize the impact of
these disposal regulations.
The domestic mining operations of Celite and Harborlite are subject to
regulation by the Mine Safety and Health Administration ("MSHA"). This agency
establishes health and safety standards relating to noise, respiratory
protection and dust for employee work environments in the mining industry.
Celite's and Harborlite's domestic production facilities which are not under the
jurisdiction of MSHA are subject to regulation by the Occupational Safety and
Health Administration ("OSHA"), which establishes regulations regarding, among
other things, workplace conditions, and exposure to dust and noise. In addition,
certain state agencies exercise concurrent jurisdiction in these areas. During
1997, both MSHA and OSHA announced special emphasis programs to reduce the
incidence of silicosis in the workplace. Due to Celite's industrial hygiene and
monitoring programs, Celite does not expect these special emphasis programs to
impact its business in any material way.
World Minerals maintains a staff of experienced environmental, safety and
industrial hygiene professionals who assist plant personnel in complying with
environmental, health and safety regulations. Its environmental, safety and
industrial hygiene audit group also performs routine internal audits and reviews
of World Minerals' plant facilities worldwide. Due to these programs and
responsible management at the local plant level, compliance with such
regulations has been facilitated and the financial impact of such regulations on
operating results has been minimal.
-49-
50
Certain products of Celite and Harborlite are subject to the Hazard
Communication Standard promulgated by OSHA, which requires Celite and Harborlite
to disclose the hazards of those products to employees and customers. Celite's
diatomite products and certain of Harborlite's products contain varying amounts
of crystalline silica, a mineral which is among the most common found on earth.
In 1997, the International Agency for Research on Cancer ("IARC") reclassified
the inhalation of crystalline silica from occupational sources from "probably
carcinogenic to humans" to a category reflecting "sufficient evidence of human
carcinogenicity." Celite and Harborlite provide required 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. Such requirements also mandate that industrial 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 such products contain in excess of 0.1 percent of
crystalline silica by volume. Due to labeling concerns, 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.
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 occupational exposure to crystalline
silica. One such study, conducted by the University of Washington on diatomite
workers in Lompoc, California (the "Washington 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 expected 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.
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,
prior to World Minerals' purchase of the Lompoc plant, than originally thought.
Since exposure to asbestos has been found to cause lung cancer and respiratory
disease, this finding has raised concern that the Washington Study may have
overstated the adverse health effects of exposure to crystalline silica. IDPA
engaged an epidemiologist and an industrial hygienist to examine the cohort to
determine whether asbestos exposure was properly accounted for in the
-50-
51
Washington Study's results. The final IDPA report (the "Asbestos Study") was
issued in December 1994 and found:
"Although asbestos operations were small relative to the
diatomaceous earth operations, analyses in this report showed that
exposure to asbestos by workers was relatively common. For example, the
number of cohort members who were ever definitely, probably or possibly
exposed to asbestos was shown to involve approximately 60 percent of the
cohort. Even when only men employed in jobs definitely exposed to asbestos
for more than [one] year in the period 1950-1977 were considered, more
than 8 percent of the cohort had held such jobs."
The Asbestos Study's authors called for further analyses which fully take into
account the results of their study stating "[t]he interpretation of the
silica-lung cancer risk relationships based on the [Lompoc] cohort should await
the outcome of such analyses."
The results of the Asbestos Study were analyzed by the authors of the
Washington Study. They did not agree that asbestos was a likely confounder of
the results of the initial study.
In 1996, the Washington Study's authors, in association with researchers
from Tulane University, conducted a seven year follow-up study of the Lompoc
cohort. The follow-up study, funded by a grant from the National Institute for
Occupational Safety and Health, reported a lower SMR for the cohort (1.29 vs.
1.43), a weakened dose response relationship, which may suggest a less
conclusive indication of a causative relationship between occupational exposure
and cancer deaths, and a continued absence of excess lung cancers in workers
hired after 1960. Data errors later discovered in the follow-up study reduced
the final SMR to 1.22 and further weakened the dose response relationship. An
additional aspect of the study, which seeks to compare results of the cohort
study to radiographic readings of the workers, is ongoing.
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
During 1997, World Minerals reorganized and centralized much of the sales
functions of its foreign subsidiaries, placing many of them directly under World
Minerals ownership. As of December 31, 1997, World Minerals had 202 employees
worldwide, Celite had about 1,145 employees worldwide, and Harborlite had about
190 employees
-51-
52
worldwide. Europerlite had 54 employees, all located in Europe. Approximately
348 of Celite's employees and 45 of Harborlite's employees in the United States
are covered by collective bargaining agreements. All of the collective
bargaining agreements covering workers at Celite and Harborlite are in full
force and effect.
STEEL FASTENER BUSINESS
The Heads and Threads division of Alleghany, headquartered in Northbrook,
Illinois, is believed to be one of the nation's leading importers and
distributors of steel fasteners. Heads and Threads imports and sells commercial
fasteners -- nuts, bolts, screws, washers and other fasteners --for resale to
fastener manufacturers and distributors through a network of sales offices and
warehouses located in sixteen states. The strength of Heads and Threads lies in
its five major warehouses and fourteen regional satellite warehouses and long
years of association with suppliers and customers.
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 United
States. In addition, Heads and Threads' costs are subject to fluctuations in
foreign currency and import duties. Increases in import duties may result from
determinations by United States federal agencies that foreign countries are
violating United States laws or intellectual property rights, or are following
restrictive import policies. Heads and Threads' operations do not subject
Alleghany to a material risk from fluctuations in foreign currency or import
duties.
Regulations implementing the Fastener Quality Act, the effective date of
which has been postponed to 1998, will increase costs.
At December 31, 1997, Heads and Threads had about 182 employees.
REAL ESTATE BUSINESS
Headquartered in Sacramento, California, Alleghany Properties and its
subsidiary own and manage, among other real estate and real estate-related
assets, 30 properties in fee in California. Such properties are comprised
primarily of improved and unimproved commercial land (office, retail and
industrial), and improved and unimproved commercial and residential lots. A
major portion of API's real estate assets are located in North Natomas, the only
large undeveloped area in the City of Sacramento. Development in the area has
been delayed by flood plan zoning and wildlife habitat issues, both of which
appear to be close to resolution.
At December 31, 1997, API had 5 employees.
-52-
53
Item 2. Properties.
Alleghany's headquarters is located in leased office space of about 11,000
square feet at 375 Park Avenue in New York City.
CT&T and CTI lease about 282,000 square feet for their headquarters
operations in the Chicago Title and Trust Center, a 49-story office complex at
171 North Clark Street in Chicago, Illinois.
Ticor Title's and Security Union's headquarters are in leased premises of
about 45,000 square feet in Pasadena, California. CT&T and its subsidiaries own
or lease buildings or office space in approximately 550 locations throughout the
United States, primarily for CTI, Security Union and Ticor Title full-service
and satellite branch office operations.
