-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CILrayPZIVqBHZZmNSYafS6yUkFNHMigWSnUZ7G5sK0kNhxvUoYFpnQ092keQ1K8 0Ed/2pk4Q6O4gvOTI/HJIg== 0000950123-05-005867.txt : 20050509 0000950123-05-005867.hdr.sgml : 20050509 20050509111800 ACCESSION NUMBER: 0000950123-05-005867 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050509 DATE AS OF CHANGE: 20050509 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEGHANY CORP /DE CENTRAL INDEX KEY: 0000775368 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 510283071 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-09371 FILM NUMBER: 05810237 BUSINESS ADDRESS: STREET 1: 375 PARK AVENUE STREET 2: SUITE 3201 CITY: NEW YORK STATE: NY ZIP: 10152 BUSINESS PHONE: 2127521356 MAIL ADDRESS: STREET 1: 375 PARK AVENUE STREET 2: SUITE 3201 CITY: NEW YORK STATE: NY ZIP: 10152 FORMER COMPANY: FORMER CONFORMED NAME: ALLEGHANY FINANCIAL CORP DATE OF NAME CHANGE: 19870115 10-Q 1 y08798e10vq.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTERLY PERIOD ENDED MARCH 31, 2005 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 SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS AN ACCELERATED FILER (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES [X] NO [ ] INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LAST PRACTICABLE DATE. 7,884,216 SHARES AS OF APRIL 30, 2005 ITEM 1. FINANCIAL STATEMENTS ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004 (dollars in thousands, except share and per share amounts) (unaudited)
2005 2004 ---------- ---------- REVENUES Net premiums earned $ 213,552 $ 189,668 Net mineral and filtration sales 69,738 67,081 Interest, dividend and other income 17,562 16,352 Net gain on investment transactions 47,227 33,183 ---------- ---------- Total revenues 348,079 306,284 ---------- ---------- COSTS AND EXPENSES Loss and loss adjustment expenses 115,277 93,098 Commissions and brokerage 53,044 41,638 Cost of mineral and filtration sales 56,954 51,378 Salaries, administrative and other operating expenses 18,563 16,789 Corporate administration 9,081 8,802 Interest expense 1,352 1,088 ---------- ---------- Total costs and expenses 254,271 212,793 ---------- ---------- Earnings from continuing operations, before income taxes 93,808 93,491 Income taxes 32,937 32,795 ---------- ---------- Earnings from continuing operations 60,871 60,696 Discontinued operations Operations -- 2,287 Income taxes -- 919 ---------- ---------- Earnings from discontinued operations, net -- 1,368 ---------- ---------- Net earnings $ 60,871 $ 62,064 ========== ========== Basic earnings per share of common stock ** Continuing operations $ 7.74 $ 7.78 Discontinued operations -- 0.17 ---------- ---------- $ 7.74 $ 7.95 ========== ========== Diluted earnings per share of common stock ** Continuing operations $ 7.72 $ 7.75 Discontinued operations -- 0.17 ---------- ---------- $ 7.72 $ 7.92 ========== ========== Dividends per share of common stock * * ========== ========== Average number of outstanding shares of common stock ** 7,896,309 7,835,784 ========== ==========
* In March 2005 and 2004, Alleghany declared a stock dividend consisting of one share of Alleghany common stock for every fifty shares outstanding. ** Adjusted to reflect the common stock dividend declared in March 2005. See Notes to Unaudited Consolidated Financial Statements. 1 ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share amounts)
MARCH 31, DECEMBER 31, 2005 2004* ---------- ---------- (UNAUDITED) ASSETS Available for sale securities at fair value: Equity securities (cost: 2005 $276,370; 2004 $290,597) $ 637,291 $ 645,184 Debt securities (cost: 2005 $1,481,008; 2004 $1,178,982) 1,466,558 1,179,210 Short-term investments 265,733 378,452 ---------- ---------- 2,369,582 2,202,846 Cash 240,729 288,436 Notes receivable 91,665 91,665 Accounts receivable, net 63,008 70,547 Premium balances receivable 181,466 203,141 Reinsurance recoverables 648,922 623,325 Ceded unearned premium reserves 275,131 286,451 Deferred acquisition costs 55,514 56,165 Property and equipment at cost, net of accumulated depreciation and amortization 164,976 168,316 Inventory 39,950 41,521 Goodwill and other intangibles, net of amortization 221,339 223,706 Deferred tax assets 110,738 104,563 Other assets 121,131 67,043 ---------- ---------- $4,584,151 $4,427,725 ========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Losses and loss adjustment expenses $1,266,411 $1,232,337 Unearned premiums 729,517 751,131 Reinsurance payable 121,794 112,479 Deferred tax liabilities 225,384 224,847 Subsidiaries' debt 138,860 138,258 Current taxes payable 46,008 17,433 Other liabilities 228,389 177,824 ---------- ---------- Total liabilities 2,756,363 2,654,309 Common stockholders' equity 1,827,788 1,773,416 ---------- ---------- $4,584,151 $4,427,725 ========== ========== COMMON SHARES OUTSTANDING ** 7,885,205 7,829,721 ========== ==========
* Certain amounts have been reclassified to conform to the 2005 presentation. ** Adjusted to reflect the common stock dividend declared in March 2005. See Notes to Unaudited Consolidated Financial Statements. 2 ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2005 (dollars in thousands) (unaudited)
