10-Q 1 y62572e10vq.txt ALLEGHANY CORPORATION SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED JUNE 30, 2002 COMMISSION FILE NUMBER 1-9371 ALLEGHANY CORPORATION --------------------------------------------------------------------- EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER DELAWARE --------------------------------------------------------------------- STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION 51-0283071 --------------------------------------------------------------------- INTERNAL REVENUE SERVICE EMPLOYER IDENTIFICATION NUMBER 375 PARK AVENUE, NEW YORK NY 10152 --------------------------------------------------------------------- ADDRESS OF PRINCIPAL EXECUTIVE OFFICE, INCLUDING ZIP CODE 212-752-1356 --------------------------------------------------------------------- REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE NOT APPLICABLE --------------------------------------------------------------------- FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE YES X NO --------------------------------------------------------------------- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASS OF COMMON STOCK, AS OF THE CLOSE OF THE PERIOD COVERED BY THIS REPORT: 7,288,952 SHARES AS OF JUNE 30, 2002 --------------------------------------------------------------------- ITEM 1. FINANCIAL STATEMENTS ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001 (dollars in thousands, except share and per share amounts) (unaudited)
2002 2001 --------- --------- REVENUES Net fastener sales $28,953 $30,665 Interest, dividend and other income 10,990 14,149 Net insurance premiums earned 30,647 0 Net mineral and filtration sales 56,501 58,023 Gain (loss) on sale of subsidiary 0 (13) Net gain on investment transactions 4,354 936 --------- --------- Total revenues 131,445 103,760 --------- --------- COSTS AND EXPENSES Commissions and brokerage expenses 6,063 0 Salaries, administrative and other operating expenses 22,389 22,443 Loss and loss adjustment expenses 24,340 0 Cost of goods sold-fasteners 22,002 26,046 Cost of mineral and filtration sales 38,334 39,916 Interest expense 1,623 3,931 Corporate administration 3,251 8,976 --------- --------- Total costs and expenses 118,002 101,312 --------- --------- Earnings from continuing operations, before income taxes 13,443 2,448 Income taxes 4,547 (99) --------- --------- Earnings from continuing operations 8,896 2,547 DISCONTINUED OPERATIONS (Loss) from discontinued operations, net of tax 0 (11,865) --------- --------- Net earnings (loss) $8,896 ($9,318) ========= ========= BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK ** Continuing operations $1.21 $0.34 Discontinued operations 0.00 (1.60) --------- --------- Basic net earnings per share $1.21 ($1.26) --------- --------- DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK ** Continuing operations $1.11 $0.34 Discontinued operations 0.00 (1.60) --------- --------- Diluted net earnings per share $1.11 ($1.26) ========= ========= Dividends per share of common stock * * ========= ========= Average number of outstanding shares of common stock ** 7,332,402 7,388,656 ========= =========
* In March 2002, Alleghany declared a dividend consisting of one share of Alleghany common stock for every fifty shares outstanding. ** Adjusted to reflect the common stock dividend declared in March 2002. ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (dollars in thousands, except share and per share amounts) (unaudited)
2002 2001 --------- --------- REVENUES Net fastener sales $56,885 $64,428 Interest, dividend and other income 19,997 29,831 Net insurance premiums earned 59,670 0 Net mineral and filtration sales 106,484 108,181 Gain on sale of subsidiary 0 775,810 Net gain on investment transactions 38,947 1,313 --------- --------- Total revenues 281,983 979,563 --------- --------- COSTS AND EXPENSES Commissions and brokerage expenses 11,556 0 Salaries, administrative and other operating expenses 44,515 41,441 Loss and loss adjustment expenses 43,227 0 Cost of goods sold-fasteners 43,087 53,133 Cost of mineral and filtration sales 74,574 78,829 Interest expense 3,296 7,945 Corporate administration 9,014 32,707 --------- --------- Total costs and expenses 229,269 214,055 --------- --------- Earnings from continuing operations, before income taxes 52,714 765,508 Income taxes 17,990 296,764 --------- --------- Earnings from continuing operations 34,724 468,744 DISCONTINUED OPERATIONS (Loss) from discontinued operations, net of tax 0 (22,653) --------- --------- Net earnings $34,724 $446,091 ========= ========= BASIC EARNINGS (LOSS) PER SHARE OF COMMON STOCK ** Continuing operations $4.73 $63.53 Discontinued operations 0.00 (3.07) --------- --------- Basic net earnings per share $4.73 $60.46 ========= ========= DILUTED EARNINGS (LOSS) PER SHARE OF COMMON STOCK ** Continuing operations $4.62 $62.70 Discontinued operations 0.00 (3.02) --------- --------- Diluted net earnings per share $4.62 $59.68 ========= ========= Dividends per share of common stock * * ========= ========= Average number of outstanding shares of common stock ** 7,337,815 7,377,808 ========= =========
