-----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, TPh7/eCN7pfbGopFX0s0Fj64kVMhj6nDgMqP+Tec446f9mzTBKtGg+kApR4EAx4f lLtqhCmAR6v9pJd/GCF1vA== 0000950123-97-002333.txt : 19970327 0000950123-97-002333.hdr.sgml : 19970327 ACCESSION NUMBER: 0000950123-97-002333 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970321 DATE AS OF CHANGE: 19970326 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEGHANY CORP /DE CENTRAL INDEX KEY: 0000775368 STANDARD INDUSTRIAL CLASSIFICATION: 6361 IRS NUMBER: 510283071 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09371 FILM NUMBER: 97560800 BUSINESS ADDRESS: STREET 1: PARK AVE PLZ CITY: NEW YORK STATE: NY ZIP: 10055 BUSINESS PHONE: 2127521356 MAIL ADDRESS: STREET 1: PARK AVENUE PLAZA CITY: NEW YORK STATE: NY ZIP: 10055 FORMER COMPANY: FORMER CONFORMED NAME: ALLEGHANY FINANCIAL CORP DATE OF NAME CHANGE: 19870115 10-K 1 FORM 10-K/CURRENT REPORT 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, 1996 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 3, 1997, 7,106,605 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 $1,202,564,518. 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 Corporation for the year 1996... I and II Proxy Statement relating to Annual Meeting of Stockholders of Alleghany Corporation to be held on April 25, 1997................................. III
2 3 ALLEGHANY CORPORATION ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996 TABLE OF CONTENTS
DESCRIPTION PAGE ------------------------------------------------------------------------- ---- PART I Item 1. Business................................................................. 4 Item 2. Properties............................................................... 31 Item 3. Legal Proceedings........................................................ 34 Item 4. Submission of Matters to a Vote of Security Holders...................... 34 Supplemental Item Executive Officers of Registrant......................................... 34 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.... 35 Item 6. Selected Financial Data.................................................. 36 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................ 36 Item 8. Financial Statements and Supplementary Data.............................. 36 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure............................................................... 36 PART III Item 10. Directors and Executive Officers of Registrant........................... 36 Item 11. Executive Compensation................................................... 36 Item 12. Security Ownership of Certain Beneficial Owners and Management........... 37 Item 13. Certain Relationships and Related Transactions........................... 37 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......... 37 Signatures............................................................... 45 INDEX TO FINANCIAL STATEMENT SCHEDULES FINANCIAL STATEMENT SCHEDULES INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES INDEX TO EXHIBITS EXHIBITS
3 4 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 businesses, and through CT&T's subsidiary, Alleghany Asset Management, Inc. ("Alleghany Asset Management") and its subsidiaries, in certain other financial services businesses. Alleghany is also engaged, through its subsidiary Underwriters Re Group, Inc. (the "Underwriters 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. 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. ("API"), purchased real estate and real estate-related assets of Sacramento Savings for a purchase price of about $116 million. Alleghany's intention with respect to such assets, the bulk of which is raw land, is to dispose of them in an orderly fashion, which may take several years. Reference is made to Item 2 of this Report for further information about the properties held by API. 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 1996, 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 1996. The consolidated financial statements of Alleghany, incorporated by reference in Item 8 of this Report, include the accounts of Alleghany and its subsidiaries for all periods presented. TITLE INSURANCE, REAL ESTATE-RELATED SERVICES AND FINANCIAL SERVICES BUSINESSES TITLE OPERATIONS CT&T, headquartered in Chicago, is engaged in the sale and underwriting of title insurance and related services (including abstracting, searches, and escrow, closing and disbursement services) through CTI, Security Union, Ticor Title and their title insurance subsidiaries, collectively known as the CT&T Family of Title Insurers. Organized as an Illinois corporation in 1912, CT&T was acquired, along with CTI, by 4 5 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, but both were a part of business organizations that had succeeded to businesses conducted since around the turn of the century. Security Union and Ticor Title are headquartered in Pasadena, California. The CT&T Family of Title Insurers is the largest title insurance organization in the world, based upon title revenue in 1995 (the latest full year for which data is available). 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., confirming the financial strength of the CT&T Family of Title Insurers. 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. The CT&T Family of Title Insurers has approximately 300 offices and more than 3,700 policy-issuing agents in 49 states, Puerto Rico, the Virgin Islands, Guam, Canada and Mexico. General Description of Title Insurance The CT&T Family of Title Insurers insures a variety of interests in real property. For a one-time premium, purchasers of residential and commercial properties, mortgagees, lessees and others with an interest in real property purchase insurance policies to insure against loss suffered as a result of encumbrances or other defects in title, as that title is defined in the policy. Prior to the issuance of a policy, a title insurer conducts a title search and examination of the property, a process by which it identifies and defines the risks to be assumed by the insurer under the policy. To conduct a title search and examination, an agent or employee of the CT&T Family of Title Insurers reviews various records providing a history of transfers of interests in the parcel of real estate with respect to which a policy of title insurance is to be issued. These records are maintained by local governmental entities, such as counties and municipalities. Title records, known as title plants, owned by the CT&T Family of Title Insurers are also used as a reference, allowing complete title searches without resorting to governmental records. The CT&T Family of Title Insurers' title plants consist of compilations of land title and deed information copied from public records dating back many years on properties in various geographical locations. These title plants are updated daily. As CT&T's title insurance operations have grown, CT&T has sought to improve the effectiveness and efficiency of the company as a whole. CT&T's title insurance operations continue to institute programs to focus better on customer needs and to achieve greater operational and cost efficiencies. Title plant and production facilities are being consolidated in certain markets to provide greater product consistency and to reduce turnaround times and expenses. Technology investments continue to be made to streamline workflow processes and to secure competitive advantages through automation. Agents and employees are being trained to sharpen their problem solving abilities and to heighten their responsiveness to customer needs. Implementation of these initiatives, which continues in 1997, is expected to result in better, more cost effective alignment of the internal operations of CT&T's title insurance operations with marketplace demands. Marketing The CT&T Family of Title Insurers issues title insurance policies directly through its branch office operations as well as through policy-issuing independent agents. The CT&T Family of Title Insurers also issues policies of insurance in situations where the title search and examination process is performed by approved attorneys working as independent contractors. The primary sources of title insurance business are the major participants in local real estate markets: attorneys, builders, commercial banks, thrift institutions, mortgage banks and real estate brokers. Other significant sources of business are large commercial developers and real estate brokerage firms operating on a national scale. 5 6 To meet the needs of national commercial customers, the National Business Unit and National Title Services offices serve as one-stop sources of title services for both single-site and multi-site commercial and industrial real estate ventures. Other business components of the national operations organization include the National Lenders unit, a one-stop source for national residential lenders and low liability commercial accounts; and SAFETRANS, which provides one-stop title services to employee relocation firms. The title insurance business of the CT&T Family of Title Insurers is not dependent on one or a few customers. Business Conditions; Seasonality The title insurance industry is highly sensitive to interest rate levels and to the volume of real estate transactions. The title industry was adversely affected by the recession and severely depressed real estate markets in 1990 and 1991. However, interest rates began to drop in 1992 and in 1993 reached new thirty-year lows. Driven by first-time buyers enticed into the market by the low interest rates, home sales increased in those years. Low interest rates also resulted in a high volume of refinancing orders. Beginning in February 1994, a series of increases in short-term interest rates significantly reduced the volume of real estate transactions and brought to an abrupt end one of the longest refinancing surges in history. The overall industry-wide decline in revenues and volume of orders from 1993 to 1994 and through the first half of 1995 was the steepest downturn the industry experienced since it began keeping those statistics in the early 1960's. This trend began to reverse its course in the second half of 1995 when lower rates again 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 providing an environment conducive to healthy volumes of real estate construction and resale activity. The business of the CT&T Family of Title Insurers is seasonal, as real estate activity is seasonal. The strongest quarters are typically the third and fourth quarters because there are more home sales and more commercial and industrial construction during the summer. Revenues generally are recognized by CT&T at the time of the closing of the real estate transaction with respect to which a title insurance policy is issued; accordingly, there is typically a lag of about two months between the time that a title insurance order is placed, at which time work commences, and the time that CT&T recognizes the revenues associated with the order. 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. The fourth quarter is also aided by a higher level of commercial and industrial transactions, typically representing the desire of commercial entities to complete transactions by year-end. The first quarter is typically the weakest quarter. Approximately 69 percent of the title revenues of the CT&T Family of Title Insurers in 1996 are estimated to have been generated by residential real estate activity, consisting of resales (43 percent), refinancings (15 percent) and new housing (11 percent). Commercial and industrial real estate activity is estimated to account for the remaining 31 percent of 1996 revenues, attributable to initial sales and resales (25 percent) and refinancings (6 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 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 6 7 title insurers, access to title plants owned by others or employment of abstractors to search public records on behalf of such regional title insurers. The CT&T Family of Title Insurers' 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 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, dependent 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, Security Union and Ticor Title each have generally restricted the size of any one risk of loss that they will retain to $70 million, $30 million and $50 million, respectively. The title insurers in the CT&T Family of Title Insurers reinsure risks with each other and with other title insurance companies in excess of what they are willing to retain. In addition, the title insurers have purchased reinsurance coverage for individual losses in excess of $12.5 million, subject to certain exclusions. This coverage will pay 90 percent of such losses up to $50 million. However, reinsurance arrangements do not relieve a title insurance company that issues a policy from its legal liability to the holder of the policy and, thus, the risk of nonperformance by the assuming reinsurer is borne by the issuer of the policy. Losses and Loss Adjustment Expenses The largest single liability on CT&T's books is its reserve for title insurance claims. Historical experience with respect to payments 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. Losses are reported to CT&T directly by its insured parties or indirectly through its agents. 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 ("LAE"). These reserves are periodically adjusted by CT&T based on its evaluation of subsequent reports regarding the reported claim. 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 are 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 monthly by management, and tested semi-annually for adequacy by an independent actuary. CT&T does not discount its reserves for anticipated investment income. Provisions to 7 8 reserves 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, 1996 are adequate. REAL ESTATE-RELATED SERVICES Beginning in 1994, CT&T restructured its national operations organization to address the increasing importance of national and regional residential lenders. In recent years, mortgage lenders have made significant investments in technology to reduce costs and shorten the time necessary to originate a mortgage loan. Increasingly, they are seeking cost efficiencies by requiring vendors to provide a bundle of services and to deliver them in an electronic format which is compatible with their automated systems. Such services include not only the traditional title insurance and escrow services provided by the CT&T Family of Title Insurers, but new services such as flood certifications, credit information and property evaluations, including traditional appraisals. Between 1995 and 1996, three acquisitions were completed that expanded CT&T's real estate-related services business and improved its ability to service mortgage lenders. In May 1995, CT&T acquired National Flood Information Services, Inc., a Delaware corporation based in Arlington, Texas ("NFIS"), which has provided flood certification services since 1987. In August 1995, Credit Data Reporting Services, Inc., a New York corporation headquartered in Kingston, New York ("CDRS"), was acquired. CDRS has been in the credit reporting business since 1941. In July 1996, Market Intelligence, Inc., a Massachusetts corporation based in Hopkinton, Massachusetts ("Market Intelligence"), was acquired. Market Intelligence has been in the property evaluation business since 1989. 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. NFIS 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. NFIS is neither an issuer nor an underwriter of flood insurance policies. 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. CDRS 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 without human intervention. CDRS 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). Changes in federal mortgage requirements aimed at lowering closing costs and technological innovations permit lenders to use other avenues of property evaluation, in lieu of a traditional full appraisal, for many residential loans. Market Intelligence provides real estate information services and alternatives to appraisals nationwide using database research supplemented by a network of real estate agents that verify computer reports through physical property inspections. CT&T also maintains a network of 750 state-licensed contract appraisers covering all 50 states. Through this network, CT&T offers a full array of property appraisal products for residential mortgage loans. Property appraisals for commercial properties are also available on a limited basis. To integrate CT&T's products and services and to improve the delivery of such products and services to its customers through one source, CT&T introduced in late 1996 a new product ordering software system -- OrderNET. OrderNET enables customers electronically to transmit orders for credit, appraisal, flood certification and title products services, from one common system and to receive automated order confirmations, as well as certain products. 8 9 FINANCIAL SERVICES CT&T's financial services group was restructured in 1995 under Alleghany Asset Management, Inc., a Delaware corporation and a newly-formed subsidiary of CT&T. The financial services businesses conducted directly by CT&T were transferred to The Chicago Trust Company ("Chicago Trust"), an Illinois trust company acquired by Alleghany Asset Management. Also transferred to Alleghany Asset Management were Montag & Caldwell, Inc. ("Montag & Caldwell"), an Atlanta-based investment counseling firm acquired in July 1994, and Chicago Deferred Exchange Corporation, an Illinois corporation, which facilitates certain tax-deferred property exchanges. The following are the significant lines of business of Alleghany Asset Management: Institutional Investment Management -- manages equity, fixed income, and balanced accounts primarily for employee benefit plans, foundations, endowments, pension plans and insurance companies. Full Service 401(k) Administration -- provides trustee, plan design, investment management and other administrative services for companies primarily in the Midwest and South. Personal Trust and Investment Services -- provides investment management and trust and estate planning services. Real Estate Trust Services -- facilitates tax-deferred exchanges of income-producing real property, and offers land trusts, which permit real estate to be conveyed to a trustee while reserving to the beneficiaries the full management and control of the property. CT&T Funds -- a mutual fund family, with total assets of $1.0 billion as of December 31, 1996, which offers the following eight no-load, open-end mutual funds: -- Chicago Trust Growth and Income Fund -- Montag & Caldwell Growth Fund -- Chicago Trust Talon Fund -- Montag & Caldwell Balanced Fund -- Chicago Trust Bond Fund -- Chicago Trust Municipal Bond Fund -- Chicago Trust Money Market Fund -- Chicago Trust Asset Allocation Fund While available to the general public, fund marketing is focused on specific niches, including rollover funds from existing clients in other 401(k) and pension fund programs, third party distribution channels, and new 401(k) clients. As of December 31, 1996, Alleghany Asset Management, through its subsidiaries, managed assets totalling about $14.5 billion. INVESTMENT OPERATIONS Investments held by CT&T or any of its subsidiaries must comply with the insurance laws of the state of incorporation of the company holding the investment; relevant states are Illinois, Missouri, California, New York, 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 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. 9 10 The following table reflects investment results for CT&T for the years ended December 31, 1994, 1995 and 1996 (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 December 31, 1994...... $896,509 $ 51,385 $36,502 $ (5,447) 5.7% 4.1% Year Ended December 31, 1995...... $836,462 $ 58,385 $41,342 $ 3,702 7.0% 4.9% Year Ended December 31, 1996...... $836,390 $ 61,808 $43,661 $ 1,436 7.4% 5.2%
- - --------------- (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. The following table summarizes the investments of CT&T, excluding cash, as of December 31, 1996, 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........................ $ 84,715 9.84% $ 84,715 9.78% Corporate bonds............................... 108,758 12.64% 110,296 12.73% United States government and government agency bonds....................................... 224,637 26.10% 227,174 26.21% Mortgage- and asset-backed securities......... 160,634 18.67% 161,522 18.64% Municipal bonds............................... 229,280 26.64% 232,114 26.79% Foreign bonds................................. 2,823 .33% 2,852 .33% Redeemable preferred stock.................... 8,363 .97% 8,838 1.01% Other preferred stock......................... 5,754 .67% 5,723 .66% Equity securities............................. 35,650 4.14% 33,349 3.85% -------- ---------- -------- ---------- Total............................... $860,614 100.00% $866,583 100.00% ======== ======== ======== ========
10 11 The following table indicates the composition of the long-term fixed maturity portfolio, including preferred stock, as of December 31, 1996 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......................................................... $ 688,313 91.96% NAIC 2......................................................... 33,725 4.50% NAIC 3......................................................... 11,650 1.56% NAIC 6......................................................... 269 .04% NAIC L & P3 (Preferred stock-redeemable........................ 5,723 .76% NAIC A, L & P3 (Preferred stock-other)......................... 8,838 1.18% -------- ------ Total................................................ $ 748,518 100.00% ======== ======
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, 1996 (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*.............................................. $ 142,256 19.0% Over one through five years.................................... 354,846 47.4% Over five through ten years.................................... 52,687 7.0% Over ten years................................................. 37,207 5.0% Mortgage- and asset-backed..................................... 161,522 21.6% -------- ----- Total................................................ $ 748,518 100.0% ======== =====
- - --------------- * Included in this category are $5,723 of preferred stock-other and $8,838 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 $70 million to $150 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 97 percent of all securities rated investment grade by Moody's and less than 1 percent in derivative instruments as of 1996 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 2.0 to 4.0 years. Duration measures a portfolio's sensitivity to change in interest rates; a change within a range of plus or minus 1% in interest rates would be expected to result in an inverse change of approximately 2.2% 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. CT&T does not specifically match particular assets to related liabilities, but instead holds the investment portfolio to a shorter maturity than liabilities. However, asset allocation and bond portfolio maturity are modified periodically based on the market outlook, interest rates and/or title insurance operating conditions. 11 12 COMPETITION The title insurance industry is competitive throughout the United States, with large firms such as CT&T's title insurers competing on a national basis, while smaller firms have significant market shares on a regional basis. During 1996, CTI, Security Union, Ticor Title, First American Title Insurance Company, Commonwealth Land Title Insurance Company, Stewart Title Insurance Co., Fidelity National Title Insurance Co., Lawyers Title Insurance Corporation and Old Republic Title Insurance Group, Inc. together accounted for approximately 85 percent of the revenues generated by title insurance companies. The CT&T Family of Title Insurers also competes with abstractors, attorneys issuing opinions and, in some areas, state land registration systems. Competition in the title insurance industry is primarily on the basis of service. In addition, the financial strength of the insurer has become an increasingly important factor in 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. Each of the businesses within CT&T's real estate-related services business unit faces significant competition from other real estate service providers. Mortgage lenders may choose to produce these services internally rather than purchase them from outside vendors. Competition is generally on the basis of service, technological capabilities and price. 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. REGULATION Title insurance companies are subject to regulation and supervision by state insurance regulators under the insurance statutes and regulations of states in which they are incorporated. CTI is incorporated in Missouri, Security Union is incorporated in California and has a title insurance subsidiary incorporated in Oregon, and Ticor Title is incorporated in California and has a title insurance subsidiary incorporated in New York. Each of these companies is also regulated in each jurisdiction in which it is authorized to write title insurance. Regulation and supervision vary from state to state, but generally cover such matters as the standards of solvency which must be met and maintained, the nature of limitations on investments, the amount of dividends which may be distributed to a parent corporation, requirements regarding reserves for unearned premiums and losses, the licensing of insurers and their agents, the approval of policy forms and premium rates, periodic examinations of title insurers and annual and other reports required to be filed on the financial condition of title insurance companies. As insurance holding companies, Alleghany and CT&T are also subject to the insurance regulations of Missouri, California, Oregon and New York. 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. While CDRS, NFIS, and Market Intelligence 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. NMS is a unit within CTI and is therefore subject to supervision by insurance industry regulators. Acting as fiduciaries, CT&T and Chicago Trust are primarily regulated by the State of Illinois Commissioner of Banks and Trust Companies. 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. 12 13 EMPLOYEES At December 31, 1996, CT&T and its subsidiaries had approximately 7,900 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 is licensed in 41 states, Puerto Rico and the District of Columbia, is accredited as a reinsurer in seven additional states and Canada, and has branch offices in Atlanta, 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, 1996, Underwriters' statutory surplus was $614 million. Alleghany currently owns about 96.8 percent of the capital stock of URG, and management of URG owns the remaining 3.2 percent. In 1995, Underwriters was upgraded from "A (Excellent)" to "A+ (Superior)" by A.M. Best Company, Inc., an independent insurance industry rating organization ("Best's"). Best's publications indicate that the higher 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, during 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. To capitalize on advantageous market conditions for certain primary insurance business lines and on its expertise in specialized coverages, 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. CUIC and UIC are rated "A+ (Superior)" by Best's because Underwriters reinsures a significant share of their business. Similarly, Underwriters will reinsure a significant share of NUIC's business and, therefore assignment of the same rating is expected. 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 40 other states, Guam and the District of Columbia on an approved nonadmitted basis. In 1996, CUIC generated $88.5 million in gross written premiums. Underwriters Re Group retained $52.1 million of such amount constituting 14 percent of Underwriters Re Group's consolidated net written premiums in 1996. UIC has licenses to write primary property and casualty insurance in 42 states and the District of Columbia and focuses on primary and umbrella liability policies for medium- to large-sized businesses. In connection with the acquisition of UIC, Underwriters was indemnified for all losses that occurred prior to the acquisition date. A capital contribution of $100 million was made to UIC, consisting principally of about 5 million shares of Santa Fe common stock, which was subsequently converted to approximately 2.1 million shares of BNSF common stock, increasing UIC's statutory surplus to $112.1 million at 1994 year-end. In 13 14 1996, UIC generated $4.9 million in gross written premiums, of which Underwriters Re Group retained $2.3 million, constituting 0.6 percent of Underwriters Re Group's consolidated net written premiums in 1996. NUIC is approved to write property and casualty insurance in New Hampshire, and will focus on general liability and umbrella excess liability policies for medium- to large-sized businesses. To capitalize on the considerable expertise of certain individuals in handling specialized classes of primary business, The Center Insurance Services, Inc., formerly known as The Underwriting Center, Inc. ("The Center"), was established in 1995 as a wholly owned subsidiary of URG. The Center's subsidiaries act as agents and underwrite business on behalf of CUIC, UIC and, to a lesser extent, non-affiliated insurers. Such subsidiaries also expect to underwrite business on behalf of NUIC. The focus of The Center includes specialized products liability insurance, general liability insurance for certain insureds with significant self-insured retentions, specialized environmental liability insurance, and marine insurance. During 1996 approximately $43.3 million of gross written premium was underwritten by The Center, of which Underwriters Re Group retained $22.5 million. The Center has offices in Kennesaw and Roswell, Georgia and in New York, New York. To capitalize on international underwriting opportunities, Underwriters Re Group established representative offices in Barbados at the end of 1995 and in London, England in 1996. In addition, Underwriters Re Group made strategic investments in reinsurance 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 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 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 an established percentage. Under excess of 14 15 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 effect the reinsurers on higher layers. MARKETING 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, property catastrophe, clash, homeowners and workers' compensation coverages and certain excess and surplus lines. Underwriters focuses on coverages which require a relatively high degree of underwriting and 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 and actuarial expertise offer greater potential for favorable results than more general coverages, based on current market conditions. In 1996, Underwriters wrote 90% of its treaty business and 92% of its facultative business through reinsurance brokers. The remaining treaty business was principally reinsurance of portions of the primary insurance underwritten by subsidiaries of Underwriters. The remainder of Underwriters' facultative business was written directly with ceding companies. By working primarily through brokers, Underwriters does not need to maintain a large sales organization which, during periods of reduced premium volume, 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 its 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 1996, Underwriters paid brokers $10.5 million in commissions, which represents approximately 2% of its gross written premiums of $434.0 million. Underwriters' five leading brokers, E.W. Blanch Company, Pegasus Advisors, Inc., Sedgwick Re, Inc., AM-RE Brokers, Inc. and AON Reinsurance Agency, Inc., accounted for 34% of Underwriters' gross written premiums in 1996. Over this period, none of the brokers accounted for 10% or more 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. A significant percentage of Underwriters' gross written premiums are generally obtained from a relatively small number of ceding companies. In 1996, approximately 36% of gross written premiums were obtained from Underwriters' ten largest ceding companies. None of the ceding companies accounted for 10% or more of such premiums. The ceding companies that account for relatively large percentages of gross written premiums 15 16 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. UNDERWRITING OPERATIONS 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 1996, Underwriters acted as lead or co-lead underwriter on a majority of its treaty business. Treaty reinsurance generated approximately $277.7 million, or 77%, of Underwriters Re Group's net written premiums in 1996, facultative reinsurance generated $21.2 million, or 6% of net written premiums, and primary insurance generated $61.4 million, or 17%, of net written premiums. Casualty lines represented approximately 72% 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 53% of Underwriters' net reinsurance written premiums, with reinsurance written on a pro rata basis representing the balance. In 1996, Underwriters Re Group's net written premiums increased $68.3 million, or 23%, from 1995. 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 Re Group generally wrote up to $1.0 million per reinsurance risk in 1996 on a net basis. In the case of reinsurance of certain clash coverage, Underwriters Re Group has written up to $2.5 million on a net basis and in limited circumstances has accepted more. With regard to primary operations, Underwriters Re Group has written up to $1.5 million on a net basis. The largest net risk assumed in 1996 was $14.0 million. 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 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, 16 17 Underwriters' write-offs for unrecoverable reinsurance were negligible in 1996 and 1995. As of December 31, 1996, Underwriters had an allowance for estimated unrecoverable reinsurance of $2.1 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 $1.2 million per property facultative risk. Underwriters also has an aggregate reinsurance contract to cover losses up to $75.0 million incurred during the period July 1, 1996 through June 30, 1997 in excess of a 70% loss and loss adjustment expense ratio. The contract covers essentially all lines of business written by Underwriters; however, property catastrophe losses are subject to a sublimit of $50.0 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 Reinsurance Corporation International Ltd. (the "Continental Re Reinsurance Contracts") that provide coverage for pre-1987 business up to an aggregate limit of $200.0 million. Underwriters received quarterly payments under these contracts totaling $39.1 million in 1995 and $37.6 million in 1996, reducing the reinsurance receivable attributable to such contracts from $149.1 million at year-end 1995 to $111.5 million at year-end 1996. Such receivable is secured by a combination of letters of credit and a trust fund dedicated solely to payments under the Continental Re Reinsurance Contracts. As of December 31, 1996, Underwriters had reported reinsurance receivables of $392.2 million through retrocessional agreements, including $111.5 million of reinsurance receivables under the Continental Re Reinsurance Contracts, which was fully secured as described above, and $127.9 million due from another reinsurer, which was fully secured with a combination of letters of credit and funds withheld. 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 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. 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 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 reviews its aggregate loss reserves at least twice each year. Between the semi-annual reviews, Underwriters updates its loss reserves by applying the loss ratios determined in the previous review to earned premiums to date, less incurred losses reported. Underwriters does not discount its reserves for 17 18 anticipated investment income. There are inherent uncertainties in estimating reserves primarily due to the long-term nature of most reinsurance, 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 claims. Actual losses and loss expenses may deviate, perhaps substantially, from reserves in Underwriters' financial statements, which could have a material adverse effect on Underwriters' financial condition and results of operations. Based on current information, management believes reserves for losses and loss expenses at December 31, 1996 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 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 $3.6 million per year) and paid losses (approximately $1.1 million per year) for the last three years. The per year figures are net of reinsurance, including the Continental Re Reinsurance 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 $3.2 million per year) and paid losses (approximately $0.1 million per year) for the last three years. The per year figures are net of reinsurance, including the Continental Re Reinsurance Contracts. During the three years ended December 31, 1996, the average net loss payment per claim (open and settled) for asbestos and environmental impairment exposures (excluding cessions to the Continental Re Reinsurance Contracts) was $25,000 and $22,000, respectively, and the highest paid loss was $1.0 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 Re Reinsurance Contracts). Most claims paid to date have been paid under contracts with varying levels of retention by the ceding company or insurer. Although the 18 19 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, 1996, Underwriters' case and IBNR reserves (net of reinsurance, including cessions to the Continental Re Reinsurance Contracts) totalled approximately $17.5 million for asbestos liabilities, which includes reserves for approximately 917 open claims where cedents have advised Underwriters that they currently expect to recover from Underwriters. As of December 31, 1996, Underwriters' case and IBNR reserves (net of reinsurance, including cessions to the Continental Re Reinsurance Contracts) totalled about $22.6 million for environmental impairment claims, which includes reserves for approximately 628 open claims where cedents have advised Underwriters that they currently expect to recover from Underwriters. Additionally, ceding companies have submitted 1,261 precautionary notices for asbestos claims and 7,107 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. 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 Re Reinsurance Contracts, but excluding an additional $27.4 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
1996 1995 1994 ------- ------- ------- Reserve, net of reinsurance recoverables, as of January 1..... $14,494 $10,136 $10,000 Incurred loss, net of reinsurance............................. 3,000 4,358 3,505 Paid loss, net of reinsurance................................. 0 0 (3,369) ------- ------- ------- Reserve, net of reinsurance recoverables, as of December 31... 17,494 14,494 10,136 Reinsurance recoverables, as of December 31................... 15,176 17,506 32,487 ------- ------- ------- Reserve, gross of reinsurance recoverables, as of December 31.......................................................... $32,670 $32,000 $42,623 ======= ======= ======= Type of Reserve, net of reinsurance recoverables: Case........................................................ $ 4,494 $ 4,494 $ 136 IBNR........................................................ 13,000 10,000 10,000 ------- ------- ------- Total.................................................... $17,494 $14,494 $10,136 ======= ======= =======