2005 2004 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Earnings from continuing operations $ 60,871 $ 60,696 Adjustments to reconcile net earnings to cash provided by operations: Depreciation and amortization 10,796 10,386 Net gain on investment transactions (47,227) (33,183) Tax benefit on stock options exercised 137 375 Decrease in accounts and notes receivable 8,003 7,713 Decrease in inventory 1,571 363 (Increase) decrease in other assets (12,629) 15,282 Increase in reinsurance recoverables (16,282) (176,537) Decrease in premium balances receivable 21,675 102,671 Decrease (increase) in ceded unearned premium reserves 11,320 (56,497) Increase (decrease) in deferred acquisition costs 651 (750) Increase in other liabilities and current taxes 40,533 22,562 (Decrease) increase in unearned premiums (21,614) 55,329 Increase in losses and loss adjustment expenses 34,074 118,728 --------- --------- Net adjustments 31,008 66,442 --------- --------- Net cash provided by operations 91,879 127,138 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (415,415) (474,840) Sales of investments 181,736 294,088 Purchases of property and equipment (4,411) (3,596) Net change in short-term investments 113,623 (14,839) Other, net (14,853) (17,349) --------- --------- Net cash used in investing activities (139,320) (216,536) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt (5,398) (6,122) Proceeds of long-term debt 6,000 4,000 Other, net (868) 2,171 --------- --------- Net cash (used in) provided by financing activities (266) 49 --------- --------- Net decrease in cash (47,707) (89,349) Cash at beginning of period 288,436 230,929 --------- --------- Cash at end of period $ 240,729 $ 141,580 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest $ 1,582 $ 990 Income taxes $ 4,740 $ 30,178
See Notes to Unaudited Consolidated Financial Statements. 3 Notes to the Unaudited Consolidated Financial Statements This report should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2004 (the "2004 Form 10-K") of Alleghany Corporation (the "Company"). The information included in this report is unaudited but reflects all adjustments which, in the opinion of management, are necessary to a fair statement of the results of the interim periods covered thereby. All adjustments are of a normal and recurring nature except as described herein. Stock-Based Compensation Accounting In December 2002, the Financial Accounting Standards Board issued SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure" ("SFAS 148"). SFAS 148 amended FASB Statement No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") to provide alternative methods of transition for enterprises that elect to change to the SFAS 123 fair value method of accounting for stock-based employee compensation and to amend the disclosure requirements of SFAS 123. The Company maintains fixed option plans and a performance-based stock plan. Effective January 1, 2003, the Company adopted the fair value recognition provisions of SFAS 123 prospectively for all employee and/or director awards granted, modified or settled under any of its stock-based compensation plans after January 1, 2003. Fair value is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: no cash dividend yield for all years; expected volatility ranging from 17 to 19 percent; risk-free interest rates ranging from 3.21 percent to 4.40 percent; and expected lives of seven years. Prior to 2003, the Company accounted for its fixed option plans and performance-based stock plan under the recognition and measurement provisions of APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). During the first quarters of 2005 and 2004, no stock options were granted under the Company's fixed option plans. The expense relating to options issued in prior periods was $52,000 in the first quarter of 2005 and $20,000 in the first quarter of 2004. With respect to its performance-based stock plan, the Company recognized after-tax compensation expense of $2.5 million in the 2005 first quarter and $1.7 million in the 2004 first quarter (in each case calculated pursuant to the prospective method under SFAS 123). 4 Had the Company applied SFAS 123 to all option awards outstanding under its fixed option plans during the 2005 and 2004 first quarters, the Company would have recognized after-tax expense of $73,000 in the 2005 first quarter and $48,000 in the 2004 first quarter. Had the Company applied SFAS 123 to all awards outstanding under its performance-based stock plan during the same periods, the Company would have recognized after-tax expense of $2.2 million in the 2005 first quarter and $1.9 million in the 2004 first quarter. In December 2004, SFAS 123 (revised) "Share-Based Payment," ("Revised SFAS 123") was issued. Revised SFAS 123 requires that the cost resulting from all share-based payment transactions be recognized in the financial statements, establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires the application of a fair value based measurement method in accounting for share-based payment transactions with employees. Revised SFAS 123 is effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The Company's present method of accounting for share-based payments is described above. The pro forma effects of adoption of Revised SFAS 123 are also described in the following table. The Company plans to adopt Revised SFAS 123 in the first quarter of 2006. The following table illustrates the effect on net earnings and earnings per share if the fair value based method had been applied to all outstanding and unvested awards under all of the Company plans in each period. 5
