-----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, WLn1OZ+v80M4bbfh1nVTNQu+YpD181oDenY3zoWVnpur5epmywXZ/cD1q1A4IoI6 mmoGNoF4MX1JEFvt7otoAg== 0000950123-00-002548.txt : 20000323 0000950123-00-002548.hdr.sgml : 20000323 ACCESSION NUMBER: 0000950123-00-002548 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLEGHANY CORP /DE CENTRAL INDEX KEY: 0000775368 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 510283071 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09371 FILM NUMBER: 575404 BUSINESS ADDRESS: STREET 1: 375 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10152 BUSINESS PHONE: 2127521356 MAIL ADDRESS: STREET 1: 375 PARK AVENUE CITY: NEW YORK STATE: NY ZIP: 10055 FORMER COMPANY: FORMER CONFORMED NAME: ALLEGHANY FINANCIAL CORP DATE OF NAME CHANGE: 19870115 10-K 1 ALLEGHANY CORPORATION 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ___________ Commission 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 1, 2000, 7,289,071 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 $1,094,277,388. 2 DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the indicated part(s) of this Report:
Part Annual Report to Stockholders of Alleghany I and II Corporation for the year 1999 Proxy Statement relating to Annual Meeting III of Stockholders of Alleghany Corporation to be held on April 28, 2000
3 ALLEGHANY CORPORATION Annual Report on Form 10-K for the year ended December 31, 1999 Table of Contents
Description Page PART I Item 1. Business 5 Item 2. Properties 46 Item 3. Legal Proceedings 53 Item 4. Submission of Matters to a Vote of Security Holders 53 Supplemental Item Executive Officers of Registrant 53 PART II Item 5. Market for Registrant's Common Equity and Related 54 Stockholder Matters Item 6. Selected Financial Data 54 Item 7. Management's Discussion and Analysis of Financial Condition 54 and Results of Operations Item 7A. Quantitative and Qualitative Disclosures About Market Risk 54 Item 8. Financial Statements and Supplementary Data 54 Item 9. Changes in and Disagreements With Accountants on Accounting 55 and Financial Disclosure
-3- 4
Description Page PART III Item 10. Directors and Executive Officers of Registrant 56 Item 11. Executive Compensation 56 Item 12. Security Ownership of Certain Beneficial Owners and 56 Management Item 13. Certain Relationships and Related Transactions 56 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 57 8-K Signatures 70
Index to Financial Statement Schedules FINANCIAL STATEMENT SCHEDULES INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULES Index to Exhibits EXHIBITS -4- 5 PART I Item 1. Business. Alleghany Corporation ("Alleghany") was incorporated in 1984 under the laws of the State of Delaware. In December 1986, Alleghany succeeded to the business of its parent company, Alleghany Corporation, a Maryland corporation incorporated in 1929, upon the parent company's liquidation. Alleghany's principal executive offices are located at 375 Park Avenue, New York, New York 10152 and its telephone number is (212) 752-1356. Alleghany is engaged, through its subsidiary Underwriters Re Group, Inc. and its subsidiaries ("Underwriters Re Group"), in the property and casualty reinsurance and insurance businesses. Alleghany is also engaged, through its subsidiary Alleghany Asset Management, Inc. ("Alleghany Asset Management") and its subsidiaries, in the financial services business. In addition, Alleghany is engaged, through its subsidiaries World Minerals Inc. ("World Minerals"), Celite Corporation ("Celite") and Harborlite Corporation ("Harborlite") and their subsidiaries, in the industrial minerals business. Alleghany conducts a steel fastener importing and distribution business through its subsidiary Heads & Threads International LLC ("Heads & Threads"). Through its subsidiary Alleghany Properties, Inc. ("Alleghany Properties"), Alleghany owns and manages properties in California. On December 30, 1999, Alleghany entered into an agreement to sell Underwriters Re Group to Swiss Re America Holding Corporation for $725 million in cash, subject to adjustment based upon the stockholder's equity of Underwriters Re Group at the closing date. Alleghany will retain Underwriters Re Group's London-based Lloyd's operations to be conducted through Alleghany Underwriting Holdings Ltd. ("AUL London," previously referred to as Venton Holdings Ltd.). The transaction is expected to close in April 2000. Until June 17, 1998, Alleghany was also engaged, through its subsidiaries Chicago Title and Trust Company ("CT&T"), Chicago Title Insurance Company, Security Union Title Insurance Company and Ticor Title Insurance Company and their subsidiaries, in the sale and underwriting of title insurance and in other real estate-related services businesses. On that date, Alleghany completed the tax-free spin-off of Chicago Title Corporation, the newly formed holding company of CT&T, to Alleghany stockholders. As a part of the spin-off, the common stock of Chicago Title Corporation was listed on the New York Stock Exchange under the symbol "CTZ." On March 20, 2000, Chicago Title Corporation merged with and into Fidelity National Financial, Inc. During 1994 and early 1995, Alleghany and its subsidiaries acquired a substantial number of shares of common stock of Santa Fe Pacific Corporation ("Santa Fe"). On -5- 6 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 shares of BNSF. As of March 1, 2000, Alleghany owned approximately 17.95 million shares of BNSF, or about 3.9 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. BNSF has entered into an agreement to merge with Canadian National Railway Company. The merger, which remains subject to regulatory approval, is expected to close mid-2001. In 1999, 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 1999. 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. PROPERTY AND CASUALTY REINSURANCE AND INSURANCE BUSINESSES General Underwriters Re Group, Inc. ("URG"), headquartered in Calabasas, California, is engaged in the property and casualty reinsurance and insurance businesses, through Underwriters Reinsurance Company ("Underwriters"), its primary insurance subsidiaries and its London-based Lloyd's operations (collectively, "Underwriters Re Group"). Underwriters was organized in 1867 as a primary insurer in New York under the name "Buffalo German Insurance Company." By 1970, Underwriters had become principally a reinsurer, and in 1977 it changed its corporate domicile to New Hampshire. Underwriters operates throughout the United States, including Puerto Rico and the District of Columbia, and Canada, either as a licensed carrier or accredited reinsurer, and has branch offices in Chicago, New York and Calabasas. On December 30, 1999, Alleghany executed a definitive stock purchase agreement to sell Underwriters Re Group to Swiss Re America Holding Corporation for $725 million in cash, subject to adjustment based upon the stockholders' equity of Underwriters Re Group at the closing date. Alleghany will retain the London-based Lloyd's operations to be conducted through Alleghany Underwriting Holdings Ltd. ("AUL London"). The transaction, which is subject to regulatory approvals among other conditions, is expected to close in April 2000. Upon completion of the transaction, Alleghany will assume or replace the $275 million letter of credit facility currently -6- 7 provided by Underwriters to support the corporate capital provided by AUL London to the Lloyd's syndicates that it manages. In light of the pending sale of Underwriters Re Group, this "Property and Casualty Reinsurance and Insurance Businesses" section is organized as follows. The section entitled "AUL London" presents information relating to AUL London, excluding the operations of Underwriters Re Group. The section entitled "Underwriters Re Group," other than as specifically noted, presents information relating to Underwriters Re Group, including AUL London. AUL London On October 23, 1998, Underwriters acquired AUL London (previously referred to as Venton Holdings Ltd.) and certain related Bermuda operations for approximately $181.1 million in cash and Alleghany common stock valued at approximately $8.9 million. Subsequent to its purchase, the Bermuda operations were transferred to Underwriters and operated as a branch of Underwriters. AUL London, through its subsidiaries, is a managing agent and provider of corporate capital for syndicates in the Lloyd's insurance market. Lloyd's is a market, not an insurance company, in which individual professional underwriters accept risks on behalf of competing businesses or syndicates formed by both individual and corporate members. The members' resources provide the security behind Lloyd's policies. Considered as a franchise with common policyholder security, Lloyd's is, according to Standard & Poor's, the world's second largest commercial insurer and eighth largest reinsurer, operating in over 100 countries. Lloyd's carries an A (Excellent) rating from A.M. Best Company, Inc., an independent industry rating organization ("Best's"). According to Best's, the rating reflects the financial strength, operating performance and market profile of Lloyd's. The rating applies to the business written by active underwriting syndicates that have common policyholder security and to all policies written since the 1993 year of account. Lloyd's also carries an A+ rating from Standard & Poor's. In 1999, AUL London, through its subsidiaries, managed three Lloyd's syndicates: Syndicate 376 (non-marine), Syndicate 1183 (marine) and Syndicate 1207 (non-marine), and provided pound sterling 218 million, or 76 percent, of the capacity of such syndicates. In 1998, AUL London and two affiliated companies provided approximately pound sterling 155 million, or 63 percent, of the total capacity of the three syndicates. The remainder of the capacity in 1999 and 1998 was provided by third-party members. -7- 8 Following the introduction of corporate capital to the Lloyd's market in 1994, AUL London pursued a policy of acquiring the capacity held by third-party members as it became available. In 1999, AUL London acquired the remaining third-party capacity and merged Syndicates 1207 and 1183 into Syndicate 376. Beginning with calendar year 2000, AUL London, through its subsidiaries, will manage a single syndicate and provide 100 percent of the pound sterling 275 million capacity of such syndicate. AUL London's managing agent subsidiary is currently the thirteenth-largest managing agent in Lloyd's, representing about 2.75 percent of the market's 2000 capacity. Although AUL London is managing a single syndicate for the year 2000, it continues to manage the three syndicates for the prior open years of account. Lloyd's operates under a three year "year of account" accounting system. Typically, each "year of account" of a syndicate is treated as a separate entity in which risk is underwritten for one year followed by a two-year period of development. At the end of the three-year period, the "reinsurance to close" mechanism is triggered whereby the members forming the next year's underwriting syndicate reinsure the outstanding liabilities of the closing syndicate. After buying reinsurance to close for a syndicate, profits or losses are declared and settled. As a subscription market, Lloyd's has certain unique operating characteristics. A risk is typically placed with several different insurers (often including London insurance companies as well as a number of Lloyd's syndicates) each of which is liable on a several, not joint, basis. Because there are multiple syndicate participants in a typical insurance policy or reinsurance treaty placed at Lloyd's, all premium fund collections and claim payments go through central processing facilities provided by Lloyd's to facilitate policy signing, netting, settlement, and accounting services for the syndicates. Although AUL London assumed the management of Syndicate 376 in 1988 and Syndicates 1183 and 1207 were established thereafter in 1991 and 1996, respectively, the information herein relates to business written after 1992 since, in response to its financial crises, Lloyd's created Equitas in 1996 as a group of companies to reinsure and handle the runoff of pre-1993 non-life business ceded by Lloyd's syndicates. Due to the complexity of converting Lloyd's accounting information to U.S. accounting principles, AUL London's accounts are included in the consolidated financial statements of Underwriters Re Group and Alleghany on a one-quarter lag. Therefore, AUL London's results from the date of purchase through September 30, 1999 are included in Alleghany's consolidated financial statements for the year ending December 31, 1999. -8- 9 General Description of Business AUL London's insurance and reinsurance operations focus primarily on specialty commercial lines that AUL London believes provide opportunities for strong profitability. Through the syndicates it manages, AUL London underwrites risks across diverse commercial classes, including property (marine and non-marine) and casualty (such as financial institutions and directors and officers liability insurance), at varying risk layers from primary coverage to high layer excess of loss. The majority of AUL London's casualty business is on a claims-made basis. AUL London's risks are located around the world, with an emphasis on the United States. Over half of AUL London's business in the 1999 year of account involved insureds located in the United States and risks located in the United States of non-U.S. insureds. The United Kingdom, Western Europe, Canada and Australia also contributed substantial amounts of premium income. 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 insurance 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. Approximately 60 percent of AUL London's business is property and 40 percent casualty. 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. AUL London writes reinsurance on both an excess of loss and pro rata basis. Under excess of loss reinsurance contracts, the reinsurer agrees to reimburse the ceding company for all losses in excess of a predetermined amount (commonly referred to as the cedent's "retention"), generally up to a predetermined limit. Excess of loss reinsurance is often written in "layers" or levels, with one reinsurer (or a group of reinsurers) assuming the risk of loss on the primary insurance policy in excess of the cedent's retention level -9- 10 up to a predetermined level, above which the risk of loss is assumed by another reinsurer or reverts to the cedent. Under pro rata reinsurance contracts, the ceding company and reinsurer share the premiums as well as the losses and expenses of any single risk, or an entire group of risks, based upon contractually defined rates. Reinsurance written on an excess of loss basis represented approximately 85 percent of AUL London's net reinsurance written premiums, with reinsurance written on a pro rata basis representing the balance. Marketing AUL London continues to develop strong long term relationships with its core clients and with the international brokering community in order to understand the business and offer a fast efficient service. AUL London's experienced underwriting team is able to respond quickly to market opportunities and rate changes and, through the Lloyd's franchise, is able to conduct business in a number of territories around the world. AUL London writes a balance of insurance and reinsurance business across most of the main classes of insurance. Underwriting expertise and detailed actuarial analysis are, where appropriate, brought to bear on the accounts written to maximize potential profitability. In addition to the traditional classes of business, AUL London is innovative in its outlook in order to take advantage of new opportunities and meet the ever changing needs of the business community. Blended programs, covering a number of risks usually insured separately, and multiple line insurance are offered utilizing non-standard wording. In general, Lloyd's syndicates, including those managed by AUL London, may only access business through Lloyd's brokers. The AUL London-managed syndicates have strong and long-standing relationships with the principal brokers in the Lloyd's market. Reflecting the typical level of concentration, the Aon, Marsh and Willis groups produced a substantial portion of the business of the AUL London-managed syndicates done in the Lloyd's market. AUL London's five leading brokers accounted for 62.8% of AUL London's gross written premiums in 1999. Over this period, the Aon group and the Marsh group accounted for 25.4% and 22.9%, respectively, and no other broker accounted for more than 10% of such premiums. Without the replacement of business from other brokers, the termination of relationships with either one of these brokers could have a material adverse effect on AUL London's results of operations. No such terminations are anticipated. Certain lines of business are less suited to placement through the larger international brokers, as many of the Lloyd's brokers tend to be. AUL London has expertise in some of these classes and has established a service company to develop the business. At present, the service company produces approximately $10 million of gross written premium from yacht and marina insurance. -10- 11 Underwriting Operations AUL London has organized its underwriting activities under the categories of direct and treaty business. Direct Direct business generally refers to risks that are individually underwritten and includes primary insurance and reinsurance. The business is accepted both facultatively, whereby each individual risk is seen and rated by an AUL London underwriter, or under facilities such as lineslips, consortia or binding authorities. Under these facilities, AUL London delegates the authority to accept business, within specified underwriting criteria, to a third party who has expertise in that particular class of business. With lineslips and consortia, the third party will be another Lloyd's syndicate also participating on each risk accepted and, in the case of binding authorities, the third party will act as agent of AUL London. In general, such facilities are utilized for smaller premium business. AUL London's direct business focuses on the traditional marine classes (hull, cargo, energy, war and liabilities), associated marine classes (political risks and terrorism), casualty business (professional indemnity, directors & officers liability, financial institutions and employment practices liability) and non-marine property. The business is regularly monitored to identify trends in rating and loss activity in order to maximize potential profits. Direct business generated approximately $157.7 million, or 62 percent, of AUL London's net written premiums in 1999. Treaty AUL London also provides reinsurance on a treaty basis. Treaty reinsurance is based on a standing arrangement (a "treaty"), traditionally for a year (but with longer term arrangements becoming more common), 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. AUL London maintains a disciplined underwriting program, writing a spread of property treaty reinsurance business, including catastrophe, pro rata and risk excess business, as well as marine, aviation, satellite and casualty treaty business. AUL London writes business at various attachment points (i.e., dollar levels at which risk is assumed) depending on where the best rewards are perceived; in recent years there has been an emphasis away from the lower working layers which suffer from greater loss frequency. AUL London also seeks to serve as lead or co-lead underwriter on a greater proportion of its business in order to have more control over the pricing and terms of the risks into which it enters and thereby achieve better underwriting results. Treaty reinsurance -11- 12 generated approximately $96.7 million, or 38 percent, of AUL London's net written premiums in 1999. Reinsurance Arrangements As is customary in the insurance and reinsurance industry, AUL London reinsures a portion of the risks it underwrites. AUL London buys reinsurance primarily to manage exposures in its direct and treaty reinsurance businesses. Reinsurance serves to reduce the exposure to any one policy or physical risk, or to a catastrophic accumulation of loss in one event, to a level judged to be commensurate with AUL London's financial resources. It also allows large losses to be managed over time. AUL London has reinsurance agreements with a number of domestic and international reinsurance companies and Lloyd's syndicates. In the event that a reinsurer is unable to meet its obligations assumed under the reinsurance agreement, AUL London remains liable for the portion reinsured. Consequently, AUL London has established a committee to examine the financial strength and stability of potential reinsurers prior to entering into any arrangements with them. This committee utilizes the ratings given to reinsurers by Best's and Standard & Poor's, as well as other specific information available regarding the financial strength and stability, the classes of business written and the management strength of the reinsurers. Once placed, AUL London continues to monitor these factors in addition to the reinsurer's payment performance and outstanding debt. Generally, AUL London requires that unpaid losses and loss adjustment expenses 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. AUL London cedes approximately 30 percent of its direct business income and 25 percent of its reinsurance treaty income to purchase reinsurance that protects both frequency and severity of loss. With reinsurance, AUL London intends to limit its loss from any single event to less than 12.5 percent of its syndicates' capacity. AUL London purchases a combination of pro-rata, per risk, per event and aggregate excess of loss protections to cover its business. As of September 30, 1999, AUL London had reported reinsurance receivables of $210.1 million. 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 (including reinsurance costs, reinsurance recoverables, premiums receivable and bad debt), insurers and reinsurers establish "reserves." These reserves are balance sheet liabilities representing estimates of future amounts needed to -12- 13 pay claims and related expenses with respect to insured events which have occurred (or may occur in the future), including events which have not been reported to the insurer. The AUL London-managed syndicates establish reserves for the estimated unpaid liability for losses and loss expenses for claims of which they are notified under the terms of its policies and agreements. Such reserves are determined by AUL London claims personnel (in conjunction with the Lloyd's Claims Office and other insurers who may be leading a particular risk) based upon a variety of factors, including an evaluation of the nature of the claim, the coverage afforded by the policy, the jurisdiction in which the claim is brought and general economic and social conditions. Additional reserves are established on an aggregate basis to provide for losses incurred but not yet reported ("IBNR") 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. AUL London establishes IBNR reserves by using accepted loss reserving standards and principles to estimate the ultimate liability for losses and loss adjustment expenses. 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. AUL London engages an independent actuarial firm to review the reserving methods and assumptions of the syndicates. Such reserves are necessarily based on estimates and therefore the future losses and loss expenses may differ from such reserves. AUL London reviews its aggregate loss reserves each year with three quarterly reviews at which AUL London updates its loss reserves by applying the loss ratios determined in the previous review to earned premiums to date, less incurred losses reported. AUL London does not discount its reserves for anticipated investment income. There are inherent uncertainties in estimating reserves due primarily to the significant periods of time that may elapse between occurrence of an insured or reinsured loss and reporting and ultimate settlement of such loss, the diversity of development patterns among different lines of business and types of reinsurance, and the necessary reliance on the ceding company for information regarding reinsurance claims. Actual losses and loss expenses may deviate, perhaps substantially, from reserves in AUL London's financial statements, which could have a material adverse effect on AUL London's financial condition and results of operations. -13- 14 Changes in Historical Net Loss and LAE Reserves The reconciliation of beginning and ending reserves for AUL London is shown below (dollars in thousands): Reconciliation of Reserves for Losses and LAE
1999 ---- Reserve, net of reinsurance recoverables, as of October 1, 1998 .. $127,339 Incurred loss, net of reinsurance, related to: Current year ..................................................... 149,359 Prior years ...................................................... 19,485 -------- Total incurred loss, net of reinsurance .......................... 168,844 -------- 1996 year of account reinsurance to close adjustment ............. 17,830 -------- Paid loss, net of reinsurance, related to: Current year ................................................ (30,253) Prior years ................................................. (52,941) -------- Total paid loss, net of reinsurance .............................. (83,194) -------- Reserve, net of reinsurance recoverables, as of September 30 ..... 230,819 Reinsurance recoverables, as of September 30 ..................... 185,684 -------- Reserve, gross of reinsurance recoverables, as of September 30 ... $416,503 ========
Investment Operations The investment policy of the AUL London-managed syndicates is to maximize overall return, in accordance with guidelines established by Lloyd's and Underwriters. With rare exception, Lloyd's syndicates are required to provide profit distributions to -14- 15 members (both individual names and corporate capital providers) annually upon the close of each three-year underwriting cycle, and portfolio managers engaged by AUL London to manage the syndicates' portfolios have adopted a conservative approach to investments. Investments, which are held in trust at Lloyd's, consist of cash and cash equivalents, bonds issued by governments or public authorities and high quality corporate bonds. The following table reflects investment results for the fixed maturity portfolio of AUL London for the year ended September 30, 1999 (dollars in thousands): Investment Results
Net Net Pre-Tax Pre-Tax After-Tax Realized Average Investment Investment Gains Effective After-Tax Period Investments (1) Income (2) Income (3) (Losses) Yield (4) Yield (5) - ---------------------------------------------------------------------------------------------------------------------- Year Ended $171,100 $10,022 $6,514 $(1,673) 5.86% 3.81% September 30, 1999
(1) Average of amortized cost of fixed maturities portfolio at beginning and end of period. Fixed maturities include premium trust funds of $167.6 million. (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. Competition The AUL London-managed syndicates compete for business with other Lloyd's syndicates, insurers in the U. K. and major international insurers and reinsurers. On international risks, competition may also come from the domestic insurers in the country of origin of the insured. Competition is based on many factors, including underwriting expertise, premiums charged and overall financial strength. Competition in the property and casualty insurance and reinsurance industry has historically been cyclical in nature. Typically, a cycle operates as follows. The ability of primary insurers and reinsurers to conduct business is dependent generally upon their ability to purchase reinsurance. A surplus of reinsurers allows primary insurers to obtain reinsurance more cheaply, thereby enhancing profits. Enhanced profits increase the number of primary insurers, which increases competition for business and consequently reduces premium rates. As premium rates fall, the primary insurance business becomes less profitable and insurers profit only at the expense of their reinsurers. As reinsurance -15- 16 becomes less profitable, the reinsurance market contracts, consequently increasing reinsurance rates. Reduced insurance rates and increased reinsurance rates cause the primary insurance market to contract. Competition decreases in a contracted primary insurance market, allowing insurance rates to increase again, thereby enhancing profits of primary insurers. The enhanced profitability of primary insurers is passed on to reinsurers. A profitable reinsurance market will again lead to a surplus of reinsurers. The insurance/reinsurance cycle operates at different stages depending on the class of business involved. The historical pattern of these cycles may change as the developing global nature of the industry evolves. Regulation AUL London's operations in the U.K. are subject to regulation by The Council of Lloyd's; through its Regulatory Division, Lloyd's establishes rules and regulations that must be adhered to by all businesses in the Lloyd's market. These cover such areas as capital adequacy, related party transactions, ownership and control, underwriting and management controls, standards of conduct and conflicts of interest. The prior approval of Lloyd's was required for the acquisition of AUL London by Underwriters in 1998. Every member of Lloyd's, both corporate and individual, must deposit capital with Lloyd's in the form of readily-realizable assets, such as cash, securities, letters of credit or bank or other guarantees, which are held in trust as additional security for policyholders. The capital requirements are determined annually for each member by Lloyd's risk-based capital methodology, subject to a minimum requirement of 45 percent of capacity, and is based on the nature and quantity of risks. AUL London's underwriting activities are supported by a $275 million letter of credit facility currently provided by Underwriters Re Group. The facility will be replaced or assumed by Alleghany upon the sale of Underwriters Re Group. Lloyd's is at present primarily self-governing, subject to overall supervision by the Treasury in the U.K.; however, the U.K. government has announced the establishment of the Financial Services Authority ("FSA"), a single independent regulator that will supervise the securities, banking and insurance industries, including Lloyd's. While the implications of future FSA regulation are not yet fully known, it is expected that there will be a smooth transition and a high degree of continuity in the day-to-day regulatory activities. Employees AUL London and its subsidiaries employed 103 persons as of December 31, 1999. -16- 17 Underwriters Re Group General Description of Business Reinsurance Underwriters writes treaty reinsurance on both a pro rata and excess of loss basis. Since 1995, Underwriters has been rated "A+ (Superior)" by Best's. Best's publications indicate that this 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' consistently strong operating results, solid capitalization and strong presence in the broker market. Additionally, since 1995 Underwriters has been rated "AA- (Excellent)" by 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. As of December 31, 1999, Underwriters' statutory surplus was $524.6 million. Primary Insurance 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. These three property and casualty insurance companies are rated "A+ (Superior)" by Best's because Underwriters reinsures a significant share of their business. In 1999, CUIC, UIC and NUIC generated $135.5 million in direct written premiums and retained net written premiums of $44.2 million, constituting 6 percent of Underwriters Re Group's consolidated net written premiums in 1999. The Center Insurance Services, Inc. ("The Center"), was established in 1995 as a wholly owned subsidiary of URG, and has acted as agent and has underwritten business on behalf of CUIC, UIC, NUIC and, to a lesser extent, non-affiliated insurers. During 1999, approximately $65.8 million of gross written premiums was underwritten by The Center. International Representative offices were established in Barbados at the end of 1995 and in London, England in 1996 to capitalize on international underwriting opportunities. In -17- 18 addition, in 1995, Underwriters Re Group made a strategic investment in a reinsurance company in Barbados. Marketing In 1999, Underwriters wrote 65% of its treaty business through reinsurance brokers. The remaining treaty business was principally reinsurance of portions of the primary insurance underwritten by subsidiaries of Underwriters. Underwriters did not write any facultative certificate business in 1999. Reinsurance brokers regularly approach Underwriters for quotations on reinsurance being placed on behalf of ceding companies. In 1999, Underwriters paid brokers $13.4 million in commissions, which represents approximately 2.6% of its gross written premiums of $506.2 million. Underwriters' five leading brokers accounted for 51% of Underwriters' gross written premiums in 1999. Over this period, Guy Carpenter & Co., Inc. and Aon Re Inc. accounted for 21.3% and 11.3%, respectively, of such premiums and no other broker accounted for more than 10% of such premiums. The brokers that account for relatively large percentages of gross written premiums tend to vary from year to year. Management does not believe that the termination of its business with any one broker would have a material effect on Underwriters Re Group's financial condition or results of operations. A significant percentage of Underwriters' gross written premiums are generally obtained from a relatively small number of ceding companies. In 1999, approximately 37% of gross written premiums were obtained from Underwriters' ten largest unaffiliated ceding companies. One of the ceding companies accounted for 14% of such premiums and no other unaffiliated ceding company accounted for more than 10% of such premiums. The ceding companies that account for relatively large percentages of gross written premiums tend to vary from year to year. Management does not believe that the loss of any one ceding company account would have a material effect on Underwriters Re Group's financial condition or results of operations. Underwriting Operations Treaty reinsurance generated approximately $429 million, or 100%, of Underwriters' net written premiums in 1999. Reinsurance written on an excess of loss basis represented approximately 59% of Underwriters' net reinsurance written premiums, with reinsurance written on a pro rata basis representing the balance. Property lines represented approximately 52% of Underwriters Re Group's net written premiums, with the remainder represented by casualty lines. In 1999, Underwriters Re Group's net written premiums increased $287.2 million, or 65.5%, from 1998, primarily reflecting the acquisition of AUL London, which recorded $254.4 million of net premiums written in 1999, and the related Bermuda operations with net premiums written of $22.9 million. -18- 19 Underwriters generally wrote up to $2.0 million per reinsurance risk in 1999 on a net basis. In the case of reinsurance of certain clash coverage, Underwriters has written up to $2.5 million on a net basis and in limited circumstances has accepted more. The largest net risk assumed in 1999 was $13.2 million. Underwriters Re Group wrote up to $1.0 million per primary insurance risk in 1999 on a net basis. Retrocessional and Reinsurance Arrangements Underwriters currently has reinsurance contracts in force which cede to other reinsurers ("retrocessionaires") risks in excess of Underwriters' net risk retention. Underwriters has an aggregate reinsurance contract to cover losses up to $150 million incurred during the period July 1, 1999 through June 30, 2000 in excess of a 95.44% net loss and loss adjustment expense ratio. Such net loss ratio is calculated by dividing losses by premiums net of commissions and brokerage. The contract covers essentially all lines of business written by Underwriters; however, property catastrophe losses are subject to a sublimit of $125 million. In 1999, Underwriters ceded losses in the amount of $90 million in respect of its primary operations and $10 million in respect of AUL London, for an aggregate of $100 million under similar contracts with such reinsurer covering prior accident years. In 1999, Underwriters purchased additional reinsurance to mitigate property catastrophe exposure; this reinsurance provides a per occurrence limit of $20 million in excess of $5 million, and an additional $47.5 million on an aggregate basis in excess of $25 million aggregate retention. Underwriters also purchases from time to time retrocessional reinsurance in varying amounts for specific assumed treaties. Underwriters has two reinsurance contracts with Continental Casualty Company (the "Continental Contracts") that provide coverage for pre-1987 business up to an aggregate limit of $200.0 million. Underwriters received payments under these contracts totaling $22.1 million in 1998 and $20.1 million in 1999, reducing the reinsurance receivable attributable to such contracts from $65.7 million at year-end 1998 to $45.6 million at year-end 1999. Such receivable is secured by a trust fund dedicated solely to payments under the Continental Contracts. As of December 31, 1999, Underwriters had reported reinsurance receivables of $632.1 million through retrocessional agreements, including $45.6 million of reinsurance receivables under the Continental Contracts, which were fully secured as described above, and $329 million (which includes the $100 million of ceded losses described above) due from another reinsurer, 100 percent of which was secured with a combination of letters of credit and funds withheld. Although there can be no assurance that such will be the case in future years, Underwriters' write-offs for unrecoverable reinsurance were negligible in 1999 and 1998. -19- 20 As of December 31, 1999, Underwriters had an allowance for estimated unrecoverable reinsurance of $3.4 million. Outstanding Losses and Loss Adjustment Expenses When a reinsurance claim is reported by the ceding company, Underwriters establishes a "case" reserve for the estimated amount of Underwriters' ultimate payment. Such reserves are based upon the amounts recommended by the ceding company and are often supplemented by additional amounts as deemed necessary by Underwriters after Underwriters has evaluated such claim on the basis of numerous factors, including coverage, liability, severity of injury or damage, jurisdiction and ability of the ceding company to evaluate and handle the claim properly. Case reserves are periodically adjusted by Underwriters based on its evaluation of subsequent reports from and audits of the ceding companies. When a primary claim is reported, Underwriters Re Group personnel establish a "case" reserve based on evaluation of the claim and estimation of the ultimate payment amount. All primary claims are supervised by Underwriters Re Group personnel who at times may engage outside counsel or adjusting firms, if necessary. Additional reserves are established on an aggregate basis to provide for losses incurred but not yet reported ("IBNR") to the reinsurer and to supplement the overall adequacy of reported case reserves and estimated expenses of settling such claims, including legal and other fees and general expenses of administering the claims adjustment process ("LAE"). Underwriters Re Group establishes IBNR reserves by using accepted loss reserving standards and principles to estimate the ultimate liability for LAE. The process implicitly recognizes the impact of inflation and other factors that affect claims reporting by taking into account changes in historic loss reporting patterns and perceived probable trends. Underwriters Re Group reviews its aggregate loss reserves at least twice each year. Between the semi-annual reviews, Underwriters Re Group updates its loss reserves by applying the loss ratios determined in the previous review to earned premiums to date, less incurred losses reported. Underwriters Re Group does not discount its reserves for anticipated investment income. There are inherent uncertainties in estimating reserves due primarily to the significant periods of time that may elapse between occurrence of an insured or reinsured loss and reporting and ultimate settlement of such loss, the diversity of development patterns among different lines of business and types of reinsurance, and the necessary reliance on the ceding company for information regarding reinsurance claims. Actual losses and loss expenses may deviate, perhaps substantially, from reserves in Underwriters Re Group's financial statements, which could have a material adverse effect on Underwriters Re Group's financial condition and results of operations. Based on current information, management believes reserves for losses and loss expenses at December 31, 1999 are adequate. -20- 21 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 the claims 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. During the three years ended December 31, 1999, the average net loss payment per claim (open and settled) for asbestos and environmental impairment exposures (excluding cessions to the Continental Contracts) was $9,242 and $31,208, respectively, and the highest paid loss was $0.2 million for an asbestos claim and $1.0 million for an environmental impairment claim, in each case net of ceded reinsurance (excluding cessions to the Continental Contracts). All loss payments for asbestos and environmental impairment exposures for the last three years have been recovered through cessions to the Continental Contracts. Most claims paid to date have been paid under contracts with varying levels of retention by the ceding company or insurer. Although the range of losses paid by Underwriters has been wide, most losses paid have involved dollar amounts at the lower end of such range. As of December 31, 1999, Underwriters' case and IBNR reserves (net of reinsurance, including cessions to the Continental Contracts) totalled approximately $26.2 million for asbestos liabilities, which includes reserves for approximately 697 open -21- 22 claims where cedents have advised Underwriters that they currently expect to recover from Underwriters. As of December 31, 1999, Underwriters' case and IBNR reserves (net of reinsurance, including cessions to the Continental Contracts) totalled about $24.0 million for environmental impairment claims, which includes reserves for approximately 455 open claims where cedents have advised Underwriters that they currently expect to recover from Underwriters. Additionally, ceding companies have submitted 1,586 precautionary notices for asbestos claims and 4,050 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 Contracts, but excluding an additional $9.4 million provision for such claims, discussed in the text following the tables), is shown below (dollars in thousands): -22- 23 Reconciliation of Asbestos-Related Claims Reserve for Losses and LAE
1999 1998 1997 ---- ---- ---- Reserve, net of reinsurance recoverables, as of January 1 ............................. $23,044 $21,172 $17,494 Incurred loss, net of reinsurance ............... 3,119 1,872 3,678 Paid loss, net of reinsurance ................... 0 0 0 ------- ------- ------- Reserve, net of reinsurance recoverables, as of December 31 ........................... 26,163 23,044 21,172 Reinsurance recoverables, as of December 31 ..... 15,642 15,746 14,726 ------- ------- ------- Reserve, gross of reinsurance recoverables, as of December 31 ................................. $41,805 $38,790 $35,898 ======= ======= ======= Type of reserve, net of reinsurance recoverables: Case ......................................... $ 6,663 $ 3,544 $ 3,172 IBNR ......................................... 19,500 19,500 18,000 ------- ------- ------- Total ............................................ $26,163 $23,044 $21,172 ======= ======= =======
-23- 24 Reconciliation of Environmental Impairment Claims Reserve for Losses and LAE
1999 1998 1997 ---- ---- ---- Reserve, net of reinsurance recoverables, as of January 1 ....................... $23,950 $23,922 $22,600 Incurred loss, net of reinsurance ......... 0 28 1,322 Paid loss, net of reinsurance ............. 0 0 0 ------- ------- ------- Reserve, net of reinsurance recoverables, as of December 31 ..................... 23,950 23,950 23,922 Reinsurance recoverables, as of December 31 ........................... 1,678 4,222 4,640 ------- ------- ------- Reserve, gross of reinsurance recoverables, as of December 31 ..................... $25,628 $28,172 $28,562 ======= ======= ======= Type of reserve, net of reinsurance recoverables: Case .................................. $ 9,950 $ 9,950 $10,922 IBNR .................................. 14,000 14,000 13,000 ------- ------- ------- Total ..................................... $23,950 $23,950 $23,922 ======= ======= =======
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 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 $9.4 million as of December 31, 1999, compared with $13.9 million as of December 31, 1998. 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. -24- 25 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 1989. Reported reserve development is derived primarily from information included in statutory financial statements of Underwriters, CUIC, UIC and NUIC. 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. For the years ended December 31, 1998 and 1999, the first line also includes the loss reserves associated with the corporate capital provided by subsidiaries of AUL London to the AUL London-managed syndicates at Lloyd's. 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 1989 at $100,000 and was determined in 1992 to be $150,000, the $50,000 deficiency would be included in the Cumulative Redundancy (Deficiency) row shown below for each of the years 1989 through 1992. 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 1989. The cumulative reserve deficiencies in the years 1989 through 1992 resulted primarily from prior increases to asbestos and environmental impairment claims reserves and includes the $35.8 million reserve strengthening in 1993. -25- 26 Changes in Historical Net Reserves for Losses and LAE (in millions)
Year Ended December 31, ---------------------------------------------------------------------------------------- 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Net liability as of the end of year ........................... $453 $411 $411 $437 $509 $536 $ 628 $ 732 $ 784 $1,008 $1,179 Cumulative amount of net liability paid as of: One year later ................. $137 $101 $84 $98 $112 $102 $117 $ 175 $ 134 $ 310 -- Two years later ................ 227 173 161 178 189 167 214 247 276 -- -- Three years later .............. 285 239 214 236 236 220 256 327 -- -- -- Four years later ............... 342 274 254 266 265 252 296 -- -- -- -- Five years later ............... 370 294 276 287 285 278 -- -- -- -- -- Six years later ................ 384 311 287 301 303 -- -- -- -- -- -- Seven years later .............. 396 319 296 310 -- -- -- -- -- -- -- Eight years later .............. 403 326 303 -- -- -- -- -- -- -- -- Nine years later ............... 407 331 -- -- -- -- -- -- -- -- -- Ten years later ................ 407 -- -- -- -- -- -- -- -- -- -- Net liability re-estimated as of: One year later ................. 457 414 412 483 516 539 629 727 782 1,039 -- Two years later ................ 460 421 455 487 518 538 622 724 785 -- -- Three years later .............. 474 465 460 491 523 531 620 721 -- -- -- Four years later ............... 520 472 469 496 519 530 617 -- -- -- -- Five years later ............... 528 485 469 493 519 526 -- -- -- -- -- Six years later ................ 545 483 468 498 514 -- -- -- -- -- -- Seven years later .............. 544 479 472 492 -- -- -- -- -- -- -- Eight years later .............. 541 485 467 -- -- -- -- -- -- -- -- Nine years later ............... 550 479 -- -- -- -- -- -- -- -- -- Ten years later ................ 541 -- -- -- -- -- -- -- -- -- -- Cumulative Redundancy (Deficiency) ................... $(88) $(68) $(56) $(55) $ (5) $ 10 $ 11 $ 11 $ (1) $ (31) -- Gross Liability-End of Year $861 $940 $1,014 $1,110 $1,159 $1,555 $1,974 Reinsurance Recoverable 352 404 386 378 375 547 795 ---- ---- ------ ------ ------ ------ ------ Net Liability - End of Year $509 $536 $ 628 $ 732 $ 784 $1,008 $1,179 ==== ==== ====== ====== ====== ====== ====== Gross Re-estimated Liability-Latest $901 $921 $1,068 $1,199 $1,382 $1,802 Re-estimated Recoverable-Latest 387 395 451 477 597 763 ---- ---- ------ ------ ------ ------ Net Re-estimated Liability-Latest $514 $526 $ 617 $ 721 $ 785 $1,039 ==== ==== ====== ====== ====== ======
-26- 27 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 (dollars in thousands): Reconciliation of Reserves for Losses and LAE from SAP Basis to GAAP Basis
December 31 ------------------------------------------------- 1999 1998 1997 ---- ---- ---- Statutory Reserves................................... $ 950,920 $ 866,647 $ 765,419 Elimination of Intercompany Reserve (1).............. (12,000) 0 0 AUL London Reserves.................................. 230,820 127,339 0 Additional Mass Action Reserves (2).................. 9,350 13,850 18,850 Reinsurance Recoverables............................. 794,834 546,982 374,801 ---------- ---------- ---------- GAAP Reserves........................................ $1,973,924 $1,554,818 $1,159,070 ========== ========== ==========
(1) Amount represents the elimination of a statutory reserve relating to a subsidiary not consolidated on a statutory basis. (2) Amounts represent additional reserves recorded by Underwriters in 1993 for probable asbestos-related and environmental impairment claims exposure. -27- 28 The reconciliation of reserves for Underwriters Re Group for the last three years on a GAAP basis is shown below (dollars in thousands): Reconciliation of Reserves for Losses and LAE
1999 1998 1997 ---- ---- ---- Reserve, net of reinsurance recoverables, as of January 1 ..................................... $1,007,836 $784,269 $732,456 Incurred loss, net of reinsurance, related to: Current year .......................................... 516,704 290,513 267,530 Prior years ........................................... 31,755 (2,254) (5,702) ---------- -------- -------- Total incurred loss, net of reinsurance ............... 548,459 288,259 261,828 ---------- -------- -------- Paid loss, net of reinsurance, related to: Current year ..................................... (78,628) (57,788) (35,033) Prior years ...................................... (316,407) (134,243) (174,982) ---------- -------- -------- Total paid loss, net of reinsurance ................... (395,035) (192,031) (210,015) ---------- -------- -------- AUL London adjustments (1) ............................ 17,830 127,339 0 Reserve, net of reinsurance recoverables, as of December 31 ................................... 1,179,090 1,007,836 784,269 Reinsurance recoverables, as of December 31 ........... 794,834 546,982 374,801 ---------- -------- -------- Reserve, gross of reinsurance recoverables, as of December 31 ................................ $1,973,924 $1,554,818 $1,159,070 ========== ========== ==========
(1) Represents reinsurance to close adjustment and acquisition date balance, respectively. 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. -28- 29 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. The following table reflects investment results for the fixed maturity portfolio of Underwriters Re Group for the years ended December 31, 1999, 1998 and 1997 (dollars in thousands): Investment Results
Net Net Pre-Tax Pre-Tax After-Tax Realized Average Investment Investment Gains Effective After-Tax Period Investments (1) Income (2) Income (3) (Losses) Yield (4) Yield (5) - ------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1999 $1,395,412 $83,586 $60,605 $(291) 6.0% 4.3% Year Ended December 31, 1998 $1,244,611 $74,895 $54,614 $ 844 6.0% 4.4% Year Ended December 31, 1997 $1,147,064 $69,229 $50,239 $(855) 6.0% 4.4%
(1) Average of amortized cost of fixed maturities at beginning and end of period, excluding operating cash. Fixed maturities include premium trust funds of $171.4 million and $107.9 million in 1999 and 1998, respectively. (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. -29- 30 As of December 31, 1999, the equity portfolio of Underwriters Re Group was carried at a market value of approximately $212.1 million with an original cost of approximately $135.9 million, and consisted primarily of approximately 7.4 million shares of BNSF common stock. The cost of equities listed in the table below, $110.1 million, includes the cost paid by Alleghany for the BNSF common stock prior to its being contributed to Underwriters Re Group. In 1999, Underwriters Re Group had dividend income of $11.7 million, which included $3.6 million on the BNSF common stock and $7.0 million from another common stock held in Underwriters Re Group's portfolio. The following table summarizes the investments of Underwriters Re Group, excluding cash, as of December 31, 1999, with all investments carried at fair value (dollars in thousands):
Investments ----------- Amortized Cost or Cost Fair Value --------------------------------------------------------------------- Amount Percentage Amount Percentage ------ ---------- ------ ---------- Short-term investments ..... $ 122,524 9% $ 122,524 8% Corporate bonds ............ 360,548 25 349,967 24 United States government and government agency bonds 96,976 7 95,320 6 Mortgage- and asset-backed securities ............. 258,966 18 254,443 17 Foreign bonds .............. 25,840 2 24,729 2 Redeemable and auction preferred stocks ....... 25,727 2 25,875 2 Municipal bonds ............ 410,992 29 404,784 27 Equity securities (1) ...... 110,098 8 212,085 14 Other ...................... 5,883 0 5,798 0 ---------- --- ---------- --- Total .................. $1,417,554 100% $1,495,525 100% ========== === ========== ===
(1) Includes 7,424,469 shares of BNSF common stock at the original cost to Alleghany. -30- 31 Competition Underwriters competes primarily in the United States reinsurance market with numerous domestic and foreign reinsurers, many of which have greater financial resources than Underwriters. Underwriters' competitors include independent reinsurance companies, subsidiaries or affiliates of worldwide insurance companies, reinsurance departments of certain primary insurance companies and domestic, European and Asian underwriting syndicates. Competition in the types of reinsurance in which Underwriters is engaged is based on many factors, including the perceived overall financial strength of the reinsurer, premiums charged, contract terms and conditions, services offered, speed of claims payment, reputation and experience. The commercial property and casualty insurance industry is highly competitive on the basis of price and service. Competitors of CUIC, UIC and NUIC include other primary insurers and new forms of insurance 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. Employees Underwriters Re Group, excluding AUL London, employed 275 persons as of December 31, 1999. FINANCIAL SERVICES BUSINESS Alleghany Asset Management, organized as a Delaware corporation in 1995, conducts a financial services business through its subsidiaries, The Chicago Trust Company ("Chicago Trust"), a Chicago-based investment firm with trust powers; Montag & Caldwell, Inc. ("Montag & Caldwell"), an Atlanta-based investment counseling firm; -31- 32 and Chicago Deferred Exchange Corporation ("CDEC"), which facilitates certain tax-deferred property exchanges. In 1996, Chicago Trust acquired The Chicago Trust Company of California, formerly Security Trust Company ("CT of California"), a California trust company, from a subsidiary of CT&T. Alleghany Asset Management and its subsidiaries, formerly a part of the financial services group of CT&T, were transferred to Alleghany in June 1998 and were not a part of the spin-off of CT&T. Alleghany Asset Management has expanded its product line in the past few years by adding a small capitalization equity product and acquiring a 40 percent interest in Veredus Asset Management LLC ("Veredus"), a Louisville, Kentucky-based investment counseling firm in 1998, and acquiring Blairlogie Capital Management ("Blairlogie"), an Edinburgh, Scotland-based international equity manager in 1999. Also in 1999, Alleghany Asset Management formed Alleghany Investment Services, Inc. ("AISI") to administer, market and sell the Alleghany Funds. Alleghany Asset Management provides distribution and marketing services to its investment managers through the 401(k) services offered by Chicago Trust and the Alleghany Funds, a mutual funds family offering twelve no-load mutual funds. Chicago Trust's full service 401(k) administration group provides trustee, plan design, investment management and other administrative services. Such services are marketed through internal sales forces in Chicago and Atlanta as well as consultants and brokerage sources. The Alleghany Funds are marketed primarily through registered investment advisers, broker-dealers and direct sales to institutional clients, as well as through intermediary services, including Schwab and Fidelity. Montag & Caldwell Founded in 1945, Montag & Caldwell, one of the Southeast's oldest investment management firms, concentrates on managing large capitalization equity and balanced portfolios for institutional, mutual fund and high net worth clients. Montag & Caldwell believes that success in the institutional investment business is dependent upon a disciplined and consistently applied investment process translating into outstanding investment results. Montag & Caldwell's equity results have placed the firm among the top money managers in its category. Montag & Caldwell's investment returns (net of fees) exceeded the S&P 500 Index for eight of the past ten years. Montag & Caldwell targets separate accounts of $40 million and higher, accessed through independent consultants or direct calls to prospective clients. Its investment expertise is also available through the Alleghany Funds. Montag & Caldwell advises two of the Alleghany Funds' mutual funds. -32- 33 Chicago Trust Chicago Trust and its predecessors have managed assets for investors since 1887. Chicago Trust is an investment firm with full trust powers and is engaged in the businesses of institutional investment management, full service 401(k) administration, and personal trust & investment services. Chicago Trust specializes in fixed income, large capitalization growth equity and small capitalization value equity money management for institutional clients. Chicago Trust's fixed income results have consistently placed Chicago Trust among the top money managers in its category. Chicago Trust markets its fixed income and equity products through pension consultants and directly to plan sponsors. Chicago Trust also advises seven of the Alleghany Funds' mutual funds. Chicago Trust's personal trust and investment services business serves the investment and estate planning needs of individuals and families, mainly in the greater Chicago area. Chicago Trust believes that the business is well-positioned to benefit from growth in family wealth and the demographics of an aging baby boom generation. Chicago Trust's full service 401(k) business administers assets, approximately half of which are invested in the Alleghany Funds and collective funds managed by the subsidiaries of Alleghany Asset Management. The remainder is invested in third-party managed funds. Blairlogie During 1999, Alleghany Asset Management completed its acquisition of 83.25 percent of Blairlogie; the remaining interests in Blairlogie are held by Blairlogie management. Formed in 1992, Blairlogie is an international equity manager. Blairlogie's two investment products include an international developed markets product and an international emerging markets product. Its clients are based mainly in the United States. Blairlogie manages two of the Alleghany Funds' mutual funds. Veredus Veredus, formed in 1998, is a small capitalization growth equity manager of which Alleghany Asset Management owns 40 percent. Veredus' investment products include an aggressive growth equity and a market neutral product. Its clients include individual and institutional investors. Veredus manages one of the Alleghany Funds' mutual funds. -33- 34 Alleghany Funds Alleghany Funds had approximately $5.3 billion in assets under management at December 31, 1999, compared with $3.4 billion at year-end 1998. The twelve no-load mutual funds consist of seven equity funds, two balanced funds, two fixed income funds and a money market fund. All of the Funds are registered under the Investment Company Act of 1940, as amended (the "1940 Act"), as investment companies. AISI has administrative, marketing and sales responsibilities for the Alleghany Funds. Each of the mutual funds is managed by one of Chicago Trust, Montag & Caldwell, Blairlogie or Veredus pursuant to a management contract which is renewable annually by vote of either of such fund's board of trustees (including a majority of members who are not "interested persons" as defined under the 1940 Act) or such fund's shareholders. All management contracts terminate if assigned and may be terminated by either party without penalty on 60 days' written notice. The management contracts for the Alleghany Funds were all renewed for an additional year in 1999. Under these contracts, Chicago Trust, Montag & Caldwell, Blairlogie and Veredus are each authorized in its discretion to buy and sell securities for the accounts of the Alleghany Funds, subject to certain limitations. To date, no management agreements of Alleghany Asset Management or any of its subsidiaries with any of the Alleghany Funds have been involuntarily terminated. As compensation for its management services, Chicago Trust, Montag & Caldwell, Blairlogie and Veredus receive management fees from the Alleghany Funds that range from 0% (when fees are waived) to 0.83% per year of average daily net assets, depending on the mutual fund. These management fees totalled approximately $27.7 million and $17.3 million in 1999 and 1998, respectively. Current information with respect to the Alleghany Funds can be found on its website, www.alleghanyfunds.com. CDEC and CT of California CDEC was established in 1989 and facilitates, with the assistance of Chicago Trust, tax-deferred exchanges of like-kind property. In 1999, CDEC facilitated more than 2,500 exchanges. CDEC acts as a qualified intermediary, holding and investing the cash proceeds from the sale of property relinquished by a taxpayer in a qualified trust account, of which Chicago Trust acts as trustee, until replacement property is acquired. CT of California, directly and through its subsidiary, Chicago Deferred Exchange Corporation of California, provides tax-deferred property exchange, trust and investment services in California. -34- 35 Marketing Growth in profitability of Alleghany Asset Management is largely dependent on growth in assets under management, which results from market appreciation of existing assets and new business (new clients and additional investments from existing clients). Approximately 82 percent of Alleghany Asset Management's assets under management are institutional assets for which competition is intense and success is driven by investment performance. Both Montag & Caldwell and Chicago Trust have strong investment records and have received high ratings in various consultant and mutual fund informational service databases. The largest portion of the revenues of Alleghany Asset Management consists of advisory fees based primarily on the value of assets under management. Annual rates vary and typically decline as account size increases. Fees earned from the management of assets for institutional clients represented approximately 81 percent and 75 percent of the revenues of Alleghany Asset Management for 1999 and 1998, respectively. As of December 31, 1999, Alleghany Asset Management, through its subsidiaries, managed assets totaling about $48.6 billion. The separately managed accounts of Alleghany Asset Management's investment advisor subsidiaries are managed pursuant to advisory agreements between the client and the investment advisor. Such agreements are generally terminable on short notice. The trustees or corporate officials who control such accounts are usually free to change investment advisors without cumbersome legal procedures. None of the clients of Alleghany Asset Management's investment advisor subsidiaries accounted for 10 percent or more of the revenues of Alleghany Asset Management. Accordingly, the loss of any single client would not have a material adverse effect on the business of Alleghany Asset Management. The business of Alleghany Asset Management is not seasonal. Investment Operations Investments held by Chicago Trust and CT of California must comply with the banking laws of the states of Illinois and California, respectively. These laws prescribe the kind, quality and concentration of investments that may be made by trust companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds and common stocks. The current investment strategy of Chicago Trust and CT of California 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. -35- 36 Competition Alleghany Asset Management and its subsidiaries compete with national, regional and local providers of financial services, many of which have substantially greater capital and other resources and some of which offer a wider range of financial services. Competition is chiefly on the basis of service and investment performance. Regulation As fiduciaries, Chicago Trust is regulated by the State of Illinois Office of Banks and Real Estate, and CT of California is regulated by the California Department of Banking. Regulation covers such matters as the fiduciary's management capabilities, the investment of funds held for its own account, the soundness of its policies and procedures, the quality of the services it renders to the public and the effect of its trust activities on its financial soundness. Montag & Caldwell is a registered investment advisor and is therefore subject to regulation by the Securities and Exchange Commission, the state of Georgia, its domiciliary jurisdiction, and all other states in which it is licensed to act in the capacity of investment advisor. Blairlogie is a registered investment advisor and is therefore subject to regulation by the Securities and Exchange Commission, the laws of Scotland, its domiciliary jurisdiction, the Investment Management Regulatory Organisation Limited (which regulates the investment management business in the United Kingdom), and all U.S. states in which it is licensed to act in the capacity of investment advisor. Veredus is a registered investment advisor and is therefore subject to regulation by the Securities and Exchange Commission, the state of Kentucky, its domiciliary jurisdiction, and all other states in which it is licensed to act in the capacity of investment advisor. As registered investment companies, each of the funds of the Alleghany Funds is subject to extensive regulation by the Securities and Exchange Commission, governing all aspects of its operations. In addition, the Alleghany Funds is also subject to certain limited regulation by the securities regulators of all 50 states. Employees At December 31, 1999, Alleghany Asset Management and its subsidiaries had approximately 357 employees, including full-time and part-time employees. 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. -36- 37 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. 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; Ayacucho, Peru; Tuxpan, Mexico; 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. 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"). Perlite On September 25, 1998, Harborlite and Europerlite Acquisition Corp. merged and World Minerals now conducts its worldwide perlite business through Harborlite. -37- 38 World Minerals believes that Harborlite is the world's largest producer of perlite filter aids and that Harborlite, which is also engaged in the business of selling perlite ore, is one of the world's largest merchant producers of perlite ore. These products are marketed worldwide under the Harborlite(R) and Europerl(R) brand names. Perlite is a volcanic rock which contains between 2 percent and 5 percent natural combined water. When heated rapidly, the natural combined water turns explosively to steam and the perlite ore "pops" in a manner similar to popcorn, expanding up to twenty times its original volume and creating a soft material with large surface area and correspondingly low density. Perlite ore is mined at Harborlite's No Agua, New Mexico mine and is sold primarily to companies that expand it in their own expansion plants and use it in the manufacture of roofing board, formed pipe insulation and acoustical ceiling tile. Perlite ore for filter aid and certain filler applications is mined at Harborlite's Superior, Arizona mine and is expanded at Harborlite's six expansion plants located within the United States. Expanded perlite is also produced at Harborlite's European expansion plants at Hessle, United Kingdom and Wissembourg, France, Barcelona, Spain and Milan, Italy, from perlite ore obtained from Harborlite's 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 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. These are now part of Harborlite. Harborlite has its world headquarters in Lompoc, California and owns, directly or through wholly-owned subsidiaries, a perlite mine and mill in No Agua, New Mexico, a perlite loading facility in Antonito, Colorado, a perlite mine and a mill in Superior, Arizona, a perlite mine and mill in Dikili, Turkey, a perlite deposit in Central Mexico, and perlite expansion facilities in Escondido, California; Green River, Wyoming; LaPorte, Texas; Youngsville, North Carolina; Vicksburg, Michigan; Quincy, Florida; Wissembourg, France; Hessle, England; Barcelona, Spain and Milan, Italy. World Minerals conducts its business on a worldwide basis, with mining and processing operations in eleven countries. In 1999, approximately 43 percent of World Minerals' revenues (equal to 6.5 percent of Alleghany's consolidated revenues) were generated by foreign operations, and an additional 14 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 -38- 39 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 volcanic and seismic activity may adversely affect future production at Lake Myvatn). Celite believes that diatomite reserves at each site, except France and Iceland, are generally sufficient to last for at least 20 more years at the current rate of utilization. Celite enhanced its reserves at Lompoc, California in 1998 through the acquisition of rights to two diatomite mines formerly controlled by a competitor, following such competitor's decision to close its Lompoc-based diatomite business. 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 for expansion in Europe is obtained from Harborlite's Dikili mine and from third parties in Europe. Ore reserves at Harborlite's Dikili mine are believed to be sufficient to last at least 20 more years at the current rate of utilization. Celite's silicate products are produced from purchased magnesium and calcium compounds and internally supplied diatomite. World Minerals' operating subsidiaries experienced no interruption in raw material availability in 1999. Barring unforeseen circumstances, World Minerals anticipates no such interruptions in 2000. Celite and Harborlite believe that they have taken reasonable precautions for the continuous supply of their critical raw materials. Many of Celite's and Harborlite's operations use substantial amounts of energy, including electricity, fuel oil, natural gas and propane. Celite and Harborlite have supply contracts for most of their energy requirements. Most of such contracts are for one year or less. Celite and Harborlite have not experienced any energy shortages and they believe that they have taken reasonable precautions to ensure that their energy needs will be met, barring any unusual or unpredictable developments. From the time World Minerals began operations in 1991, none of its customers accounted for 10 percent or more of World Minerals' annual sales. -39- 40 World Minerals presently owns, controls or holds licenses either directly or through its subsidiaries to approximately 16 United States and 81 foreign patents and patent applications. While World Minerals considers all of its patents and licenses to be valuable, World Minerals believes that none of its patents or licenses is by itself material to its business. World Minerals normally maintains approximately a one- to four-week supply of inventory on certain products due to production lead times. Although diatomite mining activities at Celite's principal mine in Lompoc, California may be suspended during periods of heavy rainfall, World Minerals believes that, because of the stockpiling of ore during dry periods, such suspensions do not materially affect the supply of inventory. Barring unusual circumstances, World Minerals does not experience backlogs of orders. World Minerals' business is not seasonal to any material degree. World Minerals' domestic and international operations have been consolidated into a single, centrally managed worldwide business under the direction of a highly capable management team. Since 1993, financial systems and controls have been upgraded, and the Celite and Harborlite sales, operations and financial groups have been consolidated to improve efficiency and take advantage of synergies. World Minerals acts as the sales agent for both Celite and Harborlite in the United States and procures orders from customers and distributors on their behalf. World Minerals also distributes Celite's and Harborlite's products in Europe to dealers, distributors and end users on Celite's and Harborlite's behalf. World Minerals has research and development, environmental control and quality control laboratories at its Lompoc production facilities and quality control laboratories at each of its other production facilities. In 1999, World Minerals spent approximately $2.1 million on company-sponsored research and technical services (in addition to amounts spent on engineering and exploration) related to the development and improvement of its products and services. Competition 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 is the world's largest producer of perlite filter aids and is one of the world's largest merchant producers of perlite ore. Harborlite has two large competitors in the expanded perlite market, Grefco and CECA, and many smaller competitors. Harborlite also has two large competitors in the merchant perlite ore market, Grefco and Silver & Baryte, and numerous smaller competitors. -40- 41 The filter aid products of Celite 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 1997, both MSHA and OSHA announced special emphasis programs to reduce the incidence of silicosis in the workplace. Due to Celite's industrial hygiene and monitoring programs, Celite does not expect these special emphasis programs to impact its business in any material way. World Minerals maintains a staff of experienced environmental, safety and industrial hygiene professionals who assist plant personnel in complying with environmental, health and safety regulations. Its environmental, safety and industrial hygiene audit group also performs routine internal audits and reviews of World Minerals' plant facilities worldwide. Due to these programs and responsible management at the -41- 42 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 1997, the International Agency for Research on Cancer ("IARC") reclassified the inhalation of crystalline silica from occupational sources from "probably carcinogenic to humans" to a category reflecting "sufficient evidence of human carcinogenicity." Celite and Harborlite provide required warning labels on their products containing in excess of 0.1 percent respirable crystalline silica, advising customers of the IARC designation and providing recommended safety precautions. Such requirements also mandate that industrial customers who purchase diatomite or perlite for use as a filler in their products label such products to disclose hazards which may result from the inclusion of crystalline silica-based fillers, if such products contain in excess of 0.1 percent of crystalline silica by volume. Due to labeling concerns, some manufacturers of paint may be considering the use of other fillers in place of Celite's products. However, Celite believes that the loss of these customers would not have a material adverse effect on its operating results. Several states have also enacted or adopted "right to know" laws or regulations, which seek to expand the federal Hazard Communication Standard to include providing notice of hazards to the general public, as well as to employees and customers. Celite, through the industry-sponsored International Diatomite Producers Association ("IDPA"), has participated in funding several studies to examine in more detail the cancer risk to humans from occupational exposure to crystalline silica. One such study, conducted by the University of Washington on diatomite workers in Lompoc, California (the "Washington Study") found a modest increase in lung cancer deaths in the cohort compared with national rates (indicated by a standardized mortality ratio ("SMR") equal to 1.43). The standardized mortality ratio compares the number of expected cancer deaths in the cohort with 1, representing the number of cancer deaths in the population at large. The study also found an increase in non-malignant respiratory disease ("NMRD") (SMR equal to 2.59); this finding was expected because the NMRD category included silicosis resulting from exposures in past decades. After the publication of the Washington Study, Celite conducted its own review of the portion of the cohort representing the Lompoc plant and found that more workers in this portion of the cohort may have been exposed to asbestos, prior to World Minerals' purchase of the Lompoc plant, than originally thought. Since exposure to asbestos has been found to cause lung cancer and respiratory disease, this finding has raised concern that the Washington Study may have overstated the adverse health effects of exposure to crystalline silica. IDPA engaged an epidemiologist and an industrial hygienist to -42- 43 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. Data errors later discovered in the follow-up study reduced the final SMR to 1.22 and further weakened the dose response relationship. An additional aspect of the study, which sought to compare results of the cohort study to radiographic readings of the workers, confirmed that the risk of silicosis to workers hired since 1950 and exposed to a cumulative crystalline silica exposure equal to or less than 3 mg/m3 over the working lifetime of the workers has not been appreciably different than in non-exposed populations. 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, 1999, World Minerals had 192 employees worldwide, Celite had about 1,268 employees worldwide, and Harborlite had about 250 employees -43- 44 worldwide. Approximately 374 of Celite's employees and 45 of Harborlite's employees in the United States are covered by collective bargaining agreements. All of the collective bargaining agreements covering workers at Celite and Harborlite are in full force and effect. STEEL FASTENER BUSINESS The Heads and Threads division of Alleghany was reorganized in 1999 as Heads & Threads International LLC, after its acquisition of Gardenbolt International Corp. Now headquartered in Sayreville, New Jersey, Heads & Threads is believed to be one of the nation's leading importers and distributors of steel fasteners. Heads & Threads imports and sells commercial fasteners -- nuts, bolts, screws, washers and other fasteners -- for resale to distributors and fastener manufacturers through multiple distribution centers primarily providing same day or next day delivery. The strength of Heads & Threads lies in its long years of association with suppliers and customers, and its breadth of product line. With the acquisition of Gardenbolt International Corp. in 1998, Heads & Threads substantially increased its size and its presence in East Coast markets. Heads & Threads also completed in 1998 the installation and implementation of a new fully-integrated, enterprise-wide computer system which has enhanced the functionality of all areas of Heads & Threads' business operations, including order processing, sales and inventory management, transportation services and accounting and finance. In 1999, Heads & Threads entered into an agreement to purchase Reynolds Fasteners, Inc., a distributor of fasteners headquartered in Edison, New Jersey. The transaction is expected to close in March 2000. With the acquisition of Reynolds Fasteners, Inc., Heads & Threads will double its current size. Beginning in 1999 and continuing into 2000, Heads & Threads has pursued a cost reduction program. A major part of this program has been the closing of some of Heads & Threads' satellite sales offices and warehouses in order to operate out of larger state-of-the-art distribution centers, allowing Heads & Threads to consolidate inventory and provide higher service levels to its customers. Since Heads & 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 & 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 & Threads' operations do not subject Alleghany to a material risk from fluctuations in foreign currency or import duties. -44- 45 At December 31, 1999, Heads and Threads had about 209 employees. REAL ESTATE BUSINESS Headquartered in Sacramento, California, Alleghany Properties owns and manages, among other real estate and real estate-related assets, 21 properties in California. Such properties are comprised primarily of improved and unimproved commercial land and commercial and residential lots. A major portion of the real estate assets of Alleghany Properties are located in North Natomas, the only large undeveloped area in the City of Sacramento. Development in the area was delayed until the resolution in 1998 of flood plan zoning and wildlife habitat issues. The area experienced considerable growth in its first season of development activity, including more than a dozen residential projects, office buildings and a fully-leased retail shopping center. Contributing to the growth, Alleghany Properties sold approximately 450 residential lots and a multi-family site accommodating more than 270 apartment units. At December 31, 1999, Alleghany Properties had 4 employees. -45- 46 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. Chicago Trust leases about 60,000 square feet at 171 North Clark Street in Chicago, Illinois. Montag & Caldwell leases approximately 23,400 square feet in Atlanta, Georgia. CT of California leases approximately 8,400 square feet in San Diego, California. Blairlogie leases approximately 4,900 square feet in Edinburgh, Scotland. URG leases approximately 45,000 square feet of office space for its headquarters in Calabasas, California. CUIC leases about 19,700 square feet of office space. AUL London is leasing approximately 13,000 square feet of office space in London. World Minerals' headquarters is located in leased premises of approximately 13,000 square feet in Santa Barbara, California. Celite, Harborlite 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 and Harborlite is set forth below. All of the following properties are owned, with the exception of Plant # 1 at Quincy, Washington, the headquarters offices at Santa Barbara and Lompoc, California, the Nanterre, France, Santiago, Chile and Izmir, Turkey offices and the plant at Wissembourg, France, which are leased. -46- 47
Location and Approximate Product Nature of Property Square Footage or Use ------------------ -------------- ------ CELITE: - ------- Lompoc, CA 997,410 Diatomite filter aids, fillers, Production facility; silicates and specialty products 18 multi-story production buildings; 5 one-story warehouse buildings; 6 one-story laboratory buildings; 4 multi-story bulk handling buildings; 6 one-story office buildings; 2 one-story lunch and locker-room buildings; and 10 one-story shops. Lompoc, CA 16,800 Administrative office 1 one-story building; and 3 units within 1 one-story building. Quincy, WA 60,941 Diatomite filter aids and fillers Production facility; Plant #1-1 multi-story production building and 7 one-story buildings. Plant #2-1 multi-story production building and 6 one-story buildings. Murat, Department of 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 6,600 Sales and administrative offices 1 single floor.