RECONCILIATION OF ENVIRONMENTAL IMPAIRMENT CLAIMS RESERVE FOR LOSSES AND LAE
1996 1995 1994 ------- ------- ------- Reserve, net of reinsurance recoverables, as of January 1..... $19,600 $16,198 $12,879 Incurred loss, net of reinsurance............................. 3,000 3,402 3,074 Paid loss, net of reinsurance................................. 0 0 245 ------- ------- ------- Reserve, net of reinsurance recoverables, as of December 31... 22,600 19,600 16,198 Reinsurance recoverables, as of December 31................... 4,939 12,896 17,994 ------- ------- ------- Reserve, gross of reinsurance recoverables, as of December 31.......................................................... $27,539 $32,496 $34,192 ======= ======= ======= Type of Reserve, net of reinsurance recoverables: Case........................................................ $ 9,600 $ 9,600 $ 6,198 IBNR........................................................ 13,000 10,000 10,000 ------- ------- ------- Total.................................................... $22,600 $19,600 $16,198 ======= ======= =======
19 20 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 $27.4 million as of December 31, 1996, compared with $32.4 million as of December 31, 1995. While there can be no assurance that such total reserves will be adequate, management believes that Underwriters' total asbestos and environmental impairment 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 1986. 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 1986. The cumulative reserve deficiencies in the years 1988 through 1992 primarily resulted from the $35.8 million reserve strengthening in 1993, along with prior increases to asbestos and environmental impairment claims reserves. 20 21 CHANGES IN HISTORICAL NET RESERVES FOR LOSSES AND LAE (IN MILLIONS)
YEAR ENDED DECEMBER 31, --------------------------------------------------------------------------------- 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 ----- ----- ----- ---- ---- ---- ---- ---- ---- ------ ------ Net liability as of the end of year*......................... $ 359 $ 470 $ 461 $453 $411 $411 $437 $509 $536 $ 628 $ 732 Cumulative amount of net liability paid as of: One year later................ $ 94 $ 116 $ 119 $137 $101 $ 84 $ 98 $112 $102 $ 117 -- Two years later............... 193 208 242 227 173 161 178 189 167 -- -- Three years later............. 277 330 306 285 239 214 236 236 -- -- -- Four years later.............. 375 380 348 342 274 254 266 -- -- -- -- Five years later.............. 407 416 394 370 294 276 -- -- -- -- -- Six years later............... 423 458 414 384 311 -- -- -- -- -- -- Seven years later............. 460 475 425 396 -- -- -- -- -- -- -- Eight years later............. 471 483 434 -- -- -- -- -- -- -- -- Nine years later.............. 475 489 -- -- -- -- -- -- -- -- -- Ten years later............... 478 -- -- -- -- -- -- -- -- -- -- Net liability re-estimated as of: One year later................ 439 481 454 457 414 412 483 516 539 629 -- Two years later............... 449 473 457 460 421 455 487 518 538 -- -- Three years later............. 441 476 462 474 465 460 491 523 -- -- -- Four years later.............. 444 478 492 520 472 469 496 -- -- -- -- Five years later.............. 445 516 538 528 485 469 -- -- -- -- -- Six years later............... 484 562 548 545 483 -- -- -- -- -- -- Seven years later............. 531 572 568 544 -- -- -- -- -- -- -- Eight years later............. 539 591 567 -- -- -- -- -- -- -- -- Nine years later.............. 554 591 -- -- -- -- -- -- -- -- -- Ten years later............... 554 -- -- -- -- -- -- -- -- -- -- Cumulative Redundancy (Deficiency)................ $(195) $(121) $(106) $(91) $(72) $(58) $(59) $(14) $ (2) $ (1) -- Gross Liability -- End of Year.......................... $861 $940 $1,014 $1,110 Reinsurance Recoverable......... 352 404 386 378 ---- ---- ------ ------ Net Liability -- End of Year.... 509 536 $ 628 $ 732 ==== ==== ====== ====== Gross Re-estimated Liability -- Latest........................ 931 968 1,086 Re-estimated Recoverable -- Latest......... 408 430 457 ---- ---- ------ Net Re-estimated Liability -- Latest........... $523 $538 $ 629 ==== ==== ======
- - --------------- * Amounts for 1986 were determined in accordance with statutory accounting principles. 21 22 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 ---------------------------------- 1996 1995 1994 ---------- ---------- -------- Statutory Reserves........................................ $ 705,105 $ 596,070 $500,567 Additional Mass Action Reserves(1)........................ 27,350 32,350 35,750 Reinsurance Recoverables.................................. 377,565 385,580 404,210 ---------- ---------- -------- GAAP Reserves............................................. $1,110,020 $1,014,000 $940,527 ========== ========== ========
- - --------------- (1) Amount represents additional reserves recorded by Underwriters in 1993 for probable asbestos-related and environmental impairment claims exposure. 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
1996 1995 1994 ---------- ---------- --------- Reserve, net of reinsurance recoverables, as of January 1.................................................... $ 628,420 $ 536,317 $ 509,375 Incurred Loss, net of reinsurance, related to: Current year......................................... 242,332 200,543 146,426 Prior years.......................................... 1,393 2,565 6,630 ---------- ---------- -------- Total Incurred Loss, net of reinsurance................ 243,725 203,108 153,056 ---------- ---------- -------- Paid Loss, net of reinsurance, related to: Current year......................................... (23,342) (9,239) (13,826) Prior years.......................................... (116,348) (101,766) (112,288) ---------- ---------- -------- Total Paid Loss, net of reinsurance.................... (139,690) (111,005) (126,114) ---------- ---------- -------- Reserve, net of reinsurance recoverables, as of December 31.......................................... 732,455 628,420 536,317 Reinsurance recoverables, as of December 31............ 377,565 385,580 404,210 ---------- ---------- -------- Reserve, gross of reinsurance recoverables, as of December 31.......................................... $1,110,020 $1,014,000 $ 940,527 ========== ========== ========
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. 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 22 23 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, 1994, 1995 and 1996 (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, 1994....... $748,681 $ 41,226 $ 32,465 $(6,115) 5.5% 4.3% Year Ended December 31, 1995....... $797,132 $ 50,173 $ 36,113 $(5,476) 5.9% 4.5% Year Ended December 31, 1996....... $984,345 $ 59,542 $ 42,971 $ (94) 6.0% 4.4%
- - --------------- (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. As of December 31, 1996, the equity portfolio of Underwriters Re Group was carried at a market value of approximately $252.2 million with an original cost of approximately $137.5 million, and consisted primarily of approximately 2.5 million shares of BNSF common stock. The cost of equities listed in the table below, $111.7 million, includes the cost paid by Alleghany for the BNSF common stock prior to being contributed to Underwriters Re Group. In 1996, Underwriters Re Group realized a gain of $1.0 million related to the sale of equity securities and had dividend income of $3.6 million therefrom. The following table summarizes the investments of Underwriters Re Group, excluding cash, as of December 31, 1996, with all investments carried at fair value (dollars in thousands): INVESTMENTS
AMORTIZED COST OR COST FAIR VALUE ------------------------- ------------------------- AMOUNT PERCENTAGE AMOUNT PERCENTAGE ---------- ---------- ---------- ---------- Short-term investments....................... $ 132,136 11% $ 132,136 10% Corporate bonds.............................. 237,837 19 235,953 17 United States government and government agency bonds............................... 95,436 8 95,016 7 Mortgage- and asset-backed securities........ 320,620 26 322,861 24 Foreign bonds................................ 18,342 1 17,783 1 Redeemable preferred stocks.................. 21,058 2 21,600 2 Municipal bonds.............................. 294,696 24 295,219 21 Equity securities (1)........................ 111,676 9 252,207 18 ---------- --- ---------- --- Total.............................. $1,231,801 100% $1,372,775 100% ========= ======== ========= ========
- - --------------- (1) Includes 2,474,823 shares of BNSF common stock at the original cost to Alleghany. 23 24 The following table indicates the composition of the long-term fixed maturity portfolio by Moody's rating as of December 31, 1996 (dollars in thousands): LONG-TERM FIXED MATURITY PORTFOLIO BY MOODY'S RATING
FAIR VALUE PERCENTAGE ---------- ---------- Aaa.................................................................... $ 529,934 53% Aa..................................................................... 174,507 18 A...................................................................... 205,983 21 Baa.................................................................... 57,082 6 Ba..................................................................... 20,926 2 ---------- --- Total........................................................ $ 988,432 100% ======== ========
The following table indicates the composition of the long-term fixed maturity portfolio by years until contractual maturity as of December 31, 1996 (dollars in thousands): LONG-TERM FIXED MATURITY PORTFOLIO BY YEARS UNTIL MATURITY
FAIR VALUE PERCENTAGE ---------- ---------- One year or less....................................................... $ 47,902 5% Over one through five years............................................ 215,320 22 Over five through ten years............................................ 237,993 24 Over ten years......................................................... 164,356 17 Mortgage- and asset-backed securities.................................. 322,861 32 ---------- --- Total............................................................. $ 988,432 100% ======== ========
COMPETITION Underwriters competes primarily in the United States reinsurance market with numerous foreign and domestic 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. 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 24 25 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, 1996 there were 41 domestic professional reinsurers, and Underwriters was the nation's tenth-largest in terms of statutory surplus and seventeenth-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 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. 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 (Georgia and New York). 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, are generally 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 warning tool to identify weakly capitalized companies for purposes of initiating corrective action. At 25 26 December 31, 1996, 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 218 persons as of December 31, 1996. 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"). The three joint ventures are in the start-up phase of production. 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 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 the world's largest merchant producer of perlite ore. These products are marketed worldwide under the Harborlite(R) and Europerl(R) brand names. 26 27 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. 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. 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, 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 ten countries. In 1996, approximately 44 percent of World Minerals' revenues (equal to 4.2 percent of Alleghany's consolidated revenues) were generated by foreign operations, and an additional 11.5 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. 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 its 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 last for another 15 years at current utilization rates. Celite is conducting active 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 1997. 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. 27 28 Celite's silicate products are produced from purchased magnesium and calcium compounds and internally produced diatomite. World Minerals' operating subsidiaries experienced no interruption in raw material availability in 1996, and barring unforeseen circumstances anticipate no such interruption in 1997. 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 25 United States and 41 foreign patents and patent applications. While World Minerals considers all of its patents to be valuable, World Minerals believes that none of its patents 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. Barring unusual circumstances, World Minerals does not experience backlogs of orders. World Minerals' business is not seasonal to any material degree. Programs instituted by management from 1991 through 1993 have strengthened World Minerals. Domestic and international operations are now 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. Beginning in 1997, World Minerals will also distribute Harborlite's and Europerlite's products in Europe to dealers, distributors and end users on 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 1996, World Minerals spent approximately $2.9 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 the world's largest merchant producer of perlite ore. Harborlite and Europerlite each have two large competitors in the expanded perlite market, Grefco and CECA, and many smaller competitors. 28 29 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. 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 1996, 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 and industrial hygiene professionals who assist plant personnel in complying with environmental, health and safety regulations. This 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. 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 1987, the International Agency for Research on Cancer ("IARC") issued a report, which was supplemented in 1988, designating crystalline silica as "probably carcinogenic to humans," which is a tentative classification falling between "probably not carcinogenic to humans" and "sufficient evidence of human carcinogenicity." In late 1996, a working group of IARC reconsidered the issue of crystalline silica and recommended reclassifying the inhalation of crystalline silica from occupational sources from Group 2A, "probably carcinogenic to humans" to Group 1, "carcinogenic to humans." The new classification will be published in mid-1997 in a new IARC monograph. Since 1987, Celite and Harborlite have provided 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 labelling 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 29 30 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 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. 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 As of December 31, 1996, World Minerals had 117 employees, all located in the United States, Celite had about 1,383 employees worldwide, and Harborlite had about 191 employees worldwide. Europerlite had about 71 employees, all located in Europe. Approximately 346 of Celite's employees and 41 of Harborlite's employees in the United States are covered by collective bargaining agreements. During 1996, Celite agreed to a new six-year collective bargaining agreement with its largest union, representing production workers at its 30 31 Lompoc, California mine and plant. Also in 1996, Harborlite agreed to a new four-year agreement with the union representing its No Agua/Antonito mine and mill workers. 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, long years of association with suppliers and customers, and ability to control operating costs. Since Heads and Threads imports virtually all of its fasteners, it is necessary to forecast inventory requirements from six months to a year in advance to allow time for shipments to reach their destinations in the 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 1997, will increase costs. At December 31, 1996, Heads and Threads had about 165 employees. 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 522 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 headquarters in Calabasas, California. The lease term is expected to begin in late 1997 upon completion of construction and relocation. Currently, URG leases about 29,000 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 3,000 square feet to 6,700 square feet. CUIC leases about 9,400 square feet of office space. All three branch offices of The Center are also in leased space, ranging in size from about 1,100 square feet to 4,600 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, and Izmir, Turkey, offices and the plant at Wissembourg, France, which are leased. 31 32
LOCATION AND APPROXIMATE PRODUCT NATURE OF PROPERTY SQUARE FOOTAGE OR USE - - ------------------------------------------------------- -------------- ----------------------- CELITE: Lompoc, CA............................................. 961,410 Diatomite filter aids, Production facility; 17 multi-story production fillers, silicates and buildings; 5 one-story warehouse buildings; 6 one-story specialty products 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 Headquarters offices 1 one story building; 3 units within 1 one-story building. Quincy, WA............................................. 60,941 Diatomite filter aids Production facility; Plant #1-1 multi-story production and fillers building and 7 one-story buildings. Plant #2-1 multi-story production building and 6 one-story buildings. Murat, Department of Cantal, France.................... 77,000 Diatomite filter aids Production facility; 1 one-story manufacturing building; 2 one-story warehouses; and 1 one-story office building. Nanterre, France....................................... 6,000 Sales and 1 single floor. administrative offices Guadalajara, Mexico.................................... 116,610 Diatomite filter aids Production facility; 2 multi-story production and fillers buildings; 2 multi-story pollution-control buildings; and 20 one-story buildings. Mexico City, Mexico.................................... 2,700 Offices 1 single floor condominium. Arica, Chile........................................... 50,000 Diatomite filter aids Production facility; 1 calcined line; 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; 2 multi-story manufacturing and fillers buildings; 3 one-story warehouses; 2 one-story office buildings; 1 two-story laboratory; and 3 miscellaneous buildings. Changbai County, Jilin Province, PRC................... 95,000 Diatomite filter aids 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, Jilin Province, PRC................... 74,665 Diatomite filter aids 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, Jilin Province, PRC................... 142,000 Diatomite filter aids 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 manufacturing building and warehouse; 1 for perlite ore one-story office building; and 1 one-story warehouse. 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.
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LOCATION AND APPROXIMATE PRODUCT NATURE OF PROPERTY SQUARE FOOTAGE OR USE - - ------------------------------------------------------- -------------- ----------------------- 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. 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 warehouse and office building. fillers Wissembourg, France.................................... 5,000 Perlite filter aids and a portion of 1 multi-story production and warehouse fillers building. Hessle, Humberside,.................................... 36,700 Perlite filter aids and United Kingdom 1 one-story manufacturing building; and fillers 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, Turkey.......................................... 1,000 Sales and 1 single-floor administrative office EUROPERLITE: Barcelona, Spain....................................... 70,300 Perlite filter aids and Production facility; 1 one-story manufacturing and fillers 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
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. Celite and Harborlite also lease warehouses, office space and other facilities in the United States and abroad. A joint venture between Celite and the Government of Iceland has mining rights to mine diatomaceous earth in sections of Lake Myvatn, Iceland, and Celite's joint ventures in PRC have mining rights to mine diatomaceous earth in sections of Jilin Province, PRC. 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 33 34 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 of improved and unimproved commercial land (office, retail and industrial), improved and unimproved commercial and residential lots, and office, retail, commercial and residential buildings. In addition, the following properties are held by joint ventures in dissolution in which API has an interest, but the liquidation of such joint ventures has not yet been completed. API intends to dispose of all of these properties in an orderly fashion, which may take several years.
LOCATION APPROXIMATE ACREAGE PROPERTY TYPE - - ------------------------------------------ ------------------- --------------------------- Roseville, California..................... 15.7 acres Unimproved land (commercial/residential) Roseville, California (subject to a first Unimproved land deed of trust).......................... 112.3 acres (commercial/residential) Folsom, California........................ 7.4 acres Unimproved land (commercial/office/retail) Sacramento, California.................... 215.8 acres Unimproved land (commercial/residential) Sacramento, California.................... 136.0 acres Unimproved land (commercial/residential)
Alleghany also owns one truck terminal property in Ohio which is being held for sale, and which has been leased from time to time on an interim basis. ITEM 3. LEGAL PROCEEDINGS. A. The federal tax returns of the Alleghany group for the tax years 1991 and 1992 were audited by the Internal Revenue Service ("IRS"), and by letter dated December 27, 1995, the IRS proposed adjustments to the Alleghany group's federal income tax liability for the 1988, 1991 and 1992 tax years totalling about $6.7 million. Based upon discussions with the IRS Appeals Office, Alleghany believes it has preliminarily settled the proposed adjustments for an aggregate additional tax liability of about $0.4 million for such years. B. 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, 1996. 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 1996. 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:
NAME AGE CURRENT POSITION BUSINESS EXPERIENCE DURING LAST 5 YEARS - - --------------------- --- --------------------------- --------------------------------------- F.M. Kirby........... 77 Chairman of the Board Chairman of the Board, Alleghany; Chairman of the Board and chief executive officer, Alleghany, prior to July 1992.
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NAME AGE CURRENT POSITION BUSINESS EXPERIENCE DURING LAST 5 YEARS - - --------------------- --- --------------------------- --------------------------------------- John J. Burns, Jr.... 65 President, chief executive President, chief executive officer and officer and chief operating chief operating officer, Alleghany officer since July 1992; President and chief operating officer, Alleghany, prior thereto. David B. Cuming...... 64 Senior Vice President and Senior Vice President and chief chief financial officer financial officer, Alleghany. Robert M. Hart....... 52 Senior Vice President, Senior Vice President and General General Counsel and Counsel since September 1994 and Secretary Secretary since January 1995; Partner, Donovan Leisure Newton & Irvine, prior thereto. Peter R. Sismondo.... 41 Vice President, Controller, Vice President, Controller, Treasurer, Treasurer, Assistant Assistant Secretary and principal Secretary and principal accounting officer, Alleghany, since accounting officer January 1995; Vice President, Controller, Assistant Secretary and principal accounting officer, Alleghany, prior thereto.
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 5 of Alleghany's Annual Report to Stockholders for the year 1996, filed as Exhibit 13 hereto. RECENT SALES OF UNREGISTERED SECURITIES On January 10, 1996, Alleghany issued 1,126 shares of common stock to S. Arnold Zimmerman, a former director of Alleghany, upon the exercise of an option to purchase 1,000 shares of Alleghany common stock, subject to adjustment for stock dividends, at an exercise price of $77.2522 per share, or $86,985.97 in the aggregate, granted to Mr. Zimmerman on May 1, 1989 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 10, 1996, Alleghany issued an aggregate of 469 shares of Alleghany common stock to seven non-employee directors of Alleghany pursuant to the Alleghany Corporation Directors' Equity Compensation Plan representing one-half of the value of each director's retainer for the following twelve month's service as a director, exclusive of any per meeting fees, committee fees or expense reimbursements. The sale of the common stock was exempt from registration under the Securities Act, pursuant to Section 4(2) thereof, as a transaction not involving a public offering. On July 9, 1996, Alleghany issued 12,415 shares of Alleghany common stock to each of Robert F. Sennott, Jr., Mark P. Sennott and Bryant P. Linares for an aggregate consideration valued at $7,259,044 in connection with an acquisition. The sale of the 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 resale of such shares of common stock was subsequently registered in Alleghany's Registration Statement on Form S-3 (Registration No. 333-9881). On August 21, 1996, Alleghany issued an aggregate of 2,230 shares of common stock to S. Arnold Zimmerman, a former director of Alleghany, 1,126 shares upon the exercise of an option to purchase 1,000 shares of Alleghany common stock, subject to adjustment for stock dividends, at an exercise price of $75.5331 per share, or $85,050.27 in the aggregate, and 1,104 shares of common stock upon the exercise of an option to 35 36 purchase 1,000 shares of Alleghany common stock, subject to adjustment for stock dividends, at an exercise price of $86.8369 per share, or $95,867.94 in the aggregate, granted to Mr. Zimmerman on May 7, 1990 and April 29, 1991, respectively, 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, pursuant to Section 4(2) thereof, as a transaction not involving a public offering. On September 12, 1996, Alleghany issued 16,855, 8,396 and 6,313 shares of Alleghany common stock to Mike A. Leprino, Nancy A. Leprino and Donald C. Ford, respectively, for an aggregate consideration valued at $6,000,000 in connection with an acquisition. 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 resale of such shares of common stock was subsequently registered in Alleghany's Registration Statement on Form S-3 (Registration No. 333-13971). The above does not include unregistered issuances of Alleghany common stock that did not involve a sale consisting of a stock dividend paid in April 1996 and issuances of common stock and other securities pursuant to employee incentive plans. ITEM 6. SELECTED FINANCIAL DATA. The information required by this Item 6 is incorporated by reference from page 5 of Alleghany's Annual Report to Stockholders for the year 1996, 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 3, from pages 8 through 17, and from pages 20 and 21, of Alleghany's Annual Report to Stockholders for the year 1996, 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 37 of Alleghany's Annual Report to Stockholders for the year 1996, filed as Exhibit 13 hereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 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 25, 1997. 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 12 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 25, 1997. ITEM 11. EXECUTIVE COMPENSATION. The information required by this Item 11 is incorporated by reference from pages 12 through page 21 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 25, 1997. The information set forth beginning with the first full paragraph of page 21 through 36 37 page 27 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 25, 1997, is not "filed" as a part hereof. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information required by this Item 12 is incorporated by reference from pages 1 through 5, and from pages 11 through 12, of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 25, 1997. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by this Item 13 is incorporated by reference from page 14 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 25, 1997. 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 1996 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. 4.01 Indenture dated as of June 15, 1989 between Alleghany and Pittsburgh National Bank, as Trustee, relating to the 6-1/2% Subordinated Exchangeable Debentures due June 15, 2014 (the "Debentures"), including the form of Debenture, filed as Exhibit 4.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *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.
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EXHIBIT NUMBER DESCRIPTION - - -------------- ---------------------------------------------------------------------------- *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(a) Alleghany 1983 Long-Term Incentive Plan as adopted on March 16, 1983, filed as Exhibit 10.24 to the Annual Report on Form 10-K of Alleghany Corporation, a Maryland corporation and the predecessor of Alleghany ("Old Alleghany"), for the year ended December 31, 1982, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.03(b) Description of amendments to the Alleghany 1983 Long-Term Incentive Plan as adopted on December 30, 1986, filed as Exhibit 10.05(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1986, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.04 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. *10.05 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). *10.06(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. *10.06(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. *10.06(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. *10.07 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). *10.08 Description of Alleghany Group Long Term Disability Plan effective as of July 1, 1995, field 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. *10.09 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. *10.10 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. *10.11 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).
- - --------------- * Compensatory plan or arrangement.
38 39
EXHIBIT NUMBER DESCRIPTION - - -------------- ---------------------------------------------------------------------------- *10.12(a) Description of compensatory arrangement between Alleghany and Paul F. Woodberry, filed as Exhibit 10.21 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.12(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. 10.13 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. 10.14(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). 10.14(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). 10.14(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). 10.15 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). 10.16 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). 10.17(a) Agreement and Plan of Merger dated as of April 29, 1994 among Montag & Caldwell Associates, Inc., Alleghany Acquisition Corporation, Alleghany and the Shareholders of Montag & Caldwell Associates, Inc. (the "Montag & Caldwell Acquisition Agreement"), filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, is incorporated herein by reference. 10.17(b) List of Contents of Exhibits to the Montag & Caldwell Acquisition Agreement, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, is incorporated herein by reference. 10.18(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. 10.18(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.
- - --------------- * Compensatory plan or arrangement
39 40
EXHIBIT NUMBER DESCRIPTION - - -------------- ---------------------------------------------------------------------------- 10.19(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. 10.19(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. 10.19(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. 10.19(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. 10.20 Letter agreement dated January 24, 1995 among Alleghany, Santa Fe Pacific Corporation and Burlington Northern Inc., filed as Exhibit 2 to Amendment No. 3 to Alleghany's Schedule 13D relating to Santa Fe Pacific Corporation dated January 24, 1995, is incorporated herein by reference. 10.21(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). 10.21(b) Intercreditor and Collateral Agency Agreement dated as of August 1, 1990 among Manufacturers Hanover Trust Company, Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.21(c) Interest Rate and Currency Exchange Agreement dated as of August 14, 1990 between Barclays Bank PLC and Alleghany Funding Corporation, and related Confirmation dated August 13, 1990 between Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, are incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.21(d) Indenture dated as of August 1, 1990 between Alleghany Funding Corporation and Manufacturers Hanover Trust Company, filed as Exhibit 10.3 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371).
40 41
EXHIBIT NUMBER DESCRIPTION - - -------------- ---------------------------------------------------------------------------- 10.22(a) Acquisition Agreement dated as of November 29, 1990 by and between CT&T and Westwood Equities Corporation (the "Ticor Acquisition Agreement"), filed as Exhibit (2)(i) to Alleghany's Current Report on Form 8-K dated December 21, 1990, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(b) List of Contents of Schedules to the Ticor Acquisition Agreement, filed as Exhibit (2)(ii) to Alleghany's Current Report on Form 8-K dated December 21, 1990, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(c) Amendment to the Ticor Acquisition Agreement dated as of January 9, 1991 by and between CT&T and Westwood Equities Corporation, filed as Exhibit (2)(iii) to Alleghany's Current Report on Form 8-K dated March 21, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(d) Amended and Restated Credit Agreement dated as of December 30, 1993 among CT&T, certain commercial lending institutions and Continental Bank, N.A. as agent, 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. 10.22(e) Letter Agreement dated May 2, 1991 between CT&T and Continental Bank, N.A. relating to an interest rate swap effective May 6, 1991, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(f) 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. 10.23(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). 10.23(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). 10.24(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). 10.24(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).
41 42
EXHIBIT NUMBER DESCRIPTION - - -------------- ---------------------------------------------------------------------------- 10.25(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). 10.25(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). 10.25(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). 10.26(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). 10.26(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). 10.26(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). 10.27(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, NationsBanks, 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. 10.27(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. 10.27(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). 10.27(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). 10.28(a) Standstill Agreement dated as of September 24, 1991 between Armco Inc. and Alleghany (the "Standstill Agreement"), filed as Exhibit 10.39(e) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371).
42 43
EXHIBIT NUMBER DESCRIPTION - - -------------- ---------------------------------------------------------------------------- 10.28(b) Amendment dated as of March 17, 1992 to the Standstill Agreement, filed as Exhibit 10.39(f) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.28(c) Amendment No. 2 dated as of April 24, 1992 to the Standstill Agreement, as amended as of March 17, 1992, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, is incorporated herein by reference. 10.29(a) Stock Purchase Agreement dated as of October 31, 1991 among Associated Insurance Companies, Inc., Alleghany and The Shelby Insurance Group, Inc. (the "Shelby Stock Purchase Agreement"), filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.29(b) List of Contents of Exhibits and Schedules to the Shelby Stock Purchase Agreement, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.30(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. 10.30(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. 10.30(c) Stock Purchase Related Agreement dated as of July 28, 1993 (the "Underwriters Stock Purchase Related Agreement") among certain persons named therein and Alleghany, filed as Exhibit 10.3(c) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. 10.30(d) List of Exhibits and Schedules to the Underwriters Stock Purchase Related Agreement, filed as Exhibit 10.3(d) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. 10.30(e) Supplement to Underwriters Stock Purchase Related Agreement dated as of August 12, 1993 among certain persons named therein and Alleghany, filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, is incorporated herein by reference. 10.30(f) Amendment to Underwriters Stock Purchase Related Agreement made as of October 7, 1993 among certain persons named therein and Alleghany, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, is incorporated herein by reference. 10.30(g) Amendment No. 1 to Underwriters Stock Purchase Related Agreement effective as of January 1, 1995 among stockholders named in Schedule 1 thereto and Alleghany, filed as Exhibit 10.39(g) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10.30(h) Letter amendment dated April 6, 1995 to Underwriters Stock Purchase Related Agreement, as supplemented and amended, among certain persons named therein and Alleghany, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, is incorporated herein by reference.
43 44
EXHIBIT NUMBER DESCRIPTION - - -------------- ---------------------------------------------------------------------------- 10.30(i) 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. 10.30(j) 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. 10.31(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. 10.31(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. 10.32(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. 10.32(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. 10.33(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. 10.33(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 3, page 5, pages 8 through 17, and pages 20 through 37 of the Annual Report to Stockholders of Alleghany for the year 1996. 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) and Form S-3 (Registration No. 333-13971). 27 Financial Data Schedule.
