-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, faBljMRlRBoS2KQxJorg5tXrstdaCBZnNSKjaaddk1//hTRV68Aa9AxzSNMCEieg nh1Qjij7Bb+P6TRZpTUh5A== 0000950123-95-000585.txt : 19950615 0000950123-95-000585.hdr.sgml : 19950615 ACCESSION NUMBER: 0000950123-95-000585 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950317 SROS: NYSE 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: 1934 Act SEC FILE NUMBER: 001-09371 FILM NUMBER: 95521480 BUSINESS ADDRESS: STREET 1: PARK AVE PLZ CITY: NEW YORK STATE: NY ZIP: 10055 BUSINESS PHONE: 2127521356 MAIL ADDRESS: STREET 1: PARK AVENUE PLAZA CITY: NEW YORK STATE: NY ZIP: 10055 FORMER COMPANY: FORMER CONFORMED NAME: ALLEGHANY FINANCIAL CORP DATE OF NAME CHANGE: 19870115 10-K 1 ALLEGHANY CORPORATION -- FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION For the fiscal year ended DECEMBER 31, 1994 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) Park Avenue Plaza, New York, New York 10055 ---------------------------------------- ---------- (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 6-1/2% Subordinated Exchangeable New York Stock Exchange Debentures Due June 15, 2014 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, 1995, 6,903,381 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 $854,729,702. 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 1994 Proxy Statement relating to Annual Meeting III of Stockholders of Alleghany Corporation to be held on April 28, 1995 -2- 3 ALLEGHANY CORPORATION Annual Report on Form 10-K for the year ended December 31, 1994 Table of Contents
Description Page ----------- ---- PART I Item 1. Business 5 Item 2. Properties 51 Item 3. Legal Proceedings 58 Item 4. Submission of Matters to a Vote of Security Holders 62 Supplemental Executive Officers of Registrant 62 Item PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 64 Item 6. Selected Financial Data 64 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 64 Item 8. Financial Statements and Supple- mentary Data 64 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 64
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Description Page ----------- ---- PART III Item 10. Directors and Executive Officers of Registrant 65 Item 11. Executive Compensation 65 Item 12. Security Ownership of Certain Beneficial Owners and Management 65 Item 13. Certain Relationships and Related Transactions 65 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 66 Signatures 84
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 Park Avenue Plaza, New York, New York 10055 and its telephone number is (212) 752-1356. Alleghany is engaged, through its subsidiaries Chicago Title and Trust Company ("CT&T"), Chicago Title Insurance Company ("CTI"), Security Union Title Insurance Company ("Security Union") and Ticor Title Insurance Company ("Ticor Title") and their subsidiaries, in the sale and underwriting of title insurance and in certain other financial services businesses. Alleghany is also engaged, through its subsidiary Underwriters Reinsurance Company ("Underwriters"), in the property and casualty reinsurance 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 Heads and Threads division. Until October 31, 1994, Alleghany was also engaged, through its subsidiary Sacramento Savings Bank ("Sacramento Savings") in retail banking. On that date, Alleghany completed the sale of Sacramento Savings and an ancillary company to First Interstate Bank of California for a cash purchase price of $331 million. As part of the transaction, Alleghany, through its wholly owned subsidiary Alleghany Properties, Inc. ("API"), purchased real estate and real estate-related assets of Sacramento Savings for a purchase price of about $116 million. Alleghany's intention with respect to such assets, the bulk of which is raw land, is to dispose of them in an orderly fashion, which may take several years. Based on Alleghany's liquidation plan and anticipated higher carrying costs for the real estate and real estate-related assets, Alleghany expects to realize less than $116 million. Accordingly, and in recognition that no general loss reserves of Sacramento Savings were transferred, Alleghany reduced the carrying value of such assets by about $20 million, net of related tax benefits. -5- 6 Pursuant to the requirements of the Financial Institutions Reform, Recovery and Enforcement Act of 1989, Sacramento Savings was subject to a plan, approved by the Federal Deposit Insurance Corporation, providing for the complete divestiture of its real estate investments and related business. As a result of the sale of Sacramento Savings, Alleghany is no longer subject to such divestiture plan. During 1994 and early 1995, with temporary borrowings under Alleghany's revolving credit agreement, the proceeds from the sale of Sacramento Savings and cash on hand, Alleghany and its subsidiaries acquired a substantial number of shares of common stock of Santa Fe Pacific Corporation ("Santa Fe"). As of March 1, 1995, Alleghany and its subsidiaries owned about 18.1 million shares of Santa Fe, or 11.8 percent of the outstanding common stock of Santa Fe at a cost of $251.3 million and a market price at March 1, 1995 of $381.6 million. Santa Fe operates The Atchison, Topeka and Santa Fe Railway, which transports a broad range of commodities on routes extending from Chicago to the Gulf of Mexico and the West Coast. Alleghany has federal regulatory clearance to make additional purchases of Santa Fe shares up to 15 percent of Santa Fe's outstanding common stock. Alleghany's purchase of additional shares of Santa Fe common stock is dependent upon market conditions, the state of affairs of Santa Fe and of the businesses in which it is engaged and other factors, and is subject to applicable laws and to the availability of shares at prices deemed favorable to Alleghany. Santa Fe is a party to a merger agreement with Burlington Northern Inc. ("Burlington"), pursuant to which shareholders of Santa Fe would receive a minimum of 0.40 shares of Burlington common stock for each share of Santa Fe common stock. Burlington operates Burlington Northern Railroad, which is the largest transporter of grain and coal in North America with routes in 25 states and two Canadian provinces. Based on the number of shares of outstanding common stock of Santa Fe and Burlington as of March 1, 1995, Alleghany would own approximately 4.8 percent of the combined companies after the merger. The merger agreement was approved by the stockholders of Santa Fe and Burlington at their respective special meetings held on February 7, 1995. The merger is conditioned upon the approval of the Interstate Commerce Commission (the "ICC"), which recently stated that it plans to announce its decision by August 23, 1995. -6- 7 On July 31, 1994, Alleghany acquired Montag & Caldwell, Inc. ("Montag & Caldwell"), a privately held investment counseling firm based in Atlanta, Georgia. The transaction was effected through an exchange of stock, and was accounted for by Alleghany as a pooling of interests. After the acquisition, Alleghany contributed Montag & Caldwell to CT&T. On October 7, 1993, Alleghany acquired approximately 93 percent of the issued and outstanding capital stock of the holding company which owns all of the issued and outstanding capital stock of Underwriters for a cash purchase price of approximately $201 million. Alleghany acquired its 93 percent interest in the holding company from a holding company formerly owned by The Continental Corporation, Goldman, Sachs & Co. and certain affiliated investment partnerships, and members of Underwriters management. Prior to the acquisition by Alleghany, The Continental Corporation acquired the interests of the Goldman, Sachs entities for cash and the interests of the members of Underwriters management for cash and the remaining 7 percent of the issued and outstanding capital stock of the holding company which owns Underwriters. In December 1994, Alleghany contributed approximately 6 million shares of Santa Fe common stock, having an aggregate market value of about $100 million, to the holding company, which increased Alleghany's equity interest in the holding company to 96.4 percent as of 1994 year-end. In 1994 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. Alleghany experienced the following executive officer changes in 1994 and early 1995. Theodore E. Somerville, formerly Vice President and General Counsel of Alleghany, retired effective as of December 31, 1994, and John E. Conway, formerly Vice President, Secretary and Treasurer of Alleghany, retired effective as of January 31, 1995. Robert M. Hart was appointed Senior Vice President and General Counsel of Alleghany in September 1994, and was appointed to the additional office of Secretary effective January 1, 1995. Peter R. Sismondo, Vice President, Controller and Assistant Secretary of Alleghany, was appointed to the additional office of Treasurer, effective January 1, 1995. -7- 8 Reference is made to Items 7 and 8 of this Report for further information about the business of Alleghany in 1994. The consolidated financial statements of Alleghany, incorporated by reference in Item 8 of this Report, include the accounts of Alleghany and its subsidiaries for all periods presented. TITLE INSURANCE AND TRUST BUSINESS Title Operations - ---------------- CT&T, headquartered in Chicago, is engaged in the sale and underwriting of title insurance and related services (including abstracting, searches, and escrow, closing and disbursement services) through CTI, Security Union, Ticor Title and their title insurance subsidiaries, collectively known as the CT&T Family of Title Insurers. Organized as an Illinois corporation in 1912, CT&T was acquired, along with CTI, by Alleghany in June 1985. CTI, a Missouri corporation incorporated in 1961, succeeded to businesses conducted by predecessor corporations since 1847. Security Union (acquired in 1987) and Ticor Title (acquired in 1991) were incorporated in California in 1962 and 1965, respectively, but both were a part of business organizations that had succeeded to businesses conducted since around the turn of the century. On March 8, 1991, CT&T acquired Ticor Title Insurance Company of California (which was Ticor Title's immediate parent prior to its merger into CTI in September 1992), from Westwood Equities Corporation for a total cash purchase price of $55.6 million and a promissory note in the principal amount of $15 million, subject to adjustment. The principal amount of the promissory note issued by CT&T to Westwood Equities Corporation, which will mature on March 31, 1995, was subject to an increase to $20 million or a decrease to zero based on a re-evaluation of the title loss reserves of Ticor Title Insurance Company of California and its subsidiaries as of December 31, 1994. The re-evaluation consisted of a formula-driven projection of ultimate claims payments on policies which existed at the date of acquisition, and was based on actual claims payments through December 31, 1994. Based on the re-evaluation, the principal amount of the promissory note is zero and, accordingly, Alleghany has excluded this note from the determination of the purchase price and from its consolidated financial statements. -8- 9 The CT&T Family of Title Insurers is the largest title insurance organization in the world. Each of the principal title insurance subsidiaries -- CTI, Security Union and Ticor Title -- was assigned a claims-paying ability rating of "A-" by Standard & Poor's Corporation in 1993 and 1994, confirming the financial strength of the CT&T Family of Title Insurers. These subsidiaries were rated by Duff & Phelps Credit Rating Co. for the first time in 1994 and assigned a claims-paying ability of "A". The CT&T Family of Title Insurers has approximately 250 full-service offices and more than 3,500 policy-issuing agents in 49 states, Puerto Rico, the Virgin Islands and Canada. CTI is headquartered in Chicago, and Security Union and Ticor Title are headquartered in Rosemead, California. As CT&T's title insurance operations have grown, CT&T has sought to improve the effectiveness and efficiency of the company as a whole. One initiative was the development and implementation of Quest for Excellence, a customer-focused assessment of product quality. This project identified issues that are important to CT&T's customers in their relationships with CT&T, and provided training and support to CT&T's personnel to enable them to be more responsive to their customers' title insurance needs. In late 1994, CT&T's title insurance operations were realigned to improve CT&T's service to customers at both the local and national levels. The CT&T Family of Title Insurers' nationwide network of branch office and agency operations was restructured into eight geographic areas: the Northeast, Southeast, Great Lakes, Southwest, Chicago Central, Chicago Metro and Pacific Northwest regions, and the Western division. CT&T also restructured its national operations organization in 1994 to address emerging market trends reflecting the increasing importance of national residential lenders, and regional and national players in the commercial market. Among these trends is the preference among national residential lenders for bundled services from suppliers as a means of reducing costs and enhancing efficiency. Accordingly, a new national Mortgage Services Unit was established to develop and provide a range of ancillary mortgage services including appraisals, flood plain certifications, and credit reports. To meet more effectively the needs of national commercial customers, the National Business Unit and National Title Services offices were restructured and now report centrally to an expanded corporate marketing operation. These offices serve as a one-stop source of title services for both -9- 10 single-site and multi-site commercial and industrial real estate ventures. Other business components of the national operations organization include the National Accounts Unit, a one-stop source for national residential lenders and low liability commercial accounts; SAFETRANS, which provides one-stop title services to employee relocation firms; and Heritage American Insurance Services, a limited general line insurance broker which markets mortgage layoff insurance, homeowners insurance and mortgage life insurance. CT&T's title insurance operations in the state of California have inaugurated Action '95, an ambitious program to create a customer-focused organization that better insulates CT&T's California operation from market cycles, while enhancing the operation's profitability and competitive position. During 1994, Richard P. Toft, who is a Senior Vice President of Alleghany, President and Chief Executive Officer of CT&T, and Chairman of CTI, also assumed the vacant office of Chairman of CT&T. Richard L. Pollay, who was President and Chief Operating Officer of CTI, became President and Chief Executive Officer of CTI and Vice-Chairman of CT&T. Trust Operations/Financial Services Group - ----------------------------------------- CT&T is a qualified Illinois trust company and conducts certain other financial services businesses through its Financial Services Group. This group includes Montag & Caldwell, an Atlanta-based investment counseling firm acquired by Alleghany in July 1994 and subsequently contributed to CT&T. As of December 31, 1994, CT&T and Montag & Caldwell together managed $7.06 billion in assets. The Financial Services Group comprises six businesses, as follows: -- The institutional investment management group manages equity and fixed income institutional assets primarily for employee benefit plans, foundations and insurance companies. -- The employee benefits services group offers profit sharing plans, matching savings plans, money purchase pensions and consulting services, and 401(k) salary deferral plans to mid-sized companies in the upper Midwest and South. -10- 11 -- The personal trust and investment services group provides investment management and trust and estate planning services primarily for accounts in the $250,000 to $15 million range. -- The real estate trust services group offers land trusts which permit real estate to be conveyed to a trustee while reserving to the beneficiaries the full management and control of the property. This group also facilitates tax-deferred exchanges of income-producing real property. -- Montag & Caldwell, founded in 1945, manages equity, fixed income and balanced portfolios for institutional, corporate and individual investors. As of December 31, 1994, Montag & Caldwell managed assets totalling $3.22 billion. -- In December 1993, CT&T received clearance from the Securities and Exchange Commission to establish a new investment management company, CT&T Funds. Currently, CT&T Funds offers seven no-load, open-end mutual funds to the general public: the CT&T Growth and Income Fund, a fund invested mainly in common stocks, the Montag & Caldwell Growth Fund, a fund which seeks long-term capital appreciation, the CT&T Talon Fund, a fund invested mainly in equity securities, the Montag & Caldwell Balanced Fund, a fund invested in a combination of equity, fixed income and short-term securities, the CT&T Intermediate Fixed Income Fund, a fund invested mainly in intermediate taxable bonds, the CT&T Intermediate Municipal Bond Fund, a fund invested mainly in intermediate municipal bonds, and the CT&T Money Market Fund, a fund invested mainly in short-term investments. While available to the general public, fund marketing is focused on attracting rollover funds from existing clients in CT&T's 401(k) and pension fund programs, and marketing to title insurance policyholders and other company affinity groups. CT&T also owns Security Trust Company, a California corporation, which is a full-service trust company offering a wide array of fiduciary and financial services including tax deferred exchanges, title holding trusts, personal investments and retirement plan services. General Description of Title Insurance - -------------------------------------- The CT&T Family of Title Insurers insures a variety of interests in real property. For a one-time premium, purchasers -11- 12 of residential and commercial properties, mortgagees, lessees and others with an interest in real property, purchase insurance policies to insure against loss suffered as a result of any encumbrances or other defects in title, as that title is defined in the policy. Prior to the issuance of a policy, a title insurer conducts a title search and examination of the property, a process by which it identifies risks and defines the risks to be assumed by the insurer under the policy. To conduct a title search and examination, an agent or employee of the CT&T Family of Title Insurers reviews various records providing a history of transfers of interests in the parcel of real estate with respect to which a policy of title insurance is to be issued. These records are maintained by local governmental entities, such as counties and municipalities. Title records, known as title plants, owned by the CT&T Family of Title Insurers are also used as a reference, allowing complete title searches without resorting to governmental records. The CT&T Family of Title Insurers' title plants consist of compilations of land title and deed information copied from public records dating back many years on properties in various geographical locations. These title plants are updated daily. Marketing - --------- The CT&T Family of Title Insurers issues title insurance policies directly through its branch office operations as well as through