-47- 48
Location and Approximate Product Nature of Property Square Footage or Use ------------------ -------------- ------ Guadalajara, Mexico 116,610 Diatomite filter aids and fillers Production facility; 2 multi-story production buildings; 2 multi-story pollution-control buildings; and 20 one-story buildings. Mexico City, Mexico 2,700 Sales and administrative offices 1 single floor condominium. Arica, Chile 50,000 Diatomite filter aids Production facility; 1 calcined line; 1 administration building; 1 laboratory; 1 warehouse building; 1 changing room building; 1 maintenance workshop; and 1 product warehouse. Santiago, Chile 2,500 Offices 1 single floor in a multi-story, rented office building. Alicante, Spain 70,777 Diatomite filter aids and fillers Production facility; 2 multi-story manufacturing buildings; 3 one-story warehouses; 2 one-story office buildings; 1 two-story laboratory; and 3 miscellaneous buildings.
-48- 49
Location and Approximate Product Nature of Property Square Footage or Use ------------------ -------------- ------ Changbai County, 95,000 Diatomite filter aids Jilin Province, PRC Production facility; 1 multi-story processing facility; 4 one-story warehouse buildings; 1 multi-story office building; and 4 one-story miscellaneous buildings. Linjiang County, 74,665 Diatomite filter aids Jilin Province, PRC Production facility; 1 multi-story production facility; 1 two-story office building; 3 one-story warehouse buildings; and 3 one-story miscellaneous buildings. Linjiang County, 142,000 Diatomite filter aids Jilin Province, PRC Production facility; 3 multi-story production facilities; 1 one-story office building; 2 one-story warehouse buildings; and 5 one-story miscellaneous buildings. HARBORLITE: - ---------- Antonito, CO 9,780 Warehouse facilities for perlite 1 one-story manufacturing building ore and warehouse; 1 one-story office building; and 1 one-story warehouse.
-49- 50
Location and Approximate Product Nature of Property Square Footage or Use ------------------ -------------- ------ No Agua, NM 40,550 Perlite ore Production facility; 1 six-story mill building; 1 one-story office and shop building; and 8 miscellaneous one-story buildings. Superior, AZ 6,900 Perlite ore Production facility; 1 one-story warehouse building; and 1 one-story office building. Escondido, CA 8,450 Perlite filter aids 1 one-story warehouse building; and 1 one-story office building. Green River, WY 17,300 Perlite filter aids 1 one-story warehouse building; and 1 one-story office building. Vicksburg, MI 25,050 Perlite filter aids 2 one-story warehouse buildings; and 1 one-story office building. Youngsville, NC 22,500 Perlite filter aids 1 one-story warehouse building; 1 one-story manufacturing building; and 1 one-story office building.
-50- 51
Location and Approximate Product Nature of Property Square Footage or Use ------------------ -------------- ------ Quincy, FL 18,450 Perlite filter aids 1 one-story warehouse building; 1 one-story manufacturing building; and 1 one-story office building. LaPorte, TX 23,000 Perlite filter aids and fillers 1 one-story expansion warehouse and office building. Wissembourg, France 5,000 Perlite filter aids and fillers a portion of 1 multi-story production and warehouse building. Hessle, Humberside, 36,700 Perlite filter aids and fillers United Kingdom 1 one-story manufacturing building; and 1 two-story office building. Dikili, Turkey 63,200 Perlite crushing mill Production facility; 1 four-story manufacturing building; 1 one-story warehouse building; 1 one-story raw material warehouse; 1 one-story office building; and 1 one-story maintenance shop. Izmir, Turkey 1,000 Sales and administrative offices 1 single floor.
-51- 52
Location and Approximate Product Nature of Property Square Footage or Use ------------------ -------------- ------ Barcelona, Spain 70,300 Perlite filter aids and fillers Production facility; 1 one-story manufacturing and warehouse building; 1 one-story raw material warehouse; and 1 two-story office building. Milan, Italy 68,600 Perlite filter aids Production facility; 1 one-story manufacturing/ warehouse building; 1 one-story raw material warehouse; and 1 two-story office building. WORLD MINERALS: - -------------- Santa Barbara, CA 13,000 Headquarters office 1 one-story rented building.
Celite's largest mine is located on owned property immediately adjacent to the City of Lompoc, California, and is the site of one of the most unusual marine diatomite deposits in the world. The mine celebrated its 100th anniversary of production in 1993 and has been in continuous operation for more than 60 years. Reserves are believed to be sufficient for the operation of the plant for at least 20 more years at the current rate of utilization. The Lompoc production facility has a rated capacity in excess of 200,000 tons annually and currently supplies more than 25 different grades of products to the filtration and filler markets. The facility also houses World Minerals' research and development, and health, safety and environmental departments and Celite's quality control laboratories. World Minerals, Celite 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 rights to mine diatomaceous earth in sections of Lake Myvatn, Iceland, and Celite's joint ventures in PRC have rights to mine diatomaceous earth in sections of Jilin Province, PRC. -52- 53 Item 3. Legal Proceedings. Alleghany's subsidiaries are parties to pending litigation and claims in connection with the ordinary course of their businesses. Each such subsidiary 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, 1999. 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 1999. Supplemental Item. Executive Officers of Registrant. The name, age, current position, date elected and five-year business history of each executive officer of Alleghany are as follows:
Current Position Business Experience Name Age (date elected) During Last 5 Years - ---- --- -------------- ------------------- F.M. Kirby 80 Chairman of the Board (since 1967) Chairman of the Board, Alleghany. John J. Burns, Jr. 68 President, chief operating officer President, chief operating officer (since 1977) and chief executive and chief executive officer, officer (since 1992) Alleghany. David B. Cuming 67 Senior Vice President and chief Senior Vice President and chief financial officer (since 1989) financial officer, Alleghany. Robert M. Hart 55 Senior Vice President, General Counsel Senior Vice President, General (since 1994) and Secretary (since 1995) Counsel and Secretary, Alleghany. Peter R. Sismondo 44 Vice President, Controller, Assistant Vice President, Controller, Secretary, principal accounting Treasurer, Assistant Secretary and officer (since 1989) and Treasurer principal accounting officer, (since 1995) Alleghany.
-53- 54 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 26 of Alleghany's Annual Report to Stockholders for the year 1999, filed as Exhibit 13 hereto. Recent Sales of Unregistered Securities. Other than unregistered issuances of Alleghany common stock previously reported in Alleghany's Quarterly Reports on Form 10-Q for the quarters ending March 31, 1999, June 30, 1999 and September 30, 1999, such issuances that did not involve a sale consisting of issuances of common stock and other securities pursuant to employee incentive plans and the sale described above, Alleghany did not sell any Alleghany common stock during 1999 that was not registered under the Securities Act. Item 6. Selected Financial Data. The information required by this Item 6 is incorporated by reference from page 26 of Alleghany's Annual Report to Stockholders for the year 1999, 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 3, 5, 7 through 9, 11 through 13, 15 through 17, 19 through 20, 23 and 28 through 30, of Alleghany's Annual Report to Stockholders for the year 1999, filed as Exhibit 13 hereto. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information required by this Item 7A is incorporated by reference from pages 30 through 31 of Alleghany's Annual Report to Stockholders for the year 1999, 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 32 through 48 of Alleghany's Annual Report to Stockholders for the year 1999, filed as Exhibit 13 hereto. -54- 55 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not applicable. -55- 56 PART III Item 10. Directors and Executive Officers of Registrant. As permitted by General Instruction G(3), information concerning the executive officers of Alleghany is set forth as a supplemental item included in Part I of this Form 10-K Report under the caption "Executive Officers of Registrant." Information concerning the directors of Alleghany is incorporated by reference from pages 5 through 8 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 28, 2000. 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 10 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 28, 2000. Item 11. Executive Compensation. The information required by this Item 11 is incorporated by reference from pages 12 through 17 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 28, 2000. The information set forth beginning with the middle of page 17 through page 23 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 28, 2000, is not "filed" as a part hereof. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item 12 is incorporated by reference from pages 2 through 4, and from pages 9 through 10, of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 28, 2000. Item 13. Certain Relationships and Related Transactions. The information required by this Item 13 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 28, 2000. -56- 57 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 LLP, independent certified public accountants, are incorporated by reference from the Annual Report to Stockholders for the year 1999 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 LLP, independent certified public accountants, are detailed in a separate index herein. 3. Exhibits. The following are filed as exhibits to this Report:
Exhibit Number Description - -------------- ----------- 3.01 Restated Certificate of Incorporation of Alleghany, as amended by Amendment accepted and received for filing by the Secretary of State of the State of Delaware on June 23, 1988, filed as Exhibit 20 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 3.02 By-Laws of Alleghany as amended April 18, 1995, filed as Exhibit 3.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, is incorporated herein by reference. *10.01 Description of Alleghany Management Incentive Plan, filed as Exhibit 10.01 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference.
- -------- * Compensatory plan or arrangement. -57- 58 *10.02 Alleghany Corporation Deferred Compensation Plan, as amended and restated as of December 15, 1992, filed as Exhibit 10.03 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. *10.03 Alleghany 1993 Long-Term Incentive Plan, as amended and restated effective as of January 1, 1994, filed as Exhibit 10.06(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.04 Alleghany Supplemental Death Benefit Plan dated as of May 15, 1985 and effective as of January 1, 1985, filed as Exhibit 10.08 to Old Alleghany's Annual Report on Form 10-K for the year ended December 31, 1985, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.05(a) Trust Agreement Amendment made as of July 8, 1994 between Alleghany and Chemical Bank, filed as Exhibit 10.08(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. *10.05(b) Alleghany Retirement Plan, as amended and restated on March 14, 1995, filed as Exhibit 10.08(c) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.05(c) Amendments to Alleghany Retirement Plan, effective as of January 1, 1996, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, is incorporated herein by reference. *10.05(d) Amendments to Alleghany Retirement Plan, effective as of January 1, 1998, filed as Exhibit 10.05(d) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1997, are incorporated herein by reference.
- -------- * Compensatory plan or arrangement. -58- 59 *10.06 Alleghany Retirement COLA Plan dated and effective as of January 1, 1992, as adopted on March 17, 1992, filed as Exhibit 10.7 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, are incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.07 Description of Alleghany Group Long Term Disability Plan effective as of July 1, 1995, filed as Exhibit 10.10 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. *10.08 Alleghany Amended and Restated Directors' Stock Option Plan effective as of April 20, 1993, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. *10.09 Alleghany Directors' Equity Compensation Plan, effective as of January 16, 1995, filed as Exhibit 10.11 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.10 Alleghany Non-Employee Directors' Retirement Plan effective July 1, 1990, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.11(a) 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. -59- 60 10.11(b) First Amendment dated as of April 8, 1998, to the Revolving Credit Loan Agreement dated as of June 14, 1995, among Alleghany and Chase Manhattan Bank (formerly known as Chemical Bank), filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, is incorporated herein by reference. 10.12(a) Distribution Agreement dated as of June 16, 1998 by and between Alleghany Corporation and Chicago Title Corporation (the "Spin-Off Distribution Agreement"), filed as Exhibit 2.1(a) to Chicago Title Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference (Securities and Exchange Commission File No. 001-13995). 10.12(b) List of Contents of Exhibits to the Spin-Off Distribution Agreement, filed as Exhibit 2.1(b) to Chicago Title Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference (Securities and Exchange Commission File No. 001-13995). 10.12(c) Tax Sharing Agreement dated as of June 17, 1998 by and among Alleghany Corporation and Chicago Title Corporation, filed as Exhibit 10.2 to Chicago Title Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference (Securities and Exchange Commission File No. 001-13995). 10.13 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).
-60- 61 10.14 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). 10.15(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. 10.15(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. 10.16(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.
-61- 62 10.16(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. 10.16(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. 10.16(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. 10.16(e) Third Amendment to Alleghany Properties Note Purchase Agreement dated as of December 11, 1998 by and among Alleghany, Alleghany Properties, Inc., Hartford Life Insurance Company, 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, filed as Exhibit 10.17(e) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference.
-62- 63 10.17(a) Note Purchase Agreement dated as of December 11, 1998 by and among Alleghany Properties, Inc., Alleghany and United of Omaha Life Insurance Company (the "Alleghany Properties 1998 Note Purchase Agreement"), filed as Exhibit 10.18(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. Agreements dated as of December 11, 1998 among Alleghany Properties, Inc., Alleghany and each of Companion Life Insurance Company, Hartford Life Insurance Company, The Lincoln National Life Insurance Company, and First Penn-Pacific Life Insurance Company are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K. 10.17(b) List of Contents of Annexes and Exhibits to the Alleghany Properties 1998 Note Purchase Agreement, filed as Exhibit 10.18(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.18(a) Installment Sales Agreement dated December 8, 1986 by and among Alleghany, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch & Co., Inc., filed as Exhibit 10.10 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1986, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.18(b) Intercreditor and Collateral Agency Agreement dated as of October 20, 1997 among The Chase Manhattan Bank, Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371).
-63- 64 10.18(c) Master Agreement dated as of October 20, 1997 between Barclays Bank PLC and Alleghany Funding Corporation, and related Amended Confirmation dated October 24, 1997 between Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, are incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.18(d) Indenture dated as of October 20, 1997 between Alleghany Funding Corporation and The Chase Manhattan Bank, filed as Exhibit 10.3 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.19(a) 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). 10.19(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). 10.20(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).
-64- 65 10.21(b) List of Contents of Exhibits and Schedules to the Celite Joint Venture Stock Purchase Agreement, filed as Exhibit 10.3(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.21(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). 10.21(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). 10.21(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). 10.22(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).
-65- 66 10.22(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). 10.22(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). 10.23(a) Credit Agreement dated as of March 17, 1999 among Mineral Holdings Inc., World Minerals Inc., the Banks named therein and The Chase Manhattan Bank, as Administrative Agent and Collateral Agent (the "World Minerals Credit Agreement"), filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.23(b) List of Contents of Exhibits, Annexes and Schedules to the World Minerals Credit Agreement, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.23(c) Subordination Agreement dated as of March 17, 1999, among Alleghany Corporation and The Chase Manhattan Bank, filed as Exhibit 10.3 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
-66- 67 10.24(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. 10.24(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. 10.25 Indenture dated as of June 25, 1996 between URC Holdings Corp. (now known as Underwriters Re Group, Inc.) and The First National Bank of Chicago, as trustee, relating to the 7-7/8% Senior Notes due 2006, filed as Exhibit 10.30(j) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10.26(a) Credit Agreement dated as of November 1, 1999 by and among Underwriters Re Group, Inc., Underwriters Reinsurance Company and Venton Underwriting Limited as Borrowers; Venton Underwriting Limited, Talbot Underwriting Limited, Underwriters Re Capital Ltd., Underwriters Reinsurance Company and certain of the wholly-owned subsidiaries of Underwriters Reinsurance Company as Account Parties; Underwriters Re Group, Inc. and Underwriters Reinsurance Company as Guarantors; the Banks parties thereto from time to time; Mellon Bank, N.A. as Issuing Bank, as Administrative Agent and as Co-Arranger; Dresdner Bank AG, New York Branch and Grand Cayman Branch, as Documentation Agent; Dresdner Kleinwort Benson North America LLC as Co-Arranger; and First Union National Bank as Syndication Agent (the "Underwriters Credit Agreement").
-67- 68 10.26(b) List of Contents of Exhibits to the Underwriters Credit Agreement. Alleghany agrees to furnish supplementally a copy of any omitted exhibit to the Securities and Exchange Commission upon request. 10.27(a) Agreement and Plan of Amalgamation dated as of July 30, 1998 by and among Underwriters Reinsurance Company, Underwriters Acquisition Company Ltd. and Venton Holdings Ltd. (the "Amalgamation Agreement"), filed as Exhibit 10.28(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.27(b) List of Contents of Exhibits to the Amalgamation Agreement, filed as Exhibit 10.28(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.27(c) Amendment No. 1 dated as of September 24, 1998 to the Amalgamation Agreement (the "Amalgamation Amendment No. 1"), filed as Exhibit 10.28(c) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.27(d) List of Contents of Exhibits to the Amalgamation Amendment No. 1, filed as Exhibit 10.28(d) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.28 Stock Purchase Agreement dated as of December 30, 1999 by and between Alleghany and Swiss Re America Holding Corporation, filed as Exhibit 99.1 to Alleghany's Current Report on Form 8-K dated December 30, 1999, is incorporated herein by reference. 13 Pages 3, 5, 7 through 9, 11 through 13, 15 through 17, 19 through 20, 23, 26 and 28 through 48 of the Annual Report to Stockholders of Alleghany for the year 1999.
-68- 69 21 List of subsidiaries of Alleghany. 23 Consent of KPMG 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. 333-37237), Form S-8 (Registration No. 333-57133), Form S-8 (Registration No. 333-76159), Form S-3 (Registration No. 33-55707), Form S-3 (Registration No. 33-62477), Form S-3 (Registration No. 333-09881), 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 1999. -69- 70 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 21, 2000 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 21, 2000 By /s/ Rex D. Adams -------------- ---------------------------------------- Rex D. Adams Director Date: March 21, 2000 By /s/ John J. Burns, Jr. -------------- ---------------------------------------- John J. Burns, Jr. President and Director (principal executive officer) Date: March 21, 2000 By /s/ Dan R. Carmichael -------------- ---------------------------------------- Dan R. Carmichael Director Date: March 21, 2000 By /s/ David B. Cuming -------------- ---------------------------------------- David B. Cuming Senior Vice President (principal financial officer) Date: March 21, 2000 By /s/ Thomas S. Johnson -------------- ---------------------------------------- Thomas S. Johnson Director -70- 71 Date: March 21, 2000 By /s/ Allan P. Kirby, Jr. -------------- ---------------------------------------- Allan P. Kirby, Jr. Director Date: March 21, 2000 By /s/ F.M. Kirby -------------- ---------------------------------------- F.M. Kirby Chairman of the Board and Director Date: March 21, 2000 By /s/ William K. Lavin -------------- ---------------------------------------- William K. Lavin Director Date: March 21, 2000 By /s/ Roger Noall -------------- ---------------------------------------- Roger Noall Director Date: March 21, 2000 By /s/ Peter R. Sismondo -------------- --------------------------------------- Peter R. Sismondo Vice President, Controller, Treasurer and Assistant Secretary (principal accounting officer) Date: March 21, 2000 By /s/ James F. Will -------------- ---------------------------------------- James F. Will Director -71- 72 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. 73 SCHEDULE I ALLEGHANY CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1999 (in thousands)
Amount at which shown in the Fair Balance Type of Investment Cost Value Sheet - ------------------------------------------------------------------------------------------------------------------------------------ Fixed maturities: Bonds: United States Government and government agencies and authorities $287,803 $282,589 $282,589 States, municipalities and political subdivisions 419,446 413,128 413,128 Foreign governments 25,840 24,729 24,729 Public utilities 45,742 45,306 45,306 All other corporate bonds 388,454 377,168 377,168 Redeemable preferred stock 25,727 25,875 25,875 --------------------- ------------------ ---------------------- Fixed maturities 1,193,012 $1,168,795 1,168,795 --------------------- ================== ---------------------- Equity securities: Common stocks: Banks, trust, and insurance companies 16,000 $16,000 16,000 Industrial, miscellaneous, and all other 224,623 454,104 454,104 --------------------- ------------------ ---------------------- Equity securities 240,623 $470,104 470,104 --------------------- ================== ---------------------- Other long-term investments 11,110 11,050 Short-term investments 277,798 277,798 --------------------- ---------------------- Total investments $1,722,543 $1,927,747 ===================== ======================
74 SCHEDULE II ALLEGHANY CORPORATION CONDENSED BALANCE SHEETS DECEMBER 31, 1999 AND 1998 (in thousands)
1999 1998 ----------------------------------------------- Assets Equity securities (cost: 1999 $131,398; 1998 $207,573) $258,871 $534,296 Short-term investments 120,514 284 Cash (110) 999 Accounts and other receivables, less allowances 5,782 27,992 Property and equipment - at cost, less accumulated depreciation 141 4,866 Other assets 8,571 47,347 Investment in consolidated subsidiaries 892,533 898,450 =============================================== $1,286,302 $1,514,234 ----------------------------------------------- Liabilities and common stockholders' equity Other liabilities $56,767 $66,438 Net deferred tax liability 90,440 140,686 Long-term debt 31,198 59,682 ----------------------------------------------- Total liabilities 178,405 266,806 Commitments and contingent liabilities Common stockholders' equity 1,107,897 1,247,428 ----------------------------------------------- $1,286,302 $1,514,234 ===============================================
See accompanying Notes to Condensed Financial Statements. 75 SCHEDULE II ALLEGHANY CORPORATION CONDENSED STATEMENTS OF EARNINGS THREE YEARS ENDED DECEMBER 31, 1999 (in thousands)
1999 1998 1997 ------------------------------------------------------------ Revenues: Interest, dividend and other income $9,530 $73,477 $61,362 Net gain (loss) on investment transactions 85,174 318 (11,280) ------------------------------------------------------------ Total revenues 94,704 73,795 50,082 ------------------------------------------------------------ Costs and Expenses: Interest expense 4,397 6,597 4,466 General and administrative 17,632 91,934 73,908 ------------------------------------------------------------ Total costs and expenses 22,029 98,531 78,374 ------------------------------------------------------------ Operating gain (loss) 72,675 (24,736) (28,292) Equity in earnings of consolidated subsidiaries 89,229 115,752 93,522 ------------------------------------------------------------ Earnings from continuing operations, before income taxes 161,904 91,016 65,230 Income taxes 61,799 27,635 13,830 ------------------------------------------------------------ Earnings from continuing operations 100,105 63,381 51,400 Earnings from discontinued operations, net of tax 0 32,725 54,267 ------------------------------------------------------------ Net earnings $100,105 $96,106 $105,667 ============================================================
See accompanying Notes to Condensed Financial Statements. 76 SCHEDULE II ALLEGHANY CORPORATION CONDENSED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1999 (in thousands)
1999 1998 1997 ------------------------------------------------------ Cash flows from operating activities Earnings from continuing operations $100,105 $63,381 $51,400 Adjustments to reconcile earnings from continuing operations to cash provided by (used in) continuing operations: Depreciation and amortization 23 894 501 Net (gain) loss on investment transactions (85,174) (318) 11,280 Decrease (increase) in accounts and other receivables, less allowances 9,629 (7,432) (2,402) Decrease (increase) in other assets 1,387 (15,327) (2,874) Increase (decrease) in other liabilities 15,412 (8,562) (7,375) Other operating, net (5) 471 1,226 Equity in undistributed net earnings of consolidated subsidiaries (60,616) (79,071) (64,007) ------------------------------------------------------ Net adjustments (119,344) (109,345) (63,651) ------------------------------------------------------ Cash used in operating activities (19,239) (45,964) (12,251) ------------------------------------------------------ Cash flows from investing activities Purchase of investments (6,777) (195) (100,221) Sales of investments 168,132 7,015 53,390 Capital contributions to consolidated subsidiaries (11,050) (263) (1,171) Cash dividends from consolidated subsidiaries 20,202 61,826 14,362 Purchase of property and equipment 10 (2,613) (976) Disposition of property and equipment 0 0 0 Net change in short-term investments (120,507) 3,942 21,933 ------------------------------------------------------ Net cash provided by (used in) investing activities 50,010 69,712 (12,683) ------------------------------------------------------ Cash flows from financing activities Principal payments on long-term debt (56,300) (100,800) (69,425) Proceeds of long-term debt 38,100 125,359 85,425 Cash provided by discontinued operations 0 3,903 18,805 Net cash transferred to subsidiary (358) 0 0 Other, net (13,322) (51,211) (11,726) ------------------------------------------------------ Net cash (used in) provided by financing activities (31,880) (22,749) 23,079 ------------------------------------------------------ Net (decrease) increase in cash (1,109) 999 (1,855) Cash at beginning of year 999 0 1,855 ------------------------------------------------------ Cash at end of year ($110) $999 $0 ====================================================== Supplemental disclosures of cash flow information Cash paid during the year for interest $5,374 $5,147 $4,869 Cash paid during the year for income taxes $16,455 $56,112 $34,100 Supplemental disclosure of noncash investing and financing activities Book value of spin-off of Chicago Title and Trust Company $0 $413,767 $0
See accompanying Notes to Condensed Financial Statements. 77 SCHEDULE II ALLEGHANY CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (in thousands) 1. Investment in Consolidated Subsidiaries. Reference is made to Note 2 of the Notes to Consolidated Financial Statements incorporated herein by reference for information regarding the spin-off of Chicago Title and Trust. 2. Long-Term Debt. Reference is made to Note 6 of the Notes to Consolidated Financial Statements incorporated herein by reference for information regarding the significant provisions of the revolving credit loan agreement of Alleghany. Included in long-term debt in the accompanying condensed balance sheets is $19,123 and $12,075 in 1999 and 1998 of intercompany notes payable to Alleghany Funding and World Minerals, respectively. 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 13 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. 78 SCHEDULE III ALLEGHANY CORPORATION AND SUBSIDIARIES SUPPLEMENTARY INSURANCE INFORMATION (in thousands)
AT DECEMBER 31 -------------------------------------------------------------------------------------- FUTURE POLICY OTHER BENEFITS, POLICY DEFERRED LOSSES, CLAIMS POLICY CLAIMS AND ACQUISITION AND LOSS UNEARNED BENEFITS YEAR SEGMENT COST EXPENSES PREMIUMS PAYABLE - ---------- --------------------- -------------------------------------------------------------------------------------- 1999 Property and casualty reinsurance $97,593 $1,973,924 $419,608 $0 ====================================================================================== 1998 Property and casualty reinsurance $93,397 $1,554,818 $389,603 $0 ====================================================================================== 1997 Property and casualty reinsurance $29,644 $1,159,070 $136,288 $0 ======================================================================================
FOR THE YEAR ENDED DECEMBER 31 ------------------------------------------------------------------------------------------------- BENEFITS, CLAIMS, AMORTIZATION LOSSES OF DEFERRED NET AND POLICY OTHER PREMIUM INVESTMENT SETTLEMENT ACQUISITION OPERATING PREMIUMS YEAR SEGMENT REVENUE INCOME EXPENSES COSTS EXPENSES WRITTEN - ------- ------------------ ------------------------------------------------------------------------------------------------- 1999 Property and casualty reinsurance $719,846 $95,194 $548,459 $172,527 $86,663 $725,436 ================================================================================================= 1998 Property and casualty reinsurance $420,809 $80,404 $288,259 $113,170 $54,805 $438,162 ================================================================================================= 1997 Property and casualty reinsurance $376,672 $75,531 $261,828 $94,444 $51,769 $414,191 =================================================================================================
79 SCHEDULE IV ALLEGHANY CORPORATION AND SUBSIDIARIES REINSURANCE THREE YEARS ENDED DECEMBER 31, 1999 (in thousands)
PERCENTAGE CEDED TO ASSUMED OF AMOUNT GROSS OTHER FROM OTHER NET ASSUMED YEAR SEGMENT AMOUNT COMPANIES COMPANIES AMOUNT TO NET - --------- -------------- ----------------------------------------------------------------------- ---------- 1999 Property and casualty reinsurance premiums $312,839 $182,683 $589,690 $719,846 82% ======================================================================= ========== 1998 Property and casualty reinsurance premiums $144,812 $110,377 $386,374 $420,809 92% ======================================================================= ========== 1997 Property and casualty reinsurance premiums $112,158 $88,416 $352,930 $376,672 94% ======================================================================= ==========
80 SCHEDULE VI ALLEGHANY CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS (in thousands)
DISCOUNT, IF ANY, RESERVES DEDUCTED FOR IN RESERVES UNPAID FOR UNPAID DEFERRED CLAIMS CLAIMS AFFILIATION POLICY AND CLAIM AND CLAIM NET WITH ACQUISITION ADJUSTMENT ADJUSTMENT UNEARNED EARNED INVESTMENT REGISTRANT COST EXPENSES EXPENSES PREMIUMS PREMIUMS INCOME - ----------------- --------------------------------------------------------------------------------------------------------------- 1999 Consolidated property-casualty entities $97,593 $1,973,924 $0 $419,608 $719,846 $95,194 =============================================================================================================== 1998 Consolidated property-casualty entities $93,397 $1,554,818 $0 $389,603 $420,809 $80,404 =============================================================================================================== 1997 Consolidated property-casualty entities $29,644 $1,159,070 $0 $136,288 $376,672 $75,531 ===============================================================================================================
CLAIMS AND CLAIM ADJUSTMENT EXPENSES INCURRED RELATED TO AMORTIZATION ----------------------------------------- OF DEFERRED PAID CLAIMS AFFILIATION (1) (2) POLICY AND CLAIM WITH CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS REGISTRANT YEAR YEAR COSTS EXPENSES WRITTEN - ----------------- --------------------------------------------------------------------------------------------------------------- 1999 Consolidated property-casualty entities $516,704 $31,755 $172,527 $395,035 $725,436 =============================================================================================================== 1998 Consolidated property-casualty entities $290,513 ($2,254) $113,170 $192,031 $438,162 =============================================================================================================== 1997 Consolidated property-casualty entities $267,530 ($5,702) $94,444 $210,015 $414,191 ===============================================================================================================
81 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Alleghany Corporation: Under date of February 28, 2000, we reported on the consolidated balance sheets of Alleghany Corporation and subsidiaries as of December 31, 1999 and 1998 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, 1999 as contained in the 1999 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 1999. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statements schedules as listed in the accompanying index. These financial statements schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements schedules based on our audits. In our opinion, such financial statements schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ KPMG LLP KPMG LLP New York, New York February 28, 2000 82 EXHIBIT INDEX
Exhibit Number Description - -------------- ----------- 3.01 Restated Certificate of Incorporation of Alleghany, as amended by Amendment accepted and received for filing by the Secretary of State of the State of Delaware on June 23, 1988, filed as Exhibit 20 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 3.02 By-Laws of Alleghany as amended April 18, 1995, filed as Exhibit 3.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995, is incorporated herein by reference. *10.01 Description of Alleghany Management Incentive Plan, filed as Exhibit 10.01 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. *10.02 Alleghany Corporation Deferred Compensation Plan, as amended and restated as of December 15, 1992, filed as Exhibit 10.03 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. *10.03 Alleghany 1993 Long-Term Incentive Plan, as amended and restated effective as of January 1, 1994, filed as Exhibit 10.06(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.04 Alleghany Supplemental Death Benefit Plan dated as of May 15, 1985 and effective as of January 1, 1985, filed as Exhibit 10.08 to Old Alleghany's Annual Report on Form 10-K for the year ended December 31, 1985, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371).
- -------- * Compensatory plan or arrangement. 83 *10.05(a) Trust Agreement Amendment made as of July 8, 1994 between Alleghany and Chemical Bank, filed as Exhibit 10.08(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. *10.05(b) Alleghany Retirement Plan, as amended and restated on March 14, 1995, filed as Exhibit 10.08(c) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.05(c) Amendments to Alleghany Retirement Plan, effective as of January 1, 1996, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1996, is incorporated herein by reference. *10.05(d) Amendments to Alleghany Retirement Plan, effective as of January 1, 1998, filed as Exhibit 10.05(d) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1997, are incorporated herein by reference. *10.06 Alleghany Retirement COLA Plan dated and effective as of January 1, 1992, as adopted on March 17, 1992, filed as Exhibit 10.7 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, are incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.07 Description of Alleghany Group Long Term Disability Plan effective as of July 1, 1995, filed as Exhibit 10.10 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1995, is incorporated herein by reference. *10.08 Alleghany Amended and Restated Directors' Stock Option Plan effective as of April 20, 1993, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference.
- -------- * Compensatory plan or arrangement. 84 *10.09 Alleghany Directors' Equity Compensation Plan, effective as of January 16, 1995, filed as Exhibit 10.11 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1994, is incorporated herein by reference. *10.10 Alleghany Non-Employee Directors' Retirement Plan effective July 1, 1990, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.11(a) 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. 10.11(b) First Amendment dated as of April 8, 1998, to the Revolving Credit Loan Agreement dated as of June 14, 1995, among Alleghany and Chase Manhattan Bank (formerly known as Chemical Bank), filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998, is incorporated herein by reference. 10.12(a) Distribution Agreement dated as of June 16, 1998 by and between Alleghany Corporation and Chicago Title Corporation (the "Spin-Off Distribution Agreement"), filed as Exhibit 2.1(a) to Chicago Title Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference (Securities and Exchange Commission File No. 001-13995). 10.12(b) List of Contents of Exhibits to the Spin-Off Distribution Agreement, filed as Exhibit 2.1(b) to Chicago Title Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference (Securities and Exchange Commission File No. 001-13995).
- -------- * Compensatory plan or arrangement. 85 10.12(c) Tax Sharing Agreement dated as of June 17, 1998 by and among Alleghany Corporation and Chicago Title Corporation, filed as Exhibit 10.2 to Chicago Title Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, is incorporated herein by reference (Securities and Exchange Commission File No. 001-13995). 10.13 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). 10.14 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). 10.15(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. 10.15(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.
86 10.16(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. 10.16(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. 10.16(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. 10.16(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.
87 10.16(e) Third Amendment to Alleghany Properties Note Purchase Agreement dated as of December 11, 1998 by and among Alleghany, Alleghany Properties, Inc., Hartford Life Insurance Company, 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, filed as Exhibit 10.17(e) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.17(a) Note Purchase Agreement dated as of December 11, 1998 by and among Alleghany Properties, Inc., Alleghany and United of Omaha Life Insurance Company (the "Alleghany Properties 1998 Note Purchase Agreement"), filed as Exhibit 10.18(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. Agreements dated as of December 11, 1998 among Alleghany Properties, Inc., Alleghany and each of Companion Life Insurance Company, Hartford Life Insurance Company, The Lincoln National Life Insurance Company, and First Penn-Pacific Life Insurance Company are omitted pursuant to Instruction 2 of Item 601 of Regulation S-K. 10.17(b) List of Contents of Annexes and Exhibits to the Alleghany Properties 1998 Note Purchase Agreement, filed as Exhibit 10.18(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.18(a) Installment Sales Agreement dated December 8, 1986 by and among Alleghany, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch & Co., Inc., filed as Exhibit 10.10 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1986, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371).
88 10.18(b) Intercreditor and Collateral Agency Agreement dated as of October 20, 1997 among The Chase Manhattan Bank, Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.18(c) Master Agreement dated as of October 20, 1997 between Barclays Bank PLC and Alleghany Funding Corporation, and related Amended Confirmation dated October 24, 1997 between Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, are incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.18(d) Indenture dated as of October 20, 1997 between Alleghany Funding Corporation and The Chase Manhattan Bank, filed as Exhibit 10.3 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.19(a) 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). 10.19(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).
89 10.20(a) Joint Venture Stock Purchase Agreement dated as of July 1, 1991 among Celite Holdings Corporation, Celite Corporation and Manville Corporation (the "Celite Joint Venture Stock Purchase Agreement"), filed as Exhibit 10.3(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.21(b) List of Contents of Exhibits and Schedules to the Celite Joint Venture Stock Purchase Agreement, filed as Exhibit 10.3(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.21(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). 10.21(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). 10.21(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).
90 10.22(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). 10.22(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). 10.22(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). 10.23(a) Credit Agreement dated as of March 17, 1999 among Mineral Holdings Inc., World Minerals Inc., the Banks named therein and The Chase Manhattan Bank, as Administrative Agent and Collateral Agent (the "World Minerals Credit Agreement"), filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.23(b) List of Contents of Exhibits, Annexes and Schedules to the World Minerals Credit Agreement, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference. 10.23(c) Subordination Agreement dated as of March 17, 1999, among Alleghany Corporation and The Chase Manhattan Bank, filed as Exhibit 10.3 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, is incorporated herein by reference.
91 10.24(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. 10.24(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. 10.25 Indenture dated as of June 25, 1996 between URC Holdings Corp. (now known as Underwriters Re Group, Inc.) and The First National Bank of Chicago, as trustee, relating to the 7-7/8% Senior Notes due 2006, filed as Exhibit 10.30(j) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1996, is incorporated herein by reference. 10.26(a) Credit Agreement dated as of November 1, 1999 by and among Underwriters Re Group, Inc., Underwriters Reinsurance Company and Venton Underwriting Limited as Borrowers; Venton Underwriting Limited, Talbot Underwriting Limited, Underwriters Re Capital Ltd., Underwriters Reinsurance Company and certain of the wholly-owned subsidiaries of Underwriters Reinsurance Company as Account Parties; Underwriters Re Group, Inc. and Underwriters Reinsurance Company as Guarantors; the Banks parties thereto from time to time; Mellon Bank, N.A. as Issuing Bank, as Administrative Agent and as Co-Arranger; Dresdner Bank AG, New York Branch and Grand Cayman Branch, as Documentation Agent; Dresdner Kleinwort Benson North America LLC as Co-Arranger; and First Union National Bank as Syndication Agent (the "Underwriters Credit Agreement").
92 10.26(b) List of Contents of Exhibits to the Underwriters Credit Agreement. Alleghany agrees to furnish supplementally a copy of any omitted exhibit to the Securities and Exchange Commission upon request. 10.27(a) Agreement and Plan of Amalgamation dated as of July 30, 1998 by and among Underwriters Reinsurance Company, Underwriters Acquisition Company Ltd. and Venton Holdings Ltd. (the "Amalgamation Agreement"), filed as Exhibit 10.28(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.27(b) List of Contents of Exhibits to the Amalgamation Agreement, filed as Exhibit 10.28(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.27(c) Amendment No. 1 dated as of September 24, 1998 to the Amalgamation Agreement (the "Amalgamation Amendment No. 1"), filed as Exhibit 10.28(c) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.27(d) List of Contents of Exhibits to the Amalgamation Amendment No. 1, filed as Exhibit 10.28(d) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1998, is incorporated herein by reference. 10.28 Stock Purchase Agreement dated as of December 30, 1999 by and between Alleghany and Swiss Re America Holding Corporation, filed as Exhibit 99.1 to Alleghany's Current Report on Form 8-K dated December 30, 1999, is incorporated herein by reference. 13 Pages 3, 5, 7 through 9, 11 through 13, 15 through 17, 19 through 20, 23, 26 and 28 through 48 of the Annual Report to Stockholders of Alleghany for the year 1999. 21 List of subsidiaries of Alleghany.
93 23 Consent of KPMG 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. 333-37237), Form S-8 (Registration No. 333-57133), Form S-8 (Registration No. 333-76159), Form S-3 (Registration No. 33-55707), Form S-3 (Registration No. 33-62477), Form S-3 (Registration No. 333-09881), and Form S-3 (Registration No. 333-13971). 27 Financial Data Schedule.