* In March 2002, Alleghany declared a dividend consisting of one share of Alleghany common stock for every fifty shares outstanding. ** Adjusted to reflect the common stock dividend declared in March 2002. ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS JUNE 30, 2002 AND DECEMBER 31, 2001 (dollars in thousands, except share and per share amounts)
(Unaudited) June 30, December 31, 2002 2001 ---------- ---------- Assets 6/30/02 12/31/01 Available for sale securities: -------- -------- Fixed maturities (cost $477,240 $0 ) $482,439 $0 Equity securities (cost $292,529 $226,226 ) 596,205 550,826 Short-term investments 274,846 796,511 ---------- ---------- 1,353,490 1,347,337 Cash 32,276 15,717 Notes receivable 92,289 91,536 Accounts receivables 95,966 57,161 Reinsurance receivable 155,849 0 Property and equipment - at cost, less accumulated depreciation and amortization 172,687 169,622 Inventory 68,568 71,169 Goodwill and other intangibles, net of amortization 112,060 49,708 Other assets 103,888 72,755 ---------- ---------- $2,187,073 $1,875,005 ========== ========== Liabilities and Common Stockholders' Equity Current taxes payable $32,203 $90,209 Losses and loss adjustment expenses 246,144 0 Other liabilities 130,624 103,595 Unearned premiums 65,812 0 Subsidiaries' debt 173,766 181,856 Net deferred tax liability 129,818 108,763 ---------- ---------- Total liabilities 778,367 484,423 Common stockholders' equity 1,408,706 1,390,582 ---------- ---------- $2,187,073 $1,875,005 ========== ========== Shares of common stock outstanding 7,288,952 7,350,006 * ========== ========== Common stockholders' equity per share $193.27 $189.20 * ========== ==========
* Adjusted to reflect the common stock dividend declared in March 2002. ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOW FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (dollars in thousands) (unaudited)
2002 2001 ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Net earnings from continuing operations $34,704 $468,744 Adjustments to reconcile net earnings to cash (used in) provided by operations: Depreciation and amortization 10,065 8,523 Net gain on investment transactions (38,947) (476,119) Tax benefit on stock options exercised 1,176 725 Other charges, net 9,997 (8,351) Increase in other receivables (37,049) (2,269) Decrease in other assets 24,597 11,449 (Decrease) increase in other liabilities and income taxes payable (44,493) 192,877 Increase in unearned premium reserve 7,838 0 Decrease in losses and loss adjustment expenses (20,542) 0 Decrease in reinsurance receivable 26,357 0 ------- -------- Net adjustments (61,001) (273,165) ------- -------- Cash (used in) provided by operations (26,297) 195,579 ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (561,331) (77,042) Sales of investments 325,661 48,468 Purchases of property and equipment (5,579) (5,681) Net change in short-term investments 544,167 (700,683) Other, net (16,489) (6,146) Acquisition of insurance companies, net of cash acquired (221,056) 0 Proceeds from sale of subsidiaries, net of cash disposed 0 531,477 ------- -------- Net cash provided by (used in) investing activities 65,373 (209,607) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt (90,641) (172,112) Proceeds of long-term debt 82,316 181,628 Treasury stock acquisitions (18,360) (5,971) Other, net 4,168 10,035 ------- -------- Net cash (used in) provided by financing activities (22,517) 13,580 ------- -------- Net increase (decrease) in cash 16,559 (448) Cash at beginning of period 15,717 10,247 ------- -------- Cash at end of period $32,276 $9,799 ======= ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $2,876 $8,002 Income taxes $48,873 $3,073
Notes to the Consolidated Financial Statements This report should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2001 (the "2001 Form 10-K") and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 (the "2002 First Quarter Form 10-Q") of Alleghany Corporation (the "Company"). The information included in this report is unaudited but reflects all adjustments which, in the opinion of management, are necessary to a fair statement of the results of the interim periods covered thereby. All adjustments are of a normal and recurring nature except as described herein. On January 4, 2002, the Company completed the acquisition of Capitol Transamerica Corporation ("CATA") for a total purchase price of approximately $182 million, of which $62.8 million was allocated to goodwill and intangibles. Contemporaneous with the acquisition of CATA, the Company purchased