(b) Reports on Form 8-K. Alleghany did not file any reports on Form 8-K during the fourth quarter of 1996. 44 45 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 18, 1997 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 18, 1997 By /s/ JOHN J. BURNS, JR. ------------------------------------------- John J. Burns, Jr. President and Director (principal executive officer) Date: March 18, 1997 By /s/ DAN R. CARMICHAEL ------------------------------------------- Dan R. Carmichael Director Date: March 18, 1997 By /s/ DAVID B. CUMING ------------------------------------------- David B. Cuming Senior Vice President (principal financial officer) Date: March 18, 1997 By /s/ ALLAN P. KIRBY, JR. ------------------------------------------- Allan P. Kirby, Jr. Director Date: March 18, 1997 By /s/ F.M. KIRBY ------------------------------------------- F.M. Kirby Chairman of the Board and Director
45 46 Date: March 18, 1997 By /s/ WILLIAM K. LAVIN ----------------------------------------------- William K. Lavin Director Date: March 18, 1997 By /s/ ROGER NOALL ------------------------------------------- Roger Noall Director Date: March 18, 1997 By /s/ PETER R. SISMONDO ------------------------------------------- Peter R. Sismondo Vice President, Controller, Treasurer and Assistant Secretary (principal accounting officer) Date: March 18, 1997 By /s/ JAMES F. WILL ------------------------------------------- James F. Will Director Date: March 18, 1997 By /s/ PAUL F. WOODBERRY ------------------------------------------- Paul F. Woodberry Director
46 47 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. 48 SCHEDULE I ALLEGHANY CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1996 (IN THOUSANDS)
AMOUNT AT WHICH SHOWN IN THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET - - ---------------------------------------------------- ---------- ---------- --------------- Fixed maturities: Bonds: United States Government and government agencies and authorities..................... $ 704,688 $ 708,846 $ 708,846 States, municipalities and political subdivisions................................. 523,976 527,333 527,333 Foreign governments............................ 21,946 21,427 21,427 All other corporate bonds...................... 442,454 443,184 443,184 Certificates of deposit............................. 11,363 11,363 11,363 Redeemable preferred stock.......................... 35,174 36,161 36,161 ---------- ---------- ---------- Fixed maturities.......................... 1,739,601 $1,748,314 1,748,314 ---------- ---------- ========== Equity securities: Common stocks: Banks, trust, and insurance companies.......... 31,753 $ 32,734 32,734 Industrial, miscellaneous, and all other....... 296,691 682,134 682,134 ---------- ---------- ---------- Total equity securities................... 328,444 $ 714,868 714,868 ---------- ---------- ========== Other long-term investments......................... 12,231 12,231 Short-term investments.............................. 238,704 238,704 ---------- ---------- Total investments......................... $2,318,980 $ 2,714,117 ========== ==========
49 SCHEDULE II ALLEGHANY CORPORATION CONDENSED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (IN THOUSANDS)
1996 1995 ---------- ---------- ASSETS Investment securities (Cost: 1996 $209,943; 1995 $208,011).......... $ 452,495 $ 410,966 Cash................................................................ 1,855 832 Accounts and other receivables, less allowances..................... 18,158 19,042 Property and equipment -- at cost, less accumulated depreciation.... 2,440 2,436 Other assets........................................................ 29,378 33,078 Investment in consolidated subsidiaries............................. 1,133,499 1,067,229 ---------- ---------- $1,637,825 $1,533,583 ========== ========== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Other liabilities................................................... $ 78,043 $ 88,702 Net deferred tax liability.......................................... 117,399 105,115 Long-term debt...................................................... 19,123 19,123 ---------- ---------- Total liabilities......................................... 214,565 212,940 Commitments and contingent liabilities.............................. Common stockholders' equity......................................... 1,423,260 1,320,643 ---------- ---------- $1,637,825 $1,533,583 ========== ==========
See accompanying Notes to Condensed Financial Statements. 50 SCHEDULE II ALLEGHANY CORPORATION CONDENSED STATEMENTS OF EARNINGS THREE YEARS ENDED DECEMBER 31, 1996 (IN THOUSANDS)
1996 1995 1994 -------- -------- -------- Revenues: Interest, dividend and other income...................... $ 58,647 $ 59,967 $ 62,302 Net gain on investment transactions...................... 801 37,836 23,403 -------- -------- -------- Total revenues................................... 59,448 97,803 85,705 -------- -------- -------- Costs and Expenses: Interest expense......................................... 3,444 5,832 7,743 General and administrative............................... 67,192 69,694 71,354 -------- -------- -------- Total costs and expenses......................... 70,636 75,526 79,097 -------- -------- -------- Operating (loss) income.......................... (11,188) 22,277 6,608 Equity in earnings of consolidated subsidiaries............ 138,270 98,799 86,386 -------- -------- -------- Earnings from continuing operations, before income taxes................................................. 127,082 121,076 92,994 Income taxes............................................... 40,034 35,776 24,622 -------- -------- -------- Earnings from continuing operations...................... 87,048 85,300 68,372 Discontinued operations: Earnings from discontinued operations, net of tax........ 0 0 6,265 Gain on sale of Sacramento Savings, net of tax........... 0 0 62,869 -------- -------- -------- Net earnings..................................... $ 87,048 $ 85,300 $137,506 ======== ======== ========
See accompanying Notes to Condensed Financial Statements. 51 SCHEDULE II ALLEGHANY CORPORATION CONDENSED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1996 (IN THOUSANDS)
1996 1995 1994 -------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES Earnings from continuing operations................................ $ 87,048 $ 85,300 $ 68,372 Adjustments to reconcile earnings from continuing operations to cash provided by (used in) continuing operations: Depreciation and amortization.................................... 463 539 661 Net gain on investment transactions.............................. (801) (37,836) (23,403) Decrease (increase) in accounts and other receivables, less 884 (1,852) (773) allowances..................................................... Decrease (increase) in other assets.............................. 3,554 (2,973) (2,862) (Decrease) increase in other liabilities......................... (8,436) 25,811 (2,927) Equity in undistributed net earnings of consolidated (96,016) (69,859) (63,812) subsidiaries................................................... -------- -------- -------- Net adjustments.................................................. (100,352) (86,170) (93,116) -------- -------- -------- Cash used in continuing operations............................... (13,304) (870) (24,744) -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments.......................................... (7,502) (92,005) (331,992) Sales of investments............................................. 6,469 124,110 135,159 Capital contributions to consolidated subsidiaries............... (446) (33,700) (4,320) Capital contributions to discontinued operations................. 0 0 (4,000) Cash dividends from consolidated subsidiaries.................... 31,040 69,216 73,039 Purchases of property and equipment.............................. (333) (354) (164) Disposition of property and equipment............................ 18 1 4 Proceeds from sale of Sacramento Savings, net of expenses........ 0 0 316,348 Purchase of real estate and real estate related assets related to 0 0 (116,089) the sale of Sacramento Savings................................. -------- -------- -------- Net cash provided by investing activities...................... 29,246 67,268 67,985 -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on long-term debt............................. (35,000) (129,600) (341,000) Proceeds of long-term debt....................................... 35,000 70,000 307,000 Other, net....................................................... (14,919) (7,461) (10,202) -------- -------- -------- Net cash used in financing activities.......................... (14,919) (67,061) (44,202) -------- -------- -------- Net increase (decrease) in cash................................ 1,023 (663) (961) Cash at beginning of year.......................................... 832 1,495 2,456 -------- -------- -------- CASH AT END OF YEAR................................................ $ 1,855 $ 832 $ 1,495 ======== ======== ======== Supplemental disclosures of cash flow information Cash paid during the year for: Interest....................................................... $ 3,443 $ 5,982 $ 7,869 Income taxes................................................... $ 54,822 $ 11,979 $ 44,226
- - --------------- 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. In 1994, Alleghany made a noncash capital contribution of $76,478 to its consolidated subsidiaries by contributing investment securities with a cost basis of $74,213, a newly-acquired company with a cost basis of $1,900 and a partnership interest with a cost basis of $365. The Company contributed the real estate and real estate related assets of $116,089 purchased in connection with the sale of Sacramento Savings net of additional reserves to a consolidated subsidiary. In addition, in connection with dissolving a previously consolidated subsidiary, the Company relieved said subsidiary of $34,250 of its long term debt and received from said subsidiary investment securities with a cost basis of $5,209. See accompanying Notes to Condensed Financial Statements. 52 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 sale of Sacramento Savings Bank. 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 1996 and 1995 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 10 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. 53 SCHEDULE III ALLEGHANY CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION (IN THOUSANDS)
FOR THE YEAR ENDED AT DECEMBER 31 ---------------------------------------------- DECEMBER 31 FUTURE ----------------------- POLICY OTHER BENEFITS, POLICY DEFERRED LOSSES, CLAIMS POLICY CLAIMS AND NET ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT YEAR SEGMENT COST EXPENSES PREMIUMS PAYABLE REVENUE INCOME - - ---- ------------------------------------------- ----------- ---------- -------- -------- ---------- ---------- 1996 Title...................................... $ 0 $ 532,923 $ 0 $0 $1,098,875 $ 49,395 ====== ========== ====== == ========== Property and casualty reinsurance.......... $20,771 $1,110,020 $95,472 $0 $ 346,777 $ 63,184 ====== ========== ====== == ========== 1995 Title...................................... $ 0 $ 529,915 $ 0 $0 $ 953,364 $ 45,361 ====== ========== ====== == ========== Property and casualty reinsurance.......... $16,951 $1,014,000 $74,561 $0 $ 277,507 $ 50,173 ====== ========== ====== == ========== 1994 Title...................................... $ 0 $ 536,068 $ 0 $0 $1,162,207 $ 39,850 ====== ========== ====== == ========== Property and casualty reinsurance.......... $11,325 $ 940,527 $52,828 $0 $ 190,279 $ 41,226 ====== ========== ====== == ========== BENEFITS, CLAIMS, AMORTIZATION LOSSES OF DEFERRED AND POLICY OTHER SETTLEMENT ACQUISITION OPERATING PREMIUMS YEAR EXPENSES COSTS EXPENSES WRITTEN - - ---- ---------- ------------ ---------- -------- 1996 $ 83,023 $ 0 $1,131,199 $ 0 ====== ======== ====== ========== $243,725 $ 88,895 $ 40,373 $360,305 ====== ======== ====== ========== 1995 $ 81,385 $ 0 $ 989,775 $ 0 ====== ======== ====== ========== $203,108 $ 63,617 $ 29,833 $291,995 ====== ======== ====== ========== 1994 $ 94,845 $ 0 $1,138,921 $ 0 ====== ======== ====== ========== $153,056 $ 38,883 $ 24,200 $200,596 ====== ======== ====== ==========
54 SCHEDULE IV ALLEGHANY CORPORATION AND SUBSIDIARIES REINSURANCE THREE YEARS ENDED DECEMBER 31, 1996 (IN THOUSANDS)
PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED YEAR SEGMENT AMOUNT COMPANIES COMPANIES AMOUNT TO NET - - ---- ----------------------- ---------- --------- ---------- ---------- ---------- 1996 Title premiums......... $1,101,294 $ 4,579 $ 2,160 $1,098,875 0.20% ========== ======= ======== ========== ====== Property and casualty reinsurance premiums... $ 85,437 $65,968 $327,308 $ 346,777 94.39% ========== ======= ======== ========== ====== 1995 Title premiums......... $ 953,364 $ 5,872 $ 2,012 $ 949,504 0.21% ========== ======= ======== ========== ====== Property and casualty reinsurance premiums... $ 42,413 $85,234 $320,328 $ 277,507 115.43% ========== ======= ======== ========== ====== 1994 Title premiums......... $1,162,207 $ 5,250 $ 2,771 $1,159,728 0.24% ========== ======= ======== ========== ====== Property and casualty reinsurance premiums... $ 8,821 $69,299 $250,757 $ 190,279 131.78% ========== ======= ======== ========== ======
55 SCHEDULE VI ALLEGHANY CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (IN THOUSANDS)
CLAIMS AND DISCOUNT, CLAIM IF ANY, ADJUSTMENT DEDUCTED EXPENSES RESERVES IN INCURRED FOR RESERVES RELATED UNPAID FOR UNPAID TO DEFERRED CLAIMS CLAIMS -------- POLICY AND CLAIM AND CLAIM NET (1) ACQUISITION ADJUSTMENT ADJUSTMENT UNEARNED EARNED INVESTMENT CURRENT AFFILIATION WITH REGISTRANT COST EXPENSES EXPENSES PREMIUMS PREMIUMS INCOME YEAR - - ---------------------------------------- ----------- ---------- ---------- -------- -------- ---------- -------- 1996 Consolidated property-casualty entities.............................. $20,771 $1,110,020 $0 $95,472 $346,777 $ 63,184 $242,332 ======= ========== ======= ======== ======= ======== ====== 1995 Consolidated property-casualty entities.............................. $16,951 $1,014,000 $0 $74,561 $277,507 $ 50,173 $199,783 ======= ========== ======= ======== ======= ======== ====== 1994 Consolidated property-casualty entities.............................. $11,325 $ 940,527 $0 $52,828 $190,279 $ 41,226 $146,416 ======= ========== ======= ======== ======= ======== ====== AMORTIZATION PAID OF DEFERRED CLAIMS (2) POLICY AND CLAIM PRIOR ACQUISITION ADJUSTMENT PREMIUMS AFFILIATION WITH REGISTRANT YEAR COSTS EXPENSES WRITTEN - - ---------------------------------------- ------ ------------ ---------- -------- 1996 Consolidated property-casualty entities.............................. $1,393 $ 88,895 $139,689 $360,305 ======= ======== ======== ======== 1995 Consolidated property-casualty entities.............................. $3,325 $ 63,617 $111,005 $291,995 ======= ======== ======== ======== 1994 Consolidated property-casualty entities.............................. $6,630 $ 38,883 $126,114 $200,596 ======= ======== ======== ========
56 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Alleghany Corporation: Under date of February 19, 1997, we reported on the consolidated balance sheets of Alleghany Corporation and subsidiaries as of December 31, 1996 and 1995 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, 1996 as contained in the 1996 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 1996. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in the accompanying index. These financial 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 New York, New York February 19, 1997 57 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. 4.01 Indenture dated as of June 15, 1989 between Alleghany and Pittsburgh National Bank, as Trustee, relating to the 6-1/2% Subordinated Exchangeable Debentures due June 15, 2014 (the "Debentures"), including the form of Debenture, filed as Exhibit 4.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *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(a) Alleghany 1983 Long-Term Incentive Plan as adopted on March 16, 1983, filed as Exhibit 10.24 to the Annual Report on Form 10-K of Alleghany Corporation, a Maryland corporation and the predecessor of Alleghany ("Old Alleghany"), for the year ended December 31, 1982, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). - - ---------- *Compensatory plan or arrangement. 58 *10.03(b) Description of amendments to the Alleghany 1983 Long-Term Incentive Plan as adopted on December 30, 1986, filed as Exhibit 10.05(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1986, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.04 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. *10.05 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). *10.06(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. *10.06(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. *10.06(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. *10.07 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). - - ---------- * Compensatory plan or arrangement. 59 *10.08 Description of Alleghany Group Long Term Disability Plan effective as of July 1, 1995, field 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. *10.09 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. *10.10 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. *10.11 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). *10.12(a) Description of compensatory arrangement between Alleghany and Paul F. Woodberry, filed as Exhibit 10.21 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.12(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. 10.13 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. 60 10.14(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). 10.14(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). 10.14(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). 10.15 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). 10.16 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). 10.17(a) Agreement and Plan of Merger dated as of April 29, 1994 among Montag & Caldwell Associates, Inc., Alleghany Acquisition Corporation, Alleghany and the Shareholders of Montag & Caldwell Associates, Inc. (the "Montag & Caldwell Acquisition Agreement"), filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10- Q for the quarter ended March 31, 1994, is incorporated herein by reference. 61 10.17(b) List of Contents of Exhibits to the Montag & Caldwell Acquisition Agreement, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, is incorporated herein by reference. 10.18(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. 10.18(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. 10.19(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. 10.19(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. 62 10.19(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. 10.19(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. 10.20 Letter agreement dated January 24, 1995 among Alleghany, Santa Fe Pacific Corporation and Burlington Northern Inc., filed as Exhibit 2 to Amendment No. 3 to Alleghany's Schedule 13D relating to Santa Fe Pacific Corporation dated January 24, 1995, is incorporated herein by reference. 10.21(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). 10.21(b) Intercreditor and Collateral Agency Agreement dated as of August 1, 1990 among Manufacturers Hanover Trust Company, Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 63 10.21(c) Interest Rate and Currency Exchange Agreement dated as of August 14, 1990 between Barclays Bank PLC and Alleghany Funding Corporation, and related Confirmation dated August 13, 1990 between Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, are incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.21(d) Indenture dated as of August 1, 1990 between Alleghany Funding Corporation and Manufacturers Hanover Trust Company, filed as Exhibit 10.3 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(a) Acquisition Agreement dated as of November 29, 1990 by and between CT&T and Westwood Equities Corporation (the "Ticor Acquisition Agreement"), filed as Exhibit (2)(i) to Alleghany's Current Report on Form 8-K dated December 21, 1990, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(b) List of Contents of Schedules to the Ticor Acquisition Agreement, filed as Exhibit 2(ii) to Alleghany's Current Report on Form 8-K dated December 21, 1990, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(c) Amendment to the Ticor Acquisition Agreement dated as of January 9, 1991 by and between CT&T and Westwood Equities Corporation, filed as Exhibit (2)(iii) to Alleghany's Current Report on Form 8-K dated March 21, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(d) Amended and Restated Credit Agreement dated as of December 30, 1993 among CT&T, certain commercial lending institutions and Continental Bank, N.A. as agent, 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. 64 10.22(e) Letter Agreement dated May 2, 1991 between CT&T and Continental Bank, N.A. relating to an interest rate swap effective May 6, 1991, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.22(f) 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. 10.23(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). 10.23(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). 10.24(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). 65 10.24(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). 10.25(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). 10.25(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). 10.25(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). 10.26(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). 10.26(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). 66 10.26(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). 10.27(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, NationsBanks, 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. 10.27(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. 10.27(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). 10.27(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). 10.28(a) Standstill Agreement dated as of September 24, 1991 between Armco Inc. and Alleghany (the "Standstill Agreement"), filed as Exhibit 10.39(e) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 67 10.28(b) Amendment dated as of March 17, 1992 to the Standstill Agreement, filed as Exhibit 10.39(f) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.28(c) Amendment No. 2 dated as of April 24, 1992 to the Standstill Agreement, as amended as of March 17, 1992, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, is incorporated herein by reference. 10.29(a) Stock Purchase Agreement dated as of October 31, 1991 among Associated Insurance Companies, Inc., Alleghany and The Shelby Insurance Group, Inc. (the "Shelby Stock Purchase Agreement"), filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.29(b) List of Contents of Exhibits and Schedules to the Shelby Stock Purchase Agreement, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.30(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. 10.30(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. 68 10.30(c) Stock Purchase Related Agreement dated as of July 28, 1993 (the "Underwriters Stock Purchase Related Agreement") among certain persons named therein and Alleghany, filed as Exhibit 10.3(c) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. 10.30(d) List of Exhibits and Schedules to the Underwriters Stock Purchase Related Agreement, filed as Exhibit 10.3(d) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. 10.30(e) Supplement to Underwriters Stock Purchase Related Agreement dated as of August 12, 1993 among certain persons named therein and Alleghany, filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, is incorporated herein by reference. 10.30(f) Amendment to Underwriters Stock Purchase Related Agreement made as of October 7, 1993 among certain persons named therein and Alleghany, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, is incorporated herein by reference. 10.30(g) Amendment No. 1 to Underwriters Stock Purchase Related Agreement effective as of January 1, 1995 among stockholders named in Schedule 1 thereto and Alleghany, filed as Exhibit 10.39(g) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. 10.30(h) Letter amendment dated April 6, 1995 to Underwriters Stock Purchase Related Agreement, as supplemented and amended, among certain persons named therein and Alleghany, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, is incorporated herein by reference. 69 10.30(i) 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. 10.30(j) 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. 10.31(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. 10.31(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. 10.32(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. 10.32(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. 70 10.33(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. 10.33(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 3, page 5, pages 8 through 17, and pages 20 through 37 of the Annual Report to Stockholders of Alleghany for the year 1996. 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) and Form S-3 (Registration No. 333-13971). 27 Financial Data Schedule. EX-10.30J 2 INDENTURE DATED JUNE 25, 1996 1 Exhibit 10.30(j) EXECUTION COPY URC HOLDINGS CORP. TO THE FIRST NATIONAL BANK OF CHICAGO, Trustee ------------------------- INDENTURE Dated as of June 25, 1996 ------------------------- $200,000,000 7 7/8% Senior Notes due 2006 2 URC HOLDINGS CORP. RECONCILIATION AND TIE BETWEEN TRUST INDENTURE ACT OF 1939 AND INDENTURE, DATED AS OF JUNE 25, 1996
TRUST INDENTURE ACT SECTION INDENTURE SECTION Section 310(a)(1) .......................................... 607 (a)(2) .......................................... 607 (b) .......................................... 608 Section 312(c) .......................................... 701 Section 314(a)(4) .......................................... 1004 (c)(1) .......................................... 102 (c)(2) .......................................... 102 (e) .......................................... 102 Section 315(b) .......................................... 601 Section 316(a)(last sentence) .......................................... 101 ("Outstanding") (a)(1)(A) .......................................... 502, 512 (a)(1)(B) .......................................... 513 (b) .......................................... 508 (c) .......................................... 104[(e)] Section 317(a)(1) .......................................... 503 (a)(2) .......................................... 504 (b) .......................................... 1003 Section 318(a) .......................................... 111
- - -------- Note: This reconciliation and tie shall not, for any purpose, be deemed to be a part of the Indenture. 3 TABLE OF CONTENTS
PAGE PARTIES ................................................................................ 1 RECITALS OF THE COMPANY ................................................................ 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions .............................................................. 1 Act ............................................................. 2 Affiliate ............................................................. 2 Agent Members ............................................................. 2 Board of Directors ............................................................. 2 Board Resolution ............................................................. 2 Business Day ............................................................. 3 Commission ............................................................. 3 Company ............................................................. 3 Company Request or Company Order................................................. 3 Corporate Trust Office........................................................... 3 corporation ............................................................. 3 Debt ............................................................. 3 Default ............................................................. 3 Defaulted Interest ............................................................. 3 Depositary ............................................................. 3 Event of Default ............................................................. 3 Exchange Act ............................................................. 4 Federal Bankruptcy Code.......................................................... 4 Holder ............................................................. 4 Indenture ............................................................. 4 Interest Payment Date............................................................ 4 Lien ............................................................. 4 Maturity ............................................................. 4 Non-U.S. Persons ............................................................. 4 Officers' Certificate............................................................ 4 Opinion of Counsel ............................................................. 4 Outstanding ............................................................. 4
- - -------- Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. 4 ii
Page Paying Agent ............................................................. 5 Person ............................................................. 5 Physical Security ............................................................. 5 Predecessor Security ............................................................ 5 Private Placement Legend......................................................... 6 QIB ............................................................. 6 Regular Record Date ............................................................. 6 Regulation S ............................................................. 6 Responsible Officer ............................................................. 6 Restricted Securities............................................................ 6 Rule 144A ............................................................. 6 Securities ............................................................. 6 Securities Act ............................................................. 6 Security Register; Security Registrar............................................ 6 Significant Subsidiary........................................................... 7 Special Record Date ............................................................. 7 Stated Maturity ............................................................. 7 Subsidiary ............................................................. 7 Trust Indenture Act; TIA......................................................... 7 Trustee ............................................................. 7 Vice President ............................................................. 7 Voting Stock ............................................................. 7 SECTION 102. Compliance Certificates and Opinions ..................................... 7 SECTION 103. Form of Documents Delivered to Trustee ................................... 8 SECTION 104. Acts of Holders .......................................................... 9 SECTION 105. Notices, etc., to Trustee and Company .................................... 10 SECTION 106. Notice to Holders; Waiver................................................. 10 SECTION 107. Effect of Headings and Table of Contents.................................. 11 SECTION 108. Successors and Assigns.................................................... 11 SECTION 109. Separability Clause....................................................... 11 SECTION 110. Benefits of Indenture..................................................... 11 SECTION 111. Governing Law............................................................. 11 SECTION 112. Legal Holidays............................................................ 12 SECTION 113. Incorporation by Reference of Trust Indenture Act......................... 12 SECTION 114. Immunity of Incorporators, Stockholders, Officers, Directors and Employees .......................................................... 12
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Page ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally........................................................... 13 SECTION 202. Restrictive Legends....................................................... 15 ARTICLE THREE THE SECURITIES SECTION 301. Title and Terms........................................................... 17 SECTION 302. Denominations............................................................. 17 SECTION 303. Execution, Authentication, Delivery and Dating............................ 17 SECTION 304. Temporary Securities...................................................... 18 SECTION 305. Registration, Registration of Transfer and Exchange....................... 18 SECTION 306. Book-Entry Provisions for U.S. Global Security............................ 19 SECTION 307. Special Transfer Provisions............................................... 21 SECTION 308. Mutilated, Destroyed, Lost and Stolen Securities.......................... 25 SECTION 309. Payment of Principal and Interest; Interest Rights Preserved.............. 25 SECTION 310. Persons Deemed Owners..................................................... 27 SECTION 311. Cancellation.............................................................. 28 SECTION 312. Computation of Interest................................................... 28 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture................................... 28 SECTION 402. Application of Trust Money................................................ 30 ARTICLE FIVE REMEDIES SECTION 501. Events of Default......................................................... 30 SECTION 502. Acceleration of Maturity; Rescission and Annulment........................ 31 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee........... 33 SECTION 504. Trustee May File Proofs of Claim.......................................... 33 SECTION 505. Trustee May Enforce Claims Without Possession of Securities............... 34
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Page SECTION 506. Application of Money Collected............................................ 35 SECTION 507. Limitation on Suits....................................................... 35 SECTION 508. Unconditional Right of Holders to Receive Principal and Interest.......... 36 SECTION 509. Restoration of Rights and Remedies........................................ 36 SECTION 510. Rights and Remedies Cumulative............................................ 36 SECTION 511. Delay or Omission Not Waiver.............................................. 37 SECTION 512. Control by Holders........................................................ 37 SECTION 513. Waiver of Past Defaults................................................... 37 SECTION 514. Waiver of Stay or Extension Laws.......................................... 38 ARTICLE SIX THE TRUSTEE SECTION 601. Notice of Defaults........................................................ 38 SECTION 602. Certain Rights of Trustee................................................. 38 SECTION 603. Trustee Not Responsible for Recitals or Issuance of Securities............ 40 SECTION 604. May Hold Securities....................................................... 40 SECTION 605. Money Held in Trust....................................................... 40 SECTION 606. Compensation and Reimbursement............................................ 40 SECTION 607. Corporate Trustee Required; Eligibility................................... 41 SECTION 608. Resignation and Removal; Appointment of Successor......................... 41 SECTION 609. Acceptance of Appointment by Successor.................................... 43 SECTION 610. Merger, Conversion, Consolidation or Succession to Business............... 43 ARTICLE SEVEN HOLDER LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Holder Lists; Disclosure of Names and Addresses of Holders................ 44 SECTION 702. Reports by Trustee........................................................ 44 SECTION 703. Reports by Company........................................................ 44 ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, etc., Only on Certain Terms...................... 46 SECTION 802. Successor Person Substituted.............................................. 47 SECTION 803. Securities to Be Secured in Certain Events................................ 47
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Page ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders........................ 48 SECTION 902. Supplemental Indentures with Consent of Holders........................... 49 SECTION 903. Authorization and Execution of Supplemental Indentures.................... 49 SECTION 904. Effect of Supplemental Indentures......................................... 50 SECTION 905. Conformity with Trust Indenture Act....................................... 50 SECTION 906. Reference in Securities to Supplemental Indentures........................ 50 SECTION 907. Notice of Supplemental Indentures......................................... 50 ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, If Any, and Interest...................... 50 SECTION 1002. Maintenance of Office or Agency.......................................... 51 SECTION 1003. Money for Security Payments to Be Held in Trust.......................... 51 SECTION 1004. Statement as to Compliance............................................... 52 SECTION 1005. Payment of Taxes and Other Claims........................................ 53 SECTION 1006. Corporate Existence...................................................... 53 SECTION 1007. Limitation on Liens...................................................... 53 SECTION 1008. Waiver of Certain Covenants.............................................. 55 ARTICLE ELEVEN DEFEASANCE AND COVENANT DEFEASANCE SECTION 1101. Company's Option to Effect Defeasance or Covenant Defeasance............. 56 SECTION 1102. Defeasance and Discharge................................................. 56 SECTION 1103. Covenant Defeasance...................................................... 56 SECTION 1104. Conditions to Defeasance or Covenant Defeasance.......................... 57 SECTION 1105. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions............................... 59 SECTION 1106. Reinstatement............................................................ 59
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Page TESTIMONIUM ............................................................................ 61 SIGNATURES AND SEALS ................................................................... 61 EXHIBIT A Form of Securities; Trustee's Certificate of Authentication EXHIBIT B Form of Certificate to Be Delivered upon Termination of Restricted Period EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers to Non- QIB Institutional Accredited Investors EXHIBIT D Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S
9 INDENTURE, dated as of June 25, 1996 between URC HOLDINGS CORP., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 22801 Ventura Boulevard, Woodland Hills, California 91364, and THE FIRST NATIONAL BANK OF CHICAGO, a national banking association duly organized and existing under the laws of the United States of America, as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue of 7 7/8% Senior Notes due 2006 (herein called the "Securities"), of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. This Indenture incorporates by reference the provisions of the Trust Indenture Act of 1939 and shall, to the extent applicable, be governed by such provisions. All things necessary have been done to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company and to make this Indenture a valid agreement of the Company, in accordance with their and its terms. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; 10 2 (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein, and the terms "cash transaction" and "self-liquidating paper", as used in TIA Section 311, shall have the meanings assigned to them in the rules of the Commission adopted under the Trust Indenture Act; (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; and (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section or other subdivision. Certain terms, used principally in Articles Two and Eleven, are defined in those Articles. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Members" has the meaning specified in Section 306. "Board of Directors" means either the board of directors of the Company or any duly authorized committee of that board. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. 11 3 "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Company" means the Person named as the "Company" in the first paragraph of this Indenture, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Request" or "Company Order" means a written request or order signed in the name of the Company by its Chairman, its President, any Vice President, its Treasurer or an Assistant Treasurer, and delivered to the Trustee. "Corporate Trust Office" means the principal corporate trust office of the Trustee, at which at any particular time its corporate trust business shall be administered, which office at the date of execution of this Indenture is located at One First National Plaza, Suite 0126, Chicago, Illinois 60670-0126, Attention: Corporate Trust Services Division, except that, for purposes of Section 1002, such term shall mean the office or agency of the Trustee in the Borough of Manhattan, The City of New York, which office at the date hereof is located at 14 Wall Street, Eighth Floor, New York, New York 10005. "corporation" includes corporations, associations, companies and business trusts. "Debt" means notes, bonds, debentures or other similar evidences of indebtedness for money borrowed. "Default" means any event which is, or after notice or passage of time or both would be, an Event of Default. "Defaulted Interest" has the meaning specified in Section 309. "Depositary" means The Depository Trust Company, its nominees and their respective successors. "Event of Default" has the meaning specified in Section 501. 12 4 "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and the rules and regulations thereunder. "Federal Bankruptcy Code" means the Bankruptcy Act of Title 11 of the United States Code, as amended from time to time. "Holder" means a Person in whose name a Security is registered in the Security Register. "Indenture" means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Lien" means any pledge, mortgage, lien, charge, encumbrance or security interest. "Maturity", when used with respect to any Security, means the date on which the principal of such Security becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration or otherwise. "Non-U.S. Person" has the meaning specified in Section 307(a). "Officers' Certificate" means a certificate signed by the Chairman, the President or a Vice President, and by the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company, and delivered to the Trustee. "Opinion of Counsel" means a written opinion of counsel, who may be counsel for the Company, including an employee of the Company, and who shall be reasonably acceptable to the Trustee. "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities, or portions thereof, for whose payment money in the necessary amount has been theretofore deposited with the Trustee or any Paying 13 5 Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; (iii) Securities, except to the extent provided in Sections 1102 and 1103, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article Eleven; and (iv) Securities which have been paid pursuant to Section 308 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands the Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, and for the purpose of making the calculations required by TIA Section 313, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the reasonable satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor. "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of or interest on the Securities on behalf of the Company. "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 308 in exchange for a mutilated security or in lieu of a lost, destroyed or 14 6 stolen Security shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Security. "Physical Security" has the meaning specified in Section 201. "Private Placement Legend" has the meaning specified in Section 202. "QIB" means a "Qualified Institutional Buyer" under Rule 144A. "Regular Record Date" for the interest payable on any Interest Payment Date means the June 15 or December 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Regulation S" means Regulation S under the Securities Act or, if at any time after the execution of this Indenture such regulation is superseded or no longer in effect, then any rule, regulation or statutory provision of like intent successor thereto. "Responsible Officer", when used with respect to the Trustee, means the chairman or any vice-chairman of the board of directors, the chairman or any vice-chairman of the executive committee of the board of directors, the chairman of the trust committee, the president, any Vice President, the secretary, any assistant secretary, the treasurer, any assistant treasurer, the cashier, any assistant cashier, any trust officer or assistant trust officer, the controller or any assistant controller or any other officer of the Trustee customarily performing functions similar to those performed by any of the above-designated officers, and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Securities" has the meaning specified in Section 1007. "Rule 144A" means Rule 144A under the Securities Act or, if at any time after the execution of this Indenture such rule is superseded or no longer in effect, then any rule, regulation or statutory provision of like intent successor thereto. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture. "Securities Act" means the Securities Act of 1933, as amended from time to time, and the rules and regulations thereunder. "Security Register; Security Registrar" have the respective meanings specified in Section 305. 15 7 "Significant Subsidiary" means any subsidiary of the Company which constitutes a "Significant Subsidiary" as defined in Rule 1-02 of Regulation S-X under the Exchange Act. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 309. "Stated Maturity", when used with respect to any Security or any installment of principal thereof or interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of principal or interest is due and payable. "Subsidiary" means any corporation of which at the time of determination the Company, directly and/or indirectly through one or more Subsidiaries, owns more than 50% of the Voting Stock. "Trust Indenture Act; TIA" means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was executed, except as provided in Section 905. "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Voting Stock" means stock of the class or classes having general voting power under ordinary circumstances to elect at least a majority of the board of directors, managers or trustees of a corporation (irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency). SECTION 102. Compliance Certificates and Opinions. Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the 16 8 furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than pursuant to Section 1004) shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. 17 9 Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 104. Acts of Holders. (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing; and, except as herein otherwise expressly provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that the Trustee deems sufficient. (c) The principal amount and serial numbers of Securities held by any Person, and the date of holding the same, shall be proved by the Security Register. (d) If the Company shall solicit from the Holders any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Notwithstanding TIA Section 316(c), such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date 18 10 shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Securities shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after the record date. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. SECTION 105. Notices, etc., to Trustee and Company. Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Trust Services Division, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this Indenture, or at any other address previously furnished in writing to the Trustee by the Company. SECTION 106. Notice to Holders; Waiver. Where this Indenture provides for notice of any event to Holders by the Company or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at his address as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. Where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice mailed to a Holder in the manner herein 19 11 prescribed shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case, by reason of the suspension of or irregularities in regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event to Holders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be reasonably satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice for every purpose hereunder. SECTION 107. Effect of Headings and Table of Contents. The Article and Section headings herein, the Cross-Reference Table and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 108. Successors and Assigns. All covenants and agreements in this Indenture by the Company or the Trustee shall bind its respective successors and assigns, whether so expressed or not. SECTION 109. Separability Clause. In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 110. Benefits of Indenture. Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Securities Registrar and their successors hereunder and the Holders, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 111. Governing Law. This Indenture and the Securities shall be governed by and construed in accordance with the law of the State of New York applicable to contracts to be performed entirely within such state. This Indenture incorporates by reference the provisions of the Trust Indenture Act and shall, to the extent applicable, be governed by such provisions. 20 12 SECTION 112. Legal Holidays. In any case where any Interest Payment Date or Stated Maturity or Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of principal or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or at the Stated Maturity or Maturity; provided that no interest shall accrue for the period from and after such Interest Payment Date or Stated Maturity or Maturity, as the case may be. SECTION 113. Incorporation by Reference of Trust Indenture Act. This Indenture incorporates by reference the provisions of the Trust Indenture Act. The following Trust Indenture Act terms used in this Indenture have the following meanings: "indenture securities" means the Securities; "indenture security holder" means a Holder; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the indenture securities means the Company or any other obligor on the Securities. All other Trust Indenture Act terms used in this Indenture that are defined by the Trust Indenture Act, defined by reference in the Trust Indenture Act to another statute or defined by a rule of the Commission and not otherwise defined herein shall have the meanings assigned to them therein. If any provision hereof conflicts with a provision of the Trust Indenture Act incorporated herein, the provision of the Trust Indenture Act shall control. SECTION 114. Immunity of Stockholders, Officers, Directors and Employees. No recourse under or upon any obligation, covenant or agreement of this Indenture or of the Securities, or for any claim based thereon or otherwise in respect thereof, shall be had against any stockholder, officer, director, employee or controlling person, as such, past, present or future, of the Company or of any successor corporation, either directly or through the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly understood that this Indenture and the obligations issued hereunder are solely corporate obligations of the 21 13 Company, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the stockholders, officers, directors, employees or controlling persons, as such, of the Company or of any successor corporation, or any of them, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in the Securities or implied therefrom; and that any and all such personal liability, either at common law or in equity or by constitution or statute, of, and any and all such rights and claims against, every such stockholder, officer, director, employee or controlling person, as such, because of the creation of the indebtedness hereby authorized, or under or by reason of the obligations, covenants or agreements contained in this Indenture or in the Securities or implied therefrom, are hereby expressly waived and released as a condition of, and as a consideration for, the execution of this Indenture and the issue of such Securities. All payments of interest and other amounts, if any, to be made by the Trustee hereunder shall be made only from the money deposited with the Trustee and only to the extent that the Trustee shall have sufficient income or proceeds to make such payments in accordance with the terms of this Indenture, and each Holder, by its acceptance of a Security, agrees that it will look solely to the income and proceeds deposited with the Trustee to the extent available for distribution to such Holder as provided and that the Trustee is not personally liable in any manner to such Holder for any amounts payable or any liability under this Indenture or the Securities. ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally. The definitive Securities may be printed, lithographed or engraved on steel-engraved borders or produced in any other manner, all as determined by the officers of the Company executing such Securities, as evidenced by their execution of such Securities. The Securities shall be known as the "7 7/8% Senior Notes due 2006" of the Company. The Securities and the Trustee's certificate of authentication shall be in substantially the forms annexed hereto as Exhibit A. The Securities may have such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such notations, legends or endorsements placed thereon as may be required to comply with law, securities exchange rules or usage or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. The Company shall approve the form of the Securities and any notation, legend 22 14 or endorsement on the Securities and shall furnish such form of Security, notation, legend or endorsement in writing to the Trustee. Any portion of the text of any Security may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Security. Each Security shall be dated the date of its authentication. The terms and provisions contained in the form of the Securities annexed hereto as Exhibit A are hereby expressly made a part of this Indenture. To the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. Securities offered and sold in reliance on Rule 144A shall be issued initially in the form of a permanent global Security in fully registered form without interest coupons (the "U.S. Global Security") deposited with the Trustee, as custodian for the Depositary, registered in the name of a nominee of the Depositary, duly executed by the Company and authenticated by the Trustee as hereinafter provided. The aggregate principal amount of the U.S. Global Security may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary or its nominee, as hereinafter provided. Securities offered and sold in reliance on Regulation S shall be issued initially in the form of temporary global Securities in fully registered form without interest coupons (the "Temporary Offshore Securities"). The Temporary Offshore Securities will be registered in the name of, and held by, a temporary certificate holder designated by Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated until the later of the completion of the distribution of the Securities and the termination of the "restricted period" (as defined in Regulation S) with respect to the offer and sale of the Securities (the "Offshore Securities Exchange Date"). At any time following the Offshore Securities Exchange Date, upon receipt by the Trustee and the Company of a certificate substantially in the form of Exhibit B hereto, the Company shall execute, and the Trustee shall authenticate and deliver, one or more permanent certificated Securities in fully registered form without interest coupons (the "Permanent Offshore Securities"), in exchange for the surrender of Temporary Offshore Securities of like tenor and amount. Securities offered and sold other than as described in the preceding two paragraphs shall be initially issued in the form of physical Securities in fully registered form without interest coupons in substantially the form of Exhibit A hereto (the "U.S. Securities"). The Temporary Offshore Securities, Permanent Offshore Securities and U.S. Securities are sometimes collectively herein referred to as the "Physical Securities". 23 15 SECTION 202. Restrictive Legends. Unless and until the Securities shall have been registered pursuant to an effective registration statement or unless the circumstances contemplated by paragraph (a)(i)(x), (d)(i) or (e)(ii) of Section 307 exists, each Security shall bear the following legend (the "Private Placement Legend") on the face thereof: THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY PRIOR TO THE DATE WHICH IS THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE COMPANY OR ANY AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR OF THIS SECURITY) ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL BUYER" AS DEFINED IN RULE 144A THAT PURCHASES FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A "QUALIFIED INSTITUTIONAL BUYER" TO WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A, (D) PURSUANT TO OFFERS AND SALES TO NON-U.S. PERSONS THAT OCCUR OUTSIDE THE UNITED STATES WITHIN THE MEANING OF, AND IN ACCORDANCE WITH, REGULATION S UNDER THE SECURITIES ACT, (E) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF SUBPARAGRAPHS (A)(1), (2), (3) OR (7) OF RULE 501 OF REGULATION D UNDER THE SECURITIES ACT THAT IS ACQUIRING THIS SECURITY FOR ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL "ACCREDITED INVESTOR," FOR INVESTMENT AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES ACT, 24 16 OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO CLAUSE (D), (E) OR (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL, A CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND (ii) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE TRUSTEE. Each U.S. Global Security shall also bear the following legend on the face thereof: UNLESS (1) THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY ("DTC") TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND (2) ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DTC (AND ANY PAYMENT HEREON IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF THE DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL SINCE THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S NOMINEE, AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN SECTIONS 306 AND 307 OF THE INDENTURE. 25 17 ARTICLE THREE THE SECURITIES SECTION 301. Title and Terms. The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $200,000,000, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 304, 305, 306, 307, 308 or 906. The Securities shall not be redeemable prior to Maturity. SECTION 302. Denominations. The Securities shall be issuable only in fully registered form without interest coupons and only in denominations of $1,000 and any integral multiple thereof. SECTION 303. Execution, Authentication, Delivery and Dating. The Securities shall be executed on behalf of the Company by its Chairman, its President or a Vice President, under its corporate seal reproduced thereon and attested by its Secretary or an Assistant Secretary. The signature of any of these officers on the Securities may be manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Securities. The seal of the Company may be in the form of a facsimile thereof and may be impressed, affixed, imprinted or otherwise reproduced on the Securities. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities. Each Security shall be dated the date of its authentication. 26 18 No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for in Exhibit A, duly executed by the Trustee by manual signature of an authorized officer, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. SECTION 304. Temporary Securities. Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for such purpose pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 305. Registration, Registration of Transfer and Exchange. The Company shall cause to be kept at each office or agency of the Company designated pursuant to Section 1002 a register (the register so maintained being herein sometimes referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Security Register shall be in written form or any other form capable of being converted into written form within a reasonable time. At all reasonable times, the Security Register shall be open to inspection by the Trustee. The Trustee is hereby initially appointed as security registrar (the "Security Registrar") for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security at any office or agency of the Company designated pursuant to Section 1002, the Company shall execute, and 27 19 the Trustee shall authenticate and deliver, in the name of the designated transferee, one or more new Securities of any authorized denomination or denominations of a like aggregate principal amount. Furthermore, any Holder of the U.S. Global Security shall, by acceptance of such U.S. Global Security, agree that transfers of beneficial interest in such U.S. Global Security may be effected only through a book-entry system maintained by such Holder of such U.S. Global Security (or its agent), and that ownership of a beneficial interest in such U.S. Global Security shall be required to be reflected in a book entry. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denomination and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at any office or agency of the Company designated pursuant to Section 1002. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Security Registrar) be duly endorsed, or be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Security Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304 or 906 not involving any transfer. SECTION 306. Book-Entry Provisions for U.S. Global Security. (a) The U.S. Global Security initially shall (i) be registered in the name of the Depositary for such U.S. Global Security or the nominee of such Depositary, (ii) be delivered to the Trustee as custodian for such Depositary and (iii) bear legends as set forth in Section 202. 28 20 Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any U.S. Global Security held on their behalf by the Depositary, or the Trustee as its custodian, or under such U.S. Global Security, and the Depositary and/or its nominee may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such U.S. Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or shall impair, as between the Depositary and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Security. (b) Transfers of the U.S. Global Security shall be limited to transfers of such U.S. Global Security in whole, but not in part, to the Depositary, its successors or their respective nominees. Interests of beneficial owners in any such U.S. Global Security may be transferred in accordance with the rules and procedures of the Depositary and the provisions of Section 307. U.S. Securities shall not be transferred to all beneficial owners in exchange for their beneficial interests in the U.S. Global Security unless (i) the Depositary notifies the Company that it is unwilling or unable to continue as Depositary for the U.S. Global Security and a successor depositary is not appointed by the Company within 90 days of such notice, (ii) an Event of Default has occurred and is continuing and the Security Registrar has received a request from the Depositary or (iii) the Company determines not to have any Securities represented by one or more U.S. Global Securities. (c) In connection with any transfer of a portion of the beneficial interest in the U.S. Global Security pursuant to subsection (b) of this Section, the Security Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Security in an amount equal to the principal amount of the beneficial interest in the U.S. Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more U.S. Securities of like tenor and amount. (d) In connection with the transfer of the entire U.S. Global Security to beneficial owners thereof pursuant to subsection (b) of this Section, the U.S. Global Security shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depositary in exchange for its beneficial interest in the U.S. Global Security, an equal aggregate principal amount of U.S. Securities of authorized denominations. (e) Any U.S. Security delivered in exchange for an interest in the U.S. Global Security pursuant to subsection (c) or subsection (d) of this Section 306 shall, except as otherwise provided by paragraph (f) of Section 307, bear the Private Placement Legend. 29 21 (f) The registered holder of the U.S. Global Security may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. SECTION 307. Special Transfer Provisions. Unless and until the Securities shall have been registered pursuant to an effective registration statement, the following provisions shall apply: (a) Transfers to Non-QIB Institutional Accredited Investors. The following provisions shall apply with respect to the registration of any proposed transfer of a Security to any institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) which is not a QIB (excluding non-U.S. persons (as such term is defined in Rule 902(o) of Regulation S under the Securities Act, "Non-U.S. Persons")): (i) The Security Registrar shall register the transfer of Securities, whether or not such Security bears the Private Placement Legend, if (x) the requested transfer is at least three years after the original issue date of the Securities and the last date on which such Security was held by the Company or an affiliate of the Company or (y) the proposed transferee has delivered to the Security Registrar and the Company a certificate substantially in the form set forth in Exhibit C hereto. (ii) If the proposed transferor is an Agent Member holding a beneficial interest in the U.S. Global Security, upon receipt by the Security Registrar of (x) the documents, if any, required by paragraph (i) and (y) instructions given in accordance with the Depositary's and the Security Registrar's procedures therefor, the Security Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Security in an amount equal to the principal amount of the beneficial interest in the U.S. Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more U.S. Securities of like tenor and amount. (b) Transfers to QIBs. The following provisions shall apply with respect to the registration of any proposed transfer of a Security to a QIB (excluding Non-U.S. Persons): (i) If such Security to be transferred consists of U.S. Securities, Temporary Offshore Securities or Permanent Offshore Securities, the Registrar shall register the transfer if such transfer is being made by a proposed transferor who has checked the box provided for on the form of such Security stating, or has otherwise 30 22 advised the Company and the Security Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Security stating, or has otherwise advised the Company and the Security Registrar in writing, that it is purchasing the Security for its own account or an account with respect to which it exercises sole investment discretion and that it, or the person on whose behalf it is acting with respect to any such account, is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A. (ii) If the proposed transferee is an Agent Member, and the Security to be transferred consists of U.S. Securities, Temporary Offshore Securities or Permanent Offshore Securities, upon receipt by the Security Registrar of instructions given in accordance with the Depositary's and the Security Registrar's procedures therefor, the Security Registrar shall reflect on its books and records the date and an increase in the principal amount of the U.S. Global Security in an amount equal to the principal amount of the U.S. Securities, Temporary Offshore Securities or Permanent Offshore Securities, as the case may be, to be transferred, and the Trustee shall cancel the Security so transferred. (c) Transfers by Non-U.S. Persons Prior to August 5, 1996. The following provisions shall apply with respect to registration of any proposed transfer of a Security by a Non-U.S. Person prior to August 5, 1996: (i) The Security Registrar shall register the transfer of any Security (x) if the proposed transferee is a Non-U.S. Person and the proposed transferor has delivered to the Security Registrar a certificate substantially in the form of Exhibit D hereto or (y) if the proposed transferee is a QIB and the proposed transferor has checked the box provided for on the form of Security stating, or has otherwise advised the Company and the Security Registrar in writing, that the sale has been made in compliance with the provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Security stating, or has otherwise advised the Company and the Security Registrar in writing, that it is purchasing the Security for its own account or an account with respect to which it exercises sole investment discretion and that it, or the person on whose behalf it is acting with respect to any such account, is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is 31 23 relying upon its foregoing representations in order to claim the exemption from registration provided by Rule 144A. Unless clause (ii) below is applicable, the Company shall execute, and the Trustee shall authenticate and deliver, one or more Temporary Offshore Securities of like tenor and amount. (ii) If the proposed transferee is an Agent Member, upon receipt by the Security Registrar of instructions given in accordance with the Depositary's and the Security Registrar's procedures therefor, the Security Registrar shall reflect on its books and records the date and an increase in the principal amount of the U.S. Global Security in an amount equal to the principal amount of the Temporary Offshore Security to be transferred, and the Trustee shall cancel the Temporary Offshore Security so transferred. (d) Transfers by Non-U.S. Persons on or After August 5, 1996. The following provisions shall apply with respect to any transfer of a Security by a Non-U.S. Person on or after August 5, 1996: (i) (x) If the Security to be transferred is a Permanent Offshore Security, the Security Registrar shall register such transfer, (y) if the Security to be transferred is a Temporary Offshore Security, upon receipt of a certificate substantially in the form of Exhibit D hereto from the proposed transferor, the Security Registrar shall register such transfer and (z) in the case of either clause (x) or (y), unless clause (ii) below is applicable, the Company shall execute, and the Trustee shall authenticate and deliver, one or more Permanent Offshore Securities of like tenor and amount. (ii) If the proposed transferee is an Agent Member, upon receipt by the Security Registrar of instructions given in accordance with the Depositary's and the Security Registrar's procedures therefor, the Security Registrar shall reflect on its books and records the date and an increase in the principal amount of the U.S. Global Security in an amount equal to the principal amount of the Temporary Offshore Security or of the Permanent Offshore Security to be transferred, and the Trustee shall cancel the Security so transferred. (e) Transfers to Non-U.S. Persons at Any Time. The following provisions shall apply with respect to any transfer of a Security to a Non-U.S. Person: (i) Prior to August 5, 1996, the Security Registrar shall register any proposed transfer of a Security to a Non-U.S. Person upon receipt of a certificate substantially in the form of Exhibit D hereto from the proposed transferor and the Company shall execute, and the Trustee shall authenticate and make available for delivery, one or more Temporary Offshore Securities. 32 24 (ii) On and after August 5, 1996, the Security Registrar shall register any proposed transfer to any Non-U.S. Person (w) if the Security to be transferred is a Permanent Offshore Security, (x) if the Security to be transferred is a Temporary Offshore Security, upon receipt of a certificate substantially in the form of Exhibit D hereto from the proposed transferor, (y) if the Security to be transferred is a U.S. Security or an interest in the U.S. Global Security, upon receipt of a certificate substantially in the form of Exhibit D hereto from the proposed transferor and (z) in the case of any of clause (w), (x) or (y), the Company shall execute, and the Trustee shall authenticate and deliver, one or more Permanent Offshore Securities of like tenor and amount. (iii) If the proposed transferor is an Agent Member holding a beneficial interest in the U.S. Global Security, upon receipt by the Security Registrar of (x) the document, if any, required by paragraph (i), and (y) instructions in accordance with the Depositary's and the Security Registrar's procedures therefor, the Security Registrar shall reflect on its books and records the date and a decrease in the principal amount of the U.S. Global Security in an amount equal to the principal amount of the beneficial interest in the U.S. Global Security to be transferred and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Permanent Offshore Securities of like tenor and amount; provided that, if any such transfer shall occur during the period set forth in subparagraph (i) of this paragraph, the Company shall record, and the Trustee shall authenticate, one or more Temporary Offshore Securities. (f) Private Placement Legend. Upon the transfer, exchange or replacement of Securities not bearing the Private Placement Legend, the Security Registrar shall deliver Securities that do not bear the Private Placement Legend. Upon the transfer, exchange or replacement of Securities bearing the Private Placement Legend, the Security Registrar shall deliver only Securities that bear the Private Placement Legend unless (i) the circumstances contemplated by paragraph (a)(i)(x), (d)(i) or (e)(ii) of this Section 307 exist or (ii) there is delivered to the Security Registrar an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. (g) General. By its acceptance of any Security bearing the Private Placement Legend, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Security only as provided in this Indenture. The Security Registrar shall not register a transfer of any Security unless such transfer complies with the restrictions on transfer of the Securities set forth herein. 33 25 The Security Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 306 or this Section 307. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable written notice to the Security Registrar. SECTION 308. Mutilated, Destroyed, Lost and Stolen Securities. If (i) any mutilated Security is surrendered to the Trustee, or (ii) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, and there is delivered to the Company and the Trustee such security or indemnity as may be required by them to hold each of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon Company Order the Trustee shall authenticate and deliver, in exchange for any such mutilated Security or in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 309. Payment of Principal and Interest; Interest Rights Preserved. The principal of and interest on the Securities shall be payable at the office or agency of the Company maintained for such purpose pursuant to Section 1002 in such coin or 34 26 currency of the United States of America as at the time of payment is legal tender for payment of public and private debts. The total amount of payments in respect of principal of or interest on any U.S. Global Security representing one or more Securities on any Interest Payment Date or at Stated Maturity will be made available to the Trustee on such date. As soon as possible thereafter, the Trustee will make such payments to the Depositary or its nominee as the registered owner of the U.S. Global Security. Interest on any Physical Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name such Physical Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 1002; provided, however, that interest on the Physical Securities may at the Company's option be paid by (i) mailing a check for such interest, payable to or upon the written order of the Person entitled thereto pursuant to Section 310, to the address of such Person as it appears in the Security Register or (ii) transfer to an account located in the United States maintained by the Person entitled thereto pursuant to Section 310 for whom satisfactory instructions have been furnished on or prior to such Regular Record Date. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date shall forthwith cease to be payable to the Holder on the Regular Record Date by virtue of having been such Holder, and such defaulted interest and (to the extent lawful) interest on such defaulted interest at the rate borne by the Securities (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") may be paid by the Company, at its election in each case, as provided in clause (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days 35 27 prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date, and in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given in the manner provided for in Section 106, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so given, such Defaulted Interest shall be paid to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following clause (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 310. Persons Deemed Owners. Prior to the due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of and (subject to Sections 305 and 309) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and none of the Company, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary. None of the Company, the Trustee, any Paying Agent or the Security Registrar will have any responsibility or liability for any aspect of the records relating to, or payments made on account of, beneficial ownership interests of a U.S. Global Security or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. Notwithstanding the foregoing, with respect to any U.S. Global Security, nothing herein shall prevent the Company, the Trustee, or any agent of the Company or the 36 28 Trustee, from giving effect to any written certification, proxy or other authorization furnished by any depositary, as a Holder, with respect to such U.S. Global Security or impair, as between such depositary and owners of beneficial interests in such U.S. Global Security, the operation of customary practices governing the exercise of the rights of such depositary (or its nominee) as Holder of such U.S. Global Security. SECTION 311. Cancellation. All Securities surrendered for payment, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly cancelled by the Trustee. If the Company shall so acquire any of the Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of by the Trustee in accordance with its customary procedures and certification of their disposal shall be delivered to the Company unless by Company Order the Company shall direct that cancelled Securities be returned to it. SECTION 312. Computation of Interest. Interest on the Securities shall be computed on the basis of a 360-day year of twelve 30-day months. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture. This Indenture shall upon Company Request cease to be of further effect (except as to surviving rights of registration of transfer or exchange of the Securities expressly provided for herein or pursuant hereto) and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture when 37 29 (1) either (A) all Securities theretofore authenticated and delivered (other than (i) Securities which have been lost, stolen or destroyed and which have been replaced or paid as provided in Section 308 and (ii) Securities for which payment has theretofore been deposited in trust with the Trustee or any Paying Agent or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust, in any case pursuant to, and as provided in, Section 1003) have been delivered to the Trustee for cancellation; or (B) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable or (ii) will become due and payable at their Stated Maturity within one year and the Company, in the case of (i) or (ii) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal of and interest on the Securities to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity, together with irrevocable instructions from the Company directing the Trustee to apply such funds to the payment thereof at Maturity. (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 606 and, if money shall have been deposited with the Trustee pursuant to subclause (B) of clause (1) of this Section, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. 38 30 SECTION 402. Application of Trust Money. Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of the principal and interest for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. ARTICLE FIVE REMEDIES SECTION 501. Events of Default. "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of any interest on any Security when it becomes due and payable, and continuance of such default for a period of 30 days; (2) default in the payment of the principal of any Security at its Maturity; (3) default in the performance, or breach, of any covenant or agreement of the Company in this Indenture, and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in principal amount of the Outstanding Securities, a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; (4) (A) there shall have occurred one or more defaults by the Company or any Subsidiary in the payment of the principal of Debt in an aggregate amount in excess of $10 million, when the same becomes due and payable at the stated maturity thereof, and such default or defaults shall have continued after any applicable grace period and shall not have been cured or waived or (B) Debt of the Company or any Subsidiary aggregating in an aggregate amount in excess of $10 million shall have been accelerated or otherwise declared due and payable, or required to be prepaid or 39 31 repurchased (other than by regularly scheduled required prepayment), prior to the stated maturity thereof and such acceleration shall not have been annulled within 30 days after written notice to the Company by the Trustee or to the Company and the Trustee by the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities; (5) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company under the Federal Bankruptcy Code or any other applicable federal or state law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 90 consecutive days; or (6) the institution by the Company of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under the Federal Bankruptcy Code or any other applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Company or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due. SECTION 502. Acceleration of Maturity; Rescission and Annulment. If an Event of Default (other than an Event of Default specified in Section 501(5) or 501(6)) occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities may declare the principal amount of all the Securities, and all accrued and unpaid interest thereon, to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal amount, and all accrued and unpaid interest thereon, shall become immediately due and payable. If an Event of Default specified in Section 501(5) or 501(6) occurs and is continuing, then the principal amount, and all accrued and unpaid interest thereon, of all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration has been made with respect to the Securities and before a judgment or decree for payment of the money due has been 40 32 obtained by the Trustee as hereinafter provided in this Article, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may on behalf of the Holders of all of the Securities rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Outstanding Securities, (B) all unpaid principal of any Outstanding Securities which has become due otherwise than by such declaration of acceleration, and interest on such unpaid principal at the rate borne by the Securities, (C) to the extent that payment of such interest is lawful, interest on overdue interest at the rate borne by the Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the non-payment of amounts of principal of or interest on Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. Notwithstanding the preceding paragraph, in the event of a declaration of acceleration in respect of the Securities because of an Event of Default specified in Section 501(4) shall have occurred and be continuing, such declaration of acceleration shall be automatically annulled if the Debt that is the subject of such Event of Default has been discharged or the holders thereof have rescinded their declaration of acceleration in respect of such Debt, and written notice of such discharge or rescission, as the case may be, shall have been given to the Trustee by the Company and countersigned by the holders of such Debt or a trustee, fiduciary or agent for such holders, within 30 days after such declaration of acceleration in respect of the Securities, and no other Event of Default has occurred during such 30-day period which has not been cured or waived during such period. 41 33 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee. The Company covenants that if (a) default is made in the payment of any installment of interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to the Trustee for the benefit of the Holders of such Securities the whole amount then due and payable on such Securities for principal and interest, and interest on any overdue principal and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installment of interest, at the rate borne by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as therein expressed or 42 34 by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel) and of the Holders allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 606. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505. Trustee May Enforce Claims Without Possession of Securities. All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. 43 35 SECTION 506. Application of Money Collected. Any money collected by the Trustee pursuant to this Article shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 606; SECOND: To the payment of the amounts then due and unpaid for principal of and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal and interest, respectively; and THIRD: The balance, if any, to the Person or Persons entitled thereto, including the Company. SECTION 507. Limitation on Suits. No Holder of Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and 44 36 (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority or more in principal amount of the Outstanding Securities; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and proportionate benefit of all the Holders. SECTION 508. Unconditional Right of Holders to Receive Principal and Interest. Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment, as provided herein (including, if applicable, Article Eleven) and in such Security, of the principal of and (subject to Section 309) interest on, such Security on the Stated Maturity expressed therein and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 308, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 45 37 SECTION 511. Delay or Omission Not Waiver. No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. The Holders of not less than a majority in principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (3) the Trustee need not take any action which might involve it in personal liability or be unjustly prejudicial to the Holders not consenting. SECTION 513. Waiver of Past Defaults. The Holders of not less than a majority in principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default (1) in respect of the payment of principal of or interest on any Security, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. 46 38 SECTION 514. Waiver of Stay or Extension Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it will not hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601. Notice of Defaults. Within 90 days after the occurrence of any Default hereunder, the Trustee shall transmit, in the manner and to the extent provided in TIA Section 313(c), notice of such Default hereunder known to the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders; and provided further that, in the case of any Default of the character specified in Section 501(3), no such notice to Holders shall be given until at least 60 days after the occurrence thereof. SECTION 602. Certain Rights of Trustee. Subject to the provisions of TIA Sections 315(a) through 315(d): (1) the Trustee may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; 47 39 (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, rely upon an Officers' Certificate; (4) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; and (8) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture. The Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. 48 40 SECTION 603. Trustee Not Responsible for Recitals or Issuance of Securities. The recitals contained herein and in the Securities, except for the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities and perform its obligations hereunder and thereunder. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 604. May Hold Securities. The Trustee, any Paying Agent, any Security Registrar or any other agent of the Company or of the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to TIA Sections 310(b) and 311, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other agent. SECTION 605. Money Held in Trust. All moneys received by the Trustee shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. SECTION 606. Compensation and Reimbursement. The Company agrees: (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and 49 41 (3) to indemnify the Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Trustee shall promptly notify the Company in writing of any claim for which it may seek indemnity. The obligations of the Company under this Section to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify and hold harmless the Trustee shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture. As security for the performance of such obligations of the Company, the Trustee shall have a claim prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of or interest on particular Securities. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(5) or (6), the expenses (including the reasonable charges and expenses of its counsel) of and the compensation for such services are intended to constitute expenses of administration under any applicable Federal or State bankruptcy, insolvency or other similar law. The provisions of this Section shall survive the termination of this Indenture. SECTION 607. Corporate Trustee Required; Eligibility. There shall be at all times a Trustee hereunder which shall be eligible to act as Trustee under TIA Section 310(a)(1) and shall have a combined capital and surplus of at least $50,000,000. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of Federal, State, territorial or District of Columbia supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article. SECTION 608. Resignation and Removal; Appointment of Successor. (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 609. 50 42 (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 609 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of not less than a majority in principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of TIA Section 310(b) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 607 and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company, by a Board Resolution, may remove the Trustee, or (ii) subject to TIA Section 315(e), any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others 51 43 similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Holders of Securities in the manner provided for in Section 106. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. SECTION 609. Acceptance of Appointment by Successor. Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 610. Merger, Conversion, Consolidation or Succession to Business. Any corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. In case any of the Securities shall not have been authenticated by such predecessor Trustee, any successor Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee. In all such 52 44 cases such certificates shall have the full force and effect that this Indenture provides for the certificate of authentication of the Trustee; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. ARTICLE SEVEN HOLDER LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Holder Lists; Disclosure of Names and Addresses of Holders. The Trustee shall preserve, in as current a form as is reasonably practicable, the most recent list available to it of the names and addresses of Holders. If the Trustee is not the Security Registrar, the Company shall furnish to the Trustee not less than 10 days before each Interest Payment Date and at such other times as the Trustee may request in writing all information in the possession or control of the Company or any Paying Agent as to the names and addresses of the Holders. Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that none of the Company or the Trustee or any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with TIA Section 312, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under TIA Section 312(b). SECTION 702. Reports by Trustee. If required by TIA Section 313(a), within 60 days after May 15 of each year commencing with the first May 15 after the first issuance of Securities, the Trustee shall transmit to the Holders and the Company, in the manner and to the extent provided in TIA Section 313(c), a brief report that complies with TIA Section 313(b)(2) dated as of such May 15. SECTION 703. Reports by Company. The Company shall: (1) file with the Trustee, for so long as the Company is a Subsidiary of Alleghany Corporation ("Alleghany") within 15 days after Alleghany is required to 53 45 file the same with the Commission, copies of each of (A) Alleghany's Annual Reports to Stockholders, (B) Alleghany's Annual Report on Form 10-K (together with a description of exhibits thereto), and (C) Alleghany's Quarterly Report on Form 10-Q (together with a description of exhibits thereto); or, if Alleghany is not required to file information, documents or reports pursuant to either of such Sections, then the Company shall file with the Trustee such of the supplementary and periodic information, documents and reports which Alleghany may be required to file pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed by the Commission from time to time under rules and regulations under such act; (2) file with the Trustee the Company's annual audited consolidated financial statements and any additional information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture; and (3) transmit by mail to all Holders, in the manner and to the extent provided in TIA Section 313(c), within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (1) and (2) of this Section as are required by rules and regulations prescribed from time to time by the Commission; provided, however, that if the Company should become subject to the informational requirements of the Exchange Act, and in accordance therewith files periodic reports, proxy statements and other information with the Commission, then the Company shall: (4) file with the Trustee, within 15 days after the Company is required to file the same with the Commission, copies of the annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the Commission may from time to time by rules and regulations prescribe) which the Company is required to file with the Commission pursuant to Section 13 or Section 15(d) of the Exchange Act; or, if the Company is not required to file information, documents or reports pursuant to either of such Sections, then it shall file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such of the supplementary and periodic information, documents and reports which are required pursuant to Section 13 of the Exchange Act in respect of a security listed and registered on a national securities exchange as may be prescribed from time to time in such rules and regulations; (5) file with the Trustee and the Commission, in accordance with rules and regulations prescribed from time to time by the Commission, such additional 54 46 information, documents and reports with respect to compliance by the Company with the conditions and covenants of this Indenture as are required from time to time by such rules and regulations; and (6) transmit to all Holders, in the manner and to the extent provided in TIA Section 313(c), within 30 days after the filing thereof with the Trustee, such summaries of any information, documents and reports required to be filed by the Company pursuant to paragraphs (2), (4) and (5) of this Section as are required by rules and regulations prescribed from time to time by the Commission pursuant to the terms of this Indenture. ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, etc., Only on Certain Terms. The Company shall not consolidate with or merge into any other corporation or convey, transfer or lease, or permit any one or more of its Significant Subsidiaries to convey, transfer or lease, all or substantially all of the properties and assets of the Company, on a consolidated basis, to any Person, unless: (1) the corporation formed by such consolidation or into which the Company is merged or the Person which acquires by conveyance or transfer, or which leases, the properties and assets of the Company substantially as an entirety (A) shall be a corporation, partnership or trust organized and validly existing under the laws of the United States of America, any state thereof or the District of Columbia and (B) shall expressly assume, by an indenture supplemental hereto, executed and delivered to the Trustee, in form satisfactory to the Trustee, the Company's obligation for the due and punctual payment of the principal of and interest on all the Securities and the performance and observance of every covenant of this Indenture on the part of the Company to be performed or observed; (2) immediately after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing; and (3) the Company or such Person shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that such consolidation, merger, conveyance, transfer or lease and such supplemental indenture comply with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with. 55 47 This Section shall only apply to a merger or consolidation in which the Company is not the surviving corporation and to conveyances, leases and transfers by the Company as transferor or lessor. SECTION 802. Successor Person Substituted. Upon any consolidation by the Company with or merger by the Company into any other corporation or any conveyance, transfer or lease of all or substantially all of the properties and assets of the Company, on a consolidated basis, to any Person in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and in the event of any such conveyance or transfer, the Company (which term shall for this purpose mean the Person named as the "Company" in the first paragraph of this Indenture or any successor Person which shall theretofore become such in the manner described in Section 801), except in the case of a lease, shall be discharged of all obligations and covenants under this Indenture and the Securities and may be dissolved and liquidated. SECTION 803. Securities to Be Secured in Certain Events. If, upon any such consolidation of the Company with or merger of the Company into any other corporation, or upon any conveyance, lease or transfer of all or substantially all of the properties or assets of the Company, on a consolidated basis, to any other Person, or any Restricted Securities owned immediately prior thereto, would thereupon become subject to any Lien, then unless such Lien could be created pursuant to Section 1007 without equally and ratably securing the Securities, the Company, prior to or simultaneously with such consolidation, merger, conveyance, lease or transfer, will, as to such Restricted Securities, (i) secure the Outstanding Securities hereunder (together with, if the Company shall so determine, any other Debt of the Company now existing or hereafter created which is not subordinate to the Securities and any Debt which is subordinate to the Securities if such Debt is secured by a Lien with the priority described in clause (i) of Section 1007) equally and ratably with (or prior to) the Debt which upon such consolidation, merger, conveyance, lease or transfer is to become secured as to such Restricted Securities by such Lien, or will cause such Securities to be so secured and (ii) comply with the provisions of Section 314(b) of the TIA. 56 48 ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders. Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company contained herein and in the Securities; (2) to add covenants of the Company for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; (3) to add Events of Default; (4) to secure the Securities pursuant to the requirements of Section 803 or 1007 or otherwise; (5) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee pursuant to the requirements of Section 609; (6) to cure any ambiguity or defect or to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture; provided that such action shall not adversely affect the interests of the Holders; (7) to supplement any of the provisions hereof to the extent necessary to permit or facilitate defeasance and discharge of the Notes in accordance with Article XI hereof; provided that such action shall not adversely affect the interests of the Holders; or (8) to conform with the requirements of the Trust Indenture Act. 57 49 SECTION 902. Supplemental Indentures with Consent of Holders. With the consent of the Holders of not less than a majority in principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby: (1) change the Stated Maturity of the principal of or any installment of interest on any Security, or reduce the principal amount thereof or the rate of interest thereon, or change the place or coin or currency of payment of the principal of or interest on any Security is payable, or impair the right to institute suit for the enforcement of any such payment on or after the Stated Maturity thereof, or (2) reduce the percentage in principal amount of the Outstanding Securities, the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture, or (3) modify any of the provisions of this Section or Sections 508 and 513, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby. It shall not be necessary for any Act of Holders under this Section to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. Authorization and Execution of Supplemental Indentures. In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture. The Trustee shall execute all such supplemental indentures, except that it shall not be obligated to enter into any such supplemental indenture which adversely affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. 58 50 SECTION 904. Effect of Supplemental Indentures. Upon the execution of any supplemental indenture under this Article, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. SECTION 905. Conformity with Trust Indenture Act. Every supplemental indenture executed pursuant to this Article shall conform to the requirements of the Trust Indenture Act as then in effect. SECTION 906. Reference in Securities to Supplemental Indentures. Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article may, and shall if required by the Trustee or if requested by the Company, bear a notation in form approved by the Trustee as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. SECTION 907. Notice of Supplemental Indentures. Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 902, the Company shall give notice thereof to the Holder of each Outstanding Security affected, in the manner provided for in Section 106, setting forth in general terms the substance of such supplemental indenture. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, If Any, and Interest. The Company covenants and agrees for the benefit of the Holders that it will duly and punctually pay the principal of and interest on the Securities in accordance with the terms of the Securities and this Indenture. Principal of and interest on the Securities shall be considered paid on the date due if a Paying Agent other than the Company holds on that date money designated for and sufficient to pay all such principal and interest then due. 59 51 SECTION 1002. Maintenance of Office or Agency. The Company will maintain in The City of New York, an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Corporate Trust Office of the Trustee shall be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company will give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of New York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York for such purposes. The Company will give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. SECTION 1003. Money for Security Payments to Be Held in Trust. If the Company shall at any time act as its own Paying Agent, it will, on or before each due date of the principal of or interest on the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal of or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and will promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for the Securities, it will, on or before each due date of the principal of, or interest on, any Securities, deposit with a Paying Agent a sum sufficient to pay the principal or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. The Company will cause each Paying Agent (other than the Trustee) to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section, that such Paying Agent will: 60 52 (1) hold all sums held by it for the payment of the principal of or interest on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment of principal of or interest on the Securities; and (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of or interest on any Security and remaining unclaimed for two years after such principal or interest has become due and payable shall be repaid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. Statement as to Compliance. The Company will deliver to the Trustee, within 120 days after the end of each fiscal year, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of the Company's compliance with all conditions and covenants under this Indenture. For purposes of this 61 53 Section 1004, such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. SECTION 1005. Payment of Taxes and Other Claims. The Company will pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (1) all material taxes, assessments and governmental charges levied or imposed upon the Company or any Significant Subsidiary or upon the income, profits or property of the Company or any Significant Subsidiary and (2) all material lawful claims for labor, materials and supplies which, if unpaid, might by law become a Lien upon the Company or any Significant Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 1006. Corporate Existence. Subject to Article Eight, the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the material rights (charter and statutory) and franchises of the Company and any Significant Subsidiary; provided, however, that the Company shall not be required to preserve any such right or franchise if the Company shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries as a whole. SECTION 1007. Limitation on Liens. The Company will not itself, and will not permit any of its Subsidiaries to, directly or indirectly create, incur, issue or assume any Debt secured by any Lien with respect to any property or assets owned by the Company or any Subsidiary, and the Company will not itself, and will not permit any Subsidiary to, create, incur, issue or assume any Debt secured by a Lien on any shares of stock or Debt of any Subsidiary (such shares of stock or Debt of any Subsidiary being called "Restricted Securities"), unless (i) in the case of Debt which is, by its terms, expressly subordinate or junior in right of payment to the Securities, the Securities (together with, if the Company shall so determine, any other Debt of the Company or such Subsidiary then existing or thereafter created which is not subordinate to the Securities and any Debt which is subordinate to the Securities if such Debt is secured by a Lien with the priority described in this clause (i)) are secured by a Lien on such property or assets that is senior to such other Lien with the same relative priority as such subordinated Debt has with respect to the Securities or (ii) in the case of Liens securing Debt which is pari passu with the Securities, the Securities are secured by a Lien on such property or assets that is equal and ratable with (or prior to) such other Lien; provided, 62 54 however, that nothing contained in this Section 1007 shall prevent, restrict or apply to Debt secured by: (a) Liens on any property, assets or Restricted Securities of the Company or any Subsidiary existing as of the date of this Indenture; (b) Liens on any property, assets or Restricted Securities of any corporation existing at the time such corporation becomes a Subsidiary, or arising thereafter (i) otherwise than in connection with the borrowing of money arranged thereafter and (ii) pursuant to contractual commitments entered into prior to, and not in contemplation of, such corporation becoming a Subsidiary; (c) Liens on any property, assets or Restricted Securities of the Company or any Subsidiary (i) existing at the time of acquisition thereof (including acquisition through merger or consolidation or by a sale, lease or other disposition of the properties of a corporation as an entirety or substantially as an entirety to the Company or a Subsidiary) or (ii) securing the payment of all or any part of the purchase price thereof or securing any Debt incurred prior to, at the time of or within 180 days after, the acquisition of such property, assets or Restricted Securities for the purpose of financing all or any part of the purchase price thereof (provided such Liens are limited to such property, assets or Restricted Securities, to improvements on such property or assets and to any other property or assets not then owned by the Company or any Subsidiary or constituting Restricted Securities); (d) Liens on any property or assets to secure all or any part of the cost of development, operation, construction, alteration, repair or improvement of all or any part of such property or assets, or to secure Debt incurred by the Company or any Subsidiary prior to, at the time of or within 180 days after, the completion of such development, operation, construction, alteration, repair or improvement, whichever is later, for the purpose of financing all or any part of such cost (provided such Liens are limited to such property or assets, improvements thereon and any other property or assets not then owned by the Company or any Subsidiary); (e) Liens in favor of the Trustee for the benefit of the Holders and subsequent holders of the Securities securing the Notes; (f) Liens secured by property or assets of the Company or any Subsidiary that comprise no more than $15 million of indebtedness outstanding at any one time; (g) Liens which secure Debt owing by a Subsidiary to the Company or to another Subsidiary; and 63 55 (h) any extension, renewal, substitution or replacement (or successive extensions, renewals, substitutions or replacements), as a whole or in part, of any of the Liens referred to in paragraphs (a) through (g) above or the Debt secured thereby; provided that (1) such extension, renewal, substitution or replacement Lien shall be limited to all or any part of the same property, assets or Restricted Securities that secured the Lien extended, renewed, substituted or replaced (plus improvements on such property, and plus any other property or assets not then owned by the Company or any Subsidiary or constituting Restricted Securities), and (2) in the case of paragraphs (a) through (c) above, the Debt secured by such Lien at such time is not increased (other than an increase in such Debt equal to the amount of any premium required to be paid in connection with, or reasonably determined by the Company as necessary to accomplish, any extension, renewal, substitution or replacement of such Debt and the expenses of the Company and its Subsidiaries incurred in any such extension, renewal, substitution or replacement of such Debt). For the purposes of this Section 1007, the giving of a guarantee which is secured by a Lien on any property, assets or Restricted Securities, and the creation of a Lien on any property, assets or Restricted Securities to secure Debt which existed prior to the creation of such Lien, shall be deemed to involve the creation of Debt in an amount equal to the principal amount guaranteed or secured by such Lien; but the amount of Debt secured by Liens on property, assets and Restricted Securities shall be computed without cumulating the underlying indebtedness with any guarantee thereof or Lien securing the same. SECTION 1008. Waiver of Certain Covenants. The Company may omit in any particular instance to comply with any term, provision or condition set forth in Section 803 or Sections 1005 to 1007, inclusive, if before the time for such compliance the Holders of not less than a majority in principal amount of the Outstanding Securities, by Act of such Holders, waive such compliance in such instance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. 64 56 ARTICLE ELEVEN DEFEASANCE AND COVENANT DEFEASANCE SECTION 1101. Company's Option to Effect Defeasance or Covenant Defeasance. The Company may, at its option by Board Resolution, at any time with respect to the Securities, elect to have either Section 1102 or Section 1103 be applied to all Outstanding Securities upon compliance with the conditions set forth below in this Article Eleven. The rights of the Company under this Article Eleven shall be in addition to its rights under Article Four. SECTION 1102. Defeasance and Discharge. Upon the Company's exercise under Section 1101 of the option applicable to this Section 1102, the Company shall be deemed to have paid and discharged its obligations with respect to all Outstanding Securities on the date the conditions set forth in Section 1104 are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Securities, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 1105 and the other Sections of this Indenture referred to in (A) and (B) below, and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of Outstanding Securities to receive, solely from the trust fund described in Section 1104 and as more fully set forth in such Section, payments in respect of the principal of and interest on such Securities when such payments are due, (B) the Company's obligations with respect to such Securities under Sections 304, 305, 308, 1002 and 1003, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article Eleven. Subject to compliance with this Article Eleven, the Company may exercise its option under this Section 1102 notwithstanding the prior exercise of its option under Section 1103 with respect to the Securities. SECTION 1103. Covenant Defeasance. Upon the Company's exercise under Section 1101 of the option applicable to this Section 1103, the Company shall be released from its obligations under Section 803 and Sections 1005 through 1007 with respect to the Outstanding Securities on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Securities shall thereafter be deemed to be not "Outstanding" for the purposes of any 65 57 direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Outstanding Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 501(3), but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby. SECTION 1104. Conditions to Defeasance or Covenant Defeasance. The following shall be the conditions to application of either Section 1102 or Section 1103 to the Outstanding Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 607 who shall agree to comply with the provisions of this Article Eleven applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities, (A) cash in United States dollars in an amount, or (B) U.S. Government Obligations (as defined below) which, through the scheduled payment of principal and interest in respect thereof in accordance with their terms, will provide, not later than one day before the due date of any payment, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of and interest on the Outstanding Securities on the Stated Maturity of such principal or installment of interest applicable to the Outstanding Securities on the day on which such payments are due and payable in accordance with the terms of this Indenture and of such Securities; provided that the Trustee shall have been irrevocably instructed to apply such money or the proceeds of such U.S. Government Obligations to said payments with respect to the Securities. For this purpose, "U.S. Government Obligations" means securities that are (x) direct obligations of the United States of America for the timely payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the timely payment of which is unconditionally guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of the issuer thereof, and shall also include a depository receipt issued by a bank (as defined 66 58 in Section 3(a)(2) of the Securities Act), as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the holder of such depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt. (2) In the case of an election under Section 1102, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (y) since June 20, 1996, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred. (3) In the case of an election under Section 1103, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that (i) the Holders of the Outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred and (ii) the defeasance trust will be exempt from registration under the Investment Company Act of 1940. (4) No Default or Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit or, insofar as paragraphs (5) and (6) of Section 501 hereof are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (5) Such defeasance under Section 1102 or covenant defeasance under Section 1103 shall not cause the Trustee to have a conflicting interest as defined by the TIA with respect to any securities of the Company. (6) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound. 67 59 (7) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the defeasance under Section 1102 or the covenant defeasance under Section 1103 (as the case may be) have been complied with and that no violations under the agreements governing any other outstanding Debt would result. SECTION 1105. Deposited Money and U.S. Government Obligations to Be Held in Trust; Other Miscellaneous Provisions. Subject to the provisions of the last paragraph of Section 1003, all money and U.S. Government Obligations (including any proceeds therefrom) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 1105, the "Trustee") pursuant to Section 1104 in respect of the Outstanding Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee against any tax, fee or other charge imposed on or assessed against the U.S. Government Obligations deposited pursuant to Section 1104 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Securities. Anything in this Article Eleven to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or U.S. Government Obligations (including any proceeds therefrom) held by it as provided in Section 1104 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance, as applicable, in accordance with this Article. SECTION 1106. Reinstatement. If the Trustee or any Paying Agent is unable to apply any money or U.S. Government Obligations in accordance with Section 1105 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 1102 or 1103, 68 60 as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 1105; provided, however, that if the Company makes any payment of principal of or interest on any Security following the reinstatement of its obligations, the Company shall be subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or Paying Agent. 69 61 ------------------------- This Indenture may be signed in any number of counterparts each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Indenture. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. URC HOLDINGS CORP. [SEAL] By /s/ Dennis E. Arnold ----------------------------- Title: Senior Vice President Attest: /s/ Pamela Taylor ------------------ Title: Secretary THE FIRST NATIONAL BANK OF CHICAGO, as Trustee [SEAL] By /s/ Barbara S. Gross ------------------------------- Title: Assistant Vice President Attest: /s/ Indecipherable ------------------------------ Title: Assistant Vice President 70 Exhibit A [FORM OF FACE OF SECURITY] URC HOLDINGS CORP. 7 7/8% Senior Note due 2006 No. [$ ] CUSIP: URC Holdings Corp., a Delaware corporation (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to _____________, or registered assigns, the principal sum of _______________ Dollars on June 30, 2006, at the office or agency of the Company referred to below, and to pay interest thereon on December 30, 1996 and semiannually thereafter, on June 30 and December 30 in each year, from June 25, 1996, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 7 7/8% per annum, until the principal hereof is paid or duly provided for, and (to the extent lawful) to pay on demand interest on any overdue interest at the rate borne by the Securities from the date on which such overdue interest becomes payable to the date payment of such interest has been made or duly provided for. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the June 15 or December 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date, and such defaulted interest, and (to the extent lawful) interest on such defaulted interest at the rate borne by the Securities, may be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior to such Special Record Date, or may be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities may be listed, and upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of and interest on this Security will be made at the office or agency of the Company maintained for that purpose in The City of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest on the 71 A-2 Physical Securities may be made at the option of the Company by (i) check mailed to the address of the Person entitled thereto at such address as shall appear on the Security Register or (ii) transfer to an account located in the United States maintained by the Person entitled thereto. Interest will be computed on the basis of a 360-day year of twelve 30-day months. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature of an authorized officer, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. 72 A-3 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: URC HOLDINGS CORP. By___________________________________ Title: Attest:______________________ Authorized Signature 73 A-4 TRUSTEE'S CERTIFICATE OF AUTHENTICATION. This is one of the Securities referred to in the within-mentioned Indenture. THE FIRST NATIONAL BANK OF CHICAGO, as Trustee By______________________________________ Authorized Officer 74 A-5 [REVERSE SIDE OF SECURITY] URC HOLDINGS CORP. 7 7/8% Senior Note due 2006 This Security is one of a duly authorized issue of securities of the Company designated as its 7 7/8% Senior Notes due 2006 (herein called the "Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $200,000,000, which may be issued under an indenture (herein called the "Indenture") dated as of June 25, 1996 between the Company and The First National Bank of Chicago, as trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is a global Security representing [$ ] of the Securities. The Securities shall not be redeemable prior to Maturity. If an Event of Default shall occur and be continuing, the principal of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions for defeasance at any time of (a) the entire indebtedness of the Company on this Security and (b) certain restrictive covenants and the related Defaults and Events of Default, upon compliance by the Company with certain conditions set forth therein, which provisions apply to this Security. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Outstanding Securities. The Indenture also contains provisions permitting the Holders of a majority in principal amount of the Outstanding Securities, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by or on behalf of the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Security. 75 A-6 No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of and interest on this Security at the times, place, and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registerable on the Security Register of the Company, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for such purpose in The City of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Securities are exchangeable for a like aggregate principal amount of Securities of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment in certain circumstances of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to the time of due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. The Indenture provides that no recourse for the payment of the principal of, or interest on any of the Securities or for any claim based thereon or otherwise in respect thereof, and no recourse under or upon any obligation, covenant or agreement of the Company in the Indenture, or in this Security or because of the creation of any indebtedness represented thereby, shall be had against any stockholder, officer, director, employee or controlling person of the Company or of any successor Person thereof. Each Holder, by accepting this Security, waives and releases all such liability. The Security and the Indenture shall be governed by and construed in accordance with the law of the State of New York applicable to contracts to be performed entirely within such state. 76 A-7 All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. 77 A-8 [FORM OF TRANSFER CERTIFICATION] FOR VALUE RECEIVED the undersigned registered holder hereby sell(s), assign(s) and transfer(s) unto Insert Taxpayer Identification No. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- (Please print or typewrite name and address including zip code of assignee) - - -------------------------------------------------------------------------------- the within Security and all rights thereunder, hereby irrevocably constituting and appointing - - -------------------------------------------------------------------------------- attorney to transfer such Security on the books of the Company with full power of substitution in the premises. [THE FOLLOWING PROVISION TO BE INCLUDED ON ALL CERTIFICATES EXCEPT PERMANENT OFFSHORE PHYSICAL CERTIFICATES] In connection with any transfer of this Security occurring prior to the date which is the earlier of the date of an effective Registration Statement, or June 25, 1999, the undersigned confirms that without utilizing any general solicitation or general advertising that: [Check One] [ ](a) This Security is being transferred in compliance with the exemption from registration under the Securities Act of 1933, as amended, provided by Rule 144A thereunder. or [ ](b) This Security is being transferred other than in accordance with (a) above and documents are being furnished which comply with the conditions of transfer set forth in this Security and the Indenture. 78 A-9 If none of the foregoing boxes is checked, the Trustee or other Security Registrar shall not be obligated to register this Security in the name of any Person other than the Holder hereof unless and until the conditions to any such transfer of registration set forth herein and in Section 307 of the Indenture shall have been satisfied. Date:__________________________ ___________________________________________ NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within-mentioned instrument in every particular, without alteration or any change whatsoever. Signature Guarantee: ___________________________________________ TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED: The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act of 1933, as amended, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representation in order to claim the exemption from registration provided by Rule 144A. Dated: ______________________ ___________________________________________ NOTICE: To be executed by an executive officer 79 Exhibit B Form of Certificate to Be Delivered upon Termination of Restricted Period On or after August 5, 1996 URC Holdings Corp. 22801 Ventura Boulevard Woodland Hills, California 91364 The First National Bank of Chicago One First National Plaza, Suite 0126 Chicago, Illinois 60670-0126 Re: URC Holdings Corp. (the "Company") 7 7/8% Senior Notes due 2006 (the "Securities") Ladies and Gentlemen: This letter relates to $__________ million principal amount of Securities represented by the temporary global note certificate issued in the name of ____________ (the "Temporary Certificate"). Pursuant to Section 201 of the Indenture dated as of June 25, 1996 relating to the Securities (the "Indenture"), we hereby certify that (1) we are the beneficial owner of such principal amount of Securities represented by the Temporary Certificate and (2) we are a person outside the United States to whom the Securities could be transferred in accordance with Rule 904 of Regulation S promulgated under the Securities Act of 1933, as amended. Accordingly, you are hereby requested to issue a Security representing the undersigned's interest in the principal amount of Securities represented by the Temporary Certificate, all in the manner provided by the Indenture. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Holder] By:_____________________________________ Authorized Signature 80 Exhibit C Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Institutional Accredited Investors [Date] URC Holdings Corp. 22801 Ventura Boulevard Woodland Hills, California 91364 The First National Bank of Chicago One First National Plaza, Suite 0126 Chicago, Illinois 60670-0126 Ladies and Gentlemen: In connection with our proposed purchase of $____________ aggregate principal amount of the 7 7/8% Senior Notes due 2006 (the "Securities") of URC Holdings Corp., a Delaware corporation (the "Company"), we confirm that: 1. We understand that the Securities have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or any other applicable securities law and may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the Securities Act or any other applicable securities law, or pursuant to an exemption therefrom, and in each case in compliance with the conditions for transfer set forth below. We agree on our own behalf and on behalf of any investor account for which we are purchasing the Securities to offer, sell or otherwise transfer such Securities prior to the date which is three years after the later of the date of original issue and the last date on which the Company or any affiliate of the Company was the owner of such Securities (or any predecessor thereto) (the "Resale Restriction Termination Date") only (a) to the Company, (b) pursuant to a registration statement that has been declared effective under the Securities Act, (c) for so long as the Securities are eligible for resale pursuant to Rule 144A under the Securities Act, to a person we reasonably believe is a "Qualified Institutional Buyer" under Rule 144A (a "QIB") that purchases for its own account or for the account of a QIB to whom notice is given that the transfer is being made in reliance on Rule 144A, (d) pursuant to offers and sales to non-U.S. persons that occur outside the United States within the meaning of Regulations S under the Securities Act, (e) to an institutional "accredited investor" within the meaning of subparagraphs (a)(1), (2), (3) or (7) of Rule 501 of Regulation D under 81 C-2 the Securities Act that is acquiring the Securities for its own account or for the account of such an institutional "accredited investor" for investment and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act or (f) pursuant to any other available exemption from the registration requirements of the Securities Act, subject in each of the foregoing cases to any requirement of law that the disposition of our property or the property of such investor account or accounts be at all times within our or their control and to compliance with any applicable state securities laws. The foregoing restrictions on resale will not apply subsequent to the Resale Restriction Termination Date. If any resale or other transfer of the Securities is proposed to be made pursuant to clause (e) above prior to the Resale Restriction Termination Date, the transferor shall deliver to The First National Bank of Chicago, as trustee (the "Trustee"), a letter from the transferee substantially in the form of this letter, which shall provide, among other things, that the transferee is an institutional "accredited investor" within the meaning of subparagraphs (a)(1), (2), (3) or (7) of Rule 501 of Regulation D under the Securities Act that is acquiring such Securities for investment and not with a view to, or for offer and sale in connection with, any distribution in violation of the Securities Act. We acknowledge that the Company and the Trustee reserve the right prior to any offer, sale or other transfer of the Securities pursuant to clauses (d), (e) and (f) above prior to the Resale Restriction Termination Date, to require the delivery of an opinion of counsel, a certification and/or other information satisfactory to the Company and the Trustee. 2. We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act) purchasing for our own account or for the account of such an institutional "accredited investor", and we are acquiring the Securities for investment and not with a view to, or for offer or sale in connection with, any distribution in violation of the Securities Act or any other applicable securities laws and we have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment. 3. We are acquiring the Securities purchased by us for our own account or for one or more accounts as to each of which we exercise sole investment discretion. 82 C-3 4. You are entitled to rely upon this letter and you are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Very truly yours, Date:___________________ By:_____________________________________ (NAME OF PURCHASER) Upon registration of transfer, the Securities should be registered in the name of the new beneficial owner as follows: Name:__________________________________________________________________________ Address:_______________________________________________________________________ Taxpayer ID Number:____________________________________________________________ 83 Exhibit D Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S [Date] URC Holdings Corp. 22801 Ventura Boulevard Woodland Hills, California 91364 The First National Bank of Chicago, as Trustee One First National Plaza, Suite 0126 Chicago, Illinois 60670-0126 Re: URC Holdings Corp. (the "Company") 7 7/8% Senior Notes due 2006 (the "Securities") Ladies and Gentlemen: In connection with our proposed sale of $________ aggregate principal amount of the Securities, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Securities was not made to a person in the United States; (2) either (a) at the time the buy order was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; and 84 D-2 (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act. In addition, if the sale is made during a restricted period and the provisions of Rule 903(c)(3) or Rule 904(c)(1) of Regulation S are applicable thereto, we confirm that such sale has been made in accordance with the applicable provisions of Rule 903(c)(3) or Rule 904(c)(1), as the case may be. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceeding or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By:_____________________________________ Authorized Signature EX-13 3 PGS 1-3, 5, 8-17, 20-37, ANNUAL RPT TO STKHLDRS. 1 Exhibit 13 To Our Stockholders In 1996 Alleghany Corporation's net earnings were $87.0 million, or $12.06 per share, compared with $85.3 million, or $11.83 per share, in 1995. Financial highlights of both years are summarized in the first table on page 4 of this report. Alleghany's principal operating unit, Chicago Title and Trust Company, rebounded strongly from its depressed results in 1995, with pre-tax earnings in 1996 of $79.4 million, representing a 72 percent increase from 1995. The significant improvement reflected active real estate markets and the benefits of expense control efforts undertaken in 1995. The first quarter of 1996 saw an increase in home mortgage refinancings, which declined significantly during the rest of the year, but such decline was offset by an increase in residential resale and commercial transactions. In contrast, the increase in interest rates in 1994 ended one of the longest refinancing surges in history and precipitated in 1995 one of the strongest downturns in title industry revenue and orders since the industry began keeping those statistics. The stronger 1996, however, also gave rise to increased labor related expenses. The increase in the volume of business by CT&T resulted in additional hires, and increased profitability resulted in higher employee incentive and profit sharing expenses. Net earnings in 1995 included $23.6 million, or $3.26 per share, representing net gains in connection with Alleghany's redemption in the fourth quarter of its 6-1/2% Subordinated Exchangeable Debentures due 2014 and the disposition of common shares of American Express Company into which such Debentures were exchangeable. On October 23, 1996, John Rau, formerly dean of the School of Business at Indiana University and president and chief executive officer of LaSalle National Bank, was elected, effective January 1, 1997, president, chief executive officer and director of CT&T and its subsidiary, Chicago Title Insurance Company. Mr. Rau succeeded Richard P. Toft as president and chief executive officer of CT&T and Richard L. Pollay in both roles for Chicago Title Insurance Company. Mr. Toft retains his responsibilities as non-executive chairman of the combined boards of CT&T and Chicago Title Insurance Company and was elected chairman and chief executive officer of CT&T's investment management and advisory services subsidiary, Alleghany Asset Management, Inc. Mr. Pollay retired at year end after 40 years with CT&T and Chicago Title Insurance Company, and continues as vice chairman emeritus of CT&T and as a director of both companies. CT&T's results also reflect the contribution of its financial services businesses conducted through Alleghany Asset Management and its subsidiaries, The Chicago Trust Company, Montag & Caldwell, Inc. and Chicago Deferred Exchange Corporation. Alleghany Asset Management contributed pre-tax earnings of $13.1 million to CT&T [GRAPHIC -- SEE EDGAR APPENDIX] [GRAPH -- SEE EDGAR APPENDIX]
Stockholders' Equity Per Share* (In dollars) '87 67.59 '88 73.72 '89 83.40 '90 91.91 '91 102.57 '92 112.55 '93 130.22 '94 142.12 '95 182.47 '96 196.54
*Adjusted for 2% stock dividends 1 2 in 1996, an increase of 57 percent over 1995. The improved results of Alleghany Asset Management are primarily due to an increase in assets under management. Assets under management at year-end 1996 totalled $14.5 billion, compared with $10.1 billion at year-end 1995. While CT&T's business is affected materially by changes in real estate markets, we believe that its strong investment portfolio and heightened focus on expense controls will tend to reduce the severity of decline during depressed periods. Underwriters Re Group, Inc. also recorded significantly higher pre-tax earnings for 1996 than in the prior year. Underwriters Re Group contributed pre-tax earnings of $37.0 million in 1996, a 49 percent increase over its 1995 pre-tax earnings, reflecting increased business and an absence of significant catastrophe losses. Commissions and brokerage expenses also increased in 1996 over 1995 levels primarily because of the increase in business written and a change in the mix of treaty business having higher ceding commissions paid but lower assumed levels of risk. Underwriters Re Group took several steps during 1996 to increase its global presence. Representative offices were established in London, England and Barbados to capitalize on international underwriting opportunities. In addition, Underwriters Re Group made strategic investments in reinsurance and insurance companies in Barbados and Bermuda. As of December 31, 1996, the statutory surplus of Underwriters Re Group's principal subsidiary, Underwriters Reinsurance [GRAPH -- SEE EDGAR APPENDIX]
Year-End Closing Stock Prices* (In dollars) '87 60.67 '88 60.59 '89 79.66 '90 75.59 '91 100.53 '92 123.56 '93 135.22 '94 146.09 '95 194.13 '96 212.0
*Adjusted for 2% stock dividends Company, was $614 million, making Underwriters Reinsurance the tenth largest domestic professional reinsurer in terms of statutory surplus, according to the Reinsurance Association of America. World Minerals Inc. contributed pre-tax earnings of $18.0 million, representing a decrease of 31 percent from its 1995 pre-tax earnings, but recorded higher revenues in 1996 compared to 1995. The increase in World Minerals' revenues primarily reflects the result of strategic acquisitions since the 1995 second quarter. The decrease in earnings was due to increased debt and related interest expense associated with the strategic acquisitions and joint ventures, higher than expected start-up costs related to World Minerals' Chinese joint ventures, a charge related to the purchase of minority interests in one of its businesses and lower foreign exchange gains in 1996. Although the rapid growth of World Minerals has resulted in increased expenses from higher-than-expected start-up and acquisition-related costs, we believe such costs should prove to be profitable long-term investments in operations. 2 3 The comparative contributions to Alleghany's earnings before income taxes made by the operating units and by Alleghany's parent-company operations were as follows (in millions):
Year Ended Quarter Ended December 31 December 31 1996 1995 1996 1995 CT&T $ 79.4 $ 46.2 $22.4 $22.3 Underwriters Re Group 37.0 24.9 13.1 4.1
World Minerals 18.0 26.1 3.7 7.3 Parent company and other (7.3) 23.9 (1.2) 32.7 Earnings before income taxes $127.1 $121.1 $38.0 $66.4
As of March 3, 1997, Alleghany beneficially owned approximately 7.43 million shares, or 4.8 percent, of the outstanding common stock of Burlington Northern Santa Fe Corporation, which had an aggregate market value on that date of approximately $616.8 million, or $83.00 per share. The aggregate cost of such shares was approximately $253.7 million, or $34.15 per share. BNSF has made remarkable progress in achieving its merger synergies. Alleghany common stockholders' equity per share was $196.54 at 1996 year-end, an increase of 7.7 percent over common stockholders' equity per share at 1995 year-end of $182.47, after adjustment to reflect the two percent dividend paid in common stock in 1996. It is with great sadness that we report the passing of our long-time friend and director, John E. Tobin, who served on Alleghany's board for almost thirty years and also as Alleghany's outside counsel. We gratefully acknowledge his outstanding contributions to Alleghany as a director, counselor and advisor. Overall, we feel the year 1996 was a challenging, albeit satisfactory, year for Alleghany Corporation and a year which set the groundwork to achieve improved results in 1997. Yours sincerely, /s/ John J. Burns, Jr. /s/ F.M. Kirby President Chairman of the Board March 18, 1997 [PHOTO -- SEE EDGAR APPENDIX] Photo caption: Seated, F.M. Kirby, Chairman of the Board. Standing, John J. Burns, Jr., President. 3 4 Selected Financial Data Alleghany Corporation and Subsidiaries (in thousands, except for share and per share amounts)
Year Ended December 31 1996 1995 1994 1993 1992 Operating Data Revenues from continuing operations $2,062,165 $1,784,810 $1,827,105 $1,698,147 $1,548,820 Earnings from continuing operations $ 87,048 $ 85,300 $ 68,372 $ 80,849 $ 44,366 Earnings from discontinued operations -- -- 69,134 16,703 20,255 Cumulative effect of accounting change -- -- -- -- 8,216 Net earnings $ 87,048 $ 85,300 $ 137,506 $ 97,552 $ 72,837 Earnings per share of common stock:* Continuing operations $ 12.06 $ 11.83 $ 9.62 $ 11.45 $ 6.28 Discontinued operations -- -- 9.72 2.36 2.87 Cumulative effect of accounting change -- -- -- -- 1.16 Net earnings $ 12.06 $ 11.83 $ 19.34 $ 13.81 $ 10.31 Average number of shares of common stock* 7,216,259 7,210,610 7,110,875 7,063,398 7,066,177
December 31 1996 1995 1994 1993 1992 Balance Sheet Total assets $4,500,623 $4,122,514 $3,587,891 $3,469,123 $2,226,637 Long-term debt $ 447,525 $ 331,689 $ 335,073 $ 405,303 $ 352,075 Common stockholders' equity $1,423,260 $1,320,643 $1,021,193 $ 915,734 $ 796,268 Common stockholders' equity per share of common stock* $ 196.54 $ 182.47 $ 142.12 $ 130.22 $ 112.55
The Company acquired Underwriters Reinsurance Company on October 7, 1993. The Company sold Sacramento Savings Bank on October 31, 1994; accordingly, the operations of Sacramento Savings have been classified as discontinued operations. * Restated to reflect subsequent common stock dividends. Dividends, Market Prices and Related Security Holder Matters As of December 31, 1996, there were approximately 2,150 holders of record of Alleghany common stock. The following table indicates quarterly high and low prices of the common stock in 1996 and 1995 on the New York Stock Exchange. Alleghany's ticker symbol is Y.