policy-issuing independent agents. The CT&T Family of Title Insurers also sometimes issues policies of insurance in situations where the title search and examination process is performed by approved attorneys working as independent contractors. The primary sources of title insurance business are the major participants in local real estate markets: attorneys, builders, commercial banks, thrift institutions, mortgage banks and real estate brokers. Other significant sources of business are large commercial developers and real estate brokerage firms operating on a national scale. The title insurance business of the CT&T Family of Title Insurers is not dependent on one or a few customers. The title insurance industry is highly sensitive to the volume of real estate transactions and to interest rate levels. The title industry was adversely affected by the recession and severely depressed real estate markets in 1990 and 1991. However, interest rates began to drop in 1992 and in 1993 -12- 13 reached new thirty-year lows. Driven by first-time buyers enticed into the market by the low interest rates, home sales increased 11.1 percent in 1992, and 3.4 percent in 1993. The 1993 home sales figures came within 5 percent of the all-time high recorded in 1978, producing record levels of title operations revenues and pre-tax earnings at CT&T. Low interest rates also resulted in a high volume of refinancing orders, including a record number of such orders in the last three quarters of 1993 and the first quarter of 1994. Beginning in February 1994, the Federal Reserve Board implemented a series of increases in short-term interest rates in an effort to forestall inflation. This action brought to an abrupt end one of the longest refinancing surges in history. While the decline in refinancing activity in 1994 was partially offset by an increase in revenues from conventional sales and resales and by modest improvement in commercial real estate activity, the overall industry-wide decline in revenues and volume of orders from 1993 to 1994 was the steepest downturn the industry experienced since it began keeping those statistics in the early 1960's. Interest rates have continued to rise in 1995, further depressing real estate markets. Thus far in 1995, title orders have been at a low level and, absent an improvement in real estate markets, CT&T's 1995 earnings are expected to be lower than in 1994. The first priority of CT&T's management in 1995 will be to keep costs in line with the anticipated reduced volume of title business. The business of the CT&T Family of Title Insurers is seasonal, as housing activity is seasonal. The strongest quarter is typically the third quarter because there are more home sales and commercial construction during the summer; the first quarter is typically the weakest quarter. Revenues generally are recognized by CT&T at the time of the closing of the real estate transaction with respect to which a title insurance policy is issued; accordingly, there is typically a lag of about two months between the time that a title insurance order is placed, at which time work commences, and the time that CT&T recognizes the revenues associated with the order. Approximately 70 percent of the revenues of the CT&T Family of Title Insurers in 1994 are estimated to have been generated by residential real estate activity, consisting of resales (50 percent), refinancings (6 percent) and new housing (14 percent). Commercial and industrial real estate activity is estimated to account for the remaining 30 percent of 1994 revenues, attributable to initial sales and resales (23 percent) and refinancings (7 percent). -13- 14 Underwriting Operations; Losses and Loss Adjustment Expenses - ------------------------------------------------------------ While most other forms of insurance provide for the assumption of risk of loss arising out of unforeseen future events, title insurance serves to protect the policyholder from the risk of loss from events that predate the issuance of the policy. This distinction underlies the low claims loss experience of title insurers as compared with other insurance underwriters. Realized losses generally result from either judgment errors or mistakes made in the title search and examination process or the escrow process, or from other problems such as fraud or incapacity of persons transferring property rights. Operating expenses, on the other hand, are higher for title insurance companies than for other companies in the insurance industry. Most title insurers incur considerable costs relating to the personnel required to process forms, search titles, collect information on specific properties and prepare title insurance commitments and policies. Many title insurers also face ongoing costs associated with the establishment, operation and maintenance of title plants, or, in the case of smaller regional title insurers, access to title plants owned by others or employment of abstractors to search public records on behalf of such regional title insurers. The CT&T Family of Title Insurers' operations facilitate rapid communication between field underwriters and the principal office underwriting staff for dealing with difficult, large or unusual underwriting risks. Authority levels for field underwriters are set on the basis of an evaluation of their skills and experience level. The most experienced field underwriters are required to be involved in the decision to insure difficult, large or unusual risks. Risks with very high potential liability require approval from higher levels of the title insurer's management, which may include, dependent upon the particular risk, the Chief Underwriting Counsel, the General Counsel or senior executive officers of the title insurer. Geographic concentration of risk is less significant in underwriting title insurance coverage than in casualty insurance lines. The title insurance underwriting process reduces the number of perils which are covered on an actuarial basis to a minimum through reliance on state public records acts. However, maintaining geographic diversity spreads the risk of fraud which may result from regional economic recession, and of claims which are not readily determinable from public records, such as aboriginal title claims of Native Americans. -14- 15 CTI, Security Union and Ticor Title each have generally restricted the size of any one risk of loss that they will retain to $70 million, $30 million and $50 million, respectively. The title insurers in the CT&T Family of Title Insurers reinsure risks with each other and with other title insurance companies in excess of what they are willing to retain. In addition, the title insurers have purchased reinsurance coverage for individual losses in excess of $12.5 million, subject to certain exclusions. This coverage will pay 90 percent of such losses up to $50 million. However, reinsurance arrangements do not relieve a title insurance company that issues a policy from its legal liability to the holder of the policy and, thus, the risk of nonperformance by the assuming reinsurer is borne by the issuer of the policy. The largest single liability on CT&T's books is its reserve for title insurance claims. Historical experience with respect to payments made under title insurance policies indicates that, for policies issued in a given year, approximately two-thirds of the total projected payments with respect to such policies are made within four years of the issuance of such policies. Investment Operations - --------------------- Investments held by CT&T or any of its subsidiaries must comply with the insurance laws of the state of incorporation of the company holding the investment; relevant states are Illinois, Missouri, California, New York and Oregon. These laws prescribe the kind, quality and concentration of investments which may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks and real estate mortgages. CT&T's current investment strategy is to maximize after-tax investment income through a high-quality diversified investment portfolio, consisting primarily of taxable and tax-exempt fixed maturity securities, while maintaining an adequate level of liquidity. The duration of the investment portfolio approximates 3.0 years. CT&T may adjust the maturity of its investment portfolio from time to time as necessary to maintain a reasonable relationship between the maturity of its liabilities and its portfolio assets. -15- 16 The following table reflects investment results for CT&T for the year ended December 31, 1994 (in thousands except percentages): Investment Results
Net Pre-Tax Pre-Tax After-Tax Realized After Average Investment Investment Gains/ Effective Tax Investment(1) Income(2) Income(3) Losses Yield(4) Yield(5) ------------- ---------- ---------- ----------- --------- -------- $899,246 $51,385 $36,502 ($5,447) 5.7% 4.1%
(1) Average of amortized cost of fixed maturities plus cost of equity securities at beginning and end of period, excluding operating cash. (2) Excludes realized gains or losses from sale of investments. (3) Pre-tax investment income less appropriate income taxes. (4) Pre-tax investment income for the period divided by average investments for the same period. (5) After-tax investment income for the period divided by average investments for the same period. -16- 17 The following table summarizes the investments of CT&T, excluding cash, as of December 31, 1994, with all investments carried at market value (in thousands except percentages): Investments
Amortized Cost or Cost Market Value --------------------- --------------------- Amount Percentage Amount Percentage Short-term investments $104,766 12.1% $104,766 12.3% Corporate bonds 119,303 13.8% 115,408 13.6% United States government and government agency bonds 201,339 23.2% 198,709 23.4% Mortgage- and asset-backed securities 140,829 16.3% 133,429 15.7% Municipal bonds 234,868 27.1% 231,363 27.3% Foreign bonds 391 0.0% 356 0.0% Redeemable preferred stock 5,754 0.7% 5,218 0.7% Other preferred stock 2,497 0.3% 2,281 0.3% Equity securities 56,485 6.5% 57,035 6.7% -------- ----- -------- ----- Total $866,232 100.0% $849,565 100.0%
The following table indicates the composition of the long-term fixed maturity portfolio, including preferred stock, as of December 31, 1994 by the rating system of the National Association of Insurance Commissioners ("NAIC") (in thousands except percentages): Long-Term Fixed Maturity Portfolio by NAIC Rating
Market Value Percentage ------ ---------- NAIC 1 . . . . . . . . . . . . . . . . . . . . . $617,237 89.9% NAIC 2 . . . . . . . . . . . . . . . . . . . . . 47,590 6.9% NAIC 3 . . . . . . . . . . . . . . . . . . . . . 8,902 1.3% NAIC 4 . . . . . . . . . . . . . . . . . . . . . 5,536 0.8% NAIC L & P3 (Preferred stock-redeemable) . . . . 5,218 0.8% NAIC A, L & P3 (Preferred stock-other). . . . . . 2,281 0.3% -------- ----- Total $686,764 100.0%
-17- 18 The following table indicates the composition of the long-term fixed maturity portfolio, including preferred stock, by years until maturity as of December 31, 1994 (in thousands except percentages): Long-Term Fixed Maturity Portfolio by Years Until Maturity
Market Value Percentage ------ ---------- One year or less* . . . . . . . . . . . . . . . . $193,372 28.2% Over one through five years . . . . . . . . . . . 257,625 37.5% Over five through ten years . . . . . . . . . . . 58,959 8.6% Over ten years . . . . . . . . . . . . . . . . . 43,379 6.3% Mortgage- and asset-backed . . . . . . . . . . . 133,429 19.4% -------- ----- Total $686,764 100.0%
* Included in this category are $2,281 of preferred stock-other and $5,218 of preferred stock-redeemable. The principal tangible asset of CT&T is its investment portfolio. The entire investment portfolio is classified as available for sale. CT&T has a conservative investment philosophy with respect to both asset quality and maturity distribution. CT&T maintains a short-term investment portfolio ranging from approximately $100 million to $150 million, consisting of top rated commercial paper (A-1, P-1), highest rated bank CD's, and institutional money market funds. The average maturity period is approximately 30 days. CT&T's long-term portfolio consists of top rated tax exempt bonds, United States Treasury securities, corporate bonds of United States issuers, mortgage backed securities, and a limited amount of publicly traded common stocks. Average quality of the long-term portfolio is maintained at a Moody's rating of Aa3 or higher, with over 97 percent of all securities rated investment grade by Moody's and less than 1 percent in derivative instruments as of 1994 year-end. The duration of securities in the long-term portfolio is approximately 3.0 years, and is managed within a range of 2.3 to 4.0 years. This relatively short average portfolio maturity is maintained so that investment income responds to changes in the level of interest rates, offsetting to some degree the cyclicality of title insurance operations. -18- 19 CT&T does not specifically match particular assets to related liabilities, but instead holds the investment portfolio to a shorter maturity than liabilities. However, asset allocation and bond portfolio maturity are modified periodically based on the market outlook, interest rates and/or title insurance operating conditions. Competition - ----------- The title insurance industry is competitive throughout the United States, with large firms such as CT&T's title insurers competing on a national basis, while smaller firms have significant market shares on a regional basis. During 1994, CTI, Security Union, Ticor Title, First American Title Insurance Company, Commonwealth Land Title Insurance Company, Stewart Title Insurance Co., Fidelity National Title Insurance Co., Lawyers Title Insurance Corporation and Old Republic Title Insurance Group, Inc. together accounted for more than 85 percent of the revenues generated by title insurance companies. The CT&T Family of Title Insurers also competes with abstractors, attorneys issuing opinions and, in some areas, state land registration systems. Competition in the title insurance industry is primarily on the basis of service. In addition, the financial strength of the insurer has become an increasingly important factor in title insurance purchase decisions, particularly in multi-site transactions and investment decisions regarding real estate-related investment vehicles such as real estate investment trusts and real estate mortgage investment conduits. In connection with their financial services activities, CT&T and Montag & Caldwell compete with national, regional and local providers of financial services. Such competition is chiefly on the basis of service and investment performance. Regulation - ---------- Title insurance companies are subject to regulation and supervision by state insurance regulators under the insurance statutes and regulations of states in which they are incorporated. CTI is incorporated in Missouri, Security Union is incorporated in California and has a title insurance subsidiary incorporated in Oregon, and Ticor Title is incorporated in California and has a title insurance subsidiary incorporated in New York. Each of these companies is also regulated in each jurisdiction in which it is authorized to write title insurance. Regulation and supervision vary from -19- 20 state to state, but generally cover such matters as the standards of solvency which must be met and maintained, the nature of limitations on investments, the amount of dividends which may be distributed to a parent corporation, requirements regarding reserves for unearned premiums and losses, the licensing of insurers and their agents, the approval of policy forms and premium rates, periodic examinations of title insurers and annual and other reports required to be filed on the financial condition of title insurance companies. The Financial Services Group of CT&T acts as a fiduciary, and is primarily regulated by the State of Illinois Commissioner of Banks and Trust Companies. Regulation covers such matters as the fiduciary's management capabilities, 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, as a registered investment advisor, is subject to regulation by the Securities and Exchange Commission, the state of Georgia, its domiciliary jurisdiction, and all other states in which it is licensed to act in the capacity of investment advisor. Employees - --------- At December 31, 1994, CT&T and its subsidiaries had approximately 7,650 employees. PROPERTY AND CASUALTY REINSURANCE BUSINESS Underwriters, headquartered in Woodland Hills, California, provides reinsurance to property and casualty insurers and reinsurers. Underwriters initially was organized in 1867 as a primary insurer in New York under the name "Buffalo German Insurance Company." By 1970, Underwriters had become principally a reinsurer, and in 1977 it changed its corporate domicile to New Hampshire. Underwriters is licensed in 37 states, Puerto Rico and the District of Columbia, is authorized to engage in business in three additional states and Canada, and has branch offices in Atlanta, Chicago, Houston, New York and Woodland Hills. In early 1987, members of current management joined Underwriters and shortly thereafter began a program to restructure its reinsurance portfolio and operations. Among other steps, the restructuring undertaken by the new management included (i) strengthening Underwriters' reserves for pre-1987 business and the purchase from The Continental Corporation of two reinsurance contracts providing coverage for pre-1987 business up to an -20- 21 aggregate limit of $200 million, (ii) tightening underwriting standards by initiating a program of pre-underwriting audits of prospective treaty business, (iii) expanding claims audits to improve monitoring of reported and unreported claims and (iv) employing actuaries to oversee underwriting activities and reserve practices. The restructuring contributed to an increase in the statutory surplus of Underwriters from $130.0 million at 1987 year-end to $185.0 million at September 30, 1993, after payment of more than $139.5 million in dividends over such period to its parent company. In October 1993, Alleghany acquired approximately 93 percent of the holding company which owns Underwriters, and thereafter contributed about $51 million in 1993 and $100 million in 1994 to the capital of Underwriters. The capital contribution in 1994 was in the form of about 6 million shares of Santa Fe common stock. As of December 31, 1994, Underwriters' statutory surplus was $361 million. Underwriters' management currently owns about 3.6 percent of the capital stock of the holding company which owns Underwriters. Underwriters is currently rated "A (Excellent)" by A.M. Best Company, Inc., an independent insurance industry rating organization ("Best's"). Best's publications indicate that this rating is assigned to companies which Best's believes have achieved excellent overall performance and have a strong ability to meet their obligations over a long period of time. According to Best's, the rating reflects Underwriters' strong capital base, reduced debt service obligations and operating performance. Alleghany's acquisition of Underwriters was accounted for as a purchase and, therefore, the accounts of Underwriters and its results of operations included in Alleghany's financial statements reflect purchase accounting adjustments and are not comparable to Underwriters' prior reported results. To capitalize on advantageous market conditions for certain primary insurance business lines and on Underwriters' expertise in specialized coverages, Underwriters established Commercial Underwriters Insurance Company ("CUIC") at the end of 1992. CUIC is a California property and casualty insurance company that focuses on specialized primary insurance lines in California on an admitted basis and in other states on an approved, non-admitted basis. In 1994, CUIC generated $30 million in gross written premiums. Underwriters or CUIC retained $14.4 million of such amount, constituting 7 percent of Underwriters' consolidated net written premiums in 1994. -21- 22 To further expand its ability to market specialized primary insurance lines in states outside California, Underwriters acquired for $10 million an inactive Nebraska insurance company with licenses to write primary property and casualty insurance in 31 states and the District of Columbia; subsequently, the acquired company was renamed Underwriters Insurance Company ("UIC"). In connection with the acquisition, Underwriters was indemnified for all losses that occurred prior to the acquisition date. A capital contribution of $100 million was made to UIC, consisting principally of about 5 million shares of Santa Fe common stock, thereby increasing UIC's statutory surplus to $112.1 million at 1994 year-end. UIC will focus primarily on specialized primary insurance lines outside California. CUIC and UIC are rated "A (Excellent)" by Best's. General Description of Reinsurance - ---------------------------------- Reinsurance is an agreement between two insurance companies in which one company, the "reinsurer," agrees to indemnify the other company, the "cedent" or "ceding company," for all or part of the insurance risks underwritten by the ceding company. Reinsurance provides ceding companies with three major benefits: it reduces net liability on individual risks, protects against catastrophic losses and helps to maintain acceptable surplus and reserve ratios. Related to the last of these, reinsurance also 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 appropriately collateralized. 