For the three months ended dollars in thousands, ------------------------------- except per share amounts March 31, 2005 March 31, 2004 -------------- -------------- Net earnings, as reported $ 60,871 $ 62,064 Add: stock-based employee compensation expense included in reported net earnings, net of related tax 2,547 1,739 Less: stock-based compensation expense determined under fair value method for all stock options, net of related tax (2,172) (1,862) ---------- ---------- Pro forma net earnings $ 61,246 $ 61,941 ========== ========== Earnings per share Basic - as reported $ 7.74 $ 7.95 Basic - pro forma $ 7.79 $ 7.94 Diluted - as reported $ 7.72 $ 7.92 Diluted - pro forma $ 7.76 $ 7.90
For certain stock compensation arrangements, the Company issues stock at grant date or upon settlement date. These arrangements were previously included in other liabilities in the consolidated balance sheet and have been reclassified to stockholders' equity in the quarter. The reclassification reflects that stock has been issued or is expected to be issued upon settlement, if the terms of the compensation arrangements are met. The prior period comparative information has been reclassified to conform to the current period presentation. The amount of such reclassification at December 31, 2004 was $17.3 million. Employee Benefit Plans The Company has several noncontributory defined benefit pension plans, including plans in place at its World Minerals, Inc. operating unit. Under executive retirement plans, defined benefits are based on years of service and the employee's highest average annual base salary over a consecutive three-year period during the last 6 ten years or, if applicable, shorter period of employment, plus one-half of the highest average annual bonus over a consecutive five-year period during the last ten years, or, if applicable, shorter period of employment. With respect to its funded plans, the Company's policy is to contribute annually the amount necessary to satisfy the Internal Revenue Service's funding requirements. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. Additional details regarding the Company's noncontributory defined benefit pension plans can be found in Note 12 to the Consolidated Financial Statements in the Company's 2004 Form 10-K. The Company plans to contribute $4.7 million to the plans in 2005, compared with contributions of $5.6 million in 2004. The components of net periodic benefit cost for the three months ended March 31, 2005 and 2004 consisted of the following:
For the three months ended ---------------------------------- (in millions) March 31, 2005 March 31, 2004 - ------------- -------------- -------------- Net periodic cost included the following expense (income) components: Service cost-benefits earned during the quarter $ 0.9 $ 0.9 Interest cost on projected benefit obligation 1.1 1.1 Expected return on plan assets (0.9) (0.9) Net amortization 0.6 0.6 -------- -------- Net periodic pension cost $ 1.7 $ 1.7 ======== ========
Comprehensive Income The Company's total comprehensive income for the three months ended March 31, 2005 and 2004 was $51.7 million and $45.3 million. Comprehensive income includes the Company's net earnings adjusted for changes in unrealized (depreciation) of investments, which were $(6.2) million and $(14.6) million for the three months ended March 31, 2005 and 2004 and cumulative translation adjustments, which were $(3.1) million and $(2.2) million for the three months ended March 31, 2005 and 2004. Segment Information Information related to the Company's reportable business operating segments is shown in the tables below. The Company's reportable segments are reported in a manner consistent with the way management evaluates the businesses. As such, insurance underwriting activities are evaluated separately from investment activities. Realized investment gains are not considered relevant in evaluating investment performance on an annual basis. 7
For the three months ended March 31, March 31, (dollars in millions) 2005 2004 ---- ---- REVENUES FROM CONTINUING OPERATIONS AIHL insurance group Net premiums earned RSUI $ 155.5 $ 148.4 CATA 39.3 34.4 Darwin 18.7 6.9 ------ ------ 213.5 189.7 Interest, dividend and other income 14.3 10.3 Net gain on investment transactions 25.2 31.4 ------ ------ Total insurance group 253.0 231.4 World Minerals 69.6 67.0 Corporate activities 3.5 6.2 Net gain on investment transactions 22.0 1.7 ------ ------ Total $ 348.1 $ 306.3 ====== ====== EARNINGS (LOSSES) FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES AIHL insurance group Underwriting profit (loss) RSUI $ 43.1 $ 54.9 CATA 1.6 0.4 Darwin 0.5 (0.4) ------ ------ 45.2 54.9 Interest, dividend and other income 14.3 10.3 Net gain on investment transactions 25.2 31.4 Other expenses (7.5) (6.0) ------ ------ Total insurance group 77.2 90.6 World Minerals 2.2 5.8 Corporate activities Interest, dividend and other income 3.5 6.2 Net gain on investment transactions 22.0 1.7 Other expenses (0.7) (1.0) ------ ------ 104.2 103.3 Interest expense (1.4) (1.0) Corporate administration (9.0) (8.8) ------ ------ Total 93.8 93.5 Income taxes 32.9 32.8 ------ ------ Earnings from continuing operations $ 60.9 $ 60.7 ====== ======