1996 1995 Quarter Ended High Low High Low March 31 $198 $191 7/8 $158 $146 1/8 June 30 197 1/2 187 159 3/4 154 3/4 September 30 209 187 172 1/2 158 1/4 December 31 213 203 199 1/2 171 3/4
In each of 1995, 1996 and 1997, Alleghany's Board of Directors declared, as Alleghany's dividend on its common stock for that year, a stock dividend consisting of one share of Alleghany common stock for every fifty shares outstanding. The 1995 and 1996 stock dividends were paid in April of each of those years. Alleghany's ability to pay cash dividends is restricted by the terms of a revolving credit loan agreement. At December 31, 1996, this agreement permitted the payment of dividends aggregating approximately $226 million. At that date about $1.201 billion of Alleghany's consolidated common stockholders' equity of $1.423 billion was unavailable for dividends or advances to Alleghany from its subsidiaries, due to limitations imposed by statutes and agreements with lenders to which those subsidiaries are subject. 5 5 Chicago Title and Trust Company Headquartered in Chicago, CT&T, through its subsidiaries, is engaged in the sale and underwriting of title insurance, and in the real estate-related services business. CT&T is also engaged, through its subsidiary, Alleghany Asset Management, Inc., in the financial services business. CT&T contributed pre-tax earnings of $79.4 million on revenues of $1.38 billion in 1996, representing a 72 percent increase from 1995's pre-tax earnings of $46.2 million on revenues of $1.17 billion. In 1994, CT&T's pre-tax earnings totalled $65.7 million on revenues of $1.35 billion. CT&T's 1996 results included a $4.2 million pre-tax charge to write down the carrying value of title plants and goodwill in connection with the implementation of Financial Accounting Standards Board Statement No. 121, and pre-tax income of $8.0 million in respect of a reduction in title claims reserves. The reduction in reserves reflects the continuing decrease in claims paid and consideration of the assumed lower risk level of the mix of business written between 1993 and 1996. Title Insurance The CT&T Family of Title Insurers, consisting of Chicago Title Insurance Company, Security Union Title Insurance Company and Ticor Title Insurance Company and their respective subsidiaries, is the largest title insurance organization in the world (based on 1995 title revenue data), with approximately 300 offices, 7,900 employees and more than 3,700 policy-issuing agents in 49 states, Puerto Rico, the Virgin Islands, Guam, Canada and Mexico. The title insurance industry is highly sensitive to interest rate levels and to the volume of real estate transactions. Beginning in February 1994, a series of increases in short-term interest rates significantly reduced the volume of real estate transactions and brought to an abrupt end one of the longest refinancing surges in history. The overall industry-wide decline in revenues and volume of orders from 1993 to 1994 and through the first half of 1995 was the steepest downturn the industry experienced since it began keeping those statistics in the early 1960's. This trend began to reverse its course in the second half of 1995 when lower rates again 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 providing an environment conducive to healthy volumes of real estate construction and resale activity. [GRAPHICS -- SEE EDGAR APENDIX] 8 6 In 1994 and 1995, CT&T undertook to bring costs into line with its declining revenues, including reduction of staff, deferral of pay increases and short-term salary reductions for senior managers. In 1996, CT&T continued its efforts to reduce costs, including consolidation and re-engineering of certain of its operations. The stronger year of 1996, however, also gave rise to increased labor related expenses. The increase in the volume of business by CT&T resulted in additional hires, and increased profitability resulted in higher employee incentive and profit sharing expenses. While title revenues, net of agents' commissions, increased from $704.2 million to $817.7 million, or 16.1 percent, from 1995 to 1996, labor related expenses from title operations increased from $321.2 million to $386.8 million, or 20.4 percent, during the same period. Such total expenses included an increase from $225.4 million to $260.4 million, or 15.5 percent, in base salary, overtime, temporary help and outsourcing expenses, and an increase from $95.8 million to $126.5 million, or 32.0 percent, in employee incentive, profit sharing and other benefit expenses. As CT&T's title insurance operations have grown, CT&T has sought to improve the effectiveness and efficiency of the company as a whole. CT&T's title insurance operations continue to institute programs to focus better on customer needs and to achieve greater operational and cost efficiencies. Title plant and production facilities are being consolidated in certain markets to provide greater product consistency and to reduce turnaround times and expenses. Technology investments continue to be made to streamline workflow processes and to secure competitive advantages through automation. Agents and employees are being trained to sharpen their problem solving abilities and to heighten their responsiveness to customer needs. Implementation of these initiatives, which continues in 1997, is expected to result in better, more cost-effective alignment of the internal operations of CT&T's title insurance operations with marketplace demands. Pre-tax investment income totalled $61.8 million in 1996, compared with $58.4 million in 1995 and $51.4 million in 1994, reflecting an increase in invested assets in 1996 offset by lower short-term interest rates. CT&T also recorded a pre-tax gain of $1.4 million on investment transactions in 1996, compared with a pre-tax gain of $3.7 million in 1995 and a pre-tax loss of $5.4 million in 1994. [GRAPH -- SEE EDGAR APPENDIX]
CT&T Revenues (Dollars in millions) '92 1.345.7 '93 1,440.2 '94 1,352.6 '95 1,172.6 '96 1,381.0
CT&T Pre-Tax Earnings (Dollars in millions) '92 85.8 '93 88.6 '94 65.7 '95 46.2 '96 79.4
9 7 Real Estate-Related Services Beginning in 1994, CT&T restructured its national operations organization to address the increasing importance of national and regional residential lenders. Increasingly, mortgage lenders are seeking cost efficiencies by requiring vendors to provide a bundle of services and to deliver them in an electronic format. Such services include not only the traditional title insurance and escrow services provided by CT&T, but new services such as flood certifications, credit information and property evaluations, including traditional appraisals. Between 1995 and 1996, three acquisitions were completed that expanded CT&T's real estate-related services business and improved its ability to service mortgage lenders. In May 1995, CT&T acquired National Flood Information Services, Inc. Based in Arlington, Texas, NFIS has provided flood certification services since 1987. NFIS 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. NFIS is neither an issuer nor an underwriter of flood insurance policies. In August 1995, Credit Data Reporting Services, Inc. was acquired. Headquartered in Kingston, New York, CDRS has been in the credit reporting business since 1941. CDRS has developed a state-of-the-art proprietary system which can receive an order; obtain, edit and merge credit information from the three national repositories; and report back to the lending institution in a matter of seconds. In July 1996, Market Intelligence, Inc. was acquired. Based in Hopkinton, Massachusetts, Market Intelligence has been in the property evaluation business since 1989. Market Intelligence provides real estate information services and alternatives to appraisals nationwide using database research supplemented by a network of real estate agents that verify computer reports through physical property inspections. CT&T also offers a full array of property appraisal products for residential mortgage loans through a network of 750 state-licensed contract appraisers covering all 50 states. To integrate CT&T's products and services and to improve the delivery of such products and services to its customers through one source, CT&T introduced in 1996 a new product ordering software system - OrderNET. OrderNET enables customers electronically to transmit orders for credit, appraisal, flood certification and title products from one common system, and to receive automated order confirmations, as well as certain products. [GRAPH -- SEE EDGAR APPENDIX]
CT&T Stockholder's Equity (Dollars in millions) '92 521.8 '93 354.8 '94 316.5 '95 346.4 '96 360.6
CT&T Claims Reserves (Dollars in millions) '92 512.5 '93 533.2 '94 537.1 '95 531.0 '96 533.7
10 8 Alleghany Asset Management, Inc. CT&T's financial services group was restructured in 1995 under Alleghany Asset Management, Inc., a newly-formed subsidiary of CT&T. The financial services businesses conducted directly by CT&T were transferred to an Illinois trust company acquired by Alleghany Asset Management and renamed The Chicago Trust Company. Also transferred to Alleghany Asset Management were Montag & Caldwell, Inc., an Atlanta-based investment counseling firm acquired in July 1994, and Chicago Deferred Exchange Corporation, which facilitates certain tax-deferred property exchanges. The significant lines of business of Alleghany Asset Management are: Institutional Investment Management - manages equity, fixed income, and balanced accounts primarily for employee benefit plans, foundations, endowments, pension plans and insurance companies; Full Service 401(k) Administration - provides trustee, plan design, investment management and other administrative services for companies primarily in the Midwest and South; Personal Trust and Investment Services - provides investment management and trust and estate planning services; Real Estate Trust Services - facilitates tax-deferred exchanges of income-producing real property and offers land trust services; and CT&T Funds - a mutual fund family which offers eight no-load, open-end mutual funds and had total assets of $1.0 billion at December 31, 1996. Alleghany Asset Management posted the following results (in millions), which include Montag & Caldwell results commencing August 1994:
1996 1995 1994 Revenues $56.8 $43.2 $31.7 Earnings before taxes* $13.1 $ 8.3 $ 4.6 Assets under management (in billions) $14.5 $10.1 $ 7.0
*1995 and 1994 figures are adjusted to reflect CT&T's recently instituted corporate overhead allocation. 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 institutional assets where competition is intense and success is driven principally by investment performance. Both Montag & Caldwell and Chicago Trust have recorded very strong investment results over the past three years and have received high ratings in various consultant and mutual fund data bases. The $4.4 billion growth in assets under management from 1995 to 1996 included new business of approximately $2.5 billion. [GRAPH -- SEE EDGAR APPENDIX]
Assets Under Management (Dollars in millions) '92 3,933 '93 4,029 '94 6,966 '95 10,114 '96 14,451
11 9 Underwriters Re Group, Inc. Underwriters Re Group, headquartered in Woodland Hills, California, provides reinsurance, through its principal subsidiary, Underwriters Reinsurance Company, to property and casualty insurers and reinsurers. Although it writes many lines of business, Underwriters Reinsurance concentrates on coverages requiring specialized underwriting expertise and a high degree of actuarial analysis. Underwriters Reinsurance is licensed in 41 states, Puerto Rico and the District of Columbia, is accredited as a reinsurer in seven additional states and Canada, and has branch offices in Atlanta, Chicago, Houston, New York and Woodland Hills. Underwriters Re Group contributed pre-tax earnings of $37.0 million on revenues of $410.9 million in 1996, compared with $24.8 million on revenues of $322.2 million in 1995 and $8.6 million on revenues of $225.4 million in 1994. Underwriters Re Group's results in 1996 reflect increased business, including a 23 percent, or $68.3 million, increase in net written premiums from 1995 and an absence of significant catastrophe losses. Underwriters Re Group believes the increase in premiums is attributable, in part, to the increase in its surplus level and high ratings for financial strength and claims-paying ability, as described below, enabling it to attract a broad range of reinsurance opportunities in a highly competitive and soft market, and also to growth in its primary insurance operations. Underwriters Re Group, however, does not expect the current rapid rate of growth in premiums to continue into the future. Commissions and brokerage expenses also increased in 1996 over 1995 levels primarily because of the increase in business written and a change in the mix of treaty business having higher ceding commissions paid but lower assumed levels of risk. Underwriters Re Group's increase in premiums is shown below (in millions):
1996 1995 1994 Net written reinsurance premiums $298.9 $257.5 $186.0 Net written insurance premiums $ 61.4 $ 34.5 $ 14.5 Net written premiums $360.3 $292.0 $200.5
[GRAPHIC -- SEE EDGAR APPENDIX] [GRAPH -- SEE EDGAR APPENDIX]
Underwriters Re Group Pre-Tax Earnings (Dollars in millions) '93* 3.0* '94 8.6 '95 24.8 '96 37.0
* 1993 shows results for three months 12 10 Pre-tax investment income totalled $63.2 million in 1996, compared with $50.2 million in 1995 and $41.2 million in 1994, reflecting an increase in invested assets. The 1994 results reflect a charge (before reinsurance recoveries and taxes) of about $5.0 million for estimated losses associated with the earthquake in Northridge, California in January of that year. In addition, Underwriters Re Group recorded a pre-tax gain of $910 thousand on investment transactions during 1996, compared with pre-tax losses of $5.5 million in 1995 and $6.1 million in 1994. Most of such losses in 1995 and 1994 were due to portfolio restructurings to respond to changes in interest rates and the writedown in the fourth quarter of 1995 of the carrying value of an investment which was downgraded. Underwriters Reinsurance carries an "A+ (Superior)" rating from A.M. Best Company, Inc. and a claims-paying ability rating of "AA-" from Standard & Poor's. As of December 31, 1996, the statutory surplus of Underwriters Reinsurance was $614 million, making Underwriters Reinsurance the tenth largest domestic professional reinsurer in terms of statutory surplus, according to the Reinsurance Association of America. Brokers are the principal source of the reinsurance business of Underwriters Reinsurance; the remainder of its business is obtained directly from ceding companies. By working primarily through brokers, Underwriters Reinsurance 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, Underwriters Reinsurance 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 Reinsurance is able to exercise greater selectivity than would usually be possible in dealing directly with ceding companies. Underwriters Reinsurance maintains a disciplined underwriting program with a focus on generating profitable business rather than on increasing market share. An important element of this program is to respond quickly to market opportunities (such as increased demand resulting in more favorable pricing) by adjusting the mix of property and casualty business it writes. Underwriters Reinsurance writes certain professional, environmental, directors and officers' liability and catastrophe coverages, in the belief that these coverages, which require high levels of underwriting and actuarial expertise, offer greater potential for favorable results than more general coverages, based upon current market conditions. Underwriters Reinsurance has maintained a defensive underwriting posture by reducing writings in lines of business offering inadequate contract terms. [GRAPH -- SEE EDGAR APPENDIX]
Underwriters Re Group Revenues (Dollars in millions) '93* 40.7 '94 225.4 '95 322.2 '96 410.9 * 1993 shows results for three months
13 11 To capitalize on advantageous market conditions for certain primary insurance business lines and on its expertise in specialized coverages, Underwriters Re Group established Commercial Underwriters Insurance Company at the end of 1992, acquired an inactive Nebraska insurance company which was renamed Underwriters Insurance Company in 1994, and established Newmarket Underwriters Insurance Company in 1996. Commercial Underwriters and Underwriters Insurance are rated "A+ (Superior)" by Best's because Underwriters Reinsurance reinsures a significant share of their business. Similarly, Underwriters Reinsurance will reinsure a significant share of the business of Newmarket Underwriters and, therefore, assignment of the same rating is expected. Commercial Underwriters, Underwriters Insurance and Newmarket Underwriters are property and casualty insurance companies. Commercial Underwriters focuses on specialized primary insurance lines in California and New York on an admitted basis and in 40 other states and Guam and the District of Columbia on an approved nonadmitted basis. Underwriters Insurance, licensed in 42 states and the District of Columbia, focuses on primary and umbrella liability policies for medium- to large-sized businesses, and Newmarket Underwriters will focus on general liability and umbrella excess liability policies for medium- to large-sized businesses in New Hampshire on an admitted basis and in other states on an approved nonadmitted basis. Underwriters Re Group also established The Center Insurance Services, Inc. (previously known as The Underwriting Center, Inc.) in 1995. The Center acts as agent and underwrites business on behalf of Commercial Underwriters, Underwriters Insurance and non-affiliated insurers, and will underwrite business on behalf of Newmarket Underwriters. To capitalize on international underwriting opportunities, Underwriters Re Group established representative offices in Barbados at the end of 1995 and in London, England in 1996. In addition, Underwriters Re Group made strategic investments in reinsurance and insurance companies in Barbados and Bermuda. [GRAPH -- SEE EDGAR APPENDIX]
Underwriters Reinsurance Policy Holders Surplus (Dollars in millions) '93 250.0 '94 361.0 '95 458.0 '96 614.0
14 12 World Minerals Inc. World Minerals, which recently relocated its headquarters to Santa Barbara, California, conducts a worldwide industrial minerals business through its own operations and those of its subsidiaries, Celite Corporation, Harborlite Corporation and Europerlite Acquisition Corporation. World Minerals contributed pre-tax earnings of $18.0 million on revenues of $198.5 million in 1996, compared with $26.1 million on revenues of $178.7 million in 1995 and $18.2 million on revenues of $162.6 million in 1994. The increase in revenues primarily reflects the result of strategic acquisitions since the 1995 second quarter. Pre-tax earnings declined in 1996 due to increased debt and related interest expense associated with strategic acquisitions and joint ventures, start-up costs related to World Minerals' joint ventures in China, a charge related to the purchase of minority interests in Harborlite, severance costs, expenses related to the relocation of World Minerals' headquarters, and lower foreign exchange gains. The rapid growth of World Minerals has resulted in increased expenses from higher-than-expected start-up and acquisition-related costs, but management believes such costs should prove to be profitable long-term investments in operations. The period from 1994 through 1996 was one of resurgent economic activity in world markets, especially the United States, Europe and Latin America. World Minerals was positioned to take advantage of this economic growth as a result of programs instituted by management from 1991 through 1993 that strengthened the organization. Since 1993, financial systems and controls have been upgraded and the Celite, Harborlite and Europerlite sales, operations and financial groups have been consolidated to improve efficiency and to take advantage of synergies. In addition, World Minerals enhanced its position in both of its core businesses during 1995 and 1996 through acquisitions and strategic investments. Celite invested in diatomaceous earth mining, processing, distribution and/or sales facilities in China, South Korea, Peru, Japan and Brazil. Its China operations consist of controlling interests through various subsidiaries of Celite in three joint ventures which are engaged in the mining and processing of diatomite in Jilin Province, China. With respect to World Minerals' perlite business, Harborlite acquired perlite ore reserves in Dikili, Turkey, and built a new perlite expansion plant in Youngsville, North Caroline; Europerlite acquired perlite expansion plants in Barcelona, Spain and Milan, Italy; and World Minerals acquired minority interest in Harborlite. [GRAPHICS -- SEE EDGAR APPENDIX] 15 13 Celite is believed to be the world's largest producer of filter-aid grade diatomite, a silica-based mineral consisting of the fossilized remains of microscopic freshwater or marine plants. Diatomite is used as a filter aid in the production of beer, fruit juice, wine, water, sweeteners, fats and oils, pharmaceuticals, chemicals, lubricants and petroleum; it is used as a filler, mainly in paints, and as an anti-block agent in plastic film. Celite is also a producer of calcium and magnesium silicate products, which are used to convert liquid, semi-solid and sticky ingredients into dry, free-flowing powders in the production of rubber, sweeteners, flavorings and pesticides. World Minerals believes that Harborlite and Europerlite together constitute the world's largest producer of perlite filter aids and that Harborlite, which is also engaged in the business of selling perlite ore, is the world's largest merchant producer of perlite ore, a volcanic rock containing a small amount of water that causes the ore to "pop" when heated, expanding it up to twenty times its original volume. Harborlite sells perlite ore to companies that expand it for use primarily in the manufacture of roofing board, formed pipe insulation, acoustical ceiling tile and filter aids. Harborlite and Europerlite also expand perlite in their own expansion plants in the United States and Europe. Most of this expanded perlite is sold as a filter aid to companies in the brewing, food, wine, sweetener, pharmaceutical, chemical and lubricant industries, or as a filler and insulating medium to companies in the construction industry. World Minerals conducts its business on a worldwide basis, with mining or processing operations in ten countries. 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 minimizes its exposure to the risk of foreign currency fluctuation by, among other things, having its subsidiaries 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 closely monitors its methods of operating in each country and adopts strategies responsive to changing economic and political environments. [GRAPH -- SEE EDGAR APPENDIX] World Minerals (Dollars in millions)
Pre-tax Earnings Revenues Cash Flow* ---------------- -------- ---------- 1992 $11.6 $141.1 $15.8 1993 8.2 149.5 14.4 1994 18.2 162.6 22.1 1995 26.1 178.7 27.6 1996 18.0 198.5 27.6
* Net earnings after tax, plus depreciation and amortization. 16 14 Heads and Threads 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. Nuts, bolts, screws, washers and other fasteners are imported and resold 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 its long years of association with suppliers and customers. Heads and Threads has been consistently profitable since its acquisition by Alleghany in 1974, despite the cyclical nature of its business and changing market conditions. Its earnings contribution to Alleghany has been steady with 1994's contribution being the highest since 1979. The contributions in 1995 and 1996 declined from 1994's record level due to LIFO inventory adjustments and lower sales. Since Heads and Threads imports virtually all of its fasteners, its costs are subject to fluctuations in foreign currency and import duties. Costs will also be impacted by regulations implementing the Fastener Quality Act, the effective date of which has been postponed to 1997. [GRAPHICS -- SEE EDGAR APPENDIX] 17 15 Financial Condition In recent years, Alleghany has followed a policy of maintaining a relatively liquid financial condition, in the form of cash, marketable securities, available credit lines and minimal amounts of debt at the parent company. This has permitted Alleghany to expand its operations through internal growth at its subsidiaries and through acquisitions or substantial investments in well-managed operating companies. On November 6, 1995, Alleghany redeemed its $59.6 million aggregate principal amount of 6-1/2% Subordinated Exchangeable Debentures due 2014 and disposed of common shares of American Express Company into which such Debentures were exchangeable, resulting in net gains to Alleghany of $23.6 million. During 1994 and early 1995, with temporary borrowings under Alleghany's revolving credit agreement, the proceeds from the sale of Sacramento Savings Bank, as described below, and cash on hand, Alleghany and its subsidiaries acquired about 18.06 million shares, or 11.8 percent, of the outstanding 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, or about 4.8 percent, of BNSF's currently outstanding common stock. As of March 3, 1997, such 7.43 million shares held by Alleghany and its subsidiaries had an aggregate market value of approximately $616.8 million, or $83 per share. The aggregate cost of such shares was approximately $253.7 million, or $34.15 per share. As of March 3, 1997, Alleghany and its subsidiaries owned about 5.64 million shares, or about 5.3 percent, of the outstanding common stock of Armco Inc. Alleghany has declared stock dividends in lieu of cash dividends every year since 1987, which have helped to conserve Alleghany's financial strength and, in particular, the liquid assets available to finance internal growth and operating company acquisitions and investments. On April 25, 1997, Alleghany will pay to stockholders of record on April 1, as its dividend on its common stock for 1997, a dividend of one share of Alleghany common stock for every 50 shares outstanding. In addition to its liquid financial assets, Alleghany has a revolving credit agreement with a bank which provides a commitment for revolving credit loans in an aggregate principal amount of $200 million. Borrowings have been repaid promptly in order to keep the facility available for future acquisitions. No amounts were outstanding under this facility at 1996 or 1995 year-end. This agreement was renewed in June 1995 and will mature in July 2000. Alleghany has announced that it may purchase shares of its common stock in open market transactions from time to time. In 1995, Alleghany purchased an aggregat of 44,523 shares of its common stock for about $7.6 million, at an average cost of about $171 per share. In 1996, Alleghany purchased an aggregate of 92,700 shares of its common stock for about $18.0 million, at an average cost of about $194 per share, and from January 1, 1997 to March 3, 1997, Alleghany purchased an aggregate of 151,652 shares of its common stock for about $31.9 million, at an average cost of about $210.11 per share. At December 31, 1996, about $222 million of the equity of Alleghany's subsidiaries was available for dividends or advances to Alleghany. CT&T's availability of funds for payout of its permitted dividends, however, may be further restricted by limitations imposed by statutes to which its subsidiaries are subject. At that date about $1.201 billion of Alleghany's equity of $1.423 billion was unavailable for dividends or advances to Alleghany from its subsidiaries, due to limitations imposed by statutes and agreements with lender to which those subsidiaries are subject. These limitations have not adversely affected Alleghany's ability to meet its obligations. CT&T Financial strength is also a high priority of Alleghany's subsidiaries, whose assets stand behind their financial commitments to their customers and vendors. The financial strength of CT&T is illustrated by the following statistics from its insurance regulatory filings. CT&T's combined statutory surplus as regards policyholders was $181.0 million in 1996, an increase of $21.4 million from $159.6 million in 1995. Combined cash and marketable securities were $602.5 million in 1996, an increase of about $33.7 million from 1995 levels. Title insurance loss reserves at 1996 year-end totalled $533.7 million (based on generally accepted accounting principles), almost nine times the estimated amount of claims then in process. CT&T's principal title insurance subsidiaries each 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 insurance financial strength ratings of "A2" to Chicago Title Insurance Company, "A3" to Ticor Title Insurance Company and "Baa1" to Security Union Title Insurance Company. CT&T paid cash dividends to Alleghany totalling $30 million in 1996 and $29.5 million in 1995. At December 31, 1996, CT&T's investment portfolio had a fair value of $866.6 million and consisted primarily of short and intermediate maturity investment grade rated debt securities. Modest investment is made in preferred stocks, convertible and lower quality bonds, and publicly traded equity securities. A relatively short average portfolio maturity and effective duration of 3.2 years and 2.2 years, respectively, are maintained so that investment income may 20 16 more readily respond to changes in the level of interest rates, offsetting to some degree the cyclicality of title insurance operations. Effective duration measures a portfolio's sensitivity to change in interest rates; a change within a range of plus or minus 1% in interest rates would be expected to result in an inverse change of approximately 2.2% in the value of CT&T's portfolio. Overall portfolio quality is maintained at a Moody's rating of Aa3 or higher, with over 97 percent of all securities rated investment grade by Moody's and less than one percent in derivative instruments as of 1996 year-end. As of December 31, 1996, $39.5 million was outstanding under a loan agreement among CT&T and several banks. The loan calls for annual principal payments, with final maturity in December 2000. Underwriters Re Group After its acquisition of Underwriters Re Group in October 1993, Alleghany contributed to the capital of Underwriters Re Group approximately $51 million in cash and shares of Armco common stock in 1993 and $100 million in shares of BNSF common stock in 1994. On June 25, 1996, the parent company of Underwriters Reinsurance 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 Reinsurance, $50 million was used to repay indebtedness under the parent company's credit agreement, and the remainder is being used for general corporate purposes. As of December 31, 1996, the statutory surplus of Underwriters Reinsurance was $614 million. At December 31, 1996, Underwriters Re Group's investment portfolio had a fair value of $1.373 billion, an average maturity of 5.3 years, an effective duration of 3.6 years, and consisted primarily of high quality short term fixed-maturity securities and about 2.5 million shares of BNSF common stock with a market value of $205.4 million at March 3, 1997. Overall portfolio quality is maintained at a Moody's rating of Aa3 or higher, with over 98 percent of all securities rated investment grade by Moody's as of December 31, 1996. Underwriters Re Group's portfolio contains no investments of a derivative nature. In October 1996, the parent company of Underwriters Reinsurance entered into a new credit agreement with several banks which provides for a commitment for revolving credit loans in an aggregate principal amount of $50 million, at interest rates tied to the parent company's then-current debt rating. No amounts were outstanding under this facility at 1996 year-end. World Minerals As of December 31, 1996, $86 million of indebtedness and $1.8 million of letters of credit were outstanding under World Mineral's credit facility. The amount available under the facility is required to be reduced periodically, with final maturity in December 1999. The aggregate available borrowing and letter of credit amount as of December 31, 1996 was $100 million. During 1995, Alleghany contributed $30 million to the capital of World Minerals. Aided by such contribution, World Minerals, through its subsidiary Celite, made strategic investments in diatomaceous earth mining and processing facilities in China and, through its subsidiary Europerlite, acquired perlite expansion plants in Spain and Italy. API On October 31,1994, Alleghany completed the sale of Sacramento Savings Bank ("Sacramento Savings") and an ancillary company to First Interstate Bank of California for $331 million in cash. As part of the sale of Sacramento Savings, Alleghany, through its wholly owned subsidiary Alleghany Properties, Inc. ("API"), purchased real estate and real estate-related assets of Sacramento Savings for about $116 million. Alleghany's intention with respect to such assets, the bulk of which is raw land, is to dispose of them in an orderly fashion, which may take several years. Accordingly, and in recognition that no general loss reserves of Sacramento Savings were transferred, Alleghany reduced the carrying value of such assets by about $20 million, net of related tax benefits. API is Alleghany's only subsidiary holding substantial passive real estate investments. On February 23, 1995, API issued $50 million aggregate principal amount of 8.62 percent senior notes due 2000 (the "Notes"). The Notes are being repaid in five equal annual principal amortization payments beginning on the first anniversary of the issuance of the Notes. A portion of the proceeds from the sale of the Notes was used to pay a dividend of $37 million to Alleghany and to repay outstanding indebtedness of a subsidiary of API in the amount of $8 million; the balance is used for API's working capital. On February 24, 1997, API made its second principal payment on the Notes, including interest accrued thereon, in the amount of $11.7 million, reducing the outstanding principal to $30.0 million. As of December 31, 1996, API held 44 loans and properties having a total book value of approximately $79.2 million, as compared with 57 loans and properties having a total book value of approximately $80.1 million as of December 31, 1995, and 89 loans and properties having a total book value of approximately $90.1 million as of October 31, 1994 (the date the assets were purchased by API). Heads and Threads Heads and Threads has a credit facility with a bank providing for letters of credit totalling up to $20 million. Alleghany management believes that Alleghany and its subsidiaries have and will have adequate internally generated funds, cash resources and unused credit facilities to provide for the currently foreseeable needs of its and their businesses. Alleghany and its subsidiaries have no material commitments for capital expenditures. 21 17 Alleghany Corporation and Subsidiaries Consolidated Balance Sheets