In 1996, URG agreed to lease approximately 45,000 square feet of office
space for its new headquarters in Calabasas, California. The lease term is
expected to begin in the second quarter of 1998 upon completion of construction
and relocation. Currently, URG leases about 30,000 square feet of office space
for its headquarters operations in Woodland Hills, California. All of its five
branch office locations are also in leased space, ranging in size from about
2,900 square feet to 6,700 square feet. CUIC leases about 19,700 square feet of
office space. All three branch offices of The Center are also in leased space,
ranging in size from about 4,300 square feet to 5,800 square feet.
World Minerals' headquarters is located in leased premises of
approximately 13,000 square feet in Santa Barbara, California. Celite,
Harborlite, Europerlite and certain departments of World Minerals share 16,800
square feet of leased premises in Lompoc, California.
A description of the major plants and properties owned and operated by
Celite, Europerlite 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 Santa Barbara and Lompoc, California, the Nanterre,
France, Santiago, Chile and Izmir, Turkey, offices and the plant at Wissembourg,
France, which are leased.
-53-
54
Location and Approximate Product
Nature of Property Square Footage or Use
------------------ -------------- ------
CELITE:
Lompoc, CA 961,410 Diatomite filter aids,
Production facility; fillers, silicates and
17 multi-story specialty products
production buildings; 5
one-story warehouse
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 16,800 Administrative office
1 one-story building; and 3
units within 1 one-story
building.
Quincy, WA 60,941 Diatomite filter aids
Production facility; and fillers
Plant #1-1 multi-story
production building and 7
one-story buildings. Plant
#2-1 multi-story production
building and 6 one-story
buildings.
Murat, Department of 77,000 Diatomite filter aids
Cantal, France
Production facility;
1 one-story
manufacturing building;
2 one-story warehouses;
and 1 one-story office
building.
-54-
55
Location and Approximate Product
Nature of Property Square Footage or Use
------------------ -------------- ------
Nanterre, France 6,000 Sales and
1 single floor. administrative offices
Guadalajara, Mexico 116,610 Diatomite filter aids
Production facility; and fillers
2 multi-story production
buildings; 2 multi-story
pollution-control
buildings; and 20
one-story buildings.
Mexico City, Mexico 2,700 Sales and
1 single floor condominium. administrative offices
Arica, Chile 50,000 Diatomite filter aids
Production facility;
1 calcined line
(currently being
expanded to two lines);
1 natural line; 1
administration building;
1 laboratory; 1
warehouse building; 1
changing room building;
1 maintenance workshop;
and 1 product warehouse.
Santiago, Chile 1,682 Offices
1 single floor in a
multi-story, rented
office building.
Alicante, Spain 70,777 Diatomite filter aids
Production facility; and fillers
2 multi-story
manufacturing buildings;
3 one-story warehouses;
2 one-story office
buildings; 1 two-story
laboratory; and 3
miscellaneous buildings.
-55-
56
Location and Approximate Product
Nature of Property Square Footage or Use
------------------ -------------- ------
Changbai County, 95,000 Diatomite filter aids
Jilin Province, PRC
Production facility;
1 multi-story processing
facility; 4 one-story
warehouse buildings; 1
multi-story office
building; and 4
one-story miscellaneous
buildings.
Linjiang County, 74,665 Diatomite filter aids
Jilin Province, PRC
Production facility;
1 multi-story production
facility; 1 two-story
office building; 3
one-story warehouse
buildings; and 3
one-story miscellaneous
buildings.
Linjiang County, 142,000 Diatomite filter aids
Jilin Province, PRC
Production facility;
3 multi-story production
facilities; 1 one-story
office building; 2
one-story warehouse
buildings; and 5
one-story miscellaneous
buildings.
HARBORLITE:
Antonito, CO 9,780 Warehouse facilities
1 one-story for perlite ore
manufacturing building
and warehouse; 1
one-story office
building; and 1
one-story warehouse.
-56-
57
Location and Approximate Product
Nature of Property Square Footage or Use
------------------ -------------- ------
No Agua, NM 40,550 Perlite ore
Production facility;
1 six-story mill
building; 1 one-story
office and shop
building; and 8
miscellaneous one-story
buildings.
Superior, AZ 6,900 Perlite ore
Production facility;
1 one-story warehouse
building; and 1
one-story office
building.
Escondido, CA 8,450 Perlite filter aids
1 one-story warehouse
building; and 1
one-story office
building.
Green River, WY 17,300 Perlite filter aids
1 one-story warehouse
building; and 1
one-story office
building.
Vicksburg, MI 25,050 Perlite filter aids
2 one-story warehouse
buildings; and 1
one-story office
building.
Youngsville, NC 22,500 Perlite filter aids
1 one-story warehouse
building; 1 one-story
manufacturing building;
and 1 one-story office
building.
-57-
58
Location and Approximate Product
Nature of Property Square Footage or Use
------------------ -------------- ------
Quincy, FL 18,450 Perlite filter aids
1 one-story warehouse
building; 1 one-story
manufacturing building;
and 1 one-story office
building.
LaPorte, TX 23,000 Perlite filter aids and
1 one-story expansion fillers
warehouse and office
building.
Wissembourg, France 5,000 Perlite filter aids and
a portion of 1 fillers
multi-story production
and warehouse building.
Hessle, Humberside, 36,700 Perlite filter aids and
United Kingdom fillers
1 one-story
manufacturing building;
and 1 two-story office
building.
Dikili, Turkey 63,200 Perlite crushing mill
Production facility;
1 four-story
manufacturing building;
1 one-story warehouse
building; 1 one-story
raw material warehouse;
1 one-story office
building; and 1
one-story maintenance
shop.
Izmir, 1,000 Sales and
Turkey administrative offices
1 single floor.
-58-
59
Location and Approximate Product
Nature of Property Square Footage or Use
------------------ -------------- ------
EUROPERLITE:
Barcelona, Spain 70,300 Perlite filter aids and
Production facility; fillers
1 one-story
manufacturing and
warehouse building; 1
one-story raw material
warehouse; and 1
two-story office
building.
Milan, Italy 68,600 Perlite filter aids
Production facility;
1 one-story
manufacturing/ warehouse
building; 1 one-story
raw material warehouse;
and 1 two-story office
building.
WORLD MINERALS:
Santa Barbara, CA 13,000 Headquarters office
1 one-story rented building.
Celite's largest mine is located on 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.
World Minerals, Celite, Harborlite and Europerlite 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 rights to mine
diatomaceous earth in sections of Lake Myvatn, Iceland, and Celite's joint
ventures in PRC have rights to mine diatomaceous earth in sections of Jilin
Province, PRC.
-59-
60
The operations of Alleghany's Heads and Threads division are conducted in
16 states at 19 locations. There are either warehouses, or combined warehouses
and sales offices, at such locations; two locations are owned and the remainder
are leased. Heads and Threads' headquarters in Northbrook, Illinois is owned by
Alleghany.