EX-10.26.A 2 CREDIT AGREEMENT 1 Exhibit 10.26(a) $350,000,000 CREDIT AGREEMENT BY AND AMONG UNDERWRITERS RE GROUP, INC., UNDERWRITERS REINSURANCE COMPANY and VENTON UNDERWRITING LIMITED, as Borrowers, VENTON UNDERWRITING LIMITED, TALBOT UNDERWRITING LIMITED, UNDERWRITERS RE CAPITAL LTD and UNDERWRITERS REINSURANCE COMPANY and certain of its wholly-owned Subsidiaries, as Account Parties, AND UNDERWRITERS RE GROUP, INC. and UNDERWRITERS REINSURANCE COMPANY, as Guarantors, AND THE BANKS PARTIES HERETO FROM TIME TO TIME AND MELLON BANK, N.A., as Issuing Bank, as Administrative Agent and as Co-Arranger AND DRESDNER KLEINWORT BENSON NORTH AMERICA LLC, as Co-Arranger AND DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH, as Documentation Agent AND FIRST UNION NATIONAL BANK, as Syndication Agent DATED AS OF November 1, 1999 2 Table of Contents
Section Title Page ARTICLE I DEFINITIONS; CONSTRUCTION.................................................1 1.01 Certain Definitions.......................................................1 1.02 Construction.............................................................16 1.03 Accounting Principles....................................................16 ARTICLE II THE LETTER OF CREDIT FACILITY............................................16 2.01 Letters of Credit........................................................16 2.02 Commitment Fee; Reduction of the Committed Amounts.......................18 2.03 Procedure for Issuance and Amendment of Letters of Credit................18 2.04 Letter of Credit Participating Interests.................................19 2.05 Letter of Credit Drawings and Reimbursements.............................21 2.06 Equalization.............................................................21 2.07 Obligations Absolute.....................................................22 2.08 Unacceptable Credit Rating...............................................22 2.09 Letter of Credit Applications............................................22 2.10 Certain Provisions Relating to the Issuing Bank..........................23 2.11 Payments Generally; Interest and Interest on Overdue Amounts..................................................................24 2.12 Additional Compensation in Certain Circumstances.........................25 2.13 Taxes....................................................................26 2.14 Extensions of Expiration Date............................................28 2.15 Tranches.................................................................28 ARTICLE IIA REVOLVING CREDIT LOANS...................................................31 2A.1 Revolving Credit Loans...................................................31 2A.2 Making of Loans..........................................................32 2A.3 Interest Rates...........................................................33 2A.4 Conversion or Renewal of Interest Rate Options...........................35 2A.5 Prepayments Generally....................................................36 2A.6 Optional Prepayments.....................................................36 2A.7 Mandatory Prepayments....................................................36 2A.8 Interest Payment Dates...................................................36 2A.9 Pro Rata Treatment and Payments..........................................37 2A.10 Calculation of Dollar Equivalent.........................................38 2A.11 Additional Compensation in Certain Circumstances, etc. ..................38 2A.12 Funding by Branch, Subsidiary or Affiliate...............................40 ARTICLE III REPRESENTATIONS AND WARRANTIES...........................................41 3.01 Corporate Existence and Standing.........................................41 3.02 Authorization and Validity...............................................41
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3.03 Compliance with Laws and Contracts.......................................41 3.04 Governmental Consents....................................................42 3.05 Financial Statements.....................................................42 3.06 Material Adverse Change..................................................42 3.07 Taxes....................................................................42 3.08 Litigation...............................................................42 3.09 Insurance Licenses.......................................................42 3.10 Use of Proceeds..........................................................43 3.11 Permits, Licenses and Rights.............................................43 3.12 Disclosure...............................................................43 3.13 Environmental Laws.......................................................43 3.14 Reserves.................................................................44 3.15 Year 2000 Compliance.....................................................44 3.16 Capitalization...........................................................44 3.17 ERISA....................................................................44 3.18 Defaults.................................................................45 3.19 Federal Reserve Regulations..............................................45 3.20 Investment Company; Public Utility Holding Company Act...................45 3.21 Certain Fees.............................................................45 3.22 Solvency.................................................................45 3.23 Ownership of Properties..................................................46 3.24 Indebtedness.............................................................46 3.25 Material Agreements......................................................46 3.26 Insurance................................................................46 ARTICLE IV CONDITIONS...............................................................46 4.01 Effectiveness............................................................46 4.02 Extension of Credit......................................................47 ARTICLE V GUARANTEE................................................................48 5.01 The Guarantee............................................................48 5.02 Obligations Unconditional................................................48 5.03 Reinstatement............................................................49 5.04 Remedies.................................................................49 5.05 Continuing Guarantee.....................................................50 5.06 No Restrictions..........................................................50 ARTICLE VI COVENANTS................................................................50 6.01 Financial Reporting......................................................50 6.02 Use of Proceeds..........................................................52 6.03 Notice of Default........................................................52 6.04 Conduct of Business......................................................53 6.05 Taxes....................................................................53 6.06 Insurance................................................................53 6.07 Compliance with Laws.....................................................54 6.08 Maintenance of Properties; Year 2000 Compliance..........................54 6.09 Inspection...............................................................54 6.10 Capital Stock and Dividends..............................................54 6.11 Indebtedness.............................................................54 6.12 Merger...................................................................55 6.13 Sale of Assets...........................................................55
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6.14 Investments and Purchases................................................55 6.15 Contingent Obligations...................................................57 6.16 Liens....................................................................57 6.17 Affiliates...............................................................58 6.18 Other Indebtedness.......................................................58 6.19 Environmental Matters....................................................58 6.20 Change in Corporate Structure; Fiscal Year...............................58 6.21 Inconsistent Agreements..................................................58 6.22 Financial Covenants......................................................59 6.23 Tax Consolidation........................................................59 6.24 ERISA Compliance.........................................................59 ARTICLE VII EVENTS OF DEFAULT........................................................60 7.01 Events of Default........................................................60 7.02 Consequences of an Event of Default......................................62 7.03 Certain Actions in Respect of Letters of Credit upon Default.............63 ARTICLE VIII THE AGENTS...............................................................63 8.01 Appointment..............................................................63 8.02 General Nature of Agents' Duties.........................................64 8.03 Exercise of Powers.......................................................64 8.04 General Exculpatory Provisions...........................................65 8.05 Administration by the Agents.............................................65 8.06 Bank Not Relying on Agent or Other Banks.................................66 8.07 Indemnification..........................................................66 8.08 Agents in their Individual Capacities....................................67 8.09 Successor Agents.........................................................67 8.10 Additional Administrative Agents.........................................67 8.11 Calculations.............................................................67 8.12 Agents' Fees.............................................................68 ARTICLE IX MISCELLANEOUS............................................................68 9.01 No Implied Waiver etc....................................................68 9.02 Set-Off..................................................................68 9.03 Survival of Provisions...................................................68 9.04 Expenses and Fees; Indemnity.............................................68 9.05 Severability.............................................................69 9.06 Holidays.................................................................69 9.07 Notices, etc.............................................................70 9.08 Forum Selection and Consent to Jurisdiction..............................70 9.09 Waiver of Jury Trial.....................................................70 9.10 Governing Law............................................................70 9.11 Validity and Enforceability..............................................70 9.12 Counterparts.............................................................71 9.13 Successors and Assigns; Participations; Assignments......................71 9.14 Amendments and Waivers...................................................73 9.15 Judgment Currency........................................................74 9.16 Records..................................................................74 9.17 Confidentiality..........................................................74 9.18 Sharing of Collections...................................................75
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9.19 Co-Arrangers.............................................................75 Exhibit A Form of Continuing Letter of Credit Agreement Exhibit B Form of Transfer Supplement Exhibit C Content of Opinions of Counsel Exhibit D Form of Compliance Certificate Exhibit E List of Existing Letters of Credit Exhibit F Letter of Credit Application Exhibit G Form of Account Party Accession Instrument Exhibit H-1 Form of Note of Underwriters Re Group, Inc. Exhibit H-2 Form of Note of Underwriters Reinsurance Company Exhibit H-3 Form of Note of Venton Underwriting Limited Schedule 2.01(b) Form of Evergreen Provision Schedule 3.03 Approvals and Consents Schedule 3.04 Governmental Consents Schedule 3.05 Financial Statements Schedule 3.07 Taxes Schedule 3.09 Insurance Licenses Schedule 3.13 Environmental Laws Schedule 3.16 Capitalization Schedule 3.17 ERISA Schedule 3.23 Ownership of Properties Schedule 3.24 Indebtedness Schedule 6.14 Investments Schedule 6.16 Liens
-iv- 6 CREDIT AGREEMENT, dated as of November 1, 1999, by and among UNDERWRITERS RE GROUP, INC., a Delaware corporation, UNDERWRITERS REINSURANCE COMPANY, a New Hampshire corporation and VENTON UNDERWRITING LIMITED, a Bermuda exempted limited liability company, as Borrowers; VENTON UNDERWRITING LIMITED, TALBOT UNDERWRITING LIMITED, an English company, UNDERWRITERS RE CAPITAL LTD, an English company, UNDERWRITERS REINSURANCE COMPANY and certain of the wholly-owned Subsidiaries of Underwriters Reinsurance Company, as Account Parties; UNDERWRITERS RE GROUP, INC. and UNDERWRITERS REINSURANCE COMPANY, as Guarantors; the Banks (as defined further below) parties hereto from time to time; MELLON BANK, N.A., a national banking association, as Issuing Bank, as Administrative Agent for the Banks and for the Issuing Bank hereunder, and as a Co-Arranger; DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH, branches of a German banking corporation, as Documentation Agent; DRESDNER KLEINWORT BENSON NORTH AMERICA LLC, a Delaware Limited Liability company, as Co-Arranger; and FIRST UNION NATIONAL BANK, a national banking association, as Syndication Agent. PRELIMINARY STATEMENT WHEREAS, the Banks have agreed to extend credit to the Credit Parties upon all of the terms and conditions herein set forth; NOW, THEREFORE, in consideration of their mutual agreements hereinafter set forth and intending to be legally bound hereby, the Account Parties, the Borrowers, the Guarantors, the Agents, the Issuing Bank, the Co-Arrangers and each Bank agree as follows. ARTICLE I DEFINITIONS; CONSTRUCTION 1.01. Certain Definitions. In addition to other words and terms defined elsewhere in this Agreement, as used herein the following words and terms shall have the following meanings, respectively, unless the context hereof otherwise clearly requires: "Account Parties" shall mean Venton Underwriting Limited, Talbot Underwriting Limited, Underwriters Re Capital Ltd, URC and any Other Account Parties, together with their respective successors as permitted by this Agreement, and "Account Party" shall mean one of them. "Account Party Accession Instrument" shall mean an Account Party Accession Instrument in the form attached hereto as Exhibit G, as amended, modified or supplemented from time to time. "Additional Amount" shall have the meaning assigned to that term in Section 2.13(a) hereof. 7 "Administrative Agent" shall mean Mellon, in its capacity as Administrative Agent for the Banks and the Issuing Bank hereunder, together with its successors and assigns in such capacity. "Affected Bank" shall have the meaning assigned to that term in Section 2.12 hereof. "Affiliate" of any Person means any other Person directly or indirectly controlling, controlled by or under common control with such Person. For the purposes of this Agreement, a Person shall be deemed to control another Person if the controlling Person owns 10% or more of any class of voting securities (or other ownership interests) of the controlled Person or possesses, directly or indirectly, the power to direct or cause the direction of the management or policies of the controlled Person, whether through ownership of stock, by contract or otherwise. "Agents" shall mean, collectively, the Administrative Agent, the Documentation Agent, and the Syndication Agent and "Agent" shall mean one of them. "Aggregate Letter of Credit Undrawn Availability" at any time shall mean the aggregate amount of the Letter of Credit Undrawn Availability for all Letters of Credit at such time. "Aggregate Letter of Credit Unreimbursed Draws" at any time shall mean the aggregate amount of Letter of Credit Unreimbursed Draws for all Letters of Credit at such time. "Agreement" shall mean this Agreement as amended, modified or supplemented from time to time. "Agreement Accounting Principles" means generally accepted accounting principles as in effect in the United States from time to time, applied in a manner consistent with those used in preparing the financial statements referred to in Section 3.05, provided, that with respect to the financial covenants contained in Section 6.22 hereof, the related definitions and the computations required thereby, such term means generally accepted accounting principles (except where SAP is applicable) in effect in the United States on the date hereof applied in a manner consistent with those used in preparing the financial statements referred to in Section 6.01(a) and (b). "Alleghany" means Alleghany Corporation, a Delaware corporation. "Annual Statement" means the annual statutory financial statement of any Insurance Subsidiary required to be filed with the insurance commissioner (or similar authority) of its jurisdiction of incorporation, which statement shall be in the form required by such Insurance Subsidiary's jurisdiction of incorporation or, if no specific form is so required, in the form of financial statements permitted by such insurance commissioner (or such similar authority) to be used for filing annual statutory financial statements and shall contain the type of information permitted by such insurance commissioner (or such similar authority) to be disclosed therein, together with all exhibits or schedules filed therewith. "Annual Statement-1998" means the Annual Statement of URC for 1998. "Applicable Margin" shall mean 0.50% for each Level One Day, 0.625% for each Level Two Day, 0.75% for each Level Three Day and 1.00% for each Level Four Day. "Applicable Reimbursement Interest Rate" as used herein with respect to Letters of Credit, (i) with respect to obligations denominated in Dollars, shall mean the Prime Rate and (ii) with respect to obligations denominated in Pounds, shall mean 0.5% per annum in excess of the seven-day rate appearing on the Telerate Screen page 3750 or any equivalent successor to such page or other page as appropriate on the Telerate Service or such other service as may, from time to time, display the British Bankers' Association Interest Settlement Rate for deposits in Pounds and (iii) -2- 8 with respect to obligations denominated in Euros, shall mean 0.5% per annum in excess of the seven-day rate appearing on the Telerate Screen page 3750 or any equivalent successor to such page or other page as appropriate on the Telerate Service or such other service as may, from time to time, display such Settlement Rate for deposits in Euros. "Bank Parties" shall mean the Banks, the Issuing Bank and the Agents. "Banks" shall mean the parties listed on the signature pages hereof, subject to the provisions of Section 9.13 hereof pertaining to Persons becoming or ceasing to be Banks, and "Bank" shall mean any of them. "Base Rate" shall have the meaning assigned to that term in Section 2A.3(a)(i) hereof. "Base Rate Loan" shall mean a Loan with respect to which a Borrower has selected the Base Rate Option. "Base Rate Option" shall have the meaning assigned to that term in Section 2A.3(a)(i) hereof. "Base Rate Portion" of any Loan or Loans shall mean at any time the portion, including the whole of such Loan or Loans bearing interest at any time under the Base Rate Option. If no Loan or Loans is specified, "Base Rate Portion" shall refer to the Base Rate Portion of all Loans outstanding at such time. "Business Day" shall mean any day other than a Saturday, Sunday, public holiday under the laws of the Commonwealth of Pennsylvania or other day on which banking institutions are authorized or obligated to close in Pittsburgh, Pennsylvania or London, England and, in the case of the making or payment of loans or reimbursement obligations denominated in Euros, other than a day which is not a TARGET Day. "Borrowers" shall mean URGI, URC and Venton Underwriting Limited, together with their respective successors as permitted by this Agreement and "Borrower" shall mean one of them. "Capitalized Lease" of a Person means any lease of Property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Capitalized Lease Obligations" of a Person means the amount of the obligations of such Person under Capitalized Leases which would be shown as a liability on a balance sheet of such Person prepared in accordance with Agreement Accounting Principles. "Cash Equivalents" means Investments maturing within one year from the date of investment (excluding (x) Investments as to which the principal amount to be repaid may be subject to fluctuation and (y) mortgage backed securities consisting of principal only or interest only strips) in (a) certificates of deposit, Eurodollar time deposits and other interest bearing deposits or accounts with United States commercial banks having a combined capital and surplus of at least $500,000,000 and rated C or better by Thomson BankWatch or with any Bank, (b) certificates of deposit, other interest bearing accounts or deposits and demand deposits with other United States commercial banks, which deposits and accounts are in amounts fully insured by the Federal Deposit Insurance Corporation, (c) obligations issued or unconditionally guaranteed by the United States government or issued by an agency thereof and backed by the full faith and credit of the United States, (d) direct obligations issued by any state of the United States or any political subdivision thereof which have the highest rating obtainable from Standard & Poor's on the date of -3- 9 investment, (e) commercial paper rated A-1 or better by Standard & Poor's and P-1 or better by Moody's or (f) money market mutual funds identified by the valuation office of the NAIC as requiring no investment reserve. "Change in Control" shall mean (a) any Credit Party (other than URGI) shall cease to be a Wholly-Owned Subsidiary of URGI (it being understood that a merger of a Credit Party into an entity which is a Wholly-Owned Subsidiary of URGI, to the extent otherwise permitted by this Agreement, will not be deemed to cause such Credit Party to cease to be a Wholly-Owned Subsidiary of URGI for purposes of this definition) or (b) Alleghany shall fail to maintain beneficial ownership, directly or indirectly, free and clear of any Lien, of at least 51 % of the outstanding voting stock of URGI (unless such failure arises from a Public Offering and no Person (other than Alleghany) or Persons acting in concert acquire (either in such Public Offering or thereafter) beneficial ownership (within the meaning of Rule l3d-3) of the Securities and Exchange Commission under the Securities Exchange Act of 1934) of 10% or more of the outstanding voting stock of URGI), or (c) during any period of 25 consecutive calendar months, commencing on the date of this Agreement, the ceasing of those individuals (the "Continuing Directors") who (i) were directors of URGI on the first day of each such period or (ii) subsequently became directors of URGI and whose initial election or initial nomination for election subsequent to that date was approved by a majority of the Continuing Directors then on the board of directors of URGI, to constitute a majority of the board of directors of the URGI. "Closing Date" shall mean November 4, 1999 or such later date as may be specified by the Account Parties by one day's written notice to the Administrative Agent. "Co-Arranger" shall mean each of Mellon Bank, N. A. and Dresdner Kleinwort Benson North America LLC, in each case in its capacity as Co-Arranger hereunder. "Code" means the Internal Revenue Code of 1986, as amended, reformed or otherwise modified from time to time. "Commitment Banks" shall have the meaning assigned to that term in Section 2.15 hereof. "Commitment Fee" shall have the meaning assigned to that term in Section 2.02(a) hereof. "Commitment Percentage" for each Bank shall mean a fraction, expressed as a percentage, the numerator of which is such Bank's Committed Amount and the denominator of which is the aggregate Committed Amounts of all the Banks. "Committed Amount" shall have the meaning assigned to that term in Section 2.01(a) hereof. "Consolidated" or "consolidated", when used in connection with any calculation means a calculation to be determined on a consolidated basis for a Credit Party (and, if no Credit Party is specified, URGI) and its Subsidiaries in accordance with Agreement Accounting Principles. "Consolidated Person" means, for the taxable year of reference of Alleghany, each Person which has joined or which is required to join in the filing of a consolidated federal income tax return with Alleghany. "Consolidated Subsidiaries" of a Person shall mean those Subsidiaries of such Person the accounts of which are consolidated with the accounts of such Person in accordance with generally accepted accounting principles in effect in the United States. -4- 10 "Contingent Obligation" of a Person means any agreement, undertaking or arrangement by which such Person assumes, guarantees, endorses, contingently agrees to purchase or provide funds for the payment of, or otherwise becomes or is contingently liable upon, the obligation or liability of any other Person, or agrees to maintain the net worth or working capital or other financial condition of any other Person, or otherwise assures any creditor of such other Person against loss, including, without limitation, any comfort letter, operating agreement or take-or-pay contract. "Controlled Group" mean all members of a controlled group of corporations and all trades or businesses (whether or not incorporated) under common control which, together with the URGI or any of its Subsidiaries, are treated as a single employer under Section 414 of the Code. "Continuing Letter of Credit Agreement" shall mean, collectively, one or more letter of credit agreements executed and delivered by the Account Parties substantially in the form of Exhibit A hereto. "Conversion to Tranche System" shall have the meaning assigned to that term in Section 2.15 hereof. "Corresponding Source of Funds" shall mean in the case of any Funding Segment of the Euro-Rate Portion, the proceeds of hypothetical receipts by a Notional Euro-Rate Funding Office or by a Bank through a Notional Euro-Rate Funding Office of one or more deposits in Pounds or Euros, as applicable, in the London interbank market at the beginning of the Euro-Rate Funding Period corresponding to such Funding Segment having maturities approximately equal to such Euro-Rate Funding Period and in an aggregate amount approximately equal to such Bank's pro rata share of such Funding Segment. "Credit Extension" shall mean (a) the making of any Loan by any Bank or (b) the issuance, or extension of the expiration date of, any Letter of Credit by the Issuing Bank. "Credit Parties" means the Account Parties, the Borrowers and the Guarantors and "Credit Party" means any of them. "Current Expiration Date" shall have the meaning assigned to that term in Section 2.14 hereof. "Default" and "Event of Default" shall have the same meaning and shall mean an event or condition described in Article VII hereof. "Designated Extended Maturity Date" shall have the meaning set forth in Section 2A.1(d). "Designated Small Subsidiary" shall mean any Subsidiary (other than a Credit Party) of URGI which has been designated by URGI as a Designated Small Subsidiary in written notice to the Administrative Agent; provided, that at no time shall all Designated Small Subsidiaries account, in the aggregate, for more than 5% of the premiums or 5% of the net income, in each case on a consolidated basis, of URGI and its Subsidiaries for the most recently completed Fiscal Year of URGI. URGI may, by written notice to the Administrative Agent, remove a Subsidiary from the classification as a Designated Small Subsidiary in order to comply with the proviso to the first sentence of this definition. "Documentation Agent" shall mean Dresdner Bank, in its capacity as Documentation Agent hereunder. -5- 11 "Dollar," "Dollars" and the symbol $ shall mean lawful money of the United States of America. "Dollar Equivalent" of an amount of a currency other than Dollars shall mean the amount of Dollars which such amount of such currency could purchase at 11:00 o'clock A.M., Pittsburgh time on the date of determination, based upon the quoted spot rates of the Issuing Bank at which its applicable branch or office offers to exchange Dollars for such currency in the London foreign exchange market and "Dollar Equivalent" of an amount denominated in Dollars shall mean such amount of Dollars. Section 2A.10 hereof contains certain provisions with respect to calculation of Dollar Equivalent. "Domestic Office" when used in connection with the Administrative Agent, shall mean its office located at One Mellon Bank Center, Pittsburgh, Pennsylvania 15258, or such other address of the Administrative Agent or branch, subsidiary or affiliate thereof as may be designated in writing from time to time by the Administrative Agent to the Account Parties and the Borrowers. "Dresdner Bank" shall mean Dresdner Bank AG, New York Branch and Grand Cayman Branch. "Environmental Laws" shall have the meaning ascribed to that term in Section 3.13 hereof. "Environmental Permits" shall have the meaning ascribed to that term in Section 3.13 hereof. "Euro" and "Euros" shall mean the lawful currency of the participating member states of the European Union that adopt a single currency in accordance with the Treaty establishing the European Communities, as amended by the Treaty on European Union. "Euro-Rate" shall have the meaning assigned to that term in Section 2A.3(a) hereof. "Euro-Rate Funding Period" shall have the meaning assigned to that term in Section 2A.3(c) hereof. "Euro-Rate Loan" shall have the meaning assigned to that term in Section 2A.3(a) hereof. "Euro-Rate Option" shall have the meaning assigned to that term in Section 2A.3(a) hereof. "Euro-Rate Portion" of any Loan or Loans shall mean at any time the portion, including the whole, of such Loan or Loans bearing interest at any time under the Euro-Rate Option. If no Loan or Loans is specified, "Euro-Rate Portion" shall refer to the Euro-Rate Portion of all Loans outstanding at such time. "Euro-Rate Reserve Percentage" shall have the meaning set forth in Section 2A.3(a) hereof. "Existing Letters of Credit" shall mean the letters of credit listed on Exhibit E hereto. "Expiration Date" shall mean the Business Day immediately preceding the first anniversary of the Closing Date, as the same may be extended in accordance with Section 2.14 hereof. "Extension Request" shall have the meaning set forth in Section 2.14 hereof. "Financial Statements" shall have the meaning set forth in Section 3.05 hereof. -6- 12 "Fiscal Year" means the twelve-month accounting period ending December 31 of each year. "Funding Segment" of the Euro-Rate Portion of the Loans at any time shall mean the entire principal amount of such Portion to which at the time in question there is applicable a particular Euro-Rate Funding Period beginning on a particular day and ending on a particular day. (By definition, each such Portion is at all times composed of an integral number of discrete Funding Segments and the sum of the principal amounts of all Funding Segments of any such Portion at any time equals the principal amount of such Portion at such time.) "Governmental Authority" shall mean any government (foreign or domestic) or any state or other political subdivision thereof or any governmental body, agency, authority, department or commission (including without limitation any board of insurance, insurance department or insurance commissioner or any taxing authority or political subdivision) or any instrumentality or officer thereof (including without limitation any court or tribunal) exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government and any corporation, partnership or other entity directly or indirectly owned or controlled by or subject to the control of any of the foregoing. "Guaranteed Obligations" shall have the meaning assigned to that term in Section 5.01 hereof. "Guarantors" shall mean URC and URGI, together with their respective successors as permitted by this Agreement and "Guarantor" shall mean one of them. "Guaranty Equivalents" means, with respect to any Person, without duplication, any obligations of such Person (other than endorsements in the ordinary course of business of negotiable instruments for deposit or collection) guaranteeing or intended to guarantee any Indebtedness of any other Person in any manner, whether direct or indirect, and including without limitation any obligation, whether or not contingent, (i) to purchase any such Indebtedness or any property constituting security therefor for the purpose of assuring the holder of such Indebtedness, (ii) to advance or provide funds or other support for the payment or purchase of any such Indebtedness or to maintain working capital, solvency or other balance sheet condition of such other Person (including without limitation keepwell agreements, maintenance agreements, comfort letters or similar agreements or arrangements) for the benefit of any holder of Indebtedness of such other Person, (iii) to lease or purchase property, securities or services primarily for the purpose of assuring the holder of such Indebtedness, or (iv) to otherwise assure or hold harmless the holder of such Indebtedness against loss in respect thereof. The amount of any Guaranty Equivalent hereunder shall (subject to any limitations set forth therein) be deemed to be an amount equal to the outstanding principal amount (or maximum principal amount, if larger) of the Indebtedness in respect of which such Guaranty Equivalent is made. "Hazardous Materials" shall have the meaning ascribed thereto in Section 3.13. "Indebtedness" of a Person means such Person's (a) obligations for borrowed money, (b) obligations representing the deferred purchase price of Property or services (other than accounts payable arising in the ordinary course of such Person's business payable on terms customary in the trade), (c) obligations, whether or not assumed, secured by Liens or payable out of the proceeds or production from Property now or hereafter owned or acquired by such Person, (d) obligations which are evidenced by notes, acceptances, or similar instruments, (e) Capitalized Lease Obligations, (f) Rate Hedging Obligations, (g) Contingent Obligations, (h) obligations for which such Person is obligated (contingently, including with respect to undrawn amounts of issued letters of credit, or otherwise) pursuant to or in respect of a letter of credit or similar instrument which is issued upon the application of such Person or upon which such Person is an account party -7- 13 or for which such Person is in any way liable and (i) repurchase obligations or liabilities of such Person with respect to accounts or notes receivable sold by such Person. "Insurance Subsidiary" shall mean any direct or indirect present or future Subsidiary of URGI which is engaged in the insurance business (and shall in any event include URC), but excluding each of the Venton Entities. "Investment" of a Person means any loan, advance (other than commission, travel and similar advances to officers and employees made in the ordinary course of business), extension of credit (other than accounts receivable arising in the ordinary course of business on terms customary in the trade), deposit account or contribution of capital by such Person to any other Person or any investment in, or purchase or other acquisition, of the stock, partnership interests, notes, debentures or other securities of any other Person made by such Person. "Issuing Bank" shall mean Mellon, in its capacity as Issuing Bank hereunder, together with its successors and assigns in such capacity. "Law" shall mean any law (including common law), constitution, statute, treaty, regulation, rule, ordinance, order, injunction, writ, decree or award of any Official Body. "L/C Termination Date" shall have the meaning assigned to that term in Section 2.15 hereof. "Letter of Credit" shall mean each Letter of Credit issued by the Issuing Bank for the account of one or more of the Account Parties pursuant to this Agreement and each of the Existing Letters of Credit, each as amended, modified or supplemented from time to time. "Letter of Credit Application" shall have the meaning given that term in Section 2.03(a)(ii) hereof. "Letter of Credit Exposure" at any time shall mean the sum at such time of (a) the Aggregate Letter of Credit Unreimbursed Draws (determined as a Dollar Equivalent), (b) the Aggregate Letter of Credit Undrawn Availability and (c) the aggregate Stated Amount (determined as a Dollar Equivalent) of Letters of Credit which have been requested by an Account Party to be issued hereunder but are not yet so issued. "Letter of Credit Fee" shall have the meaning given that term in Section 2.01(d) hereof. "Letter of Credit Participating Interest" shall have the meaning given that term in Section 2.04(a) hereof. "Letter of Credit Participating Interest Commitment" shall have the meaning given that term in Section 2.04(a) hereof. "Letter of Credit Participating Interest Commitment Percentage" of any Bank shall mean the Commitment Percentage of such Bank. "Letter of Credit Reimbursement Obligation" with respect to a Letter of Credit means the obligation of the applicable Account Party to reimburse the Issuing Bank for drawings on a Letter of Credit, together with interest thereon, and "Letter of Credit Reimbursement Obligations" shall mean all such obligations with respect to all Letters of Credit. "Letter of Credit Undrawn Availability" with respect to a Letter of Credit at any time shall mean the maximum amount (determined as a Dollar Equivalent) available to be drawn under such -8- 14 Letter of Credit at such time or thereafter, regardless of the existence or satisfaction of any conditions or limitations on drawing. "Letter of Credit Unreimbursed Draw" with respect to a Letter of Credit at any time shall mean the amount at such time of a payment made by the Issuing Bank under such Letter of Credit, to the extent not repaid. "Level One Day" shall mean each day on which URC has a Standard & Poor's claims paying rating and has at least one Tier I Rating and no rating below a Tier II Rating; "Level Two Day" shall mean each day (which is not a Level One Day) on which URC has a Standard & Poor's claims paying rating and has at least one rating which is a Tier III Rating, a Tier II Rating or a Tier I Rating, and no rating below a Tier IV Rating; "Level Three Day" shall mean each day (which is not a Level Two Day or a Level One Day) on which URC has a Standard & Poor's claims paying rating and has at least one Tier V Rating and no rating below a Tier VI Rating; "Level Four Day" shall mean each day which is not a Level Three Day, a Level Two Day or a Level One Day. "Leverage Ratio" means, with respect to URGI on a consolidated basis with its Subsidiaries, at any time, the ratio of (a) Indebtedness to (b) the sum of Indebtedness plus Net Worth, excluding the impact of Statement of Financial Accounting Standards No. 115. For the purpose of determining this ratio, Contingent Obligations shall be excluded from Indebtedness to the extent that they relate to underlying obligations which are included in Indebtedness with respect to URGI on a consolidated basis with its Subsidiaries. "License" means any license, certificate of authority, permit or other authorization which is required to be obtained from any Governmental Authority in connection with the operation, ownership or transaction of insurance business. "Lien" means any security interest, lien (statutory or other), mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, the interest of a vendor or lessor under any conditional sale, Capitalized Lease or other title retention agreement). "Loan" shall have the meaning assigned to that term in Section 2A.1(a) hereof. "Loan Maturity Extension Notice" shall have the meaning set forth in Section 2A.1(d). "Loan Repayment Obligation" with respect to a Loan means the obligation of a Borrower to repay the Banks for such Loan, and "Loan Repayment Obligations" shall mean all such obligations with respect to all Loans. "London Office" when used in connection with the Administrative Agent, shall mean its office located at Princess House, One Suffolk Lane, London EC4R OAN England, or such other address of the Administrative Agent or branch, subsidiary or affiliate thereof as may be designated in writing from time to time by the Administrative Agent to the Account Parties and the Borrowers. "Material Adverse Effect" shall mean a material adverse effect on (a) the business, Property, condition (financial or other), performance or operations of URGI and its Subsidiaries, taken as a whole, (b) the ability of any Credit Party to perform its obligations under the Loan Documents, or (c) the validity or enforceability of any of the Transaction Documents or the rights or remedies of the Agents, the Issuing Bank or the Banks thereunder. "Maturity Date" shall have the meaning set forth in Section 2A.1(d). -9- 15 "Mellon" shall mean Mellon Bank, N. A. "Moody's" means Moody's Investors Service, Inc., a Delaware corporation, together with any Person succeeding thereto by merger, consolidation or acquisition of all or substantially all of its assets, including substantially all of its business of rating securities. "Multiemployer Plan" means a Plan maintained pursuant to a collective bargaining agreement which is subject to Title IV of ERISA to which URGI or any member of the Controlled Group is a party to which more than one employer is obligated to make contributions. "Multi-year Letter of Credit" means a Letter of Credit of which the expiry date is more than one year after the date of issuance. "NAIC" means the National Association of Insurance Commissioners or any successor thereto, or in lieu thereof any other association, agency or other organization performing advisory, coordination or other like functions among insurance departments, insurance commissioners and similar Governmental Authorities of the various states of the United States toward the promotion of uniformity in the practices of such Governmental Authorities. "Net Worth" means at any date the stockholders' equity of URGI and its Subsidiaries determined on a consolidated basis in accordance with Agreement Accounting Principles. "Nonextending Bank" shall have the meaning assigned to that term in Section 2.14 hereof. "Note" shall have the meaning assigned to that term in Section 2A.1(c) hereof. "Notional Euro-Rate Funding Office" shall have the meaning given to that term in Section 2A.12(a) hereof. "Obligations" shall mean, collectively, the Letter of Credit Reimbursement Obligations, the Loan Repayment Obligations and the obligations of each and every Account Party and Borrower to pay all fees, indemnities and all other liabilities of such Account Party or Borrower arising pursuant to the terms of this Agreement or the other Transaction Documents (including without limitation under Section 7.03 hereof). "Official Body" shall have the same meaning as Governmental Authority. "Option" shall mean the Base Rate Option or the Euro-Rate Option, as the case may be. "Other Account Parties" means each Wholly-Owned Subsidiary of URC which has become a party to this Agreement by the execution and delivery by such Wholly-Owned Subsidiary and URC to the Administrative Agent of an Account Party Accession Instrument and the other documentation referred to in such Account Party Accession Instrument. "Participant" has the meaning assigned to that term in Section 9.13(b) hereof. "Permitted Liens" shall mean the Liens described in paragraphs (a) through (h) of Section 6.16. "Person" shall mean an individual, corporation, partnership, trust, unincorporated association, joint venture, joint-stock company, government (including political subdivisions), official body or agency, or any other entity. -10- 16 "Plan" means an employee pension benefit plan as defined in Section 3(2) of ERISA, as to which URGI or any member of the Controlled Group may have any liability. "Portion" shall mean the Base Rate Portion or the Euro-Rate Portion, as the case may be. "Potential Default" shall mean any event or condition referenced in Article VII hereof which with notice, passage of time or both would constitute an Event of Default. "Pound," "Pounds" and the symbol "pound sterling" shall mean the lawful money of the United Kingdom. "Prime Rate" shall mean the interest rate per annum announced from time to time by the Administrative Agent as its prime rate, such rate to change automatically effective as of the effectiveness of each announced change in such prime rate (it being understood that such Prime Rate may be greater or less than other interest rates charged by the Administrative Agent to other borrowers and is not solely based or dependent upon the interest rate which the Administrative Agent may charge any particular borrower or class of borrower). "Property" of a Person means any and all property, whether real, personal, tangible, intangible, or mixed, of such Person, or other assets owned, leased or operated by such Person. "Pro Rata" shall have the meaning assigned to that term in Section 2.15 hereof. "Purchase" means any transaction, or any series of related transactions, consummated on or after the date of this Agreement by which URGI or any of its Subsidiaries (a) acquires any going business or all or substantially all of the assets of any firm, corporation or division or line of business thereof whether through purchase of assets, merger or otherwise, or (b) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding partnership interests of a partnership or membership interests of a limited liability company. "Purchasing Bank" shall have the meaning assigned to that term in Section 9.13(c) hereof. "Quarterly Statement" means the quarterly statutory financial statement of any Insurance Subsidiary required to be filed with the insurance commissioner (or similar authority) of its jurisdiction of incorporation or, if no specific form is so required, in the form of financial statements permitted by such insurance commissioner (or such similar authority) to be used for filing quarterly statutory financial statements and shall contain the type of financial information permitted by such insurance commissioner (or such similar authority) to be disclosed therein, together with all exhibits or schedules filed therewith. "Rate Hedging Obligations" of a Person means any and all obligations of such Person, whether absolute or contingent and however and whenever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under (a) any and all agreements, devices or arrangements designed to protect at least one of the parties thereto from the fluctuations of interest rates, exchange rates or forward rates applicable to such party's assets, liabilities or exchange transactions, including, but not limited to, dollar-denominated or cross-currency interest rate exchange agreements, forward currency exchange agreements, interest rate cap or collar protection agreements, forward rate currency or interest rate options, puts and warrants, and (b) any and all cancellations, buybacks, reversals, terminations or assignments of any of the foregoing. -11- 17 "Regular Payment Date" shall mean the last day of each March, June, September and December after the date hereof, or, if such last day is not a Business Day, the next succeeding Business Day. "Regulation T" means Regulation T of the Board of Governors of the Federal Reserve System as from time to time in effect and shall include any successor or other regulation or official interpretation of such Board of Governors relating to the extension of credit by securities brokers and dealers for the purpose of purchasing or carrying margin stocks applicable to such Persons. "Regulation U" means Regulation U of the Board of Governors of the Federal Reserve System as from time to time in effect and any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by banks for the purpose of purchasing or carrying margin stocks applicable to such Persons. "Regulation X" means Regulation X of the Board of Governors of the Federal Reserve System as from time to time in effect and shall include any successor or other regulation or official interpretation of said Board of Governors relating to the extension of credit by the specified Banks for the purpose of purchasing or carrying margin stocks applicable to such Persons. "Release" is defined in the Comprehensive Environmental Response, Compensation and Liability Act, as amended, 42 U.S.C. 39601 et seq. "Replacement Bank" shall have the meaning assigned to that term in Section 2.14 hereof. "Reportable Event" means a reportable event as defined in Section 4043(a) of ERISA and the regulations issued under such section, with respect to a Plan, excluding, however, such events as to which the PBGC has by regulation unconditionally or conditionally waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event; provided, that a failure to meet the minimum funding standard of Section 412 of the Code and of Section 302 of ERISA shall be a Reportable Event regardless of the issuance of any such waiver of the notice requirement in accordance with either Section 4043(a) of ERISA or Section 412(d) of the Code. "Required Banks" shall mean at any time Banks which have at least 51% of the aggregate Letter of Credit Participating Interests in Letters of Credit outstanding at such time. "Required Commitment Banks" shall have the meaning assigned to that term in Section 2.15 hereof. "Revolving Credit Commitment" shall have the meaning assigned to that term in Section 2A.1(a) hereof. "Revolving Credit Exposure" of any Bank at any time shall mean the outstanding principal amount at such time of such Bank's Loans. "SAP" shall mean, with respect to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the insurance commissioner (or other similar authority, including the Council of Lloyd's) in the jurisdiction of such Insurance Subsidiary for the preparation of annual statements and other financial reports by insurance companies of the same type as such Insurance Subsidiary in effect from time to time, applied in a manner consistent with those used in preparing the financial statements referred to in Section 3.05; provided, that with respect to the financial covenants contained in Section 6.22 hereof the related definitions, and the computations required thereby, "SAP" means such statutory accounting practices (except where -12- 18 Agreement Accounting Principles are applicable) in effect on the date hereof applied in a manner consistent with those used in preparing the financial statements referred to in Section 3.05. "Single Employer Plan" means a Plan subject to Title IV of ERISA maintained by any member of the Controlled Group for employees of any member of the Controlled Group, other than a Multiemployer Plan. "Solvent" means, when used with respect to a Person, that (a) the fair saleable value of the assets of such Person is in excess of the total amount of the present value of its liabilities (including for purposes of this definition all liabilities (including loss reserves as determined by such Person), whether or not reflected on a balance sheet prepared in accordance with Agreement Accounting Principles and whether direct or indirect, fixed or contingent, secured or unsecured, disputed or undisputed), (b) such Person is able to pay its debts or obligations in the ordinary course as they mature and (c) such Person does not have unreasonably small capital to carry on its business as conducted and as proposed to be conducted. "Solvency" shall have a correlative meaning. "Special Expiration Date" has the meaning assigned to that term in Section 2.15 hereof. "Standard Notice" shall mean an irrevocable notice provided to the Administrative Agent at no later than 10:00 o'clock a.m., Pittsburgh time, on a Business Day which is (a) not later than the same day in the case of selection of, conversion to or renewal of the Base Rate Option and not later than one day in advance with respect to prepayment of a Base Rate Loan; and (b) at least three Business Days in advance in the case of selection of, conversion to or renewal of the Euro-Rate Option or prepayment of a Euro-Rate Loan. Standard Notice shall be in writing (including telex, facsimile or cable communication) or by telephone (to be subsequently confirmed in writing) in any such case, effective upon receipt by the Administrative Agent. "Stated Amount" shall mean, with respect to a Letter of Credit, the maximum face or stated amount of such Letter of Credit, irrespective of whether such maximum amount is available for drawing at the time in question. "Statutory Authorized Control Level Risk-Based Capital" means, with respect to any Insurance Subsidiary at any time, the statutory authorized control level risk-based capital of such Insurance Subsidiary at such time, as determined in accordance with SAP (currently "Five Year Historical Data", Line 26 of the Annual Statement-1998), based on methodology of NAIC in effect on the date hereof. "Statutory Net Income" means, with respect to any Insurance Subsidiary for any computation period, the net income earned by such Person during such period, as determined in accordance with SAP (currently "Underwriting and Investment" exhibit, "Statement of Income", Line 16 of the Annual Statement-1998). "Statutory Risk-Based Capital Ratio" means, with respect to URC and its Insurance Subsidiaries, determined on a combined basis for URC and all of its Insurance Subsidiaries (without double counting), the ratio of (i) Statutory Total Adjusted Capital to (ii) Statutory Authorized Control Level Risk-Based Capital. -13- 19 "Statutory Surplus" means, with respect to any Insurance Subsidiary at any time, the surplus as regards policyholders of such Insurance Subsidiary at such time, as determined in accordance with SAP (currently "Liabilities, Surplus and Other Funds" statement, Page 3, Line 25, Column I of the Annual Statement-1998). "Statutory Total Adjusted Capital" means, with respect to any Insurance Subsidiary at any time, the statutory total adjusted capital of such Insurance Subsidiary at such time, as determined in accordance with SAP (currently "Five Year Historical Data," Line 25 of the Annual Statement-1998). "Subsidiary" of a Person means (a) any corporation more than 50% of the outstanding securities having ordinary voting power of which shall at the time be owned or controlled, directly or indirectly, by such Person or (b) any partnership, association, joint venture or similar business organization more than 50% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. Unless the context otherwise requires, all references to a "Subsidiary" shall mean a Subsidiary of URGI. "Substantial Portion" means, with respect to the Property of URGI and its Subsidiaries, Property which (a) represents more than 10% of the consolidated assets of URGI and its Subsidiaries, as would be shown in the consolidated financial statements of URGI and its Subsidiaries as at the end of the Fiscal Quarter next preceding the date on which such determination is made, or (b) is responsible for more than 10% of the consolidated net revenues or of the consolidated Net Income of URGI and its Subsidiaries for the 12-month period ending as of the end of the Fiscal Quarter next preceding the date of determination. "Supplement to Tranche System" shall have the meaning assigned to that term in Section 2.15 hereof. "Syndication Agent" shall mean First Union National Bank, in its capacity as syndication agent hereunder. "TARGET" means the Trans-European Automated Real-Time Gross Settlement Express Transfer payment system. "TARGET Day" shall mean any day on which TARGET is open for the settlement of payment in Euros. "Tax Sharing Agreements" means, collectively, that certain Amendment to Agreement dated as of August 18, 1995 between Alleghany and URGI, that certain Amendment to Agreement dated as of December 1, 1995 between URGI and URC, that certain Amendment to Agreement dated as of December 1, 1995 between URGI and URC Risk Managers., Inc., that certain Agreement dated as of December 1, 1995 between URGI and The Underwriting Center, Inc., that certain Agreement dated as of December 1, 1995 between The Underwriting Center, Inc. and The Underwriting Center of Georgia, Inc. (now known as The Center E&S Insurance Services, Inc.), that certain Amendment to Agreement dated as of December 1, 1995 between URC and Commercial Underwriters Insurance Company, and that certain Agreement dated as of December 1, 1995 between URC and Underwriters Insurance Company, as each is in effect on the date of this Agreement, together with any other agreements entered into pursuant to Section 6.23, and as any such agreement may be hereafter amended, subject to compliance with the terms hereof. "Termination Event" means, with respect to a Plan which is subject to Title IV of ERISA, (a) a Reportable Event, (b) the withdrawal of any member of the Controlled Group from such Plan during a plan year in which such member of the Controlled Group was a "substantial employer" as defined in Section 4001(a)(2) of ERISA or was deemed such under Section 4068(f) of ERISA, (c) -14- 20 the termination of such Plan, the filing of a notice of intent to terminate such Plan or the treatment of an amendment of such Plan as a termination under Section 4041 of ERISA, (d) the institution by the PBGC of proceedings to terminate such Plan or (e) any event or condition which could reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of or appointment of a trustee to administer, such Plan. "Tier I Rating" with respect to Standard & Poor's shall mean a claims paying rating of at least AA and with respect to Moody's shall mean a solicited insurance financial strength rating of at least Aa2; "Tier II Rating" with respect to Standard & Poor's shall mean a claims paying rating of AA- and with respect to Moody's shall mean a solicited insurance financial strength rating of Aa3; "Tier III Rating" with respect to Standard & Poor's shall mean a claims paying rating of A+ and with respect to Moody's shall mean a solicited insurance financial strength rating of A1; "Tier IV Rating" with respect to Standard & Poor's shall mean a claims paying rating of A and with respect to Moody's shall mean a solicited insurance financial strength rating of A2; "Tier V Rating" with respect to Standard & Poor's shall mean a claims paying rating of A- and with respect to Moody's shall mean a solicited insurance financial strength rating of A3; "Tier VI Rating" with respect to Standard & Poor's shall mean a claims paying rating of BBB+ and with respect to Moody's shall mean a solicited insurance financial strength rating of Baa1. As used in this definition, a Moody's rating shall be deemed to be "solicited" only if such rating was obtained from Moody's upon application by the entity to which such rating relates. "Total Credit Exposure" of any Bank at any time shall mean the sum at such time of such Lender's Revolving Credit Exposure plus such Lender's Pro Rata share of the Letter of Credit Exposure. "Tranche 1 Bank", "Tranche 1 Letter of Credit", "Tranche 1 Letter of Credit Participating Interest", "Tranche 2 Bank", "Tranche 2 Letter of Credit", "Tranche 2 Letter of Credit Participating Interest", "Tranche 2 Letter of Credit Participating Interest Commitment", "Tranche 2 Letter of Credit Participating Interest Committed Amount", "Tranche 2 Letter of Credit Participating Interest Commitment Percentage", "Tranche 3 Letter of Credit", "Tranche 4 Letter of Credit" and "Tranche X" shall have the respective meanings assigned to those terms in Section 2.15 hereof. "Transaction Document" or "Transaction Documents" shall mean this Agreement, the Continuing Letter of Credit Agreement, each Letter of Credit Application, each Letter of Credit, each Note and any other documents or instruments executed and delivered in connection herewith or therewith. "Unfunded Liabilities" means the amount (if any) by which the present value of all vested and unvested accrued benefits under all Single Employer Plans exceeds the fair market value of all such Plan assets allocable to such benefits, all determined as of the then most recent valuation date for such Plans using PBGC actuarial assumptions for single employer plan terminations. "Unmatured Default" means an event or condition which but for the lapse of time or the giving of notice, or both, would constitute a Default. "URC" means Underwriters Reinsurance Company, a New Hampshire insurance company. "URGI" means Underwriters Re Group, Inc., a Delaware corporation. "Venton" means Underwriters Re LLC, a Delaware limited liability company. -15- 21 "Venton Entities" means, collectively, Venton, Underwriters Re Capital Ltd, an English company, Venton Underwriting Limited, Talbot Underwriting Limited and each company which is a Subsidiary of Venton on the date of this Agreement, together with each permitted successor thereto which does not engage in any business other than the businesses engaged in by the Venton Entities on the date of this Agreement. "Wholly-Owned Subsidiary" of a Person means (a) any Subsidiary all of the outstanding voting securities of which shall at the time be owned or controlled directly or indirectly, by such Person or one or more Wholly-Owned Subsidiaries of such Person, or by such Person and one or more Wholly-Owned Subsidiaries of such Person, or (b) any partnership, association, joint venture or similar business organization 100% of the ownership interests having ordinary voting power of which shall at the time be so owned or controlled. "Year 2000 Problem" shall mean any significant risk that computer hardware, software or equipment containing embedded microchips of any Credit Party or any of its Subsidiaries which is essential to its business or operations will not, in the case of dates or time periods occurring after December 31, 1999, function at least as effectively and reliably as in the case of times or time periods occurring before January 1, 2000, including the making of accurate leap year calculations. 1.02. Construction. Unless the context of this Agreement otherwise clearly requires, "or" has the inclusive meaning represented by the phrase "and/or." References in this Agreement to "determination" by any Agent include estimates by such Agent in good faith, without gross negligence and without manifest error (in the case of quantitative determinations) and beliefs held by such Agent in good faith and without gross negligence (in the case of qualitative determinations). The words "hereof," "herein," "hereunder" and similar terms in this Agreement refer to this Agreement as a whole and not to any particular provision of this Agreement. The section and other headings contained in this Agreement are for reference purposes only and shall not control or affect the construction of this Agreement or the interpretation hereof in any respect. Section, subsection and exhibit references are to this Agreement unless otherwise specified. 1.03. Accounting Principles. Except as otherwise provided in this Agreement, all computations and determinations as to accounting or financial matters shall be made, and all financial statements to be delivered pursuant to this Agreement shall be prepared, in accordance with Agreement Accounting Principles or SAP, as the context requires (including principles of consolidation where appropriate), and all accounting or financial terms shall have the meanings ascribed to such terms by Agreement Accounting Principles or SAP, as appropriate. ARTICLE II THE LETTER OF CREDIT FACILITY 2.01. Letters of Credit. (a) Letter of Credit Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, the Issuing Bank agrees to issue Letters of Credit for the account of an Account Party at any time or from time to time on or after the date hereof and to but not including the Expiration Date (it being understood that Letters of Credit may be outstanding for the account of one or more of the Account Parties at any time). The Issuing Bank shall have no obligation to issue any Letter of Credit if, after such Letter of Credit were issued, the aggregate Total Credit Exposure of the Banks upon such issuance would exceed the aggregate of the Banks' Committed -16- 22 Amounts (which, on the Closing Date, is $350,000,000). Each Bank's "Committed Amount" at any time shall be equal to the amount set forth as its "Initial Committed Amount" below its name on the signature pages hereof, as such amount may have been reduced under Section 2.02(b) hereof at such time, and subject to transfer to another Bank as provided in Section 9.13 hereof. The Issuing Bank shall have no obligation to issue any Multi-year Letter of Credit if the aggregate Stated Amount of all Multi-year Letters of Credit upon such issuance would exceed $275,000,000. (b) Terms of Letters of Credit. The Account Parties shall not request to be issued, and the Issuing Bank shall have no obligation to issue, any Letter of Credit except within the following limitations: (i) each Letter of Credit shall have an expiration date no later than five years after the date of issuance thereof; provided, however, any Letter of Credit may have an "evergreen" provision having substantially the effect set forth on Schedule 2.01(b) hereof, (ii) each Letter of Credit shall be denominated in Dollars, Pounds or Euros and (iii) each Letter of Credit shall be payable only against sight drafts (and not time drafts). (c) Form of Letters of Credit. The Issuing Bank shall have no obligation to issue any letter of credit which is unsatisfactory in form, substance or beneficiary to the Issuing Bank in the exercise of its reasonable judgment consistent with its customary practice (it being understood that the standard form of letter of credit required by Lloyd's from time to time will be found satisfactory by the Issuing Bank unless issuance of a letter of credit in such form would violate Law). The Issuing Bank may not object to a letter of credit on account of the fact that it may be presented for drawing at the Issuing Bank's branch in London, England (or, if the Issuing Bank no longer maintains such a branch at the time of issuance of a Letter of Credit, at such other location in London, England as may be commercially reasonable). (d) Letter of Credit Fee. Each Account Party shall pay or cause to be paid to the Administrative Agent for the account of each Bank, in accordance with its Commitment Percentage, a fee (the "Letter of Credit Fee") (based on a year of 360 days and actual days elapsed), for each Letter of Credit issued for the account of such Account Party for each day from and including the date of issuance thereof to and including the date of expiration or termination thereof, on the Letter of Credit Undrawn Availability on such day at a rate per annum equal to 0.50% for each Level One Day, 0.625% for each Level Two Day, 0.75% for each Level Three Day and 1.00% for each Level Four Day. Such Letter of Credit Fee shall be due and payable for the preceding period for which such fee has not been paid on each of the following dates: (i) each Regular Payment Date, (ii) the date of each drawing on such Letter of Credit, and (iii) the date of expiration or termination of such Letter of Credit. For each day on which a Default shall have occurred and be continuing, the rate set forth in the first sentence of this paragraph shall be increased by 2% per annum. The rate set forth in the first sentence of this paragraph shall automatically increase by 0.125% per annum on the day after the Expiration Date (or, if the Conversion to Tranche System occurs, on the date of the Conversion to Tranche System) and by an additional 0.125% per annum on each anniversary of the Expiration Date (or, if the Conversion to Tranche System shall have occurred, on each anniversary of the Conversion to Tranche System). (e) Purpose of Letters of Credit. Each Letter of Credit shall be used by the Account Party for whom it is issued as a standby letter of credit, to support the Account Party's Lloyds of London underwriting activity or for other general corporate purposes, all in the ordinary course of business of such Account Party. The provisions of this Section 2.01(e) represent only an obligation of the Account Parties to the Issuing Bank and the Banks; the Issuing Bank shall have no obligation to the Banks to ascertain the purpose of any Letter of Credit, and, without limiting the generality of the provisions of Section 2.04(b) hereof, the rights and obligations of the Banks and the Issuing Bank among themselves shall not be impaired or affected by a breach of this Section 2.01(e). (f) Fronting Fee; Administration Fees. Each Account Party shall pay to the Administrative Agent, for the sole account of the Issuing Bank, (i) a fronting fee (the "Fronting Fee") for Letters of -17- 23 Credit (based on a year of 360 days and actual days elapsed), for each Letter of Credit issued for the account of such Account Party for each day from and including the date of issuance thereof to and including the date of expiration or termination thereof, on the Letter of Credit Undrawn Availability on such day at a rate per annum equal to 0.10%; and (ii) such other administration, issuance, maintenance, amendment, drawing and negotiation fees as are customarily charged by the Issuing Bank to its customers generally at the time in question (a list of which customary charges as of the date of this Agreement has been provided by the Issuing Bank to URC) or are otherwise agreed between the Issuing Bank and URC. (g) Administrative Agent's Annual Fee. The Account Parties shall pay to the Administrative Agent, for its sole account, an annual agent's fee (the "Administrative Agent's Annual Fee") at the times and in the amounts specified in a letter agreement between URC and the Administrative Agent. 