December 31, 1996 and 1995 (in thousands, except share amounts) 1996 1995 ---------- ---------- Assets Available for sale securities Fixed maturities (amortized cost: 1996 $1,990,536; 1995 $1,677,476) $1,999,249 $1,699,782 Equity securities (cost: 1996 $328,444; 1995 $308,210) 714,868 637,956 ---------- ---------- 2,714,117 2,337,738 Cash 59,954 55,175 Cash pledged to secure trust and escrow deposits 118,066 122,893 Notes receivable 91,536 91,536 Funds held, accounts and other receivables 285,895 301,290 Title records and indexes 152,291 155,170 Property and equipment - at cost, less accumulated depreciation and amortization 287,177 272,289 Reinsurance receivable 392,210 399,783 Other assets 399,377 386,640 ---------- ---------- $4,500,623 $4,122,514 ========== ========== Liabilities and Common Stockholders' Equity Title losses and other claims $ 533,738 $ 530,986 Property and casualty losses and loss adjustment expenses 1,110,020 1,014,000 Other liabilities 569,599 538,750 Long-term debt of subsidiaries 447,525 331,689 Net deferred tax liability 38,941 21,659 Trust and escrow deposits secured by pledged assets 377,540 364,787 ---------- ---------- Total liabilities 3,077,363 2,801,871 Commitments and contingent liabilities Common stockholders' equity (common shares authorized: 1996 and 1995 - 22,000,000; common shares issued and outstanding: 1996 - 7,241,502; 1995 - 7,237,559) 1,423,260 1,320,643 ---------- ---------- $4,500,623 $4,122,514 ========== ==========
See accompanying Notes to Consolidated Financial Statements. 22 18 Alleghany Corporation and Subsidiaries Consolidated Statements of Earnings
Years Ended December 31, (in thousands, except per share amounts) 1996 1995 1994 ---------- ---------- ---------- Revenues Title premiums, escrow and trust fees $1,317,719 $1,110,540 $1,306,708 Net property and casualty premiums earned 346,777 277,507 190,279 Interest, dividend and other income 193,747 183,516 158,950 Net mineral and filtration sales 198,179 177,185 162,427 Net gain on investment transactions 5,743 36,062 8,741 ---------- ---------- ---------- Total revenues 2,062,165 1,784,810 1,827,105 Costs and expenses Commissions and brokerage expenses 573,247 484,172 589,408 Salaries, administrative and other operating expenses 853,319 726,008 731,994 Provisions for title losses and other claims 83,719 87,076 98,185 Property and casualty loss and loss adjustment expenses 243,725 203,108 153,056 Cost of mineral and filtration sales 128,681 113,149 109,433 Interest expense 32,139 28,982 29,285 Corporate administration 20,253 21,239 22,750 ---------- ---------- ---------- Total costs and expenses 1,935,083 1,663,734 1,734,111 Earnings from continuing operations, before income taxes 127,082 121,076 92,994 Income taxes 40,034 35,776 24,622 ---------- ---------- ---------- Earnings from continuing operations 87,048 85,300 68,372 Discontinued operations Earnings from discontinued operations, net of tax -- -- 6,265 Gain on sale of Sacramento Savings, net of tax -- -- 62,869 Net earnings $ 87,048 $ 85,300 $ 137,506 ========== ========== ========== Earnings per share of common stock:* Continuing operations $ 12.06 $ 11.83 $ 9.61 Discontinued operations -- -- 0.88 Gain on sale of Sacramento Savings -- -- 8.84 ---------- ---------- ---------- Net earnings $ 12.06 $ 11.83 $ 19.33 ========== ========== ==========
*Adjusted to reflect subsequent common stock dividends. See accompanying Notes to Consolidated Financial Statements. 23 19 Alleghany Corporation and Subsidiaries Consolidated Statements of Changes in Common Stockholders' Equity
Three Years Ended December 31, 1996 (in thousands, except share amounts) Unrealized Appreciation Cumulative Total Common Contributed (Depreciation) Treasury Retained Translation Stockholders' Stock Capital of Securities Stock Earnings Gain (Loss) Equity ------ ----------- -------------- -------- -------- ----------- ------------ Balance at December 31, 1993 $6,768 $451,095 $31,246 $(14,763) $444,221 $(2,833) $915,734 (7,181,745 shares of common stock issued; 149,533 in treasury)* Add (deduct): Net earnings -- -- -- -- 137,506 -- 137,506 Common stock dividend -- 4,601 -- 13,834 (18,556) -- (121) Cumulative translation loss -- -- -- -- -- (4,849) (4,849) Change in unrealized appreciation of investments, net -- -- (19,540) -- -- -- (19,540) Other, net 212 886 -- (9,473) 838 -- (7,537) ------ -------- ------- --------- -------- -------- ---------- Balance at December 31, 1994 6,980 456,582 11,706 (10,402) 564,009 (7,682) 1,021,193 (7,262,288 shares of common stock issued; 76,993 in treasury)* Add (deduct): Net earnings -- -- -- -- 85,300 -- 85,300 Common stock dividend 100 16,400 -- 5,318 (21,939) -- (121) Cumulative translation loss -- -- -- -- -- (2,536) (2,536) Change in unrealized appreciation of investments, net -- -- 217,128 -- -- -- 217,128 Other, net 79 4,690 -- (5,090) -- -- (321) ------ -------- -------- --------- -------- -------- --------- Balance at December 31, 1995 7,159 477,672 228,834 (10,174) 627,370 (10,218) 1,320,643 (7,302,441 shares of common stock issued; 64,882 in treasury)* Add (deduct): Net earnings -- -- -- -- 87,048 -- 87,048 Common stock dividend 75 15,756 -- 11,792 (27,766) -- (143) Cumulative translation loss -- -- -- -- -- (1,357) (1,357) Change in unrealized appreciation of investments, net -- -- 28,003 -- -- -- 28,003 Other, net 69 1,508 -- (12,511) -- -- (10,934) ------ -------- -------- -------- -------- -------- --------- Balance at December 31, 1996 $7,303 $494,936 $256,837 $(10,893) $686,652 $(11,575) $1,423,260 ====== ======== ========== ======== ======== ======== ========== (7,303,065 shares of common stock issued; 61,563 in treasury)
*Adjusted to reflect subsequent common stock dividends. See accompanying Notes to Consolidated Financial Statements. 24 20 Alleghany Corporation and Subsidiaries Consolidated Statements of Cash Flows
Years Ended December 31, (in thousands) 1996 1995 1994 ---- ---- ---- Cash flows from operating activities Earnings from continuing operations $ 87,048 $ 85,300 $ 68,372 Adjustments to reconcile earnings from continuing operations to cash provided by (used in) continuing operations: Depreciation and amortization 51,582 44,148 44,778 Net gain on investment transactions (5,743) (36,062) (8,741) Other charges to continuing operations, net (345) 1,836 6,827 Decrease (increase) in funds held, accounts and other receivables 15,395 (89,839) (29,193) Decrease (increase) in reinsurance receivable 7,573 22,900 (68,780) Increase (decrease) in title losses and other claims 2,752 (6,087) 3,883 Increase in property and casualty loss and loss adjustment expenses 96,020 73,473 79,323 (Decrease) increase in other assets (28,401) 75,210 (11,428) Increase in other liabilities 30,849 1,011 5,527 Decrease (increase) in cash pledged to secure trust and escrow deposits 4,827 (62,448) 7,947 Increase (decrease) in trust and escrow deposits 12,753 46,942 (35,169) Net adjustments 187,262 71,084 (5,026) Cash provided by continuing operations 274,310 156,384 63,346 Cash provided by discontinued operations -- -- 5,502 Cash provided by operations 274,310 156,384 68,848 Cash flows from investing activities Purchase of investments (761,229) (718,751) (929,961) Maturities of investments 186,762 208,809 139,156 Sales of investments 244,072 468,683 634,385 Purchases of property and equipment (52,230) (41,469) (30,541) Proceeds from sale of Sacramento Savings, net of expenses -- -- 316,348 Purchase of real estate and real estate related assets -- -- (116,089) Purchase of mining operations and other acquisitions -- (82,043) -- Other, net 4,239 26,910 5,125 Net cash (used in) provided by investing activities $(378,386) $(137,861) $ 18,423
25 21 Alleghany Corporation and Subsidiaries Consolidated Statements of Cash Flows (CONTINUED)
Years Ended December 31, (in thousands) 1996 1995 1994 ---- ---- ---- Cash flows from financing activities Principal payments on long-term debt $(172,505) $(167,274) $(379,818) Proceeds of long-term debt 297,632 163,890 309,472 Other, net (16,272) (7,461) (10,202) Net cash provided by (used in) financing activities 108,855 (10,845) (80,548) Net increase in cash 4,779 7,678 6,723 Cash at beginning of year 55,175 47,497 40,774 Cash at end of year $59,954 $55,175 $47,497 Supplemental disclosures of cash flow information Cash paid during the year for: Interest $32,063 $26,943 $28,038 Income taxes $64,286 $19,161 $49,526
See accompanying Notes to Consolidated Financial Statements. 26 22 Alleghany Corporation and Subsidiaries Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Principles a. Principles of Financial Statement Presentation. Alleghany Corporation, a Delaware corporation ("Alleghany", or together with its subsidiaries, the "Company"), owns Chicago Title and Trust Company ("CT&T") whose principal subsidiaries are Chicago Title Insurance Company ("CTI"), Security Union Title Insurance Company ("Security Union"), Ticor Title Insurance Company ("Ticor Title"), and Alleghany Asset Management, Inc.; Alleghany Funding Corporation ("AFC"); World Minerals Inc. ("World Minerals"); Underwriters Re Group, Inc., formerly known as URC Holdings Corp. ("Underwriters Re Group"), whose principal subsidiaries are Underwriters Reinsurance Company ("Underwriters Reinsurance"), Commercial Underwriters Insurance Company ("CUIC") and Underwriters Insurance Company ("UIC"); and Alleghany Properties Inc. ("API"). Sacramento Savings Bank ("Sacramento Savings") was sold on October 31, 1994, and accordingly its operations are shown as discontinued operations for all periods presented. See Note 2. The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles and include the accounts of the Company. All significant intercompany items have been eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions include those associated with estimating title insurance loss reserves which involve interpretations of varying real estate laws and inherent uncertainties primarily due to the long-term nature of the business. Estimates and assumptions associated with property and casualty loss reserves include inherent uncertainties primarily due to the long-term nature of most reinsurance business, the diversity of development patterns among different lines of business and types of reinsurance, and the necessary reliance on the ceding company for information regarding claims. Actual results could differ from those estimates. b. Investments. Marketable investment securities at December 31, 1996 and 1995 consist of U.S. Treasury securities, obligations of U.S. government agencies, municipal obligations, mortgage-backed securities, corporate debt securities, certificates of deposit, and equity securities. The Company classifies its debt and marketable equity securities into one of three categories: trading, available for sale, or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held to maturity securities are those fixed maturity securities which the Company has the ability and intent to hold until maturity. Securities held for indefinite periods of time which may not be held to maturity are classified as available for sale. At December 31, 1996 and 1995, securities are classified as available for sale securities and recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available for sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. A decline in the fair value of an available for sale security below its cost that is deemed other than temporary is charged to earnings. Realized gains and losses on investments are determined on the specific identification method. c. Property and Equipment. Depreciation of buildings and equipment and amortization of leasehold improvements are principally calculated using the straight-line method over the estimated useful life of the respective assets or the life of the lease, whichever is less. d. Title Records and Indexes. Title records and indexes are recorded at cost. The cost is not being amortized and, in management's opinion, has not materially diminished in value. Costs of maintaining title records and indexes are expensed in the year incurred. e. Title Losses and Other Claims. Liabilities for title losses and other claims are estimated based on the title insurance subsidiaries' experience. These amounts include both case-basis evaluations and formula calculations and represent the estimated net cost of all unpaid losses. In management's opinion, reserves for title losses and other claims are adequate. f. Property and Casualty Losses and Loss Adjustment Expenses. The liability for outstanding losses and loss adjustment expenses includes estimated provisions for all reported and unreported claims incurred and is reduced by allowances for salvage and subrogation. In management's opinion, reserves for property and casualty losses and loss adjustment expenses are adequate. g. Revenue Recognition. Title insurance premiums are recognized as revenues principally at the time of the real estate closing. Escrow and trust fees are recognized principally when billed. Property and casualty reinsurance premiums are reflected in income generally on a daily pro rata basis for facultative business and as reported by the ceding company for treaty business. 27 23 Notes to Consolidated Financial Statements (continued) h. Derivative Financial Instruments. The Company has only limited involvement with derivative financial instruments and does not use them for trading purposes. The Company enters into interest rate swaps for purposes of converting variable interest rate exposure to a fixed rate and to match interest expense with interest income. Interest rate swaps are accounted for as a hedge of the obligation. Interest expense is recorded using the revised interest rate. i. Income Taxes. The Company files a consolidated federal income tax return with its domestic subsidiaries. The Company follows the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequence attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. j. Funds Held, Accounts and Other Receivables. Funds held, accounts, and other receivables consists of funds held under reinsurance contracts and accounts and other receivables, net of allowances. k. Acquisition Costs. Acquisition costs related to unearned property and casualty premiums are deferred by major underwriting lines and amortized over the period in which the premiums are earned. The method followed in computing the deferred acquisition costs consists of deferring only those variable acquisition costs, such as commissions and brokerage fees, which relate directly to the production of business, and limiting the amount of those costs deferred to their net realizable value after allowing for anticipated investment income. l. Reinsurance. Underwriters Re Group follows the provisions of Statement of Financial Accounting Standards No. 113, "Accounting and Reporting for Reinsurance for Short-Duration and Long-Duration Contracts." Reinsurance receivables (including amounts related to claims incurred but not reported) and prepaid reinsurance premiums are reported as assets. Reinsurance contracts that do not result in a reasonable possibility that the reinsurer may realize a significant loss from the insurance risk assumed and that do not provide for the transfer of significant insurance risk generally do not meet the conditions for reinsurance accounting and are accounted for as deposits. m. Cash. For purposes of the consolidated statements of cash flows, cash includes only funds on deposit which are available for immediate withdrawal. n. Net Earnings Per Share of Common Stock. Net earnings per share of common stock are based on the average number of shares of Alleghany common stock outstanding during the years ended December 31, 1996, 1995, and 1994, respectively, as adjusted for stock dividends. The average number of shares of common stock outstanding, as adjusted for stock dividends, was 7,216,259 in 1996, 7,210,610 in 1995, and 7,110,875 in 1994. o. Impairment of Long-Lived Assets. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Statement No. 121 provides guidance for recognition and measurement of impairment of long-lived assets, certain identifiable intangibles and goodwill related both to assets to be held and used and assets to be disposed of. The adoption of Statement No. 121 did not have a material impact on the Company's financial position or results of operations. p. Stock Option Plans. Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation." Statement No. 123 establishes accounting and reporting standards for stock-based employee compensation plans. This statement allows companies to choose between the "fair value based method of accounting" as defined in this statement and the "intrinsic value based method of accounting" as prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has elected to continue to follow the accounting guidance provided by APB 25 as permitted in its 1996 consolidated financial statements. The pro forma effect of Statement No. 123 was immaterial to the Company's net earnings and earnings per share. Therefore, the pro forma disclosure provisions of Statement No. 123 are not presented. q. Reclassification. Certain prior year amounts have been reclassified to conform to the 1996 presentation. 28 24 Alleghany Corporation and Subsidiaries 2. Sale of Sacramento Savings On October 31, 1994, Alleghany sold its wholly owned retail banking subsidiary, Sacramento Savings, and an ancillary company to First Interstate Bank of California for a cash purchase price of approximately $331 million. The operations of Sacramento Savings and the ancillary company are presented as discontinued operations in the accompanying consolidated financial statements. Condensed information relating to discontinued operations is as follows (in thousands):
1994 Revenues $150,277 Pre-tax earnings from discontinued operations $ 11,305 Income taxes 5,040 Earnings from discontinued operations, net of tax 6,265 Gain on sale of Sacramento Savings, net of tax of $31,946 62,869 - - ------------------------------------------------------------------------ Earnings from discontinued operations $ 69,134 - - ------------------------------------------------------------------------
3. Investments Available for sale securities at December 31, 1996 and 1995 are summarized as follows (in thousands):
- - ---------------------------------------------------------------------------------------------------------- 1996 - - ---------------------------------------------------------------------------------------------------------- Amortized Gross Gross Cost Unrealized Unrealized Fair Consolidated or Cost Gains Losses Value - - ---------------------------------------------------------------------------------------------------------- Fixed maturities: U.S. Government, government agency and municipal obligations $1,235,632 $ 14,490 $ (6,974) $1,243,148 Certificates of deposit 11,363 -- -- 11,363 Commercial paper 148,666 -- -- 148,666 Bonds, notes and other 594,875 5,735 (4,538) 596,072 - - ---------------------------------------------------------------------------------------------------------- 1,990,536 20,225 (11,512) 1,999,249 Equity securities 328,444 394,808 (8,384) 714,868 - - ---------------------------------------------------------------------------------------------------------- $2,318,980 $ 415,033 $ (19,896) $2,714,117 - - ---------------------------------------------------------------------------------------------------------- Industry Segment - - ---------------------------------------------------------------------------------------------------------- Title, trust and escrow $ 857,876 $ 18,304 $ (9,597) $ 866,583 Property and casualty reinsurance 1,231,801 149,969 (8,995) 1,372,775 Mining and filtration 2,278 -- -- 2,278 Corporate activities 227,025 246,760 (1,304) 472,481 - - ---------------------------------------------------------------------------------------------------------- $2,318,980 $ 415,033 $ (19,896) $2,714,117 - - ----------------------------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------------------------- 1995 - - ----------------------------------------------------------------------------------------------------------- Amortized Gross Gross Cost Unrealized Unrealized Fair Consolidated or Cost Gains Losses Value - - ----------------------------------------------------------------------------------------------------------- Fixed maturities: U.S. Government, government agency and municipal obligations $1,019,799 $ 20,865 $ (3,352) $1,037,312 Certificates of deposit 20,587 -- -- 20,587 Commercial paper 70,315 -- -- 70,315 Bonds, notes and other 566,775 6,690 (1,897) 571,568 - - ---------------------------------------------------------------------------------------------------------- 1,677,476 27,555 (5,249) 1,699,782 Equity securities 308,210 331,825 (2,079) 637,956 - - ---------------------------------------------------------------------------------------------------------- $1,985,686 $ 359,380 $ (7,328) $2,337,738 - - ---------------------------------------------------------------------------------------------------------- Industry Segment - - ---------------------------------------------------------------------------------------------------------- Title, trust and escrow $ 809,426 $ 26,017 $ (3,102) $ 832,341 Property and casualty reinsurance 937,453 129,899 (3,716) 1,063,636 Mining and filtration 6,961 -- -- 6,961 Corporate activities 231,846 203,464 (510) 434,800 - - ---------------------------------------------------------------------------------------------------------- $1,985,686 $ 359,380 $ (7,328) $2,337,738 - - ----------------------------------------------------------------------------------------------------------
The amortized cost and estimated fair value of fixed maturities at December 31, 1996, by contractual maturity, are shown below (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.
- - ----------------------------------------------------------------------------------- Amortized Fair Cost Value - - ----------------------------------------------------------------------------------- Fixed maturities: Due in one year or less $ 450,831 $ 451,299 Due after one year through five years 566,575 570,326 Due after five years through ten years 291,037 290,680 Due after ten years 199,843 201,563 Mortgage-backed securities 482,250 485,381 - - ----------------------------------------------------------------------------------- $1,990,536 $1,999,249 - - -----------------------------------------------------------------------------------
The proceeds from sales of available for sale securities were $244 million, $469 million, and $634 million, which included the proceeds from sales of fixed maturities of $231 million, $382 million, and $476 million in 1996, 1995, and 1994, respectively. Gross realized gains and gross realized losses of available for sale securities were $5.9 million and $0.2 million, $42.6 million and $6.6 million, $24.3 million and $15.6 million, respectively, in 1996, 1995, and 1994. These amounts include gross realized gains and gross realized losses on sales of fixed maturities of $1.5 million and $0.2 million, $1.7 million and $6.3 million, $0.9 million and $10.7 million, respectively, in 1996, 1995, and 1994. 29 25 Notes to Consolidated Financial Statements (CONTINUED) During 1995 and 1994, Alleghany had fixed maturity and equity investments that were trading below cost. The Company determined that these declines were other than temporary and, accordingly, recorded a loss provision of approximately $2.3 million, and $3.1 million, respectively, for these investments. The Company owned 7,431,414 shares of Burlington Northern Santa Fe Corporation at December 31, 1996, with a cost basis of $254 million and a fair value of $642 million. At December 31, 1996 and 1995, investments, carried at fair value, totalling approximately $386 million and $377 million, respectively, were pledged principally to secure unearned title insurance premium liabilities computed under statutory insurance regulations, as required by law. At December 31, 1996 and 1995, investments, carried at fair value, totalling approximately $30 million and $25 million, respectively, were on deposit with various states or governmental departments to comply with property and casualty insurance laws. Assets pledged to secure trust and escrow deposits at December 31, 1996 and 1995, carried at fair value, were as follows (in thousands):
1996 1995 - - ------------------------------------------------------------------------- Cash $118,066 $122,893 U.S. Government and municipal obligations 243,959 218,116 Certificates of deposit 7,082 16,405 Commercial paper 23,000 30,000 Equity securities 10,140 10,209 Other 230 224 $402,477 $397,847
Additionally, Alleghany's title insurance subsidiaries administer escrow deposits generally related to customers' real estate transactions. These funds are not considered assets and liabilities of the Company and, accordingly, amounts aggregating approximately $1.3 billion and $1.2 billion are excluded from the accompanying consolidated balance sheets at December 31, 1996 and 1995, respectively. 4. Reinsurance In the ordinary course of business, Underwriters Reinsurance assumes and cedes reinsurance for purposes of risk diversification and limiting maximum loss exposure to catastrophic events. If such assuming reinsurers are unable to meet the obligations assumed under these agreements, Underwriters Reinsurance would remain liable. Reinsurance receivable at December 31, 1996 and 1995 consists of the following (in thousands):
1996 1995 Reinsurance recoverable on paid losses $ 14,646 $ 14,203 Ceded outstanding losses and loss adjustment expenses $377,564 $385,580
For the years ended December 31, 1996, 1995 and 1994, Underwriters Reinsurance ceded losses and loss adjustment expenses of $86.5 million, $49.5 million and $51.4 million, respectively. The following table indicates property and casualty premiums written and earned for the years ended December 31, 1996, 1995, and 1994 (in thousands):
Written Earned 1996 Premiums direct $105,053 $ 85,437 Premiums assumed $328,604 $327,308 Premiums ceded $ 73,352 $ 65,968 1995 Premiums direct $ 54,038 $ 42,413 Premiums assumed $330,435 $320,328 Premiums ceded $ 92,478 $ 85,234 1994 Premiums direct $ 10,257 $ 8,821 Premiums assumed $254,832 $250,757 Premiums ceded $ 64,493 $ 69,299
The reinsurance receivable balance as of December 31, 1996 and 1995 includes $111 million and $149 million, respectively, from Continental Reinsurance under reinsurance contracts entered into prior to 1993. As of December 31, 1996 and 1995, loss reserves ceded are secured by deposits in a trust fund totalling $57.4 million and $179.2 million, respectively, and letters of credit totalling $104.3 million and $133.3 million, respectively. 5. Liability for Unpaid Claims and Claim Adjustment Expenses Activity in the liability for unpaid claims and claim adjustment expenses is summarized as follows (in thousands):
1996 1995 1994 Title Losses Balance at January 1 $529,915 $536,068 $532,123 Less reinsurance recoverables -- -- -- Net balance at January 1 529,915 536,068 532,123 Incurred related to: Current year 83,023 81,385 94,845 Prior years -- -- -- Total incurred 83,023 81,385 94,845 Paid related to: Current year 3,071 2,829 3,105 Prior years 76,944 84,709 87,795 Total paid 80,015 87,538 90,900 Net balance at December 31 532,923 529,915 536,068 Plus reinsurance recoverables -- -- -- Balance at December 31 $532,923 $529,915 $536,068
30 26 Alleghany Corporation and Subsidiaries The above reserves for title losses excludes trust and escrow reserves of $0.8 million, $1.1 million, and $1.0 million, in 1996, 1995, and 1994, respectively.