API's headquarters is located in leased premises of approximately 2,500
square feet in Sacramento, California. API or its subsidiary owns 30 properties
in fee in California. Such properties are comprised primarily of improved and
unimproved commercial land (office, retail and industrial) and improved and
unimproved commercial and residential lots. In addition, 112.3 acres of
commercial/residential unimproved land located in Roseville, California, which
is subject to a first deed of trust, is held by a joint venture in dissolution
in which API has an interest, but the liquidation of such joint venture has not
yet been completed.
-60-
61
Item 3. Legal Proceedings.
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, 1997.
-61-
62
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 1997.
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:
Business Experience
Name Age Current Position During Last 5 Years
- ---- --- ---------------- -------------------
F.M. Kirby 78 Chairman of the Board Chairman of the Board,
Alleghany.
John J. Burns, Jr. 66 President, chief President, chief
executive officer and executive officer and
chief operating officer chief operating officer,
Alleghany.
David B. Cuming 65 Senior Vice President Senior Vice President
and chief financial and chief financial
officer officer, Alleghany.
Robert M. Hart 53 Senior Vice President, Senior Vice President
General Counsel and and General Counsel
Secretary since September 1994 and
Secretary since January
1995; Partner, Donovan
Leisure Newton & Irvine,
prior thereto.
Peter R. Sismondo 42 Vice President, Vice President,
Controller, Treasurer, Controller, Treasurer,
Assistant Secretary and Assistant Secretary and
principal accounting principal accounting
officer officer, Alleghany,
since January 1995; Vice
President, Controller,
Assistant Secretary and
principal accounting
officer, Alleghany, prior
thereto.
-62-
63
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The information required by this Item with respect to the market price of
and dividends on Alleghany's common stock and related stockholder matters is
incorporated by reference from page 18 of Alleghany's Annual Report to
Stockholders for the year 1997, filed as Exhibit 13 hereto.
Recent Sales of Unregistered Securities
Other than unregistered issuances of Alleghany common stock previously
reported in Alleghany's Quarterly Reports on Form 10-Q for the quarters ending
March 31, 1997, June 30, 1997 and September 30, 1997 and such issuances that did
not involve a sale consisting of issuances of common stock and other securities
pursuant to employee incentive plans, Alleghany did not sell any Alleghany
common stock during 1997 that was not registered under the Securities Act.
Item 6. Selected Financial Data.
The information required by this Item 6 is incorporated by reference from
page 18 of Alleghany's Annual Report to Stockholders for the year 1997, 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 1 through 4, from pages 6 through 16, and from pages 19 and 21, of
Alleghany's Annual Report to Stockholders for the year 1997, 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 22 through 38 of Alleghany's Annual Report to Stockholders for the year
1997, filed as Exhibit 13 hereto.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not applicable.
-63-
64
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 9 of Alleghany's Proxy Statement, filed or to
be filed in connection with its Annual Meeting of Stockholders to be held on
April 24, 1998. 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 11 of Alleghany's Proxy
Statement, filed or to be filed in connection with its Annual Meeting of
Stockholders to be held on April 24, 1998.
Item 11. Executive Compensation.
The information required by this Item 11 is incorporated by reference from
pages 11 through page 19 of Alleghany's Proxy Statement, filed or to be filed in
connection with its Annual Meeting of Stockholders to be held on April 24, 1998.
The information set forth beginning with the first full paragraph of page 19
through page 25 of Alleghany's Proxy Statement, filed or to be filed in
connection with its Annual Meeting of Stockholders to be held on April 24, 1998,
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 2 through 5, and from pages 10 through 11, of Alleghany's Proxy Statement,
filed or to be filed in connection with its Annual Meeting of Stockholders to be
held on April 24, 1998.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item 13 is incorporated by reference from
page 13 of Alleghany's Proxy Statement, filed or to be filed in connection with
its Annual Meeting of Stockholders to be held on April 24, 1998.
-64-
65
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 LLP, independent certified
public accountants, are incorporated by reference from the Annual Report to
Stockholders for the year 1997 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 LLP, 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
(Securities and Exchange Commission File No. 1-9371).
3.02 By-Laws of Alleghany as amended April 18, 1995, filed
as Exhibit 3.1 to Alleghany's Quarterly Report on Form
10-Q for the quarter ended March 31, 1995, is
incorporated herein by reference.
*10.01 Description of Alleghany Management Incentive Plan,
filed as Exhibit 10.01 to Alleghany's Annual Report on
Form 10-K for the year ended December 31, 1993, is
incorporated herein by reference.
- --------
* Compensatory plan or arrangement.
-65-
66
*10.02 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.
*10.03 Alleghany 1993 Long-Term Incentive Plan, as amended
and restated effective as of January 1, 1994, filed as
Exhibit 10.06(b) to Alleghany's Annual Report on Form
10-K for the year ended December 31, 1994, is
incorporated herein by reference.
*10.04 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 (Securities
and Exchange Commission File No. 1-9371).
*10.05(a) Trust Agreement Amendment made as of July 8, 1994
between Alleghany and Chemical Bank, filed as Exhibit
10.08(a) to Alleghany's Annual Report on Form 10-K for
the year ended December 31, 1995, is incorporated
herein by reference.
*10.05(b) Alleghany Retirement Plan, as amended and restated on
March 14, 1995, filed as Exhibit 10.08(c) to
Alleghany's Annual Report on Form 10-K for the year
ended December 31, 1994, is incorporated herein by
reference.
*10.05(c) Amendments to Alleghany Retirement Plan, effective as
of January 1, 1996, filed as Exhibit 10.1 to
Alleghany's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, is incorporated herein
by reference.
*10.05(d) Amendments to Alleghany Retirement Plan, effective
as of January 1, 1998.
- --------
* Compensatory plan or arrangement.
-66-
67
* 10.06 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 (Securities and
Exchange Commission File No. 1-9371).
*10.07 Description of Alleghany Group Long Term Disability
Plan effective as of July 1, 1995, filed as Exhibit
10.10 to Alleghany's Annual Report on Form 10-K for
the year ended December 31, 1995, is incorporated
herein by reference.
*10.08 Alleghany Amended and Restated Directors' Stock Option
Plan effective as of April 20, 1993, 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.
*10.09 Alleghany Directors' Equity Compensation Plan,
effective as of January 16, 1995, filed as Exhibit
10.11 to Alleghany's Annual Report on Form 10-K for
the year ended December 31, 1994, 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 (Securities and Exchange Commission File No.
1-9371).
*10.11(a) Description of compensatory arrangement between
Alleghany and Paul F. Woodberry.
- --------
* Compensatory plan or arrangement.
-67-
68
*10.11(b) Description of long-term incentive arrangement between
Alleghany and Paul F. Woodberry, filed as Exhibit
10.21(b) to Alleghany's Annual Report on Form 10-K for
the year ended December 31, 1995, is incorporated
herein by reference.
10.12 Revolving Credit Loan Agreement dated as of June 14,
1995 among Alleghany and Chemical Bank, filed as
Exhibit 10.1 to Alleghany's Quarterly Report on Form
10-Q for the quarter ended June 30, 1995, is
incorporated herein by reference.