a Nebraska-domiciled insurance company for a total purchase price of approximately $40 million, of which $8.3 million was allocated to goodwill and intangibles. The Company applies the following significant accounting policies to its insurance operations: a. DEFERRED ACQUISITION COSTS Acquisition costs that vary with, and are directly related to, the production of premiums (principally commissions, premium taxes, compensation and certain underwriting expenses) are deferred. Deferred acquisition costs are amortized to expense as the related premiums are earned. Deferred acquisition costs are periodically reviewed to determine their recoverability from future income, including investment income, and if any such costs are determined not recoverable they are charged to expense. b. PREMIUMS Premiums are recognized as revenue on a pro-rata basis over the term of a contract. Unearned premiums represent the portion of premiums written which are applicable to the unexpired terms of insurance policies in force. c. INVESTMENTS The investment portfolio consists of equity securities, fixed maturity instruments and short-term investments. The portfolio is classified as available for sale and carried at its fair market value. Unrealized holding gains or losses, net of the related tax effect, are excluded from earnings and reported in comprehensive income as a separate component of stockholders' equity until realized. A decline in the fair value of available for sale investments that is deemed other than temporary is charged to earnings. The cost basis of 5 fixed maturity instruments is adjusted for the amortization of premiums and the accretion of discounts to maturity. Realized gains and losses are determined on the specific identification method. d. LOSS RESERVES The reserves for losses and loss adjustment expenses represent management's best estimate of the ultimate cost of all reported and unreported losses incurred through the balance sheet date and include: (i) the accumulation of individual estimates for claims reported on direct business prior to the close of the accounting period; (ii) estimates received from other insurers with respect to reinsurance assumed; (iii) estimates for incurred but not reported claims based on past experience modified for current trends and (iv) estimates of expenses for investigating and settling claims based on past experience. The liabilities recorded are based on estimates resulting from the continuing review process, and differences between estimates and ultimate payments are reflected as an expense in the statement of earnings in the period in which the estimates are revised. e. REINSURANCE The Company follows the customary practice of reinsuring with other companies the loss exposures on business it has written. This practice allows the Company to diversify its business and write larger policies, while limiting the extent of its primary maximum net loss. Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders. The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreements. To minimize its exposure to losses from reinsurer insolvencies, the Company continually evaluates the financial condition of its reinsurers. Comprehensive Income The Company's total comprehensive income for the three and six months ended June 30, 2002 and 2001 was $11.7 million and $3.2 million, and $31.7 million and $480.3 million, respectively. Comprehensive income includes the Company's net earnings adjusted for changes in unrealized appreciation (depreciation) of investments, which was $0.1 million and $1.8 million, and $(5.5) million and $37.3 million, and cumulative translation adjustments, which were $2.6 million and $(1.1) million, and $2.4 million and $(3.1) million, for the three and six months ended June 30, 2002 and 2001, respectively. Segment Information Information concerning the Company's continuing operations by industry segment is summarized below (in thousands): 6
For the three months ended For the six months ended ------------------------ ------------------------ June 30, June 30, June 30, June 30, 2002 2001 2002 2001 --------- --------- --------- --------- REVENUES Property and casualty insurance $ 33,221 $ 4,237 $ 63,895 $ 7,363 Mining and filtration 56,558 57,828 106,001 107,885 Industrial fasteners 28,953 30,665 56,885 64,428 Corporate activities 12,713 11,030 55,182 799,887 --------- --------- --------- --------- Total $ 131,445 $ 103,760 $ 281,963 $ 979,563 ========= ========= ========= ========= EARNINGS (LOSS) FROM CONTINUING OPERATIONS Property and casualty insurance $ (2,144) $ 4,237 $ (927) $ 7,363 Mining and filtration 7,736 7,020 10,665 8,099 Industrial fasteners 578 (8,781) 1,080 (12,669) Corporate activities 7,273 (28) 41,876 762,715 --------- --------- --------- --------- Total 13,443 2,448 52,694 765,508 Income taxes 4,547 (99) 17,990 296,764 --------- --------- --------- --------- Earnings from continuing operations $ 8,896 $ 2,547 $ 34,704 $ 468,744 ========= ========= ========= =========