2.02. Commitment Fee; Reduction of the Committed Amounts. (a) Commitment Fee. Each Account Party shall pay or cause to be paid to the Administrative Agent for the account of each Bank a commitment fee (the "Commitment Fee") for each day during the period from the Closing Date to but excluding the Expiration Date calculated (based on a year of 360 days and actual days elapsed) at a per annum rate equal to 0.08% for each Level One Day, 0.10% for each Level Two Day, 0.125% for each Level Three Day and 0.15% for each Level Four Day, payable on the unused portion of such Bank's Committed Amount in effect on such day. Such fee shall be payable on each Regular Payment Date and on the Expiration Date for the preceding period for which such fee has not been paid. (b) Reduction of the Committed Amounts. URC may at any time or from time to time reduce Pro Rata the Committed Amounts of the Banks to an aggregate amount (which may be zero) not less than the aggregate of the Total Credit Exposure of the Banks. Any reduction of the Committed Amounts shall be in an aggregate minimum amount of $5,000,000 and in an amount which is an integral multiple of $1,000,000. Reduction of the Committed Amounts shall be made by providing not less than three Business Days' notice (which notice shall be irrevocable) to such effect to the Administrative Agent. After the date specified in such notice, the Commitment Fee shall be calculated upon the Committed Amounts as so reduced. 2.03. Procedure for Issuance and Amendment of Letters of Credit. (a) Request for Issuance. An Account Party may from time to time request, upon at least three Business Days' notice, the Issuing Bank to issue a Letter of Credit by: (i) delivering to the Issuing Bank and the Administrative Agent a written request to such effect, specifying the date on which such Letter of Credit is to be issued, the expiration date thereof, and the Stated Amount thereof, and (ii) delivering to the Issuing Bank a completed application, in the form annexed hereto as Exhibit F, or in such other form as may from time to time be required by the Issuing Bank in accordance with its customary practice with respect to its customers generally (the "Letter of Credit Application"), together with such other certificates, documents and other papers as are specified in such application. Upon receiving any such notice, the Issuing Bank shall promptly notify the Administrative Agent (by telephone or otherwise), and furnish the Administrative Agent with the proposed form of Letter of Credit to be issued. The Administrative Agent shall, promptly upon receiving such notice, notify the Banks of such proposed Letter of Credit (which notice shall specify the Stated Amount and term of such proposed Letter of Credit), and shall determine, as of the close of business on the Business Day before such proposed issuance, whether such proposed Letter of Credit complies with the limitations -18- 24 set forth in Section 2.01 hereof. If such limitations set forth in Section 2.01 are not satisfied or if the Required Banks have given notice to the Administrative Agent to cease issuing Letters of Credit pursuant to Section 2.03(c)(ii) hereof, the Administrative Agent shall notify the Issuing Bank (in writing or by telephone promptly confirmed in writing) that the Issuing Bank is not authorized to issue such Letter of Credit. If the Issuing Bank issues a Letter of Credit, it shall deliver the original of such Letter of Credit to the beneficiary thereof or as the Account Party shall otherwise direct, and shall promptly notify the Administrative Agent thereof and furnish a copy thereof to the Administrative Agent. (b) Request for Extension or Increase. An Account Party may from time to time request the Issuing Bank to extend the expiration date of an outstanding Letter of Credit or increase (or, with the consent of the beneficiary, decrease) the Stated Amount of or the amount available to be drawn on such Letter of Credit. Such extension or increase shall for all purposes hereunder be treated as though such Account Party had requested issuance of a replacement Letter of Credit (except only that the Issuing Bank may, if it elects, issue a notice of extension or increase in lieu of issuing a new Letter of Credit in substitution for the outstanding Letter of Credit). (c) Limitations on Issuance, Extension and Amendment. (i) As between the Issuing Bank, on the one hand, and the Agents and the Banks, on the other hand, the Issuing Bank shall be justified and fully protected in issuing such Letter of Credit after receiving authorization from the Administrative Agent as provided in Section 2.03(a) hereof, notwithstanding any subsequent notices to the Issuing Bank, any knowledge of an Event of Default (unless the Issuing Bank shall have received a notice specifying that such Event of Default is an "Event of Default" under this Agreement) or Potential Default, any knowledge of failure of any condition specified in Section 4.02 hereof to be satisfied, any other knowledge of the Issuing Bank, or any other event, condition or circumstance whatsoever. The Issuing Bank may amend, modify or supplement Letters of Credit or Letter of Credit Applications, or waive compliance with any condition of issuance or payment, without the consent of, and without liability to, any Agent or any Bank, provided that any such amendment, modification or supplement that extends the expiration date or increases the Stated Amount of or the amount available to be drawn on an outstanding Letter of Credit shall be subject to Section 2.01. (ii) As between the Administrative Agent, on the one hand, and the Banks, on the other hand, the Administrative Agent shall not authorize issuance of any Letter of Credit if the Administrative Agent shall have received, at least one Business Day before authorizing such issuance, from the Required Banks an unrevoked written notice that any condition precedent set forth in Section 4.02 will not be satisfied as of the time of such issuance and expressly requesting that the Administrative Agent direct the Issuing Bank to cease to issue Letters of Credit. Absent such notice, or unless the Administrative Agent determines that the applicable limitations set forth in Section 2.01 hereof are not satisfied, the Administrative Agent shall be justified and fully protected, as against the Banks, in authorizing the Issuing Bank to issue such Letter of Credit, notwithstanding any subsequent notices to the Administrative Agent, any knowledge of an Event of Default or Potential Default, any knowledge of failure of any condition specified in Section 4.02 hereof to be satisfied, any other knowledge of the Administrative Agent, or any other event, condition or circumstance whatsoever. 2.04. Letter of Credit Participating Interests. (a) Generally. Concurrently with the issuance of each Letter of Credit, the Issuing Bank automatically shall be deemed, irrevocably and unconditionally, to have sold, assigned, transferred and conveyed to each other Bank, and each other Bank automatically shall be deemed, irrevocably and unconditionally, severally to have purchased, acquired, accepted and assumed from the Issuing Bank, -19- 25 without recourse to, or representation or warranty by, the Issuing Bank, an undivided interest, in a proportion equal to such Bank's Pro Rata share, in all of the Issuing Bank's rights and obligations in, to or under such Letter of Credit, the related Letter of Credit Application, the Letter of Credit Reimbursement Obligations, and all collateral, guarantees and other rights from time to time directly or indirectly securing the foregoing (such interest of each Bank being referred to herein as a "Letter of Credit Participating Interest", it being understood that the Letter of Credit Participating Interest of the Issuing Bank is the interest not otherwise attributable to the Letter of Credit Participating Interests of the other Banks). Each Bank irrevocably and unconditionally agrees to the immediately preceding sentence, such agreement being herein referred to as such Bank's "Letter of Credit Participating Interest Commitment". Amounts other than Letter of Credit Reimbursement Obligations and Letter of Credit Fees payable from time to time under or in connection with a Letter of Credit or Letter of Credit Application shall be for the sole account of the Issuing Bank. On the date that any Purchasing Bank becomes a party to this Agreement in accordance with Section 9.13(c) hereof, Letter of Credit Participating Interests in all outstanding Letters of Credit held by the Bank from which such Purchasing Bank acquired its interest hereunder shall be proportionately reallocated between such Purchasing Bank and such transferor Bank (and, to the extent such transferor Bank is the Issuing Bank, the Purchasing Bank shall be deemed to have acquired a Letter of Credit Participating Interest from the Issuing Bank to such extent). (b) Maximum Amounts of Funding of Participations. (i) This Section 2.04(b)(i) is applicable if the Conversion to Tranche System has not occurred. No Bank will be obligated to fund its Commitment Percentage of a drawing on a Letter of Credit if such funding would cause the sum of the aggregate amount of outstanding unreimbursed fundings by such Bank of drawings on Letters of Credit and the aggregate amount of outstanding principal with respect to Loans made by such Bank to exceed such Bank's Committed Amount, unless such excess results from the fact, with respect to a drawing on a Letter of Credit denominated in Pounds or Euros, that the Dollar Equivalent of one Pound or one Euro, as the case may be, is higher at the time of such funding than it was at the time of issuance of such Letter of Credit denominated in Pounds or Euros. (ii) This Section 2.04(b)(ii) is applicable if the Conversion to Tranche System has occurred. No Tranche 1 Bank, Tranche 2 Bank or Tranche X Bank, as the case may be, will be obligated to fund its Commitment Percentage of a drawing on a Tranche 1 Letter of Credit, Tranche 2 Letter of Credit or Tranche X Letter of Credit, as the case may be, if such funding would cause the sum of the aggregate amount of outstanding unreimbursed fundings by such Bank of drawings on Letters of Credit under such applicable Tranche and the aggregate amount of outstanding principal with respect to Loans made by such Bank to exceed such Bank's Committed Amount under such applicable Tranche, unless such excess results from the fact, with respect to a drawing on a Letter of Credit denominated in Pounds or Euros, that the Dollar Equivalent of one Pound or one Euro, as the case may be, is higher at the time of such funding than it was at the time of issuance of such Letter of Credit denominated in Pounds or Euros. (c) Obligations Absolute. Notwithstanding any other provision hereof, each Bank hereby agrees that its obligation to participate in each Letter of Credit issued in accordance herewith, its obligation to make the payments specified in Section 2.05 hereof, and the right of the Issuing Bank to receive such payments in the manner specified therein, are each absolute, irrevocable and unconditional and shall not be affected by any event, condition or circumstance whatever. The failure of any Bank to make any such payment shall not relieve any other Bank of its funding obligation hereunder on the date due, but no Bank shall be responsible for the failure of any other Bank to meet its funding obligations hereunder. -20- 26 2.05. Letter of Credit Drawings and Reimbursements. (a) Account Party's Reimbursement Obligation. Each Account Party hereby agrees to reimburse the Issuing Bank, by making payment to the Administrative Agent for the account of the Issuing Bank in accordance with Section 2.11(a) hereof on the date of each payment made by the Issuing Bank under any Letter of Credit issued for such Account Party's account (but not earlier than the date which is one Business Day after notice of such payment or of the drawing giving rise to such payment is given to URC), without, protest or demand, all of which are hereby waived, and an action therefor shall immediately accrue. Each Account Party agrees that it will make such payment to the Administrative Agent for the account of the Issuing Bank in the same currency as the currency of the payment by the Issuing Bank under such Letter of Credit. To the extent such payment is not timely made, such Account Party hereby agrees to pay to the Administrative Agent, for the account of the Issuing Bank, on demand, interest on any Letter of Credit Unreimbursed Draws for each day from and including the date of such payment by the Issuing Bank until paid (before and after judgment) in accordance with Section 2.11(a) hereof, at the rate per annum set forth in Section 2.11(b) hereof. (b) Payment by Banks on Account of Unreimbursed Draws. If the Issuing Bank makes a payment under any Letter of Credit and is not reimbursed in full therefor on such payment date in accordance with Section 2.05(a) hereof, the Issuing Bank will promptly notify the Administrative Agent thereof (which notice may be by telephone), and the Administrative Agent shall forthwith notify each Bank (which notice may be by telephone promptly confirmed in writing) thereof. No later than the Administrative Agent's close of business on the date such notice is given (if notice is given by 11:30 o'clock A.M. Pittsburgh time) or 10:00 o'clock A.M. Pittsburgh time the following day (if notice is given after 11:30 o'clock A.M. Pittsburgh time) , each such Bank will pay to the Administrative Agent, for the account of the Issuing Bank, in immediately available funds, an amount equal to such Bank's Pro Rata share of the unreimbursed portion of such payment by the Issuing Bank. Each Bank agrees that such payment to the Administrative Agent for the account of the Issuing Bank shall be in the same currency as the currency of the payment by the Issuing Bank under the Letter of Credit. If and to the extent that any Bank fails to make such payment to the Issuing Bank on such date, such Bank shall pay such amount on demand, together with interest, for the Issuing Bank's own account, for each day from and including the date of the Issuing Bank's payment to but not including the date of repayment to the Issuing Bank (before and after judgment) at rate per annum for each day from and including the date of such payment by the Issuing Bank equal to the Applicable Reimbursement Interest Rate. (c) Distributions to Banks. If, at any time, after there occurs a Letter of Credit Unreimbursed Draw and the Issuing Bank has received from any Bank such Bank's share of such Letter of Credit Unreimbursed Draw, and the Issuing Bank receives any payment or makes any application of funds on account of the Letter of Credit Reimbursement Obligation arising from such Letter of Credit Unreimbursed Draw, the Issuing Bank will pay to the Administrative Agent, for the account of such Bank, such Bank's Pro Rata share of such payment. (d) Rescission. If any amount received by the Issuing Bank on account of any Letter of Credit Reimbursement Obligation shall be avoided, rescinded or otherwise returned or paid over by the Issuing Bank for any reason at any time, whether before or after the termination of this Agreement (or the Issuing Bank believes in good faith that such avoidance, rescission, return or payment is required, whether or not such matter has been adjudicated), each such Bank will, promptly upon notice from the Administrative Agent or the Issuing Bank, pay over to the Administrative Agent for the account of the Issuing Bank its Pro Rata share of such amount, together with its Pro Rata share of any interest or penalties payable with respect thereto. 2.06 Equalization. If any Bank receives any payment or makes any application on account of its Letter of Credit Participating Interest, such Bank shall forthwith pay over to the Issuing Bank, in -21- 27 Dollars and in like kind of funds received or applied by it the amount in excess of such Bank's ratable share of the amount so received or applied. 2.07. Obligations Absolute. The payment obligations of the Account Parties and of the Banks under Section 2.05 shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation, the following circumstances: (a) any lack of validity or enforceability of this Agreement, any Letter of Credit or any Transaction Document against an Account Party; (b) the existence of any claim, set-off, defense or other right which any Account Party, any Guarantor or any other Person may have at any time against any beneficiary or transferee of any Letter of Credit (or any Persons for whom any such beneficiary or transferee may be acting), the Issuing Bank, any Bank, or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or any unrelated transaction; (c) any draft, certificate, statement or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (d) payment by the Issuing Bank under any Letter of Credit against presentation of a draft or certificate which does not comply with the terms of such Letter of Credit, or payment by the Issuing Bank under the Letter of Credit in any other circumstances in which conditions to payment are not met, except any such wrongful payment to the extent resulting from the gross negligence or willful misconduct of the Issuing Bank; or (e) any other event, condition or circumstance whatever, whether or not similar to any of the foregoing, except if the same results solely from the gross negligence or willful misconduct of the Issuing Bank. Each Account Party bears the risk of, and neither the Issuing Bank, any of its directors, officers, employees or agents, nor any Bank, shall be liable or responsible for any of, the foregoing matters, the use which may be made of any Letter of Credit, or acts or omissions of the beneficiary or any transferee in connection therewith, except for such person's gross negligence or willful misconduct (it being understood that this sentence is without prejudice to any rights which any Account Party may have to assert a claim against the Issuing Bank for failure of the Issuing Bank to fulfill its obligations to such Account Party with respect to payment under Letters of Credit). 2.08. Unacceptable Credit Rating. If the long-term debt credit rating of any Bank shall decline below the Acceptable Credit Rating (as defined below), the Issuing Bank shall have the right, but not the obligation, to cause such Bank to be replaced as a party hereto by a Replacement Bank, subject to approval of such Replacement Bank by each Account Party (which in each case shall not be unreasonably withheld). In the event that any Bank is to be replaced by a Replacement Bank, such Bank shall, upon payment to it of all amounts owing to it on the date of its replacement, assign all of its interests hereunder to such Replacement Bank in accordance with the provisions of Section 9.13(c) hereof. A Bank shall have an "Acceptable Credit Rating" if it has both (i) a long-term debt rating of at least A by Standard & Poor's and (ii) a long-term debt rating of at least A2 by Moody's. Each Credit Party agrees that it shall cooperate with the Issuing Bank in connection with the identification of one or more Replacement Banks if the Issuing Bank exercises its right set forth in the first sentence of this Section 2.08. 2.09. Letter of Credit Applications. The representations, warranties and covenants by the Account Parties under, and the rights and remedies of the Issuing Bank under, the Continuing Letter of -22- 28 Credit Agreement and any Letter of Credit Application relating to any Letter of Credit are in addition to, and not in limitation or derogation of, representations, warranties and covenants by the Account Parties under, and rights and remedies of the Issuing Bank and the Banks under, this Agreement, the Transaction Documents, and applicable Law. Each Account Party acknowledges and agrees that all rights of the Issuing Bank under any Letter of Credit Application shall inure to the benefit of each Bank to the extent of its Commitment Percentage as fully as if such Bank was a party to such Letter of Credit Application. In the event of any inconsistency between the terms of this Agreement and any Letter of Credit Application, this Agreement shall prevail. 2.10. Certain Provisions Relating to the Issuing Bank. (a) General. The Issuing Bank shall have no duties or responsibilities to the other Bank Parties except those expressly set forth in this Agreement and the other Transaction Documents, and no implied duties or responsibilities on the part of the Issuing Bank shall be read into this Agreement or any Transaction Document or shall otherwise exist. The duties and responsibilities of the Issuing Bank to the other Bank Parties under this Agreement and the other Transaction Documents shall be mechanical and administrative in nature, and the Issuing Bank shall not have a fiduciary relationship in respect of any Bank Party or any other Person. The Issuing Bank shall not be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Transaction Document, unless caused by its own gross negligence or willful misconduct. The Issuing Bank shall not be under any obligation to ascertain, inquire or give any notice to the other Bank Parties relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Transaction Document on the part of any Account Party, (ii) the business, operations, condition (financial or otherwise) or prospects of the Account Parties or any other Person, or (iii) the existence of any Event of Default or Potential Default. The Issuing Bank shall not be under any obligation, either initially or on a continuing basis, to provide any Agent or any Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement to be so furnished. The Issuing Bank shall not be responsible for the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Transaction Document. (b) Administration. The Issuing Bank may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Transaction Document) purportedly made by or on behalf of the proper party or parties, and the Issuing Bank shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. The Issuing Bank may consult with legal counsel (including, without limitation, in-house counsel for the Issuing Bank or in-house or other counsel for the Account Parties), independent public accountants and any other experts selected by it from time to time, and the Issuing Bank shall not be liable for any action taken or omitted to be taken in good faith in accordance with the advice of such counsel, accountants or experts. Whenever the Issuing Bank shall deem it necessary or desirable that a matter be proved or established with respect to any Account Party or Bank Party, such matter may be established by a certificate of such Account Party or Bank Party, as the case may be, and the Issuing Bank may conclusively rely upon such certificate. The Issuing Bank shall not be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless the Issuing Bank has received notice from a Bank or any Credit Party referring to this Agreement, describing such Event of Default or Potential Default, and stating that such notice is a "notice of default". If the Issuing Bank receives such a notice, the Issuing Bank shall give prompt notice thereof to the Administrative Agent. (c) Indemnification of Issuing Bank by Banks. Each Bank hereby agrees to reimburse and indemnify the Issuing Bank and each of its directors, officers, employees and agents (to the extent not reimbursed by the Account Parties and without limitation of the obligations of the Account Parties to do so), Pro Rata, from and against any and all amounts, losses, liabilities, claims, damages, expenses, -23- 29 obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the reasonable fees and disbursements of counsel (other than in-house counsel) for the Issuing Bank or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not the Issuing Bank or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against the Issuing Bank, in its capacity as such, or such other Person, as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction financed in whole or in part or directly or indirectly with the proceeds of any Letter of Credit, provided, that no Bank shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements resulting from the gross negligence or willful misconduct of the Issuing Bank or such other Person, as finally determined by a court of competent jurisdiction. (d) Issuing Bank in its Individual Capacity. With respect to its Commitments and the Obligations owing to it, the Issuing Bank shall have the same rights and powers under this Agreement and each other Transaction Document as any other Bank and may exercise the same as though it were not the Issuing Bank, and the term "Banks" and like terms shall include the Issuing Bank in its individual capacity as such. The Issuing Bank and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Credit Party and any stockholder, subsidiary or affiliate of any Credit Party, as though the Issuing Bank were not the Issuing Bank hereunder. 2.11. Payments Generally; Interest and Interest on Overdue Amounts. (a) Payments Generally. All payments to be made by an Account Party in respect of fees, indemnity, expenses or other amounts due from such Account Party hereunder or under any Transaction Document shall be payable in Dollars (except in the case of payment of reimbursement obligations with respect to Letters of Credit denominated in Pounds, which shall be payable in Pounds, and in the case of payment of reimbursement obligations with respect to Letters of Credit denominated in Euros, which shall be payable in Euros) by not later than 2:00 o'clock p.m., Pittsburgh time (or, in the case of payments in Pounds or Euros, London time), on the day when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue, without setoff, counterclaim, withholding or other deduction of any kind or nature. Except for payments under Sections 2.12, 2.13 and 9.04 hereof, such payments shall be made to the Administrative Agent at its Domestic Office in Dollars in funds immediately available at such office or, in the case of payments in Pounds or Euros, at its London Office in funds immediately available at such office. Payments under Sections 2.12, 2.13 and 9.04 hereof shall be made to the applicable Bank at such domestic account as it shall specify to the Account Parties from time to time in funds immediately available at such account. Any payment or prepayment received by the Administrative Agent or such Bank after 2:00 p.m., Pittsburgh time or London time, as applicable, on any day shall be deemed to have been received on the next succeeding Business Day. The Administrative Agent shall distribute to the Banks all such payments received by it from an Account Party as promptly as practicable after receipt by the Administrative Agent. (b) Interest and Interest on Overdue Amounts. Interest on Letter of Credit Reimbursement Obligations shall accrue at a rate per annum (based on a year of 360 days (or, in the case of such Obligations denominated in Dollars, 365 or 366 days, as the case may be) and actual days elapsed) which for each day shall be equal to the then-current Applicable Reimbursement Interest Rate beginning on the day that the related Letter of Credit payment is made and shall be due and payable on the day that the Letter of Credit Reimbursement Obligation is due and payable in accordance with Section 2.05(a) hereof. To the extent permitted by law, after there shall have become due (by acceleration or otherwise) fees, indemnity, expenses or any other amounts due from the Account Parties hereunder or under any other Transaction Document, such amounts shall bear interest for each -24- 30 day until paid (before and after judgment), payable on demand, at a rate per annum (in each case based on a year of 360 days and actual days elapsed) which for each day shall be equal to 2% above the then-current Applicable Reimbursement Interest Rate. To the extent permitted by law, interest accrued on any amount which has become due hereunder or under any Transaction Document shall compound on a day-by-day basis, and hence shall be added daily to the overdue amount to which such interest relates. 2.12. Additional Compensation in Certain Circumstances. If the introduction of or any change in, or any change in the interpretation or application of, any Law, regulation or guideline by any Official Body charged with the interpretation or administration thereof or compliance with any request or directive of any applicable Official Body (whether or not having the force of law): (i) subjects any Bank to any tax or changes the basis of taxation with respect to this Agreement, the Letters of Credit or payments by the Account Parties of fees or other amounts due from the Account Parties hereunder or under the other Transaction Documents (except for taxes on the overall net income or overall gross receipts, profits or gains of such Bank imposed by the jurisdictions (federal, state and local) in which the Bank's principal office is located), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, assets (funded or contingent) of, deposits with or for the account of, other acquisitions of funds by, such Bank, (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or credits or commitments to extend credit extended by, any Bank or (B) otherwise applicable to the obligations of any Bank under this Agreement, or (iv) imposes upon any Bank any other condition or expense with respect to this Agreement or the issuance of any Letter of Credit, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank or, in the case of clause (iii) hereof, any Person controlling a Bank, with respect to this Agreement or the issuance of any Letter of Credit (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on such Bank's or controlling Person's capital, taking into consideration such Bank's or controlling Person's policies with respect to capital adequacy so long as such policies are reasonable in light of prevailing market practice at the time) by an amount which such Bank deems to be material, such Bank may from time to time notify the Account Parties of the amount determined in good faith (using any averaging and attribution methods) by such Bank (which determination shall be conclusive absent manifest error) to be necessary to compensate such Bank for such increase, reduction or imposition. Such amount shall be due and payable by any applicable Account Party to such Bank five Business Days after such notice is given, together with an amount equal to interest on such amount from the date two Business Days after the date demanded until such due date at the Prime Rate. Such notice shall set forth in reasonable detail the calculations upon which such Bank determined such amount. A certificate by such Bank as to the amount due and payable under this Section 2.12 from time to time and the method of calculating such amount shall be conclusive absent manifest error. Each Bank agrees that it will use good faith efforts promptly to notify the Account Parties of the occurrence of any event that would give rise to a payment under this Section 2.12; provided, however that, so long as such notice is given within a reasonable period after the occurrence of such event, any failure of such Bank to give any such notice shall have no effect on the Account Parties' obligations hereunder. Upon the receipt by the Account Parties or the Borrowers, as the case may be, from any Bank (an "Affected Bank") of a claim for compensation under this Section 2.12 or under Section 2A.11(a) or of a claim for payment of an Additional Amount under Section 2.13, URGI may designate another commercial lending institution satisfactory to the Issuing Bank to acquire and assume all of -25- 31 such Affected Bank's Letter of Credit Participating Interest Commitment, Letter of Credit Participating Interest, Loans and Revolving Credit Commitment, and all other rights and obligations of the Affected Bank hereunder, by giving notice of the name of such institution to the Administrative Agent, the Issuing Bank and the Affected Bank. Such acquisition and assumption shall be made in accordance with Section 9.13(c). 2.13. Taxes. (a) Payments Net of Taxes. All payments made by the Account Parties and Borrowers under this Agreement, any Note, or any other Transaction Document shall be made free and clear of, and without reduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Official Body, and all liabilities with respect thereto, excluding (i) in the case of each Agent and each Bank, income, profits, gains or franchise taxes imposed on such Agent or such Bank by the jurisdiction under the laws of which such Agent or such Bank is organized or any political subdivision or taxing authority thereof or therein or as a result of a connection between such Agent or such Bank and any jurisdiction other than a connection resulting solely from this Agreement and the transactions contemplated hereby, and (ii) in the case of each Bank, income, profits, gains or franchise taxes imposed by any jurisdiction in which such Bank's lending offices which issue Letters of Credit or which makes Loans hereunder are located or any political subdivision or taxing authority thereof or therein (all such non-excluded taxes, levies, imposts, deductions, charges or withholdings being hereinafter called "Taxes"), unless an Account Party or Borrower is required by Law to withhold or deduct Taxes. If any Taxes are required to be withheld or deducted from any amounts payable to any Agent or any Bank under this Agreement or any other Transaction Document, subject to Section 2.13(c) hereof, the applicable Account Party or Borrower shall pay the relevant amount of such Taxes and the amounts so payable to such Agent or such Bank shall be increased (the amount of such increase, an "Additional Amount") to the extent necessary to yield to such Agent or such Bank (after payment of all Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement and the other Transaction Documents. Whenever any Taxes are paid by an Account Party or a Borrower with respect to payments made in connection with this Agreement or any other Transaction Document, as promptly as possible thereafter, such Account Party or such Borrower shall send to such Agent for its own account or to the Administrative Agent for the account of such Bank, as the case may be, a certified copy of an original official receipt received by such Account Party or such Borrower showing payment thereof. If an Agent or a Bank determines in its sole discretion in good faith that it has received a refund in respect of, or that it has been able to utilize to offset its liability for Taxes a credit (a "utilized credit") in respect of, any Taxes as to which it has been indemnified by an Account Party or a Borrower, or with respect to which an Account Party or a Borrower has paid additional amounts pursuant to this Section 2.13, such Agent or such Bank shall promptly after the date of such receipt pay over the amount of such refund or utilized credit to such Account Party or such Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by an Account Party or a Borrower under this Section 2.13 with respect to Taxes giving rise to such refund or utilized credit and only to the extent that such Agent or such Bank has determined that the amount of any such refund or utilized credit is directly attributable to payments made under this Agreement), net of all reasonable expenses of such Agent or such Bank (including additional Taxes attributable to such refund or utilized credit, as determined by such Agent or such Bank) and without interest (other than interest, if any, paid by the relevant Official Body with respect to such refund or utilized credit). An Account Party or a Borrower receiving any such payment from an Agent or a Bank shall, upon demand, pay to such Agent or such Bank any amount paid over to such Account Party or such -26- 32 Borrower by such Agent or such Bank (plus penalties, interest or other charges) in the event such Agent or such Bank is required to repay any portion of such refund or utilized credit to such Official Body. Nothing in this Section 2.13(a) shall entitle an Account Party or a Borrower to have access to the records of any Agent or any Bank, including, without limitation, tax returns. (b) Indemnity. Each Account Party and each Borrower hereby indemnifies each of the Agents and each of the Banks for the full amount of all Taxes attributable to payments by or on behalf of such Account Party or such Borrower hereunder or under any of the other Transaction Documents, any Taxes paid by such Agent or such Bank, as the case may be, any present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any Taxes (including any incremental Taxes, interest or penalties that may become payable by such Agent or such Bank as a result of any failure to pay such Taxes, except by reason of unreasonable delay by such Agent or Bank in notifying an Account Party or a Borrower in making payment after payment was received from an Account Party or a Borrower), whether or not such Taxes were correctly or legally asserted, except to the extent that such Taxes (x) are required to be paid solely because of failure of such Agent or such Bank to deliver a form it is required to deliver pursuant to Section 2.13(c) hereof or solely as a result of such form being incorrect in a material respect and (y) would not have been required to be paid if such form had been delivered or had not been incorrect. Such indemnification shall be made within 30 days from the date such Bank or such Agent, as the case may be, makes written demand therefor. (c) Withholding and Backup Withholding. Each Bank and each Agent that is incorporated or organized under the laws of any jurisdiction other than the United States or any State thereof agrees that, on or prior to the date the first payment is due to be made to it hereunder or under any other Transaction Document, it will furnish to the Account Parties, the Borrowers and the Administrative Agent: (i) two valid, duly completed copies of United States Internal Revenue Service Form 4224 or United States Internal Revenue Form 1001 or successor applicable form (including proposed Form W-8BEN, W-8ECI or W-8EXP), as the case may be, certifying in each case that such Bank is entitled to receive payments under this Agreement and the other Transaction Documents without deduction or withholding of any United States federal income taxes and (ii) a valid, duly completed Internal Revenue Service Form W-8 or W-9 or successor applicable form (including proposed Form W-8BEN, W-8ECI or W-8EXP), as the case may be, to establish an exemption from United States backup withholding tax. Each Bank and each Agent which so delivers to the Account Parties, the Borrowers and the Administrative Agent a Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, agrees to deliver to the Account Parties, the Borrowers and the Administrative Agent two further copies of the said Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other manner of certification, as the case may be, on or before the date that any such form expires or becomes obsolete or otherwise is required to be resubmitted as a condition to obtaining an exemption from withholding tax, or after the occurrence of any event requiring a change in the most recent form previously delivered by it, and such extensions or renewals thereof as may reasonably be requested by the Account Parties, the Borrowers and the Administrative Agent, certifying in the case of a Form 1001 or Form 4224 that such Bank or Agent is entitled to receive payments under this Agreement or any other Transaction Document without deduction or withholding of any United States federal income taxes, unless in any such cases an event (including any changes in Law) has occurred prior to the date on which any such delivery would otherwise be required which renders all such forms inapplicable or which would prevent such Bank from duly completing and delivering any such letter or form with respect to it and such Bank advises the Account Parties, the Borrowers and the Administrative Agent that it is not capable of receiving payments without any deduction or withholding of United States federal income tax, and in the case of a Form W-8 or W-9, establishing -27- 33 an exemption from United States backup withholding tax, in which case Section 2.13(a) and (b) shall apply to all further payments. The Borrowers and the Account Parties shall not be required to pay any Additional Amount on account of Taxes to a Bank or Agent (A) that has failed to deliver any of the forms it is required by this Section 2.13 to deliver, to the extent that deduction or withholding of the relevant Taxes would not have been required if the form had been delivered, or (B) that has delivered such a form that is incorrect in any material respect, to the extent that deduction or withholding of the relevant Taxes would not have been required if such form had been correct in all material respects. 2.14. Extensions of Expiration Date. URGI may, at its option, give the Administrative Agent and the Issuing Bank written notice (an "Extension Request") at any time not more than ninety days, nor less than forty-five days, prior to the Expiration Date in effect at such time (the "Current Expiration Date") of URGI's desire to extend the Expiration Date to a date which is not later than 364 days after the Current Expiration Date. The Administrative Agent shall promptly inform the Banks of such Extension Request. Each Bank which agrees to such Extension Request shall deliver to the Administrative Agent its express written consent thereto no later than thirty days prior to the Current Expiration Date. No extension shall become effective unless the express written consent thereto by the Required Commitment Banks and the Issuing Bank is received by the Administrative Agent on or before the thirtieth day prior to the Current Expiration Date. If the Issuing Bank and the Required Commitment Banks, but not all Commitment Banks, have expressly consented in writing to such Extension Request by such thirtieth day, then the Administrative Agent shall so notify URGI and URGI may, effective as of the Current Expiration Date, take one or both of the following actions: (i) replace any Commitment Bank which has not agreed to such Extension Request (a "Nonextending Bank") with another commercial lending institution satisfactory to the Issuing Bank (a "Replacement Bank") by giving notice of the name of such Replacement Bank to the Administrative Agent and the Issuing Bank not later than five Business Days prior to the Current Expiration Date and (ii) elect to implement a Conversion to Tranche System as contemplated by Section 2.15 hereof (or, if the Conversion to Tranche System has previously been implemented, elect to implement a Supplement to Tranche System as contemplated by Section 2.15 hereof). In the event that a Nonextending Bank is to be replaced by a Replacement Bank, such Nonextending Bank shall, upon payment to it of all amounts owing to it on the date of its replacement (it being understood that such payment of the outstanding principal amount of and accrued interest on Loans will be made by the Replacement Bank in accordance with Section 9.13(c) hereof), assign all of its interests hereunder to such Replacement Bank in accordance with the provisions of Section 9.13(c) hereof. If a Nonextending Bank is not so replaced, such Nonextending Bank shall, in accordance with Section 2.15 hereof, retain the obligation to fund draws on Letters of Credit issued prior to the Current Expiration Date, unless such Letter of Credit shall have been renewed (including, without limitation, renewal by operation of an evergreen provision) since the Current Expiration Date. If the Issuing Bank and the Required Commitment Banks shall have consented to such Extension Request (and, if fewer than all the Banks shall have so consented, URGI shall have elected to implement a Conversion to Tranche System or Supplement to Tranche System, as the case may be), then, on the Current Expiration Date, the Expiration Date shall be deemed to have been extended to, and shall be, the date specified in such Extension Notice. The Administrative Agent shall promptly after any such extension advise the Banks of any changes in the Committed Amounts and the Commitment Percentages, as well as any changes effected by the election of the Conversion to Tranche System or a Supplement to Tranche System. 2.15. Tranches. (a) Certain Definitions. As used in this Agreement the following terms have the meanings ascribed thereto: -28- 34 "Commitment Banks" at any time means Banks which have Letter of Credit Participating Interest Commitments at such time and "Commitment Bank" means any one of them. "Conversion to Tranche System" means the written election by URGI, at a time when URGI has made an Extension Request pursuant to Section 2.14 hereof and such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, to classify Letters of Credit as Tranche 1 Letters of Credit and Tranche 2 Letters of Credit, all in accordance with Section 2.15(b) hereof. "L/C Termination Date" means, with respect to a Letter of Credit, the date which is stated therein to be the last day on which the beneficiary thereof may draw thereon. "Pro Rata" means, with respect to Loans, ratably among the Banks in accordance with the outstanding principal amount thereof and, with respect to Letters of Credit: (i) until the first Special Expiration Date, from and to the Banks in accordance with their respective Letter of Credit Participating Interest Percentages and (ii) thereafter, (x) with respect to Tranche 1 Letters of Credit, from and to the Tranche 1 Banks in accordance with their respective Tranche 1 Letter of Credit Participating Interest Percentages, (y) with respect to Tranche 2 Letters of Credit and Tranche 2 Letter of Credit Commitments, from and to the Tranche 2 Banks in accordance with their respective Tranche 2 Letter of Credit Participating Interest Percentages and (z) with respect to each additional Tranche of Letters of Credit (i.e., Tranche 3 Letters of Credit, Tranche 4 Letters of Credit, and so on), if any, from and to the Banks which have Letter of Credit Participating Interest Commitments or Letter of Credit Participating Interests, as applicable, with respect to such Tranche in accordance with their respective related Letter of Credit Participating Interest Percentages. "Required Commitment Banks" at any time means Commitment Banks which have, in the aggregate, Committed Amounts in excess of 51% of the total outstanding Committed Amounts at such time. "Special Expiration Date" means the Expiration Date which is in effect at a time when each of the following has occurred: (i) URGI has made an Extension Request pursuant to Section 2.14 hereof, (ii) such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, and (iii) URGI has elected to implement a Conversion to Tranche System or a Supplement to Tranche System. "Supplement to Tranche System" means the election by URGI at a time when the Conversion to Tranche System has been previously made and when URGI has made an Extension Request pursuant to Section 2.14 hereof and such Extension Request has been consented to in writing by the Issuing Bank and the Required Commitment Banks, but not by all of the Commitment Banks, to classify additional Letters of Credit as Tranche X Letters of Credit. "Tranche 1 Bank" shall mean each Bank which is a Bank immediately prior to the first Special Expiration Date. "Tranche 1 Letter of Credit" means each Letter of Credit which is issued prior to the first Special Expiration Date, but shall not include any such Letter of -29- 35 Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such first Special Expiration Date. "Tranche 1 Letter of Credit Participating Interest Percentage" for each Tranche 1 Bank means such Bank's Letter of Credit Participating Interest Percentage immediately prior to the first Special Expiration Date. "Tranche 2 Bank" shall mean each Bank which has a Tranche 2 Letter of Credit Participating Interest Commitment. "Tranche 2 Letter of Credit" means each Letter of Credit which is issued prior to the second Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such second Special Expiration Date and shall not include any Tranche 1 Letter of Credit (it being understood that a Letter of Credit may change from a Tranche 1 Letter of Credit to a Tranche 2 Letter of Credit as a result of the extension, after the first Special Expiration Date, of its L/C Termination Date). "Tranche 3 Letter of Credit" and "Tranche 4 Letter of Credit" have the meanings set forth in the definition of the term "Tranche X". "Tranche X" shall mean Tranche 3 if there are existing Tranche 2 Letters of Credit but not Tranche 3 Letters of Credit, Tranche 4 if there are existing Tranche 3 Letters of Credit but not Tranche 4 Letters of Credit, and so on in consecutive integral succession. The terms "Tranche X Bank", "Tranche X Letter of Credit Participating Interest Commitment", "Tranche X Letter of Credit Participating Interest Committed Amount" and "Tranche X Letter of Credit Participating Interest Percentage" shall have comparable meanings. The term "Tranche X Letter of Credit" shall have a comparable meaning, but such meaning shall be consistent with the following: (i) the term "Tranche 3 Letter of Credit" means each Letter of Credit which is issued prior to the third Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such third Special Expiration Date and shall not include any Tranche 1 Letter or Credit or any Tranche 2 Letter of Credit; (ii) the term "Tranche 4 Letter of Credit" means each Letter of Credit which is issued prior to the fourth Special Expiration Date, but shall not include any such Letter of Credit as to which the L/C Termination Date has been extended to a date after the L/C Termination Date which was in effect on such fourth Special Expiration Date and shall not include any Tranche 1 Letter of Credit, any Tranche 2 Letter of Credit or any Tranche 3 Letter of Credit; (iii) the terms "Tranche 5 Letter of Credit", "Tranche 6 Letter of Credit", and so on shall have comparable meanings (it being understood that a Letter of Credit can change from one Tranche to another as a result of an extension of its L/C Termination Date). (b) Conversion to Tranche System. If URGI elects the Conversion to Tranche System with respect to an Extension Request, the following shall occur: (i) the Letter of Credit Participating Interest Commitments of Banks which, with respect to such Extension Request, are Nonextending Banks shall terminate as of the Special Expiration Date related to such Extension Request, but such Nonextending Banks (other than Nonextending Banks which have been replaced as contemplated by Section 2.14 hereof) shall remain parties to this Agreement and shall retain all of their respective obligations with respect to Tranche 1 Letters of Credit and shall retain their respective Letter of Credit Participating Interests in and with respect to Tranche 1 Letters of -30- 36 Credit; (ii) from and after the Special Expiration Date related to such Extension Request, the Letter of Credit Participating Interest Commitment of each Bank which has consented in writing to such Extension Request shall be a "Tranche 2 Letter of Credit Participating Interest Commitment" and the Committed Amount of such Bank shall be its "Tranche 2 Committed Amount"; (iii) the "Tranche 2 Letter of Credit Participating Interest Commitment Percentage" for each Tranche 2 Bank shall mean a fraction, expressed as a percentage, the numerator of which is such Tranche 2 Bank's Tranche 2 Committed Amount and the denominator of which is the aggregate Tranche 2 Committed Amounts of all of the Tranche 2 Banks; and (iv) the Issuing Bank shall have no obligation to issue any Tranche 2 Letter of Credit (or to permit any Letter of Credit to become a Tranche 2 Letter of Credit by extension of its L/C Termination Date) if the Letter of Credit Exposure upon such issuance (or extension) would exceed the aggregate of the Banks' Tranche 2 Committed Amounts. (c) Supplement to Tranche System. If URGI elects a Supplement to Tranche System with respect to an Extension Request, the following shall occur: (i) the Letter of Credit Participating Interest Commitments of Banks which, with respect to such Extension Request, are Nonextending Banks shall terminate, but such Nonextending Banks shall remain parties to this Agreement and shall retain all of their respective obligations with respect to Letters of Credit under existing Tranches and shall retain their respective Letter of Credit Participating Interests in and with respect to existing Letters of Credit; (ii) from and after the Special Expiration Date related to such Extension Request, the Letter of Credit Participating Interest Commitment of each Bank which has consented in writing to such Extension Request shall be a "Tranche X Letter of Credit Participating Interest Commitment" and the Committed Amount of such Bank shall be its "Tranche X Committed Amount"; (iii) the "Tranche X Letter of Credit Participating Interest Commitment Percentage" for each Tranche X Bank shall mean a fraction, expressed as percentage, the numerator of which is such Tranche X Bank's Tranche X Committed Amount, and the denominator of which is the aggregate Tranche X Committed Amounts of all of the Tranche X Banks, all as contemplated by the definition of the term "Tranche X" contained in paragraph (a) of this Section 2.15; and (iv) the Issuing Bank shall have no obligation to issue any Tranche X Letter of Credit (or to permit any Letter of Credit to become a Tranche X Letter of Credit by extension of its L/C Termination Date) if the Letter of Credit Exposure upon such issuance (or extension) would exceed the aggregate of the Banks' Tranche X Committed Amounts. ARTICLE IIA REVOLVING CREDIT LOANS 2A.1. Revolving Credit Loans. (a) Revolving Credit Commitments. Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Bank, severally and not jointly, agrees (such agreement being herein called such Bank's "Revolving Credit Commitment") to make loans (the "Loans") in Dollars, Pounds or Euros to a Borrower at any time or from time to time on or after the Closing Date and to but not including the Expiration Date. A Bank shall have no obligation to make any Loan to the extent that the Dollar Equivalent of such Bank's Total Credit Exposure at any time outstanding would exceed such Bank's Committed Amount at such time. The sum of all of the Banks' Revolving Credit Exposures shall not exceed $75,000,000 at any time. No Loans shall be requested or shall be made from and after the date when a Designated Extended Maturity Date is first in effect. (b) Purpose and Nature of Credit. Within the limits of time and amount set forth in this Section 2A.1, and subject to the provisions of this Agreement, a Borrower may borrow, repay and -31- 37 reborrow Loans hereunder. The failure of any Bank to make a Loan shall not relieve any other Bank of its obligation to lend hereunder, but neither the Administrative Agent nor any Bank shall be responsible for the failure of any other Bank to make a Loan. Each Loan shall be made to a single Borrower and shall be made in Dollars, Pounds or Euros. Loans shall be used by the Borrowers for general corporate purposes, including without limitation for temporary liquidity needs. (c) Revolving Credit Notes. The obligation of each Borrower to repay the unpaid principal amount of the Loans made to it by each Bank and to pay interest thereon shall be evidenced in part by promissory notes of such Borrower, one to each Bank, dated the Closing Date (collectively for all Borrowers and all Banks, the "Notes") in substantially the form attached hereto as Exhibit H-1, H-2 or H-3, as the case may be, with the blanks appropriately filled, payable to the order of such Bank. (d) Maturity. The Loans shall mature, and be due and payable, on the Maturity Date. The term "Maturity Date" shall mean (i) if a Designated Extended Maturity Date is in effect, the Designated Extended Maturity Date, (ii) if no Designated Extended Maturity Date is in effect and the Conversion to Tranche System has not occurred, the Expiration Date and (iii) if no Designated Extended Maturity Date is in effect and the Conversion to Tranche System has occurred, the Current Expiration Date which was in effect immediately before the occurrence of the Conversion to Tranche System. The term "Designated Extended Maturity Date" shall mean the date which is the one year anniversary of the effective date of a Loan Maturity Extension Notice. The term "Loan Maturity Extension Notice" shall mean a notice in writing furnished by URGI to the Administrative Agent to the effect that URGI desires the maturity of all of the Loans to be extended to the date which is the one year anniversary of the date which is stated therein to be the proposed effective date of such notice, provided that such notice shall be effective only if the conditions of lending set forth in Section 4.02 are satisfied on such proposed effective date and provided further that the proposed effective date may not be later than ten days prior to the Expiration Date. 2A.2 Making of Loans. Whenever any Borrower desires that the Banks make Loans, such Borrower shall provide Standard Notice to the Administrative Agent setting forth the following information: (a) The name of the Borrower to whom such proposed Loans are to be made; (b) The date, which shall be a Business Day, on which such proposed Loans are to be made; (c) The currency, which shall be Dollars, Pounds or Euros, in which such Loans are to be made; (d) The aggregate principal amount of such proposed Loans, which shall be the sum of the principal amounts selected pursuant to clause (e) of this Section 2A.2; and (e) The interest rate Option or Options selected in accordance with Section 2A.3(a) hereof and the principal amount selected in accordance with Section 2A.3(d) hereof of the Base Rate Portion and each Funding Segment of the Euro-Rate Portion of such proposed Loans and (f) with respect to each such Funding Segment of such proposed Loans, the Funding Period to apply to such Funding Segment selected in accordance with Section 2A.3(c) hereof. The Administrative Agent shall promptly give notice to each Bank of the information contained in such notice and of the amount of such Bank's Loan. Unless any applicable condition specified in Article IV hereof has not been satisfied on the proposed borrowing date specified in such Standard Notice, each Bank shall make the proceeds of its Loan available to the Administrative Agent (a) with respect to -32- 38 Dollars, at the Administrative Agent's Domestic Office, no later than 12:00 o'clock Noon, Pittsburgh time, and (b) with respect to Pounds or Euros, at the Administrative Agent's London Office, no later than 12:00 o'clock Noon, London time, on the date specified in such notice, in funds immediately available at such office. The Administrative Agent will make the funds so received available to such Borrower in funds immediately available at the Administrative Agent's Domestic Office or at the Administrative Agent's London Office, as the case may be. 2A.3 Interest Rates. (a) Optional Bases of Borrowing. The unpaid principal amount of the Loans shall bear interest for each day until due on one or more bases selected by a Borrower from among the interest rate Options set forth below. Subject to the provisions of this Agreement a Borrower may select different Options to apply simultaneously to different Portions of the Loans and may select different Funding Segments to apply simultaneously to different parts of the Euro-Rate Portion of the Loans, it being understood that the Base Rate Option may not be selected for Loans denominated in Pounds or Euros. (i) Base Rate Option: A rate per annum (computed on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed) for each day equal to the Base Rate for such day. The "Base Rate" for any day shall mean the greater of (A) the Prime Rate for such day or (B) the Federal Funds Effective Rate for such day plus .50%, such interest rate to change automatically from time to time effective as of the effective date of each change in the Prime Rate or the Federal Funds Effective Rate (ii) Euro-Rate Option: A rate per annum (based on a year of 360 days and actual days elapsed) for each day equal to the Euro-Rate for such day plus the Applicable Margin for such day plus, if a Designated Extended Maturity Date is in effect, 0.125%. "Euro-Rate" for any day, as used herein, shall mean for each Funding Segment of the Euro-Rate Portion corresponding to a proposed or existing Euro-Rate Funding Period the rate per annum determined by the Administrative Agent by dividing (the resulting quotient to be rounded upward to the nearest 1/100 of 1%) (A) the rate of interest (which shall be the same for each day in such Euro-Rate Funding Period) determined in good faith by the Administrative Agent in accordance with its usual procedures for determination of London interbank market-based interest rates for borrowers in general by reference to the applicable Telerate Screen page or other similar source (which determination shall be conclusive absent manifest error) to be the average of the rates per annum for deposits in Dollars, Pounds or Euros, as applicable, offered to major money center banks in the London interbank market (or, to the extent consistent with the Administrative Agent's usual procedures, the interbank market for the Euro zone) at approximately 11:00 a.m., London time (or, in the case of Euros, to the extent consistent with the Administrative Agent's usual procedures, Brussels time), two Business Days prior to the first day of such Euro-Rate Funding Period for delivery on the first day of such Euro-Rate Funding Period in amounts comparable to such Funding Segment and having maturities comparable to such Funding Period by (B) a number equal to 1.00 minus the Euro-Rate Reserve Percentage. The "Euro-Rate" may also be expressed by the following formula: [average of the rates offered to major money] [center banks in the London (or Euro zone) interbank market] Euro-Rate = [determined by the Administrative Agent per subsection (A)] [1.00 - Euro-Rate Reserve Percentage] -33- 39 "Euro-Rate Reserve Percentage" for any day shall mean the percentage (expressed as a decimal, rounded upward to the nearest 1/100 of 1%), as determined in good faith by the Administrative Agent (which determination shall be conclusive absent manifest error), which is in effect on such day as prescribed by the Board of Governors of the Federal Reserve System (or any successor) representing the maximum reserve requirement (including, without limitation, supplemental, marginal and emergency reserve requirements) with respect to eurocurrency funding (currently referred to as "Eurocurrency liabilities") of a member bank in such System. The Euro-Rate shall be adjusted automatically as of the effective date of each change in the Euro-Rate Reserve Percentage. The Euro-Rate Option shall be calculated in accordance with the foregoing whether or not any Bank is actually required to hold reserves in connection with its eurocurrency funding or, if required to hold such reserves, is required to hold reserves at the "Euro-Rate Reserve Percentage" as herein defined. The Administrative Agent shall give prompt notice to the Borrower and to the Banks of the Euro-Rate determined or adjusted in accordance with the definition of the Euro-Rate, which determination or adjustment shall be conclusive, absent manifest error, if made in good faith. (b) Rate Increase. At any time as it is necessary for any Bank to access funding through the Federal Reserve System "Century Date Change Special Liquidity Facility Program" due to the unavailability of funds through traditional sources, the per annum interest rate applicable to such Bank's Loans for any day shall be equal to the Applicable Margin for such day plus 1.50% plus the Federal Open Market Committee's target Federal Funds rate as publicly announced from time to time. (c) Funding Periods. At any time when a Borrower shall select, convert to or renew the Euro-Rate Option to apply to any part of its Loans, the Borrower shall specify one or more periods (the "Euro-Rate Funding Periods") during which such Option shall apply, such Euro-Rate Funding Periods being one, two, three or six months; provided, that (i) each Euro-Rate Funding Period shall begin on a Business Day, and the term "month", when used in connection with a Euro-Rate Funding Period, shall be construed in accordance with prevailing practices in the London interbank market at the commencement of such Euro-Rate Funding Period, as determined in good faith by the Administrative Agent (which determination shall be conclusive absent manifest error) and (ii) such Borrower may not select a Euro-Rate Funding Period that would end after the Maturity Date. (d) Transactional Amounts. Every selection of, conversion from, conversion to or renewal of an interest rate Option and every payment or prepayment of any Loans shall be in a principal amount such that after giving effect thereto the aggregate principal amount of the Base Rate Portion of such Loans or the aggregate principal amount of each Funding Segment of the Euro-Rate Portion of such Loans shall be as set forth below:
PORTION OR FUNDING SEGMENT ALLOWABLE AGGREGATE PRINCIPAL AMOUNTS - -------------------------- ------------------------------------- Base Rate Portion Any Each Funding Segment of Integral multiples of $1,000,000, the Euro-Rate Portion pound sterling 1,000,000 or EU1,000,000 not less than $5,000,000, pound sterling 5,000,000 or EU5,000,000, as the case may be.