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 its obligation to others for loss or damage to persons or property. Property and casualty reinsurance such as that provided by Underwriters protects the ceding company against loss to the extent of the reinsurance coverage provided. While both property and casualty reinsurance involve a high degree of volatility, property losses are generally reported within a relatively short time period after the event, while there tends to be a greater lag in the reporting -22- 23 and payment of casualty claims. Consequently, the ultimate losses associated with property risks are generally known in a shorter time than losses associated with casualty risks. Underwriters provides reinsurance on both a treaty and facultative basis. Treaty reinsurance is reinsurance based on a standing arrangement (a "treaty"), usually for a year, between a cedent and reinsurer for the cession and assumption of risks defined in the treaty. Under most treaties, the cedent is obligated to offer and the reinsurer is obligated to accept a specified portion of all such risks originally underwritten by the cedent. Risks are assumed under treaties without having been individually reviewed. Facultative reinsurance is the reinsurance of individual risks. Rather than agreeing to reinsure all or a portion of a class of risk, the reinsurer separately rates and underwrites each individual risk and is free to accept or reject each risk offered by the reinsured. Facultative reinsurance is normally purchased by insurance companies for risks not covered or covered only in part by their reinsurance treaties, and for unusual risks. Generally, as the supply of treaty reinsurance decreases, the demand for facultative reinsurance increases. Underwriters writes treaty and facultative reinsurance in both of the major forms, pro rata and excess of loss. The pro rata form is an agreement in which the ceding company and reinsurer share the premiums as well as the losses and expenses of a single risk, or an entire group of risks, based upon an established percentage. Under excess of loss reinsurance, 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 taking the risk from the cedent's retention level up to an established level, above which the risk is assumed by another reinsurer or reverts to the cedent. Excess of loss reinsurance allows the reinsurer to control better the relationship of the premium charged to the exposures assumed. The reinsurer assuming the risk immediately above the cedent's retention level is said to write "working layer" or "low layer" excess of loss reinsurance. A loss that reaches just beyond the cedent's retention level would create a loss for the lower level reinsurers but not for the reinsurers on higher levels. -23- 24 Marketing - --------- Underwriters primarily reinsures commercial general, auto and umbrella liability, professional liability, directors and officers' liability, workers' compensation, homeowners, marine and aviation and property clash* and catastrophe risks. Premiums associated with such risks comprised approximately 91 percent of Underwriters gross written premiums for the year ended December 31, 1994. Underwriters concentrates on coverages requiring specialized underwriting expertise and a high degree of actuarial analysis. An important element of Underwriters' marketing strategy is to respond quickly to market opportunities (such as increased demand or more favorable pricing) by adjusting the mix of the different lines of property and casualty business it writes. As an example, between 1989 and 1994, the worldwide reinsurance industry experienced unusual catastrophic losses, in terms of both frequency and severity, from a variety of natural disasters, including Hurricanes Hugo, Andrew and Iniki, and the Northridge earthquake. This extended period of unusual catastrophic losses has caused many reinsurers to reduce the amount of property catastrophe coverage they are prepared to write. The reduction in capacity has led to improved terms available in the reinsurance market for such risks. Underwriters has increased its writings and retentions of this business because it believes that substantial increases in premium rates for property catastrophe coverage, combined, in certain instances, with higher deductibles retained by ceding companies, have improved the risk/reward relationship on such coverage. Underwriters also writes certain unusual professional, environmental and directors and officers' liability risks, again in the belief that these risks offer greater potential for favorable results than more general risks, based on current premium rates. Underwriters' business is not seasonal. Underwriters writes almost all of its treaty business and 70 percent of its facultative business through reinsurance brokers. The remainder of its facultative business is written directly with ceding companies. By working primarily through brokers, Underwriters does not need to maintain a large sales organization which, during periods of reduced premium volume, could comprise a significant and non-productive part of overhead. - ------------------------------ * An excess of loss reinsurance policy covering losses arising from a single set of circumstances covered by more than one primary insurance policy. -24- 25 In addition, Underwriters believes that submissions from the broker market, including certain targeted specialty coverages, are more numerous and diverse than would be available through a salaried sales organization, and Underwriters is able to exercise greater selectivity than would usually be possible in dealing directly with ceding companies. Reinsurance brokers regularly approach Underwriters and others for quotations on reinsurance being placed on behalf of the ceding companies. In 1994, Underwriters paid brokers $9 million in commissions, which represents 3 percent of its gross written premiums of $265 million. Underwriters' five leading brokers, Pegasus Advisors, Inc., Guy Carpenter & Co., AM-RE Brokers, Inc., Willcox, Inc. and Sedgwick Payne Company, accounted for 42 percent of Underwriters' gross written premiums in 1994. Pegasus Advisors, Inc. alone accounted for 11 percent of such premiums; none of the other brokers accounted for 10 percent or more of such premiums. However, loss of all or a substantial portion of the business provided by these five brokers could have a material adverse effect on the results of operations of Underwriters. A significant percentage of Underwriters' gross written premiums are generally obtained from a relatively small number of ceding companies. In 1994, approximately 52 percent of gross written premiums were obtained from Underwriters' ten largest ceding companies. Due to the nature of Underwriters' business, the ceding companies accounting for relatively large percentages of gross written premiums tend to vary from year to year. While Underwriters has generally been successful in replacing accounts that have not been renewed, there can be no assurance that it will be able to do so in the future. Underwriters does not believe that the loss of any one ceding company account would have a material effect on Underwriters' financial condition or results of operations. Underwriting Operations - ----------------------- Underwriters maintains a disciplined underwriting strategy with a focus on generating profitable business rather than on increasing market share. Underwriters has maintained a defensive underwriting posture by withdrawing from lines of business that it considers to offer inadequate contract terms. Underwriters' underwriting discipline is enhanced by its focus on excess of loss casualty reinsurance with low level attachment points (i.e., dollar-levels at which risk is assumed). Such layers are characterized by greater loss frequency, lower loss severity and quicker loss settlement than layers with higher -25- 26 attachment points. Underwriters believes that these factors result in greater predictability of losses, which improves Underwriters' ability to analyze its exposures and price them appropriately. Underwriters seeks to serve as lead or co-lead reinsurer on its treaties. As lead or co-lead reinsurer, Underwriters believes that it is able to more effectively influence the pricing and terms of the treaties and achieve better underwriting results. During 1994, Underwriters was a lead or co-lead reinsurer on a majority of its treaty business. Treaty operations generated approximately $141.6 million or 71 percent of Underwriters' consolidated net written premiums in 1994. Casualty lines treaties represented approximately 68 percent of total treaty net written premiums with the remainder represented by property lines treaties. Approximately 71 percent of total treaty net written premiums represented treaty reinsurance written on an excess of loss basis and the balance represented treaty reinsurance written on a pro rata basis. In 1994, treaty net written premiums increased 7 percent from 1993 due to the increased writing of property catastrophe, clash coverage and certain excess and surplus lines. Underwriters' treaty department generally wrote up to $1 million per risk in 1994. In the case of certain clash coverage, Underwriters' treaty department has written up to $2.5 million on a net basis and in limited circumstances has accepted more. The largest net risk assumed in 1994 was $14 million. Facultative operations generated approximately $44.6 million or 22 percent of Underwriters' consolidated net written premiums in 1994. Casualty risks represented 92 percent of total facultative net written premiums with property risks comprising the remainder. Over 90 percent of total facultative net written premiums represented facultative reinsurance written on an excess of loss basis and the balance represented facultative reinsurance written on a pro rata basis. Facultative net written premiums increased 7 percent, or $3.1 million, from 1993. In 1994, Underwriters offered gross casualty facultative underwriting capacity of $2.5 million, with a net retention of $1.6 million. Underwriters has a $2 million gross property facultative underwriting capacity with a net retention of $0.6 million. -26- 27 Retrocessional Arrangements - --------------------------- A reinsurer often reinsures some of its risk with other reinsurers ("retrocessionaires") pursuant to retrocessional agreements, and pays such retrocessionaires a portion of the premiums it receives. Reinsurance companies enter into retrocessional agreements for the same reasons that primary insurers purchase reinsurance. Underwriters has retrocessional agreements with a number of domestic and international reinsurance companies. Retrocessional contracts do not relieve Underwriters from its obligations to ceding companies and Underwriters remains liable to its ceding companies for the portion reinsured to the extent that any retrocessionaire does not meet the obligations assumed under the retrocessional agreements. Consequently, one of the most important factors in Underwriters' selection of retrocessionaires is financial strength. Underwriters carefully evaluates potential retrocessionaires, and, once engaged, monitors the financial condition of such retrocessionaires and takes appropriate actions to eliminate or minimize bad debt exposure. As a general rule, Underwriters requires that unpaid losses and loss adjustment expenses for non-admitted reinsurers that are unregulated by United States insurance regulatory authorities be collateralized by letters of credit, funds withheld or pledged trust agreements. Actions such as drawdowns of letters of credit provided as collateral, cessation of relationships and commutations may be taken to reduce or eliminate exposure when necessary. Because of these precautions, Underwriters did not experience any significant difficulty with retrocessionaires fulfilling their obligations in 1994 and 1993. As of December 31, 1994, Underwriters had an allowance for estimated unrecoverable reinsurance of $1.8 million. Underwriters currently has reinsurance contracts in force which cede to retrocessionaires risks in excess of Underwriters' net risk retention, ceding up to $0.9 million per casualty facultative risk and up to $1.4 million per property facultative risk. Underwriters also has an aggregate reinsurance contract to cover losses, up to $40 million, incurred during the period July 1, 1994 through June 30, 1995 in excess of a 75 percent loss and loss adjustment expense ratio. The contract covers essentially all lines of business written by Underwriters; however, property catastrophe losses are subject to a sublimit of $30 million. Also, Underwriters from time to time purchases retrocessional reinsurance in varying amounts for specific assumed treaties. -27- 28 As of December 31, 1994, Underwriters had reported reinsurance receivables of $422.7 million through retrocessional agreements, including $188.2 million of reinsurance receivables under the $200 million aggregate excess of loss reinsurance contracts with a subsidiary of Continental Insurance Group. The $188.2 million reinsurance receivable is secured by a combination of letters of credit and a trust fund dedicated solely to payments under the two reinsurance contracts. In addition, $85.7 million is due from another reinsurer, which amount is fully secured with a combination of letters of credit and funds withheld. Outstanding Losses and Loss Adjustment Expenses - ----------------------------------------------- In many cases, significant periods of time may elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the reinsurer and the insurer's payment of that loss and subsequent payments by the reinsurer. To recognize liabilities for unpaid losses, insurers and reinsurers establish "reserves," which are balance sheet liabilities representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred, including events which have not been reported to the insurer. When a claim is reported by the ceding company, Underwriters' claims department 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 supplemented by additional amounts as deemed necessary by Underwriters' claims department, after an evaluation of numerous factors including coverage, liability, severity of injury or damage, jurisdiction and ability of the ceding company to evaluate and handle the claim properly. In many cases Underwriters establishes case reserves even when the ceding company believes the reinsurer has no liability. In no instance is the case reserve established by Underwriters less than that suggested by the ceding company. These reserves are periodically adjusted by Underwriters' claims department based on its evaluation of subsequent reports from and audits of the ceding company. Incurred but not reported ("IBNR") reserves are established on an aggregate basis to provide for losses incurred but not yet reported to the insurer and to supplement the overall adequacy of reported case reserves and estimated expenses of settling such claims, including legal and other fees and general expenses of administering the claims adjustment process. Underwriters establishes IBNR reserves by using generally accepted -28- 29 actuarial reserving techniques to estimate the ultimate liability for losses and loss adjustment expenses ("LAE"). The process provides implicit recognition of 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' actuarial department performs reviews of aggregate loss reserves at least twice each year. Between the semi-annual reviews, Underwriters uses an updating system which applies the loss ratios determined in the previous review to earned premiums to date, less incurred losses reported. Underwriters does not discount any of its reserves for reported or unreported claims in any line of its business for anticipated investment income. There are inherent uncertainties in estimating reserves 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 insurer for information regarding claims. Actual losses and LAE may deviate, perhaps substantially, from reserves on Underwriters' financial statements, which could have a material adverse effect on Underwriters' financial condition and results of operations. Based upon current information, Underwriters' believes reserves for losses and LAE at December 31, 1994 are a reasonable provision for such losses and LAE. Underwriters' reserve for unpaid losses and loss adjustment expenses include amounts 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 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 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. As with all reinsurance claims, Underwriters establishes case reserves for both asbestos and environmental excess of loss -29- 30 reinsurance claims, by applying reinsurance contract terms to losses reported by ceding companies, analyzing from the first dollar of loss incurred by the primary insurer. Additionally, ceding companies often report potential losses on a precautionary basis to protect their rights under the reinsurance arrangements (a "precautionary notice"), 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 extent of such loss. Underwriters' Claims Department reviews each of these precautionary notices and, based upon current information, assesses the likelihood of loss to Underwriters. Such assessment is one of the factors used in determining the adequacy of IBNR reserves. For asbestos claims, emphasis is placed on a review of precautionary notices with a named insured previously linked to large asbestos exposure (a "target defendant"). If the named insured is a "target defendant," Underwriters considers there is a probability of loss even if the named ceding company has not reported reserves. IBNR reserves are recorded based on this review, as well as the additional subjective consideration of the aggregate reported losses (approximately $7 million per year) and paid losses (approximately $3 million per year) for the last three years. For environmental claims, Underwriters establishes case reserves and reviews precautionary notices as described above. Ultimate environmental claims exposure is especially uncertain because of the problematic apportionment of clean-up costs, the uncertain enforceability of contract exclusions and the lack of specific "target defendants." IBNR reserves are recorded based on Underwriters' Claims Department's assessment of precautionary notices and a review of historical calendar-year reported losses (approximately $4.6 million per year) and paid losses (approximately $1 million per year) for the last three years. During the three years ended December 31, 1994, the average net loss payment per claim (open and settled) for asbestos and environmental exposures was $19,000 and $16,000, respectively, and the highest paid loss was $0.5 million for an asbestos claim and $0.6 million for an environmental claim, in each case net of ceded reinsurance. Most claims paid to date have been paid under excess of loss contracts with varying levels of retention by the ceding company. Although the range of losses paid by Underwriters has been wide, the frequency is more heavily weighted to lower dollar amounts. -30- 31 As of December 31, 1994, Underwriters' net case and IBNR reserves totaled about $34.2 million for asbestos-related liabilities, which includes reserves for approximately 810 open claims where cedents have advised Underwriters that they currently expect to recover from Underwriters. As of December 31, 1994, Underwriters' net case and IBNR reserves totaled about $25.6 million for environmental impairment claims, which includes reserves for approximately 505 open claims where cedents have advised Underwriters that they currently expect to recover from Underwriters. Additionally, ceding companies have submitted about 1,200 precautionary notices for asbestos-related claims and 8,700 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 expect such underlying losses 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 (excluding an additional $35.8 million reserve for such claims, discussed in the text following the tables) is shown below (in thousands): Reconciliation of Asbestos-Related Claims Reserve for Losses and LAE