June 30, December 31, 2002 2001 -------- -------- IDENTIFIABLE ASSETS Property and casualty insurance $ 675.3 $ 143.0 Mining and filtration 324.3 310.1 Industrial fasteners 70.3 78.1 Corporate activities 1,117.2 1,343.8 -------- -------- Total $2,187.1 $1,875.0 ======== ========
7 Contingencies The Company's subsidiaries are parties to pending claims and litigation in the ordinary course of their businesses. Each such operating unit makes provisions on its books in accordance with generally accepted accounting principles for estimated losses to be incurred as a result of such claims and litigation, including related legal costs. In the opinion of management, such provisions are adequate as of June 30, 2002. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION. The following discussion and analysis presents a review of Alleghany Corporation and its subsidiaries (collectively, the "Company") for the three and six months ended June 30, 2002 and 2001, respectively. This review should be read in conjunction with the consolidated financial statements and other data presented herein as well as Management's Discussion and Analysis of Financial Condition and Results of Operation contained in the Company's 2001 Form 10-K and 2002 First Quarter Form 10-Q. The Company reported net earnings from continuing operations in the second quarter of 2002 of $8.9 million on revenues of $131.4 million, compared with net earnings from continuing operations of $2.5 million on revenues of $103.8 million in the second quarter of 2001. The 2002 second quarter results include net gains on investment transactions after taxes of $2.8 million, compared with $0.6 million in the 2001 period. Net earnings including discontinued operations were $8.9 million in the second quarter of 2002, compared with net losses including million operations of $9.3 million in the 2001 second quarter. Discontinued operations consist of the operations of Alleghany Asset Management prior to its disposition in February 2001 and the operations of Alleghany Underwriting prior to its disposition in November 2001. In the first six months of 2002, the Company's net earnings from continuing operations were $34.7 million on revenues of $282.0 million, compared with net earnings from continuing operations of $468.7 million on revenues of $979.6 million in the first six months of 2001. Net earnings including discontinued operations were $34.7 million in the first six months of 2002, compared with $446.1 million in the first six months of 2001. The 2002 results from continuing operations include net gains on investment transactions after taxes of $25.3 million, primarily resulting from the disposition of 1.9 million shares of common stock of Burlington Northern Santa Fe for aggregate cash proceeds of $55.3 million. The 2001 results from continuing operations include an after-tax gain from the disposition of Alleghany Asset Management of approximately $474.8 million, excluding certain expenses relating to the closing of the transaction. 8 Effective January 1, 2002, the Company adopted Financial Accounting Standards Board Statement 142, "Goodwill and Other Intangible Assets." In general, SFAS 142 provides that goodwill and other intangible assets with indefinite lives are no longer amortized, but are regularly tested, for impairment. At June 30, 2002, the Company had on its books $112.1 million of goodwill and other intangibles that may no longer be amortized pursuant to provisions of SFAS 142. World Minerals Inc. ("World Minerals") recorded pre-tax earnings of $7.7 million on revenues of $56.6 million in the 2002 second quarter, compared with pre-tax earnings of $7.0 million on revenues of $57.8 million in the 2001 second quarter, and pre-tax earnings of $10.7 million on revenues of $106.0 million in the first six months of 2002, compared with pre-tax earnings of $8.1 million on revenues of $107.9 million in the first six months of 2001. The 2002 first half results reflect the results of businesses acquired in April 2001 and January 2002, cost controls, and net reductions of approximately $1.8 million in energy costs, primarily natural gas, at U.S. and Latin American plants, $1.1 million in interest expense and $0.8 million in amortization expense (primarily due to requirements of SFAS 142). Such factors more than offset a decline in net sales due to reduced demand both in the U.S. and in the European and Asian export markets for its U.S.