(e) Euro-Rate Unascertainable. If -34- 40 (i) on any date on which a Euro-Rate would otherwise be set the Administrative Agent shall have determined in good faith (which determination shall be conclusive absent manifest error) that: (A) adequate and reasonable means do not exist for ascertaining such Euro-Rate, (B) a contingency has occurred which materially and adversely affects the London interbank market (or, if applicable, the interbank market for the Euro zone) for deposits in the relevant currency, or (C) the effective cost to Banks having more than half of the Committed Amounts of funding a proposed Funding Segment of the Euro-Rate Portion from a Corresponding Source of Funds shall exceed the Euro-Rate plus the Applicable Margin applicable to such Funding Segment, or (ii) at any time any Bank shall have determined in good faith (which determination shall be conclusive absent manifest error) that the making, maintenance or funding of any part of the Euro-Rate Portion has been made unlawful by compliance by such Bank or a Notional Euro-Rate Funding Office in good faith with any Law or guideline or interpretation or administration thereof by any Official Body charged with the interpretation or administration thereof or with any request or directive of any such Official Body; then, and in any such event, the Administrative Agent or such Bank, as the case may be, may notify the Borrower of such determination (and any Bank giving such notice shall notify the Administrative Agent). Upon such date as shall be specified in such notice (which shall not be earlier than the date such notice is given), the obligation of each of the Banks (or, in the case of clause (ii), of the Bank giving such notice) to allow the Borrower to select, convert to or renew the Euro-Rate Option shall be suspended until the Administrative Agent or such Bank, as the case may be, shall have later notified the Borrower (and any Bank giving such notice shall notify the Administrative Agent) of the Administrative Agent's or such Bank's determination in good faith (which determination shall be conclusive absent manifest error) that the circumstance giving rise to such previous determination no longer exists. If any Bank notifies the Borrower of a determination under subsection (ii) of this Section 2A.3(e), the Euro-Rate Portion of the Dollar-denominated Loans of such Bank (the "Affected Bank") shall automatically be converted to the Base Rate Option as of the date specified in such notice. If at the time the Administrative Agent or a Bank makes a determination under subsection (i) or (ii) of this Section 2A.3(e) the Borrower previously has notified the Administrative Agent that it wishes to select, convert to or renew the Euro-Rate Option with respect to any proposed Loans but such Loans have not yet been made, such notification shall be deemed to provide for selection of, conversion to or renewal of the Base Rate Option instead of the Euro-Rate Option with respect to such Loans or, in the case of a determination by a Bank, such Loans of such Bank. 2A.4 Conversion or Renewal of Interest Rate Options. (a) Conversion or Renewal. Subject to the provisions of Section 2A.11(b) hereof, a Borrower may convert any part of its Loans from any interest rate Option or Options to one or more different interest rate Options and may renew the Euro-Rate Option as to any Funding Segment of the Euro-Rate Portion: (i) at any time with respect to conversion from the Base Rate Option; or (ii) at the expiration of any Funding Period with respect to conversions from or -35- 41 renewals of the Euro-Rate Option as to the Funding Segment corresponding to such expiring Funding Period. Whenever a Borrower desires to convert or renew any interest rate Option or Options, such Borrower shall provide to the Administrative Agent Standard Notice setting forth the following information: (1) the Loans to which such conversion or renewal is to apply; (2) the date, which shall be a Business Day, on which the proposed conversion or renewal is to be made; (3) the principal amounts selected in accordance with Section 2A.3(d) hereof of the Base Rate Portion and each Funding Segment of the Euro-Rate Portion to be converted from or renewed; (4) the interest rate Option or Options selected in accordance with Section 2A.3(a) hereof and the principal amounts selected in accordance with Section 2A.3(d) hereof of the Base Rate Portion and each Funding Segment of the Euro-Rate Portion to be converted to; and (5) with respect to each Funding Segment to be converted to or renewed, the Funding Period selected in accordance with Section 2A.3(c) hereof to apply to such Funding Segment. Standard Notice having been so provided, after the date specified in such Standard Notice, interest shall be calculated upon the principal amount of the Loans as so converted or renewed. (b) Failure to Convert or Renew. Absent due notice from a Borrower of conversion or renewal in the circumstances described in clause (ii) of the first sentence of Section 2A.4(a) hereof, any part of the Euro-Rate Portion for which such notice is not received shall be (i) converted automatically to the Base Rate Option on the last day of the expiring Funding Period if such Euro-Rate Portion is in Dollars or (ii) renewed automatically for one month on the last day of the expiring Funding Period if such Euro-Rate Portion is in Pounds or Euros. 2A.5. Prepayments Generally. Whenever a Borrower desires or is required to prepay any part of its Loans, it shall provide Standard Notice to the Administrative Agent setting forth the following information: (a) the date, which shall be a Business Day, on which the proposed prepayment is to be made; (b) subject to Section 2A.9, the currency, which shall be either Dollars, Pounds or Euros, in which such proposed prepayment is to be made, (c) the total principal amount of such prepayment, which shall be the sum of the principal amounts selected pursuant to clause (d) of this Section 2A.5 and (d) the principal amounts selected in accordance with Section 2A.3(d) hereof of the Base Rate Portion and each part of each Funding Segment of Euro-Rate Portion to be prepaid. Standard Notice having been so provided, on the date specified in such Standard Notice, the principal amounts of the Base Rate Portion and each part of the Euro-Rate Portion specified in such notice, together with interest on each such principal amount to such date, shall be due and payable. 2A.6. Optional Prepayments. A Borrower shall have the right at its option from time to time voluntarily to prepay its Loans in whole or part without premium or penalty (subject, however, to Section 2A.11(b) hereof) at any time. Any such prepayment shall be made in accordance with Section 2A.5 hereof. 2A.7. Mandatory Prepayments. If the Dollar Equivalent of the aggregate Total Credit Exposure of the Banks exceeds the aggregate of the Banks' Committed Amounts at any time, then the Borrowers shall, upon receipt of notice of such excess from the Administrative Agent (and, if the amount of such excess is equal to or less than $3,500,000 upon the expiration of a period of ten days at the end of which period any excess remains outstanding), immediately prepay a principal amount of Loans (subject to Section 2A.11(b)) so as to reduce the Dollar Equivalent of the aggregate Total Credit Exposures of the Banks by such excess. 2A.8. Interest Payment Dates. Interest on the Base Rate Portion shall be due and payable on each Regular Payment Date. Interest on each Funding Segment of the Euro-Rate Portion shall be due and payable on the last day of the corresponding Euro-Rate Funding Period and also, if such Funding Period is longer than three months, every three months during such Funding Period. After maturity of any part of the Loans (by acceleration or otherwise), interest on such part of the Loans shall be due and payable on demand. -36- 42 2A.9. Pro Rata Treatment and Payments. (a) Each borrowing from the Banks and each payment or prepayment to the Banks under this Article IIA (except as specifically provided in Sections 2A.11, 2A.12 and 2A.13) and all fees payable by the Borrowers hereunder shall be made Pro Rata in accordance with each Bank's Commitment Percentage and from and to each Bank on the same date. (b) The parties agree that (i) all payments of principal, interest and other amounts in connection with Loans denominated in Dollars and all fees shall be made in Dollars and (ii) all payments of principal, interest and other amounts (other than fees) in connection with Loans denominated in Pounds or Euros shall be made in such currency. (c) All payments and prepayments to be made in respect of principal, interest, fees or other amounts due from the Borrowers in Dollars shall be payable by 2:00 p.m., Pittsburgh time, on the day when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue. Such payments shall be made to the Administrative Agent at its Domestic Office in Dollars in funds immediately available at such office without setoff, counterclaim or other deduction of any nature. The Administrative Agent shall make the funds so received available to each Bank in funds immediately available at the Administrative Agent's Domestic Office. (d) All payments and prepayments to be made in respect of principal, interest fees or other amounts due from a Borrower in any Pounds or Euros shall be payable by 2:00 p.m., London time, on the day when due without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived, and an action therefor shall immediately accrue. Such payments shall be made to the Administrative Agent at its London Office in such currency in funds immediately available at such office without setoff, counterclaim or other deduction of any nature. The Administrative Agent shall promptly make the funds so received available to each Bank in funds immediately available at each Bank's office designated in writing to the Administrative Agent. (e) To the extent permitted by law, after there shall have become due (by acceleration or otherwise) interest, funding fees or any other amounts due from a Borrower hereunder or under its Notes (excluding overdue principal, which shall bear interest as described in the immediately-following sentence), such amounts shall bear interest for each day until paid (before and after judgment), payable on demand, at a rate per annum (based on a year of 365 or 366 days, as the case may be, with respect to Loans bearing interest at the Base Rate Option and based on a year of 360 days with respect to Loans bearing interest at the Euro-Rate Option) equal to the following: (i) in the case of any part of the Euro-Rate Portion of the Loans, (A) until the end of the applicable then-current Euro-Rate Funding Period, at a rate per annum 2 % above the rate otherwise applicable to such part, and (B) thereafter, in accordance with the following clause (ii); and (ii) otherwise, 2% above the then-current Base Rate Option, such interest rate to change automatically from time to time effective as of the effective date of each change in the Base Rate. After the principal amount of any Loan has become due (by acceleration or otherwise), such Loan shall bear interest for each day until paid (before and after judgment) at a rate per annum (based on a year of 365 or 366 days, as the case may be, with respect to Loans bearing interest at the Base Rate Option and based on a year of 360 days with respect to Loans bearing interest at the Euro-Rate Option) which shall be equal to the following: (i) in the case of any part of the Euro-Rate Portion of the Loans, (A) until the end of the applicable then-current Euro-Rate Funding Period, at a rate per annum 2 % above the rate otherwise applicable to such part, and (B) thereafter, in accordance with the following clause (ii); and (ii) in the case of any other principal amount due, 2 % above the then-current Base Rate Option, such interest rate to change automatically from time to time effective as of the effective date of each change in the Base Rate. -37- 43 (f) The provisions of this Section 2A.9 are cumulative and not exclusive of the other provisions of this Agreement; without limitation, the increased interest rates provided for herein are cumulative with the adjustments in interest rates provided for elsewhere in this Agreement (including but not limited to the adjustments provided for in Sections 2A.3(b)). The Banks and the Borrowers acknowledge that, in no event shall the interest charged on any Loan exceed the maximum rate permitted under applicable law. Interest in excess of the maximum allowed by applicable law will not be collected and, if inadvertently collected, will be credited as a reduction of principal, effective as of the date inadvertently collected. Any payment of principal in excess of the then outstanding principal balance resulting from the inadvertent collection of interest in excess of the maximum rate allowed by law shall be refunded to the relevant Borrower, effective as of the date inadvertently collected. 2A.10 Calculation of Dollar Equivalent. (a) Calculation of Dollar Equivalent. Upon each making and upon each payment of a Loan or a Letter of Credit denominated in an Pounds or Euros, the Administrative Agent shall calculate the Dollar Equivalent of such Loan or Letter of Credit, as the case may be, and shall provide written confirmation to the Banks and to URGI. (b) Recalculation of Dollar Equivalent. In determining the Dollar Equivalent of the aggregate Total Credit Exposure of the Banks, the Administrative Agent may use the respective Dollar Equivalent for the Loans and the Letters of Credit calculated in accordance with Section 2A.10(a) hereof, unless such Dollar Equivalent so calculated exceeds 90% of the aggregate of the Banks' Committed Amounts, in which case the Administrative Agent shall recalculate the Dollar Equivalent of the Loans and the Letters of Credit outstanding no less frequently than once each week. The Administrative Agent may recalculate the Dollar Equivalent of each of the Loans and the Letters of Credit as frequently as it determines to do so in its discretion, provided, that such recalculation shall be made for all of the Loans and the Letters of Credit no less frequently than once each week during any period when the aggregate Dollar Equivalent of the aggregate Total Credit Exposure of the Banks exceeds 90% of the aggregate Committed Amounts of the Banks. 2A.11. Additional Compensation in Certain Circumstances, etc. (a) Increased Costs or Reduced Return Resulting From Taxes, Reserves, Capital Adequacy Requirements, Expenses, Etc. If the introduction of or any change in, or any change in the interpretation or application of, any Law, regulation or guideline by any Official Body charged with the interpretation or administration thereof or compliance with any request or directive of any applicable Official Body (whether or not having the force of law): (i) subjects any Bank or any Notional Euro-Rate Funding Office to any tax or changes the basis of taxation with respect to this Agreement, the Notes, the Loans or payments by a Borrower of principal, interest, commitment fee or other amounts due from such Borrower hereunder or under the Notes (except for taxes on the overall net income or overall gross receipts of such Bank or such Notional Euro-Rate Funding Office imposed by the jurisdictions (federal, state and local) in which the Bank's principal office or Notional Euro-Rate Funding Office is located), (ii) imposes, modifies or deems applicable any reserve, special deposit or similar requirement against credits or commitments to extend credit extended by, assets (funded or contingent) of, deposits with or for the account of, other acquisitions of funds by, such Bank or any Notional Euro-Rate Funding Office (other than requirements expressly included herein in the determination of the Euro-Rate hereunder), -38- 44 (iii) imposes, modifies or deems applicable any capital adequacy or similar requirement (A) against assets (funded or contingent) of, or credits or commitments to extend credit extended by, any Bank or any Notional Euro-Rate Funding Office, or (B) otherwise applicable to the obligations of any Bank or any Notional Euro-Rate Funding Office under this Agreement, or (iv) imposes upon any Bank or any Notional Euro-Rate Funding Office any other condition or expense with respect to this Agreement, the Notes or its making, maintenance or funding of any Loans or any security therefor, and the result of any of the foregoing is to increase the cost to, reduce the income receivable by, or impose any expense (including loss of margin) upon any Bank, any Notional Euro-Rate Funding Office or, in the case of clause (iii) hereof, any person controlling a Bank, with respect to this Agreement, the Notes or the making, maintenance or funding of any Loan (or, in the case of any capital adequacy or similar requirement, to have the effect of reducing the rate of return on such Bank's or controlling person s capital, taking into consideration such Bank's or controlling person's policies with respect to capital adequacy) by an amount which such Bank deems to be material (such Bank being deemed for this purpose to have made, maintained or funded each Funding Segment of the Euro-Rate Portion from a Corresponding Source of Funds), such Bank may from time to time notify such Borrower of the amount determined in good faith (using any averaging and attribution methods) by such Bank (which determination shall be conclusive absent manifest error) to be necessary to compensate such Bank or such Notional Euro-Rate Funding Office for such increase, reduction or imposition. Such amount shall be due and payable by such Borrower to such Bank five Business Days after such notice is given, together with an amount equal to interest on such amount from the date two Business Days after the date demanded until such due date at the Base Rate Option applicable to Loans. A certificate by such Bank as to the amount due and payable under this Section 2A.11(a) from time to time and the method of calculating such amount shall be conclusive absent manifest error. Each Bank agrees that it will use good faith efforts to notify each Borrower of the occurrence of any event that would give rise to a payment by such Borrower under this Section 2A.11(a); provided, however, that any failure of such Bank to give any such notice shall have no effect on such Borrower's obligations hereunder. (b) Funding Breakage. If (i) any Borrower fails to borrow, convert or renew any Loan hereunder which would, after such borrowing, conversion or renewal, have a Euro-Rate Portion, after notice requesting such borrowing, conversion or renewal has been given by such Borrower (whether such failure results from failure to satisfy applicable conditions to such borrowing, conversion, or renewal or otherwise), or (ii) any part of any Funding Segment of any Euro-Rate Portion of the Loans becomes due (by acceleration or otherwise), or is paid, prepaid or converted to another interest rate Option (whether or not such payment, prepayment or conversion is mandatory or automatic and whether or not such payment or prepayment is then due), on a day other than the last day of the corresponding Funding Period, such Borrower shall indemnify the Banks on demand against any loss, liability, cost or expense of any kind or nature which the Banks may sustain or incur in connection with or as a result of such event. Such indemnification in any event shall include an amount equal to the excess, if any, of (i) the aggregate amount of interest which would have accrued on the amount of the Euro-Rate Portion not so borrowed, converted or renewed, or which so becomes due, or which is so paid, prepaid or converted, from and including the date on which such borrowing, conversion or renewal would have been made pursuant to such notice, or on which such part of such Funding Segment so becomes due, or on which such part of such Funding Segment is so paid, prepaid or converted, to the last day of the Funding Period applicable to such amount (or, in the case of a failure to borrow, convert or renew, the Funding Period that would have been applicable to such amount but for such failure) in each case at the applicable rate of interest for such Euro-Rate Portion provided for herein (excluding, however, the Applicable Margin included therein, if any), over (ii) the aggregate amount of interest (as determined in good faith by the Administrative Agent with reference to the applicable Telerate -39- 45 Screen page or other source and after consultation with the Banks) which would have accrued to the Banks on such amount for such period by placing such amount on deposit for such period with leading banks in the London interbank market. A certificate by the Banks as to any amount that the Banks are entitled to receive pursuant to this Section 2A.11(b) shall be conclusive absent manifest error if made in good faith. 2A.12. Funding by Branch, Subsidiary or Affiliate. (a) Notional Funding. Each Bank shall have the right from time to time, prospectively or retrospectively, without notice to a Borrower, to deem any branch, subsidiary or affiliate of such Bank to have made, maintained or funded any part of the Euro-Rate Portion at any time. Any branch, subsidiary or affiliate so deemed shall be known as a "Notional Euro-Rate Funding Office." Such Bank shall deem any part of the Euro-Rate Portion of the Loans or the funding therefor to have been transferred to a different Notional Euro-Rate Funding Office if such transfer would avoid or cure an event or condition described in Section 2A.3(e)(ii) hereof or would lessen compensation payable by the Borrower under Section 2A.11(a) hereof, and if such Bank determines in its sole discretion that such transfer would be practicable and would not have a material adverse effect on such part of the Loans, such Bank or any Notional Euro-Rate Funding Office (it being assumed for purposes of such determination that each part of the Euro-Rate Portion is actually made or maintained by or funded through the corresponding Notional Euro-Rate Funding Office). Notional Euro-Rate Funding Offices may be selected by such Bank without regard to such Bank's actual methods of making, maintaining or funding Loans or any sources of funding actually used by or available to such Bank. (b) Actual Funding. Each Bank shall have the right from time to time to make or maintain any part of the Euro-Rate Portion by arranging for a branch, subsidiary or affiliate of such Bank to make or maintain such part of the Euro-Rate Portion. Such Bank shall have the right to (i) hold any applicable Note payable to its order for the benefit and account of such branch, subsidiary or affiliate or (ii) request the Borrower to (A) execute and deliver to the Administrative Agent (for delivery to such branch, subsidiary or affiliate) a new Note in the principal amount of such Euro-Rate Portion, in substantially the form of a Note, with the blanks appropriately filled, payable to such branch, subsidiary or affiliate and with appropriate changes reflecting that the holder thereof is not obligated to make any additional Loans to a Borrower, and (B) execute and deliver to the Administrative Agent (for delivery to such Bank) a replacement Note in the principal amount of such Bank's Committed Amount minus the amount of the new Note under subsection (b)(ii)(A) (such Note to be in exchange for (and to be delivered against delivery, marked "exchanged" to such Borrower of), but not in payment of, the Note then held by such Bank). Each such Note shall be dated as of and be in substantially the form of the predecessor Note. The Administrative Agent shall mark the predecessor Note "exchanged" and deliver it to the respective Borrower. Each Borrower agrees to comply promptly with any request under subsection (b)(ii) of this Section 2A.12. If any Bank causes a branch, subsidiary or affiliate to make or maintain any part of the Euro-Rate Portion hereunder, all terms and conditions of this Agreement, the Notes, and any other Transaction Document shall, except where the context clearly requires otherwise, be applicable to such part of the Euro-Rate Portion and to any note payable to the order of such branch, subsidiary or affiliate to the same extent as if such part of the Euro-Rate Portion were made or maintained and such note were a Note payable to such Bank's order. -40- 46 ARTICLE III REPRESENTATIONS AND WARRANTIES. Each Credit Party represents and warrants to the Issuing Bank, the Banks and the Agents that: 3.01. Corporate Existence and Standing. Such Credit Party and each of its Subsidiaries is a corporation duly incorporated, validly existing and in good standing under the laws of its respective jurisdiction of incorporation, has the power and authority to own its properties and assets, and to carry on its business as presently conducted, and is duly qualified to conduct business as a foreign corporation in each jurisdiction in which such qualification is required, except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect. 3.02. Authorization and Validity. Such Credit Party and any Subsidiary of such Credit Party which is also a Credit Party has all requisite corporate power and authority and legal right to execute and deliver (or file, as the case may be) this Agreement and any other Transaction Document to which it is a party, to request the issuance of Letters of Credit or the making of Loans and to perform its obligations hereunder and thereunder. The execution and delivery (or filing, as the case may be) by such Credit Party of this Agreement and each such Transaction Document and the performance of its obligations hereunder and thereunder have been duly authorized by proper corporate proceedings and this Agreement and each such Transaction Document constitute legal, valid and binding obligations of such Credit Party enforceable against such Credit Party in accordance with their terms, except as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws affecting the enforcement of creditors' rights generally or by general principles of equity. 3.03. Compliance with Laws and Contracts. Such Credit Party and its Subsidiaries have complied in all material respects with all applicable statutes, rules, regulations, orders and restrictions of any domestic or foreign government or any instrumentality or agency thereof having jurisdiction over the conduct of their respective businesses or the ownership of their respective properties, except where the failure to so comply could not reasonably be expected to have a Material Adverse Effect. Neither the execution and delivery by such Credit Party of the Transaction Documents, the issuance or use of the Letters of Credit, the making of Loans or the use of the proceeds of Loans, the consummation of the transactions contemplated by the Transaction Documents nor compliance with the provisions of the Transaction Documents will, or at the relevant time did, (a) violate any law, rule, regulation, order, writ, judgment, injunction, decree or award binding on such Credit Party or any Subsidiary or such Credit Party's or any Subsidiary's charter, articles or certificate of incorporation or by-laws, (b) violate the provisions of or require the approval or consent of any party to any indenture, instrument or agreement to which such Credit Party or any Subsidiary is a party or is subject, or by which it, or its property, is bound, or conflict with or constitute a default thereunder, or result in the creation or imposition of any Lien in, of or on the property of such Credit Party or any Subsidiary pursuant to the terms of any such indenture, instrument or agreement or (c) require any consent of the stockholders of any Person except for approvals or consents which will be obtained before the initial Letter of Credit issuance or making of a Loan and are disclosed on Schedule 3.03, except for any violation of, or failure to obtain an approval or consent required under, any such law, rule, regulation, order, writ, judgment, injunction, decree, award, indenture, instrument or agreement that could not reasonably be expected to have a Material Adverse Effect. -41- 47 3.04. Governmental Consents. Except as set forth on Schedule 3.04 hereto, no order, consent, approval, qualification, license, authorization, or validation of, or filing, recording or registration with, or exemption by, or other action in respect of, a Governmental Authority, or any subdivision thereof, any securities exchange or any other Person is or at the relevant time was required to authorize, or is or at the relevant time was required in connection with the execution, delivery, consummation or performance of, or the legality, validity, binding effect or enforceability of any of the Transaction Documents, the issuance or use of the Letters of Credit, the making of Loans or the use of the proceeds of Loans, or the consummation of any transaction contemplated in the Transaction Documents. 3.05. Financial Statements. URC and URGI have heretofore furnished to the Administrative Agent, with sufficient copies for each Bank, the financial statements listed on Schedule 3.05 hereto (collectively, the "Financial Statements"). Each of the Financial Statements was prepared in accordance with Agreement Accounting Principles or SAP, as applicable, and, together with the related notes, fairly presents the consolidated financial condition and operations of the relevant Credit Party and its Subsidiaries, or of the relevant Insurance Subsidiary, as applicable, at such dates and the consolidated results of their operations for the respective periods then ended (except, in the case of such unaudited statements, for normal year-end audit adjustments). 3.06. Material Adverse Change. No material adverse change in the business, Property, condition (financial or otherwise), performance or operations of URC and its Subsidiaries, taken as a whole, or of URGI and its Subsidiaries, taken as a whole, has occurred since December 31, 1998. 3.07. Taxes. Except as set forth in Schedule 3.07 hereto, such Credit Party and each of its Subsidiaries have filed or caused to be filed on a timely basis and in correct form all United States federal and applicable state tax returns and all other material tax returns which are required to be filed by it, each of Alleghany and each other Consolidated Person has filed or caused to be filed all United States federal and material applicable state tax returns which are required to be filed by it on a consolidated or combined basis and which include URC or any Subsidiary of URC and each of the Credit Parties, the Subsidiaries, Alleghany and each other Consolidated Person has paid all taxes due pursuant to said returns or pursuant to any assessment received by such person, except, in each case, such taxes, if any, as are being contested in good faith and as to which adequate reserves have been provided in accordance with Agreement Accounting Principles or SAP, as applicable, and as to which no Lien exists. From and after October 7, 1993, each of URC and each Subsidiary of URC has joined in the filing of a consolidated federal income tax return with Alleghany. No tax liens have been filed and no claims are being asserted with respect to any taxes for which any Consolidated Person may be liable which could reasonably be expected to have a Material Adverse Effect. The charges, accruals and reserves (a) on the books of each Credit Party and its Subsidiaries in respect of any taxes or other governmental charges and (b) on the books of Alleghany and such other Consolidated Person in respect of any taxes or other governmental charges owing with respect to any tax year beginning after December 31, 1992 are in accordance with Agreement Accounting Principles or SAP, as applicable. 3.08. Litigation. There is no litigation, arbitration proceeding, inquiry or governmental investigation pending or, to the knowledge of any of its officers, threatened against or affecting such Credit Party or any of its Subsidiaries or any of their respective properties which could reasonably be expected to have a Material Adverse Effect if adversely determined. 3.09. Insurance Licenses. No License, the loss of which could reasonably be expected to have a Material Adverse Effect, is the subject of a proceeding for suspension or revocation. To such Credit Party's knowledge, there is no sustainable basis for such suspension or revocation, and no such suspension or revocation has been threatened by any Governmental Authority. No Insurance Subsidiary has received written notice from any Governmental Authority that it is -42- 48 deemed to be "commercially domiciled" for insurance regulatory purposes in any jurisdiction other than that indicated on Schedule 3.09. Schedule 3.09 also indicates the line or lines of insurance in which each Insurance Subsidiary is engaged and the state or states in which such Insurance Subsidiary is licensed to engage in any line of insurance in each case as of the date of this Agreement. 3.10. Use of Proceeds. Such Credit Party is not engaged in the business of extending credit to others for the purposes of buying or carrying any "margin stock." 3.11. Permits, Licenses and Rights. Such Credit Party and each Subsidiary of such Credit Party own or possess all the patents, trademarks, service marks, trade names, copyrights, licenses, franchises, permits and rights with respect to the foregoing necessary to own and operate their respective properties and to carry on their respective businesses as presently conducted and presently planned to be conducted without, to the best knowledge of such Credit Party, conflict with the rights of others, except where failure to do so could not reasonably be expected to have a Material Adverse Effect. 3.12. Disclosure. None of the (a) information, exhibits or reports furnished by or on behalf of any Credit Party to any Agent or to any Bank in connection with this Agreement or the Transaction Documents and the transactions contemplated hereby and thereby or (b) representations or warranties of any Credit Party contained in this Agreement, the other Transaction Documents or any other document, certificate or written statement furnished to the Agents or the Banks by or on behalf of any Credit Party for use in connection with the transactions contemplated by this Agreement or the Transaction Documents contained, contains or will contain any untrue statement of a material fact or omitted, omits or will omit to state a material fact necessary in order to make the statements contained herein or therein not misleading in light of the circumstances in which the same were made and on the date as of which the same were made; provided, that this Section 3.12 shall not apply to any plan, forecast, projection or pro forma financial information contained in such materials that is based upon good faith estimates and assumptions believed to be reasonable at the time made. The pro forma financial information contained in such materials is based upon good faith estimates and assumptions believed by the Credit Parties to be reasonable at the time made. There is no fact known to any Credit Party (other than matters of a general economic or political nature and other than matters applicable to the insurance industry generally) that has had since December 31, 1998 or could reasonably be expected to have a Material Adverse Effect and that has not been disclosed herein or in such other documents, certificates and statements furnished to the Agents or Banks for use in connection with the transactions contemplated by this Agreement and the other Transaction Documents. 3.13. Environmental Laws. There are no claims, investigations, litigation, administrative proceedings, notices, requests for information (each a "Proceeding"), whether pending or, to such Credit Party's knowledge, threatened, or judgments or orders asserting violations of applicable federal, state and local environmental, health and safety statutes, regulations, ordinances, codes, rules, orders, decrees, directives and standards ("Environmental Laws") or relating to any toxic or hazardous waste, substance or chemical or any pollutant, contaminant, chemical or other substance defined or regulated pursuant to any Environmental Law, including, without limitation, asbestos, petroleum, crude oil or any fraction thereof ("Hazardous Materials") asserted against such Credit Party or any of its Subsidiaries which, in any case, could reasonably be expected to have a Material Adverse Effect. As of the date hereof, there are no such Proceedings pending, or to such Credit Party's knowledge threatened, except as disclosed on Schedule 3.13. Such Credit Party and each of its Subsidiaries have obtained and are in compliance in all material respects with all permits, certificates, licenses, approvals and other authorizations ("Environmental Permits") required for the operation of their business and have filed all required notifications or reports relating, in each case, to chemical substances, air emissions, effluent discharges and the storage, treatment, transport and disposal of Hazardous Materials. As of the date hereof, such Credit Party and its -43- 49 Subsidiaries do not have liabilities exceeding $100,000 in the aggregate for all of them with respect to compliance with applicable Environmental Laws and Environmental Permits or related to the generation, treatment, storage, disposal, release, investigation or cleanup of Hazardous Materials, and, to the knowledge of such Credit Party, no facts or circumstances exist which could give rise to such liabilities with respect to compliance with applicable Environmental Laws and Environmental Permits and the generation, treatment, storage, disposal, release, investigation or cleanup of Hazardous Materials. 3.14. Reserves. Each reserve and other liability amount in respect of the insurance business, including, without limitation reserve and other liability amounts in respect of insurance policies, established or reflected in the SAP Financial Statements for the year ended December 31, 1998 of each Insurance Subsidiary, was determined in accordance with generally accepted actuarial standards consistently applied, was fairly stated in accordance with sound actuarial principles and was in compliance with the requirements of the insurance laws, rules and regulations of its state of domicile as of the date thereof. Each Insurance Subsidiary owns assets that qualify as admitted assets under applicable law in an amount at least equal to the sum of all such reserves and liability amounts and its minimum statutory capital and surplus as required by the insurance laws, rules and regulations of its state of domicile. 3.15. Year 2000 Compliance. Such Credit Party has reviewed its operations and those of its Subsidiaries with a view to assessing whether its businesses, or the businesses of any of its Subsidiaries, will be vulnerable to a Year 2000 Problem or will be vulnerable to the effects of a Year 2000 Problem suffered by any of such Credit Party's or any of its Subsidiaries' major commercial counter-parties. Such Credit Party represents and warrants that it has a reasonable basis to believe that no Year 2000 Problem will cause a Material Adverse Effect. 3.16. Capitalization. Schedule 3.16 hereto contains (a) an accurate description of URGI's capitalization as of September 30, 1999, and (b) an accurate list of all of such Credit Party's existing Subsidiaries as of the date of this Agreement, setting forth their respective jurisdictions of incorporation and the percentage of their capital stock owned by such Credit Party or other Subsidiaries. All of the issued and outstanding shares of capital stock of such Credit Party and of each Subsidiary have been duly authorized and validly issued, are fully paid and non-assessable, and are free and clear of all Liens. Except as set forth on Schedule 3.16, no authorized but unissued or treasury shares of capital stock of such Credit Party or any Subsidiary are subject to any option, warrant, right to call or commitment of any kind or character. Except as set forth on Schedule 3.16, neither the Credit Party nor any Subsidiary has any outstanding stock or securities convertible into or exchangeable for any shares of its capital stock, or any right issued to any Person (either preemptive or other) to subscribe for or to purchase, or any options for the purchase of or any agreements providing for the issuance (contingent or otherwise) of, or any calls, commitments or claims of any character relating to any of its capital stock or any stock or securities convertible into or exchangeable for any of its capital stock other than as expressly set forth in the certificate or articles of incorporation of such Credit Party or such Subsidiary. Neither the Credit Party nor any Subsidiary is subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any convertible securities, rights or options of the type described in the preceding sentence except as otherwise set forth on Schedule 3.16. Except as set forth on Schedule 3.16 as of the date hereof such Credit Party does not own or hold, directly or indirectly, any capital stock or equity security of, or any equity or partnership interest in any Person other than such Subsidiaries. 3.17. ERISA. The Unfunded Liabilities of all Single Employer Plans maintained by such Credit Party or any of its Subsidiaries do not in the aggregate exceed $1,000,000 and the Unfunded Liabilities of all Single Employer Plans maintained by the other members of the Controlled Group do not in the aggregate exceed an amount which could reasonably be expected to have a Material Adverse Effect. Except as set forth on Schedule 3.17 neither such Credit Party nor any other -44- 50 member of the Controlled Group maintains, or is obligated to contribute to, any Multiemployer Plan. Each Plan complies in all material respects with all applicable requirements of law and regulations, no Reportable Event has occurred with respect to any Plan maintained by such Credit Party or any of its Subsidiaries, no Reportable Event has occurred with respect to any Plan maintained by any other member of the Controlled Group that could reasonably be expected to have a Material Adverse Effect, neither such Credit Party nor any Subsidiary has withdrawn from any Multiemployer Plan or initiated steps to do so, no other member of the Controlled Group has withdrawn from any Multiemployer Plan resulting in any withdrawal liability that could reasonably be expected to have a Material Adverse Effect or initiated steps to do so, and no steps have been taken to reorganize or terminate any Plan by any member of the Controlled Group or, to such Credit Party's knowledge, by any other Person. 3.18. Defaults. No Default or Unmatured Default has occurred and is continuing. 3.19. Federal Reserve Regulations. Neither the Credit Party nor any its Subsidiaries is engaged, directly or indirectly, principally, or as one of its important activities, in the business of extending, or arranging for the extension of credit for the purpose of purchasing or carrying Margin Stock. No part of the proceeds of any Letter of Credit or Loan will be used in a manner which would violate, or result in a violation of Regulation T, Regulation U or Regulation X. Neither the issuance of any Letter of Credit or the making of any Loan hereunder nor the use of the proceeds thereof will violate or conflict with the provisions of, Regulation T, Regulation U or Regulation X. Following the issuance of any Letter of Credit or the making of any Loan, less than 25% of the value (as determined by any reasonable method) of the assets of such Credit Party and its Subsidiaries which are subject to any limitation on sale, pledge, or other restriction hereunder taken as a whole has been, and will continue to be, represented by Margin Stock. 3.20. Investment Company; Public Utility Holding Company Act. Neither such Credit Party nor any Subsidiary is, or after giving effect to the issuance of any Letter of Credit or the making of any Loan will be, an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. Neither such Credit Party nor any Subsidiary is a "holding company" or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. 3.21. Certain Fees. No broker's or finder's fee or commission was, is or will be payable by such Credit Party or any Subsidiary with respect to any of the transactions contemplated by this Agreement. Such Credit Party hereby agrees to indemnify the Agents and the Banks against and agrees that it will hold each of them harmless from any claim, demand or liability for broker's or finder's fees or commissions alleged to have been incurred by such Credit Party in connection with any of the transactions contemplated by this Agreement and any expenses (including, without limitation, attorneys' fees and time charges of attorneys for any Agent or any Bank which attorneys may be employees of any Agent or any Bank) arising in connection with any such claim, demand or liability. No other similar fee or commissions will be payable by such Credit Party or any Subsidiary for any other services rendered to such Credit Party or any Subsidiary ancillary to any of the transactions contemplated by this Agreement. 3.22. Solvency. As of the date hereof, before and after giving effect to the consummation of the transactions contemplated by the Transaction Documents and the payment of all fees, costs and expenses payable by the Credit Party or its Subsidiaries with respect to the transactions contemplated by the Transaction Documents, each Credit Party (individually and on a consolidated basis) is Solvent. -45- 51 3.23. Ownership of Properties. Except as set forth on Schedule 3.23 hereto, such Credit Party and its Subsidiaries own, free of all Liens, other than those permitted by Section 6.16 or by any of the other Transaction Documents, all of the properties and assets reflected in the Financial Statements as being owned by it, except for assets sold, transferred or otherwise disposed of in the ordinary course of business since the date thereof. To the knowledge of such Credit Party, there are no actual, threatened or alleged defaults with respect to any leases of real property under which such Credit Party or any Subsidiary is lessee or lessor which could reasonably be expected to have a Material Adverse Effect. Such Credit Party and its Subsidiaries own or possess rights to use all licenses, patents, patent applications, copyrights, service marks, trademarks and trade names necessary to continue to conduct their business as heretofore conducted, and no such license, patent or trademark has been declared invalid or been limited by order of any court or by agreement or is the subject of any infringement, interference or similar proceeding or challenge, except for proceedings and challenges which could not reasonably be expected to have a Material Adverse Effect. 3.24. Indebtedness. Attached hereto as Schedule 3.24 is a complete and correct list of all Indebtedness of such Credit Party and its Subsidiaries outstanding on the date of this Agreement (other than Indebtedness in a principal amount not exceeding $1,000,000 (or its equivalent in any other currency) for a single item of Indebtedness and $5,000,000 (or its equivalent in any other currency) in the aggregate for all such Indebtedness), showing the aggregate principal amount which was outstanding on such date. Such Credit Party has delivered or caused to be delivered to the Administrative Agent, with sufficient copies for each of the Banks, a true and complete copy of each instrument evidencing Indebtedness in a principal amount of $5,000,000 or more (or its equivalent in any other currency) and of each document pursuant to which any of such Indebtedness was issued. 3.25. Material Agreements. Neither such Credit Party nor any Subsidiary is a party to any agreement or instrument or subject to any charter, bylaw or other restriction set forth in a similar governing document which could reasonably be expected to have a Material Adverse Effect or which restricts or imposes conditions upon the ability of any Subsidiary to (a) pay dividends or make other distributions on its capital stock, (b) make loans or advances to such Credit Party or (c) repay loans or advances from such Credit Party. Neither such Credit Party nor any Subsidiary is in default in the performance, observance or fulfillment of any of the obligations, covenants or conditions contained in any agreement to which it is a party, which default could reasonably be expected to have a Material Adverse Effect. 3.26 Insurance. Such Credit Party and its Subsidiaries maintain insurance on their Property with such companies, in such amounts and covering such risks as is, in each case, consistent with sound business practice. ARTICLE IV CONDITIONS 4.01. Effectiveness. The effectiveness of this Agreement shall be subject to the following conditions: (a) Proceedings and Incumbency. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank a certificate with respect to each Credit Party in form and substance satisfactory to each Co-Arranger dated the Closing Date and signed on behalf of each Credit Party by the Secretary or an Assistant Secretary of such Credit Party certifying as to: -46- 52 (a) true copies of all corporate action taken by such Credit Party relative to this Agreement and the other Transaction Documents applicable to it, including but not limited to that described in Section 3.02 hereof and (b) the names, true signatures and incumbency of the officer or officers of such Credit Party authorized to execute and deliver this Agreement and the other Transaction Documents applicable to it. Each Bank, the Issuing Bank and each Agent may conclusively rely on such certificates unless and until a later certificate revising the prior certificate has been furnished to such Person. (b) Organizational Documents. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank (i) certified copies of the articles of incorporation or memorandum of association and by-laws or other equivalent organizational documents for each Credit Party and (ii) a certificate of good standing for each Credit Party certified by the appropriate Official Body of its place of organization. (c) Opinions of Counsel. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank written opinions addressed to the Banks, dated the Closing Date, of Messrs. Dewey Ballantine LLP, counsel for URGI and URC and special English counsel for Talbot Underwriting Limited and Underwriters Re Capital Ltd, and of Messrs. Conyers, Dill & Pearman, special Bermuda counsel for Venton Underwriting Limited, in form and substance satisfactory to each Bank, which together are substantially to the effects set forth in Exhibit C. (d) Details, Proceedings and Documents. All legal details and proceedings in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory to each Bank, and each Bank shall have received all such counterpart originals or certified or other copies of this Agreement and the other the Transaction Documents and such other documents and proceedings in connection with such transactions, in form and substance satisfactory to it, as such Bank has reasonably requested. (e) Fees and Expenses. Each Credit Party shall have paid all fees and other compensation to be paid by it hereunder, or with respect to the transactions contemplated hereby, on or prior to the Closing Date. (f) Representation and Warranties. The representations and warranties contained in Article III hereof shall be true on and as of the Closing Date with the same effect as though made on and as of the Closing Date. (g) Letter of Credit Agreement and Notes. The Continuing Letter of Credit Agreement shall have been delivered to the Administrative Agent and the Issuing Bank, duly executed by each Account Party, and the Notes shall have been delivered to the Administrative Agent, duly executed by each Borrower. (h) Other Certificates, Opinions or Documents. There shall have been delivered to the Administrative Agent with sufficient copies for each Bank such other certificates, opinions or documents as may be reasonably requested by the Co-Arrangers. (i) Licenses; Regulatory Approvals. Each Credit Party shall have obtained all licenses and regulatory approvals, if any, which are necessary to complete the transactions contemplated by this Agreement and the other Transaction Documents. 4.02. Extension of Credit. The obligation of the Issuing Bank and the Banks to make any Credit Extension hereunder is subject to the accuracy as of the date hereof of the representations and warranties herein contained, to the performance by each Credit Party of its obligations to be performed hereunder on or before the date of such Credit Extension and to the satisfaction of the following further conditions: -47- 53 (a) Representations and Warranties; Events of Default and Unmatured Defaults. The representations and warranties contained in Article III hereof shall be true on and as of the date of each Credit Extension made hereunder with the same effect as though made on and as of each such date, and on the date of each Credit Extension made hereunder no Default and no Unmatured Default shall have occurred and be continuing or exist or shall occur or exist after giving effect to the Credit Extension to be made on such date. Failure of the Administrative Agent to receive notice from the applicable Credit Party to the contrary before any Credit Extension is made hereunder shall constitute a representation and warranty that: (i) the representations and warranties contained in Article III hereof are true and correct on and as of the date of such Credit Extension with the same effect as though made on and as of such date and (ii) on the date of such Credit Extension no Default or Unmatured Default has occurred and is continuing or exists or will occur or exist after giving effect to such Credit Extension. (b) Commitment. The fact that, immediately after the making of such Credit Extension, the aggregate outstanding Total Credit Exposure hereunder will not exceed the aggregate amount of the Committed Amounts. ARTICLE V GUARANTEE 5.01. The Guarantee. Each of the Guarantors hereby irrevocably, unconditionally and absolutely guarantees to the Agents, the Issuing Bank and the Banks, and becomes surety for, the prompt payment of the Obligations of the Account Parties and the Borrowers (the "Guaranteed Obligations") in full when due (whether at stated maturity, by acceleration, or otherwise) strictly in accordance with the terms thereof. Each Guarantor hereby further agrees, as a primary obligor, that if any of the Guaranteed Obligations are not paid in full when due (whether at stated maturity, by acceleration, or otherwise and whether or not such payments would not be permitted under any applicable bankruptcy or similar law), the Guarantor will promptly pay the same, without any demand or notice whatsoever (except as expressly provided herein), and that in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, the same will be promptly paid in full when due (whether at extended maturity, by acceleration or otherwise) in accordance with the terms of such extension or renewal. Notwithstanding any provision to the contrary contained herein or in any other of the Transaction Documents, to the extent the obligations of either Guarantor shall be adjudicated to be invalid or unenforceable for any reason (including, without limitation, because of any applicable law, including the insolvency laws, relating to fraudulent conveyances or transfers) then the obligations of such Guarantor hereunder automatically shall be limited to the maximum amount that is permissible under applicable law. 5.02. Obligations Unconditional. The obligations of each Guarantor under this Article are irrevocable, absolute and unconditional (to the fullest extent permitted by applicable law), irrespective of the value, genuineness, validity, regularity or enforceability of any of the Transaction Documents, or any other agreement or instrument referred to therein, or any substitution, release or exchange of any other guarantee of or security for any of the Guaranteed Obligations, and, to the fullest extent permitted by applicable law, irrespective of any other circumstance whatsoever which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor, it being the intent of this Article that the obligations of each Guarantor hereunder shall be absolute and unconditional under any and all circumstances. Each Guarantor agrees that such Guarantor shall have no right of subrogation, indemnity, reimbursement or contribution against any Account Party or any Borrower, for amounts paid under this Article V until such time as the Banks have been paid in full, no Guaranteed Obligation is outstanding, the -48- 54 Letter of Credit Participating Interest Commitments under this Agreement have been terminated and no Person or Official Body shall have any right to request any return or reimbursement of funds from any Bank in connection with monies received under the Transaction Documents. Without limiting the generality of the foregoing, it is agreed that, to the fullest extent permitted by applicable law, the occurrence of any one or more of the following shall not alter or impair the liability of either Guarantor hereunder which shall remain irrevocable, absolute and unconditional as described above: (i) at any time or from time to time, without notice to the Guarantors, the time for any performance of or compliance with any of the Guaranteed Obligations shall be extended, or such performance or compliance shall be waived; (ii) any of the acts mentioned in any of the provisions of any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents shall be done or omitted; (iii) the maturity of any of the Guaranteed Obligations shall be accelerated, or any of the Guaranteed Obligations shall be modified, supplemented or amended in any respect, or any right under any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents shall be waived or any other guarantee of any of the Guaranteed Obligations or any security therefor shall be released or exchanged in whole or in part or otherwise dealt with; (iv) any Lien granted to, or in favor of, any Agent or any Bank as security for any of the Guaranteed Obligations shall be void or violable, or shall fail to attach or be perfected or any Agent or any Bank shall fail to realize on any collateral security; or (v) any of the Guaranteed Obligations shall be determined to be void or voidable (including, without limitation, for the benefit of any creditor of either Guarantor) or shall be subordinated to the claims of any Person (including, without limitation, any creditor of either Guarantor). With respect to its obligations hereunder, each Guarantor hereby expressly waives diligence, presentment, demand of payment, protest and all notices whatsoever (except notices expressly required hereunder), and any requirement that the Banks exhaust any right, power or remedy or proceed against any Person under any of the Transaction Documents, or any other agreement or instrument referred to in the Transaction Documents, or against any other Person under any other guarantee of, or security for, any of the Guaranteed Obligations. This is a guarantee of payment and not merely of collection. 5.03. Reinstatement. The obligations of the Guarantors under this Article shall be automatically reinstated if and to the extent that for any reason any payment by or on behalf of any Person in respect of the Guaranteed Obligations is rescinded or must be otherwise restored by any holder of any of the Guaranteed Obligations, whether as a result of any proceedings in bankruptcy, receivership, or reorganization or otherwise, and each Guarantor agrees that it will indemnify the Agents and the Banks on demand for all reasonable out-of-pocket costs and expenses (including, without limitation, reasonable fees and expenses of counsel) incurred by any Agent or any Bank in connection with such rescission or restoration, including any such reasonable costs and expenses incurred in defending against any claim alleging that such payment constituted a preference, fraudulent transfer or similar payment under any bankruptcy, insolvency, receivership, reorganization or similar law. 5.04. Remedies. Each Guarantor agrees that, to the fullest extent permitted by applicable law, as between such Guarantor, on the one hand, and the Agents and the Banks, on the other hand, -49- 55 the Guaranteed Obligations may be declared to be forthwith due and payable as provided in Section 7.01 hereof (and shall be deemed to have become automatically due and payable in the circumstances provided in said Section 7.01) for purposes of Section 5.01 hereof notwithstanding any stay, injunction or other prohibition preventing such declaration (or preventing the Guaranteed Obligations from becoming automatically due and payable) as to any other Person and that, in the event of such declaration (or Guaranteed Obligations being deemed to have become automatically due and payable), the Guaranteed Obligations (whether or not due and payable by any other Person) shall forthwith become due and payable by such Guarantor for purposes of said Section 5.01. 5.05. Continuing Guarantee. The guarantee in this Article is a continuing guarantee, and shall apply to all of the Guaranteed Obligations whenever arising. 5.06. No Restrictions. Except for restrictions under the Transaction Documents, neither Guarantor shall be or become subject to any restriction of any nature (whether arising by operation of Law, by agreement, by its articles of incorporation, by-laws or other constituent documents of such Guarantor, or otherwise) on the right of such Guarantor from time to time to (x) pay any indebtedness, obligations or liabilities from time to time owed to any Account Party or any Borrower, (y) make loans or advances to any Account Party or any Borrower, or (z) transfer any of its properties or assets to any Account Party or any Borrower. ARTICLE VI COVENANTS So long as any Letter of Credit or Loan is outstanding, any Obligation is outstanding, the Issuing Bank has any obligation to issue, or the Banks have any obligation to participate in, Letters of Credit, or the Banks have any obligation to make any Loan: 6.01. Financial Reporting. Each Credit Party will maintain, for itself and each Subsidiary, a system of accounting established and administered in accordance with generally accepted accounting principles, consistently applied, and will furnish to the Banks: (a) As soon as practicable and in any event within 90 days after the close of each of its Fiscal Years, an unqualified (except for qualifications relating to changes in accounting principles or practices reflecting changes in generally accepted accounting principles and required or approved by the independent certified public accountants of URGI or of Venton, as the case may be) audit report certified by independent certified public accountants, acceptable to the Banks, prepared in accordance with Agreement Accounting Principles on a consolidated and consolidating basis (consolidating statements need not be certified by such accountants) for URGI and its Subsidiaries and for Venton and its Subsidiaries, including balance sheets as of the end of such period and related statements of income, retained earnings and cash flows accompanied by (i) any control letter prepared by said accountants addressed to the audit committee of the board of directors of URGI or Venton, as the case may be, (ii) a certificate of said accountants that, in the course of the examination necessary for their certification of the foregoing. they have obtained no knowledge of any Default or Unmatured Default, or if in the opinion of such accountants, any Default or Unmatured Default shall exist, stating the nature and status thereof and (iii) a letter from said accountants addressed to the Banks acknowledging that the Banks are relying on such certificate as part of their credit consideration of the transactions hereby contemplated and authorizing such reliance. (b) As soon as practicable and in any event within 45 days after the close of the first three Fiscal Quarters of each of its Fiscal Years, commencing September 30, 1999, for URGI and its Subsidiaries, consolidated and consolidating unaudited balance sheets as at the close of -50- 56 each such period and consolidated and consolidating statements of income, retained earnings and cash flows for the period from the beginning of such Fiscal Year to the end of such quarter, all certified by its chief financial officer. (c) (i) Upon the earlier of (A) fifteen days after the regulatory filing date or (B) 75 days after the close of each Fiscal Year of each Insurance Subsidiary, copies of the unaudited Annual Statement of such Insurance Subsidiary, certified by the chief financial officer of such Insurance Subsidiary, all such statements to be prepared in accordance with SAP and (ii) no later than each June 15, copies of such Annual Statements audited and certified by independent certified public accountants of recognized annual standing. (d) Upon the earlier of (i) ten days after the regulatory filing date or (ii) 60 days after the close of each of the first three Fiscal Quarters of each Fiscal Year of each Insurance Subsidiary, copies of the Quarterly Statement of each of the Insurance Subsidiaries, certified by the chief financial officer of such Insurance Subsidiary, all such statements to be prepared in accordance with SAP. (e) Promptly and in any event within ten days after (i) learning thereof, notification of any changes after the date hereof in the rating given by (A) A.M. Best & Co. or Standard & Poor's in respect of any Insurance Subsidiary or (B) Standard & Poor's or Moody's in respect of the senior Indebtedness of any Credit Party and (ii) receipt thereof, copies of any ratings analysis by (A) A.M. Best & Co. or Standard & Poor's relating to any Insurance Subsidiary or (B) Standard & Poor's or Moody's in respect of the senior Indebtedness of any Credit Party. (f) Copies of any actuarial certificates prepared with respect to any Insurance Subsidiary by an employee of or an actuary engaged by such Insurance Subsidiary, promptly after the receipt thereof. (g) As soon as available but in any event not later than the last Business Day in February of each year, a copy of the plan and forecast (including a projected consolidated and consolidating balance sheet, income statement and funds flow statement) of URGI and its Subsidiaries for such Fiscal Year. (h) Together with the financial statements required by clauses (a) and (b) above, a compliance certificate in substantially the form of Exhibit D hereto signed by the chief financial officer of URGI showing the calculations necessary to determine compliance with this Agreement and stating that no Default or Unmatured Default exists, or if any Default or Unmatured Default exists, stating the nature and status thereof. (i) Within 270 days after the close of each Fiscal Year, a statement of the Unfunded Liabilities of each Single Employer Plan, if any, certified as correct by an actuary enrolled under ERISA. (j) As soon as possible and in any event within ten days after any Credit Party knows that any Termination Event has occurred with respect to any Plan, a statement, signed by the chief financial officer of URGI, describing said Termination Event and the action which such Credit Party proposes to take with respect thereto and as soon as possible and in any event within ten days after learning thereof notification of any lien imposed by the PBGC or the IRS on the assets of any member of the Controlled Group in respect of any Plan maintained by any such member (or any other employee pension benefit plan as to which any such member may be liable) which relates to liabilities in excess of ten percent of the net worth (determined according to generally accepted accounting principles and without reduction for any reserve for such liabilities) of Alleghany and its Subsidiaries. -51- 57 (k) As soon as possible and in any event within ten days after receipt by any Credit Party, a copy of (i) any notice, claim, complaint or order to the effect that a Credit Party or any of its Subsidiaries is or may be liable to any Person as a result of the release by such Credit Party, any of its Subsidiaries, or any other Person of any Hazardous Materials into the environment or requiring that action be taken to respond to or clean up a Release of Hazardous Materials into the environment. and (ii) any notice, complaint or citation alleging any violation of any Environmental Law or Environmental Permit by such Credit Party or any of its Subsidiaries. Within ten days of any Credit Party or any Subsidiary having knowledge of the proposal, enactment or promulgation of any Environmental Law which could reasonably be expected to have a Material Adverse Effect, URGI or URC shall provide the Administrative Agent with written notice thereof. (1) Promptly upon the filing thereof, copies of all registration statements and annual, quarterly, monthly or other regular reports which any Credit Party or any of its Subsidiaries files with the NAIC or any insurance commission or department or analogous Governmental Authority (including without limitation, any filing made by any Credit Party or any Subsidiary pursuant to any insurance holding company act or related rules or regulations), but excluding routine or non-material filings with the NAIC, any insurance commissioner or department or analogous Governmental Authority. (m) Promptly and in any event within ten days after learning thereof, notification of (i) any tax assessments demand, notice of proposed deficiency or notice of deficiency received by Alleghany or any other Consolidated Person or (ii) the filing of any tax Lien or commencement of any judicial proceeding by or against any such Consolidated Person, of any such assessment, demand, notice, Lien or judicial proceeding relates to tax liabilities in excess of ten percent (10%) of the net worth (determined according to generally accepted accounting standards and without reduction for any reserve for such liabilities) of Alleghany and its Subsidiaries taken as a whole. (n) Such other information (including, without limitation, the annual Best's Advance Report Service report prepared with respect to each Insurance Subsidiary rated by A.M. Best & Co.) as any Agent or any Bank may from time to time reasonably request. 6.02. Use of Proceeds. Each Account Party and each Borrower will, and will cause each Subsidiary to, use the Credit Extensions made hereunder for its general corporate purposes; provided, that each Account Party will use Multi-year Letters of Credit only in connection with its business relating to Lloyd's. No Account Party or Borrower will permit a Credit Extension in connection with the purchase or carrying of any Margin Stock or in connection with the Purchase of any Person which Purchase has not been approved and recommended by the board of directors (or functional equivalent thereof) of such Person. 6.03. Notice of Default. The Credit Parties will, and will cause each Subsidiary to, give prompt notice in writing to the Banks of (a) the occurrence of any Default or Unmatured Default, (b) the occurrence of any other development, financial or other, relating specifically to any Credit Party or any of its Subsidiaries (and not of a general economic or political nature) which could reasonably be expected to have a Material Adverse Effect, (c) the receipt of any notice from any Governmental Authority of the expiration without renewal, revocation or suspension of or the institution of any proceedings to revoke or suspend any License now or hereafter held by any Insurance Subsidiary which is required to conduct insurance business in compliance with all applicable laws and regulations and the expiration, revocation or suspension of which could reasonably be expected to have a Material Adverse Effect, (d) the receipt of any notice from any Governmental Authority of the institution of any disciplinary proceedings against or in respect of any Insurance Subsidiary, or the issuance of any order, the taking of any action or any request for an extraordinary audit for cause by any Governmental Authority which, if -52- 58 adversely determined, could reasonably be expected to have a Material Adverse Effect, (e) any judicial or administrative order limiting or controlling the insurance business of any Insurance Subsidiary (and not the insurance industry generally) which has been issued or adopted and which has had, or could reasonably be expected to have, a Material Adverse Effect, or (f) the commencement of any litigation which could reasonably be expected to create a Material Adverse Effect. 