10.13(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 (Securities and Exchange Commission File No.
1-9371).
10.13(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 (Securities
and Exchange Commission File No. 1-9371).
10.13(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 (Securities and Exchange Commission File
No. 1-9371).
- --------
* Compensatory plan or arrangement.
-68-
69
10.14 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 (Securities and Exchange
Commission File No. 1-9371).
10.15 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 (Securities and Exchange Commission File No.
1-9371).
10.16(a) Stock Purchase Agreement dated as of May 18, 1994 by
and between First Interstate Bank of California and
Alleghany (the "Sacramento Savings Stock Purchase
Agreement"), filed as Exhibit 10.1(a) to Alleghany's
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, is incorporated herein by reference.
10.16(b) List of Contents of Exhibits and Schedules to the
Sacramento Savings Stock Purchase Agreement, filed as
Exhibit 10.1(b) to Alleghany's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1994, is
incorporated herein by reference.
-69-
70
10.17(a) Note Purchase Agreement dated as of January 15, 1995
by and among Alleghany Properties, Inc., Alleghany and
Hartford Life Insurance Company Separate Account CRC
(the "Alleghany Properties Note Purchase Agreement"),
filed as Exhibit 10.28(a) to Alleghany's Annual Report
on Form 10-K for the year ended December 31, 1994, is
incorporated herein by reference. Agreements dated as
of January 15, 1995 among Alleghany Properties, Inc.,
Alleghany and each of Transamerica Life Insurance &
Annuity Company, Transamerica Occidental Life
Insurance Company, United of Omaha Life Insurance
Company, Mutual of Omaha Insurance Company, The
Lincoln National Life Insurance Company, Knights of
Columbus and Woodmen Accident and Life Company are
omitted pursuant to Instruction 2 of Item 601 of
Regulation S-K.
10.17(b) List of Contents of Annexes and Exhibits to the
Alleghany Properties Note Purchase Agreement, filed as
Exhibit 10.28(b) to Alleghany's Annual Report on Form
10-K for the year ended December 31, 1994, is
incorporated herein by reference.
10.17(c) Amendment to Alleghany Properties Note Purchase
Agreement dated as of June 23, 1995 among Alleghany,
Alleghany Properties, Inc. and the Purchasers listed
on Annex 1 to the Alleghany Properties Note Purchase
Agreement, filed as Exhibit 10.1 to Alleghany's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, is incorporated herein by
reference.
10.17(d) Amendment No. 2 to Alleghany Properties Note Purchase
Agreement dated as of November 6, 1995 among
Alleghany, Alleghany Properties, Inc. and the
Purchasers listed on Annex 1 to the Alleghany
Properties Note Purchase Agreement, filed as Exhibit
10.28(d) to Alleghany's Annual Report on Form 10-K for
the year ended December 31, 1995, is incorporated
herein by reference.
-70-
71
10.18(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 (Securities and
Exchange Commission File No. 1-9371).
10.18(b) Intercreditor and Collateral Agency Agreement dated as
of October 20, 1997 among The Chase Manhattan Bank,
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, 1997,
is incorporated herein by reference (Securities and
Exchange Commission File No. 1-9371).
10.18(c) Master Agreement dated as of October 20, 1997 between
Barclays Bank PLC and Alleghany Funding Corporation,
and related Amended Confirmation dated October 24,
1997 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, 1997, are incorporated herein by
reference (Securities and Exchange Commission File No.
1-9371).
10.18(d) Indenture dated as of October 20, 1997 between
Alleghany Funding Corporation and The Chase Manhattan
Bank, filed as Exhibit 10.3 to Alleghany's Quarterly
Report on Form 10-Q for the quarter ended September
30, 1997, is incorporated herein by reference
(Securities and Exchange Commission File No. 1-9371).
10.19(a) 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, filed as Exhibit 10.28(d) to Alleghany's Annual
Report on Form 10-K for the year ended December 31,
1993, is incorporated herein by reference.
-71-
72
10.19(b) 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 (Securities and Exchange Commission File
No. 1-9371).
10.19(c) Letter Agreement dated December 13, 1994 between CT&T
and Bank of America Illinois (previously known as
Continental Bank) relating to the transfer of
Continental Bank's risk management business to Bank of
America National Trust and Savings Association, filed
as Exhibit 10.31(f) to Alleghany's Annual Report on
Form 10-K for the year ended December 31, 1994, is
incorporated herein by reference.
10.20(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 (Securities and Exchange Commission File No.
1-9371).
10.20(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 (Securities and Exchange
Commission File No. 1-9371).
10.21(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 (Securities and
Exchange Commission File No. 1-9371).
-72-
73
10.21(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 (Securities and
Exchange Commission File No. 1-9371).
10.22(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 (Securities and Exchange Commission File No.
1-9371).
10.22(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 (Securities and Exchange
Commission File No. 1-9371).
10.22(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 (Securities and Exchange
Commission File No. 1-9371).
10.23(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 (Securities and
Exchange Commission File No. 1-9371).
-73-
74
10.23(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 (Securities and Exchange Commission File No.
1-9371).
10.23(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 (Securities and Exchange
Commission File No. 1-9371).
10.24(a) Amended and Restated Credit Agreement dated as of
March 10, 1995 (the "World Minerals Credit Agreement")
among Mineral Holdings Inc., World Minerals, the banks
named therein, NationsBank, N.A. (Carolinas), Bank of
America National Trust and Savings Association and
Chemical Bank, filed as Exhibit 10.36(a) to
Alleghany's Annual Report on Form 10-K for the year
ended December 31, 1995, is incorporated herein by
reference.
10.24(b) List of Contents of Exhibits and Annexes to World
Minerals Credit Agreement, filed as Exhibit 10.36(b)
to Alleghany's Annual Report on Form 10-K for the year
ended December 31, 1995, is incorporated herein by
reference.
10.24(c) 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 (Securities and Exchange Commission File No.
1-9371).
-74-
75
10.24(d) 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 (Securities and Exchange Commission File No.
1-9371).
10.25(a) Stock Purchase Agreement dated as of July 28, 1993
(the "Underwriters 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.
10.25(b) List of Contents of Exhibits and Schedules to the
Underwriters 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.
10.26(a) Credit Agreement dated as of October 23, 1996 among
URC Holdings Corp. (now known as Underwriters Re
Group, Inc.) the Lenders named therein and The First
National Bank of Chicago, as Agent, filed as Exhibit
10.1 to Alleghany's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1996, is incorporated
herein by reference.
10.26(b) Indenture dated as of June 25, 1996 between URC
Holdings Corp. (now known as Underwriters Re Group,
Inc.) and The First National Bank of Chicago, as
trustee, relating to the 7-7/8% Senior Notes due 2006,
filed as Exhibit 10.30(j) to Alleghany's Annual Report
on Form 10-K for the year ended December 31, 1996, is
incorporated herein by reference.