-produced products. The 2001 revenues include energy surcharges on certain of World Minerals' sales due to higher energy costs in the first half of 2001. World Minerals is currently in the early stages of a periodic strategic review of its business processes, overhead costs, sales strategies and plant operations. As part of such review, which will be in process during the second half of 2002, World Minerals will consider, among other things, the possibility of consolidating or closing certain plants. Alleghany Insurance Holdings ("AIHL"), a holding company for CATA and other insurance operations of the Company, recorded a pre-tax loss of $2.1 million on revenues of $33.2 million in the second quarter of 2002, and a pre-tax loss of $0.9 million on revenues of $63.9 million in the first six months of 2002. AIHL recorded pre-tax earnings of $4.2 million from continuing operations in the second quarter of 2001, and pre-tax earnings of $7.4 million from continuing operations in the first six months of 2001, primarily reflecting investment income in those periods. The 2002 second quarter loss primarily reflects $1.6 million of adverse loss development on CATA's fidelity and surety lines of business and an increase in loss reserves of $3.5 million. The increase in loss reserves followed an independent actuarial review. Following the Company's acquisition of CATA in January, under the Company's direction, CATA commenced a review of its insurance products, underwriting guidelines and controls, investment policies and reserving methodology. With respect to its reserving methodology, CATA immediately implemented the practice of establishing loss and loss adjustment expense reserves ("case reserves") for newly reported claims on the basis of its estimate of such costs through the expected resolution of the claim. CATA 9 also commenced a review of each of the claim files that was open as of December 31, 2001 to increase, where appropriate, the case reserves for such claim to the claim's estimated ultimate cost of resolution. The increases in case reserves resulting from such review through June 30, 2002 did not result in an increase in aggregate loss reserve levels but rather a refinement of the allocation of reserves between case reserves and incurred but not reported losses. CATA expects to complete its review of the claim files in August 2002, prior to its next scheduled independent actuarial review of loss reserves, and will make appropriate adjustments in case reserves for all claims reviewed since June 30, 2002 in the third quarter of 2002. Should the review result in the need for an increase in the aggregate loss reserves, such increase would be reflected as an expense in the statement of earnings in the period in which the determination is made. As part of CATA's review of its insurance products and underwriting guidelines, CATA is considering whether to exit or re-underwrite certain property and casualty product lines. CATA expects that, as a result, there will be a decline in gross premiums written in the property and casualty product lines in the second half of 2002, but such decline is expected to be offset by increases in gross premium written in the fidelity and surety lines. In connection with the acquisition by the Company of AIHL's Nebraska-domiciled insurance company subsidiary, the seller, an A+ insurer, contractually retained through a reinsurance agreement all of the liabilities in existence at the time of such acquisition. At June 30, 2002, AIHL's loss reserves reflected $151.0 million of such liabilities, compared with $181.3 million at March 31, 2002, and AIHL's reinsurance receivables included a corresponding obligation of the seller. Such loss reserves and reinsurance receivable amounts are expected to continue to decline over time as losses are paid. Heads & Threads International LLC ("Heads & Threads") recorded pre-tax earnings of $0.6 million on revenues of $29.0 million in the 2002 second quarter, compared with a pre-tax loss of $8.8 million on revenues of $30.7 million in the 2001 second quarter, and pre-tax earnings of $1.1 million on revenues of $56.9 million in the first six months of 2002, compared with a pre-tax loss of $12.7 million on revenues of $64.4 million in the first six months of 2001. The 2002 first half results reflect net reductions of $3.9 million in operating expenses (primarily due to lower salary expenses as a result of its restructuring efforts), $1.8 million in interest expense and $0.2 million in amortization expense (pursuant to requirements of SFAS 142), which offset a decline in net sales primarily due to reduced demand in the U.S. economy. The 2001 first half results include $2.5 million of pre-tax charges for write-offs relating to Heads & Threads' computer system and the closure of certain branches and sales offices, and expenses relating to changes in its senior management. 