6.04. Conduct of Business. Each Credit Party will, and will cause each Subsidiary to, (a) carry on and conduct its business only in substantially the same manner as it is presently conducted, (b)(i) with respect to URGI, only engage in the business of a holding company owning entities engaged in the business of insurance or reasonably incidental activities, (ii) with respect to each Insurance Subsidiary, only engage in the insurance business in which it is engaged or licensed as of the date hereof if it is an Insurance Subsidiary as of such date, or as of the date of its Purchase, if hereafter acquired, or only engage in the insurance business for which it is formed, if hereafter formed, and (iii) with respect to each other Subsidiary, only engage in the business in which it is engaged as of the date hereof if it is a Subsidiary as of such date, or as of the date of its Purchase if hereafter acquired, or only engage in the business for which it is formed, if hereafter formed, (c) do all things necessary to remain duly incorporated, validly existing and in good standing in its jurisdiction of incorporation and its jurisdiction of domicile and maintain all requisite qualification to conduct business in each other jurisdiction in which such qualification is required, except where the failure to maintain such qualification could not reasonably be expected to have a Material Adverse Effect, and (d) do all things necessary to renew, extend and continue in effect all Licenses which may at any time and from time to time be necessary for any Insurance Subsidiary to operate its insurance business in compliance with all applicable laws and regulations; provided, that (i) any Insurance Subsidiary may withdraw from one or more states (other than its state of domicile) as an admitted insurer if such withdrawal is determined by the board of directors or management of such Insurance Subsidiary to be in the best interest of such Insurance Subsidiary and could not reasonably be expected to have a Material Adverse Effect and (ii) any Subsidiary that is not actively engaged in business may be dissolved, if such dissolution is determined by URGI's board of directors to be in the best interest of the Credit Parties and could not reasonably be expected to have a Material Adverse Effect. No Insurance Subsidiary shall change its state of domicile or incorporation without the prior written consent of the Required Banks. Each Wholly-Owned Subsidiary in existence as of the date of this Agreement shall continue to be a Wholly-Owned Subsidiary except as permitted by Section 6.12. It is understood that a merger of a Subsidiary of URC into an entity which is a Wholly-Owned Subsidiary of URC, to the extent otherwise permitted by this Agreement, will not be deemed to violate this Section 6.04. It is also understood that a merger of a Subsidiary of URGI (which is not a Subsidiary of URC) into an entity which is a Wholly-Owned Subsidiary of URGI, to the extent otherwise permitted by this Agreement, will not be deemed to violate this Section 6.04. 6.05. Taxes. Each Credit Party will, and will cause each Subsidiary to, timely file United States federal and applicable foreign, state and local tax returns required to be filed by it that are true and correct in all material respects, and each of each Credit Party, their respective Subsidiaries, Alleghany and each other Consolidated Person will pay when due all taxes, assessments and governmental charges and levies upon it or its income, profits or Property, except, in each case those which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves have been set aside in accordance with generally accepted accounting principles or SAP, as applicable. 6.06. Insurance. Each Credit Party will, and will cause each Subsidiary to, maintain insurance on all their Property with such companies, in such amounts and covering such risks as is, in each case, consistent with sound business practice, and the Credit Parties will furnish to any Agent and any Bank upon request all information as to the insurance carried. -53- 59 6.07. Compliance with Laws. Each Credit Party will, and will cause each Subsidiary to, comply with all laws, rules, regulations, orders, writs, judgments, injunctions, decrees or awards to which it may be subject, the failure to comply with which could reasonably be expected to have a Material Adverse Effect. 6.08. Maintenance of Properties; Year 2000 Compliance. (a) Each Credit Party will, and will cause each Subsidiary to, do all things necessary to maintain, preserve, protect and keep its Property in good repair, working order and condition except for ordinary wear and tear, and make all necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted at all times; provided, that any Credit Party or any Subsidiary may, subject to Section 6.13, dispose of any Property that such Person deems unnecessary for the conduct of its business. (b) Each Credit Party shall take all actions necessary and commit adequate resources to assure that its computer-based and other systems (and those of all Subsidiaries) are able to effectively process data, including dates before, on and after January 1, 2000, without experiencing any Year 2000 Problem that could reasonably be expected to cause a Material Adverse Effect. At the request of the Administrative Agent, each Credit Party will provide the Administrative Agent with assurances and substantiations (including, but not limited to, the results of internal or external audit reports prepared in the ordinary course of business) reasonably acceptable to the Required Banks as to the capability of such Credit Party and its Subsidiaries to conduct its and their businesses and operations before, on and after January 1, 2000 without experiencing a Year 2000 Problem that could reasonably be expected to cause a Material Adverse Effect. 6.09. Inspection. Each Credit Party will, and will cause each Subsidiary to, permit the Agents and the Banks, by their respective representatives and agents, to inspect any of the Property, corporate books and financial records of such Credit Party and each Subsidiary, to examine and make copies of the books of accounts and other financial records of such Credit Party and each Subsidiary, and to discuss the affairs, finances and accounts of such Credit Party and each Subsidiary with, and to be advised as to the same by, their respective officers at such reasonable times and intervals as the Banks may designate. Each Credit Party will keep or cause to be kept, and cause each Subsidiary to keep or cause to be kept, appropriate records and books of account in which complete entries are to be made reflecting its and their business and financial transactions, such entries to be made in accordance with Agreement Accounting Principles or SAP, as applicable, consistently applied. 6.10. Capital Stock and Dividends. No Credit Party will, nor will it permit any Subsidiary to, (a) issue any capital stock or equity securities of any kind if as a result thereof a Change in Control would occur, or (b) declare or pay any dividends or make any distributions on its capital stock (other than dividends payable in its own capital stock) or redeem, repurchase or otherwise acquire or retire any of its capital stock or any options or other rights in respect thereof at any time outstanding if a Default or Unmatured Default has occurred and is continuing or would occur after giving effect thereto (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter), except that any Subsidiary of URC may declare and pay dividends or make distributions to URC or any Wholly-Owned Subsidiary of URC. 6.11. Indebtedness. No Credit Party will, nor will it permit any Subsidiary to, create, incur or suffer to exist any Indebtedness, except: (a) the Obligations; -54- 60 (b) Indebtedness existing (or committed to) on the date hereof and described in Schedule 3.24 hereto; (c) Rate Hedging Obligations related to the loans described in item 3 of Schedule 3.24; (d) Contingent Obligations permitted pursuant to Section 6.15; and (e) additional Indebtedness of URGI in an aggregate principal amount not exceeding $25,000,000 (or its equivalent in any other currency), so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to the incurrence of such Indebtedness (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter). 6.12. Merger. No Credit Party will, nor will it permit any Subsidiary to, merge or consolidate with or into any other Person except that (a) a Wholly-Owned Subsidiary of URC may merge into URC or any Wholly-Owned Subsidiary of URC and (b) any Subsidiary formed for the purpose of effecting a transaction permitted under Section 6.14(a)(iv) or (b)(v) may merge with another entity if required to consummate such transaction. 6.13. Sale of Assets. No Credit Party will, nor will it permit any Subsidiary to, lease, sell, transfer or otherwise dispose of its Property to any other Person except for (a) sales of Investments in the ordinary course of business by a Credit Party or any Insurance Subsidiary, including without limitation, transactions undertaken for the purpose of restructuring all or a part of the portfolio of Investments owned by such Credit Party or Insurance Subsidiary and (b) leases, sales, transfers or other dispositions of its Property that together with all other Property of its Subsidiaries previously leased, sold or disposed of (other than Investments sold in the ordinary course of business by Insurance Subsidiaries) as permitted by this Section 6.13 since the date hereof do not constitute a Substantial Portion of the Property of URGI and its Subsidiaries. 6.14. Investments and Purchases. (a) URGI will not, and will not permit any Subsidiary or other Credit Party which is not an Insurance Subsidiary to, make or suffer to exist any Investments (including, without limitation, loans and advances to, and other Investments in, Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture, or to make any Purchases, except: (i) Cash and Cash Equivalents; (ii) Investments in existence as of the Closing Date (including Investments in Subsidiaries as of such date) and described in Schedule 6.14 hereto; (iii) Investments in debt securities rated BBB- or better by Standard & Poor's, Baa-3 or better by Moody's or NAIC-2 or better by the NAIC; provided, that any such Investment which, at any time after which it is made, ceases to meet such rating requirements shall (A) cease to be permitted hereby if then permitted by Section 6.14(a)(vi) and (B) if not then permitted by Section 6.14(a)(vi) remain permitted hereby until the earlier of the time it is permitted under Section 6.14(a)(vi) and the date which is 30 days after the date on which such rating requirement is no longer met; (iv) Purchases of businesses or entities engaged in the insurance business or businesses reasonably incident thereto which do not constitute hostile takeovers (including the creation of Subsidiaries in connection therewith) so long as no Default or Unmatured Default has occurred and is continuing or would occur after -55- 61 giving effect to such Purchase or creation (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter); (v) Other Investments by URGI in any Person which is a Subsidiary as of the date hereof so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to such investment (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter); and (vi) Other Investments by URGI in an amount not exceeding $40,000,000 (or its equivalent in any other currency) (including the creation of Subsidiaries and Investments therein and Investments in any partnership or joint venture) so long as at the time of such Investment no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to such Investment (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter). (b) The Credit Parties will not permit any Insurance Subsidiary to make or suffer to exist any Investments (including, without limitation, loans and advances to and other Investments in Subsidiaries), or commitments therefor, or to create any Subsidiary or to become or remain a partner in any partnership or joint venture or to make any Purchases, except: (i) Cash and Cash Equivalents; (ii) Investments in debt securities rated BBB- or better by Standard & Poor's, Baa-3 or better by Moody's or NAIC-2 or better by the NAIC, provided, that any such Investment which. at any time after which it is made, ceases to meet such rating requirements shall (A) cease to be permitted hereby if then permitted by Section 6.14(b)(vi) and (B) if not then permitted by Section 6.14(b)(vi) remain permitted hereby until the earlier of the time it is permitted under Section 6.14(b)(vi) and the date which is 30 days after the date on which such rating requirement is no longer met; (iii) Existing Investments in Subsidiaries and other Investments in existence on the date hereof; (iv) Other Investments in any Person which is a Subsidiary as of the date hereof so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect to such Investment (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter); (v) Purchases of businesses or entities engaged in the insurance business which do not constitute hostile takeovers (including the creation of Subsidiaries in connection therewith) made after the date of this Agreement for an aggregate consideration not to exceed $50,000,000 (or its equivalent in any other currency), so long as no Default or Unmatured Default has occurred and is continuing or would occur after giving effect thereto (determined with respect to the covenants set forth in Section 6.22 on a pro forma basis as of the last day of the immediately preceding Fiscal Quarter); and (vi) Other Investments (including the creation of Subsidiaries and Investments therein and Investments in any partnership or joint venture but -56- 62 excluding any Investment of the type described in clause (b)(v) above) of a type acceptable to the insurance commissioner in the respective domiciliary state of such Insurance Subsidiary, provided, that such Investments do not exceed, in the aggregate at any one time outstanding, an amount equal to the Total Admitted Assets (as presented on the "Assets" statement, currently Page 2, Line 22 of the Annual Statement-1998) of all Insurance Subsidiaries (determined, where applicable, on a combined basis by reference to the comparable line in the combined Annual Statement) less 125% of the aggregate Total Required Liabilities (as presented on the "Liabilities, Surplus and Other Funds" statement, currently Page 3, Line 23 of the Annual Statement-1998) of all Insurance Subsidiaries (determined, where applicable, on a combined basis by reference to the comparable line in the combined Annual Statement); provided, further, that the fair market value of the Investment in Burlington Northern Santa Fe Corporation held by URGI and its Insurance Subsidiaries shall be subtracted from such amount for so long as such Investment exists. 6.15. Contingent Obligations. No Credit Party will, nor will it permit any Subsidiary to, make or suffer to exist any Contingent Obligation (including, without limitation, any Contingent Obligation with respect to the obligations of a Subsidiary), except (a) the Contingent Obligations described on Schedule 3.24, (b) Contingent Obligations incurred under insurance contracts or policies or under reinsurance contracts or policies issued in the ordinary course of business, (c) Contingent Obligations in respect of the extension of guaranties in the ordinary course of business to insureds of the obligations of insurers under insurance policies or contracts or under reinsurance policies or contracts, (d) Contingent Obligations in respect of the endorsement of instruments for deposit or collection in the ordinary course of business and (e) the Obligations. 6.16. Liens. No Credit Party will, nor will it permit any Subsidiary to, create, incur, or suffer to exist any Lien in, of or on the Property of such Credit Party or any of its Subsidiaries, except Liens in favor of the Bank Parties to secure obligations hereunder and except: (a) Liens for taxes, assessments or governmental charges or levies on its Property if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with generally accepted principles of accounting or SAP, as applicable, shall have been set aside on its books; (b) Liens imposed by law, such as carriers', warehousemen's and mechanics' liens and other similar liens arising in the ordinary course of business which secure the payment of obligations not more than 60 days past due or which are being contested in good faith by appropriate proceedings and for which adequate reserves shall have been set aside on its books; (c) Liens arising out of pledges or deposits under worker's compensation laws, unemployment insurance, old age pensions, or other social security or retirement benefits, or similar legislation; (d) Utility easements, building restrictions and such other encumbrances or charges against real property as are of a nature generally existing with respect to properties of a similar character and which do not in any material way affect the marketability of the same or interfere with the use thereof in the business of such Credit Party or its Subsidiaries; (e) Deposits made by any Insurance Subsidiary with the insurance regulatory authority in its jurisdiction of domicile or other statutory liens or liens or claims imposed or required by applicable insurance law or regulation against the assets of any Insurance Subsidiary, -57- 63 in each case in favor of all policyholders of such Insurance Subsidiary and in the ordinary course of such Insurance Subsidiary's business; (f) Rights of third parties with respect to amounts deposited with or for the benefit of any Insurance Subsidiary in trust to secure obligations owed to any Insurance Subsidiary under contracts of reinsurance entered into in the ordinary course of such Insurance Subsidiary's business; (g) Liens existing on the date hereof and described in Schedule 6.16 hereto; and (h) Other Liens securing Indebtedness or obligations with an aggregate principal amount not in excess of $1,000,000 (or its equivalent in any other currency) at any time outstanding. 6.17. Affiliates. No Credit Party will, nor shall it permit any Subsidiary to, enter into any transaction (including, without limitation, the purchase or sale of any Property or service) with, or make any payment or transfer to, any Affiliate of such Credit Party (other than URC Barbados Holding Corp. and entities owned by it) except in the ordinary course of business and pursuant to the reasonable requirements of such Credit Party's or such Subsidiary's business and upon fair and reasonable terms no less favorable to such Credit Party or such Subsidiary than the Credit Party or such Subsidiary would obtain in a comparable arm's-length transaction. 6.18. Other Indebtedness. No Credit Party will, nor will it permit any Subsidiary to, directly or indirectly voluntarily prepay, defease or in substance defease, purchase, redeem, retire or otherwise acquire, any Indebtedness prior to the date when due (other than the Obligations) while a Default or Unmatured Default has occurred and is continuing. 6.19. Environmental Matters. Each Credit Party shall and shall cause each of its Subsidiaries to (a) at all times comply in all material respects with all applicable Environmental Laws and (b) promptly take any and all commercially reasonable transactions in response to the presence, storage, use, disposal, transportation or Release of any Hazardous Materials on, under or about any real property owned, leased or operated by such Credit Party or any of its Subsidiaries. 6.20. Change in Corporate Structure; Fiscal Year. No Credit Party shall, nor shall it permit any Subsidiary to, (a) permit any amendment or modification to be made to its certificate or articles of incorporation or by-laws which is materially adverse to the interests of the Banks (provided that such Credit Party shall notify the Administrative Agent of any other amendment or modification thereto as soon as practicable thereafter) or (b) change its Fiscal Year to end on any date other than December 31 of each year, except that the Venton Entities may change their fiscal year to the twelve months ending September 30. 6.21. Inconsistent Agreements. No Credit Party shall, nor shall it permit any Subsidiary to, enter into any indenture, agreement, instrument or other arrangement which, (a) directly or indirectly prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon, the incurrence of the Obligations, the amending of the Transaction Documents or the ability of any Subsidiary to (i) pay dividends or make other distributions on its capital stock, (ii) make loans or advances to a Credit Party of which it is a Subsidiary or (iii) repay loans or advances from a Credit Party or (b) contains any provision which would be violated or breached by the issuance of Letters of Credit or by the performance by any Credit Party of any of its obligations under any Loan Document. -58- 64 6.22. Financial Covenants. The Credit Parties shall: (a) Minimum Statutory Surplus. At all times after the date hereof, cause URC and its Insurance Subsidiaries, as determined on a combined basis for URC and all of its Insurance Subsidiaries (without double counting) as of the last day of each Fiscal Quarter, to maintain a minimum Statutory Surplus at least equal to the sum of (i) $555,000,000, plus (ii) 100% of any capital contributions made to URC or to any of its Insurance Subsidiaries after June 30, 1999 (without double counting), plus (iii) 35% of positive Statutory Net Income, if any, for each Fiscal Quarter ending after January 1, 1999, and on or prior to the time of determination. (b) Leverage Ratio. At all times after the date hereof determined as of the end of each Fiscal Quarter, cause URGI and its Subsidiaries to maintain a Leverage Ratio of not more than 0.50 to 1.0. (c) URC Risk-Based Capital Ratio. At all times after the date hereof determined as of the end of each Fiscal Quarter cause URC and its Insurance Subsidiaries to maintain a Statutory Risk-Based Capital Ratio of not less than 3.15 to 1.0. 6.23. Tax Consolidation. No Credit Party will, nor will it permit any of its Subsidiaries to, file or consent to the filing of any consolidated, combined or unitary income tax return with any Person (other than any of its Subsidiaries, Alleghany or any other Consolidated Person), except as required by law. No Credit Party will, nor will it permit any of its Subsidiaries to, enter into any tax sharing agreement with any Person (other than Alleghany, another Credit Party or any of its Subsidiaries) without the written consent of the Required Banks. Each Credit Party will cause each Subsidiary (including any newly acquired or newly created Subsidiary) to enter into a tax sharing agreement with such Subsidiary's immediate parent corporation, which tax sharing agreement shall obligate such Subsidiary to pay to such Subsidiary's immediate parent corporation an amount of tax substantially equal to the amount of tax such parent corporation is required to pay to Alleghany (or to a Subsidiary of Alleghany) by reason of the taxable income of such Subsidiary. No Tax Sharing Agreement or other agreement described above may be amended to provide for any payments to be made to Alleghany in an amount substantially in excess of the amount of tax which Alleghany is required to pay by reason of the taxable income of URGI and its Subsidiaries. 6.24. ERISA Compliance. With respect to any Plan neither any Credit Party nor any Subsidiary shall: (a) engage in any "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code) for which a civil penalty pursuant to Section 502(i) of ERISA or a tax pursuant to Section 4975 of the Code in excess of $1,000,000 could be imposed; (b) permit to be incurred any "accumulated funding deficiency" (as such term is defined in Section 302 of ERISA) in excess of $1,000,000, whether or not waived; (c) permit the occurrence of any Termination Event which could result in a liability to any member of the Controlled Group in excess of $1,000,000; (d) be an "employer" (as such term is defined in Section 3(5) of ERISA) required to contribute to any Multiemployer Plan or a "substantial employer" (as such term in defined in Section 4001(a)(2) of ERISA) required to contribute to any Multiemployer Plan; or (e) permit the establishment, or amendment of any Plan or fail to comply with the applicable provisions of ERISA and the Code with respect to any Plan which could reasonably be -59- 65 expected to result in liability to any member of the Controlled Group which, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect. ARTICLE VII EVENTS OF DEFAULT 7.01. Events of Default. The occurrence or existence of one or more of the following events or conditions (for any reason, whether voluntary, involuntary or effected or required by Law) shall be a Default: (a) The principal amount of any Loan or any reimbursement obligation with respect to any Letter of Credit shall not be paid when due hereunder; (b) Any interest, fee or other amount payable hereunder shall not be paid when due and shall remain unpaid for a period of five days from the due date thereof; (c) Any Credit Party shall default in the observance, performance or fulfillment of any covenant contained in Section 6.02, Section 6.03(a) or Sections 6.10 through 6.24 hereof; (d) Any Credit Party shall default in the observance, performance or fulfillment of any other covenant, condition or provision hereof and such default shall not be remedied for a period of thirty days after written notice thereof to such Credit Party from any Agent or any Bank; (e) The default by any Credit Party or any Subsidiary of a Credit Party in the performance of any term, provision or condition contained in any agreement or agreements under which any Indebtedness aggregating in excess of $5,000,000 (or its equivalent in any other currency) was created or is governed, or the occurrence of any other event or existence of any other condition, the effect of any of which is to cause, or to permit the holder or holders of such Indebtedness to cause, such Indebtedness to become due prior to its stated maturity, or any such Indebtedness of a Credit Party or any of its Subsidiaries shall be declared to be due and payable or required to be prepaid (other than by a regularly scheduled payment) prior to the stated maturity thereof; (f) Any Credit Party or any Subsidiary of a Credit Party (other than a Designated Small Subsidiary) shall (i) have an order for relief entered with respect to it under the Federal bankruptcy laws as now or hereafter in effect, (ii) make an assignment for the benefit of creditors, (iii) apply for, seek, consent to, or acquiesce in, the appointment of a receiver, custodian, trustee, examiner, liquidator or similar official for it or any Substantial Portion of its Property, (iv) institute any proceeding seeking an order for relief under the Federal bankruptcy laws as now or hereafter in effect or seeking to adjudicate it a bankrupt or insolvent, or seeking dissolution, winding up, liquidation, reorganization, arrangement, adjustment or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors or fail to file an answer or other pleading denying the material allegations of any such proceeding filed against it, (v) take any corporate action to authorize or effect any of the foregoing actions set forth in this Section 7.01(f), (vi) fail to contest in good faith any appointment or proceeding described in Section 7.01(g) or (vii) become unable to pay, not pay, or admit in writing its inability to pay, its debts generally as they become due; (g) Without the application, approval or consent of a Credit Party or any of its Subsidiaries, a receiver, trustee, examiner, liquidator or similar official shall be appointed for such Credit Party or any of its Subsidiaries or any Substantial Portion of its Property, or a proceeding -60- 66 described in Section 7.01(f)(iv) shall be instituted against any Credit Party or any Subsidiary or a Credit Party and such appointment continues undischarged or such proceeding continues undismissed or unstayed for a period of forty-five consecutive days; (h) Any court, government or governmental agency shall condemn, seize or otherwise appropriate, or take custody or control of (each a "Condemnation"), all or any portion of the Property of any Credit Party or its Subsidiaries which, when taken together with all other Property of URGI and its Subsidiaries so condemned, seized, appropriated, or taken custody or control of, during the twelve-month period ending with the month in which any such Condemnation occurs, constitutes a Substantial Portion; (i) Any Credit Party or any Subsidiary of a Credit Party shall fail within thirty days to pay, bond or otherwise discharge any judgment or order for the payment of money in excess of $500,000 (or multiple judgments or orders for the payment of an aggregate amount in excess of $1,000,000) (or, in each case, its equivalent in any other currency), which is not stayed on appeal or otherwise being appropriately contested in good faith and as to which no enforcement actions have been commenced; (j) Any representation or warranty made or deemed made by or on behalf of any Credit Party to the Banks, the Issuing Bank or the Agents under or in connection with this Agreement or any other Transaction Document, or any certificate or material information delivered in connection with this Agreement or any other Transaction Document, shall prove to have been false in any material respect on the date as of which made or deemed made; (k) A Change in Control shall occur; (l) The guarantee contained in Article V hereof shall terminate or cease, in whole or material part, to be a legally valid and binding obligation of URGI or URC, or any Credit Party or any Person acting for or on behalf of any of such parties contests such validity or binding nature of such guarantee, or any such Person shall assert any of the foregoing; (m) URC shall fail to maintain an A.M. Best claims paying rating of at least A-; (n) Any License of any Insurance Subsidiary (a) shall be revoked by the Governmental Authority which issued such License, or any action (administrative or judicial) to revoke such License shall have been commenced against such Insurance Subsidiary and shall not have been dismissed within 60 days after the commencement thereof, (b) shall be suspended by such Governmental Authority for a period in excess of 60 days or (c) shall not be reissued or renewed by such Governmental Authority upon the expiration thereof following application for such reissuance or renewal of such Insurance Subsidiary and, in any such case, the Required Banks shall have determined in good faith that, individually or in the aggregate, such event or events could have a Material Adverse Effect; (o) Any Insurance Subsidiary shall be the subject of a final non-appealable order imposing a fine in an amount in excess of $250,000 (or its equivalent in any other currency) in any single instance or other such orders imposing fines in excess of $1,000,000 (or its equivalent in any other currency) in the aggregate after the date of this Agreement by or at the request of any state insurance regulatory agency as a result of the violation by such Insurance Subsidiary of such state's applicable insurance laws or the regulations promulgated in connection therewith and, in any such case, the Required Banks shall have determined in good faith that, individually or in the aggregate, such event or events could have a Material Adverse Effect; (p) Any Insurance Subsidiary shall become subject to (i) any conservation or liquidation order, directive or mandate issued by any Governmental Authority or (ii) any other directive or -61- 67 mandate issued by any Governmental Authority which could reasonably be expected to have a Material Adverse Effect which in either case is not stayed within thirty days; (q) Any Credit Party, any Subsidiary of a Credit Party, Alleghany or any other Consolidated Person shall receive any tax assessment, demand or notice of deficiency or have any tax liens filed or any judicial proceeding relating to any tax matter commenced against it which, in any such case, could reasonably be expected to have a Material Adverse Effect or any tax lien shall be filed against any property of any Credit Party or any Subsidiary relating to the tax liabilities of any Person if the same shall not at the time be delinquent or thereafter can be paid without penalty, or are being contested in good faith and by appropriate proceedings and for which adequate reserves in accordance with generally accepted principles of accounting or SAP, as applicable, shall have been set aside on its books; and (r) (i) the unfunded Liabilities of all Single Employer Plans maintained by any Credit Party or any Subsidiary or a Credit Party shall exceed in the aggregate $1,000,000 or a Reportable Event shall occur in connection with any Plan maintained by any Credit Party or any Subsidiary or a Credit Party, (ii) the Unfunded Liabilities of all Single Employer Plans maintained by members of the Controlled Group shall exceed an amount which could reasonably be expected to have a Material Adverse Effect or any Reportable Event shall occur in connection with any Plan maintained by members of the Controlled Group which could reasonably be expected to have a Material Adverse Effect or (iii) any Lien shall be imposed by the PBGC or the IRS against any assets of any Credit Party or any Subsidiary of a Credit Party with respect to a Plan maintained by any other member of the Controlled Group (or any other employee pension benefit plan as to which any such member may be liable). 7.02. Consequences of an Event of Default. (a) If an Event of Default specified in subsections (a) through (e) or (h) through (r) of Section 7.01 hereof shall occur or exist, then, in addition to all other rights and remedies which the Administrative Agent, any Bank or the Issuing Bank may have hereunder, at law, in equity or otherwise, the Banks shall be under no obligation to make Loans and the Issuing Bank shall be under no obligation to issue Letters of Credit, and the Administrative Agent may, and upon the written request of the Required Banks shall, by notice to URGI, from time to time do any or all of the following: (i) Declare the Revolving Credit Commitments and the commitment of the Issuing Bank to issue Letters of Credit terminated, whereupon the Revolving Credit Commitments and such commitment to issue Letters of Credit will terminate and any accrued Commitment Fees hereunder shall be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue, (ii) Declare the unpaid principal amount of the Notes, interest accrued thereon and all other obligations of any of the Credit Parties hereunder to be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue. (b) If an Event of Default specified in subsection (f) or (g) of Section 7.01 hereof shall occur or exist, then, in addition to all other rights and remedies which the Administrative Agent, any Bank or the Issuing Bank may have hereunder, at law, in equity or otherwise, the Banks shall be under no further obligation to make Loans and the Issuing Bank shall be under no further obligation to issue Letters of Credit, and the following provisions shall automatically apply: -62- 68 (i) The Revolving Credit Commitments and the commitment to issue Letters of Credit shall terminate, and any accrued Commitment Fees hereunder shall be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue. (ii) The unpaid principal amount of the Notes, interest accrued thereon and all other obligations of any of the Credit Parties hereunder shall be immediately due and payable without presentment, demand, protest or further notice of any kind, all of which are hereby waived, and an action therefor shall immediately accrue. 7.03 Certain Actions in Respect of Letters of Credit upon Default. If any Default shall have occurred and be continuing or shall exist, the Administrative Agent may, and at the direction of the Required Banks shall, irrespective of whether it is taking any other action with respect to such Default or otherwise and without limiting the generality of Section 7.02, make demand upon the applicable Account Party to, and forthwith upon such demand each applicable Account Party will, pay to the Administrative Agent on behalf of the Issuing Bank and the Banks in same day funds at the Administrative Agent's Domestic Office, for deposit to the Cash Collateral Account, an amount equal to the aggregate Letter of Credit Undrawn Availability of all Letters of Credit then outstanding. If at any time the Administrative Agent determines that any funds held in the Cash Collateral Account are subject to any right or claim of any Person other than the Administrative Agent, the Issuing Bank and the Banks, or that the total amount of such funds is less than the aggregate Letter of Credit Undrawn Availability of all Letters of Credit then outstanding, the Account Parties will, forthwith upon demand by the Administrative Agent, pay to the Administrative Agent, as additional funds to be deposited and held in the Cash Collateral Account, an amount equal to the excess of such aggregate Letter of Credit Undrawn Availability over the total amount of funds, if any, then held in the Cash Collateral Account that the Administrative Agent determines to be free and clear of any such right and claim. As used herein, the term "Cash Collateral Account" shall mean a cash collateral account opened by the Administrative Agent in the name of the Account Parties but under the sole dominion and control of the Administrative Agent and subject to the terms of this Agreement. Each Account Party hereby grants to the Administrative Agent, for the benefit of the Issuing Bank and the Banks, to secure payment of the Obligations, a security interest in the Cash Collateral Account, all funds held therein and all certificates and instruments, if any, from time to time representing or evidencing the Cash Collateral Account. Amounts on deposit in the Cash Collateral Account shall bear interest at the lowest customary rate payable at the time in question by the Administrative Agent for overnight deposits of a comparable amount and such interest shall be retained in and added to the Cash Collateral Account. URC shall not have an obligation to make any payment required by this Section 7.03 to the extent making such payment would violate applicable Law. URC agrees to use it best efforts, at its own expense and without regard to the amount of such expense, to assure that the making by it of all payments otherwise required by this Section 7.03 will not violate applicable Law, including without limitation the seeking of any required regulatory approvals, the contesting of any regulatory disapprovals to the extent reasonably requested by the Administrative Agent or the Required Banks and the taking of all other actions reasonably requested by the Administrative Agent or the Required Banks. ARTICLE VIII THE AGENTS 8.01. Appointment. Each Bank hereby irrevocably appoints Mellon Bank, N.A. to act as Administrative Agent, and Dresdner Bank AG, New York Branch and Grand Cayman Branch, to act as -63- 69 Documentation Agent, for such Bank under this Agreement and the other Transaction Documents, subject to Section 8.09 hereof. Each Bank hereby irrevocably authorizes each of the Agents to take such action on behalf of such Bank under the provisions of this Agreement and the other Transaction Documents, and to exercise such powers and to perform such duties, as are expressly delegated to or required of each such Agent by the terms hereof or thereof, together with such powers as are reasonably incidental thereto. Mellon Bank, N.A. hereby agrees to act as Administrative Agent, and Dresdner Bank hereby agrees to act as Documentation Agent, on behalf of the Banks on the terms and conditions set forth in this Agreement and the other Transaction Documents, subject to the right of each Agent to resign as provided in Section 8.09 hereof. Each Bank hereby irrevocably authorizes the Administrative Agent to execute and deliver each of the Transaction Documents and to accept delivery of such of the other Transaction Documents as may not require execution by the Administrative Agent. Each Bank agrees that the rights and remedies granted to each of the Agents under the Transaction Documents shall be exercised exclusively by the Agents, and that no Bank shall have any right individually to exercise any such right or remedy, except to the extent expressly provided herein or therein. 8.02. General Nature of Agents' Duties. Notwithstanding anything to the contrary elsewhere in this Agreement or in any other Transaction Document: (a) No Agent shall have any duties or responsibilities except those expressly set forth in this Agreement and the other Transaction Documents, and no implied duties or responsibilities on the part of any Agent shall be read into this Agreement or any Transaction Document or shall otherwise exist. Neither the Documentation Agent nor the Syndication Agent shall have any duties or responsibilities in its capacity as such (as opposed to its capacity as a Bank) under this Agreement. (b) The duties and responsibilities of each of the Agents under this Agreement and the other Transaction Documents shall be mechanical and administrative in nature, and no Agent shall have a fiduciary relationship in respect of any Bank. (c) Each Agent is and shall be solely the agent of the Banks. No Agent assumes, and shall not at any time be deemed to have, any relationship of agency or trust with or for, or any other duty or responsibility to, any other Person (except only for its relationship as agent for, and its express duties and responsibilities to, the Banks as provided in this Agreement and the other Transaction Documents). (d) No Agent shall be under any obligation to take any action hereunder or under any other Transaction Document if such Agent believes in good faith that taking such action may conflict with any Law or any provision of this Agreement or any other Transaction Document, or may require such Agent to qualify to do business in any jurisdiction where it is not then so qualified. 8.03. Exercise of Powers. Each of the Agents shall take any action of the type specified in this Agreement or any other Transaction Document as being within such Agent's rights, powers or discretion in accordance with directions from the Required Banks (or, to the extent this Agreement or such Transaction Document expressly requires the direction or consent of some other Person or set of Persons, then instead in accordance with the directions of such other Person or set of Persons). In the absence of such directions, such Agent shall have the authority (but under no circumstances shall be obligated), in its sole discretion, to take any such action, except to the extent this Agreement or such Transaction Document expressly requires the direction or consent of the Required Banks (or some other Person or set of Persons), in which case such Agent shall not take such action absent such direction or consent. Any action or inaction pursuant to such direction, discretion or consent shall be binding on all the Banks. No Agent shall have any liability to any Person as a result of (x) such Agent acting or refraining from acting in accordance with the directions of the Required Banks (or other -64- 70 applicable Person or set of Persons), (y) such Agent refraining from acting in the absence of instructions to act from the Required Banks (or other applicable Person or set of Persons), whether or not such Agent has discretionary power to take such action, or (z) such Agent taking discretionary action it is authorized to take under this Section (subject, in the case of this clause (z), to the provisions of Section 8.04(a) hereof). 8.04. General Exculpatory Provisions. Notwithstanding anything to the contrary elsewhere in this Agreement or any other Transaction Document: (a) No Agent shall be liable for any action taken or omitted to be taken by it under or in connection with this Agreement or any other Transaction Document, unless caused by its own gross negligence or willful misconduct. (b) No Agent shall be responsible for (i) the execution, delivery, effectiveness, enforceability, genuineness, validity or adequacy of this Agreement or any other Transaction Document, (ii) any recital, representation, warranty, document, certificate, report or statement in, provided for in, or received under or in connection with, this Agreement or any other Transaction Document, (iii) any failure of any Credit Party or Bank to perform any of their respective obligations under this Agreement or any other Transaction Document, or (iv) the existence, validity, enforceability, perfection, recordation, priority, adequacy or value, now or hereafter, of any Lien or other direct or indirect security afforded or purported to be afforded by any of the Transaction Documents or otherwise from time to time. (c) No Agent shall be under any obligation to ascertain, inquire or give any notice relating to (i) the performance or observance of any of the terms or conditions of this Agreement or any other Transaction Document on the part of any Credit Party, (ii) the business, operations, condition (financial or otherwise) or prospects of any Credit Party or any other Person, or (iii) except to the extent set forth in Section 8.05(f) hereof, the existence of any Event of Default or Potential Default. (d) No Agent shall be under any obligation, either initially or on a continuing basis, to provide any Bank with any notices, reports or information of any nature, whether in its possession presently or hereafter, except for such notices, reports and other information expressly required by this Agreement or any other Transaction Document to be furnished by such Agent to such Bank. 8.05. Administration by the Agents. (a) Each of the Agents may rely upon any notice or other communication of any nature (written or oral, including but not limited to telephone conversations, whether or not such notice or other communication is made in a manner permitted or required by this Agreement or any Transaction Document) purportedly made by or on behalf of the proper party or parties, and such Agent shall not have any duty to verify the identity or authority of any Person giving such notice or other communication. (b) Each of the Agents may consult with legal counsel (including, without limitation, in-house counsel for such Agent or in-house or other counsel for any Credit Party), independent public accountants and any other experts selected by it from time to time, and such Agent shall not be liable for any action taken or omitted to be taken in good faith by it in accordance with the advice of such counsel, accountants or experts. (c) Each of the Agents may conclusively rely upon the truth of the statements and the correctness of the opinions expressed in any certificates or opinions furnished to such Agent in accordance with the requirements of this Agreement or any other Transaction Document. Whenever such Agent shall deem it necessary or desirable that a matter be proved or established with respect to any Credit Party or Bank, such matter may be established by a certificate of such Credit Party or Bank, -65- 71 as the case may be, and such Agent may conclusively rely upon such certificate (unless other evidence with respect to such matter is specifically prescribed in this Agreement or another Transaction Document). (d) Each of the Agents may fail or refuse to take any action unless it shall be indemnified to its satisfaction from time to time against any and all amounts, liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature which may be imposed on, incurred by or asserted against such Agent by reason of taking or continuing to take any such action. (e) Each of the Agents may perform any of its duties under this Agreement or any other Transaction Document by or through agents or attorneys-in-fact. No Agent shall be responsible for the negligence or misconduct of any agents or attorneys-in fact selected by it with reasonable care. (f) No Agent shall be deemed to have any knowledge or notice of the occurrence of any Event of Default or Potential Default unless such Agent has received notice from a Bank or any Credit Party referring to this Agreement, describing such Event of Default or Potential Default, and stating that such notice is a "notice of default". If any Agent receives such a notice, such Agent shall give prompt notice thereof to each Bank. 8.06. Bank Not Relying on Agent or Other Banks. Each Bank acknowledges as follows: (a) neither any Agent nor any other Bank has made any representations or warranties to it, and no act taken hereafter by any Agent or any other Bank shall be deemed to constitute any representation or warranty by such Agent or such other Bank to it; (b) it has, independently and without reliance upon any Agent or any other Bank, and based upon such documents and information as it has deemed appropriate, made its own credit and legal analysis and decision to enter into this Agreement and the other Transaction Documents; and (c) it will, independently and without reliance upon any Agent or any other Bank, and based upon such documents and information as it shall deem appropriate at the time, make its own decisions to take or not take action under or in connection with this Agreement and the other Transaction Documents. 8.07. Indemnification. Each Bank agrees to reimburse and indemnify each Agent and its directors, officers, employees and agents (to the extent not reimbursed by a Credit Party and without limitation of the obligations of the Credit Parties to do so), ratably in accordance with their respective Total Credit Exposures, from and against any and all amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature (including, without limitation, the reasonable fees and disbursements of counsel for such Agent or such other Person in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Agent or such other Person shall be designated a party thereto) that may at any time be imposed on, incurred by or asserted against such Agent or such other Person as a result of, or arising out of, or in any way related to or by reason of, this Agreement, any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction to which a Letter of Credit directly or indirectly relates, provided that no Bank shall be liable for any portion of such amounts, losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of such Agent or such other Person, as finally determined by a court of competent jurisdiction. Payments under this Section shall be due and payable on demand, and to the extent that any Bank fails to pay any such amount on demand, such amount shall bear interest for each day from the date of demand until paid (before and after judgment) at a rate per annum (calculated on the basis of a year of 360 days and actual days elapsed) which for each day shall be equal to 2% over the interest rate per annum announced by the Federal Reserve Bank of New York or otherwise determined by such Agent to be applicable for such day to overnight federal funds transactions arranged by federal funds brokers on the previous trading day. If an Agent receives from a Bank interest for any day on a payment due under this Section, as contemplated by the immediately -66- 72 preceding sentence, and subsequently receives interest from a Credit Party for such day with respect to the cost, expense or other item giving rise to such payment, the amount of such interest received by such Agent from a Credit Party shall be forthwith paid to such Bank. 8.08. Agents in their Individual Capacities. With respect to its Commitments and the Obligations owing to each Agent, such Agent shall have the same rights and powers under this Agreement and each other Transaction Document as any other Bank and may exercise the same as though it were not an Agent, and the terms "Banks" and like terms shall include such Agent in its individual capacity as such. Each Agent and its affiliates may, without liability to account, make loans to, accept deposits from, acquire debt or equity interests in, act as trustee under indentures of, act as agent under other credit facilities for, and engage in any other business with, any Credit Party and any stockholder, subsidiary or affiliate of any Credit Party, as though such Agent were not an Agent hereunder. 8.09. Successor Agents. Any Agent may resign at any time by giving 10 days' prior written notice thereof to the Banks, the Borrowers and the Account Parties. Any Agent may be removed by the Required Banks at any time by giving 10 days' prior written notice thereof to such Agent, the other Banks, the Borrowers and the Account Parties. Upon any such resignation or removal, the Required Banks shall have the right to appoint a successor Agent. If no successor Agent shall have been so appointed and consented to, and shall have accepted such appointment, within 30 days after such notice of resignation or removal, then such retiring Agent may, on behalf of the Banks, appoint a successor Agent. Each successor Agent shall be a commercial bank or trust company organized or licensed under the laws of the United States of America or any State thereof and having a combined capital and surplus of at least $1,000,000,000. Upon the acceptance by a successor Agent of its appointment as an Agent hereunder, such successor Agent shall thereupon succeed to and become vested with all the properties, rights, powers, privileges and duties of the former Agent, without further act, deed or conveyance. Upon the effective date of resignation or removal of a retiring Agent, such Agent shall be discharged from its duties under this Agreement and the other Transaction Documents, but the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted by it while it was an Agent under this Agreement. If and so long as no successor Agent shall have been appointed, then any notice or other communication required or permitted to be given by such Agent shall be sufficiently given if given by the Required Banks, all notices or other communications required or permitted to be given to such Agent shall be given to each Bank, and all payments to be made to such Agent shall be made directly to the Account Parties, Borrowers or Bank for whose account such payment is made. 8.10. Additional Administrative Agents. If the Administrative Agent shall from time to time deem it necessary or advisable, for its own protection in the performance of its duties hereunder or in the interest of the Banks, the Administrative Agent, the Borrowers and the Account Parties shall execute and deliver a supplemental agreement and all other instruments and agreements necessary or advisable, in the opinion of the Administrative Agent, to constitute another commercial bank or trust company, or one or more other Persons approved by the Administrative Agent, to act as co-Administrative Agent or agent with such powers of the Administrative Agent as may be provided in such supplemental agreement and to vest in such bank, trust company or Person as such co-Administrative Agent or separate agent, as the case may be, any properties, rights, powers, privileges and duties of the Administrative Agent under this Agreement or any other Transaction Document. 8.11. Calculations. No Agent shall be liable for any calculation, apportionment or distribution of payments made by it in good faith. If such calculation, apportionment or distribution is subsequently determined to have been made in error, the sole recourse of any Bank to whom payment was due but not made shall be to recover from the other Banks any payment in excess of the amount to which they are determined to be entitled or, if the amount due was not paid by the appropriate Account Party or Borrower, to recover such amount from the appropriate Account Party or Borrower. -67- 73 8.12. Agents' Fees. Each Account Party and each Borrower agrees to pay to each Agent, for its individual account, a nonrefundable Administrative Agent's fee or Documentation Agent's fee, as the case may be, in an amount and at such time or times as such Agent, the Borrowers and the Account Parties have heretofore agreed. ARTICLE IX MISCELLANEOUS 9.01. No Implied Waiver etc. No delay or failure of any Agent or any Bank in exercising any right, power or privilege hereunder shall affect such right, power or privilege; nor shall any single or partial exercise thereof or any abandonment or discontinuance of steps to enforce such a right, power or privilege preclude any further exercise thereof or of any other right, power or privilege. The rights and remedies hereunder of the Agents and the Banks are cumulative and not exclusive of any rights or remedies which, it or they would otherwise have. Any amendment, waiver, permit, consent or approval of any kind or character on the part of an Agent or a Bank of any breach or default under this Agreement or any such waiver of any provision or condition of this Agreement must be in writing and shall be effective only to the extent in such writing specifically set forth. 9.02. Set-Off. In case any one or more of the Events of Default described in Article VII hereof shall occur, each Bank shall have the right, in addition to all other rights and remedies available to it, to set-off against the unpaid balance of its interests in any Letter of Credit Reimbursement Obligations or Loan Repayment Obligations any debt owing by such Bank to the applicable Credit Party, including without limitation any funds in any deposit account maintained by such Credit Party with such Bank. Nothing in this Agreement shall be deemed any waiver or prohibition of any right of banker's lien or set-off under applicable Law. 9.03. Survival of Provisions. Each of the representations, warranties, covenants and agreements of the Credit Parties contained herein or made in writing in connection herewith shall survive the execution and delivery of this Agreement, and the making of any Credit Extension hereunder. 9.04. Expenses and Fees; Indemnity. (a) Each Account Party and each Borrower agrees to pay or cause to be paid and to save each of the Agents, the Co-Arrangers and (in the case of clause (iv) below) each of the Banks harmless against liability for the payment of all reasonable out-of-pocket costs and expenses (including but not limited to reasonable fees and expenses of counsel, including local counsel, auditors, and all other professional, accounting, evaluation and consulting costs) incurred by such Agent or such Bank from time to time arising from or relating to (i) the negotiation, preparation, execution, delivery, administration and performance of this Agreement and the other Transaction Documents, (ii) any syndication of the transactions contemplated by this Agreement and the Transaction Documents, (iii) any amendments, modifications, supplements, waivers or consents requested by any Credit Party (whether or not ultimately entered into or granted) to this Agreement or any Transaction Document, and (iv) the enforcement or preservation of rights under this Agreement or any Transaction Document (including but not limited to the fees and expenses of special counsel to the Co-Arrangers and Banks and any such costs or expenses arising from or relating to (A) collection or enforcement of any other amount owing hereunder or thereunder by any Agent or any Bank and (B) any litigation, proceeding, dispute, work-out, restructuring or rescheduling related in any way to this Agreement or the Transaction Documents). -68- 74 Notwithstanding the foregoing, no Credit Party shall be required to pay costs and expenses of a Bank (in its capacity as such) which were incurred by such Bank in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Bank by one or more of the other Banks. Each Credit Party hereby agrees to pay all stamp, document, transfer, recording, filing, registration, search, sales and excise fees and taxes and all similar impositions now or hereafter determined by any Agent or any Bank to be payable in connection with this Agreement or any other Transaction Documents or any other documents, instruments or transactions pursuant to or in connection herewith or therewith, and each such Account Party and each such Borrower agrees to save each Agent and each Bank harmless from and against any and all present or future claims, liabilities or losses with respect to or resulting from any omission to pay or delay in paying any such fees. (b) Each Account Party and each Borrower hereby agrees to reimburse and indemnify each Agent, the Co-Arrangers and each Bank and their respective directors, officers, employees and agents (the "Indemnified Parties") from and against any and all losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements of any kind or nature whatsoever (including, without limitation, the fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding commenced or threatened, whether or not such Indemnified Party shall be designated a party thereto) that may at any time be imposed on, asserted against or incurred by such Indemnified Party as a result of, or arising out of, or in any way related to or by reason of, this Agreement or any other Transaction Document, any transaction from time to time contemplated hereby or thereby, or any transaction to which any Letter of Credit directly or indirectly relates (and without in any way limiting the generality of the foregoing, including any violation or breach of any Law by any Credit Party or any exercise by any Agent or any Bank of any of its rights or remedies under this Agreement or any other Transaction Document; any breach of any representation or warranty, covenant or agreement of any Credit Party); but excluding any such losses, liabilities, claims, damages, expenses, obligations, penalties, actions, judgments, suits, costs or disbursements to the extent resulting from the gross negligence or willful misconduct of such Indemnified Party, as finally determined by a court of competent jurisdiction. If and to the extent that the foregoing obligations of the Account Parties and Borrowers under this Section 9.04, or any other indemnification obligation of the Account Parties or Borrowers hereunder or under any other Transaction Document, are unenforceable for any reason, the Account Parties and the Borrowers hereby agree to make the maximum contribution to the payment and satisfaction of such obligations which is permissible under applicable Law. Notwithstanding the foregoing, no Account Party or Borrower shall be required to pay costs and expenses of a Bank or a Participant (in its capacity as such) which were incurred by such Bank or Participant in connection with any litigation, proceeding or other dispute relating solely to a claim made against such Bank or Participant by one or more of the other Banks or Participants. 9.05. Severability. In the event any one or more of the provisions contained in this Agreement or in any other Transaction Document should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 9.06. Holidays. Unless otherwise specified herein, whenever any payment or action to be made or taken hereunder shall be stated to be due on a Saturday, Sunday or public holiday under the laws of the Commonwealth of Pennsylvania, such payment or action shall be made or taken on the next succeeding Business Day and such extension of time shall in such case be included in computing interest, if any, in connection with such payment or action. -69- 75 9.07. Notices, etc. Any notice or other communication in connection with this Agreement shall be deemed to have been given or made when received by the party to whom directed. All such notices and other communications shall be in writing unless otherwise provided herein and shall be directed, if to a Bank, at such Bank's address on the signature pages hereof, if to the Administrative Agent at Three Mellon Bank Center, Pittsburgh, Pennsylvania 15259, Attention: Loan Administration, with a copy to Institutional Banking, Room 4401, One Mellon Bank Center, Pittsburgh, PA 15258; if to the Issuing Bank at Three Mellon Bank Center, Pittsburgh, Pennsylvania 15259, Attention: Letter of Credit Department with a copy to Institutional Banking, Room 4401, One Mellon Bank Center, Pittsburgh, Pennsylvania 15258 and if to any Credit Party, to the Chief Financial Officer of URGI at 26050 Mureau Road, Calabasas, California 91302, or in accordance with the latest unrevoked written direction from any party to the other parties hereto. For the purposes of both receiving information from any Agent or any Bank or providing information to any Agent or any Bank, URGI shall act as the agent for each other Credit Party. 9.08. FORUM SELECTION AND CONSENT TO JURISDICTION. ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, OR ANY OTHER MATTER RELATED THERETO MAY BE BROUGHT AND MAINTAINED IN THE COURTS OF COMMONWEALTH OF PENNSYLVANIA OR IN THE COURTS OF THE STATE OF NEW YORK OR IN THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA OR IN THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK. EACH CREDIT PARTY HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF COMMONWEALTH OF PENNSYLVANIA, THE COURTS OF THE STATE OF NEW YORK, THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION, SUBJECT TO ANY GENERAL RIGHT OF APPEAL. EACH CREDIT PARTY FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, TO THE ADDRESS PROVIDED IN THIS AGREEMENT. 9.09. WAIVER OF JURY TRIAL. TO THE EXTENT LITIGATION HEREUNDER IS BROUGHT BEFORE A COURT IN THE UNITED STATES, THE PARTIES HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY. EACH PARTY ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISIONS OF EACH OTHER DOCUMENT HERETO TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR EACH AGENT AND EACH BANK ENTERING INTO THIS AGREEMENT AND RELATED AGREEMENTS. 9.10. Governing Law. This Agreement and any other documents delivered in connection herewith and the rights and obligations of the parties hereto and thereto shall for all purposes be governed by and construed and enforced in accordance with the substantive law of the State of New York without giving effect to conflict of laws principles. 9.11 Validity and Enforceability. If any stamp tax, levy, duty or fee is imposed or payable in respect to this Agreement or the transaction contemplated hereby or is necessary or advisable to ensure the legality, validity or enforceability of the documents in this transaction, the Account Parties and Borrowers shall promptly pay such stamp tax, levy, duty or fee. No government approval or consent is necessary for the execution, delivery and performance of the transactions contemplated under this Agreement. -70- 76 9.12. Counterparts. This Agreement may be executed in any number of counterparts and by the different parties hereto on separate counterparts, each of which, when so executed and delivered, shall be an original, but all such counterparts shall together constitute one (1) and the same instrument. 9.13. Successors and Assigns; Participations; Assignments. (a) Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the Account Parties, the Borrowers, the Banks, all future holders of the Notes, the Agents, and their respective successors and assigns, except that no Credit Party may assign or otherwise transfer any of its rights or duties under this Agreement without the prior written consent of each of the Agents and each of the Banks, and any purported assignment without such consent shall be void. (b) Participations. Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time sell participations to one or more commercial banks or other Persons (each a "Participant") in a portion of its rights and obligations under this Agreement and the other Transaction Documents (including, without limitation, all or a portion of its Letter of Credit Participating Interest Commitments and Letter of Credit Participating Interest and the Loans owing to it and any Note held by it); provided, that (i) any such participation sold to a Participant which is not a Bank, an affiliate of a Bank or a Federal Reserve Bank shall be made only with the consent (which in each case shall not be unreasonably withheld) of the Issuing Bank, (ii) any such Bank's obligations under this Agreement and the other Transaction Documents shall remain unchanged, (iii) such Bank shall remain solely responsible to the other parties hereto for the performance of such obligations, (iv) the parties hereto shall continue to deal solely and directly with such Bank in connection with such Bank's rights and obligations under this Agreement and each of the other Transaction Documents, (v) such Participant shall be bound by the provisions of Section 9.13 hereof, and the Bank selling such participation shall obtain from such Participant a written confirmation of its agreement to be so bound, (vi) no Participant (unless such Participant is an affiliate of such Bank, or is itself a Bank) shall be entitled to require such Bank to take or refrain from taking action under this Agreement or under any other Transaction Document, except that such Bank may agree with such Participant that such Bank will not, without such Participant's consent, take action of the type described in subsections (a), (b), (c), (d) or (e) of Section 9.14 hereof, and (vii) a Participant shall have the right to vote regarding amendments to this Agreement only in connection with amendments which effect changes in the amount of Letter of Credit Participating Interest Commitments, Letter of Credit Participating Interests, Revolving Credit Commitments, Loans, fees payable hereunder and the Expiration Date. Each Account Party and each Borrower agrees that any such Participant shall be entitled to the benefits of Sections 2.12, 2A.11 and 9.04(b) with respect to its participation in the Letter of Credit -71- 77 Commitments, the Letters of Credit, the Revolving Credit Commitments and the Loans outstanding from time to time; provided, that no such Participant shall be entitled to receive any greater amount pursuant to such Sections than the transferor Bank would have been entitled to receive in respect of the amount of the participation transferred to such Participant had no such transfer occurred. (c) Assignments. Any Bank may, in the ordinary course of its commercial banking business and in accordance with applicable Law, at any time assign all or a portion of its rights and obligations under this Agreement and the other Transaction Documents (including, without limitation, all or any portion of its Letter of Credit Participating Interest Commitments and Letter of Credit Participating Interests, and all or any portion of its Revolving Credit Commitments, Loans owing to it and any Note held by it) to any Bank, any affiliate of a Bank or to one or more additional commercial banks or other Persons (each a "Purchasing Bank"); provided, that (i) any such assignment shall be made only with the consent (which in each case shall not be unreasonably withheld) of the Credit Parties and the Issuing Bank, unless an Event of Default has occurred and is continuing or exists, in which case the consent of the Credit Parties shall not be required, (ii) if a Bank makes such an assignment of less than all of its then remaining rights and obligations under this Agreement and the other Transaction Documents, such assignment shall be in a minimum aggregate principal amount of $10,000,000 of the Letter of Credit Participating Interest Commitments, Letter of Credit Participating Interests, Revolving Credit Commitments and Loans then outstanding, (iii) each such assignment shall be of a constant, and not a varying, percentage of each Letter of Credit Commitment and Revolving Credit Commitment of the transferor Bank and of all of the transferor Bank's rights and obligations under this Agreement and the other Transaction Documents, and (iv) each such assignment shall be made pursuant to a Transfer Supplement in substantially the form of Exhibit B to this Agreement, duly completed (a "Transfer Supplement"). In order to effect any such assignment, the transferor Bank and the Purchasing Bank shall execute and deliver to the Administrative Agent a duly completed Transfer Supplement (including the consents required by clause (i) of the preceding sentence) with respect to such assignment, together with any Note subject to such assignment, and a processing and recording fee of $2,500; and, upon receipt thereof, the Administrative Agent shall accept such Transfer Supplement; provided, however, that no such processing and recording fee shall be due if such assignment is to an affiliate of a Bank or a Federal Reserve Bank. Upon receipt of the Purchase Price Receipt Notice pursuant to such Transfer Supplement, the Administrative Agent shall record such acceptance in the Register. Upon such execution, delivery, acceptance and recording, from and after the close of business at the Administrative Agent's Domestic Office on the Transfer Effective Date specified in such Transfer Supplement: (x) the Purchasing Bank shall be a party hereto and, to the extent provided in such Transfer Supplement, shall have the rights and obligations of a Bank hereunder, and (y) the transferor Bank thereunder shall be released from its obligations under this Agreement to the extent so transferred (and, in the case of an Transfer Supplement covering all or the remaining portion of a transferor Bank's rights and obligations under this Agreement, such transferor Bank shall cease to be a party to this Agreement) from and after the Transfer Effective Date. -72- 78 On or prior to the Transfer Effective Date specified in a Transfer Supplement pursuant to which any Revolving Credit Commitment or Loan is assigned, the Borrowers shall execute and deliver to the Administrative Agent (for delivery to the Purchasing Bank) new Notes evidencing such Purchasing Bank's assigned Revolving Credit Commitments or Loans and (for delivery to the transferor Bank) replacement Notes in the principal amount of the Loans or Revolving Credit Commitments retained by the transferor Bank (such Notes to be in exchange for (and deliverable against delivery, marked "exchanged" of), but not in payment of, those Notes then held by such transferor Bank). Each such Note shall be dated the date and be substantially in the form of the predecessor Note. The Administrative Agent shall mark the predecessor Notes "exchanged" and deliver them to the Borrowers. Accrued interest and accrued fees shall be paid to the Purchasing Bank at the same time or times provided in the predecessor Notes and this Agreement. (d) Register. The Administrative Agent shall maintain at its office a copy of each Transfer Supplement delivered to it and a register (the "Register") for the recordation of the names and addresses of the Banks and the Letter of Credit Participating Interest Commitment of, the amount of the Letter of Credit Participating Interests of, the Revolving Credit Commitment of and the amount of the Loans of, each Bank from time to time. The entries in the Register shall be conclusive absent manifest error and the Account Parties, the Borrowers, the Agents and the Banks may treat each person whose name is recorded in the Register as a Bank hereunder for all purposes of the Agreement. The Register shall be available for inspection by any Account Party, Borrower or Bank at any reasonable time and from time to time upon reasonable prior notice. (e) Financial and Other Information. Each Credit Party authorizes each Agent and each Bank to disclose to any Participant or Purchasing Bank (each, a "Transferee") and any prospective transferee any and all financial and other information in such Person's possession concerning the Credit Parties and their affiliates which has been or may be delivered to such Person by or on behalf of the Credit Parties in connection with this Agreement or any other Transaction Document or such Person's credit evaluation of the Credit Parties and their affiliates, subject to the agreement of the Transferee or prospective Transferee to be bound by Section 9.17 hereof with respect to confidentiality. At the request of any Bank, a Credit Party, at a Credit Party's expense, shall provide to each prospective transferee the conformed copies of documents referred to in Section 4 of the form of Transfer Supplement. 