March 31, December 31, (dollars in millions) 2005 2004 ---- ---- IDENTIFIABLE ASSETS AIHL Insurance group $3,510.5 $3,388.7 World Minerals 334.1 336.6 Corporate activities 739.6 702.4 -------- -------- Total $4,584.2 $4,427.7 ======== ========
8 Segment accounting policies are the same as the Consolidated Accounting Policies described in Note 17 to the Consolidated Financial Statements in the 2004 Form 10-K. Property and casualty insurance operations, which are conducted by Alleghany Insurance Holdings LLC ("AIHL") and its subsidiaries RSUI Group, Inc. ("RSUI"), Capitol Transamerica Corporation ("CATA") and Darwin Professional Underwriters, Inc. ("Darwin"), and mining and filtration operations, which are conducted by World Minerals, Inc. ("World Minerals"), are the Company's largest businesses. The primary components of "corporate activities" are Alleghany Properties, Inc. and corporate activities at the parent level. Reinsurance Through December, 31, 2004, business underwritten by Darwin was generally reinsured on a treaty basis for individual losses in excess of $3.0 million for directors and officers liability and managed care errors and omissions liability. Commencing January 2005, Darwin changed its reinsurance structure to reinsure on a treaty basis for individual losses in excess of $2.0 million for directors and officers liability, managed care errors and omissions liability, lawyers professional liability, insurance agents errors and omissions liability and other miscellaneous professional liability business. Under such treaty, losses in excess of $2.0 million are reinsured, with Darwin having a 15% co-participation for losses in excess of $5.0 million up to Darwin's $10.0 million policy limits. Darwin reinsures on a treaty basis for individual losses in excess of $0.5 million for medical professional liability insurance for physicians and in excess of $1.0 million for medical professional liability for medical facilities (with a 15.0 percent participation on losses in excess of $2.0 million). The medical professional liability reinsurance program also provides $2.0 million of "clash" protection (offering protection in the event that multiple policies written by Darwin are involved in the same loss occurrence) for losses in excess of $1.0 million. In addition, Darwin reinsures on a 50 percent quota share basis for individual psychiatrists professional liability. The reinsurance treaties contain swing-rated premiums that will vary, within a range, depending upon the profitability of the underlying premium subject to the treaty. In addition, Darwin obtains facultative reinsurance for certain business. Acquisition of Ulico Indemnity Company On May 2, 2005, Darwin National Assurance Company purchased Ulico Indemnity Company, an insurance company domiciled in Arkansas, from Ulico Casualty Company to support future business underwritten by Darwin for cash consideration of $25.3 million, $22.3 million of which represented consideration for Ulico's investment portfolio and $3.0 million of which represented consideration for licenses. 9 Contingencies The Company's subsidiaries are parties to pending claims and litigation in the ordinary course of their businesses. Each such subsidiary makes provisions on its books in accordance with generally accepted accounting principles for estimated losses to be incurred as a result of such claims and litigation, including related legal costs. In the opinion of management, such provisions are adequate as of March 31, 2005. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis presents a review of the Company and its subsidiaries for the three months ended March 31, 2005 and 2004. 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 2004 Form 10-K. The Company reported net earnings from continuing operations in the first quarter of 2005 of $60.9 million, compared with $60.7 million in the first quarter of 2004. 2005 first quarter net earnings were $60.9 million, compared with $62.1 million in the corresponding 2004 period. Discontinued operations consist of the operations of Heads & Threads International LLC prior to its disposition in December 2004. The Company's 2005 first quarter net earnings included net gains on investment transactions after tax of $30.7 million, compared with $21.6 million in the 2004 first quarter, and net catastrophe losses after tax of $5.4 million, compared with $0.3 million in the corresponding 2004 period. The Company's common stockholders' equity per share at March 31, 2005 was $231.80, an increase of 2.3% from common stockholders' equity per share of $226.50 as of December 31, 2004 (as adjusted for the stock dividend declared in March 2005). On a consolidated basis, cash and invested assets were $2.6 billion at March 31, 2005, compared with $2.5 billion at December 31, 2004. Alleghany Insurance Holdings LLC ("AIHL") recorded pre-tax earnings of $77.2 million on revenues of $253.0 million in the 2005 first quarter, compared with pre-tax earnings of $90.6 million on revenues of $231.4 million in the first quarter of 2004. AIHL's 2005 first quarter pre-tax earnings include investment income before tax of $14.3 million and net gains on investment transactions before tax of $25.2 million, compared with $10.3 million and $31.4 million, respectively, in the corresponding 2004 period. The comparative pre-tax contributions to AIHL's results made by its operating units RSUI, CATA and Darwin were as follows (in millions, except ratios): 10