-75-
76
10.27(a) Agreement and Plan of Merger dated as of August 31,
1995, among Credit Data Reporting Services, Inc.,
Credit Data of Hudson Valley Inc., The Juhl
Corporation (collectively, the "Companies"), Alleghany
Acquisition Corporation, Alleghany and each of the
shareholders of the Companies (the "Credit Data Merger
Agreement"), filed as Exhibit 2.1 to Alleghany's
Registration Statement on Form S-3 (Registration No.
33-62477), is incorporated herein by reference.
10.27(b) List of Contents of Exhibits to the Credit Data Merger
Agreement, filed as Exhibit 2.2 to Alleghany's
Registration Statement on Form S-3 (Registration No.
33-62477), is incorporated herein by reference.
10.28(a) Agreement and Plan of Merger, dated as of July 1,
1996, among Market Intelligence, Inc. ("Market
Intelligence"), Alleghany Acquisition Corporation,
Alleghany and each of the shareholders of Market
Intelligence (the "Market Intelligence Merger
Agreement"), filed as Exhibit 2.1 to Alleghany's
Registration Statement on Form S-3 (Registration No.
333-9881), is incorporated herein by reference.
10.28(b) List of Contents of Exhibits to the Market
Intelligence Merger Agreement, filed as Exhibit 2.2 to
Alleghany's Registration Statement on Form S-3
(Registration No. 333-9881), is incorporated herein by
reference.
10.29(a) Agreement and Plan of Merger dated as of August 22,
1996 among Chicago Title of Colorado, Inc. ("CT of
Colorado"), Alleghany Acquisition Corporation,
Alleghany and each of the shareholders of CT of
Colorado (the "CT of Colorado Merger Agreement"),
filed as Exhibit 2.1 to Alleghany's Registration
Statement on Form S-3 (Registration No. 333-13971), is
incorporated herein by reference.
-76-
77
10.29(b) List of Contents of Exhibits to the CT of Colorado
Merger Agreement, filed as Exhibit 2.2 to Alleghany's
Registration Statement on Form S-3 (Registration No.
333-13971), is incorporated herein
by reference.
13 Pages 1 through 4, pages 6 through 16, and pages 18
through 38 of the Annual Report to Stockholders of
Alleghany for the year 1997.
21 List of subsidiaries of Alleghany.
23 Consent of KPMG Peat Marwick LLP, 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 Alleghany's
Registration Statements on Form S-8 (Registration
No. 33-27598), Form S-8 (Registration No. 333-323),
Form S-3 (Registration No. 33-55707), Form S-3
(Registration No. 33-62477), Form S-3 (Registration
No. 333-9981), Form S-3 (Registration No. 333-13971)
and Form S-8 (Registration No. 333-37237).
27 Financial Data Schedule.
(b) Reports on Form 8-K.
Alleghany filed a report on Form 8-K dated December 17, 1997, to report in
Item 5 that Alleghany issued a press release announcing the spin-off of the
title insurance and real estate-related services businesses conducted by CT&T.
-77-
78
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 17, 1998 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 17, 1998 By /s/ John J. Burns, Jr.
-------------- ------------------------------
John J. Burns, Jr.
President and Director
(principal executive
officer)
Date: March 17, 1998 By /s/ Dan R. Carmichael
-------------- ------------------------------
Dan R. Carmichael
Director
Date: March 17, 1998 By /s/ David B. Cuming
-------------- ------------------------------
David B. Cuming
Senior Vice President
(principal financial
officer)
Date: March 17, 1998 By /s/ Thomas S. Johnson
-------------- ------------------------------
Thomas S. Johnson
Director
Date: March 17, 1998 By /s/ Allan P. Kirby, Jr.
-------------- ------------------------------
Allan P. Kirby, Jr.
Director
-78-
79
Date: March 17, 1998 By /s/ F.M. Kirby
-------------- ------------------------------
F.M. Kirby
Chairman of the Board
and Director
Date: March 17, 1998 By /s/ William K. Lavin
-------------- ------------------------------
William K. Lavin
Director
Date: March 17, 1998 By /s/ Roger Noall
-------------- ------------------------------
Roger Noall
Director
Date: March 17, 1998 By /s/ Peter R. Sismondo
-------------- ------------------------------
Peter R. Sismondo
Vice President, Controller,
Treasurer and Assistant
Secretary (principal
accounting officer)
Date: March 17, 1998 By /s/ James F. Will
-------------- ------------------------------
James F. Will
Director
Date: March 17, 1998 By /s/ Paul F. Woodberry
-------------- ------------------------------
Paul F. Woodberry
Director
-79-
80
ALLEGHANY CORPORATION
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULES
I SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED
PARTIES
II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
III SUPPLEMENTARY INSURANCE INFORMATION
IV REINSURANCE
VI SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE
OPERATIONS
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.
81
SCHEDULE I
ALLEGHANY CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS -- OTHER THAN
INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1997
(in thousands)
Amount at which
Fair shown in the
Type of Investment Cost Value Balance Sheet
====================================================================================================================
Fixed maturities:
Bonds:
United States Government and government
agencies and authorities $ 326,460 $ 333,866 $ 333,866
States, municipalities and political subdivisions 360,916 368,981 368,981
Foreign governments 19,264 19,337 19,337
Public utilities 3,125 3,196 3,196
All other corporate bonds 367,685 372,696 372,696
Certificates of deposit 2,500 2,500 2,500
Redeemable preferred stock 33,917 34,956 34,956
-------------- --------------- ------------
Fixed maturities 1,113,867 $ 1,135,532 1,135,532
-------------- =============== ------------
Equity securities:
Common stocks:
Banks, trust, and insurance companies 16,000 $ 16,000 16,000
Industrial, miscellaneous, and all other 323,888 767,433 767,433
-------------- --------------- ------------
Total equity securities 339,888 $ 783,433 783,433
-------------- =============== ------------
Other long-term investments 28,058 28,878
Short-term investments 113,156 113,156
-------------- ------------
Total investments $ 1,594,969 $ 2,060,999
============== ============
82
SCHEDULE II
ALLEGHANY CORPORATION
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(in thousands)
1997 1996
------------------------
ASSETS
Investment securities
(Cost: 1997 $218,307; 1996 $209,943) $ 499,502 $ 452,495
Cash 0 1,855
Accounts and other receivables, less allowances 20,560 18,158
Property and equipment - at cost, less accumulated depreciation 3,049 2,440
Other assets 32,118 29,378
Investment in CT&T (discontinued operations) 385,451 344,820
Investment in consolidated subsidiaries 865,131 788,679
------------------------
$1,805,811 $1,637,825
========================
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Other liabilities $ 76,896 $ 78,043
Net deferred tax liability 122,857 117,399
Long-term debt 35,123 19,123
------------------------
Total liabilities 234,876 214,565
Commitments and contingent liabilities
Common stockholders' equity 1,570,935 1,423,260
------------------------
$1,805,811 $1,637,825
========================
See accompanying Notes to Condensed Financial Statements.