1994 1993 1992 ---- ---- ---- Reserve, net of reinsurance recoverables, as of January 1 . . . . . . . . . . . . . . . . . . . $ 30,303 $ 26,719 $ 22,355 Incurred Loss, net of reinsurance . . . . . . . . . . . . 8,390 6,757 6,737 Paid Loss, net of reinsurance . . . . . . . . . . . . . . (4,492) (3,173) (2,373) -------- -------- -------- Reserve, net of reinsurance recoverables, as of December 31 . . . . . . . . . . . . . . . . . . 34,201 30,303 $ 26,719 ======== Reinsurance recoverables, as of December 31 . . . . . . . 8,422 1,257 -------- -------- Reserve, gross of reinsurance recoverables, as of December 31 . . . . . . . . . . . . . . . . . . $ 42,623 $ 31,560 ======== ======== Type of Reserve, net of reinsurance recoverable: Case . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,201 $ 20,303 $ 17,719 IBNR . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 10,000 9,000 -------- -------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,201 $ 30,303 $ 26,719 ======== ======== ========
-31- 32 Reconciliation of Environmental Impairment Claims Reserve for Losses and LAE
1994 1993 1992 ---- ---- ---- Reserve, net of reinsurance recoverables, as of January 1 . . . . . . . . . . . . . . . . . . . $ 22,281 $ 16,658 $ 14,568 Incurred Loss, net of reinsurance . . . . . . . . . . . . 3,074 7,230 3,378 Paid Loss, net of reinsurance . . . . . . . . . . . . . . 245 (1,607) (1,288) -------- -------- -------- Reserve, net of reinsurance recoverables, as of December 31 . . . . . . . . . . . . . . . . . . 25,600 22,281 $ 16,658 ======== Reinsurance recoverables, as of December 31 . . . . . . . 8,592 5,401 -------- -------- Reserve, gross of reinsurance recoverables, as of December 31 . . . . . . . . . . . . . . . . . . $ 34,192 $ 27,682 ======== ======== Type of Reserve, net of reinsurance recoverable: Case . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,600 $ 12,281 $ 10,658 IBNR . . . . . . . . . . . . . . . . . . . . . . . . . 10,000 10,000 6,000 -------- -------- -------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,600 $ 22,281 $ 16,658 ======== ======== ========
Increases to asbestos-related and environmental impairment claims reserves, if any, would be covered to varying degrees by Underwriters' existing reinsurance contracts with its retrocessionaires. In addition to the case and IBNR reserves for asbestos-related and environmental impairment claims reported in the tables above, Underwriters carries an additional $35.8 million in reserves, determined in accordance with generally accepted accounting principles ("GAAP"), for such exposures. Taking into consideration these additional reserves, Underwriters believes that its total asbestos-related and environmental impairment reserves are a reasonable provision for such claims. The table below shows changes in historical net loss and LAE reserves for Underwriters for each year since 1984. Reported reserve development is derived primarily from information included in Underwriters' statutory financial statements. 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, -32- 33 including losses that have been incurred but not yet reported to Underwriters. 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 (liability re-estimated) portion of the table shows the re-estimated amount of the previously recorded net reserves for each year based on experience as of the end of each succeeding year. The estimate changes as more information becomes known about claims for individual years. In evaluating the information in the table, it should be noted that a reserve amount reported in any period includes the effect of any subsequent change in such reserve amount. For example, if a loss was first reserved in 1987 at $100,000 and was determined in 1990 to be $150,000, the $50,000 deficiency would be included in the Cumulative Redundancy (Deficiency) row shown below for each of the years 1987 through 1989. Conditions and trends that have affected the development of liability in the past may not necessarily occur in the future. Accordingly, it is not be appropriate to extrapolate future redundancies or deficiencies based on this table. During the mid-1980's, the reinsurance industry, including Underwriters, experienced substantial underwriting losses. Such losses are reflected in the table, beginning with the comparatively high cumulative deficiencies in the years 1984-86. The $35.8 million reserve strengthening, along with prior increases to asbestos-related and environmental impairment reserves, was the primary cause of the cumulative reserve deficiencies in the years 1988-93. -33- 34
Changes in Historical Net Reserves for Loses and LAE (in millions) Year Ended December 31, ------------------------------------------------------------------------------------- 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Net liabiity as of the end of year* .............................. $ 179 $ 279 $ 359 $ 470 $ 461 $ 453 $ 411 $ 411 $ 437 $ 509 $ 536 Cumulative amount of net liability paid as of One year later..................... $ 63 $ 80 $ 94 $ 116 $ 119 $ 137 $ 101 $ 84 $ 98 $ 112 - Two years later.................... 130 161 193 208 242 227 173 161 178 - - Three years later.................. 192 258 277 330 306 285 239 214 - - - Four years later................... 260 341 375 380 348 342 274 - - - - Five years later................... 318 389 407 416 394 370 - - - - - Six years later.................... 359 404 423 458 414 - - - - - - Seven years later.................. 373 413 460 475 - - - - - - - Eight years later.................. 381 445 471 - - - - - - - - Nine years later................... 404 454 - - - - - - - - - Ten years later.................... 409 - - - - - - - - - - Net liability re-estimated as of: One year later..................... 237 341 439 481 454 457 414 412 483 516 - Two years later.................... 314 426 449 473 457 460 421 455 487 - - Three years later.................. 394 432 441 476 462 474 465 460 - - - Four years later................... 400 428 444 478 492 520 472 - - - - Five years later................... 396 426 445 516 538 528 - - - - - Six years later.................... 394 427 484 562 548 - - - - - - Seven years later.................. 395 454 531 572 - - - - - - - Eight years later.................. 410 495 539 - - - - - - - - Nine years later................... 447 498 - - - - - - - - - Ten years later.................... 449 - - - - - - - - - - Cumulative Redundancy (Deficiency)....................... $(270) $(219) $(180) $(102) $(87) $(75) ($61) $(49) $(50) $ (7) - Gross Liability - End of Year $861 $940 Reinsurance Recoverable 352 404 ---- ---- Net Liability - End of Year 509 $536 ==== ==== Gross Re-estimated Liability -Latest 881 Re-estimated Recoverable - Latest 365 ---- Net Re-estimated Liability - Latest $516 ====
__________________ * Amounts for 1984-1986 were determined in accordance with statutory accounting principles. -34- 35 The reconciliation between reserves determined in accordance with statutory accounting practices ("SAP") and reserves determined in accordance with GAAP for the last three years is shown below (in thousands): Reconciliation of Reserves for Losses and LAE from SAP Basis to GAAP Basis
December 31, ------------------------------------ 1994 1993 1992 ---- ---- ---- Statutory Reserves . . . . . . . . . . . . . . . $500,567 $473,625 $424,205 Reinsurance Deposits(1) . . . . . . . . . . . . . 0 0 12,396 Additional Mass Action Reserves(2) . . . . . . . 35,750 35,750 0 Reinsurance Recoverables. . . . . . . . . . . . . 404,210 351,829 352,073 -------- -------- -------- GAAP Reserves . . . . . . . . . . . . . . . . . . $940,527 $861,204 $788,674 ======== ======== ========
___________________ (1) Amount relates to multiple-year retrospectively-rated contracts (i.e., contracts that provide for premium adjustments or changes in future coverage based on loss experience), which were written by Underwriters in 1992 and prior years in the normal course of business consistent with industry practice and were classified as ceded reserves on a statutory basis. GAAP requires that such contracts be accounted for as deposits. (2) Amount represents additional reserves recorded by Underwriters in 1993 for probable asbestos-related and environmental impairment claims exposure. -35- 36 The reconciliation of reserves for the last three years on a GAAP basis is shown below (in thousands): Reconciliation of Reserves for Losses and LAE
1994 1993 1992 ---- ---- ---- Reseve, net of reinsurance recoverables, as of January 1 . . . . . . . . . . . . . . . . . . . . . $ 509,375 $ 436,601 $ 410,805 Incurred Loss, net of reinsurance, related to: Current year . . . . . . . . . . . . . . . . . . . . . . . 146,426 143,723 121,504 Prior years . . . . . . . . . . . . . . . . . . . . . . . 6,630 46,404 1,376 --------- --------- --------- Total Incurred Loss, net of reinsurance . . . . . . . . . . 153,056 190,127 122,880 --------- --------- --------- Paid Loss, net of reinsurance, related to: Current year . . . . . . . . . . . . . . . . . . . . . . . (13,826) (19,640) (12,954) Prior years . . . . . . . . . . . . . . . . . . . . . . . (112,288) (97,713) (84,130) --------- --------- --------- Total Paid Loss, net of reinsurance . . . . . . . . . . . . (126,114) (117,353) (97,084) --------- --------- --------- Reserve, net of reinsurance recoverables, as of December 31 . . . . . . . . . . . . . . . . . . . . 536,317 509,375 $ 436,601 ========= Reinsurance recoverables, as of December 31 . . . . . . . . 404,210 351,829 --------- --------- Reserve, gross of reinsurance recoverables, as of December 31 . . . . . . . . . . . . . $ 940,527 $ 861,204 ========= =========
Investment Operations - --------------------- Underwriters' investments must comply with the insurance laws of New Hampshire, California and Nebraska, the domiciliary states of Underwriters, CUIC and UIC, respectively, and the other states in which they are licensed. These laws prescribe the kind, quality and concentration of investments which may be made by insurance companies. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks and real estate mortgages. Underwriters' investment strategy is to match the average duration of its high-quality diversified fixed maturity portfolio to the average adjusted duration of its liabilities, which approximates 4.5 years, and to provide sufficient cash flow to meet its obligations while maximizing its after-tax rate of return. The average adjusted duration of liabilities is estimated -36- 37 by adjusting the average duration of liabilities by an appropriate amount to reflect anticipated cash flows. Securities may be sold to take advantage of investment opportunities created by changing interest rates, prepayments, tax and credit considerations or other factors. The entire fixed maturity portfolio is designed to be able to react to such opportunities or other situations that may otherwise result in a mismatch between the duration of assets and liabilities and as such is classified as available for sale. The following table reflects investment results for the fixed maturity portfolio of Underwriters for the three months ended December 31, 1993 and the year ended December 31, 1994 (in thousands except percentages): Investment Results
Net Net Pre-Tax After-Tax Pre-Tax After Average Investment Investment Realized Effective Tax Period Investments(1) Income(2) Income(3) Losses Yield(4) Yield(5) ------ -------------- ---------- ---------- -------- --------- -------- Three Months Ended December 31, 1993 $ 728,478 $ 10,390 $ 7,943 $ 2,381 5.7% 4.4% Year Ended December 31, 1994 $ 748,681 $ 41,226 $ 32,465 $ 6,115 5.5% 4.3%
(1) Average of amortized cost of fixed maturities at beginning and end of period, excluding operating cash. (2) After investment expenses, excluding realized gains or losses from sale of investments. (3) Net pre-tax investment income less appropriate income taxes. (4) Net pre-tax investment income for the period, annualized for the three months ended December 31, 1993, divided by average investments for the same period. (5) Net after-tax investment income for the period, annualized for the three months ended December 31, 1993, divided by average investments for the same period. As of December 31, 1994, the equity portfolio of Underwriters was carried at a market value of approximately $125.1 million with an original cost of approximately $118.5 million, and consisted primarily of 6,015,038 shares of the common stock of Santa Fe. In 1994, Underwriters did not realize any gains or losses from the sale of equity securities, or receive any dividends therefrom. -37- 38 The following table summarizes the investments of Underwriters, excluding cash, as of December 31, 1994, with all investments carried at market value (in thousands except percentages): Investments
Amortized Cost or Cost Market Value ---------------------- ------------------------- Amount Percentage Amount Percentage Short term investments . . . . . . . . . $ 54,248 6% $ 54,248 7% Corporate Bonds . . . . . . . . . . . . . 108,496 13 100,874 13 United States government and government agency bonds . . . . . . . 38,575 4 34,319 4 Mortgage- and asset-backed securities . . 216,132 25 200,157 25 Foreign bonds . . . . . . . . . . . . . . 21,757 2 19,743 2 Redeemable preferred stocks . . . . . . . 16,116 2 14,912 2 Municipal bonds . . . . . . . . . . . . . 290,376 34 262,740 32 Equity securities(1) . . . . . . . . . . 118,577 14 125,090 15 -------- --- -------- --- Total $864,277 100% $812,083 100% ======== === ======== ===
(1) Amount includes 6,015,038 shares of the common stock of Santa Fe. The following table indicates the composition of the long-term fixed maturity portfolio by Moody's rating as of December 31, 1994 (in thousands except percentages): Long-Term Fixed Maturity Portfolio by Moody's Rating
Market Value Percentage -------- ---------- Aaa $383,485 61% Aa 115,660 18 A 108,203 17 Baa 25,397 4 -------- --- Total $632,745 100% ======== ===
-38- 39 The following table indicates the composition of the long-term fixed maturity portfolio by years until maturity as of December 31, 1994 (in thousands except percentages): Long-Term Fixed Maturity Portfolio by Years Until Maturity
Market Value Percentage ------ ---------- One year or less . . . . . . . . $ 18,139 3% Over one through five years . . . 73,437 11 Over five through ten years . . . 133,050 21 Over ten years . . . . . . . . . 207,959 33 Mortgage- and asset-backed securities . . . . . . . . . . . 200,160 32 -------- --- Total $632,745 100% ======== ===