Three Months Ended March 31, ---------------------------- RSUI CATA Darwin(1) AIHL ---- ---- --------- ---- 2005 Gross premiums written (2) $270.9 $43.2 $33.9 $348.0 Net premiums written (2) 141.6 41.1 20.5 203.2 Net premiums earned $155.5 $39.3 $18.7 $213.5 Loss and loss adjustment expenses 82.4 20.0 12.9 115.3 Underwriting expenses 30.0 17.7 5.3 53.0 ---- ---- --- ---- Underwriting profit (3) 43.1 1.6 0.5 45.2 ==== === === Interest, dividend and other income 14.3 Net gain on investment transactions 25.2 Other expenses 7.5 --- Earnings before income taxes $77.2 ===== Loss ratio (4) 53.0% 50.9% 68.9% 54.0% Expense ratio (5) 19.2% 45.1% 28.5% 24.8% Combined ratio (6) 72.2% 96.0% 97.4% 78.8% 2004 Gross premiums written (2) $294.4 $41.7 $20.6 $356.7 Net premiums written (2) 137.7 36.8 14.0 188.5 Net premiums earned $148.4 $34.4 $6.9 $189.7 Loss and loss adjustment expenses 70.0 18.8 4.3 93.1 Underwriting expenses 23.5 15.2 3.0 41.7 ---- ---- --- ---- Underwriting profit (loss) (3) $54.9 $0.4 $(0.4) 54.9 ===== ==== ====== Interest, dividend and other income 10.3 Net gain on investment transactions 31.4 Other expenses (6.0) ----- Earnings before income taxes $90.6 ===== Loss ratio (4) 47.2% 54.6% 62.3% 49.1% Expense ratio (5) 15.8% 44.1% 43.5% 22.0% Combined ratio (6) 63.0% 98.7% 105.8% 71.1%
(1) Although Darwin is an underwriting manager for Platte River and certain subsidiaries of CATA, Darwin is managed on an operating unit basis and, therefore, the results of business generated by Darwin have been separated from CATA's results for purposes of this table. (2) Amounts do not reflect the impact of an inter-company pooling agreement. (3) Represents net premiums earned less loss and loss adjustment expenses and underwriting expenses, all as determined in accordance with U.S. generally accepted accounting principles ("GAAP"), and does not include interest, dividend and other income or net gains on investment transactions. Underwriting profit (loss) does not replace net earnings (loss) determined in accordance with GAAP as a measure of profitability; rather, Alleghany believes that underwriting profit (loss) enhances the understanding of AIHL's insurance operating units' operating results by highlighting net earnings attributable to their underwriting performance. With the addition of interest, dividend and other income and net gains on 11 investment transactions, reported pre-tax net earnings (a GAAP measure) may show a profit despite an underlying underwriting loss. Where such underwriting losses persist over extended periods, an insurance company's ability to continue as an ongoing concern may be at risk. Therefore, Alleghany views underwriting profit (loss) as an important measure in the overall evaluation of the performance of its insurance operations. (4) Loss and loss adjustment expenses divided by net premiums earned, all as determined in accordance with GAAP. (5) Underwriting expenses divided by net premiums earned, all as determined in accordance with GAAP. (6) The sum of the Loss Ratio and Expense Ratio, all as determined in accordance with GAAP, representing the percentage of each premium dollar an insurance company spends on losses (including loss adjustment expenses) and underwriting expenses. RSUI's 2005 first quarter underwriting profit was $43.1 million, compared with $54.9 million in the corresponding 2004 period, primarily reflecting an increase in loss and loss adjustment expenses in certain property lines of business and higher underwriting expenses primarily reflecting the absence of profit sharing payments under certain property reinsurance treaties due to 2004 catastrophe losses. Gross premiums written decreased in the 2005 first quarter from the 2004 first quarter, primarily reflecting price decreases in RSUI's property, general liability and umbrella lines due to market competition. Although RSUI believes that rates are still adequate to support acceptable profit margins, rates in the 2005 first quarter continued to reflect overall industry trends, with decreased rates in its property lines of business and flat or decreased rates in casualty lines of business (except for professional liability which experienced increases in rates). The continuation of these rate trends may result in lower levels of gross premiums written by RSUI during 2005, as premium per policy may decrease and RSUI is expected to write less business when it considers prices inadequate to support acceptable