83
SCHEDULE II
ALLEGHANY CORPORATION
CONDENSED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 1997
(in thousands)
1997 1996 1995
----------------------------------
Revenues:
Interest, dividend and other income $ 61,362 $ 58,647 $59,967
Net (loss) gain on investment transactions (11,280) 801 37,836
----------------------------------
Total revenues 50,082 59,448 97,803
----------------------------------
Costs and Expenses:
Interest expense 4,466 3,444 5,832
General and administrative 73,908 67,192 69,694
----------------------------------
Total costs and expenses 78,374 70,636 75,526
----------------------------------
Operating (loss) income (28,292) (11,188) 22,277
Equity in earnings of consolidated subsidiaries 93,522 68,578 61,976
----------------------------------
Earnings from continuing operations, before income taxes 65,230 57,390 84,253
Income taxes 13,830 16,920 23,887
----------------------------------
Earnings from continuing operations 51,400 40,470 60,366
Earnings from discontinued operations, net of tax 54,267 46,578 24,934
----------------------------------
Net earnings $ 105,667 $ 87,048 $85,300
==================================
See accompanying Notes to Condensed Financial Statements.
84
SCHEDULE II
ALLEGHANY CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997
(in thousands)
1997 1996 1995
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Earnings from continuing operations $ 51,400 $ 40,470 $ 60,366
Adjustments to reconcile earnings from continuing operations
to cash provided by (used in) continuing operations:
Depreciation and amortization 501 463 539
Net loss (gain) loss on investment transactions 11,280 (801) (37,836)
(Increase) decrease in accounts and other receivables, less allowances (2,402) 884 (1,852)
Decrease (increase) in other assets (2,874) 3,554 (2,973)
(Decrease) increase in other liabilities (7,375) (12,268) 20,638
Other operating, net 1,226 (1,625) 2,644
Equity in undistributed net earnings of consolidated subsidiaries (64,007) (46,731) (44,925)
------------------------------------
Net adjustments (63,651) (56,524) (63,765)
------------------------------------
Cash used in continuing operations (12,251) (16,054) (3,399)
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investments (250,930) (7,502) (92,005)
Sales of investments 226,032 6,469 124,110
Capital contributions to consolidated subsidiaries (1,171) (446) (33,700)
Cash dividends from consolidated subsidiaries 14,362 4,441 43,903
Purchase of property and equipment (976) (333) (354)
Disposition of property and equipment 0 18 1
------------------------------------
Net cash provided by investing activities (12,683) 2,647 41,955
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term debt 0 (35,000) (129,600)
Proceeds of long-term debt 16,000 35,000 70,000
Cash provided by discontinued operations 18,805 30,000 25,313
Other, net (11,726) (15,570) (4,932)
------------------------------------
Net cash provided by (used in) financing activities 23,079 14,430 (39,219)
------------------------------------
Net (decrease) increase in cash (1,855) 1,023 (663)
Cash at beginning of year 1,855 832 1,495
------------------------------------
CASH AT END OF YEAR $ 0 $ 1,855 $ 832
====================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest $ 4,869 $ 3,443 $ 5,982
Income taxes $ 34,100 $ 54,822 $ 11,979
Supplemental disclosure of noncash investing and financing activities:
In 1996, Alleghany made a noncash capital contribution to its consolidated
subsidiaries by contributing two newly-acquired companies with a combined
cost basis of $994.
In 1995, Alleghany made a noncash capital contribution to its consolidated
subsidiaries by contributing a newly-acquired company with a cost
basis of $4,480.
See accompanying Notes to Condensed Financial Statements.
85
SCHEDULE II
ALLEGHANY CORPORATION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(in thousands)
1. INVESTMENT IN CONSOLIDATED SUBSIDIARIES. Reference is made to Note 2 of
the Notes to Consolidated Financial Statements incorporated herein by reference
for information regarding the spin-off of Chicago Title and Trust.
2. LONG-TERM DEBT. Reference is made to Note 6 of the Notes to Consolidated
Financial Statements incorporated herein by reference for information regarding
the significant provisions of the revolving credit loan agreement of Alleghany.
Included in long-term debt in the accompanying condensed balance sheets is
$19,123 in 1997 and 1996 of intercompany notes payable due to Alleghany Funding.
3. INCOME TAXES. Reference is made to Note 7 of the Notes to Consolidated
Financial Statements incorporated herein by reference.
4. COMMITMENTS AND CONTINGENCIES. Reference is made to Note 12 of the Notes
to Consolidated Financial Statements incorporated herein by reference.
5. STOCKHOLDERS' EQUITY. Reference is made to Note 8 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.
86
SCHEDULE III
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
- ------ ------------ -------------------------------------------
1997 Property
and casualty
reinsurance $29,644 $1,159,070 $136,288 $0
===========================================
1996 Property
and casualty
reinsurance $20,771 $1,110,020 $ 95,472 $0
===========================================
1995 Property
and casualty
reinsurance $16,951 $1,014,000 $ 74,561 $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
- ------ ------------ -------------------------------------------------------------------
1997 Property
and casualty
reinsurance $376,672 $75,531 $261,828 $94,444 $51,769 $414,191
===================================================================
1996 Property
and casualty
reinsurance $346,777 $63,184 $243,725 $88,895 $40,373 $360,305
===================================================================
1995 Property
and casualty
reinsurance $277,507 $50,173 $203,108 $63,617 $29,833 $291,995
===================================================================
87
SCHEDULE IV
ALLEGHANY CORPORATION AND SUBSIDIARIES
REINSURANCE
THREE YEARS ENDED DECEMBER 31, 1997
(in thousands)
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED
YEAR SEGMENT AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- ------ ---------------------- ------------------------------------------------------
1997 Property and casualty
reinsurance premiums $112,158 $88,416 $352,930 $376,672 94%
======================================================
1996 Property and casualty
reinsurance premiums $ 85,437 $65,968 $327,308 $346,777 94.39%
======================================================
1995 Property and casualty
reinsurance premiums $ 42,413 $85,234 $320,328 $277,507 115.43%
======================================================
88
SCHEDULE VI
ALLEGHANY CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
(in thousands)
DISCOUNT,
IF ANY,
RESERVES DEDUCTED CLAIMS AND CLAIM
FOR IN RESERVES ADJUSTMENT EXPENSES
UNPAID FOR UNPAID INCURRED RELATED TO
DEFERRED CLAIMS CLAIMS -------------------
AFFILIATION POLICY AND CLAIM AND CLAIM NET (1) (2)
WITH ACQUISITION ADJUSTMENT ADJUSTMENT UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COST EXPENSES EXPENSES PREMIUMS PREMIUMS INCOME YEAR YEAR
- ------------ -----------------------------------------------------------------------------------------
1997
Consolidated
property-
casualty
entities $29,644 $1,159,070 $0 $136,288 $376,672 $75,531 267,530 ($5,702)
=========================================================================================
1996
Consolidated
property-
casualty
entities $20,771 $1,110,020 $0 $ 95,472 $346,777 $63,184 242,332 $1,393
=========================================================================================
1995
Consolidated
property-
casualty
entities $16,951 $1,014,000 $0 $ 74,561 $277,507 $50,173 199,783 $3,325
=========================================================================================
AMORTIZATION
OF DEFERRED PAID CLAIMS
AFFILIATION POLICY AND CLAIM
WITH ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COSTS EXPENSES WRITTEN
- ------------ -----------------------------------
1997
Consolidated
property-
casualty
entities $94,444 $210,015 $414,191
===================================
1996
Consolidated
property-
casualty
entities $88,895 $139,689 $360,305
===================================
1995
Consolidated
property-
casualty
entities $63,617 $111,005 $291,995
===================================
89
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Alleghany Corporation:
Under date of February 20, 1998, we reported on the consolidated balance sheets
of Alleghany Corporation and subsidiaries as of December 31, 1997 and 1996 and
the related consolidated statements of earnings, changes in stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1997 as contained in the 1997 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 1997. In connection
with our audits of the aforementioned consolidated financial statements, we also
have audited the related financial statements schedules as listed in the
accompanying index. These financial statements schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements schedules based on our audits.