Competition - ----------- Competition in the property and casualty reinsurance industry has historically been cyclical in nature. Typically, a cycle begins with attractive premium rates for reinsurance, which cause increased writing by existing reinsurers and the entrance into the market of new reinsurers. Competition within the market continues to grow, resulting in a decline in premium rates. As the cycle continues, these decreased premium rates, in conjunction with a combination of fluctuations in interest rates, catastrophic events and general economic conditions, usually result in a period of underwriting losses. Such losses in turn cause reinsurers to slow or stop writing reinsurance or to withdraw from the market altogether, which results in decreased competition and a subsequent increase in premium rates. Underwriters believes this competitive cycle, which may affect particular market segments at different times, is a critical factor affecting reinsurance profitability over time. There are no assurances that historical trends in the property and casualty reinsurance industry will continue or that Underwriters will be able to accurately anticipate any such trends. The property and casualty reinsurance business is competitive or highly competitive, depending upon the cycle described above. Underwriters competes primarily in the United States reinsurance market with numerous foreign and domestic reinsurers, many of which have greater financial resources than -39- 40 Underwriters. 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. Underwriters' competitors include independent reinsurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain primary insurance companies and domestic, European and Asian underwriting syndicates. According to the Reinsurance Association of America, at December 31, 1994, there were fifty-two domestic professional reinsurers, and Underwriters was the nation's twelfth-largest in terms of statutory surplus and nineteenth-largest in terms of net premiums written. Regulation - ---------- Underwriters, CUIC and UIC are subject to regulation and supervision by state insurance regulators under the insurance statutes and regulations of states in which they are incorporated (New Hampshire, California and Nebraska, respectively). 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 Underwriters, CUIC and UIC may hold, 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 examinations of Underwriters, CUIC and UIC. The terms and conditions of reinsurance agreements generally are not subject to regulation by any governmental authority with respect to rates or policy terms. These agreements contrast with primary insurance policies and agreements, the rates and policy terms of which are generally closely regulated by state insurance departments. As a practical matter, however, the rates charged by primary insurers do have an effect on the rates that can be charged by reinsurers. As an insurance holding company, Alleghany is also subject to the insurance regulations of New Hampshire, California and Nebraska. Each state required prior regulatory approval of Alleghany's acquisition of Underwriters, CUIC and UIC, -40- 41 respectively. Alleghany and its other subsidiaries, however, are generally not subject to restrictions on their business activities due to their affiliation with Underwriters. Beginning with the 1994 year end statutory financial statements, the insurance laws of New Hampshire, California and Nebraska imposed risk-based capital ("RBC") requirements on property and casualty insurers and reinsurers, based on a model adopted by the National Association of Independent Insurers. The RBC laws, and the instructions thereunder, attempt to measure a property and casualty company's statutory capital and surplus needs, taking into account the risk characteristics of the companies' investments and products. The RBC laws provide for four different levels of regulatory attention, dependent upon the ratio of a company's total adjusted capital to its risk-based capital (the "RBC ratio"), providing regulators with an early warning tool to identify weakly capitalized companies for purposes of initiating further regulatory action. Management believes that comparisons of estimated RBC ratios of property and casualty insurers and reinsurers will become generally available. Principally because of the RBC requirements associated with their investments, Underwriters, CUIC and UIC believe that their RBC ratios are better than those of many of their competitors in the property and casualty industry. Each of Underwriters, CUIC and UIC had RBC ratios well in excess of the first level at which regulatory attention under such laws would be warranted. In October 1994, the National Association of Insurance Commissioners issued a revision, effective January 1, 1995, to the statutory practices of accounting for reinsurance contracts. Under the new guidance, accounting for the risk transfer provisions of reinsurance contracts on a statutory basis will be substantially similar to generally accepted accounting principles. Employees - --------- Underwriters employed 164 persons as of December 31, 1994. 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, at a cost of about $144 million, including -41- 42 capitalized expenses. The present chief executive officer of World Minerals currently owns an equity interest of about 6.2 percent of World Minerals' immediate parent company. On November 16, 1992, New Harborlite Corporation ("Harborlite"), a newly formed subsidiary of World Minerals, acquired all of the outstanding capital stock of Harborlite Corporation ("Old Harborlite"), a privately owned perlite filter-aid company, for cash and non-voting preferred stock of Harborlite. All of World Minerals' pre-existing perlite operations were transferred to Harborlite, and Old Harborlite was merged into Harborlite, which was then renamed Harborlite Corporation. Accordingly, World Minerals conducts its industrial minerals business through its subsidiaries, Celite and Harborlite: Celite ------ Celite is believed to be the world's largest producer of filter-grade diatomite, which it markets worldwide under the Celite(registered trademark) and Kenite(registered trademark) brand names; Celite also markets filter grade diatomite in Europe under the Primisil(registered trademark) brand name and in Latin America and other areas under the Diactiv(registered trademark) brand name. Celite also produces calcium silicate products and magnesium silicate products, which are sold worldwide under the MicroCel(registered trademark) and Celkate(registered trademark) brand names (except in portions of Europe where calcium silicate products are sold under the Calflo(registered trademark) 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. Diatomite is also used as an anti-block agent in plastic film. Celite's calcium and magnesium silicate 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. Celite's calcium and magnesium silicate products are used in the production of rubber, sweeteners, flavorings and pesticides. -42- 43 Harborlite ---------- Harborlite, which began operations on November 16, 1992, carries on the business of Old Harborlite and the perlite production businesses formerly conducted by Celite. World Minerals believes that Harborlite is one of the world's largest producers of perlite filter aids and a significant producer of perlite ore. These products are marketed worldwide under the Harborlite(registered trademark) brand name. 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 one of Harborlite's seven expansion plants located within the United States. Expanded perlite is also produced at Harborlite's two expansion plants in Europe from perlite ore obtained from European and Middle Eastern suppliers. Most of Harborlite's 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. World Minerals directs its business from its world headquarters in Lompoc, California. Its Celite subsidiary also has its world headquarters in Lompoc, California and owns, directly or through wholly owned subsidiaries, diatomite mines and processing plants in Lompoc, California; Quincy, Washington; Murat, France; Alicante, Spain; Arica, Chile; 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. Harborlite has its world headquarters in Vicksburg, Michigan and owns a perlite mine and mill in No Agua, New Mexico, a perlite loading facility in Antonito, Colorado, a perlite mine -43- 44 and a mill in Superior, Arizona and perlite expansion facilities in Escondido, California; Green River, Wyoming; Laporte and Fort Worth, Texas; Reserve, Louisiana; Vicksburg, Michigan; Quincy, Florida; Wissembourg, France; and Hessle, England. World Minerals conducts certain of its operations in foreign countries. In 1994, approximately 32 percent of World Minerals' revenues (equal to 3 percent of Alleghany's consolidated revenues from continuing operations) were generated by foreign operations, and an additional 14 percent of World Minerals' revenues were generated by export sales from the United States. World Minerals minimizes its exposure to the risk of foreign currency fluctuation by, among other things, declaring and paying 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. The recent Mexican currency crisis is illustrative. Celite owns a diatomite mine and processing plant in Mexico through a Mexican subsidiary. The decline in value of the Mexican peso, which began in late December 1994, did not have any significant impact on World Minerals' 1994 earnings, and is not expected to have a significant impact on 1995 earnings primarily because almost half of the customers of the Mexican subsidiary are billed in United States dollars. 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, France, Spain, Mexico, Chile and from the Lake Myvatn mine in Iceland (although environmental regulations and seismic activity may adversely affect future production at Lake Myvatn). Celite believes that its diatomite reserves at each site are generally sufficient to last for at least 20 more years at the current rate of utilization. Harborlite obtains perlite ore 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 third parties in Europe and the Middle East. Celite's silicate products are produced from purchased magnesium and calcium compounds and internally produced diatomite. -44- 45 World Minerals experienced no interruption in raw material availability in 1994, and barring unforeseen circumstances anticipates no such interruption in 1995. While there can be no assurance that adequate supplies of all raw materials will be available in the future, 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. World Minerals presently owns, controls or holds licenses either directly or through its subsidiaries to approximately 15 United States and 33 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 three-week supply of inventory on certain products due to production lead times. Although diatomite mining activities at Celite's principal mine in Lompoc, California may be suspended during periods of heavy rainfall, World Minerals believes that, because of the stockpiling of ore during dry periods, such suspensions do not materially affect the supply of inventory. Barring unusual circumstances, World Minerals does not experience backlogs of orders. World Minerals' business is not seasonal to any material degree. Programs instituted by management from 1991 through 1993 have strengthened World Minerals. Domestic and international operations are now consolidated into a single, centrally managed worldwide business under the direction of a highly capable management team. Financial systems and controls have been upgraded, and the Celite and Harborlite sales forces have been consolidated to improve efficiency and take advantage of synergies. World Minerals acts as the sales agent for both Celite -45- 46 and Harborlite in the United States and procures orders from customers and distributors on their behalf. Celite distributes Harborlite's products in Europe to dealers, distributors and end users on 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 1994, World Minerals spent approximately $900,000 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 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. Celite's silicates compete with a wide variety of other synthetic mineral products. World Minerals believes that Harborlite is one of the world's largest producers of perlite filter aids and is a significant producer of perlite ore. Harborlite has two large competitors in the expanded perlite market, Grefco and CECA, and many smaller competitors. 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. Celite's and Harborlite's filter-aid products compete with other filter aids, such as cellulose, and other filtration technologies, such as crossflow and centrifugal separation. 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 -46- 47 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 for employee work environments in the mining industry. MSHA promulgates regulations relating to noise, respiratory protection and dust. 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. World Minerals maintains a staff of experienced environmental and industrial hygiene professionals who assist plant personnel in complying with environmental, health and safety regulations. This group also performs routine internal audits and reviews of World Minerals' plant facilities worldwide. Due to these programs and responsible management at the local plant level, compliance with such regulations has been facilitated and the financial impact of such regulations on operating results has been minimal. Certain products of Celite and Harborlite are subject to the Hazard Communication Standard promulgated by OSHA, which requires Celite and Harborlite, respectively, to disclose the hazards of their products to employees and customers. Celite's diatomite products and certain of Harborlite's products contain varying amounts of crystalline silica, a substance which is among the most common found on earth. In 1987, the International Agency for Research on Cancer ("IARC") issued a report, which was supplemented in 1988, designating crystalline silica as "probably carcinogenic to humans," which is a tentative classification falling between "probably not carcinogenic to humans" and "sufficient evidence of human carcinogenicity." Celite and Harborlite therefore provide required warning labels on their -47- 48 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. Therefore, 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. The 1987 IARC designation has been the subject of controversy and continued study. 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 crystalline silica. One such study, conducted by the University of Washington, 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 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 than originally thought. Since exposure to asbestos has been found to cause lung cancer and respiratory disease, this finding has raised concern that the Washington study may have overstated the adverse health effects of exposure to crystalline silica. IDPA engaged an epidemiologist and an industrial hygienist to examine the cohort to determine whether asbestos exposure was fully accounted for in the Washington study's results. The final IDPA report was issued in December 1994 and found: "Although asbestos operations were small relative to the diatomaceous earth operations, analyses in this report -48- 49 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 study's authors called for further analyses which fully take into account the results of the study stating "[t]he interpretation of the silica-lung cancer risk relationships based on the [Lompoc] cohort should await the outcome of such analyses." Certain other cohort mortality studies of workers occupationally exposed to crystalline silica, including a study of gold miners in North Dakota, have found no statistically significant increases in lung cancer compared with national populations. The issue remains subject to considerable debate. The various agreements covering the purchase of the business of Celite in 1991 provide for the indemnification of the holding company subsidiary of Alleghany which acquired Celite by the various selling Manville entities in respect of any environmental and health claims arising from the operations of the business of Celite prior to its acquisition by the holding company subsidiary. Employees - --------- During 1994, World Minerals reorganized and centralized much of the sales and administrative functions formerly performed at the operating subsidiary level. As of December 31, 1994, World Minerals had 114 employees, all located in the United States, Celite had a total of about 798 employees worldwide, and Harborlite had a total of about 212 employees worldwide. Approximately 339 of Celite's employees and 36 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. The collective bargaining agreement governing 53 hourly production workers at Celite's facility at Quincy, Washington is scheduled to expire in October 1995. -49- 50 STEEL FASTENER BUSINESS The Heads and Threads division of Alleghany, headquartered in Northbrook, Illinois, is believed to be the nation's leading distributor of imported steel fasteners. Heads and Threads imports and sells commercial fasteners - nuts, bolts, screws and washers - for resale to fastener manufacturers and distributors through a network of sales offices and warehouses located in sixteen states. The strength of Heads and Threads lies in its five major warehouses and fourteen regional satellite warehouses, long years of association with suppliers and customers, and ability to control operating costs. Since Heads and Threads imports virtually all of its fasteners, it is necessary to forecast inventory requirements from six months to a year in advance to allow time for shipments to reach their destinations in the United States. In addition, Heads and Threads' costs are subject to foreign currency fluctuations and increases in import duties, which may result from determinations by United States federal agencies that foreign countries are violating United States laws or intellectual property rights, or are following restrictive import policies. Heads and Threads operations do not subject Alleghany to a material risk from foreign currency fluctuation or increased import duties. The earthquake in Japan in January 1995, coupled with indigenous material cost increases, have caused Taiwanese manufacturers, the main source of supply for Heads and Threads, to increase their prices. Some shortages have also developed. These are expected to be offset by other marketing factors. Rules that have been proposed to implement the Fastener Quality Assurance Act, which became law in late 1990 but has not yet gone into effect, also may increase costs. At December 31, 1994, Heads and Threads had about 165 employees. -50- 51 Item 2. Properties ---------- Alleghany's headquarters is located in leased office space of about 10,000 square feet at Park Avenue Plaza in New York City. CT&T and CTI lease about 278,000 square feet for their headquarters operations in the Chicago Title and Trust Center, a 49-story office complex at 171 North Clark Street in Chicago, Illinois. Ticor Title's and Security Union's headquarters are in company-owned premises of about 180,000 square feet in Rosemead, California. CT&T and its subsidiaries own or lease buildings or office space in approximately 425 locations throughout the United States, primarily for CTI, Security Union and Ticor Title full-service and satellite branch office operations. Underwriters leases about 27,000 square feet of office space for its headquarters operations in Woodland Hills, California. All of its five branch office locations are also in leased spaces, ranging in size from about 3,200 square feet to 6,200 square feet. CUIC leases about 9,400 square feet of office space. World Minerals' headquarters is located in leased premises of approximately 17,300 square feet in Lompoc, California, which it shares with Celite. Harborlite's headquarters is located at its Vicksburg, Michigan plant. 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 Lompoc, California, the Rueil, France and Santiago, Chile offices, and the plant at Wissembourg, France, which are leased. -51- 52
Location and Approximate Product Nature of Property Square Footage or Use - ------------------ -------------- ------- CELITE: - ------- Lompoc, CA 961,410 Diatomite filter Production facility; aids, fillers, 17 multi-story production silicates and buildings; 5 one- specialty story warehouse products 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 17,300 Headquarters 1 one-story building; offices 3 units within 1 one-story building. Quincy, WA 60,941 Diatomite filter Production facility; Plant aids and fillers #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 Production facility; aids 1 one-story manufacturing building; 2 one- story warehouses; and 1 one-story office building. Rueil, France 10,000 Sales and 1 single floor. administrative offices
-52- 53
Location and Approximate Product Nature of Property Square Footage or Use - ------------------ -------------- ------- Guadalajara, Mexico 116,610 Diatomite filter Production facility; aids and fillers 2 multi-story production buildings; 2 multi-story pollution-control buildings; and 20 one-story buildings. Mexico City, Mexico 2,700 Offices 1 single floor condominium. Arica, Chile 50,000 Diatomite Production facility; Filter Aids 1 calcined line; 1 natural line; 1 administration building; 1 laboratory; 1 warehouse building; 1 changing room building; 1 maintenance workshop; and 1 product warehouse. Santiago, Chile 1,682 Offices 1 single floor in a multi-story, rented office building. Alicante, Spain 69,410 Diatomite filter Production facility; aids and fillers 2 multi-story manufac- turing buildings; 3 one-story ware- houses; 2 one-story office buildings; and 3 miscellaneous buildings.