1996 1995 1994 Property and Casualty Losses and Loss Adjustment Expenses Balance at January 1 $1,014,000 $ 940,527 $861,204 Less reinsurance recoverables 385,580 404,210 351,829 Net balance at January 1 628,420 536,317 509,375 Incurred related to: Current year 242,332 199,783 146,426 Prior years 1,393 3,325 6,630 Total incurred 243,725 203,108 153,056 Paid related to: Current year 23,341 9,239 13,826 Prior years 116,348 101,766 112,288 Total paid 139,689 111,005 126,114 Net balance at December 31 732,456 628,420 536,317 Plus reinsurance recoverables 377,564 385,580 404,210 Balance at December 31 $1,110,020 $1,014,000 $940,527
Underwriters Reinsurance's reserve for unpaid losses and loss adjustment expenses includes $87.6 million, $96.9 million and $112.6 million gross reserves and $67.5 million, $66.5 million, and $62.1 million net reserves at December 31, 1996, 1995 and 1994, respectively, for various liability coverages related to asbestos and environmental impairment claims that arose from general liability and certain commercial multiple-peril coverages. Restrictive asbestos and environmental impairment exclusions were introduced in late 1986 on both insurance 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 periods of time that often elapse between the occurrence of an insured 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 and, therefore, management believes it is not possible at this time to determine the ultimate losses in this area or develop a meaningful range of such losses. For both asbestos and environmental excess of loss reinsurance claims, Underwriters Reinsurance establishes case reserves by applying reinsurance contract terms to losses reported by ceding companies, analyzing from the first dollar of loss incurred by the primary insurer. In establishing the liability for claims for asbestos related liability and for environmental impairment claims, management considers facts currently known and the current state of the law and coverage litigation. Additionally, ceding companies often report potential losses on a precautionary basis to protect their rights under the reinsurance arrangement, which generally calls for prompt notice to the reinsurer. Ceding companies, at the time they report such potential losses, advise Underwriters Reinsurance of the ceding companies' current estimate of the extent of such loss. Underwriters Reinsurance's claims department reviews each of the precautionary claims notices and, based upon current information, assesses the likelihood of loss to Underwriters Reinsurance. Such assessment is one of the factors used in determining the adequacy of the recorded asbestos and environmental reserves. 6. Long-Term Debt Long-term debt at December 31, 1996 and 1995 is summarized as follows (in thousands):
1996 1995 API Senior notes at 8.6%, due through 2000 $ 40,000 $ 50,000 AFC Notes payable at 6.4% to 6.5% due 1999 80,000 80,000 CT&T Bank borrowings at 6.0% to 8.7%, due through 2000 39,500 50,000 Other loans payable at 6.0% to 9.3%, due through 2005 3,782 4,970 Capital lease obligations -- 73 Underwriters Re Group Senior notes at 7.9%, due 2006 197,116 -- Notes payable at 4.5% to 7.5% -- 50,000 World Minerals Notes payable at 6.0% to 7.0%, due through 1999 86,000 88,000 Harborlite redeemable preferred stock -- 7,825 Other loans at 6.8% to 11.2%, due 1997 618 102 Capital lease obligations 509 719 $447,525 $331,689
Under the terms of a revolving credit loan agreement dated June 14, 1995 with a bank, Alleghany may borrow up to $200 million until July 2000. At Alleghany's option, borrowings bear interest at a rate based on the purchase of negotiable certificates of deposit, prevailing rates for dollar deposits in the London interbank market or the greatest of the Federal funds rate, the bank's prime rate or a specified certificate of deposit rate. No amounts were outstanding under this agreement at December 31, 1996 or 1995. A commitment fee of 1/4 of 1% per annum of the unused commitment is charged. The revolving credit agreement, among other things, requires Alleghany to maintain tangible net worth not less than $750 million, limits the amount of certain other indebtedness and contains restrictions with respect to mortgaging or pledging any of Alleghany's assets and consolidation or merger with any other corporation. 31 27 Notes to Consolidated Financial Statements (CONTINUED) In February 1995, API issued $50 million of senior notes. Proceeds were used to repay short-term borrowings and to make a dividend to Alleghany. The senior notes are being repaid in five equal annual installments which began in 1996. AFC notes are primarily secured by a $91.5 million installment note receivable. AFC has entered into a related interest rate swap agreement with a notional amount of $88 million for the purpose of matching interest expense with interest income. This swap is pay variable, receive variable. Alleghany pays a variable rate equal to the one month commercial paper rate plus 0.125% and receives a variable rate equal to the three month LIBOR rate plus 0.85%. The swap matures on January 20, 1999. AFC is exposed to credit risk in the unlikely event of nonperformance by the swap counter party. On March 28, 1991, CT&T borrowed $42 million, without recourse to Alleghany. On May 2, 1991, CT&T entered into a swap agreement with a notional amount of $42 million for the purpose of converting variable interest rate exposure to a fixed rate. The notional amount was reset on December 31, 1996 at $10.5 million. This swap is pay fixed, receive variable. The fixed rate is 8.73% and the variable rate is equal to the three month LIBOR rate. The swap matures on December 31, 1997. CT&T is exposed to credit risk in the unlikely event of nonperformance by the swap counter party. On June 25, 1996, Underwriters Re Group issued, without recourse to Alleghany, $200 million principal amount of 7.875% Senior Notes due 2006. Of the net proceeds of the offering, $120 million was contributed to the capital of Underwriters Reinsurance, $50 million was used to repay indebtedness under Underwriters Re Group's credit agreement and the remainder is being used for general corporate purposes. On December 20, 1991, World Minerals entered into a bank loan agreement, providing for borrowings of up to $70 million, pursuant to which it borrowed $50 million, without recourse to Alleghany. On March 10, 1995, the bank loan agreement was renegotiated to provide borrowing up to $117 million. During 1995, World Minerals borrowed an additional $31 million to fund a number of small acquisitions and joint ventures. In January 1992, World Minerals entered into two interest rate swap agreements each with a notional amount of $30 million. These swaps mature on January 15, 1997 and January 15, 1999. These swaps were entered into for the purpose of converting variable interest rate exposure to a fixed rate. One such swap was entered into as a condition of a related variable rate loan agreement which required that hedging or interest rate protection agreements be maintained with respect to not less than 50% of the variable rate borrowing commitment. World Minerals is exposed to credit risk in the unlikely event of nonperformance by the swap counter party. In June and August 1996, World Minerals repurchased from the minority interest shareholders in its subsidiary, Harborlite, all of the redeemable preferred stock for a total of $7.8 million. Regarding the Company's interest rate swaps, there were no deferred gains or losses related to terminated interest rate swap contracts as of the end of each of the last three fiscal years. The impact of Alleghany's hedging activities has been to increase its weighted average borrowing rates by 0.25%, 0.48% and 0.86% and to increase reported interest expense by $1.0 million, $1.6 million, and $3.2 million for the years ended 1996, 1995, and 1994, respectively. Scheduled aggregate annual maturities of long-term debt for each of the next five years and thereafter are as follows (in thousands): 1997 $ 32,242 1998 34,810 1999 162,257 2000 20,108 2001 448 Thereafter 197,660 $447,525
7. Income Taxes Income tax expense (benefit) from continuing operations consists of the following (in thousands):
Federal State Foreign Total 1996 Current $28,363 $ 2,761 $ 6,415 $37,539 Deferred 2,854 (286) (73) 2,495 $31,217 $ 2,475 $ 6,342 $40,034 1995 Current $27,380 $ 2,636 $ 4,938 $34,954 Deferred 43 600 179 822 $27,423 $ 3,236 $ 5,117 $35,776 1994 Current $11,719 $ 837 $ 3,665 $16,221 Deferred 7,846 572 (17) 8,401 $19,565 $ 1,409 $ 3,648 $24,622
Pre-tax earnings from continuing operations includes $15.7 million, $16.1 million, and $11.5 million from foreign operations in 1996, 1995, and 1994, respectively. The difference between the federal income tax rate and the effective income tax rate on continuing operations is as follows:
1996 1995 1994 Federal income tax rate 35.0% 35.0% 35.0% Goodwill amortization 1.9 1.6 2.0 Income subject to dividends-received deduction (2.2) (0.9) (1.6) State taxes, net of federal tax benefit 1.5 0.7 0.9 Tax-exempt interest income (5.6) (6.3) (8.8) Other, net 0.6 (0.6) (1.0) 31.2% 29.5% 26.5%
32 28 Alleghany Corporation and Subsidiaries The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are as follows (in thousands):
1996 1995 Deferred tax assets Title losses, trust, and other claim reserves $169,185 $167,472 Property and casualty loss reserves 58,951 55,150 Net operating loss and alternative minimum tax carryforwards 6,393 7,566 Reserves for impaired assets 19,515 23,522 Expenses deducted for tax purposes when paid 36,084 34,502 Other 7,734 7,966 297,862 296,178 Valuation allowance 4,211 3,840 Total deferred tax assets 293,651 292,338 Deferred tax liabilities
Unearned premium reserves (81,906) (81,398) Deferred revenues and gains (175,227) (160,398) Title plant (29,085) (29,085) Tax over book depreciation (24,510) (23,155) Other (21,864) (19,961) Total deferred tax liabilities (332,592) (313,997) Net deferred tax liability $ (38,941) $ (21,659)
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. At December 31, 1996 and 1995, the Company has established a valuation allowance of $4.2 million and $3.8 million, respectively, for certain deferred state tax assets which it believes may not be realized. The amount of operating loss and tax credit carryforwards available to offset future federal taxable income is approximately $18.3 million, expiring through 2005. The Company utilized approximately $3.4 million and $1.8 million, respectively, of operating loss and tax credit carryforwards during 1996 and 1995. The Internal Revenue Service has examined Alleghany's federal income tax returns for 1991 and 1992 and has asserted federal income tax deficiencies. Management is contesting such proposed deficiencies and believes that any such proposed deficiencies will be resolved for amounts, net of existing reserves, that are not material to the Company's financial position or results of operations. 8. Stockholders' Equity The total number of shares of all classes of capital stock which Alleghany has authority to issue is 30,000,000, of which 8,000,000 shares are preferred stock, par value of $1.00, and 22,000,000 shares are common stock, par value of $1.00. Stockholder's equity and surplus of CT&T, CTI, Security Union and Ticor Title are restricted by borrowing agreements and statutory limitations as to payment of dividends. At December 31, 1996 approximately $160.6 million was available from CT&T for dividends to Alleghany. CT&T's availability of funds for dividends, however, may be further restricted by limitations imposed by statutes to which its subsidiaries are subject. CT&T's combined statutory surplus at December 31, 1996 and 1995 was $181 million and $160 million, respectively, and statutory net income for the years ended December 31, 1996, 1995, and 1994 was $49 million, $45 million, and $51 million, respectively. Stockholders' equity and surplus of Underwriters Re Group is not restricted as relates to payment of dividends. However, Underwriters Re Group's availability of funds for dividends is restricted by limitations imposed by statutes to which its subsidiaries are subject. Underwriters Reinsurance statutory surplus at December 31, 1996 and 1995 was $614 million and $458 million, respectively, and statutory net income for the years ended December 31, 1996 and 1995 was $29 million and $23 million, respectively. Stockholders' equity of World Minerals is restricted by a borrowing agreement as to payment of dividends. At December 31, 1996, substantially all of World Minerals Stockholders' equity was restricted as to dividend payment to Alleghany. Additionally, payments of dividends (other than stock dividends) by Alleghany to its stockholders are limited by the terms of its revolving credit loan agreement which provides that Alleghany can pay dividends up to the sum of cumulative net earnings after 1994, proceeds from the issuance of stock after 1994 and $50 million, provided that Alleghany maintains certain financial ratios as defined in the agreement. At December 31, 1996 approximately $226 million of capital was available for dividends. Alleghany provides, through its 1993 Long-Term Incentive Plan, for incentive compensation of the types commonly known as restricted stock, stock options, stock appreciation rights, performance shares, performance units, and phantom stock, as well as other types of incentive compensation. Awards may include, but are not limited to, cash and/or shares of Alleghany's common stock, rights to receive cash and/or shares of common stock and options to purchase shares of common stock including options intended to qualify as incentive stock options under the Internal Revenue Code and options not intended to qualify. The number of performance shares awarded under the incentive plan to employees of the Company were 37,814 in 1996, 31,617 in 1995, and 44,066 in 1994 (as adjusted for stock dividends). Under the incentive plan, participants are entitled, at the end of a four-year award period, to the fair value of the number of shares of Alleghany's common stock (adjusted for anti-dilution from date of award), equal to the number of performance shares issued to them based on market value on the payment date and normally payable half in cash and half in stock, provided defined levels of performance are achieved. As of December 31, 1996 (for all award periods through the award period 1996), approximately 118,000 performance shares were outstanding. The amounts charged to the Company's earnings with respect to the plan was $6.9 million in 1996, $6.2 million in 1995, and $4.5 million in 1994. 33 29 Notes to Consolidated Financial Statements (CONTINUED) Alleghany also provides, through its Directors' Stock Option Plan, for the automatic grant of non-qualified stock options to purchase 1,000 shares of common stock in each year after 1987 to each non-employee director. Options to purchase 7,000 shares at the then fair market value of $194.69 were granted in 1996. Options to purchase 7,000 shares at the then fair market value of $155.25 were granted in 1995. At December 31, 1996, 49,000 options were outstanding, of which 35,000 options were fully vested at an average option price of $102. The Board of Directors has authorized the purchase from time to time of additional shares of common stock for the treasury. During 1996, 1995, and 1994, Alleghany repurchased 92,700 shares, 44,523 shares, and 69,509 shares of its common stock at a cost of $17.9 million, $7.6 million, and $10.1 million, respectively. 9. Employee Benefit Plans The Company has several noncontributory defined benefit pension plans covering substantially all of its employees. The defined benefits are based on years of service and the employee's average compensation generally during the last five years of employment. The Company's funding policy is to contribute annually the amount necessary to satisfy the Internal Revenue Service's funding standards. 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. CT&T is a qualified trust company and, as such, serves as trustee for the assets of certain of the pension plans. The following tables set forth the defined benefit plans' funded status at December 31, 1996 and 1995 (in millions, except percentages):
1996 1995 Actuarial present value of benefit obligations Vested benefit obligation $ 122.2 $ 126.7 Accumulated benefit obligation $ 134.6 $ 134.2 Projected benefit obligation $ 151.8 $ 155.9 Plan assets at fair value 128.9 130.9 Projected benefit obligation, more than plan assets (22.9) (25.0) Unrecognized net loss 37.3 42.4 Unrecognized prior service cost 7.6 5.4 Unrecognized net asset (2.8) (4.1) Pension asset recognized in the balance sheet $ 19.2 $ 18.7
1996 1995 1994 Net pension cost included the following expense (income) components Service cost-benefits earned during the year $ 6.6 $ 5.6 $ 7.9 Interest cost on projected benefit obligation 11.6 11.2 10.9 Actual return on plan assets (13.9) (18.0) 1.9 Net amortization and deferral 5.6 7.4 (8.9) Net periodic pension cost included in costs and expenses $ 9.9 $ 6.2 $ 11.8
1996 1995 Assumptions used in computing the funded status of the plans are as follows Range of rates for increases in compensation levels 4.5%-5.5% 4.5%-5.0% Range of weighted average discount rates 7.0%-8.0% 6.5%-7.8% Range of expected long-term rates of return 4.0%-9.0% 4.0%-9.0%
The Company provides supplemental retirement benefits through deferred compensation programs and profit sharing plans for certain of its officers and employees for which earnings were charged $19.6 million in 1996, $8.2 million in 1995, and $12.5 million in 1994. The Company also provides certain healthcare and life insurance benefits for retired employees. The cost of these benefits is accrued during the period that employees render service. The accrued postretirement benefit obligation was $33.4 million at December 31, 1996 and 1995. The postretirement healthcare and life insurance costs recognized were $1.9 million, $3.2 million and $3.1 million for 1996, 1995 and 1994, respectively. 10. Commitments and Contingencies The Company leases certain facilities, furniture and equipment under long-term lease agreements. In addition, certain land, office space and equipment are leased under noncancelable operating leases which expire at various dates through 2012. Rent expense was $66.4 million, $69.1 million, and $66.5 million in 1996, 1995, and 1994, respectively. The aggregate minimum payments under operating leases with initial or remaining terms of more than one year are $41.6 million, $39.7 million, $32.6 million, $26.3 million, $83.8 million, and $69.9 million in 1997, 1998, 1999, 2000, 2001, and thereafter, respectively. 34 30 Alleghany Corporation and Subsidiaries The Company'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 provisions for estimated losses to be incurred in such litigation and claims, including legal costs. In the opinion of management, based in part on advice of counsel, such provisions are adequate. 11. Fair Value of Financial Instruments The estimated fair values of the Company's financial instruments are as follows (in thousands):
1996 1995 Calculated Calculated Carrying Fair Carrying Fair Amount Value Amount Value Assets Investments $2,714,117 $2,714,117 $2,337,738 $2,337,738 Notes receivable $ 91,536 $ 91,536 $ 91,536 $ 91,536 Liabilities
Long-term debt $ 447,525 $ 448,489 $ 331,689 $ 334,317
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value: Investments: The fair value of fixed maturities and equity securities are based upon quoted market prices. The fair value of short term investments approximates amortized cost. Notes receivable: The carrying amount approximates fair value because interest rates approximate market rates. Long-term debt: The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. The fair value includes the effects of the interest rate swaps. 12. Segments of Business Information concerning the Company's continuing operations by industry segment as of and for the years ended December 31, 1996, 1995, and 1994, respectively, is summarized as follows (in thousands):
1996 1995 1994 Revenues Title, trust and escrow $1,380,963 $1,172,627 $1,352,646 Property and casualty reinsurance 410,867 322,204 225,390 Mining and filtration 198,518 178,686 162,636 Corporate activities 71,817 111,293 86,433 Total $2,062,165 $1,784,810 $1,827,105 Earnings from continuing operations, before income taxes Title, trust and escrow $ 84,984 $ 52,660 $ 72,510 Property and casualty reinsurance 46,755 28,998 12,504 Mining and filtration 24,559 31,407 23,539 Corporate activities 23,176 58,232 36,476 179,474 171,297 145,029 Interest expense 32,139 28,982 29,285 Corporate administration 20,253 21,239 22,750 Total $ 127,082 $ 121,076 $ 92,994 Identifiable assets at December 31 Title, trust and escrow $1,447,777 $1,402,217 $1,407,840 Property and casualty reinsurance 2,053,101 1,750,008 1,510,335 Mining and filtration 310,444 315,074 215,204 Corporate activities 689,301 655,215 454,512 Total $4,500,623 $4,122,514 $3,587,891 Capital expenditures Title, trust and escrow $ 34,243 $ 17,045 $ 19,427 Property and casualty reinsurance 1,270 1,292 1,396 Mining and filtration 16,379 22,749 9,501 Corporate activities 338 383 217 Total $ 52,230 $ 41,469 $ 30,541 Depreciation and amortization Title, trust and escrow $ 28,476 $ 24,825 $ 25,540 Property and casualty reinsurance 6,018 7,180 8,916 Mining and filtration 16,307 11,590 9,657 Corporate activities 781 553 665 Total $ 51,582 $ 44,148 $ 44,778
35 31 Notes to Consolidated Financial Statements (CONTINUED) Alleghany Corporation and Subsidiaries 13. Quarterly Results of Operations (unaudited) Selected quarterly financial data for 1996 and 1995 are presented below (in thousands, except per share amounts):
Quarter Ended Mar. 31 Jun. 30 Sep. 30 Dec. 31 1996 Revenues from continuing operations $468,093 $525,043 $538,728 $530,301 Net earnings $ 16,811 $ 22,798 $ 19,904 $ 27,535 Net earnings per share of common stock* $ 2.33 $ 3.17 $ 2.76 $ 3.80 1995 Revenues from continuing operations $397,052 $415,176 $447,890 $524,692 Net earnings $ 793 $ 17,189 $ 23,417 $ 43,901 Net earnings per share of common stock: * $ 0.11 $ 2.39 $ 3.25 $ 6.06
* Adjusted to reflect subsequent stock dividends. Earnings per share by quarter may not equal the amount for the year due to the timing of share transactions and rounding. 14. Other Information a. Other assets shown in the consolidated balance sheets at December 31, 1996 and 1995 include goodwill, net of accumulated amortization, are as follows (in thousands):
Amortization 1996 1995 Period CT&T $ 71,093 $ 72,832 5-40 years Underwriters Re Group 46,344 49,113 20 years World Minerals 28,991 28,139 40 years $146,428 $150,084
Goodwill is reviewed for impairment whenever events or circumstances provide evidence that suggests that the carrying amount of the asset may not be recoverable. In addition, other assets shown at December 31, 1996 and 1995 includes $20.8 million and $17.0 million, respectively, of deferred acquisition costs. Amortization of deferred acquisition costs included in the 1996, 1995, and 1994 statement of earnings were $88.9 million, $63.6 million, and $38.9 million, respectively. b. Other liabilities shown in the consolidated balance sheets include the following amounts at December 31, 1996 and 1995 (in millions):
1996 1995 Accounts payable $ 80.5 $ 76.6 Unearned premiums $ 95.5 $ 74.6 Reinsurance payable $ 24.0 $ 23.4 Funds held for reinsurers $ 87.1 $ 95.9
c. Property and equipment, net of accumulated depreciation and amortization at December 31, 1996 and 1995, are as follows (in thousands):
Depreciation 1996 1995 Period Land $ 25,685 $ 26,608 -- Buildings and improvements 84,979 90,162 30-40 years Furniture and equipment 220,620 194,598 3-20 years Ore reserves 31,714 25,696 30 years Leasehold improvements 25,828 24,407 Various 388,826 361,471 Less: Accumulated depreciation and amortization (101,649) (89,182) $ 287,177 $ 272,289
36 32 Independent Auditors' Report Alleghany Corporation and Subsidiaries KPMG LOGO Certified Public Accountants 345 Park Avenue New York, NY 10154 The Board of Directors and Stockholders Alleghany Corporation: We have audited the accompanying consolidated balance sheets of Alleghany Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, changes in common stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements, appearing on pages 22 through 36, are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Alleghany Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP February 19, 1997 Member Firm of Klynveld Peat Marwick Goerdeler 33 APPENDIX
Page Narrative Description of Graphic or Image Material 1 A logo of Alleghany Corporation appears in the paper format version. 1 A table of stockholders' equity per share for the years 1987-96 appears in the electronic format version, replacing a bar graph that appears in the paper format version. 2 A table of year-end closing stock prices for the years 1987-96 appears in the electronic format version, replacing a bar graph that appears in the paper format version. 3 A photograph of John J. Burns, Jr., President and F.M. Kirby, Chairman, appears in the paper format version. 8 Logos of Chicago Title and Trust Company, The Chicago Trust Company, Ticor Title Insurance Company, Market Intelligence, Inc., Montag & Caldwell, Inc., Credit Data Reporting Services, Inc., National Flood Information Services, Inc. and Security Union Title Insurance Company appear in the paper format version. 9 A table of CT&T's revenues and a table of CT&T's pre-tax earnings, each for the years 1992-1996 appear in the electronic format version, replacing bar graphs that appear in the paper format version. 10 A table of CT&T's stockholder's equity and a table of CT&T's claims reserves, each for the years 1992-1996 appear in the electronic format version, replacing bar graphs that appear in the paper format version. 11 A table of Alleghany Asset Management's assets under management for the years 1992-1996 appears in the electronic format version, replacing a bar graph that appears in the paper format version. 12 A logo of Underwriters Re appears in the paper format version.
34
Page Narrative Description of Graphic or Image Material - - ---- -------------------------------------------------- 12 A table of Underwriters Re Group's pre-tax earnings for the years 1993-96 appears in the electronic format version, replacing a bar graph that appears in the paper format version. 13 A table of Underwriters Re Group's revenues for the years 1993-96 appears in the electronic format version, replacing a bar graph that appears in the paper format version. 14 A table of Underwriters Reinsurance's policy holder surplus for the years 1993-96 appears in the electronic format version, replacing a bar graph that appears in the paper format version. 15 Logos of World Minerals Inc., Harborlite Corporation and Celite Corporation and a globe illustrating locations in which World Minerals is engaged in business appear in the paper format version. 16 A table of World Minerals' pre-tax earnings, revenues and cash flow for the years 1992-96 appears in the electronic format version, replacing a line graph that appears in the paper format version. 17 A logo of Heads and Threads and a graphic depicting samples of steel fasteners appear in the paper format version
-2- EX-21 4 LIST OF SUBSIDIARIES OF ALLEGHANY 1 Exhibit 21 SUBSIDIARIES OF ALLEGHANY Chicago Title and Trust Company (Illinois) Chicago Title Insurance Company (Missouri) Alexander Title Agency, Inc. (Virginia) CATCO, Inc. (Oklahoma - 50%) Chicago Title Company (California) Tri-Safe, Inc. (California - 25%) Chicago Title Company of Alameda County (California - 80%) Chicago Title Insurance Company of Puerto Rico (Puerto Rico - 99.2%) Chicago Title of Colorado, Inc. (Chicago) Creative Land Services, Inc. (Minnesota) CTOA, Inc. (Texas) Johnson County Title Company (Kansas) Liberty Title Company (Minnesota) McHenry County Title Company (Illinois) Meade Title Agency, Inc. (Ohio) Service Title of Virginia, Inc. (Virginia - 30%) Johnson County Title Company (Kansas) Joint Title Plants and Associations CTP, Inc. (Florida - 16%) Dallas Seven Index, Inc. (Texas - 14%) SKLD, Inc. (Colorado - 12.91%) Title Data, Inc. (Texas - 6.25%) Diversified Information Services Corporation (Arizona) LaSalle County Title LLC (60%) Spring Services Corporation (California) Spring Services Texas, Inc. (Texas) TPO, Inc. (Oklahoma) Title and Trust Company (Idaho) Baton Rouge Title Company, Inc. (Louisiana) The Title Company of Canada, Ltd. Chicago Title and Trust Company Foundation (Illinois)(1) Title Accounting Services Corporation (Illinois) Iowa Land Services Corporation (Iowa) LC Investment Corporation (Indiana) The Lake County Trust Company (Indiana) Chicago Technology Services Corporation (Illinois) RealInfo, Inc. (Illinois LLC - 50%) Ticor Financial Company (California) Chicago Title Agency of Central Ohio (Ohio) Decator Title Company (Illinois LLC - 60%) National Flood Information Services, Inc.(Delaware) Credit Data Reporting Services, Inc. (New York) Market Intelligence, Inc. (Massachusetts) TT Acquisition Corp. (Texas) Alleghany Asset Management, Inc. (Delaware) Montag & Caldwell Inc. (Georgia) Chicago Deferred Exchange Corporation (Illinois) The Chicago Trust Company (Illinois) Security Trust Company (California) Security Union Title Insurance Company (California) Land Title of Pierce County (Washington) Northwest Equities, Inc. (Texas) Guardian Title Company of Houston (Texas) RJW Development Company (New Jersey) Chicago Title Insurance Company of Oregon (Oregon) - - ------------------------ (1) A charitable foundation in which Chicago Title and Trust Company possesses no ownership interest. 2 Real Estate Exchange, Inc. (Oregon) Title-Tax, Inc. (California) Ticor Title Insurance Company (California) Commonwealth Title Co. (Washington) Ticor Title Guarantee Company (New York) Alleghany Properties, Inc. (Delaware) Sacramento Properties Holdings, Inc. (California) Alleghany Funding Corporation (Delaware) Alleghany Capital Corporation (Delaware) Mineral Holdings Inc. (Delaware - 93.8%) World Minerals Inc. (Delaware) Advanced Minerals Corporation (Delaware) Celite Corporation (Delaware) Celite Europe Corporation (Delaware) Celite France, S.A. (France) Celite Italiana S.r.L. (Italy) Celite Hispanica, S.A. (Spain) Celite (U.K.) Limited (United Kingdom) Celite Canada Inc. (Canada) Celite Island, h.f. (Iceland) Kisilidjan, h.f. (Iceland - 48.56%) Celite Mexico S.A. de C.V. (Mexico) Almeria, S.A. de C.V. (Mexico) Diatomita San Nicholas (Mexico) Celite Pacific Limited (Hong Kong) Celite China Inc. (Delaware) Linjiang Celite Diatomite Company Ltd. (China 70%) Celite Jilin, Inc. (Delaware) Changbai Celite Diatomite Company Limited (China 65%) Celite Minerals China Corporation (Delaware) Linjiang Lin-Lin Celite Diatomite Company Limited (China 70%) Celite Chile S.A. (Chile) Sociedad Minera Celite del Peru (Peru) Celite Korea Ltd. (South Korea) Harborlite Corporation (Delaware) Perlite, Inc. (Delaware) Harborlite (U.K.) Limited (United Kingdom) Harborlite France (France) Harborlite Aegean Endustri Mineralleri-Sanayi (Turkey) Europerlite Acquisition Corp. (Delaware) Europerlite, B.V. (Netherlands) Europerlita Espanola, S.A. (Spain) Europerlite Italiana, S.p.A. (Italy) World Minerals Division Spain, S.A. (Spain) World Minerals Europe (France) World Minerals do Brasil Ltda.(Brazil) Levay & Houseman, Inc. (Nevada) World Minerals Japan, Inc. (Japan) Bibb Steel and Supply Company (Delaware) MSL Property Holdings, Inc. (Delaware) MSL Capital Recovery Corp. (Delaware) J & E Corporation (Tennessee) Underwriters Re Group, Inc. (Delaware - 96.4%) Underwriters Reinsurance Company (New Hampshire) Commercial Underwriters Insurance Company (California) Underwriters Insurance Company (Nebraska) Texas Underwriters General Agency, Inc. (Texas) Newmarket Underwriters Insurance Company (New Hampshire) URC Risk Managers, Inc. (Delaware) The Center Insurance Services, Inc. (Delaware) The Center E&S Insurance Agency, Inc. (Georgia) 3 The Center Special Risk Insurance Agency, Inc. (Georgia) The Center Marine Managers, Inc. (New York) URC Representatives Ltd. (United Kingdom) URC International Inc. (Barbados) URC Management Inc. (Barbados) EX-23 5 CONSENT OF KPMG PEAT MARWICK LLP 1 Exhibit 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Alleghany Corporation: We consent to incorporation by reference in the Registration Statements Nos. 33-27598 and 333-323 on Forms S-8 and Nos. 33-55707, 33-62477, 333-9981, and 333-13971 on Forms S-3 of our reports dated February 19, 1997, relating to the financial statements and related schedules of Alleghany Corporation and subsidiaries, which appear in, or are incorporated by reference in this Annual Report on Form 10-K of Alleghany Corporation for the fiscal year ended December 31, 1996. We also consent to the reference to our Firm in Registration Statement Nos. 33-27598 and 333-323 and under the heading "Experts" in Registration Statement Nos. 33-55707, 33-62477, 333-9981 and 333-13971. /s/ KPMG Peat Marwick LLP New York, New York March 21, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLEGHANY CORPORATION AND SUBSIDIARIES BALANCE SHEET FOR THE YEAR ENDED DECEMBER 31, 1996 AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1,999,249 0 0 714,868 0 0 2,714,117 178,020 0 0 4,500,623 1,643,758 0 0 0 447,525 0 0 0 1,423,260 4,500,623 1,664,496 193,747 5,743 198,179 327,444 0 0 127,082 40,034 87,048 0 0 0 87,048 12.06 12.06 628,420 242,332 1,393 23,341 116,348 732,456 (1,000)
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