In our opinion, such financial statements 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.
/s/ KPMG Peat Marwick LLP
--------------------------------------
KPMG Peat Marwick LLP
New York, New York
February 20, 1998
90
EXHIBIT INDEX
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 (Securities and Exchange
Commission File No. 1-9371).
3.02 By-Laws of Alleghany as amended April 18,
1995, filed as Exhibit 3.1 to
Alleghany's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995, is
incorporated herein by reference.
*10.01 Description of Alleghany Management
Incentive Plan, filed as Exhibit 10.01 to
Alleghany's Annual Report on Form 10-K
for the year ended December 31, 1993, is
incorporated herein by reference.
*10.02 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.
*10.03 Alleghany 1993 Long-Term Incentive Plan,
as amended and restated effective as of
January 1, 1994, filed as Exhibit
10.06(b) to Alleghany's Annual Report on
Form 10-K for the year ended December 31,
1994, is incorporated herein by
reference.
* Compensatory plan or arrangement.
91
*10.04 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
(Securities and Exchange Commission File
No. 1-9371).
*10.05(a) Trust Agreement Amendment made as of July
8, 1994 between Alleghany and Chemical
Bank, filed as Exhibit 10.08(a) to
Alleghany's Annual Report on Form 10-K
for the year ended December 31, 1995, is
incorporated herein by reference.
*10.05(b) Alleghany Retirement Plan, as amended and
restated on March 14, 1995, filed as
Exhibit 10.08(c) to Alleghany's Annual
Report on Form 10-K for the year ended
December 31, 1994, is incorporated herein
by reference.
*10.05(c) Amendments to Alleghany Retirement Plan,
effective as of January 1, 1996, filed as
Exhibit 10.1 to Alleghany's Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1996, is incorporated herein by
reference.
*10.05(d) Amendments to Alleghany Retirement Plan,
effective as of January 1, 1998.
*10.06 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 (Securities and Exchange
Commission File No. 1-9371).
*10.07 Description of Alleghany Group Long Term
Disability Plan effective as of July 1,
1995, filed as Exhibit 10.10 to
Alleghany's Annual Report on Form 10-K
for the year ended December 31, 1995, is
incorporated herein by reference.
* Compensatory plan or arrangement.
92
*10.08 Alleghany Amended and Restated Directors'
Stock Option Plan effective as of April
20, 1993, 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.
*10.09 Alleghany Directors' Equity Compensation
Plan, effective as of January 16, 1995,
filed as Exhibit 10.11 to Alleghany's
Annual Report on Form 10-K for the year
ended December 31, 1994, 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
(Securities and Exchange Commission File
No. 1-9371).
*10.11(a) Description of compensatory arrangement
between Alleghany and Paul F.
Woodberry.
*10.11(b) Description of long-term incentive
arrangement between Alleghany and Paul F.
Woodberry, filed as Exhibit 10.21(b) to
Alleghany's Annual Report on Form 10-K
for the year ended December 31, 1995, is
incorporated herein by reference.
10.12 Revolving Credit Loan Agreement dated as
of June 14, 1995 among Alleghany
and Chemical Bank, filed as Exhibit 10.1
to Alleghany's Quarterly Report on
Form 10-Q for the quarter ended June 30,
1995, is incorporated herein by
reference.
* Compensatory plan or arrangement.
93
10.13(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
(Securities and Exchange Commission File
No. 1-9371).
10.13(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
(Securities and Exchange Commission File
No. 1-9371).
10.13(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
(Securities and Exchange Commission File
No. 1-9371).
10.14 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
(Securities and Exchange Commission File
No. 1-9371).
10.15 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
(Securities and Exchange Commission File
No. 1-9371).
10.16(a) Stock Purchase Agreement dated as of May
18, 1994 by and between First Interstate
Bank of California and Alleghany (the
"Sacramento Savings Stock Purchase
Agreement"), filed as Exhibit 10.1(a) to
Alleghany's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994, is
incorporated herein by reference.
94
10.16(b) List of Contents of Exhibits and
Schedules to the Sacramento Savings Stock
Purchase Agreement, filed as Exhibit
10.1(b) to Alleghany's Quarterly Report
on Form 10-Q for the quarter ended June
30, 1994, is incorporated herein by
reference.
10.17(a) Note Purchase Agreement dated as of
January 15, 1995 by and among Alleghany
Properties, Inc., Alleghany and Hartford
Life Insurance Company Separate Account
CRC (the "Alleghany Properties Note
Purchase Agreement"), filed as Exhibit
10.28(a) to Alleghany's Annual Report on
Form 10-K for the year ended December 31,
1994, is incorporated herein by
reference. Agreements dated as of January
15, 1995 among Alleghany Properties,
Inc., Alleghany and each of Transamerica
Life Insurance & Annuity Company,
Transamerica Occidental Life Insurance
Company, United of Omaha Life Insurance
Company, Mutual of Omaha Insurance
Company, The Lincoln National Life
Insurance Company, Knights of Columbus
and Woodmen Accident and Life Company are
omitted pursuant to Instruction 2 of Item
601 of Regulation S-K.
10.17(b) List of Contents of Annexes and Exhibits
to the Alleghany Properties Note Purchase
Agreement, filed as Exhibit 10.28(b) to
Alleghany's Annual Report on Form 10-K
for the year ended December 31, 1994, is
incorporated herein by reference.
10.17(c) Amendment to Alleghany Properties Note
Purchase Agreement dated as of June 23,
1995 among Alleghany, Alleghany
Properties, Inc. and the Purchasers
listed on Annex 1 to the Alleghany
Properties Note Purchase Agreement, filed
as Exhibit 10.1 to Alleghany's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1995, is incorporated
herein by reference.