-53- 54
Location and Approximate Product Nature of Property Square Footage or Use - ------------------ -------------- ------- HARBORLITE: - ----------- Antonito, CO 9,780 Warehouse 1 one-story manu- facilities for facturing building perlite ore and warehouse; 1 one- story office building; and 1 one-story ware- house. 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 1 one-story aids warehouse building; and 1 one-story office building. Green River, WY 17,300 Perlite filter 1 one-story aids warehouse building; and 1 one-story office building. Vicksburg, MI 25,050 Perlite filter 2 one-story aids warehouse buildings; and 1 one-story office building.
-54- 55
Location and Approximate Product Nature of Property Square Footage or Use - ------------------ -------------- ------- Fort Worth, TX 15,000 Perlite filter 1 one-story warehouse aids building; 1 one-story manufacturing building; and 1 one-story office building. Quincy, FL 18,450 Perlite filter 1 one-story warehouse aids building; 1 one-story manufacturing building; and 1 one-story office building. Wissembourg, France 50,000 Perlite filter 1 multi-story aids and fillers production and ware- house building. Hessle, Humberside, United Kingdom 36,700 Perlite filter 1 one-story aids and fillers manufacturing building; and 1 two-story office building. LaPorte, Texas 18,000 Perlite filter 1 one-story as of 1/17/95 aids, cryogenics expansion warehouse (being expanded) and fillers and office building. Reserve, Louisiana 11,440 Perlite filter 1 one-story aids and expansion warehouse cryogenics and office building.
World Minerals' largest mine is located on Celite-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 -55- 56 years at the current rate of utilization. The Lompoc production facility has a rated capacity in excess of 200,000 tons annually and currently supplies more than 25 different grades of products to the filtration and filler markets. The facility also houses World Minerals' research and development, and health, safety and environmental departments and Celite's quality control laboratories. Celite and Harborlite also lease warehouses, office space and other facilities in the United States and abroad. A joint venture between Celite and the Government of Iceland has mining rights to mine diatomaceous earth in sections of Lake Myvatn, Iceland. The operations of Alleghany's Heads and Threads division are conducted in 16 states at 19 locations. There are either warehouses, or combined warehouses and sales offices, at such locations; two locations are owned and the remainder are leased. Heads and Threads' headquarters in Northbrook, Illinois is owned by Alleghany. API's headquarters is located in leased premises of approximately 3,630 square feet in Sacramento, California. API or its subsidiary owns 52 properties in fee (four of which are subject to a first deed of trust), and one additional property for which foreclosure is probable but has not yet occurred, in California. Such properties are comprised of improved and unimproved commercial land (office, retail and industrial), improved and unimproved commercial and residential lots, and office, retail, commercial and residential buildings. In addition, the following properties are held by joint ventures in dissolution in which API has an interest, but the liquidation of such joint ventures has not yet been completed. API intends to dispose of all of these properties in an orderly fashion, which may take several years.
Location Approximate Acreage Property Type - -------- ------------------- ------------- Roseville, 22.7 acres Unimproved land California (commercial/ residential) Roseville, 112.3 acres Unimproved land California (commercial/ (subject to a first residential) deed of trust)
-56- 57
Location Approximate Acreage Property Type - -------- ------------------- ------------- Folsom, 8.20 acres Unimproved land California (commercial/ office/retail) Sacramento, 215.8 acres Unimproved land California (commercial/ residential) Sacramento, 249 acres Unimproved land California (residential) Sacramento, 136 acres Unimproved land California (commercial/ residential)
Alleghany also owns one truck terminal property in Ohio which is being held for sale, and which has been leased from time to time on an interim basis. -57- 58 Item 3. Legal Proceedings. A. On January 7, 1985, the Federal Trade Commission (the "FTC") filed a complaint alleging that six of the largest title insurance companies, including CTI, Security Union and Ticor Title, violated Section 5 of the Federal Trade Commission Act. The violation was alleged with respect to the companies' participation in title insurance rating bureaus in thirteen states, to the extent those rating bureaus had proposed for state regulatory approval rates relating to title search and examination services and settlement services performed in connection with the issuance of title insurance policies. After proceedings before an administrative law judge and the FTC, the FTC issued an opinion and order dated September 19, 1989, finding a violation of the Federal Trade Commission Act in six states. Subsequent appeals in the United States Court of Appeals for the Third Circuit and the United States Supreme Court resulted in an affirmance of the FTC order as to four states. The FTC issued a modified order dated April 22, 1994, to conform to the results of these appeals. By that order CTI, Security Union and Ticor Title are prohibited in Connecticut, Wisconsin, Arizona and Montana, from discussing, proposing, setting or filing any rates for title search and examination services through a rating bureau, except where such activity is engaged in pursuant to clearly articulated and affirmatively expressed state policy and where such activity is actively supervised by a state regulatory body. CT&T experienced no practical adverse consequences from this order since its title insurance subsidiaries are not engaged in any types of activities proscribed thereby. Beginning shortly after the filing of the FTC complaint in 1985, a series of private suits brought under Section 1 of the Sherman Act and based on the matters alleged in the FTC proceedings, seeking treble damages and other relief against the same six title insurance companies, were filed in a number of federal district courts. These actions were consolidated in the United States District Court for the Eastern District of Pennsylvania. In June 1986, that Court issued a final judgment approving a class action settlement of the asserted claims, in consideration of the defendant companies providing class members with enhanced title insurance coverage, discounts on future purchases of title insurance, and other benefits. Additional federal and state civil actions subsequently were filed seeking damages and injunctive relief on the basis of the same matters complained of in the suits subject to the class settlement. A number of such later actions were dismissed; however, two such actions are currently pending. -58- 59 In December 1992, the United States Court of Appeals for the Ninth Circuit reversed the dismissal of damage claims asserted in one such pending case filed in the United States District Court for the District of Arizona, ruling that the prior class settlement did not bar the assertion of the plaintiffs' damage claims challenging rating bureau activity in Arizona and Wisconsin. The United States Supreme Court granted the title insurers' petition for a writ of certiorari to review the decision of the Court of Appeals on this issue in October 1993, but, after full argument by the parties on the merits of the case, dismissed the writ as improvidently granted. In June 1994, counsel for the plaintiffs and the defendants filed with the District Court in Arizona a definitive written agreement embodying terms for a proposed class action settlement of the asserted claims, which would become effective upon final approval of the Court. Under those terms, eligible class members would have the option to receive cash payments from the six title insurance companies, not to exceed in the aggregate $1,225,200 in Arizona and $1,587,326 in Wisconsin. Eligible class members who do not elect the cash option would receive an increase in the face amount of any title insurance policy purchased from the title insurers reflecting the impact of inflation since January 1, 1981, and would not be charged for the last $5,000 of insurance covered on any new title insurance policy for property in Arizona or Wisconsin purchased from any of such title insurers within the one year period following Court approval of the settlement. The settlement also contemplates that the title insurance companies would pay plaintiffs' attorneys fees and the costs of administering the settlement. Since the filing of the settlement agreement with the Court, the attorneys for the plaintiffs have told the Court that they are unable to continue to support the settlement as in the best interests of the class; the title insurance companies have stated their belief that the settlement agreement is binding upon the plaintiffs and their counsel and that the agreement is in the best interests of the settlement class. On April 21, 1994, a separate class action suit seeking treble damages was filed in the United States District Court for the Eastern District of Wisconsin, asserting federal antitrust claims against the same six defendants and a number of additional title insurers arising from Wisconsin rating bureau activity. On October 11, 1994, the Wisconsin suit was transferred to and consolidated with the suit in the United States District Court in Arizona. The District Court in Arizona has yet to act upon the settlement agreement or the issues that have arisen since the settlement agreement was jointly presented to the Court. Discussions among the parties and the Court are continuing. -59- 60 The Stock Purchase Agreement between Alleghany and Lincoln National Corporation, among other parties, dated as of June 18, 1985, provides for the indemnification of Alleghany by Lincoln National Corporation in respect of a portion of any liability resulting from the foregoing FTC and private actions and in respect of certain other pending or potential claims against CT&T and its subsidiaries. B. Alleghany entered into a consent agreement with the FTC effective July 22, 1991, which settled certain antitrust objections raised by the FTC in respect of the acquisition of Ticor Title Insurance Company of California ("Ticor Title of California") by CT&T. The consent agreement provides for the divestiture by CT&T after its acquisition of Ticor Title of California of (i) one of the two title plants owned by subsidiaries of CT&T serving each of three Illinois counties, three Indiana counties, two Washington counties and one California county; and (ii) one of the two back plants owned by subsidiaries of CT&T serving each of six California counties and one county in each of Illinois, Indiana and Tennessee. A back plant is a title plant that is no longer being updated on a daily or regular basis. For a period of ten years from its effective date, the consent agreement prohibits Alleghany or any of its subsidiaries from acquiring an ownership interest or assets in certain named title insurance companies, or in any entity that has a direct or indirect ownership interest in a title plant or back plant that services the counties with respect to which divestiture of such a plant was ordered, without the prior approval of the FTC. For the same period, Alleghany or any of its subsidiaries is required to give prior notification to the FTC of any acquisitions of an ownership interest in a title plant or back plant serving the same county as a plant already owned by Alleghany or any of its subsidiaries. There is an exception to the prior approval or notice requirements which generally would apply to acquisitions solely for the purpose of investment of up to 3 percent of the shares of a publicly traded corporation. Also, acquisitions of shares of a publicly traded corporation are not subject to the prior approval or notice requirements solely by reason of the ownership by such corporation of less than 5 percent of the shares of the named title companies. The consent agreement required divestiture of the plants by July 23, 1992, and provides that the FTC may appoint a trustee and seek civil penalties and other relief if Alleghany failed to accomplish the divestitures by such date. As of July 21, 1992, Alleghany had received the FTC's approval for divestiture in four markets and had applications pending with respect to the remaining fourteen markets. On that date, Alleghany submitted a motion to -60- 61 the FTC to extend the time within which to complete the divestitures. On September 24, 1992, the FTC denied Alleghany's motion, advising that it had "not determined whether, or what, enforcement action would be warranted for [Alleghany's] failure to meet the July 23 deadline." As of the date hereof, applications with respect to all markets have been approved by the FTC, and all divestiture transactions have closed. On September 28, 1993, the staff of the Bureau of Competition of the FTC invited Alleghany to "address why [the Bureau] should not recommend that the [FTC] seek civil penalties, or what an appropriate penalty might be. . . ." On December 10, 1993, Alleghany submitted a response demonstrating its good faith in the fulfillment of its divestiture obligations to support its position that no penalties should be imposed. The staff of the Bureau of Competition subsequently informally advised Alleghany that it will not recommend that the FTC seek any penalties. To Alleghany's best knowledge, the FTC will not formally advise Alleghany that no civil penalties or other relief will be sought with respect to Alleghany's failure to fulfill its obligations under the consent agreement. However, Alleghany's outside counsel has received informal assurances from the FTC that such penalties or other relief will not be pursued by the FTC. C. Alleghany's subsidiaries and division are parties to pending litigation and claims in connection with the ordinary course of their businesses. Each such operating unit makes provision on its books, in accordance with generally accepted accounting principles, for estimated losses to be incurred in such litigation and claims, including legal costs. In the opinion of management, such provision is adequate under generally accepted accounting principles as of December 31, 1994. -61- 62 Item 4. Submission of Matters to a Vote of Security Holders. ---------------------------------------------------- No matter was submitted to a vote of security holders during the fourth quarter of 1994. 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 Business Experience Name Age Position During Last 5 Years - ---- --- -------- ------------------- F.M. Kirby 75 Chairman of Chairman of the the Board Board, Alleghany; Chairman of the Board and chief executive officer, Alleghany, prior to July 1992. John J. 63 President, President, chief Burns, Jr. chief executive officer executive and chief operating officer officer, Alleghany and chief since July 1992; operating President and officer chief operating officer, Alleghany, prior thereto. David B. 62 Senior Vice Senior Vice Cuming President President and and chief chief financial financial officer, Alleghany, officer since December 1989; Vice President, Alleghany, prior thereto.
-62- 63
Current Business Experience Name Age Position During Last 5 Years - ---- --- -------- ------------------- Robert M. Hart 50 Senior Vice Senior Vice President President, General and General Counsel Counsel and since September 1994 Secretary and Secretary since January 1, 1995; Partner, Donovan Leisure Newton & Irvine, prior thereto. Richard P. 58 Senior Vice Senior Vice Toft President; President, Alleghany, Chairman, since March 1990; President and Chairman, President Chief Executive and Chief Executive Officer, CT&T; Officer, CT&T, since Chairman, Chicago January 1994; Title Insurance President and Chief Company Executive Officer, CT&T, prior thereto; Chairman, Chicago Title Insurance Company, since January 1994; Chairman and Chief Executive Officer, Chicago Title Insurance Company, prior thereto. Peter R. Sismondo 39 Vice President, Vice President, Controller, Controller, Treasurer, Treasurer, Assistant Assistant Secretary Secretary and and principal principal accounting officer, accounting officer Alleghany, since January 1, 1995; Vice President, Controller, Assistant Secretary and principal accounting officer, Alleghany, prior thereto.
-63- 64 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder -------------------------------------------------------------- Matters. -------- The information required by this Item 5 is incorporated by reference from page 19 of Alleghany's Annual Report to Stockholders for the year 1994, filed as Exhibit 13 hereto. Item 6. Selected Financial Data. ------------------------ The information required by this Item 6 is incorporated by reference from page 19 of Alleghany's Annual Report to Stockholders for the year 1994, 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 2 through 4, from pages 6 through 15, and from pages 20 and 21, of Alleghany's Annual Report to Stockholders for the year 1994, filed as Exhibit 13 hereto. Item 8. Financial Statements and Supplementary Data. -------------------------------------------- The information required by this Item 8 is incorporated by reference from pages 22 through 41 of Alleghany's Annual Report to Stockholders for the year 1994, filed as Exhibit 13 hereto. Item 9. Changes in and Disagreements With Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure. --------------------- Not applicable. -64- 65 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, 1995. 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 3 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 28, 1995. Item 11. Executive Compensation. ----------------------- The information required by this Item 11 is incorporated by reference from pages 11 through 26 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 28, 1995. The information set forth beginning on page 27 through the first paragraph on page 36 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 28, 1995, is not "filed" as a part hereof. Item 12. Security Ownership of Certain Beneficial Owners and Management. --------------------------------------------------------------- The information required by this Item 12 is incorporated by reference from pages 1 through 5, and from pages 9 and 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, 1995. Item 13. Certain Relationships and Related Transactions. ----------------------------------------------- The information required by this Item 13 is incorporated by reference from page 25 of Alleghany's Proxy Statement, filed or to be filed in connection with its Annual Meeting of Stockholders to be held on April 28, 1995. -65- 66 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. ---------------------------------------------------------------- (a) 1. Financial Statements. --------------------- The consolidated financial statements of Alleghany and subsidiaries, together with the report thereon of KPMG Peat Marwick LLP, independent certified public accountants, are incorporated by reference from the Annual Report to Stockholders for the year 1994 into Item 8 of this Report. 2. Financial Statement Schedules. ------------------------------ The schedules relating to the consolidated financial statements of Alleghany and subsidiaries, together with the report thereon of KPMG Peat Marwick LLP, independent certified public accountants, are detailed in a separate index herein. 3. Exhibits. --------- The following are filed as exhibits to this Report:
Exhibit Number Description - ------------- ----------- 3.01 Restated Certificate of Incorporation of Alleghany, as amended by Amendment accepted and received for filing by the Secretary of State of the State of Delaware on June 23, 1988, filed as Exhibit 20 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1988, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 3.02 By-Laws of Alleghany as amended January 16, 1995.