9.14. Amendments and Waivers. Neither this Agreement nor any Transaction Document may be amended, modified or supplemented except in accordance with the provisions of this Section. The Agents and the Credit Parties may from time to time amend, modify or supplement the provisions of this Agreement or any other Transaction Document for the purpose of amending, adding to, or waiving any provisions or changing in any manner the rights and duties of any Credit Party, any Agent or any Bank. Any such amendment, modification or supplement made by the Credit Parties and the Agents in accordance with the provisions of this Section shall be binding upon the Credit Parties, each Bank and each Agent. The Agents shall enter into such amendments, modifications or supplements from time to time as directed by the Required Banks, and only as so directed, provided, that no such amendment, modification or supplement may be made which will: (a) Increase the Committed Amount of any Bank over the amount thereof then in effect, or extend the Expiration Date or Maturity Date, without the written consent of each Bank affected thereby; (b) Reduce the principal amount of or extend the scheduled final maturity or time for any scheduled payment of principal of any Loan, or reduce the rate of interest or extend the time for payment of interest borne by any Loan (other than as a result of waiving the applicability of any increase in interest rates applicable to overdue amounts), without the written consent of each Bank affected thereby; -73- 79 (c) Reduce the amount of or postpone the date for payment of any Commitment Fee or Letter of Credit Fee or reduce or postpone the date for payment of any other fees, expenses, indemnities or amounts payable under any Transaction Document, without the written consent of each Bank affected thereby; (d) Change the definition of "Required Banks" or amend this Section 9.14, without the written consent of all the Banks; (e) Amend or waive any of the provisions of Article IX hereof, or impose additional duties upon any Agent or otherwise adversely affect the rights, interests or obligations of any Agent, without the written consent of such Agent; (f) Amend or waive any of the provisions of Article V or release any Guarantor from its obligations hereunder without the written consent of all the Banks; and provided further, that Transfer Supplements may be entered into in the manner provided in Section 9.13 hereof. Any such amendment, modification or supplement must be in writing and shall be effective only to the extent set forth in such writing. Any Event of Default or Potential Default waived or consented to in any such amendment, modification or supplement shall be deemed to be cured and not continuing to the extent and for the period set forth in such waiver or consent, but no such waiver or consent shall extend to any other or subsequent Event of Default or Potential Default or impair any right consequent thereto. 9.15. Judgment Currency. In the event of a judgment or order being rendered by any court or tribunal for the payment of any amounts owing to the Banks or any of them under this Agreement or any other Transaction Document or for the payment of damages in respect of any breach of this Agreement or any other Transaction Document or under or in respect of a judgment or order of another court or tribunal for the payment of such amounts or damages, such judgment or order being expressed in a currency (the "Judgment Currency") other than Dollars the party against whom the judgment or order is made shall indemnify and hold the Banks harmless against any deficiency in terms of Dollars in the amounts received by the Banks arising or resulting from any variations as between (i) the exchange rate at which Dollars are converted into the Judgment Currency for the purposes of such judgment or order and (ii) the exchange rate at which each Bank is able to purchase Dollars with the amount of the Judgment Currency actually received by the Banks on the date of such receipt. The indemnity in this section shall constitute a separate and independent obligation from the other obligations of the Account Parties and Borrowers hereunder and shall apply irrespective of any indulgence granted by the Banks. 9.16. Records. The amount of outstanding Letters of Credit, each Bank's Letter of Credit Participating Interest Committed Amount and the accrued and unpaid Commitment Fees shall at all times be ascertained from the records of the Administrative Agent, which shall be conclusive absent manifest error. 9.17 Confidentiality. Each of the Agents and the Banks agree to keep confidential any information relating to the Credit Parties received by it pursuant to or in connection with this Agreement which is (a) information which such Agent and such Bank reasonably expects that the applicable Credit Party would want to keep confidential or (b) information which is clearly marked "CONFIDENTIAL"; provided, however, that this Section 9.17 shall not be construed to prevent any Agent or any Bank from disclosing such information (i) to any affiliate that shall agree in writing for the benefit of the Credit Parties to be bound by this obligation of confidentiality, (ii) upon the order of any court or administrative agency of competent jurisdiction, (iii) upon the request or demand of any regulatory agency or authority having jurisdiction over such Agent or such Bank which request or demand has the force of Law or is made by a bank regulatory agency, (iv) that has been publicly disclosed, other than from a breach of this provision by any Agent or -74- 80 any Bank, (v) that has been obtained from any person that is neither a party to this Agreement nor an affiliate of any such party, but only to the extent that such Bank does not know or have reason to know that such disclosure violates a confidentiality agreement between such person and the applicable Credit Party (vi) in connection with the exercise of any right or remedy hereunder or under any other Transaction Document, (vii) as expressly contemplated by this Agreement or any other Transaction Document or (viii) to any prospective purchaser of all or any part of the interest of any Bank which shall agree in writing for the benefit of the Credit Parties to be bound by the obligation of confidentiality in this Agreement or the other Transaction Documents if such prospective purchaser is a financial institution or has been consented to by the Account Parties and the Borrowers, which consent will not be withheld if such purchaser is not a competitor of any Account Party or Borrower or an affiliate of a competitor of any Account Party or Borrower. 9.18. Sharing of Collections. The Banks hereby agree among themselves that if any Bank shall receive (by voluntary payment, realization upon security, set-off or from any other source) any amount on account of any Obligation contemplated by this Agreement or the other Transaction Documents to be made by an Account Party or Borrower pro rata to all Banks in greater proportion than any such amount received by any other Bank, then the Bank receiving such proportionately greater payment shall notify each other Bank and the Administrative Agent of such receipt, and equitable adjustment will be made in the manner stated in this Section 9.18 so that, in effect, all such excess amounts will be shared ratably among all of the Banks. The Bank receiving such excess amount shall purchase (which it shall be deemed to have done simultaneously upon the receipt of such excess amount) for cash from the other Banks a participation in the applicable Obligations owed to such other Banks in such amount as shall result in a ratable sharing by all Banks of such excess amount (and to such extent the receiving Bank shall be a Participant). If all or any portion of such excess amount is thereafter recovered from the Bank making such purchase, such purchase shall be rescinded and the purchase price restored to the extent of such recovery, together with interest or other amounts, if any, required by Law to be paid by the Bank making such purchase. The Account Parties and Borrowers hereby consent to and confirm the foregoing arrangements. Each Participant shall be bound by this Section 9.18 as fully as if it were a Bank hereunder. 9.19. Co-Arrangers. The Co-Arrangers shall have no obligations in their capacity as such under this Agreement. -75- 81 IN WITNESS WHEREOF, the parties hereto, by their respective officers thereunto duly authorized, have executed this Agreement as of the day and year first above written. UNDERWRITERS RE GROUP, INC., AS A BORROWER AND A GUARANTOR By: /s/ Stephen C. Kolakowski ----------------------------- (Signature) Name: Stephen C. Kolakowski ----------------------------- Title: Chief Financial Officer and Treasurer ----------------------------- UNDERWRITERS REINSURANCE COMPANY, AS A BORROWER, AN ACCOUNT PARTY AND A GUARANTOR By: /s/ Stephen C. Kolakowski ----------------------------- (Signature) Name: Stephen C. Kolakowski ----------------------------- Title: Senior Vice President and Chief Financial Officer ----------------------------- VENTON UNDERWRITING LIMITED, AS A BORROWER AND AN ACCOUNT PARTY By: /s/ D.M. Slade ----------------------------- (Signature) Name: D.M. Slade ----------------------------- Title: Director ----------------------------- TALBOT UNDERWRITING LIMITED, AS AN ACCOUNT PARTY By: /s/ D.M. Slade ----------------------------- (Signature) Name: D.M. Slade ----------------------------- Title: Director ----------------------------- UNDERWRITERS RE CAPITAL LTD, AS AN ACCOUNT PARTY By: /s/ D.M. Slade ----------------------------- (Signature) Name: D.M. Slade ----------------------------- Title: Director ----------------------------- -76- 82 MELLON BANK, N.A., AS A BANK, AS ISSUING BANK, AS ADMINISTRATIVE AGENT, AND AS CO-ARRANGER By: /s/ Karla K. Maloof ----------------------------- (Signature) Name: Karla K. Maloof ----------------------------- Title: Vice President ----------------------------- Initial Committed Amount: $42,500,000 Notice Address: Institutional Banking Department One Mellon Bank Center, Room 4401 Pittsburgh, PA 15258 Attn: Karla Maloof with a copy to: Manager, Letter of Credit Operations Three Mellon Bank Center, 23rd Floor Pittsburgh, PA 15259 DRESDNER BANK AG, NEW YORK BRANCH AND GRAND CAYMAN BRANCH, AS DOCUMENTATION AGENT AND AS A BANK By: /s/ S. Kovach By: /s/ George T. Ferguson, IV ----------------------------- ----------------------------- (Signature) (Signature) Name: S. Kovach Name: George T. Ferguson, IV ----------------------------- --------------------------- Title: Assistant Vice President Title: Assistant Vice President ----------------------------- --------------------------- Initial Committed Amount: $42,500,000 Notice Address: Financial Institutions Sector 75 Wall Street New York, New York 10005 Attn: -77- 83 DRESDNER KLEINWORT BENSON NORTH AMERICA LLC AS CO-ARRANGER By: /s/ Andrew Dubin By: /s/ J. Curtin Beaudouin ----------------------------- --------------------------- (Signature) (Signature) Name: Andrew Dubin Name: J. Curtin Beaudouin ----------------------------- -------------------------- Title: Vice President Title: First Vice President ----------------------------- --------------------------- Notice Address: Financial Institutions Sector 75 Wall Street New York, New York 10005 Attn: FIRST UNION NATIONAL BANK, AS SYNDICATION AGENT AND AS A BANK By: /s/ Thomas L. Stitchberry ----------------------------- (Signature) Name: Thomas L. Stitchberry ----------------------------- Title: Senior Vice President ----------------------------- Initial Committed Amount: $40,000,000 Notice Address: First Union National Bank Capital Markets Corp. NC0735 One First Union Center 301 South College Street Charlotte, North Carolina 28266-0735 Attn: Thomas Stichberry -78- 84 HSBC BANK PLC By: /s/ James Wade ----------------------------- (Signature) Name: James Wade ----------------------------- Title: Relationship Manager ----------------------------- Initial Committed Amount: $40,000,000 Notice Address: HSBC BANK Plc Corporate and Institutional Banking P0 Box 181 27-32 Poultry London EC2P 2BX Attn: Andrew Moquet -79- 85 NATIONAL WESTMINSTER BANK PLC LONDON BRANCH By: /s/Ian Grimsley ----------------------------- (Signature) Name: Ian Grimsley ----------------------------- Title: Head of Lloyd's Team ----------------------------- NATIONAL WESTMINSTER BANK PLC NATIONAL WESTMINSTER BANK PLC NEW YORK BRANCH NASSAU BRANCH By: /s/ Ian Grimsley By: /s/ Ian Grimsley ----------------------------- ----------------------------- (Signature) (Signature) Name: Ian Grimsley Name: Ian Grimsley ---------------------------- ------------------------------ Title: Head of Lloyd's Team Title: Head of Lloyd's Team ----------------------------- ----------------------------- Initial Committed Amount (jointly and severally among National Westminster Bank Plc, London Branch, New York Branch and Nassau Branch): $35,000,000 Notice Address: National Westminster Bank Plc, National Westminster Bank, Plc, New York London Branch Branch and Nassau Branch P.O.Box 12264, 3rd Floor 65 East 55th Street One Princes Street 24th Floor London EC2R 8PD New York, NY 10022 Attn: John Mallett Attn: Sattie Chinapen -80- 86 BANQUE NATIONALE DE PARIS By: /s/ Veonique Marcus By: /s/ L. Vanderzyppe ----------------------------- ----------------------------- (Signature) (Signature) Name: Vernique Marcus Name: Laurent Vanderzyppe ----------------------------- --------------------------- Title: Vice Predident Title: Vice President ----------------------------- -------------------------- Initial Committed Amount: $30,000,000 Notice Address: Banque Nationale De Paris New York Branch 499 Park Avenue New York, New York 10022-1278 Attn: Phil Truesdale CREDIT LYONNAIS NEW YORK BRANCH By: /s/ S. Rocco ----------------------------- (Signature) Name: Sebastian Rocco ----------------------------- Title: Senior Vice President ----------------------------- Initial Committed Amount: $30,000,000 Notice Address: Credit Lyonnais New York Branch 1301 Avenue of the Americas New York, New York 10019-6022 Attn: Sebastian Rocco -81- 87 DEUTSCHE BANK AG, NEW YORK AND/OR CAYMAN ISLANDS BRANCHES By: /s/ G.W. Korchowsky /s/ Susan A. Maros ----------------------------- --------------------- (Signature) Name: George Korchowsky Susan A. Maros ----------------------------- ---------------------- Title: Vice President Managing Director ----------------------------- ---------------------- Initial Committed Amount: $30,000,000 Notice Address: Deutsche Bank AG 31 West 52nd Street New York, New York 10019 Attn: George W. Korchowsky SANWA BANK CALIFORNIA By: /s/ Robsinson Kaspar ----------------------------- (Signature) Name: Robinson Kaspar ----------------------------- Title: Vice President ----------------------------- Initial Committed Amount: $30,000,000 Notice Address: Sanwa Bank California Sanwa Bank Plaza 601 South Figueroa Street Los Angeles, CA 90017 Attn: Dirk A. Price -82- 88 BANK ONE, NA (Main Office Chicago) By: /s/ Thomas A. Kiepura II ----------------------------- (Signature) Name: Thomas A. Kiepura ----------------------------- Title: Assistant Vice President ----------------------------- Initial Committed Amount: $20,000,000 Notice Address: Bank One, NA 1 Bank One Plaza Suite 0085 Chicago, IL 60670 Attn: Thomas W. Doddridge THE BANK OF BERMUDA LIMITED By: /s/ Hanne Frost ----------------------------- (Signature) Name: Hanne Frost ----------------------------- Title: Vice President ----------------------------- Initial Committed Amount: $10,000,000 Notice Address: The Bank of Bermuda Limited 6 Front Street Hamilton HM 11 PO Box HM 1020 Hamilton HM DX, Bermuda Attn: Michael W. Collins -83- EX-10.26.B 3 LIST OF CONTENTS OF EXHIBITS 1 Exhibit 10.26(b) List of Exhibits to the Underwriters Credit Agreement
Exhibit Number Description - -------------- ----------- A Form of Continuing Letter of Credit Agreement B Form of Transfer Supplement C Contents of Opinions of Counsel D Form of Compliance Certificate E List of Existing Letters of Credit F Letter of Credit Application G Form of Account Party Accession Instrument H-1 Form of Note of Underwriters Re Group, Inc. H-2 Form of Note of Underwriters Reinsurance Company H-3 Form of Note of Venton Underwriting Limited 2.01(b) Form of Evergreen Provision 3.03 Approvals and Consents 3.04 Governmental Consents 3.05 Financial Statements 3.07 Taxes 3.09 Insurance Licenses 3.13 Environmental Laws 3.16 Capitalization 3.17 ERISA
2 3.23 Ownership of Properties 3.24 Indebtedness 6.14 Investments 6.16 Liens
EX-13 4 PORTIONS OF THE ANNUAL REPORT 1 To Our Stockholders The year 1999 was a challenging year under difficult conditions for most of Alleghany's operating units. Alleghany Asset Management recorded another year of outstanding performance, but operating results at Underwriters Re Group and World Minerals were disappointing. It was also a year of transition, with the announced agreement to sell Underwriters Re Group and the planned succession of new chief executive officers at Alleghany Asset Management and Heads & Threads. Our most significant development in 1999 was the signing of an agreement on December 30 to sell our Underwriters Re Group property and casualty reinsurance business to Swiss Re America Holding Corporation for $725 million in cash, subject to adjustment based upon the stockholder's equity of Underwriters Re Group at the closing date. We will retain Underwriters Re Group's London-based Lloyd's operations to be conducted through Alleghany Underwriting Holdings Ltd. (previously referred to as Venton Holdings Ltd.). The transaction is expected to close in April 2000. Recent years have seen a continued trend toward consolidation in the reinsurance industry, with size and scale becoming increasingly important competitive factors. While we have the utmost confidence in the future prospects of Underwriters Re Group, we recognized that support of its future capital needs would require an ever increasing share of our capital resources. With this transaction, Underwriters Re Group will have access to the capital and other resources of one of the world's largest reinsurers and Swiss Re will obtain the complementary strengths of a premier U.S. broker-market reinsurer. Retention of the Lloyd's operations should enable us to participate in future improvements in insurance and reinsurance markets with a smaller and more flexible capital commitment. Alleghany Underwriting Holdings Ltd. (AUL London), which we will continue to own, will operate, through its subsidiaries, as a single syndicate for the 2000 underwriting year with pound (sterling) 275 million of capacity (equivalent to maximum gross premiums written of approximately $600 million). Upon completion of the sale of Underwriters Re Group, we will assume or replace the $275 million letter of credit facility currently provided by Underwriters Re Group to support these Lloyd's underwriting activities. Our net earnings from continuing operations in 1999 were $100.1 million, or $13.66 per share, compared with $63.4 million, or $8.57 per share in 1998. Excluding gains on investment transactions, net earnings from continuing operations in 1999 were $50.6 million, or $6.91 per share, compared with $58.4 million, or $7.89 per share in 1998. Net earnings including discontinued operations were $96.1 million, or $12.99 per share in 1998. No discontinued operations were reported in 1999. Discontinued operations consist of the operations of Chicago Title Corporation, which was spun-off to Alleghany stockholders on June 17, 1998. Our 1999 results included net gains on investment transactions from continuing operations after taxes of $49.5 million, resulting primarily from the sale by Alleghany of a portion of its holdings in Burlington Northern Santa Fe Corporation. Net gains in 1998 were $5.0 million. 3 2 [Blank page] 3 The comparative contributions to Alleghany's earnings made by our operating units, parent-company operations and discontinued operations were as follows (in millions):
Year Ended Quarter Ended December 31 December 31 ----------------------------------------------- 1999 1998 1999 1998 ----------------------------------------------- Underwriters Re Group $ 17.4 $ 52.4 $ (9.9) $ 9.9 Alleghany Asset Management 54.2 35.7 12.5 7.8 World Minerals 24.0 23.6 7.3 8.7 Parent company and other Operations $ (16.0) $ (21.0) $ (0.7) $ (6.9) Security transactions 82.3 0.3 (0.9) -- $ 66.3 $ (20.7) $ (1.6) $ (6.9) Earnings from continuing operations, before income taxes $ 161.9 $ 91.0 $ 8.3 $ 19.5 - ----------------------------------------------------------------------------------------------- Earnings from continuing operations, net $ 100.1 $ 63.4 $ 6.6 $ 13.4 Earnings from discontinued operations, net (Chicago Title) -- 32.7 -- -- - ----------------------------------------------------------------------------------------------- Net earnings $ 100.1 $ 96.1 $ 6.6 $ 13.4 - -----------------------------------------------------------------------------------------------
Underwriters Re Group, Inc. contributed pre-tax earnings of $17.4 million in 1999, a decrease of approximately 67 percent from 1998 pre-tax earnings, primarily reflecting adverse current accident year results at its primary companies and AUL London, reserve strengthening in the third quarter of 1999 in the amount of $12.0 million on prior accident years at its primary companies and reserve strengthening in the fourth quarter of 1999 in the amount of $19.5 million on prior accident years at AUL London. The reserve strengthening amounts are pre-tax. Underwriters Re Group's 1999 results include the results of AUL London for the period following its acquisition on October 23, 1998 through September 30, 1999. The results of AUL London are reported on a one quarter lag due to the complexity of converting Lloyd's accounting information to U.S. accounting principles. AUL London contributed pre-tax losses of $14.5 million on revenues of $245.0 million for such period. Underwriters Re Group's 1998 results do not include the results of AUL London. Alleghany Asset Management, Inc. and its subsidiaries, The Chicago Trust Company, Montag & Caldwell, Inc. and Chicago Deferred Exchange Corporation, contributed pre-tax earnings of $54.2 million in 1999, a 52 percent increase over 1998. The improved results of Alleghany Asset Management are due primarily to an increase in assets under management. Assets under management totalled $48.6 billion at year-end 1999, compared with $35.6 billion at year-end 1998. 5 4 The increase in assets under management was largely driven by Montag & Caldwell, whose assets under management increased from $25.5 billion at year-end 1998 to $35.2 billion at year-end 1999. Montag & Caldwell's investment returns (net of fees) have exceeded the S&P 500 Index for eight of the past ten years. The Alleghany Funds, Alleghany Asset Management's family of twelve no-load mutual funds, also experienced a significant growth in assets under management from $3.4 billion at year-end 1998 to $5.3 billion at year-end 1999; $1.3 billion of such growth was recorded by the Alleghany Funds' two mutual funds managed by Montag & Caldwell. At the end of this year's first quarter, Stuart D. Bilton, currently President of Alleghany Asset Management, will succeed Richard P. Toft as Chief Executive Officer of Alleghany Asset Management. As Chairman and Chief Executive Officer since 1995, Dick Toft has helped Alleghany Asset Management achieve its outstanding performance. Dick will continue on as Chairman of Alleghany Asset Management. World Minerals Inc. contributed pre-tax earnings of $24.0 million, an increase of less than two percent over its 1998 pre-tax earnings. These results reflect increased sales worldwide, including in China, which resulted in lower losses reported by World Minerals' Chinese joint ventures. The increased sales were offset by continued competitive pressure, increased operating costs, and expenses incurred in connection with staff reductions intended to reduce future costs. World Minerals also recorded an exchange loss in 1999, largely due to the weakening of the Euro, compared with a small exchange gain in 1998. While we had expected better results, we recognize the competitive pressures that have reduced margins in the industrial minerals business worldwide. After the acquisition of Gardenbolt International in 1998, the operations of the Heads and Threads division of Alleghany and Gardenbolt International were combined as Heads & Threads International LLC, a wholly owned subsidiary of Alleghany. The results of Heads & Threads in 1999 continued to be affected by the competitive markets for fastener imports and expenses relating to the restructuring of its warehouses and sales offices. Heads & Threads has entered into an agreement to purchase Reynolds Fasteners, Inc., a distributor of fasteners headquartered in Edison, New Jersey. The transaction is expected to close in March 2000. With the acquisition of Reynolds, Heads & Threads will double in size. After over forty years of dedicated service at Heads & Threads, Lee Bookman retired as President and Chief Executive Officer of Heads & Threads as of year-end 1999. Steven R. Schonholtz succeeds Lee in these positions. Lee continues to serve as Chairman of Heads & Threads. We extend our sincere thanks to Lee for his contributions to Heads & Threads and Alleghany over the years. Alleghany Properties, Inc. continued to benefit from the improved real estate conditions in California, which resulted in increased property sales. 7 5 As of March 1, 2000, Alleghany beneficially owned approximately 17.95 million shares, or 3.9 percent, of the outstanding common stock of Burlington Northern Santa Fe Corporation, which had an aggregate market value on that date of approximately $372.5 million, or $20.75 per share. The aggregate cost of such shares was approximately $201.3 million, or $11.21 per share. Burlington Northern has announced an agreement to combine with Canadian National Railway Company to create a 50,000 mile rail network offering single-line service to shippers throughout North America. In spite of considerably improved service levels and record 1999 earnings, negative reaction to the merger from investors and shippers has adversely affected the market value of Burlington Northern, as well as affected our own stockholders' equity. We are hopeful that over time the benefits of the transaction will be recognized by the investment community. Alleghany common stockholders' equity per share was $151.50 at year-end 1999, compared with $169.12 at year-end 1998, reflecting the decline in market prices of Alleghany's securities holdings, particularly our investment in Burlington Northern. After a year of transitions and restructurings, we are entering the new millenium with a revitalized focus. Yours sincerely, /s/ John J. Burns, Jr. F.M. Kirby President Chairman of the Board March 21, 2000 8 6 Underwriters Re Group, Inc. Underwriters Re Group, headquartered in Calabasas, California, provides reinsurance to property and casualty insurers and reinsurers through its principal subsidiary, Underwriters Reinsurance Company. Although it writes many lines of business, Underwriters Reinsurance concentrates on coverages requiring specialized underwriting expertise or a high degree of actuarial analysis. Underwriters Reinsurance operates throughout the United States, including Puerto Rico and the District of Columbia, and Canada, either as a licensed carrier or accredited reinsurer, and has branch offices in Chicago, New York and Calabasas. Underwriters Re Group also provides insurance through its primary insurance subsidiaries and underwriting centers and conducts a reinsurance and insurance business through its London-based Lloyd's operations. On December 30, 1999, Alleghany entered into an agreement to sell Underwriters Re Group to Swiss Re America Holding Corporation for $725 million in cash, subject to adjustment based upon the stockholder's equity of Underwriters Re Group at the closing date. Alleghany will retain Underwriters Re Group's London-based Lloyd's operations to be conducted through Alleghany Underwriting Holdings Ltd. (previously referred to as Venton Holdings Ltd.) The closing of the sale is expected to occur in April 2000. Alleghany Underwriting Holdings Ltd. (AUL London), through its subsidiaries, will operate as a single syndicate for the 2000 underwriting year with pound (sterling)275 million of capacity (equivalent to maximum gross premiums written of approximately $600 million). Upon completion of the transaction, Alleghany will assume or replace the $275 million letter of credit facility currently provided by Underwriters Re Group to support these Lloyd's underwriting activities. Underwriters Reinsurance acquired AUL London and certain related Bermuda operations on October 23, 1998 for approximately $181.1 million in cash and Alleghany common stock valued at approximately $8.9 million. Subsequent to its purchase, the Bermuda operations were transferred to Underwriters Reinsurance and operated as a branch of Underwriters Reinsurance. Underwriters Re Group contributed pre-tax earnings of $17.4 million on revenues of $825.0 million in 1999 compared with $52.4 million on revenues of $508.6 million in 1998 and $44.4 million on revenues of $453.1 million in 1997. Underwriters Re Group's 1999 results include the results of AUL London for the period following its acquisition on October 23, 1998 through September 30, 1999. The results of AUL London are reported on a one quarter lag due to the complexity of converting Lloyd's accounting information to U.S. accounting principles. AUL London contributed pre-tax losses of $14.5 million on revenues of $245.0 million for such period. Underwriters Re Group's 1998 results do not include the results of AUL London. Underwriters Re Group's 1999 results reflect unfavorable current accident year results at its primary companies and AUL London, reserve strengthening in the third quarter of 1999 in the amount of $12.0 million on prior accident years at its primary companies and reserve strengthening in the fourth quarter of 1999 in the amount of $19.5 million on prior accident years at AUL London. The reserve strengthening amounts are pre-tax. 9 7 The losses at the primary companies and AUL London were due to soft market conditions and unfavorable loss development in respect of primary business written by one of Underwriters Re Group's underwriting centers and one of the three syndicates managed by AUL London. In response to such losses, Underwriters Re Group has shut down such underwriting center and restructured AUL London's operations to control more effectively underwriting of business previously written by such syndicate and to deploy capacity more efficiently. Also, AUL London continues to closely monitor its reserves in light of such unfavorable loss development. Reinsurance premiums in 1999 remained level with 1998 as reinsurance markets continued to be highly competitive. The increase in premium volumes of Underwriters Re Group from 1998 levels primarily reflect the acquisition of AUL London and the related Bermuda operations. Underwriters Re Group recorded net written premiums of $725.4 million in 1999, which included net written premiums of $254.4 million recorded by AUL London and $22.9 million transferred from the Bermuda operations. Net written premiums in 1998 were $438.2 million. Underwriters Re Group's 1998 results reflect growth in its primary insurance operations but level reinsurance premiums due to highly competitive reinsurance markets. Commissions and brokerage expenses increased primarily because of the change in the mix of treaty business having higher ceding commissions paid but lower assumed levels of risk. Other insurance expenses also increased during 1998 as increasing emphasis was placed on the growth of Underwriters Re Group's primary insurance business. Pre-tax investment income totalled $95.2 million in 1999, compared with $80.4 million in 1998 and $75.5 million in 1997, reflecting an increase in invested assets, including a $7.0 million dividend received in 1999 on a common stock investment which did not pay a dividend in 1998 and invested assets acquired with AUL London. Investment income in 1998 was also affected by lower interest rates during 1998 compared with the previous year's levels and the use in the fourth quarter of 1998 of $185.4 million in investment securities to acquire AUL London. Underwriters Re Group recorded a pre-tax loss of $300 thousand on investment transactions in 1999, compared with a pre-tax gain of $7.4 million in 1998 and a pre-tax gain of $930 thousand in 1997. The following sets forth certain financial data for Underwriters Re Group and AUL London on a stand alone and consolidated basis (in thousands):
Year Ended December 31, 1999 - ---------------------------------------------------------------------------------------------------- Underwriters Re Group Consolidated (excluding AUL London) AUL London Underwriters Re Group - ---------------------------------------------------------------------------------------------------- Operating Data - ---------------------------------------------------------------------------------------------------- Revenues $ 579,982 $ 245,018 $ 825,000 Earnings (loss) before income taxes $ 31,884 $ (14,503) $ 17,381 Net earnings (loss) $ 26,957 $ (10,692) $ 16,265 - ---------------------------------------------------------------------------------------------------- Balance Sheet - ---------------------------------------------------------------------------------------------------- Total assets $2,561,204 $ 900,654 $3,461,858 Long-term debt $ 197,940 $ -- $ 197,940 Common stockholder's equity $ 439,690 $ 134,713 $ 574,403 - ----------------------------------------------------------------------------------------------------
11 8 Reinsurance 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, 1999, the statutory surplus of Underwriters Reinsurance was $524.6 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. Primary Insurance Underwriters Re Group conducts its primary insurance business through Commercial Underwriters Insurance Company, Underwriters Insurance Company and Newmarket Underwriters Insurance Company. These three property and casualty insurance companies are rated "A+ (Superior)" by Best's because Underwriters Reinsurance reinsures a significant share of their business. The Center Insurance Services, Inc., a subsidiary of Underwriters Re Group, has acted as agent and underwritten business on behalf of Commercial Underwriters, Underwriters Insurance and Newmarket Underwriters and, to a lesser extent, non-affiliated insurers. International Representative offices were established in Barbados at the end of 1995 and in London in 1996 to capitalize on international underwriting opportunities. In 1995, Underwriters Re Group also made an investment in a reinsurance company in Barbados. 12 9 AUL London AUL London, through its subsidiaries, is a managing agent and provider of corporate capital for syndicates in the Lloyd's insurance market. Lloyd's is a market, not an insurance company, in which individual professional underwriters accept risks on behalf of competing businesses or syndicates formed by both individual and corporate members. The members' resources provide the security behind Lloyd's policies. Considered as a single franchise with common policyholder security, Lloyd's is, according to Standard & Poor's, the world's second largest commercial insurer and eighth largest reinsurer, operating in over 100 countries. Lloyd's carries an A (Excellent) rating from A.M. Best Company, Inc. and an A+ rating from Standard & Poor's. In 1999, AUL London managed three Lloyd's syndicates: Syndicate 376 (non-marine), Syndicate 1183 (marine) and Syndicate 1207 (non-marine), and provided pound (sterling)218 million, or 76 percent, of the capacity of such syndicates. In 1998, AUL London and two affiliated companies provided approximately pound (sterling)155 million, or 63 percent, of the total capacity of the three syndicates. The remainder of the capacity in 1999 and 1998 was provided by third-party members. In 1999, AUL London acquired the remaining third-party capacity for approximately $19.0 million and merged Syndicates 1207 and 1183 into Syndicate 376. Beginning with calendar year 2000, AUL London will manage a single syndicate and provide 100 percent of the capacity of such syndicate. Although AUL London is managing a single syndicate for the year 2000, it continues to manage the three syndicates for the prior open years of account. Lloyd's operates under a three year "year of account" accounting system. Typically, each "year of account" of a syndicate is treated as a separate entity in which risk is underwritten for one year followed by a two-year period of development. At the end of the three-year period, the "reinsurance to close" mechanism is triggered whereby the members forming the next year's underwriting syndicate reinsure the outstanding liabilities of the closing syndicate. After buying reinsurance to close for a syndicate, profits or losses are declared and settled. AUL London's insurance and reinsurance operations focus primarily on specialty commercial lines that it believes provide opportunities for strong profitability. Through the syndicates it manages, AUL London underwrites risks across diverse commercial classes, including property (marine and non-marine) and casualty (such as financial institutions and directors and officers liability insurance), at varying risk layers from primary coverage to high layer excess of loss. AUL London's risks are located around the world, with an emphasis on the United States. The United Kingdom, Western Europe, Canada and Australia also contribute substantial amounts of premium income. 13 10 Alleghany Asset Management, Inc. Alleghany Asset Management conducts a financial services business through its subsidiaries, The Chicago Trust Company, a Chicago-based investment firm with trust powers; Montag & Caldwell, Inc., an Atlanta-based investment counseling firm; Chicago Deferred Exchange Corporation, which facilitates certain tax-deferred property exchanges; The Chicago Trust Company of California (formerly, Security Trust Company), a San Diego-based trust company; and Blairlogie Capital Management, an Edinburgh, Scotland-based international equity manager. Alleghany Asset Management also has a 40 percent interest in Veredus Asset Management LLC, a Louisville, Kentucky-based investment counseling firm. Alleghany Asset Management posted the following results (in millions):
- ---------------------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------- Revenues $ 168.3 $ 125.1 $ 78.8 Earnings before taxes $ 54.2 $ 35.7 $ 19.8 Assets under management $ 48,600 $ 35,600 $ 23,100 - ----------------------------------------------------------------------------------------------------
Growth in profitability of Alleghany Asset Management is largely dependent on growth in assets under management, through market appreciation of existing assets and new business (new clients and additional investments from existing clients). Approximately 82 percent of Alleghany Asset Management's assets under management are institutional assets for which competition is intense and success is driven primarily 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. There was a $13.0 billion growth in assets under management from 1998 to 1999, which included new business of approximately $5.3 billion, compared with $12.5 billion growth in assets under management from 1997 to 1998, which included new business of approximately $5.5 billion. Volatility in U.S. equity markets and reduced market valuations could adversely affect assets under management and the future results of Alleghany Asset Management. Alleghany Asset Management provides distribution and marketing services to its investment managers through the 401(k) services offered by Chicago Trust and the Alleghany Funds, a mutual fund family offering twelve no-load mutual funds. Chicago Trust's full service 401(k) administration group provides trustee, plan design, investment management and other administrative services. Such services are marketed through internal sales forces in Chicago and Atlanta as well as consultants and brokerage sources. The Alleghany Funds are marketed primarily through registered investment advisers, broker-dealers and direct sales to institutional clients, as well as through intermediary services, including Schwab and Fidelity. 15 11 Montag & Caldwell Founded in 1945, Montag & Caldwell, one of the Southeast's oldest investment management firms, concentrates on managing large capitalization growth equity and balanced portfolios for institutional, mutual fund and high net worth clients. Montag & Caldwell believes that success in the institutional investment business is dependent upon a disciplined and consistently applied investment process, which has translated into outstanding investment results. Montag & Caldwell's equity results have placed the firm among the top money managers in its category. Montag & Caldwell's investment returns (net of fees) have exceeded the S&P 500 Index for eight of the past ten years. Montag & Caldwell's assets under management have increased significantly, driven by excellent equity returns and strong new business activity. At year-end 1999, Montag & Caldwell had assets under management of $35.2 billion, compared with $25.5 billion at year-end 1998 and $15.5 billion at year-end 1997. Montag & Caldwell targets separate accounts of $40 million and higher through pension consultants or direct calls to prospective clients. Its investment expertise is also available through the Alleghany Funds. Montag & Caldwell advises two of the Alleghany Funds' mutual funds, with approximately $3.6 billion in assets under management at year-end 1999. Chicago Trust Chicago Trust and its predecessors have managed assets for investors since 1887. Chicago Trust is an investment firm with full trust powers and is engaged in the businesses of institutional investment management, full service 401(k) administration, and personal trust and investment services. At year-end 1999, Chicago Trust had assets under management of $11.6 billion, compared with $10.1 billion at year-end 1998 and $7.7 billion at year-end 1997. Chicago Trust manages about $4.7 billion in institutional equity and fixed income accounts. Of this amount, approximately $1.5 billion represents the investment portfolio of Underwriters Re Group, which will no longer be managed by Chicago Trust after the sale of Underwriters Re Group. Chicago Trust specializes in fixed income, large capitalization growth equity and small capitalization value equity money management for institutional clients. Its fixed income results have consistently placed Chicago Trust among the top money managers in its category. The fixed income and equity products are marketed through pension consultants and directly to plan sponsors. Chicago Trust also advises seven mutual funds of the Alleghany Funds, with approximately $1.5 billion in assets under management at year-end 1999. Chicago Trust's personal trust and investment services business serves the investment and estate planning needs of individuals and families, mainly in the greater Chicago area, and had about $2.1 billion in assets under management at year-end 1999. Chicago Trust believes that the business is well-positioned to benefit from growth in family wealth and the demographics of an aging baby boom generation. Chicago Trust's full service 401(k) business administers about $4.0 billion of assets, approximately half of which is invested in the Alleghany Funds and collective funds managed by the subsidiaries of Alleghany Asset Management. The remainder is invested in third-party managed funds. 16 12 Blairlogie During 1999, Alleghany Asset Management completed its acquisition of 83.25 percent of Blairlogie; the remaining interests in Blairlogie are held by Blairlogie management. Blairlogie manages approximately $1.4 billion in assets as of December 31, 1999. Blairlogie's two investment products include an international developed markets product and an international emerging markets product. Its clients are based mainly in the United States. Blairlogie manages two of the Alleghany Funds' mutual funds, with approximately $134 million in assets under management at year-end 1999. Veredus Alleghany Asset Management owns 40 percent of Veredus, which manages approximately $420 million in assets as of December 31, 1999. Veredus' investment products include an aggressive growth equity and a market neutral product. Its clients include individual and institutional investors. Veredus manages one of the Alleghany Funds' mutual funds, with approximately $90 million in assets under management at year-end 1999. Alleghany Funds The Alleghany Funds had approximately $5.3 billion in assets under management at December 31, 1999, compared with $3.4 billion at year-end 1998 and $1.9 billion at year-end 1997. Montag & Caldwell Growth Fund and The Chicago Trust Growth & Income Fund, two equity funds of the Alleghany Funds, experienced the greatest increase in assets under management from year-end 1998 to year-end 1999, adding a total of $1.3 billion. The no-load mutual funds of the Alleghany Funds consist of seven equity funds, two balanced funds, two fixed income funds and a money market fund. Current information with respect to the Alleghany Funds can be found on its website, www.alleghanyfunds.com. Chicago Deferred Exchange and CT of California Chicago Deferred Exchange was established in 1989 and facilitates, with the assistance of Chicago Trust, tax-deferred exchanges of like-kind property. In 1999, Chicago Deferred Exchange facilitated more than 2,500 exchanges. Chicago Deferred Exchange acts as a qualified intermediary, holding and investing the cash proceeds from the sale of property relinquished by a taxpayer in a qualified trust account, for which Chicago Trust acts as trustee, until replacement property is acquired. CT of California, directly and through its subsidiary, Chicago Deferred Exchange Corporation of California, provides tax-deferred property exchange, trust and investment services in California. Chicago Deferred Exchange and CT of California had total assets under management of about $1.0 billion at year-end 1999. 17 13 World Minerals Inc. World Minerals, headquartered in Santa Barbara, California, conducts a worldwide industrial minerals business through its own operations and those of its subsidiaries, Celite Corporation and Harborlite Corporation. World Minerals contributed pre-tax earnings of $24.0 million on revenues of $208.6 million in 1999, compared with $23.6 million on revenues of $201.1 million in 1998, and $27.5 million on revenues of $203.3 million in 1997. The 1999 results reflect increased sales worldwide, including in China, which resulted in lower losses reported by Celite's Chinese joint ventures. The increased sales were offset by continued competitive pressure, rising operating costs, and expenses incurred in connection with staff reductions intended to reduce future costs. World Minerals also recorded an exchange loss in 1999, largely due to the weakening of the Euro, compared with a small exchange gain in 1998. The 1998 results reflect increased competitive pressure and rising operating costs, primarily at Celite's Lompoc, California diatomite operations. Lompoc's operations were affected in early 1998 by severe El Nino storms and rail car shortages on the Union Pacific Railroad. Additional spending was also incurred in 1998 for research, operations and engineering. Revenues and pre-tax earnings were up in 1997 from the prior year due to improved sales and profit margins achieved by Celite's non-Asian diatomite operations. The mid-1990's was marked by a period of resurgent economic activity in most world markets. During this period, World Minerals enhanced its position in both of its core businesses, diatomite and perlite, through acquisitions of and strategic investments in mining, processing, distribution and sales facilities. In 1996, World Minerals acquired the minority interests in Harborlite and in 1997, perlite reserves in Latin America. In 1998, it acquired additional diatomite reserves in Lompoc, California, and in 1999, it acquired two additional diatomite deposits in Latin America. World Minerals has also continued to invest in new product development, seeking ways to put the unique properties of its industrial minerals to work in new applications. 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 also 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. 19 14 Harborlite is believed to be the world's largest producer of perlite filter aids and, as a seller of perlite ore, is one of the world's largest merchant producers of perlite ore. Perlite ore is 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 also expands perlite in its 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 focuses on customer and technical service. World Minerals' Research and Development group uses state of the art analytical instrumentation and techniques to seek ways to put the unique properties of its industrial minerals to work in new applications, as well as to refine minerals processing methods to yield higher purity and more consistent finished products. The Technical Services group helps identify the best grade of industrial minerals for each customer application and assists in optimizing the customer's manufacturing process to achieve the highest possible value from World Minerals' products. World Minerals conducts its business on a worldwide basis, with mining or processing operations in eleven countries. While World Minerals believes that the international scope of its operations gives it some 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 these risks by closely monitoring its methods of operating in each country and by adopting strategies responsive to changing economic and political environments. During 1999, one of Celite's largest customers began substituting perlite filtration systems for its existing diatomite filtration systems. If the installation of perlite filtration systems was to be made in all of the customer's operations, it would have an adverse impact on Celite's diatomite sales. Harborlite has supplied perlite to this customer; World Minerals expects that some of the reduction in diatomite sales would be recouped through perlite sales to this customer. 20 15 Heads & Threads International LLC The Heads and Threads division, which had been owned by Alleghany since 1974, was reorganized in 1999 as Heads & Threads International LLC, after its acquisition of Gardenbolt International. Now headquartered in Sayreville, New Jersey, Heads & Threads 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 distributors and fastener manufacturers through multiple distribution centers primarily providing same day or next day delivery. The strength of Heads & Threads lies in its long years of association with suppliers and customers, and its breadth of product line. With the acquisition of Gardenbolt International in 1998, Heads & Threads substantially increased its size and its presence in East Coast markets. Heads & Threads also completed in 1998 the installation and implementation of a new fully-integrated, enterprise-wide computer system which has enhanced the functionality of all areas of Heads & Threads' business operations, including order processing, sales and inventory management, transportation services and accounting and finance. In 1999, Heads & Threads entered into an agreement to purchase Reynolds Fasteners, Inc., which purchase is expected to close in March 2000. With the acquisition of Reynolds, Heads & Threads will double its current size. Results in 1999 were affected by competitive pressures in the markets for imported fasteners. Beginning in 1999 and continuing into 2000, Heads & Threads has pursued a cost reduction program. A major part of this program has been the closing of some of Heads & Threads' satellite sales offices and warehouses in order to operate out of larger state-of-the-art distribution centers, allowing Heads & Threads to consolidate inventory and provide higher service levels to its customers. Heads & Threads' 1999 and 1998 results were also affected by costs relating to the replacement of its computer systems. Since Heads & Threads imports virtually all of its fasteners, its costs are subject to fluctuations in foreign currency and import duties. Alleghany Properties, Inc. Headquartered in Sacramento, California, Alleghany Properties owns and manages 21 properties in California. Such properties include improved and unimproved commercial land and commercial and residential lots. A major portion of Alleghany Properties' real estate assets are located in North Natomas, the only large undeveloped area in the City of Sacramento. Development in the area was delayed until the resolution in 1998 of flood plain zoning and wildlife habitat issues. The area experienced considerable growth in its first season of development activity, including more than a dozen residential projects, office buildings and a fully-leased retail shopping center. Contributing to the growth, Alleghany Properties sold approximately 450 residential lots and a multi-family site accommodating more than 270 apartment units. 23 16 Selected Financial Data Alleghany Corporation and Subsidiaries (in thousands, except for share and per share amounts)
Years Ended December 31 ------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ----------- ---------- ---------- ---------- Operating Data Revenues from continuing operations $1,376,163 $ 918,993 $ 796,654 $ 734,482 $ 652,444 - -------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations $ 100,105 $ 63,381 $ 51,400 $ 40,470 $ 60,366 Earnings from discontinued operations -- 32,725 54,267 46,578 24,934 - -------------------------------------------------------------------------------------------------------------------------- Net earnings $ 100,105 $ 96,106 $ 105,667 $ 87,048 $ 85,300 - -------------------------------------------------------------------------------------------------------------------------- Basic earnings per share of common stock:* Continuing operations $ 13.66 $ 8.57 $ 6.91 $ 5.39 8.05 Discontinued operations -- 4.42 7.30 6.20 3.32 - -------------------------------------------------------------------------------------------------------------------------- Net earnings $ 13.66 $ 12.99 $ 14.21 $ 11.59 $ 11.37 - -------------------------------------------------------------------------------------------------------------------------- Average number of shares of common stock* 7,330,588 7,396,263 7,433,208 7,507,796 7,501,918 - --------------------------------------------------------------------------------------------------------------------------
December 31 -------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Balance Sheet Total assets $4,485,025 $4,282,444 $3,700,376 $3,448,433 $3,023,583 - --------------------------------------------------------------------------------------------------------------- Debt $ 407,950 $ 439,795 $ 389,641 $ 404,244 $ 276,646 - --------------------------------------------------------------------------------------------------------------- Common stockholders' equity $1,107,897 $1,247,428 $1,570,935 $1,423,260 $1,320,643 - --------------------------------------------------------------------------------------------------------------- Common stockholders' equity per share of common stock* $ 151.50 $ 169.12 $ 209.04 $ 185.21 $ 168.57 - ---------------------------------------------------------------------------------------------------------------
Alleghany spun off to its stockholders shares of Chicago Title on June 17, 1998; accordingly, Chicago Title has been classified as discontinued operations for each of the four years ended in 1998. * Restated to reflect subsequent common stock dividends. Dividends, Market Prices and Related Security Holder Matters As of December 31, 1999, there were approximately 1,760 holders of record of Alleghany common stock. The following table indicates quarterly high and low prices of the common stock in 1999 and 1998 on the New York Stock Exchange. The prices have not been adjusted for the spin off. Alleghany's ticker symbol is Y.
Quarter Ended 1999 1998 - ----------------------------------------------------------------------------- High Low High Low - ----------------------------------------------------------------------------- March 31 $185 29/32 $174 33/64 $350 $278 1/8 June 30 200 175 1/2 378 1/2 220 September 30 190 173 1/2 248 183 December 31 $206 5/8 $176 $205 $172 - -----------------------------------------------------------------------------
In 1999 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 1997 stock dividend was paid in April of that year. In light of the spin-off of Chicago Title on June 17, 1998, no stock dividend was declared for 1998. As part of the spin-off, Alleghany distributed three shares of Chicago Title common stock for each share of Alleghany common stock outstanding. Alleghany's ability to pay cash dividends is restricted by the terms of a revolving credit loan agreement. At December 31, 1999, this agreement permitted the payment of dividends aggregating approximately $387.7 million. At that date about $1.005 billion of Alleghany's consolidated common stockholders' equity of $1.108 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. 26 17 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 December 30, 1999, Alleghany entered into an agreement to sell Underwriters Re Group to Swiss Re America Holding Corporation for $725 million in cash, subject to adjustment based upon the stockholder's equity of Underwriters Re Group at the closing date. Alleghany will retain AUL London. On June 17, 1998, Alleghany completed the tax free spin-off of Chicago Title to Alleghany stockholders. Chicago Title and Trust Company paid cash dividends to Alleghany totalling $9 million in 1998 and $32 million in 1997. Since the spin-off, Chicago Title is no longer a source of dividends to Alleghany. Alleghany Asset Management, previously a subsidiary of Chicago Title, remained with Alleghany after the spin-off and has continued as a source of cash dividends to Alleghany. As of March 1, 2000, Alleghany and its subsidiaries owned about 17.95 million shares, or about 3.9 percent, of the outstanding common stock of BNSF having an aggregate market value as of such date of approximately $372.5 million, or $20.75 per share. The aggregate cost of such shares is approximately $201.3 million, or $11.21 per share. In 1999, Alleghany sold to BNSF approximately 4.3 million shares of BNSF for a total purchase price of $128.5 million, or $29.585 per share. Alleghany has declared stock dividends in lieu of cash dividends every year since 1987 except 1998, when Chicago Title was spun off to stockholders. These stock dividends 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 28, 2000, Alleghany will pay to stockholders of record on April 3, as its dividend on its common stock for 2000, a dividend of one share of Alleghany common stock for every 50 shares outstanding. In addition to its liquid 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 1999 year-end; $18.2 million was outstanding at 1998 year-end. This agreement 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 1999, Alleghany purchased an aggregate of 124,824 shares of its common stock for about $22.3 million, at an average cost of about $178.59 per share. In 1998, Alleghany purchased an aggregate of 222,564 shares of its common stock for about $72.1 million, at an average cost of about $324.11 per share. At December 31, 1999, about $387.7 million of the equity of Alleghany's subsidiaries was available for dividends or advances to Alleghany. At that date about $1.005 billion of $1.108 billion of Alleghany's equity 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. These limitations have not affected Alleghany's ability to meet its obligations. Financial strength is also a high priority of Alleghany's subsidiaries, whose assets stand behind their financial commitments to their customers and vendors. Underwriters Re Group On December 30, 1999, Alleghany entered into an agreement to sell Underwriters Re Group to Swiss Re America Holding Corporation for $725 million in cash, subject to adjustment based upon the stockholder's equity of Underwriters Re Group at the closing date. Alleghany will retain AUL London. The transaction is expected to close in April 2000. On October 23, 1998, Underwriters Re Group purchased AUL London and certain related Bermuda operations for approximately $181.1 million cash and Alleghany common stock valued at approximately $8.9 million. AUL London, through its subsidiaries, is a managing agent and provider of corporate capital for syndicates in the Lloyd's insurance market. The Bermuda operations were transferred to Underwriters Reinsurance and operated as a branch of Underwriters Reinsurance. On November 1, 1999, Underwriters Re Group entered into a credit agreement, which replaced a $225 million letter of credit facility and a credit agreement for borrowings of up to $43 million. The new credit agreement, which expires on October 31, 2000, subject to extensions, provides up to $275 million for letters of credit to support the underwriting activities of the Lloyd's syndicates managed by AUL London and up to $75 million for corporate purpose loans. About $266.5 million of letters of credit and no amounts of indebtedness were outstanding under the new credit agreement at year-end 1999. Upon completion of the sale of Underwriters Re Group, Alleghany will assume or replace the credit facility. 28 18 In 1999, AUL London acquired additional third-party capacity for approximately $19.0 million and merged Syndicates 1207 and 1183 into Syndicate 376. Beginning with calendar year 2000, AUL London, through its subsidiaries, will manage a single syndicate and provide 100 percent of the capacity of such syndicate. In 1999, Underwriters Re Group paid cash dividends to Alleghany totalling $4.0 million for the year, compared with $3.8 million for 1998. At December 31, 1999, Underwriters Re Group's investment portfolio (excluding AUL London) had a fair value of $1.5 billion and consisted primarily of high quality fixed maturity securities with an average maturity of 4.9 years and an effective duration of 3.5 years. Effective duration measures a portfolio's sensitivity to change in interest rates; a change within a range of plus or minus 1 percent in interest rates would be expected to result in an inverse change of approximately 3.5 percent in the value of the portfolio of Underwriters Re Group. The overall fixed maturity portfolio quality is maintained at a Moody's rating of Aa2, with over 97 percent of all securities rated investment grade by Moody's as of December 31, 1999. Underwriters Re Group's investment portfolio also included about 7.4 million shares of BNSF common stock with a market value of $153.6 million at March 1, 2000 (which in accordance with the Swiss Re agreement, will be sold to Alleghany or into the market by the closing of the sale of Underwriters Re Group). Underwriters Re Group's portfolio contains no investments of a derivative nature. At September 30, 1999, AUL London's investment portfolio had a fair value of $183.2 million, of which $166.7 million comprised AUL London's share of its syndicates' premium trust funds held at Lloyd's. The investment portfolio consisted of cash and cash equivalents, bonds issued by governments or public authorities and high quality corporate bonds. The portfolio contains no investments of a derivative nature. On June 25, 1996, Underwriters Re Group 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 Underwriters Re Group's credit agreement, and the remainder is being used for general corporate purposes. As of December 31, 1999, the statutory surplus of Underwriters Reinsurance was $524.6 million. Alleghany Asset Management The financial services business of Alleghany Asset Management is not a capital intensive business and adequate funds are generated internally to provide for the currently foreseeable needs of its business. Alleghany Asset Management paid cash dividends to Alleghany totalling $15.0 million in 1999, compared with $8.4 million in 1998. World Minerals In March 1999, World Minerals entered into a credit agreement with several banks providing for a commitment for revolving credit loans and/or letters of credit in an aggregate principal amount of $120 million. Outstanding letters of credit may not exceed $20 million. The credit agreement has a final maturity of March 2003. As of December 31, 1999, $64 million of indebtedness and $1.2 million of letters of credit were outstanding under World Minerals' credit facility and an additional $3.6 million of short-term debt was outstanding. The aggregate available long-term borrowing and letter of credit amount as of December 31, 1999 was $54.8 million. In 1999, World Minerals began to pay cash dividends to Alleghany, with dividends totalling $3.3 million for the year. Heads & Threads As of December 31, 1999, Heads & Threads had $12.3 million in short-term debt outstanding and aggregate available lines of credit totalling $7.7 million. In light of the purchase of Reynolds Fasteners, Inc., Heads & Threads expects to enter into a credit agreement with several banks providing for up to $55 million of revolving credit loans and a $5 million term loan. Alleghany Properties As part of Alleghany's sale of Sacramento Savings Bank in 1994, Alleghany, through its wholly owned subsidiary Alleghany Properties, purchased real estate and real estate-related assets of Sacramento Savings. Alleghany Properties is Alleghany's only subsidiary holding substantial real estate investments. As of December 31, 1999, Alleghany Properties held 23 loans and properties having a total book value of approximately $55.1 million, as compared to 28 loans and properties having a total book value of approximately $52.9 million as of December 31, 1998, 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 Alleghany Properties). On December 11, 1998, Alleghany Properties issued $40 million aggregate principal amount of 6.83 percent senior notes due 2004 (the "2004 Notes"). The 2004 Notes will be repaid in five equal annual principal amortization payments beginning on the second anniversary of their issuance. The proceeds from the sale of the 2004 Notes were used to pay a dividend of $39.5 million to Alleghany and the balance was used to cover the expenses of the issuance. 29 19 On February 23, 1995, Alleghany Properties issued $50 million aggregate principal amount of 8.62 percent senior notes due 2000 (the "2000 Notes"). On February 23, 2000, Alleghany Properties made its fifth, and last, principal payment on the 2000 Notes, including interest accrued thereon, in the amount of $10.9 million. The capital needs of Alleghany Properties consist primarily of various development costs relating to its owned properties. Adequate funds are expected to be generated by sales and reimbursements of tax benefits by Alleghany to provide for the currently foreseeable needs of its business. 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. Quantitative and Qualitative Market Risk Disclosure Market risk is the risk of loss from adverse changes in market prices and rates, such as interest rates, foreign currency exchange rates and commodity prices. The primary market risk related to Alleghany's non-trading financial instruments is the risk of loss associated with adverse changes in interest rates. For fixed maturity securities, short-term liquidity needs and the potential liquidity needs of the business are key factors in managing the portfolio. The portfolio duration relative to the liabilities' duration is managed primarily through cash market transactions. For additional information regarding the fixed maturity portfolio, see the discussion of Underwriters Re Group under "Financial Condition." Alleghany and its subsidiaries invest in equities. Such investments include about 17.95 million shares of BNSF common stock, which had an aggregate market value as of March 1, 2000 of approximately $372.5 million, or $20.75 per share. The aggregate cost of such shares is approximately $201.3 million, or $11.21 per share. Equity securities are subject to declines in market values. Alleghany holds its equity investments as available for sale. Any changes in the market value in these investments, net of tax, would affect Alleghany's stockholders' equity and comprehensive income. The primary market risk for the long-term debt of Alleghany and its subsidiaries is interest rate risk at the time of refinancing. Alleghany and its subsidiaries monitor the interest rate environment to evaluate refinancing opportunities. For additional information regarding the long-term debt of Alleghany and its subsidiaries, see "Financial Condition." Other than an interest rate swap, Alleghany currently does not use derivatives to manage market and interest rate risks. In respect of the interest rate swap, Alleghany is exposed to a credit rise in the unlikely event of nonperformance by the swap counterparty. Alleghany, through World Minerals and AUL London, conducts certain business activities in foreign countries. World Minerals minimizes its exposure to the risk of foreign currency fluctuation by, among other things, causing its subsidiaries, whenever feasible, to declare and pay dividends and to invoice their export customers in United States dollars or other hard currencies. In addition, Heads & Threads imports virtually all of its fasteners, the costs of which are therefore subject to fluctuations in foreign currency and import duties. The operations of World Minerals, AUL London and Heads & Threads do not subject Alleghany to a material risk from foreign currency fluctuation. The table below presents a sensitivity analysis of Alleghany's financial instruments that are sensitive to changes in interest rates, including its fixed income portfolio, and debt obligations. Sensitivity analysis is defined as the measurement of potential change in future earnings, fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates over a selected time. In this sensitivity analysis, Alleghany uses fair values to measure its potential change, and a range of - 200 to 200 basis point change in interest rates to measure the hypothetical change in fair value of the financial instruments included in the analysis. For the fixed income portfolio, duration modeling is used to calculate changes in fair values. Durations on the portfolio are adjusted for call, put and interest rate reset features. Fixed income portfolio durations are calculated on a market value weighted bases, including accrued investment income, using holdings as of December 31, 1999 and 1998. 30 20 For long-term debt, the change in fair value is determined by calculating hypothetical December 31, 1999 and 1998 ending prices based on yields adjusted to reflect a range of -200 to 200 basis point change, comparing such hypothetical ending prices to actual ending prices, and multiplying the difference by the par outstanding.