95
10.17(d) Amendment No. 2 to Alleghany Properties
Note Purchase Agreement dated as of
November 6, 1995 among Alleghany,
Alleghany Properties, Inc. and the
Purchasers listed on Annex 1 to the
Alleghany Properties Note Purchase
Agreement, filed as Exhibit 10.28(d) to
Alleghany's Annual Report on Form
10-K for the year ended December 31,
1995, is incorporated herein by
reference.
10.18(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
(Securities and Exchange Commission File
No. 1-9371).
10.18(b) Intercreditor and Collateral Agency
Agreement dated as of October 20, 1997
among The Chase Manhattan Bank, 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, 1997,
is incorporated herein by reference
(Securities and Exchange Commission File
No. 1-9371).
10.18(c) Master Agreement dated as of October 20,
1997 between Barclays Bank PLC and
Alleghany Funding Corporation, and
related Amended Confirmation dated
October 24, 1997 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, 1997, are
incorporated herein by reference
(Securities and Exchange Commission File
No. 1-9371).
10.18(d) Indenture dated as of October 20, 1997
between Alleghany Funding Corporation and
The Chase Manhattan Bank, filed as
Exhibit 10.3 to Alleghany's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1997, is incorporated
herein by reference (Securities and
Exchange Commission File No. 1-9371).
96
10.19(a) 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,
filed as Exhibit 10.28(d) to Alleghany's
Annual Report on Form 10-K for the year
ended December 31, 1993, is incorporated
herein by reference.
10.19(b) 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
(Securities and Exchange Commission File
No. 1-9371).
10.19(c) Letter Agreement dated December 13, 1994
between CT&T and Bank of America Illinois
(previously known as Continental Bank)
relating to the transfer of Continental
Bank's risk management business to Bank
of America National Trust and Savings
Association, filed as Exhibit 10.31(f) to
Alleghany's Annual Report on Form 10-K
for the year ended December 31, 1994, is
incorporated herein by reference.
10.20(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 (Securities and Exchange
Commission File No. 1-9371).
10.20(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
(Securities and Exchange Commission File
No. 1-9371).
97
10.21(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
(Securities and Exchange Commission File
No. 1-9371).
10.21(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 (Securities and Exchange
Commission File No. 1-9371).
10.22(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 (Securities and Exchange
Commission File No. 1-9371).
10.22(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
(Securities and Exchange Commission File
No. 1-9371).
10.22(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 (Securities and Exchange
Commission File No. 1-9371).
98
10.23(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 (Securities and Exchange
Commission File No. 1-9371).
10.23(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
(Securities and Exchange Commission File
No. 1-9371).
10.23(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 (Securities and
Exchange Commission File No. 1-9371).
10.24(a) Amended and Restated Credit Agreement
dated as of March 10, 1995 (the "World
Minerals Credit Agreement") among Mineral
Holdings Inc., World Minerals, the banks
named therein, NationsBank, N.A.
(Carolinas), Bank of America National
Trust and Savings Association and
Chemical Bank, filed as Exhibit 10.36(a)
to Alleghany's Annual Report on Form 10-K
for the year ended December 31, 1995, is
incorporated herein by reference.
10.24(b) List of Contents of Exhibits and Annexes
to World Minerals Credit Agreement, filed
as Exhibit 10.36(b) to Allegheny's Annual
Report on Form 10-K for the year ended
December 31, 1995, is incorporated herein
by reference.
99
10.24(c) 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 (Securities and Exchange
Commission File No. 1-9371).
10.24(d) 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
(Securities and Exchange Commission File
No. 1-9371).
10.25(a) Stock Purchase Agreement dated as of July
28, 1993 (the "Underwriters 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.
10.25(b) List of Contents of Exhibits and
Schedules to the Underwriters 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.
10.26(a) Credit Agreement dated as of October 23,
1996 among URC Holdings Corp. (now known
as Underwriters Re Group, Inc.) the
Lenders named therein and The First
National Bank of Chicago, as Agent, filed
as Exhibit 10.1 to Alleghany's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1996, is incorporated
herein by reference.
100
10.26(b) Indenture dated as of June 25, 1996
between URC Holdings Corp. (now known as
Underwriters Re Group, Inc.) and The
First National Bank of Chicago, as
trustee, relating to the 7-7/8% Senior
Notes due 2006, filed as Exhibit 10.30(j)
to Alleghany's Annual Report on Form 10-K
for the year ended December 31, 1996, is
incorporated herein by reference.
10.27(a) Agreement and Plan of Merger dated as of
August 31, 1995, among Credit Data
Reporting Services, Inc., Credit Data of
Hudson Valley Inc., The Juhl Corporation
(collectively, the "Companies"),
Alleghany Acquisition Corporation,
Alleghany and each of the shareholders of
the Companies (the "Credit Data Merger
Agreement"), filed as Exhibit 2.1 to
Alleghany's Registration Statement on
Form S-3 (Registration No. 33-62477), is
incorporated herein by reference.
10.27(b) List of Contents of Exhibits to the
Credit Data Merger Agreement, filed as
Exhibit 2.2 to Alleghany's Registration
Statement on Form S-3 (Registration
No. 33-62477), is incorporated herein
by reference.
10.28(a) Agreement and Plan of Merger, dated as of
July 1, 1996, among Market Intelligence,
Inc. ("Market Intelligence"), Alleghany
Acquisition Corporation, Alleghany and
each of the shareholders of Market
Intelligence (the "Market Intelligence
Merger Agreement"), filed as Exhibit 2.1
to Alleghany's Registration Statement on
Form S-3 (Registration No. 333-9881), is
incorporated herein by reference.
10.28(b) List of Contents of Exhibits to the
Market Intelligence Merger Agreement,
filed as Exhibit 2.2 to Alleghany's
Registration Statement on Form S-3
(Registration No. 333-9881), is
incorporated herein by reference.
101
10.29(a) Agreement and Plan of Merger dated as of
August 22, 1996 among Chicago Title of
Colorado, Inc. ("CT of Colorado"),
Alleghany Acquisition Corporation,
Alleghany and each of the shareholders of
CT of Colorado (the "CT of Colorado
Merger Agreement"), filed as Exhibit 2.1
to Alleghany's Registration Statement on
Form S-3 (Registration No. 333-13971), is
incorporated herein by reference.
10.29(b) List of Contents of Exhibits to the CT of
Colorado Merger Agreement, filed as
Exhibit 2.2 to Alleghany's Registration
Statement on Form S-3 (Registration No.
333-13971), is incorporated herein
by reference.
13 Pages 1 through 4, pages 6 through 16,
and pages 18 through 38 of the Annual
Report to Stockholders of Alleghany for
the year 1997.
21 List of subsidiaries of Alleghany.
23 Consent of KPMG Peat Marwick LLP,
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 Alleghany's
Registration Statements on Form S-8
(Registration No. 33-27598), Form S-8
(Registration No. 333-323), Form S-8
(Registration No. 333-37237), Form S-3
(Registration No. 33-55707), Form S-3
(Registration No. 33-62477), Form S-3
(Registration No. 333-9981), and Form S-3
(Registration No. 333-13971).
27 Financial Data Schedule.