-66- 67 4.01 Indenture dated as of June 15, 1989 between Alleghany and Pittsburgh National Bank, as Trustee, relating to the 6-1/2% Subordinated Exchangeable Debentures due June 15, 2014 (the "Debentures"), including the form of Debenture, filed as Exhibit 4.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 4.02 Escrow Agreement dated as of June 15, 1989 between Alleghany and Pittsburgh National Bank, as Escrow Agent, for the escrow of common shares of American Express Company for which the Debentures are exchangeable, filed as Exhibit 4.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.01 Description of Alleghany Management Incentive Plan, filed as Exhibit 10.01 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. *10.02(a) Agreement dated as of December 22, 1993 between Alleghany and David B. Cuming, filed as Exhibit 10.02(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. Agreements dated as of December 22, 1993 between Alleghany and each of F.M. Kirby, John J. Burns, Jr., Richard P. Toft, Theodore E. Somerville, John E. Conway and Peter R. Sismondo were omitted pursuant to Instruction 2 of Item 601 of Regulation S-K.
- ----------------------- * Compensatory plan or arrangement. -67- 68 *10.02(b) Agreement dated as of December 15, 1993 between CT&T and Richard P. Toft, filed as Exhibit 10.02(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. *10.03 Agreement dated August 18, 1994 between Alleghany and Theodore E. Somerville. *10.04 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. *10.05(a) Alleghany 1983 Long-Term Incentive Plan as adopted on March 16, 1983, filed as Exhibit 10.24 to the Annual Report on Form 10-K of Alleghany Corporation, a Maryland corporation and the predecessor of Alleghany ("Old Alleghany"), for the year ended December 31, 1982, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.05(b) Description of amendments to the Alleghany 1983 Long-Term Incentive Plan as adopted on December 30, 1986, filed as Exhibit 10.05(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1986, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.06(a) Alleghany 1993 Long-Term Incentive Plan adopted and effective as of January 1, 1993, filed as Exhibit 10.05 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference.
- ---------------------- * Compensatory plan or arrangement. -68- 69 *10.06(b) Alleghany 1993 Long-Term Incentive Plan, as amended and restated effective as of January 1, 1994 (subject to the approval of Alleghany's stockholders). *10.07 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). *10.08(a) Alleghany Retirement Plan effective as of January 1, 1989, as adopted on April 18, 1989, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.08(b) Trust Agreement dated as of January 1, 1989 between Alleghany and Bankers Trust Company, filed as Exhibit 10.5(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. *10.08(c) Alleghany Retirement Plan, as amended and restated on March 14, 1995. *10.09 Alleghany Retirement COLA Plan dated and effective as of January 1, 1992, as adopted on March 17, 1992, filed as Exhibit 10.7 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference.
- ----------------------- * Compensatory plan or arrangement. -69- 70 *10.10 Alleghany Amended and Restated Directors' Stock Option Plan effective as of April 20, 1993 (provided that options granted thereunder prior to the approval of Alleghany's stockholders were conditioned upon such approval), 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. *10.11 Alleghany Directors' Equity Compensation Plan, effective as of January 16, 1995 (subject to the approval of Alleghany's stockholders). *10.12 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. *10.13(a) Employment Agreement dated as of January 1, 1992, and Amendment to Employment Agreement dated as of January 1, 1993, among CT&T, Alleghany and Richard P. Toft, filed as Exhibit 10.12 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. *10.13(b) Second Amendment to Employment Agreement dated as of January 1, 1994, among CT&T, Alleghany and Richard P. Toft, filed as Exhibit 10.11(b) of Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993 is incorporated herein by reference.
- ----------------------- * Compensatory plan or arrangement. -70- 71 *10.13(c) Third Amendment to Employment Agreement dated as of October 31, 1994, among CT&T, Alleghany and Richard P. Toft, filed as Exhibit 10.1 of Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, is incorporated herein by reference. *10.14 Split/Owner "Split Dollar" Life Insurance Plan Assignment dated March 19, 1986 by and between Richard P. Toft and CT&T, filed as Exhibit 10.10(c) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. *10.15 Description of CT&T Presidents' Plan, adopted and effective as of July 1, 1985 and as amended as of January 26, 1993, filed as Exhibit 10.14 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. *10.16 CT&T Performance Unit Incentive Plan, adopted and effective as of July 1, 1985, restated as the CT&T Performance Unit Incentive Plan of 1989, effective as of July 1, 1990, filed as Exhibit 10.12 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1990, is incorporated herein by reference. *10.17 CT&T Executive Performance Unit Incentive Plan of 1992, adopted and effective as of January 1, 1992, as amended and restated effective January 1, 1993, filed as Exhibit 10.15 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. -71- 72 *10.18 Description of CT&T Quality Business Management Incentive Program for the Presidents of CT&T and Chicago Title Insurance Company, effective as of January 1, 1989, as amended as of January 1, 1992, filed as Exhibit 10.16 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. *10.19 CT&T Excess Benefits Pension Plan, effective January 1, 1987, as amended by First Amendment to CT&T Excess Benefits Pension Plan dated May 5, 1994, effective as of January 1, 1994. *10.20 CT&T Executive Salary Continuation Plan effective as of January 1, 1979, as adopted on August 23, 1978, filed as Exhibit 10.15 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1990, is incorporated herein by reference. *10.21(a) Description of compensatory arrangement between Alleghany Financial Inc. and Paul F. Woodberry. *10.21(b) Description of compensatory arrangement between Alleghany and Paul F. Woodberry. 10.22 Revolving Credit Loan Agreement dated as of July 9, 1991 among Alleghany, Chemical Bank and Manufacturers Hanover Trust Company, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference.
- ---------------------- * Compensatory plan or arrangement. -72- 73 10.23(a) Stock Purchase Agreement dated as of June 18, 1985 by and among Old Alleghany, Alleghany, Alleghany Capital Corporation and Lincoln National Corporation (the "CT&T Stock Purchase Agreement"), filed as Exhibit (2)(i) to Old Alleghany's Current Report on Form 8-K dated July 11, 1985, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.23(b) List of Contents of Schedules to the CT&T Stock Purchase Agreement, filed as Exhibit (2)(ii) to Old Alleghany's Current Report on Form 8-K dated July 11, 1985, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.23(c) Amendment No. 1 dated December 20, 1985 to the CT&T Stock Purchase Agreement, filed as Exhibit 10.12(c) to Old Alleghany's Annual Report on Form 10-K for the year ended December 31, 1985, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.24 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). 10.25 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).
-73- 74 10.26(a) Agreement and Plan of Merger dated as of April 29, 1994 among Montag & Caldwell Associates, Inc., Alleghany Acquisition Corporation, Alleghany and the Shareholders of Montag & Caldwell Associates, Inc. (the "Montag & Caldwell Acquisition Agreement"), filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, is incorporated herein by reference. 10.26(b) List of Contents of Exhibits to the Montag & Caldwell Acquisition Agreement, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, is incorporated herein by reference. 10.27(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. 10.27(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.
-74- 75 10.28(a) Note Purchase Agreement dated as of January 15, 1995 by and among Alleghany Properties, Inc., Alleghany and Hartford Life Insurance Company Seperate Account CRC (the "Alleghany Properties Note Purchase Agreement"). 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. 10.28(b) List of Contents of Annexes and Exhibits to the Alleghany Properties Note Purchase Agreement which are not being filed herewith. Alleghany hereby agrees to furnish to the Commission supplementally a copy of any omitted Annex or Exhibit upon request. 10.29 Letter agreement dated January 24, 1995 among Alleghany, Santa Fe Pacific Corporation and Burlington Northern Inc., filed as Exhibit 2 to Amendment No. 3 to Alleghany's Schedule 13D relating to Santa Fe Pacific Corporation dated January 24, 1995, is incorporated herein by reference. 10.30(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).
-75- 76 10.30(b) Intercreditor and Collateral Agency Agreement dated as of August 1, 1990 among Manufacturers Hanover Trust Company, Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, is incorporated herein by reference. 10.30(c) Interest Rate and Currency Exchange Agreement dated as of August 14, 1990 between Barclays Bank PLC and Alleghany Funding Corporation, and related Confirmation dated August 13, 1990 between Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, are incorporated herein by reference. 10.30(d) Indenture dated as of August 1, 1990 between Alleghany Funding Corporation and Manufacturers Hanover Trust Company, filed as Exhibit 10.3 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, is incorporated herein by reference. 10.31(a) Acquisition Agreement dated as of November 29, 1990 by and between CT&T and Westwood Equities Corporation (the "Ticor Acquisition Agreement"), filed as Exhibit (2)(i) to Alleghany's Current Report on Form 8-K dated December 21, 1990, is incorporated herein by reference. 10.31(b) List of Contents of Schedules to the Ticor Acquisition Agreement, filed as Exhibit 2(ii) to Alleghany's Current Report on Form 8-K dated December 21, 1990, is incorporated herein by reference.
-76- 77 10.31(c) Amendment to the Ticor Acquisition Agreement dated as of January 9, 1991 by and between CT&T and Westwood Equities Corporation, filed as Exhibit (2)(iii) to Alleghany's Current Report on Form 8-K dated March 21, 1991, is incorporated herein by reference. 10.31(d) Amended and Restated Credit Agreement dated as of December 30, 1993 among CT&T, certain commercial lending institutions and Continental Bank, N.A. as agent, filed as Exhibit 10.28(d) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10.31(e) Letter Agreement dated May 2, 1991 between CT&T and Continental Bank, N.A. relating to an interest rate swap effective May 6, 1991, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, is incorporated herein by reference. 10.31(f) Letter Agreement dated December 13, 1994 between CT&T and Bank of America Illinois (previously known as Continental Bank) relating to the transfer of Continental Bank's risk management business to Bank of America National Trust and Savings Association. 10.32(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.
-77- 78 10.32(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. 10.33(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. 10.33(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. 10.34(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. 10.34(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. 10.34(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.
-78- 79 10.35(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. 10.35(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. 10.35(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. 10.36(a) Credit Agreement dated as of December 20, 1991 among Celite Holdings Corporation, Celite, Bank of America National Trust and Savings Association and Chemical Bank (the "Celite Credit Agreement"), filed as Exhibit 10.35(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10.36(b) List of Contents of Exhibits and Annexes to the Celite Credit Agreement which are not being filed herewith, filed as Exhibit 10.35(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference.
-79- 80 10.36(c) Amendment No. 1 dated January 24, 1992 to the Celite Credit Agreement, filed as Exhibit 10.36 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10.36(d) Letter Agreement dated January 23, 1992 between Celite and Bank of America National Trust and Savings Association relating to an interest rate swap effective January 16, 1992, filed as Exhibit 10.37 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10.36(e) Letter Agreement dated January 13, 1992 between Celite and Chemical Bank relating to an interest rate swap effective January 13, 1992, filed as Exhibit 10.38 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10.37(a) Standstill Agreement dated as of September 24, 1991 between Armco Inc. and Alleghany (the "Standstill Agreement"), filed as Exhibit 10.39(e) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10.37(b) Amendment dated as of March 17, 1992 to the Standstill Agreement, filed as Exhibit 10.39(f) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10.37(c) Amendment No. 2 dated as of April 24, 1992 to the Standstill Agreement, as amended as of March 17, 1992, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, is incorporated herein by reference.
-80- 81 10.38(a) Stock Purchase Agreement dated as of October 31, 1991 among Associated Insurance Companies, Inc., Alleghany and The Shelby Insurance Group, Inc. (the "Shelby Stock Purchase Agreement"), filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, is incorporated herein by reference. 10.38(b) List of Contents of Exhibits and Schedules to the Shelby Stock Purchase Agreement, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, is incorporated herein by reference. 10.39(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. 10.39(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. 10.39(c) Stock Purchase Related Agreement dated as of July 28, 1993 (the "Underwriters Stock Purchase Related Agreement") among certain persons named therein and Alleghany, filed as Exhibit 10.3(c) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference.
-81- 82 10.39(d) List of Exhibits and Schedules to the Underwriters Stock Purchase Related Agreement, filed as Exhibit 10.3(d) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. 10.39(e) Supplement to Underwriters Stock Purchase Related Agreement dated as of August 12, 1993 among certain persons named therein and Alleghany, filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, is incorporated herein by reference. 10.39(f) Amendment to Underwriters Stock Purchase Related Agreement made as of October 7, 1993 among certain persons named therein and Alleghany, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, is incorporated herein by reference. 13 Pages 2 through 4, pages 6 through 15, and pages 19 through 41 of the Annual Report to Stockholders of Alleghany for the year 1994. 21 List of subsidiaries of Alleghany. 23 Consent of KPMG Peat Marwick LLP, independent certified public accountants, to the incorporation by reference of their reports relating to the financial statements and related schedules of Alleghany and subsidiaries in Alleghany's Registration Statements on Form S-8 (Registration No. 27598) and Form S-3 (Registration No. 55707). 27 Financial Data Schedule.
-82- 83 28 Information from reports furnished to state insurance regulatory authorities by Underwriters Reinsurance Company, Commercial Underwriters Insurance Company, and Underwriters Insurance Company is filed under cover of Form SE, pursuant to Rule 311(c) of Regulation S-T.