10 As of June 30, 2002, the Company beneficially owned approximately 16.0 million shares, or 4.2 percent, of the outstanding common stock of Burlington Northern Santa Fe Corporation, which had an aggregate market value on that date of approximately $480.0 million, or $30.00 per share, compared with a market value on March 31, 2002 of $482.9 million, or $30.18 per share. The aggregate cost of such shares is approximately $181.8 million, or $11.36 per share. The Company has previously announced that it may purchase shares of its common stock in open market transactions from time to time. In the second quarter of 2002, the Company purchased an aggregate of 78,186 shares of its common stock for approximately $14.5 million, at an average cost of about $185.44 per share. As of June 30, 2002, the Company had 7,288,952 shares of common stock outstanding (which includes the stock dividend declared in March 2002). The Company's common stockholders' equity per share at June 30, 2002 was $193.27 per share, a 2.1 percent increase from common stockholders' equity per share of $189.20 as of December 31, 2001 (both as adjusted for the stock dividend declared in March 2002). The Company's results in the first six months of 2002 are not indicative of operating results in future periods. The Company and its subsidiaries have adequate internally generated funds and unused credit facilities to provide for the currently foreseeable needs of its and their businesses. The Company believes that the accounting policies it applies to the loss and loss adjustment expense reserves of its insurance operations are critical to an investor's understanding of the Company's consolidated financial results and condition. In applying such policies, management makes subjective and complex judgments that frequently require estimates about matters that are inherently uncertain. The Company establishes reserves for losses and loss adjustment expenses for unpaid claims and claims expenses arising out of its insurance operations. Pricing of such operations' insurance products takes into account the expected frequency and severity of losses, the costs of providing coverage, competitive factors, characteristics of the property covered and the insured and profit considerations. Liabilities for property and casualty insurance are dependent on actuarial estimates of amounts payable for claims reported but not settled and claims incurred but not reported. These estimates are influenced by historical experience and actuarial assumptions of current developments, anticipated trends and risk management strategies. The Company continually evaluates the potential for changes in loss estimates, both positive and negative, and uses the results of these evaluations both to adjust recorded provisions and to adjust underwriting criteria. Additionally, the Company has engaged an outside actuary to evaluate on a quarterly basis the adequacy of CATA's loss reserves. Because setting reserves is inherently 11 uncertain, the Company cannot assure that its insurance operations' current reserves will prove adequate in light of subsequent events. Should such reserves need to be adjusted in any future period, such adjustments will be reflected as an expense in the statement of earnings in the period they are adjusted. Information regarding the Company's other accounting policies is included in the Company's 2001 Form 10-K and the Notes to the Consolidated Financial Statements included in this report on Form 10-Q and the Company's 2002 First Quarter Form 10-Q. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the risk of loss from adverse changes in market prices and rates, such as interest rates, foreign currency exchange rates and commodity prices. The primary market risk related to the Company's non-trading financial instruments is the risk of loss associated with adverse changes in interest rates. In connection with its acquisition of CATA on January 4, 2002 and the Company's purchase of securities with fixed maturities of one to three years during the 2002 second quarter, the Company acquired fixed maturity securities that expose it to risk related to adverse changes in interest rates as set forth in the table below. For fixed maturity securities, the change in fair value is determined by calculating a hypothetical June 30, 2002 ending price based on yields adjusted to reflect a +/-300 basis point range of change in interest rates, comparing such hypothetical ending price to actual ending price and multiplying the difference by the par outstanding. SENSITIVITY ANALYSIS At June 30, 2002 (dollars in millions)
Interest Rate Shifts -300 -200 -100 0 100 200 300 -------------------- ---- ---- ---- - --- --- --- FIXED MATURITY SECURITIES ------------------------- Estimated Portfolio Value $525.4 $512.6 $500.4 $482.4 $474.8 $460.8 $445.5 Projected Change in Portfolio Value $ 43.0 $ 30.2 $ 18.0 0 $(7.6) $(21.6) $(36.9)