profit margins. RSUI's net premiums earned increased in the 2005 first quarter from the corresponding 2004 period primarily reflecting the positive impact on RSUI's casualty lines of business of increased retentions under its reinsurance programs, partially offset by a decrease in property net premiums earned, primarily reflecting a decrease in property gross premiums written. Loss and loss adjustment expenses increased in the 2005 first quarter from the 2004 first quarter, primarily reflecting an increase in certain property lines of business and an increase in the percentage of total business written by RSUI attributable to casualty lines of business as such business is recorded at a higher loss ratio compared with property lines of business. CATA reported an underwriting profit of $1.6 million in the 2005 first quarter, compared with $0.4 million in the 2004 first quarter, primarily reflecting a decrease in reinsurance costs as well as improved loss experience in its property and casualty lines of business. Gross premiums written increased modestly in the 2005 first 12 quarter from the corresponding 2004 period, primarily reflecting the continued expansion of CATA's business into the excess and surplus markets, partially offset by the loss of premiums attributable to the contract surety lines of business that CATA exited in the 2005 first quarter. Gross premiums written attributable to contract surety lines during 2004 were $11.6 million; in the first quarter of 2005 such premiums were $1.0 million. Rates at CATA for the 2005 first quarter as compared with the 2004 first quarter reflect lower levels of increases in its property and casualty lines of business, primarily due to increased competition, and flat commercial surety rates. Net premiums earned at CATA increased in the 2005 first quarter from the 2004 first quarter, primarily reflecting growth in both excess and surplus markets and commercial surety lines and lower reinsurance costs partially offset by a reinstatement premium for contract surety booked in the first quarter of 2004. The increase in loss and loss adjustment expenses in the first quarter of 2005 from the corresponding period in 2004 reflects the increase in net premiums earned in the 2005 first quarter. Darwin reported an underwriting profit of $0.5 million in the 2005 first quarter, compared with an underwriting loss of $0.4 million in the 2004 first quarter, primarily reflecting a significant increase in net premiums earned due to increased levels of gross premiums written across all lines of business, partially offset by increased loss and loss adjustment expenses and underwriting expenses primarily attributable to such premium growth. As Darwin commenced operations in May 2003, it does not have any meaningful claims experience on which to base its reserves. In the absence of such history, Darwin's management and outside actuaries have used industry data related to the lines of business underwritten by Darwin to establish reserves until sufficient claims experience exists. Through December, 31, 2004, business underwritten by Darwin was generally reinsured on a treaty basis for individual losses in excess of $3.0 million for directors and officers liability and managed care errors and omissions liability. Commencing January 2005, Darwin changed its reinsurance structure to reinsure on a treaty basis for individual losses in excess of $2.0 million for directors and officers liability, managed care errors and omissions liability, lawyers professional liability, insurance agents errors and omissions liability and other miscellaneous professional liability business. Under such treaty, losses in excess of $2.0 million are reinsured, with Darwin having a 15% co-participation for losses in excess of $5.0 million up to Darwin's $10.0 million policy limits. Darwin reinsures on a treaty basis for individual losses in excess of $0.5 million for medical professional liability insurance for physicians and in excess of $1.0 million for medical professional liability for medical facilities (with a 15.0 percent participation on losses in excess of $2.0 million). The medical professional liability reinsurance program also provides $2.0 million of "clash" protection (offering protection in the event that multiple policies written by Darwin are involved in the same loss occurrence) for losses in excess of $1.0 million. In addition, Darwin reinsures on a 50 percent quota share basis for individual psychiatrists professional liability. The reinsurance treaties contain swing-rated premiums that will vary, within a range, depending upon the profitability of the underlying premium subject to the treaty. In addition, Darwin obtains facultative reinsurance for certain business. 13 The table below presents, as of March 31, 2005, the components of reserves established in connection with the loss and loss adjustment expense liabilities of AIHL's insurance operating units, as well as the changes in such reserve levels since December 31, 2004. Such loss reserve amounts represent the accumulation of estimates of ultimate losses (including losses incurred but not reported) and loss adjustment expenses, before reinsurance protection.