Sensitivity Analysis (dollars in millions) - ------------------------------------------------------------------------------------------------------------------------------------ Interest Rate Shifts -200 -100 0 100 200 - ------------------------------------------------------------------------------------------------------------------------------------ Assets December 31, 1999 Estimated fixed income portfolio value $1,332.0 $1,297.0 $1,259.9 $ 1,222.5 $ 1,185.9 Projected change in portfolio value $ 152.2 $ 117.2 $ 80.1 $ 42.7 $ 6.1 December 31, 1998 Estimated fixed income portfolio value $1,302.2 $1,264.2 $1,229.5 $ 1,191.5 $ 1,150.4 Projected change in portfolio value $ 136.6 $ 98.6 $ 63.9 $ 25.9 $ (15.2) Liabilities December 31, 1999 Estimated liability value $ 446.2 $ 426.6 $ 408.0 $ 390.5 $ 373.9 Estimated change in liabilities $ 38.2 $ 18.6 $ 0 $ (17.5) $ (34.1) December 31, 1998 Estimated liability value $ 487.9 $ 463.2 $ 440.0 $ 418.3 $ 397.9 Estimated change in liabilities $ 47.9 $ 23.2 $ 0 $ (21.7) $ (42.1) - ------------------------------------------------------------------------------------------------------------------------------------
Forward-looking Statements This "Management's Discussion and Analysis of Financial Condition and Results of Operations" (pages 3, 5, 7-9, 11-13, 15-17, 19-20, 23, 28-30) and "Quantitative and Qualitative Market Risk Disclosure" (pages 30-31) contain disclosures which are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "will," "expect," "project," "estimate," "anticipate," "plan" or "continue." These forward-looking statements are based upon Alleghany's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans and anticipated actions and Alleghany's future financial condition and results. The uncertainties and risks include, but are not limited to, those relating to conducting operations in a competitive environment, acquisition activities, the complexity of integrated computer systems, and general economic conditions. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by or on behalf of Alleghany. 31 21 Consolidated Balance Sheets Alleghany Corporation and Subsidiaries
December 31, 1999 and 1998 - ------------------------------------------------------------------------------------------------------------------------------ (in thousands, except share amounts) 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------ Assets Available for sale securities: Fixed maturities (amortized cost: 1999 $1,204,122; 1998 $1,134,152) $1,179,845 $1,165,580 Equity securities (cost: 1999 $240,623; 1998 $317,216) 470,104 824,326 Short-term investments 277,798 136,127 - ------------------------------------------------------------------------------------------------------------------------------ 1,927,747 2,126,033 - ------------------------------------------------------------------------------------------------------------------------------ Cash 26,786 25,441 Cash pledged to secure trust deposits 14,307 56,907 Premium trust funds 170,508 107,854 Notes receivable 91,536 91,536 Funds held, accounts and other receivables 529,786 502,721 Property and equipment - at cost, less accumulated depreciation and amortization 207,617 208,698 Reinsurance receivable 844,605 571,689 Other assets 672,133 591,565 - ------------------------------------------------------------------------------------------------------------------------------ $4,485,025 $4,282,444 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities and Common Stockholders' Equity Property and casualty losses and loss adjustment expenses $1,973,924 $1,554,818 Unearned premiums 419,608 389,603 Other liabilities 501,453 443,938 Parent company debt -- 18,200 Subsidiaries' debt 407,950 421,595 Net deferred tax liability 53,625 150,218 Trust deposits secured by pledged assets 20,568 56,644 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities 3,377,128 3,035,016 Commitments and contingent liabilities Common stockholders' equity: (common shares authorized: 1999 and 1998 - 22,000,000; common shares issued and outstanding: 1999 - 7,312,701; 1998 - 7,375,848) 1,107,897 1,247,428 - ------------------------------------------------------------------------------------------------------------------------------ $4,485,025 $4,282,444 - ------------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 32 22 Consolidated Statements of Earnings Alleghany Corporation and Subsidiaries
Years Ended December 31, - ----------------------------------------------------------------------------------------------------------- (in thousands, except per share amounts) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------- Revenues Investment management fees $ 165,673 $ 122,913 $ 77,341 Net property and casualty premiums earned 719,846 420,809 376,672 Interest, dividend and other income 200,135 166,737 149,724 Net mineral and filtration sales 208,480 200,815 203,264 Net gain (loss) on investment transactions 82,029 7,719 (10,347) - ------------------------------------------------------------------------------------------------------------ Total revenues 1,376,163 918,993 796,654 - ------------------------------------------------------------------------------------------------------------ Costs and expenses Commissions and brokerage expenses 172,527 113,170 94,444 Salaries, administrative and other operating expenses 304,197 231,970 187,049 Property and casualty losses and loss adjustment expenses 548,459 288,259 261,828 Cost of mineral and filtration sales 139,107 131,108 130,555 Interest expense 32,337 32,271 32,111 Corporate administration 17,632 31,199 25,437 - ------------------------------------------------------------------------------------------------------------ Total costs and expenses 1,214,259 827,977 731,424 - ------------------------------------------------------------------------------------------------------------ Earnings from continuing operations, before income taxes 161,904 91,016 65,230 Income taxes 61,799 27,635 13,830 - ------------------------------------------------------------------------------------------------------------ Earnings from continuing operations 100,105 63,381 51,400 Discontinued operations Earnings from discontinued operations, net of tax -- 32,725 54,267 - ------------------------------------------------------------------------------------------------------------ Net earnings $ 100,105 $ 96,106 $105,667 - ------------------------------------------------------------------------------------------------------------ Basic earnings per share of common stock:* Continuing operations $ 13.66 $ 8.57 $ 6.91 Discontinued operations -- 4.42 7.30 - ------------------------------------------------------------------------------------------------------------ Basic net earnings per share $ 13.66 $ 12.99 $ 14.21 - ------------------------------------------------------------------------------------------------------------ Diluted earnings per share of common stock:* Continuing operations $ 13.46 $ 8.42 $ 6.84 Discontinued operations -- 4.34 7.23 - ------------------------------------------------------------------------------------------------------------ Diluted net earnings per share $ 13.46 $ 12.76 $ 14.07 - ------------------------------------------------------------------------------------------------------------
*Adjusted to reflect subsequent common stock dividends. See accompanying Notes to Consolidated Financial Statements. 33 23 Consolidated Statements of Changes in Common Stockholders' Equity Alleghany Corporation and Subsidiaries Three Years Ended December 31, 1999
Accumulated Cumulative Cumulative Total Common Contributed Comprehensive Treasury Retained Stockholders' (in thousands, except share amounts) Stock Capital Other Income Stock Earnings Equity - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1996 $ 7,303 $ 494,936 $ 245,262 $ (10,893) $ 686,652 $ 1,423,260 (7,598,109 shares of common stock issued; 64,050 in treasury)* Add (deduct): Net earnings -- -- -- -- 105,667 105,667 Other comprehensive income, net of tax: Cumulative translation loss -- -- (3,166) -- -- (3,166) Change in unrealized appreciation of investments, net -- -- 56,900 -- -- 56,900 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income -- -- 53,734 -- 105,667 159,401 - ------------------------------------------------------------------------------------------------------------------------------------ Common stock dividend -- 1,181 -- 28,486 (29,815) (148) Other, net 110 15,032 -- (26,720) -- (11,578) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 7,413 511,149 298,996 (9,127) 762,504 1,570,935 (7,561,403 shares of common stock issued; 46,501 in treasury)* Add (deduct): Net earnings -- -- -- -- 96,106 96,106 Other comprehensive income, net of tax: Cumulative translation gain -- -- 1,022 -- -- 1,022 Change in unrealized appreciation of investments, net -- -- 47,130 -- -- 47,130 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income -- -- 48,152 -- 96,106 144,258 - ------------------------------------------------------------------------------------------------------------------------------------ Spin-off of Chicago Title -- -- (10,663) -- (403,104) (413,767) Other, net 19 152 -- (53,437) (732) (53,998) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1998 7,432 511,301 336,485 (62,564) 454,774 1,247,428 (7,580,663 shares of common stock issued; 204,815 in treasury) Add (deduct): Net earnings -- -- -- -- 100,105 100,105 Other comprehensive income, net of tax: Cumulative translation loss -- -- (6,885) -- -- (6,885) Change in unrealized appreciation of investments, net -- -- (217,266) -- -- (217,266) - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income -- -- (224,151) -- 100,105 (124,046) - ------------------------------------------------------------------------------------------------------------------------------------ Common stock dividend -- (13,292) -- 38,991 (25,810) (111) Other, net 31 (1,952) -- (13,453) -- (15,374) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1999 $ 7,463 $ 496,057 $ 112,334 $ (37,026) $ 529,069 $ 1,107,897 (7,463,252 shares of common stock issued; 150,551 in treasury) ====================================================================================================================================
*Adjusted to reflect subsequent common stock dividends. See accompanying Notes to Consolidated Financial Statements. 34 24 Consolidated Statements of Cash Flows Alleghany Corporation and Subsidiaries
Years Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities Earnings from continuing operations $ 100,105 $ 63,381 $ 51,400 Adjustments to reconcile earnings from continuing operations to cash provided by continuing operations: Depreciation and amortization 32,810 25,319 24,178 Net (gain) loss on investment transactions (82,029) (7,719) 10,347 Other charges to continuing operations, net 21,689 (4,800) (300) Increase in funds held, accounts and other receivables (27,065) (77,417) (31,088) (Increase) decrease in reinsurance receivable (272,916) (100,575) 4,601 Increase in property and casualty losses and loss adjustment expenses 419,106 192,337 49,050 Increase in unearned premium reserve 30,005 17,783 40,816 Increase in premium trust funds (62,654) -- -- Increase in other assets (91,885) (43,571) (3,175) Increase in other liabilities 57,515 77,628 22,579 Decrease (increase) in cash pledged to secure trust deposits 42,600 (55,571) 17,338 (Decrease) increase in trust and escrow deposits (36,076) 52,414 (17,599) - ----------------------------------------------------------------------------------------------------------------------------------- Net adjustments 31,100 75,828 116,747 - ----------------------------------------------------------------------------------------------------------------------------------- Cash provided by operating activities 131,205 139,209 168,147 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities Purchase of investments (317,557) (227,158) (427,093) Maturities of investments 52,584 53,367 58,121 Sales of investments 352,440 225,398 178,982 Purchases of property and equipment (27,257) (29,769) (16,580) Net change in short-term investments (141,671) (5,767) 47,424 Acquisition of AUL London, net of cash received -- (172,963) -- Other, net (1,067) (1,768) 7,039 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (82,528) (158,660) (152,107) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities Principal payments on long-term debt (92,476) (22,000) (112,000) Proceeds of long-term debt 60,631 71,484 97,639 Cash provided by discontinued operations -- 3,903 18,805 Treasury stock acquisitions (22,292) (72,135) (33,080) Other, net 6,805 17,868 21,486 - ----------------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (47,332) (880) (7,150) - ----------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 1,345 (20,331) 8,890 Cash at beginning of year 25,441 45,772 36,882 - ----------------------------------------------------------------------------------------------------------------------------------- Cash at end of year $ 26,786 $ 25,441 $ 45,772 =================================================================================================================================== Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ 31,939 $ 32,758 $ 32,140 Income taxes $ 35,044 $ 34,748 $ 44,410 - ----------------------------------------------------------------------------------------------------------------------------------- Non-cash item: Book value of spin-off of Chicago Title and Trust Company $ -- $ 413,767 -- ===================================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 35 25 Notes to Consolidated Financial Statements Alleghany Corporation and Subsidiaries 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 Alleghany Asset Management, Inc.; Alleghany Funding Corporation ("AFC"); World Minerals Inc. ("World Minerals"); Underwriters Re Group, Inc. ("Underwriters Re Group"), whose principal subsidiaries are Underwriters Reinsurance Company ("Underwriters Reinsurance"), Commercial Underwriters Insurance Company ("CUIC"), Underwriters Insurance Company ("UIC") and Alleghany Underwriting Holdings, Ltd. ("AUL London"); Alleghany Properties Inc. ("API") and Heads & Threads International LLC ("H&T"). The Company in 1998 spun-off to Alleghany stockholders shares of a newly-formed holding company for Chicago Title and Trust Company, and accordingly its operations are shown as discontinued operations for all periods presented. See Note 2. Underwriters Reinsurance acquired Alleghany Underwriting Holdings, Ltd. previously referred to as Venton Holdings Ltd., on October 23, 1998. AUL London's accounts are included in the consolidated financial statements of Alleghany on a one quarter lag. AUL London was accounted for under the purchase accounting method. On December 30, 1999, Alleghany entered into an agreement to sell Underwriters Re Group to Swiss Re America Holding Corporation for $725 million in cash, subject to adjustment based upon the stockholder's equity of Underwriters Re Group at the closing date. Alleghany will retain Underwriters Re Group's London-based Lloyd's operations to be conducted through AUL London. The closing of the sale is expected to occur in April 2000. 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. 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, 1999 and 1998 consist of U.S. Treasury securities, obligations of U.S. government agencies, municipal obligations, mortgage-backed securities, corporate debt securities, and equity securities. The Company classifies its debt and marketable equity securities as available for sale. Short-term investments include commercial paper, certificates of deposit, money market instruments and any fixed maturity with an initial maturity of less than one year. At December 31, 1999 and 1998, securities are classified as available for sale and are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect applicable to available for sale securities, are excluded from earnings and are reported in comprehensive income and 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. 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. e. Revenue Recognition. Investment management fees are recognized principally when billed. Property and casualty 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. 36 26 f. 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. g. Income Taxes. The Company files a consolidated federal income tax return with its domestic subsidiaries. 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. h. 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. i. 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. j. Reinsurance. 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. k. Cash. For purposes of the consolidated statements of cash flows, cash includes only funds on deposit which are available for immediate withdrawal. l. Net Earnings Per Share of Common Stock. 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, 1999, 1998, and 1997, respectively, as adjusted for stock dividends. The average number of shares of common stock outstanding, as adjusted for stock dividends, was 7,330,588 in 1999, 7,396,263 in 1998, and 7,433,208 in 1997. m. Impairment of Long-Lived Assets. The Company follows Statement of Financial Accounting Standards No. 121 (SFAS 121) "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of." SFAS 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. n. Stock Option Plans. The Company follows Statement of Financial Accounting Standards No. 123 (SFAS 123) "Accounting for Stock-Based Compensation." SFAS 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 Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees." The Company has elected to continue to follow the accounting guidance provided by APB 25, as permitted. o. Recent Accounting Pronouncements. In June 1998, the Financial Accounting Standards Board issued Statement 133 (SFAS 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities. The statement requires all derivatives to be recorded on the balance sheet at fair value and establishes special accounting for three different types of hedges. Though the accounting treatment and criteria for each of the three types of hedges is unique, they all result in recognizing offsetting changes in value or cash flow of both the hedge and the hedged item in earnings in the same period. Changes 37 27 in the fair value of derivatives that do not meet the criteria of one of three categories of hedges are included in earnings in the period of the change with no related offset. The requirements for SFAS 133 were delayed by SFAS 137, "Deferral of the Effective Date of FASB Statement 133," and are now effective for financial statements for periods beginning after June 15, 2000. Management is assessing the impact of SFAS 133 on the Company and does not anticipate the impact to be significant. p. Reclassification. Certain prior year amounts have been reclassified to conform to the 1999 presentation. 2. Spin-off of Chicago Title As a result of the spin-off, the Company has classified the operation spun-off as a "discontinued operation" in its financial statements. Historical financial information relating to the discontinued operations is as follows (in thousands):
- ----------------------------------------------------------------------------------------------------------------------------------- Revenues 1998* 1997 =================================================================================================================================== Title premiums, escrow and trust fees $ 777,882 $1,395,865 Interest, dividend and other income 28,025 67,897 Net gain on investment transactions 487 1,469 - ----------------------------------------------------------------------------------------------------------------------------------- Total revenues 806,394 1,465,231 - ----------------------------------------------------------------------------------------------------------------------------------- Costs and expenses - ----------------------------------------------------------------------------------------------------------------------------------- Commissions and brokerage expenses 260,797 526,324 Salaries, administrative and other operating expenses 440,260 749,624 Provision for title losses and other claims 51,910 103,251 Interest expense 2,259 4,644 - ----------------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 755,226 1,383,843 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings before income taxes 51,168 81,388 Income taxes 18,443 27,121 - ----------------------------------------------------------------------------------------------------------------------------------- Net earnings $ 32,725 $ 54,267 ===================================================================================================================================
* For the period 1/1/98 thru 6/17/98 The financial information excludes the effects of certain inter-company securities transactions that Chicago Title and the Company entered into. In addition, the operations of Alleghany Asset Management are shown as a discontinued operation in Chicago Title's stand alone financial statements. Alleghany Asset Management is included in the continuing operations of the Company. Accordingly, the financial information shown above will not agree to Chicago Title's financial statements prepared on a stand alone basis. 3. Investments Available for sale securities at December 31, 1999 and 1998 are summarized as follows (in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------ 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Consolidated Cost or Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ Fixed maturities: U.S. Government, government agency and municipal obligations $ 707,250 $ 2,606 $ (14,138) $ 695,718 Bonds, notes and other 496,872 1,405 (14,150) 484,127 Short-term investments 277,798 -- -- 277,798 - ------------------------------------------------------------------------------------------------------------------------------------ 1,481,920 4,011 (28,288) 1,457,643 Equity securities 240,623 233,349 (3,868) 470,104 - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,722,543 $ 237,360 $ (32,156) $ 1,927,747 ==================================================================================================================================== Industry Segment - ------------------------------------------------------------------------------------------------------------------------------------ Asset management $ 46,605 $ 10 $ (298) $ 46,317 Property and casualty insurance 1,417,507 109,877 (31,858) 1,495,526 Mining and filtration 1,211 -- -- 1,211 Corporate activities 257,220 127,473 -- 384,693 - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,722,543 $ 237,360 $ (32,156) $ 1,927,747 ====================================================================================================================================
- ------------------------------------------------------------------------------------------------------------------------------------ 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Gross Gross Amortized Unrealized Unrealized Fair Consolidated Cost or Cost Gains Losses Value - ------------------------------------------------------------------------------------------------------------------------------------ Fixed maturities: U.S. Government, government agency and municipal obligations $ 688,949 $ 22,106 $ (325) $ 710,730 Bonds, notes and other 445,203 11,295 (1,648) 454,850 Short-term investments 136,127 -- -- 136,127 - ------------------------------------------------------------------------------------------------------------------------------------ 1,270,279 33,401 (1,973) 1,301,707 Equity securities 317,216 507,110 -- 824,326 - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,587,495 $ 540,511 $ (1,973) $ 2,126,033 ==================================================================================================================================== Industry Segment - ------------------------------------------------------------------------------------------------------------------------------------ Asset management $ 40,591 $ 441 $ -- $ 41,032 Property and casualty insurance 1,317,398 213,321 (1,973) 1,528,746 Mining and filtration 416 -- -- 416 Corporate activities 229,090 326,749 -- 555,839 - ------------------------------------------------------------------------------------------------------------------------------------ $ 1,587,495 $ 540,511 $ (1,973) $ 2,126,033 ====================================================================================================================================
38 28 29 30 The amortized cost and estimated fair value of fixed maturities at December 31, 1999 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 $ 347,440 $ 347,125 Due after one year through five years 404,152 398,800 Due after five years through ten years 362,386 351,697 Due after ten years 107,820 104,463 Mortgage-backed securities 260,122 255,558 - -------------------------------------------------------------------------------- $1,481,920 $1,457,643 ================================================================================
The proceeds from sales of available for sale securities were $352 million, $225 million, and $179 million, which included the proceeds from sales of fixed maturities of $162 million, $145 million, and $137 million, in 1999, 1998, and 1997, respectively. Gross realized gains and gross realized losses of available for sale securities were $86.8 million and $1.9 million, $8.9 million and $1.2 million, and $2.4 million and $1.6 million, respectively, in 1999, 1998, and 1997. These amounts include gross realized gains and gross realized losses on sales of fixed maturities of $1.6 million and $1.9 million, $1.7 million and $.9 million, $.5 million and $1.3 million, respectively, in 1999, 1998, and 1997. During 1999 and 1997, 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 $2.9 million and $11.2 million, respectively for these investments. At December 31, 1999 and 1998, investments, carried at fair value, totalling approximately $203 million and $142 million, respectively, were on deposit with various states or governmental departments to comply with property and casualty insurance laws. Assets pledged to secure trust deposits at December 31, 1999 and 1998, carried at fair value, were as follows (in thousands):
- -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Cash $14,307 $56,907 U.S. Government and municipal obligations 1,673 1,751 Money market fund 6,257 2,036 - -------------------------------------------------------------------------------- $22,237 $60,694 ================================================================================
4. Reinsurance In the ordinary course of business, Underwriters Reinsurance 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, 1999 and 1998 consists of the following (in thousands):
- -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Reinsurance recoverable on paid losses $ 49,771 $ 24,707 Ceded outstanding losses and loss adjustment expenses $794,834 $546,982 ================================================================================
The reinsurance receivable balance as of December 31, 1999 and 1998 includes $39.1 million and $65.7 million, respectively, from Continental Reinsurance under reinsurance contracts entered into prior to 1993. For the years ended December 31, 1999, 1998, and 1997, Underwriters Reinsurance ceded losses and loss adjustment expenses of $367.5 million, $158.9 million, and $58.1 million, respectively. The following table indicates property and casualty premiums written and earned for the years ended December 31, 1999, 1998, and 1997 (in thousands):
- -------------------------------------------------------------------------------- 1999 Written Earned - -------------------------------------------------------------------------------- Premiums direct $353,194 $312,839 Premiums assumed $579,340 $589,690 Premiums ceded $207,098 $182,683 - -------------------------------------------------------------------------------- 1998 - -------------------------------------------------------------------------------- Premiums direct $149,930 $144,812 Premiums assumed $399,038 $386,374 Premiums ceded $110,806 $110,377 - -------------------------------------------------------------------------------- 1997 - -------------------------------------------------------------------------------- Premiums direct $139,761 $112,158 Premiums assumed $366,143 $352,930 Premiums ceded $ 91,713 $ 88,416 - --------------------------------------------------------------------------------
As of December 31, 1999 and 1998, loss reserves ceded are secured by deposits in a trust fund totalling $118.8 million and $123.3 million, respectively, and letters of credit totalling $184.4 million and $102 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): 39 31
- ------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------ Property and Casualty Losses and Loss Adjustment Expenses - ------------------------------------------------------------------------------------ Balance at January 1 $1,554,818 $ 1,159,070 $ 1,110,020 Less reinsurance recoverables 546,982 374,801 377,564 - ------------------------------------------------------------------------------------ Net balance at January 1 1,007,836 784,269 732,456 Incurred related to: Current year 516,704 290,513 267,530 Prior years 31,755 (2,254) (5,702) - ------------------------------------------------------------------------------------ Total incurred 548,459 288,259 261,828 - ------------------------------------------------------------------------------------ Paid related to: Current year 78,628 57,788 35,033 Prior years 316,407 134,243 174,982 - ------------------------------------------------------------------------------------ Total paid 395,035 192,031 210,015 - ------------------------------------------------------------------------------------ AUL's unpaid claim and claim adjustment expenses* 17,830 127,339 -- - ------------------------------------------------------------------------------------ Net balance at December 31 1,179,090 1,007,836 784,269 Plus reinsurance recoverables 794,834 546,982 374,801 - ------------------------------------------------------------------------------------ Balance at December 31 $1,973,924 $ 1,554,818 $ 1,159,070 - ------------------------------------------------------------------------------------
* Represents reinsurance to close adjustment and acquisition date balances, respectively. The increase in prior year incurred losses is due to reserve strengthenings of $12.0 million at its primary companies and $19.5 million at AUL London. Underwriters Reinsurance's reserve for unpaid losses and loss adjustment expenses includes $67.4 million, $66.9 million, and $64.5 million gross reserves and $50.1 million, $47.0 million, and $45.1 million net reserves at December 31, 1999, 1998, and 1997, 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. Debt Total debt at December 31, 1999 and 1998 is summarized as follows (in thousands):
- -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Long-Term Debt: Alleghany Revolving credit $ -- $ 18,200 API Senior notes at 8.6%, due through 2000 10,000 20,000 Senior notes at 6.83%, due through 2004 40,000 40,000 AFC Notes payable at 5.3% to 6.6% due 2007 80,000 80,000 Underwriters Re Group Senior notes at 7.9%, due 2006 197,940 197,658 World Minerals Notes payable at 7.0% to 7.63%, due through 2003 64,000 71,000 Other loans at 6.45% to 10.8%, due 2000 3,624 2,652 Heads & Threads Capital lease obligations 108 145 - -------------------------------------------------------------------------------- 395,672 429,655 - -------------------------------------------------------------------------------- Short-Term Debt: Heads & Threads Notes payable at 6.35% to 7.00% due through 2000 12,278 -- Notes payable at 6.1% to 6.4% due through 1999 -- 2,450 Secured credit lines at 5.58% to 7.48% -- 7,690 - -------------------------------------------------------------------------------- 12,278 10,140 - -------------------------------------------------------------------------------- $407,950 $439,795 ================================================================================
Under the terms of a revolving credit loan agreement dated June 14, 1995, as amended April 8, 1998, with a bank, Alleghany may borrow up to $200 million until July 2000. 40 32 33 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 at 1999 year-end; $18.2 million was outstanding under this agreement at 1998 year-end. 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. 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. In December 1998, API issued $40 million of additional senior notes. Proceeds were used to make a dividend to Alleghany and to pay for the issuance expenses. The notes are being repaid in five equal annual installments beginning in 2000. 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 $86 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 0.0625% and receives a variable rate equal to the three month LIBOR rate plus 0.375%. The swap matures on January 22, 2007. AFC 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. In March 1999, World Minerals entered into a credit agreement with several banks providing for a commitment for revolving credit loans and/or letters of credit in an aggregate principal amount of $120 million. Outstanding letters of credit may not exceed $20 million. The credit agreement has a final maturity of March 2003. As of December 31, 1999, $64 million of indebtedness and $1.2 million of letters of credit were outstanding under World Minerals' credit facility and an additional $3.6 million of short-term debt was outstanding. The aggregate available long-term borrowing and letter of credit amount as of December 31, 1999 was $54.8 million. Heads & Threads obtained a $20 million revolving line of credit with a bank. Availability under the line of credit is reduced by Standby Letters of Credit and Bankers Acceptances. This line of credit matures on May 31, 2000. Bankers Acceptances are priced at the bank's prevailing discount rate plus 115 basis points and direct borrowings under the line of credit are priced at the bank's prime rate or LIBOR plus 150 basis points. The notes outstanding at December 31, 1999 totalled $12.3 million and have due dates ranging from January through June 2000. Heads & Threads had lines of credit with banks totalling $13 million, of which $7.7 million was outstanding at December 31, 1998. The lines of credit were secured by inventory and accounts receivable. The lines of credit were terminated on or before April 30, 1999. 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 (decrease) increase its weighted average borrowing rates by (0.02)%, 0.07% and 0.31% and to (decrease) increase reported interest expense by $(0.1) million, $0.3 million, and $1.2 million for the years ended 1999, 1998 and 1997, respectively. Scheduled aggregate annual maturities of debt for each of the next five years and thereafter are as follows (in thousands): - -------------------------------------------------------------------------------- 2000 $ 33,941 2001 8,042 2002 8,027 2003 72,000 2004 8,000 Thereafter 277,940 - -------------------------------------------------------------------------------- $407,950 ================================================================================
7. Income Taxes Income tax expense (benefit) from continuing operations consists of the following (in thousands):
- -------------------------------------------------------------------------------- Federal State Foreign Total - ------------------------------------------------------------------------------- 1999 - ------------------------------------------------------------------------------- Current $ 19,794 $ 7,038 $ 8,023 $ 34,855 Deferred 27,441 (47) (450) 26,944 - ------------------------------------------------------------------------------- $ 47,235 $ 6,991 $ 7,573 $ 61,799 =============================================================================== 1998 - ------------------------------------------------------------------------------- Current $ 22,933 $ 4,979 $ 8,123 $ 36,035 Deferred (7,628) (19) (753) (8,400) - ------------------------------------------------------------------------------- $ 15,305 $ 4,960 $ 7,370 $ 27,635 =============================================================================== 1997 - ------------------------------------------------------------------------------- Current $ 7,345 $ 4,184 $ 6,736 $ 18,265 Deferred (4,758) 11 312 (4,435) - ------------------------------------------------------------------------------- $ 2,587 $ 4,195 $ 7,048 $ 13,830 ===============================================================================
41 34 Earnings from continuing operations, before income taxes includes $2.2 million, $16.5 million, and $15.4 million from foreign operations in 1999, 1998, and 1997, respectively. The difference between the federal income tax rate and the effective income tax rate on continuing operations is as follows:
- ------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------ Federal income tax rate 35.0% 35.0% 35.0% Goodwill amortization 1.9 1.4 2.3 Income subject to dividends-received deduction (0.6) (3.1) (4.3) State taxes, net of federal tax benefit 2.1 2.2 2.7 Tax-exempt interest income (3.8) (6.2) (7.6) Other, net 3.6 1.1 (6.9) - ------------------------------------------------------------------------------ 38.2% 30.4% 21.2% ================================================================================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1999 and 1998 are as follows (in thousands):
- -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Deferred tax assets Property and casualty loss reserves $ 71,097 $ 61,137 Reserves for impaired assets 9,817 11,333 Expenses deducted for tax purposes when paid 19,048 27,892 Unearned premium reserves 21,810 8,769 Other 20,998 9,031 - ------------------------------------------------------------------------------- 142,770 118,162 - ------------------------------------------------------------------------------- Valuation allowance (1,769) (2,909) - ------------------------------------------------------------------------------- Total deferred tax assets $ 141,001 $ 115,253 - ------------------------------------------------------------------------------- Deferred tax liabilities Unrealized gain on investments $ 62,472 $ 177,641 Tax over book depreciation 26,909 26,522 Deferred acquisition costs 34,158 11,915 Deferred income on installment note 31,974 31,974 Deferred tax gain on security 14,881 -- Other 24,232 17,419 - ------------------------------------------------------------------------------- Total deferred tax liabilities 194,626 265,471 - ------------------------------------------------------------------------------- Net deferred tax liability $ 53,625 $ 150,218 ===============================================================================
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, 1999 and 1998, the Company has established a valuation allowance of $1.8 million and $2.9 million, respectively, for certain deferred state tax assets which it believes may not be realized. The Internal Revenue Service has closed its examination of Alleghany's federal income tax returns for 1993, 1994 and 1995. The deficiencies were settled for an amount which was not material. The IRS is currently examining the tax returns for the years 1996 and 1997. 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 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, 1999 and 1998 was $524.6 million and $602.6 million, respectively, and statutory net income for the years ended December 31, 1999 and 1998 was $38.8 million and $41 million, respectively. Stockholders' equity of World Minerals is restricted by a borrowing agreement as to payment of dividends. At December 31, 1999, $188.5 million 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, less $158.5 million (Chicago Title's net earnings for the four year period), 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, 1999 approximately $387.7 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 47,974 in 1999, 19,783 in 1998, and 13,875 in 1997 (as adjusted for stock dividends). In 1999, a special award of 30,000 shares was awarded and will be fully earned upon the meeting of certain goals within a three year period. 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 35 anti-dilution and the effect of the Chicago Title spin-off 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, 1999 (for all award periods through the award period 1999), approximately 161,317 performance shares were outstanding. The amounts charged to the Company's earnings with respect to the plan was $3.4 million in 1999, $16.4 million in 1998, and $10.9 million in 1997. 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 11,487 shares at the then fair market value of $187.50 were granted in 1999. At December 31, 1999, 72,053 options were outstanding, of which 48,852 options were vested at an average option price of $102.98. Additionally, 9,180 shares were outstanding to subsidiary directors of which 3,060 were vested at an average option price of $230.88. In August 1997 options outstanding under the 1993 Stock Option Plan of the Underwriters Re Group, Inc. were converted into Alleghany options. The stock options are not exerciseable until one year from the date of grant when 25% are exercisable with an additional 25% becoming exercisable on each subsequent anniversary of the grant date. No options were issued in 1999. At December 31, 1999, 347,820 were outstanding, of which 201,801 were vested at an average option price of $78.35. The Board of Directors has authorized the purchase from time to time of additional shares of common stock for the treasury. During 1999, 1998, and 1997, Alleghany repurchased 124,824 shares, 222,564 shares, and 157,174 shares of its common stock at a cost of $22.3 million, $72.1 million, and $33.1 million, respectively. 9. Fixed Stock Option Plan The Company has two fixed option plans as described in Note 8. All options outstanding as of the Chicago Title spin-off date were subsequently adjusted for the effect of this transaction. The fair value of each option grant, including the converted Underwriters Re Group options, is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1999, 1998, and 1997, respectively; no cash dividend yield for all years; expected volatility ranged from 14 to 15 percent for all years; risk-free interest rates ranged from 3.9 to 6.1 percent; and expected lives of six and seven years. A summary of the status of the Company's fixed option plan as of December 31, 1999, 1998, and 1997 and changes during the years ending on those dates is presented below:
- ------------------------------------------------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Shares Grant Shares Grant Shares Grant (000) Price (000) Price (000) Price - ------------------------------------------------------------------------------------- Fixed Options - ------------------------------------------------------------------------------------- Outstanding, beginning 483 $109 398 $ 80 413 $ 76 Granted 12 188 131 184 53 99 Exercised (62) 74 (41) 67 (63) 69 Forfeited (4) 188 (5) 117 (5) 101 - ------------------------------------------------------------------------------------- Outstanding, ending 429 $116 483 $109 398 $ 80 ===================================================================================== Options exercisable at year-end 253 -- 292 -- 295 -- Weighted-average fair value of options granted during the year -- $187.50 -- $55.60 -- $30.65 =====================================================================================
Options Outstanding - ------------------------------------------------------------------------------------ Weighted Average Number Remaining Weighted Outstanding Contractual Average at 12/31/99 Life (years) Exercise Price - ------------------------------------------------------------------------------------ Range of Exercise Prices - ------------------------------------------------------------------------------------ $ 44 to 51 4,000 .8 $ 48 $ 67 to 89 247,000 4.0 75 $114 to 231 178,000 8.3 173 - ------------------------------------------------------------------------------------ $44 to 231 429,000 5.8 $116 ====================================================================================
Options Exercisable - -------------------------------------------------------------------------------- Number Weighted Exercisable Average at 12/31/99 Exercise Price - -------------------------------------------------------------------------------- Range of Exercise Prices - -------------------------------------------------------------------------------- $ 44 to 51 4,000 $ 48 $ 67 to 89 206,000 75 $114 to 231 43,000 137 - -------------------------------------------------------------------------------- $44 to 231 253,000 $ 85 ================================================================================
The Company applies APB 25 and related interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed stock option plan. The compensation cost that has been charged against income for its performance-based plan was $3.4, $16.4, and $10.9 million in 1999, 1998, and 1997, respectively. Had compensation cost for the company's two stock-based compensation plans been determined based on the fair value at the grant date for awards under those plans consistent with the method of SFAS 123, the Company's net earnings and earnings per 43 36 share would have changed to the pro forma amounts indicated below:
- -------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------- Net earnings As reported $100,105 $ 96,106 $105,667 Pro forma $ 97,593 $102,191 $107,138 Basic earnings per share As reported $ 13.66 $ 12.99 $ 14.21 Pro forma $ 13.31 $ 13.82 $ 14.41 ====================================================================
10. 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 annual base salary over a consecutive 3-year period during the last ten years of employment plus one half of the highest average annual bonus over a consecutive 5-year period during the last ten 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. Chicago Trust, a subsidiary of Alleghany Asset Management, Inc., 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, 1999 and 1998 (in millions, except percentages):
- -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Change in projected benefit obligations: Projected benefit obligation at beginning of year $57.6 $45.2 Service cost 2.9 2.2 Interest cost 3.5 3.4 Amendments 0.1 5.0 Actuarial (gain) loss (10.1) 5.8 Benefits paid (1.8) (4.0) Projected benefit obligation at end of year $52.2 $57.6 ================================================================================ Change in plan assets: Fair value of plan assets at beginning of year $44.8 $37.2 Actual return on plan assets 5.1 4.8 Company contributions 2.7 8.3 Benefits paid (1.8) (4.0) Adjustment for split off due to AAM spinoff -- (1.5) Fair value of plan assets at end of year $50.8 $44.8 ================================================================================ Funded status $(1.4) $(12.8) Unrecognized net loss 3.1 2.3 Unrecognized prior service cost (4.9) 9.9 Pension liability included in other liabilities $(3.2) $(0.6) ================================================================================
- -------------------------------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------------------------------- Net pension cost included the following expense (income) components: Service cost -- benefits earned during the year $2.9 $2.2 $1.8 Interest cost on projected benefit obligation 3.5 3.4 2.8 Actual return on plan assets (2.0) (2.9) (2.5) Net amortization and deferral 1.8 1.8 1.8 Recognized net actuarial loss 0.2 -- -- - -------------------------------------------------------------------------------- Net periodic pension cost included in costs and expenses $6.4 $4.5 $3.9 ================================================================================
- -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Assumptions used in computing the funded status of the plans are as follows: Range of rates for increases in compensation levels 4.5%-5.0% 4.5%-5.5% Range of weighted average discount rates 7.0%-7.75% 6.0%-6.85% 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 $7.9 million in 1999, $6.3 million in 1998, and $6.2 million in 1997. 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 $1.6 million and $1.5 million at December 31, 1999 and 1998, respectively. The postretirement healthcare and life insurance costs (income) recognized were $.2 million, $(.09) million, and $.6 million for 1999, 1998, and 1997, respectively. 11. Comprehensive Income Comprehensive income requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. Accumulated other comprehensive income of the Company consists of net unrealized gains on investment securities and foreign exchange translation adjustments. 44 37
- ------------------------------------------------------------------------------------------------------------------------------------ Before Tax Net of Tax Tax Expense Amount - ------------------------------------------------------------------------------------------------------------------------------------ 1999 Unrealized holding losses arising during period $(249,327) $ 87,265 $(162,062) Less: reclassification adjustments for gains realized in net income (84,929) 29,725 (55,204) - ------------------------------------------------------------------------------------------------------------------------------------ Change in unrealized loss on investments $(334,256) $ 116,990 $(217,266) ==================================================================================================================================== 1998 Unrealized holding gains arising during period $ 80,227 $ (28,080) $ 52,147 Less: reclassification adjustments for gains realized in net income (7,719) 2,702 (5,017) - ------------------------------------------------------------------------------------------------------------------------------------ Change in unrealized gain on investments $ 72,508 $ (25,378) $ 47,130 ==================================================================================================================================== 1997 Unrealized holding gains arising during period $ 88,391 $ (30,937) $ 57,454 Less: reclassification adjustments for gains realized in net income (853) 299 (554) - ------------------------------------------------------------------------------------------------------------------------------------ Change in unrealized gain on investments $ 87,538 $ (30,638) $ 56,900 ====================================================================================================================================
12. Earnings per share Earnings per share has been computed in accordance with the provisions of SFAS 128. The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the years ended December 31 (in thousands, except share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations $ 100,105 $ 63,381 $ 51,400 Discontinued operations -- 32,725 54,267 - ------------------------------------------------------------------------------------------------------------------------------------ Income available to common stockholders for basic earnings per share 100,105 96,106 105,667 - ------------------------------------------------------------------------------------------------------------------------------------ Effect of dilutive securities -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Income available to common stockholders for diluted earnings per share $ 100,105 $ 96,106 $ 105,667 ==================================================================================================================================== Weighted average common shares outstanding applicable to basic earnings per share 7,330,588 7,396,263 7,433,208 Effect of dilutive securities: Options 108,980 132,729 73,962 - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted weighted average common shares outstanding applicable to diluted earnings per share 7,439,568 7,528,992 7,507,170 ====================================================================================================================================
Contingently issuable shares of 80,657, 78,181, and 58,581 were potentially available during 1999, 1998, and 1997, respectively, but were not included in the computation of diluted earnings per share because the impact was anti-dilutive to the earnings per share calculation. 13. 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 2013. Rent expense was $10.2 million, $9.7 million, and $7.9 million in 1999, 1998, and 1997, respectively. The aggregate minimum payments under operating leases with initial or remaining terms of more than one year are $10.2 million, $9.0 million, $7.4 million, $6.0 million, $4.6 million, and $20.8 million in 2000, 2001, 2002, 2003, 2004 and thereafter, respectively. The Company's subsidiaries 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. 14. Fair Value of Financial Instruments The estimated fair values of the Company's financial instruments are as follows (in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Calculated Calculated Carrying Fair Carrying Fair Amount Value Amount Value - ------------------------------------------------------------------------------------------------------------------------------------ Assets Investments $1,927,747 $1,927,747 $2,126,033 $2,126,033 Notes receivable $ 91,536 $ 91,536 $ 91,536 $ 91,536 Liabilities Debt $ 407,950 $ 407,950 $ 439,795 $ 448,137 ====================================================================================================================================
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. 45 38 Debt: The fair value of the Company's 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. 15. Segments of Business Information concerning the Company's continuing operations by industry segment as of and for the years ended December 31, 1999, 1998 and 1997, respectively, is summarized as follows (in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues from continuing operations Asset management $ 168,306 $ 125,060 $ 78,823 Property and casualty insurance 825,000 508,602 453,135 Mining and filtration 208,554 201,137 203,295 Corporate activities 174,303 84,194 61,401 - ------------------------------------------------------------------------------------------------------------------------------------ Total $1,376,163 $ 918,993 $ 796,654 ==================================================================================================================================== Earnings from continuing operations, before income taxes Asset management $ 54,234 $ 35,733 $ 19,876 Property and casualty insurance 33,412 68,392 60,405 Mining and filtration 28,645 28,507 33,178 Corporate activities 95,582 21,854 9,319 - ------------------------------------------------------------------------------------------------------------------------------------ 211,873 154,486 122,778 Interest expense 32,337 32,271 32,111 Corporate administration 17,632 31,199 25,437 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 161,904 $ 91,016 $ 65,230 ==================================================================================================================================== Identifiable assets at December 31 Asset management $ 103,838 $ 118,458 $ 42,516 Property and casualty insurance 3,461,858 3,064,155 2,240,549 Mining and filtration 332,300 331,714 302,183 Corporate activities 587,029 768,117 729,677 - ------------------------------------------------------------------------------------------------------------------------------------ Total $4,485,025 $4,282,444 $3,314,925 ==================================================================================================================================== Capital expenditures Asset management $ 6,125 $ 1,520 $ 1,100 Property and casualty insurance 5,989 6,284 2,472 Mining and filtration 13,567 19,360 12,057 Corporate activities 1,576 2,605 951 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 27,257 $ 29,769 $ 16,580 ==================================================================================================================================== Depreciation and amortization Asset management $ 2,080 $ 1,262 $ 1,157 Property and casualty insurance 12,936 6,117 6,235 Mining and filtration 16,077 16,812 16,143 Corporate activities 1,717 1,128 643 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 32,810 $ 25,319 $ 24,178 ====================================================================================================================================
16. Quarterly Results of Operations (unaudited) Selected quarterly financial data for 1999 and 1998 are presented below (in thousands, except per share amounts):
- ------------------------------------------------------------------------------------------------------------------------------------ Quarters Ended - ------------------------------------------------------------------------------------------------------------------------------------ Mar. 31 Jun. 30 Sep. 30 Dec. 31 - ------------------------------------------------------------------------------------------------------------------------------------ 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues from continuing operations $276,062 $339,310 $407,248 $353,543 - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings $ 15,954 $ 20,887 $ 56,669 $ 6,595 - ------------------------------------------------------------------------------------------------------------------------------------ Basic earnings per share of common stock: * - ------------------------------------------------------------------------------------------------------------------------------------ Basic net earnings $ 2.17 $ 2.85 $ 7.73 $ .91 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues from continuing operations $206,792 $232,168 $244,613 $235,420 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings from continuing operations $ 12,959 $ 17,228 $ 19,834 $ 13,360 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings from discontinued operations, net of tax 21,241 11,484 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Net earnings $ 34,200 $ 28,712 $ 19,834 $ 13,360 - ------------------------------------------------------------------------------------------------------------------------------------ Basic earnings per share of common stock: * - ------------------------------------------------------------------------------------------------------------------------------------ Continuing operations $ 1.73 $ 2.34 $ 2.70 $ 1.81 - ------------------------------------------------------------------------------------------------------------------------------------ Discontinued operations 2.82 1.56 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Basic net earnings $ 4.55 $ 3.90 $ 2.70 $ 1.81 ====================================================================================================================================
* 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. 46 39 17. Other Information a. Other assets shown in the consolidated balance sheets at December 31, 1999 and 1998 includes goodwill, net of accumulated amortization. The amount of goodwill included in the balance sheet is as follows (in thousands):
- -------------------------------------------------------------------------------- Amortization 1999 1998 Period - -------------------------------------------------------------------------------- Underwriters Re Group $227,877 $202,237 30 years World Minerals 40,480 43,375 40 years Alleghany Asset Management 7,045 -- 30 years Heads and Threads 2,680 2,876 15 years - -------------------------------------------------------------------------------- $278,082 $248,488 ================================================================================
In addition, other assets shown at December 31, 1999 and 1998 includes $97.6 million and $93.4 million, respectively, of deferred acquisition costs. Amortization of deferred acquisition costs included in the 1999, 1998, and 1997 statement of earnings were $172.5 million, $113.2 million, and $94.4 million, respectively. b. Other liabilities shown in the consolidated balance sheets include the following amounts at December 31, 1999 and 1998 (in millions):
- -------------------------------------------------------------------------------- 1999 1998 - -------------------------------------------------------------------------------- Accounts payable $ 26.5 $ 24.8 Reinsurance payable $ 95.6 $ 69.4 Funds held for reinsurers $181.1 $143.8 ================================================================================
c. Property and equipment, net of accumulated depreciation and amortization at December 31, 1999 and 1998, are as follows (in thousands):
- -------------------------------------------------------------------------------- Depreciation 1999 1998 Period - -------------------------------------------------------------------------------- Land $ 14,647 $ 17,157 -- Buildings and improvements 49,255 58,348 30-40 years Furniture and equipment 165,376 148,628 3-20 years Ore reserves 33,803 32,810 30 years Leasehold improvements 10,887 4,868 Various Other 29,329 25,084 - -------------------------------------------------------------------------------- 303,297 286,895 Less: Accumulated depreciation and amortization (95,680) (78,197) - -------------------------------------------------------------------------------- $ 207,617 $ 208,698 ================================================================================
47 40 Independent Auditors' Report Alleghany Corporation and Subsidiaries KPMG LLP Certified Public Accountants 757 Third Avenue New York, NY 10017 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, 1999 and 1998, 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, 1999. These consolidated financial statements, appearing on pages 32 through 47, 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, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ KPMG LLP KPMG LLP February 28, 2000 48 EX-21 5 LIST OF SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF ALLEGHANY Alleghany Asset Management, Inc. (Delaware) Chicago Deferred Exchange Corporation (Illinois) The Chicago Trust Company (Illinois) Security Trust Company (California) Montag & Caldwell Inc. (Georgia) Blairlogie International LLC (Delaware) Pacific Shelf 797 Limited (Scotland) Blairlogie Capital Management (Scotland -- 83.25%) Veredus Asset Management LLC (Kentucky -- 40%) Chicago Capital Management, Inc. (Illinois) Alleghany Properties, Inc. (Delaware) Sacramento Properties Holdings, Inc. (California) Alleghany Funding Corporation (Delaware) Alleghany Capital Corporation (Delaware) Mineral Holdings Inc. (Delaware -- 93.44%) World Minerals Inc. (Delaware) Advanced Minerals Corporation (Delaware) Fluxx Corp. (Delaware) Fluxx France S.A. (France) LeVay & Houseman, Inc. (Nevada) World Minerals Italiana S.r.L. (Italy) World Minerals Espanola, S.A. (Spain) World Minerals (U.K.) Limited (United Kingdom) WM Canada Inc. (Canada) World Minerals do Brasil Ltda. (Brazil) World Minerals Europe, S.A. (France) World Minerals Island, h.f. (Iceland) World Minerals Japan K.K. (Japan) Celite Corporation (Delaware) Celite Europe Corporation (Delaware) Celite France, S.A. (France) Celite B.V. (Amsterdam, the Netherlands) Celite Hispanica, S.A. (Spain) Kisilidjan, h.f. (Iceland -- 48.56%) Celite Mexico S.A. de C.V. (Mexico) Almeria, S.A. de C.V. (Mexico) Diatomita San Nicolas, S.A. de C.V. (Mexico) Celite Pacific Limited (Hong Kong) Celite China Inc. (Delaware) Linjiang Celite Diatomite Company Ltd. (China -- 76.76%) 2 Celite Jilin, Inc. (Delaware) Changbai Celite Diatomite Company Ltd. (China -- 71.76%) Celite Minerals China Corporation (Delaware) Linjiang Lin-Lin Celite Diatomite Company Limited (China -- 73.48%) Celite Chile S.A. (Chile) Sociedad Minera Celite del Peru, S.A. (Peru) Peruco, Inc. (Delaware) Sociedad Minera Ayacuchana, S.A. (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, a.s. (Turkey) Substancias y Mineralas Navajas S.A. de C.V. (Mexico) Europerlite B.V. (Amsterdam, the Netherlands) Europerlita Espanola, S.A. (Spain) Europerlite Italiana, S.p.A. (Italy) 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) Underwriters Reinsurance Company (New Hampshire) Commercial Underwriters Insurance Company (California) Underwriters Insurance Company (Nebraska) Texas Underwriters General Agency, Inc. (Texas) Underwriters Lloyds of Texas (Texas) Newmarket Underwriters Insurance Company (New Hampshire) Underwriters Holdings LLC (Delaware) Venton Holdings Ltd. (Bermuda) Venton Underwriters (Bermuda) Ltd. (Bermuda) Underwriters Re Ltd. (United Kingdom) Underwriting Re Agencies Ltd. (United Kingdom) Yachtsure Ltd. (United Kingdom -- majority owned) Underwriters Re Services Ltd. (United Kingdom) Underwriters Re Risk Services Ltd. "Marinasure" (United Kingdom) Venton Underwriting Management Ltd. (United Kingdom) Underwriters Re Capital Ltd. (United Kingdom) Talbot Underwriting Limited (United Kingdom) Venton Underwriting Ltd. (Bermuda) -2- 3 Admiral Life Insurance Company of America (Arizona) The Center Insurance Services, Inc. (Delaware) Texas Underwriters Management Services Company (Texas) The Center E&S Insurance Agency, Inc. (Georgia) The Center Special Risk Insurance Agency, Inc. (Georgia) The Center Marine Managers, Inc. (New York -- 95%) The Center Financial Markets Insurance Agency, Inc. (Illinois) URC Risk Managers, Inc. (Delaware) Carnegie Holdings, Inc. (California -- 35%) URC Representatives Ltd. (United Kingdom) URC International Inc. (Barbados) URC Management Inc. (Barbados) Heads & Threads International LLC (Delaware) Heads and Threads (PA) LLC (Delaware) -3- EX-23 6 CONSENT OF KPMG 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. 333-37237, 333-57133 and 333-76159 on Forms S-8 and Nos. 33-55707, 33-62477, 333-09881 and 333-13971 on Forms S-3 of our reports dated February 28, 2000, 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, 1999. We also consent to the reference to our Firm in Registration Statement Nos. 333-37237, 333-57133 and 333-76159 and under the heading "Experts" in Registration Statement Nos. 33-55707, 33-62477, 333-09881 and 333-13971. /s/ KPMG LLP New York, New York March 22, 2000 EX-27 7 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND THE CONSOLIDATED STATEMENT OF EARNINGS FOR THE TWELVE MONTHS THEN ENDED. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1,179,845 0 0 470,104 0 0 1,927,747 41,093 844,605 0 4,485,025 1,973,924 419,608 0 0 407,950 0 0 0 1,107,897 4,485,025 719,846 126,461 82,029 447,827 548,459 0 0 161,904 61,799 100,105 0 0 0 100,105 13.66 13.46 0 0 0 0 0 0 0
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