The Company's 2001 Form 10-K provides a more detailed discussion of the market risks affecting its operations. Based on the Company's estimates as of June 30, 2002, no material change has occurred in its long-term debt obligations, as compared to amounts disclosed in its 2001 Form 10-K. 12 Forward-Looking Statements The "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures About Market Risk" contain disclosures which are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based upon the Company's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the Company's future financial condition and results. The uncertainties and risks include, but are not limited to, those relating to conducting operations in a competitive environment, conducting operations in foreign countries, effects of acquisition and disposition activities, general economic and political conditions, including the effects of a prolonged U.S. or global economic downturn or recession, changes in costs, including changes in labor costs, energy costs and raw material prices, variations in political, economic or other factors such as currency exchange rates, inflation rates, recessionary or expansive trends, tax changes, legal and regulatory changes, civil unrest or other external factors over which the Company has no control, and changes in the Company's plans, strategies, objectives, expectations or intentions, which may happen at any time at the Company's discretion. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. 13 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES. (c) Recent Sales of Unregistered Securities. On April 2, 2002, the Company issued 1,960 shares of common stock to Allan P. Kirby, Jr. upon the exercise of an option to purchase 1,000 shares of the Company's common stock, subject to adjustment for stock dividends and the spin-off of Chicago Title, at an exercise price of $62.99 per share, or $123,460.40 in the aggregate, granted to Mr. Kirby on April 28, 1992 pursuant to the Alleghany Corporation Amended and Restated Directors' Stock Option Plan. The sale of the common stock was exempt from registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to Section 4(2) thereof, as a transaction not involving a public offering. On May 1, 2002, the Company issued an aggregate of 483 shares of the Company's common stock to seven non-employee directors of the Company pursuant to the Alleghany Corporation Directors' Equity Compensation Plan. Such shares represent one-half of the value of each director's retainer for the following twelve months' service as a director, exclusive of any per meeting fees, committee fees or expense reimbursements. The sale of common stock was exempt from registration under the Securities Act pursuant to Section 4(2) thereof, as a transaction not involving a public offering. The above does not include unregistered issuances of the Company's common stock that did not involve a sale, consisting of issuances of common stock and other securities pursuant to employee incentive plans. 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company's 2002 Annual Meeting of Stockholders was held on April 26, 2002. At the Annual Meeting, three directors were elected to serve for three-year terms on the Company's Board of Directors, by the following votes:
FOR WITHHELD --- -------- Three-Year Term: --------------- F.M. Kirby 5,794,607 419,736 Roger Noall 6,093,977 120,366 Rex D. Adams 6,093,977 120,366
The Alleghany Corporation 2002 Long-Term Incentive Plan was approved by a vote of 4,710,945 shares in favor and 394,297 shares opposed. A total of 260,288 shares abstained from voting. The selection of KPMG LLP as auditors for the Company for the year 2002 was ratified by a vote of 6,143,163 shares in favor and 62,744 shares opposed. A total of 8,436 shares abstained from voting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.
Exhibit Number Description -------------- ----------- 10.1(a) 364-Day Revolving Credit Agreement, dated as of June 14, 2002, by and between Alleghany Corporation, the banks which are signatories thereto, and U.S Bank National Association, as agent for the banks (the "364-Day Revolving Credit Agreement"). 10.1(b) List of Contents of Exhibits and Schedules to the 364-Day Revolving Credit Agreement. The Company agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request.
15 10.2(a) Three-Year Revolving Credit Agreement, dated as of June 14, 2002, by and between Alleghany Corporation, the banks which are signatories thereto, and U.S Bank National Association, as agent for the banks (the "Three-Year Revolving Credit Agreement"). 10.2(b) List of Contents of Exhibits and Schedules to the Three-Year Revolving Credit Agreement. The Company agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request.
16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLEGHANY CORPORATION Registrant Date: August 8, 2002 /s/ David B. Cuming -------------------------------------- David B. Cuming Senior Vice President (and principal financial officer) 17