LOSSES AND LOSS LOSSES AND LOSS ADJUSTMENT EXPENSE ADJUSTMENT EXPENSE CHANGE FROM LOSSES AND LOSS (in millions) RESERVES AT RESERVES AT ADJUSTMENT EXPENSE RESERVES MARCH 31, 2005 DECEMBER 31, 2004 AT DECEMBER 31, 2004 -------------- ----------------- -------------------- Property $372.2 $449.7 $(77.5) Casualty 678.9 563.2 115.7 CMP 84.9 82.6 2.3 Surety 16.0 15.8 0.2 All Other 114.4 121.0 (6.6) ----- ----- ----- Total $1,266.4 $1,232.3 $34.1
The increase in total losses and loss adjustment expense reserves at March 31, 2005 from the year ended December 31, 2004 primarily reflects an increase in casualty loss reserves and a decrease in property loss reserves. With respect to property lines of business, the decrease in loss and loss adjustment expense reserves primarily reflects payments made in the first quarter of 2005 relating to losses attributable to the 2004 third quarter catastrophe losses. The increase in loss and loss adjustment expense reserves for casualty lines of business (which include, among others, excess and umbrella liability, directors and officers' liability, professional liability, general liability and workers' compensation) primarily reflects increased net premiums earned for general liability, umbrella and professional liability exposures. With respect to commercial multiple peril ("CMP") lines of business, which include both property and casualty exposures, the increase in loss and loss adjustment expense reserves primarily reflects an increase in CMP premiums earned in the first quarter of 2005. The "All Other" lines of business primarily consist of loss reserves for lines of business discontinued in 2004 and prior and loss reserves acquired in connection with the acquisition of companies in which the seller provided loss reserve guarantees. The decrease in loss and loss adjustment expense reserves in connection with the "All Other" lines primarily reflects a decrease in loss reserves acquired as part of the acquisition of Platte River Insurance Company in January 2002 for which the seller provided loss reserve guarantees. Additional information regarding the assumptions and estimates used in the 14 establishment of liabilities for unpaid losses and loss adjustment expenses, and the techniques involved in making such assumptions and estimates, can be found in the Company's 2004 Form 10-K. World Minerals recorded pre-tax earnings of $1.5 million on revenues of $69.6 million in first quarter 2005, compared with pre-tax earnings of $5.3 million on revenues of $67.0 million in the corresponding period in 2004. The increase in revenues from the 2004 first quarter to the 2005 first quarter reflects a modest increase in net sales, slightly higher average prices and the favorable impact of the strength of the euro against the dollar. The decrease in pre-tax earnings in the 2005 first quarter from the 2004 first quarter primarily reflects higher operating, production and transportation costs, primarily at World Minerals' Lompoc, California plant, which were exacerbated by unusually heavy rainfall in California during the quarter, competitive pricing pressures and an increase in selling, general and administrative expenses primarily related to the implementation of a new computer system in the U.S. Corporate activities recorded pre-tax earnings of $15.1 million on revenues of $25.5 million in the 2005 first quarter, compared with a pre-tax loss of $2.4 million on revenues of $7.9 million in the corresponding period in 2004. Corporate activities' 2005 first quarter results primarily reflect $22.0 million of net gains on investment transactions before tax, compared with $1.7 million in the corresponding 2004 period. As of March 31, 2005, Alleghany beneficially owned 8.0 million shares, or 2.1 percent, of the outstanding common stock of Burlington Northern Santa Fe Corporation, which had an aggregate market value on that date of $431.4 million, or $53.93 per share. The aggregate cost of such shares is $96.6 million, or $12.07 per share. As of March 31, 2005, Alleghany had 7,885,205 shares of common stock outstanding (which includes the stock dividend declared in March 2005). The Company's results in the 2005 first quarter are not indicative of operating results in future periods. The Company and its subsidiaries have adequate internally generated funds and unused credit facilities to provide for the currently foreseeable needs of its and their businesses. Information regarding the Company's accounting policies is included in the Company's 2004 Form 10-K and the Notes to the Consolidated Financial Statements included in this report on Form 10-Q. 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risk is the risk of loss from adverse changes in market prices and rates, such as interest rates, foreign currency exchange rates and commodity prices. The primary market risk related to the Company's non-trading financial instruments is the risk of loss associated with adverse changes in interest rates. The investment portfolios of the Company and its insurance subsidiaries may contain, from time-to-time, debt securities with fixed maturities that expose them to risk related to adverse changes in interest rates, as well as equity securities which are subject to fluctuations in market value. The Company holds its equity securities and debt securities as available for sale. Any changes in the fair value in these securities, net of tax, would be reflected in the Company's accumulated other comprehensive income as a component of stockholders' equity. The table below presents a sensitivity analysis of the debt securities of the Company and its insurance subsidiaries that are sensitive to changes in interest rates. Sensitivity analysis is defined as the measurement of potential changes in future earnings, fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates over a selected time. In this sensitivity analysis model, the Company uses fair values to measure its potential change, and a +/- 300 basis point range of change in interest rates to measure the hypothetical change in fair value of the financial instruments included in the analysis. The change in fair value is determined by calculating hypothetical March 31, 2005 ending prices based on yields adjusted to reflect a +/ - 300 basis point range of change in interest rates, comparing such hypothetical ending price to actual ending prices, and multiplying the difference by the par outstanding. SENSITIVITY ANALYSIS At March 31, 2005 (dollars in millions)
Interest Rate Shifts -300 -200 -100 0 100 200 300 - -------------------- ---- ---- ---- - --- --- --- ASSETS Debt securities, fair value $1,580.2 $1,542.5 $1,504.9 $1,466.6 $1,427.6 $1,387.9 $1,350.3 Estimated change in fair value $113.6 $75.9 $38.3 -- $(39.0) $(78.7) $(116.3) LIABILITIES Subsidiaries' debt, fair value $140.6 $141.7 $142.9 $144.0 $145.2 $146.3 $147.5 Estimated change in fair value $(3.4) $(2.3) $(1.1) -- $1.2 $2.3 $3.5
The Company's 2004 Form 10-K provides a more detailed discussion of the market risks affecting its operations. 16 ITEM 4. CONTROLS AND PROCEDURES The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer (the "CEO") and the Chief Financial Officer (the "CFO"), of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q pursuant to Rule 13a-15 promulgated under the Securities Exchange Act of 1934. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information required to be included in the Company's periodic reports required to be filed with the U.S. Securities and Exchange Commission. Additionally, as of the end of the period covered by this report on Form 10-Q, the Company's CEO and CFO have concluded that there have been no significant changes in internal control over financial reporting that have occurred during the period covered by this report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. FORWARD-LOOKING STATEMENTS "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Quantitative and Qualitative Disclosures About Market Risk" contain disclosures which are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. 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," "believe," "potential," "should," "continue" or the negative versions of those words or other comparable words. These forward-looking statements are based upon the Company's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and the Company's future financial condition and results. These statements are not guarantees of future performance, and the Company has no specific intention to update these statements. The uncertainties and risks include, but are not limited to risks relating to the Company's insurance subsidiaries such as - the cyclical nature of the property casualty industry; - the long-tail and potentially volatile nature of certain casualty lines of business written by such subsidiaries; - the availability of reinsurance; - exposure to terrorist acts; 17 - the willingness and ability of such subsidiaries' reinsurers to pay reinsurance recoverables owed to such subsidiaries; - changes in the ratings assigned to such subsidiaries; - claims development and the process of estimating reserves; - legal and regulatory changes; - the uncertain nature of damage theories and loss amounts; - increases in the levels of risk retention by such subsidiaries; - adverse loss development for events insured by such subsidiaries in either the current year or prior years; and - significant weather-related or other natural or human-made catastrophes and disasters. Additional risks and uncertainties include 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; risks relating to conducting operations in a competitive environment and conducting operations in foreign countries; effects of acquisition and disposition activities, inflation rates or recessionary or expansive trends, changes in market prices of the Company's significant equity investments; extended labor disruptions, 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 its 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. PART II. OTHER INFORMATION ITEM 6. EXHIBITS
Exhibit Number Description -------------- ----------- 31.1 Certification of the Chief Executive Officer of the Company pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certification of the Chief Financial Officer of the Company pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) of the Securities Exchange Act of 1934, as amended. 32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit shall not be deemed "filed" as a part of this Report on Form 10-Q. 32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
18 Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit shall not be deemed "filed" as a part of this Report on Form 10-Q.
19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALLEGHANY CORPORATION Registrant Date: May 9, 2005 /s/ Roger B. Gorham ------------------- Roger B. Gorham Senior Vice President (and chief financial officer) 20 EX-31.1 2 y08798exv31w1.txt CERTIFICATION Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Weston M. Hicks, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Alleghany Corporation (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the Registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and Exhibit 31.1 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: May 6, 2005 /s/ Weston M. Hicks ------------------- Weston M. Hicks President and chief executive officer EX-31.2 3 y08798exv31w2.txt CERTIFICATION Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Roger B. Gorham, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Alleghany Corporation (the "Registrant"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the Registrant and we have: a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c. evaluated the effectiveness of the Registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d. disclosed in this report any change in the Registrant's internal control over financial reporting that occurred during the Registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Registrant's internal control over financial reporting; and 5. The Registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant's auditors and the audit committee of Registrant's board of directors (or persons performing the equivalent functions): a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant's ability to record, process, summarize and report financial information; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant's internal control over financial reporting. Date: May 6, 2005 /s/ Roger B. Gorham ------------------- Roger B. Gorham Chief Financial Officer EX-32.1 4 y08798exv32w1.txt CERTIFICATION Exhibit 32.1 ALLEGHANY CORPORATION CERTIFICATION In connection with the periodic report of Alleghany Corporation (the "Company") on Form 10-Q for the quarter ended March 31, 2005, as filed with the Securities and Exchange Commission (the "Report"), I, Weston M. Hicks, President and chief executive officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that: (1) the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. This Certification, which accompanies the Report, has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission. Date: May 6, 2005 By: /s/ Weston M. Hicks ------------------- Weston M. Hicks President and chief executive officer EX-32.2 5 y08798exv32w2.txt CERTIFICATION Exhibit 32.2 ALLEGHANY CORPORATION CERTIFICATION In connection with the periodic report of Alleghany Corporation (the "Company") on Form 10-Q for the quarter ended March 31, 2005, as filed with the Securities and Exchange Commission (the "Report"), I, Roger B. Gorham, Senior Vice President and chief financial officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, that: (1) the Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated. This Certification, which accompanies the Report, has not been, and shall not be deemed, "filed" with the Securities and Exchange Commission. Date: May 6, 2005 By: /s/ Roger B. Gorham ------------------- Roger B. Gorham Senior Vice President and chief financial officer -----END PRIVACY-ENHANCED MESSAGE-----