(b) Reports on Form 8-K. -------------------- Alleghany filed a report on Form 8-K dated December 29, 1994, to report in Item 5 additional information to that appearing in Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994 relating to the real estate and real estate-related assets purchased by Alleghany Properties, Inc. in connection with the sale of Alleghany's retail banking subsidiary, Sacramento Savings Bank. -83- 84 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLEGHANY CORPORATION ------------------------------------ (Registrant) Date: March 17, 1995 By /s/ John J. Burns, Jr. -------------- --------------------------------- John J. Burns, Jr. President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: March 17, 1995 By /s/ John J. Burns, Jr. -------------- --------------------------------- John J. Burns, Jr. President and Director (principal executive officer) Date: March 17, 1995 By /s/ Dan R. Carmichael -------------- --------------------------------- Dan R. Carmichael Director Date: March 17, 1995 By /s/ David B. Cuming -------------- --------------------------------- David B. Cuming Senior Vice President (principal financial officer) Date: March 17, 1995 By /s/ Allan P. Kirby, Jr. -------------- --------------------------------- Allan P. Kirby, Jr. Director Date: March 17, 1995 By /s/ F.M. Kirby -------------- --------------------------------- F.M. Kirby Chairman of the Board and Director -84- 85 Date: March 17, 1995 By /s/ William K. Lavin -------------- -------------------------------- William K. Lavin Director Date: March 17, 1995 By /s/ Peter R. Sismondo -------------- -------------------------------- Peter R. Sismondo Vice President, Controller, Treasurer and Assistant Secretary (principal accounting officer) Date: March 17, 1995 By /s/ John E. Tobin -------------- -------------------------------- John E. Tobin Director Date: March 17, 1995 By /s/ James F. Will -------------- -------------------------------- James F. Will Director Date: March 17, 1995 By /s/ Paul F. Woodberry -------------- -------------------------------- Paul F. Woodberry Director Date: March 17, 1995 By /s/ S. Arnold Zimmerman -------------- -------------------------------- S. Arnold Zimmerman Director -85- 86 ALLEGHANY CORPORATION AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENT SCHEDULES I SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES III CONDENSED FINANCIAL INFORMATION OF REGISTRANT V SUPPLEMENTARY INSURANCE INFORMATION VI REINSURANCE X 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. 87 SCHEDULE I ---------- ALLEGHANY CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1994 (in thousands)
Amount at which shown in the Type of Investment Cost Value Balance Sheet - -------------------------------------------------------------------------------------------------- Fixed maturities: Bonds: United States Government and government agencies and authorities $ 538,315 $ 512,317 $ 512,317 States, municipalities and political subdivisions 525,208 494,104 494,104 Foreign governments 23,847 21,802 21,802 All other corporate bonds 284,696 268,875 268,875 Certificates of deposit 64,832 64,832 64,832 Redeemable preferred stock 30,366 28,411 28,411 ---------- ---------- ---------- Total fixed maturities 1,467,264 $1,390,341 1,390,341 ---------- ========== ---------- Equity securities: Common stocks: Banks, trust, and insurance companies 13,153 $ 13,525 13,525 Industrial, miscellaneous, and all other 249,139 343,695 343,695 ---------- ---------- ---------- Total equity securities 262,292 $ 357,220 357,220 ---------- ========== ---------- Other long-term investments 3,996 3,996 Short-term investments 184,177 184,177 ---------- ---------- Total investments $1,917,729 $1,935,734 ========== ==========
88 SCHEDULE III ------------ ALLEGHANY CORPORATION CONDENSED BALANCE SHEETS DECEMBER 31, 1994 AND 1993 (in thousands)
1994 1993 ------------------------------- ASSETS Investment securities (Cost: 1994 $205,094; 1993 $51,049) $ 264,433 $ 81,250 Cash 1,495 2,456 Accounts and other receivables, less allowances 17,190 11,828 Property and equipment - at cost, less accumulated depreciation 2,375 2,523 Other assets 30,352 28,141 Investment in Sacramento Savings 0 200,338 Investment in other consolidated subsidiaries 906,984 741,509 ------------------------------- $1,222,829 $1,068,045 =============================== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Other liabilities $ 122,913 $ 73,588 Long-term debt 78,723 78,723 -------------------------------- Total liabilities 201,636 152,311 Commitments and contingent liabilities Common stockholders' equity 1,021,193 915,734 ------------------------------- $1,222,829 $1,068,045 ===============================
See accompanying Notes to Condensed Financial Statements. 89 SCHEDULE III ------------ ALLEGHANY CORPORATION CONDENSED STATEMENTS OF EARNINGS THREE YEARS ENDED DECEMBER 31, 1994 (in thousands)
1994 1993 1992 ------------------------------------------ Revenues: Interest, dividend and other income $ 62,302 $55,305 $55,526 Net gain on investment transactions 23,403 13,376 4,864 ------------------------------------------ Total revenues 85,705 68,681 60,390 ------------------------------------------ Costs and Expenses: Interest expense 7,743 6,401 6,922 General and administrative 71,354 64,888 59,143 ------------------------------------------ Total costs and expenses 79,097 71,289 66,065 ------------------------------------------ Operating income (loss) 6,608 (2,608) (5,675) Equity in earnings of consolidated subsidiaries 86,386 92,111 91,190 ------------------------------------------ Earnings from continuing operations, before income taxes 92,994 89,503 85,515 Income taxes 24,622 8,654 41,149 ------------------------------------------ Earnings from continuing operations 68,372 80,849 44,366 Discontinued operations: Earnings from discontinued operations, net of tax 6,265 16,703 20,255 Gain on sale of Sacramento Savings, net of tax 62,869 0 0 ------------------------------------------ Earnings before cumulative effect of a change in accounting for income taxes 137,506 97,552 64,621 Cumulative effect on prior years of a change in accounting for income taxes 0 0 3,760 Equity in cumulative effect on prior years of a change in accounting for income taxes of consolidated subsidiaries 0 0 4,456 ------------------------------------------ Net earnings $137,506 $97,552 $72,837 ==========================================
See accompanying Notes to Condensed Financial Statements. 90 SCHEDULE III ------------ ALLEGHANY CORPORATION CONDENSED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1994 (in thousands)
1994 1993 1992 -------------------------------------------- Cash flows from operating activities: Earnings from continuing operations $ 68,372 $ 80,849 $ 44,366 Adjustments to reconcile earnings from continuing operations to cash provided by (used in) continuing operations: Depreciation and amortization 661 731 696 Net gain on investment transactions (23,403) (13,376) (4,864) Increase in accounts and other receivables, less allowances (773) (5,160) (522) (Increase) decrease in other assets (2,862) 1,573 637 Increase in other liabilities (2,927) (20,407) (16,905) Equity in net earnings of consolidated subsidiaries (63,812) (62,976) (57,923) -------------------------------------------- Net adjustments (93,116) (99,615) (78,881) -------------------------------------------- Cash used in continuing operations (24,744) (18,766) (34,515) -------------------------------------------- Cash flows from investing activities: Purchase of investments (331,992) (190,482) (358,945) Maturities of investments 0 160,670 288,410 Sales of investments 135,159 79,103 119,865 Capital contributions to consolidated subsidiaries (4,320) (55,923) 0 Capital contributions to discontinued operations (4,000) (1,575) 0 Cash dividends from consolidated subsidiaries 73,039 237,482 2,237 Purchases of property and equipment (164) (243) (283) Disposition of property and equipment 4 45 39 Proceeds from sale of Sacramento Savings, net of expenses 316,348 0 0 Purchase of real estate and real estate related assets related to the sale of Sacramento Savings (116,089) 0 0 Purchase of Underwriters Re 0 (203,865) 0 -------------------------------------------- Net cash provided by investing activities 67,985 25,212 51,323 -------------------------------------------- Cash flows from financing activities: Principal payments on long-term debt (341,000) 0 (16,000) Proceeds of long-term debt 307,000 0 0 Purchase of treasury shares (10,127) (7,897) (1,240) Common stock distributions (75) 1,753 489 -------------------------------------------- Net cash used in financing activities (44,202) (6,144) (16,751) -------------------------------------------- Net (decrease) increase in cash (961) 302 57 Cash at beginning of year 2,456 2,154 2,097 -------------------------------------------- Cash at end of year $ 1,495 $ 2,456 $ 2,154 ============================================ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 7,869 $ 6,401 $ 6,868 Income taxes $ 44,226 $ 46,236 $ 33,949
Supplemental disclosure of noncash investing and financing activities: In 1994, Alleghany made a noncash capital contribution of $76,478 to its consolidated subsidiaries by contributing investment securities with a cost basis of $74,213, a newly acquired company with a cost basis of $1,900 and a partnership interest with a cost basis of $365. The Company contributed the real estate and real estate related assets of $116,089 purchased in connection with the sale of Sacramento Savings net of additional reserves to a consolidated subsidiary. In addition, in connection with dissolving a previously consolidated subsidiary, the Company relieved said subsidiary of $34,250 of its long term debt and received from said subsidiary investment securities with a cost basis of $5,209. In 1993, Alleghany made a noncash capital contribution of $16,315 to its consolidated subsidiaries and discontinued operations by contributing a partnership interest with a cost basis of $2,525 and investment securities with a cost of $13,790. See accompanying Notes to Condensed Financial Statements. 91 SCHEDULE III ------------ ALLEGHANY CORPORATION NOTES TO CONDENSED FINANCIAL STATEMENTS (in thousands) 1. INVESTMENT IN CONSOLIDATED SUBSIDIARIES. Reference is made to Notes 2 and 3 of the Notes to Consolidated Financial Statements incorporated herein by reference for information regarding the acquisition of Underwriters Re and Montag & Caldwell, Inc., and the sale of Sacramento Savings Bank. 2. LONG-TERM DEBT. Reference is made to Note 7 of the Notes to Consolidated Financial Statements incorporated herein by reference for information regarding the significant provisions of long-term debt of Alleghany. Included in long-term debt in the accompanying condensed balance sheets is $19,123 in 1994 and 1993 of intercompany notes payable due to Alleghany Funding. 3. INCOME TAXES. Reference is made to Note 8 of the Notes to Consolidated Financial Statements incorporated herein by reference regarding the Company's adoption of FASB Statement No. 109. 4. COMMITMENTS AND CONTINGENCIES. Reference is made to Note 12 of the Notes to Consolidated Financial Statements incorporated herein by reference. 5. STOCKHOLDERS' EQUITY. Reference is made to Note 9 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. 6. RECLASSIFICATION. Certain prior year amounts have been reclassified to conform to the 1994 presentation. 92 SCHEDULE V ---------- 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 - ---- ------- -------------------------------------------------- 1994 Title $0 $536,068 $0 $0 ================================================== Property and casualty reinsurance $11,325 $940,527 $52,828 $0 ================================================== 1993 Title $0 $523,123 $0 $0 ================================================== Property and casualty reinsurance ** $10,363 $861,204 $49,078 $0 ================================================== 1992 Title $0 $512,452 $0 $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 - ---- ------- ----------------------------------------------------------------------------------- 1994 Title $1,162,207 $39,850 $94,845 $0 $1,138,921 $0 =================================================================================== Property and casualty reinsurance $190,279 $41,226 $153,056 $962 $52,645 $200,596 =================================================================================== 1993 Title $1,236,165 $37,736 $121,864 $0 $1,177,507 $0 =================================================================================== Property and casualty reinsurance ** $32,703 $10,390 $25,131 $1,194 $5,309 $36,172 =================================================================================== 1992 Title $1,125,906 $41,022 $109,235 $0 $1,075,259 $0 ===================================================================================
* Does not include Alleghany Corporation or Chicago Title and Trust Company's trust and escrow operations. ** On October 7, 1993, the Company acquired URC Holdings Corp., whose principal subsidiary is Underwriters Reinsurance Company. The acquisition for accounting purposes was effective as of October 1, 1993. Accordingly, results of operations are from October 1, 1993. 93 SCHEDULE VI ----------- ALLEGHANY CORPORATION AND SUBSIDIARIES REINSURANCE THREE YEARS ENDED DECEMBER 31, 1994 (in thousands)
CEDED ASSUMED PERCENTAGE TO FROM OF AMOUNT GROSS OTHER OTHER NET ASSUMED YEAR SEGMENT AMOUNT COMPANIES COMPANIES AMOUNT TO NET - ---- ------- -------------------------------------------------------------------------- 1994 Title premiums $1,162,207 $5,250 $2,771 $1,159,728 0.24% Property and casualty reinsurance premiums $ 8,821 $69,299 $250,757 $190,279 131.78% ========================================================================== 1993 Title premiums $1,236,165 $5,547 $1,865 $1,232,483 0.15% ========================================================================== Property and casualty reinsurance premiums * $ 4,218 $9,994 $38,479 $32,703 117.66% ========================================================================== 1992 Title premiums $1,125,906 $7,079 $2,116 $1,120,943 0.19% ==========================================================================
* On October 7, 1993, the Company acquired URC Holdings Corp., whose principal subsidiary is Underwriters Reinsurance Company. The acquisition, for accounting purposes, was effective as of October 1, 1993. Accordingly, results of operations are from October 1, 1993. 94 SCHEDULE X 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 - ----------- ------------------------------------------------------------------------- 1994 Consolidated property- casualty entities $11,325 $940,527 $0 $52,828 $190,279 $41,226 =================================================================== 1993 Consolidated property-casualty entities* $10,363 $861,204 $0 $49,078 $ 32,703 $10,390 ===================================================================
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 - ----------- ------------------------------------------------------------- 1994 Consolidated property- casualty entities $146,416 $6,630 $ 962 $126,114 $200,596 ============================================================= 1993 Consolidated property-casualty entities* $ 25,131 $ 0 $1,194 $ 27,876 $ 36,172 =============================================================
* On October 7, 1993, the Company acquired URC Holdings Corp., whose principal subsidiary is Underwriters Reinsurance Company. The acquisition, for accounting purposes, was effective as of October 1, 1993. Accordingly, results of operations are from October 1, 1993. 95 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders Alleghany Corporation: Under date of February 28, 1995, we reported on the consolidated balance sheets of Alleghany Corporation and subsidiaries as of December 31, 1994 and 1993, 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, 1994 as contained in the 1994 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 1994. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement 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. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and No. 109, "Accounting for Income Taxes" at December 31, 1993 and in 1992, respectively. /s/ KPMG Peat Marwick LLP KPMG Peat Marwick LLP New York, New York February 28, 1995 96 ALLEGHANY CORPORATION AND SUBSIDIARIES 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 January 16, 1995. 4.01 Indenture dated as of June 15, 1989 between Alleghany and Pittsburgh National Bank, as Trustee, relating to the 6-1/2% Subordinated Exchangeable Debentures due June 15, 2014 (the "Debentures"), including the form of Debenture, filed as Exhibit 4.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 4.02 Escrow Agreement dated as of June 15, 1989 between Alleghany and Pittsburgh National Bank, as Escrow Agent, for the escrow of common shares of American Express Company for which the Debentures are exchangeable, filed as Exhibit 4.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371).
97 *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(a) Agreement dated as of December 22, 1993 between Alleghany and David B. Cuming, filed as Exhibit 10.02(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. Agreements dated as of December 22, 1993 between Alleghany and each of F.M. Kirby, John J. Burns, Jr., Richard P. Toft, Theodore E. Somerville, John E. Conway and Peter R. Sismondo were omitted pursuant to Instruction 2 of Item 601 of Regulation S-K. *10.02(b) Agreement dated as of December 15, 1993 between CT&T and Richard P. Toft, filed as Exhibit 10.02(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. *10.03 Agreement dated August 18, 1994 between Alleghany and Theodore E. Somerville. *10.04 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. *10.05(a) Alleghany 1983 Long-Term Incentive Plan as adopted on March 16, 1983, filed as Exhibit 10.24 to the Annual Report on Form 10-K of Alleghany Corporation, a Maryland corporation and the predecessor
__________________________________ * Compensatory plan or arrangement. -2- 98 of Alleghany ("Old Alleghany"), for the year ended December 31, 1982, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.05(b) Description of amendments to the Alleghany 1983 Long-Term Incentive Plan as adopted on December 30, 1986, filed as Exhibit 10.05(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1986, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). *10.06(a) Alleghany 1993 Long-Term Incentive Plan adopted and effective as of January 1, 1993, filed as Exhibit 10.05 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. *10.06(b) Alleghany 1993 Long-Term Incentive Plan, as amended and restated effective as of January 1, 1994 (subject to the approval of Alleghany's stockholders). *10.07 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). *10.08(a) Alleghany Retirement Plan effective as of January 1, 1989, as adopted on April 18, 1989, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1989, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371).
__________________________________ * Compensatory plan or arrangement. -3- 99 *10.08(b) Trust Agreement dated as of January 1, 1989 between Alleghany and Bankers Trust Company, filed as Exhibit 10.5(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. *10.08(c) Alleghany Retirement Plan, as amended and restated on March 14, 1995. *10.09 Alleghany Retirement COLA Plan dated and effective as of January 1, 1992, as adopted on March 17, 1992, filed as Exhibit 10.7 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. *10.10 Alleghany Amended and Restated Directors' Stock Option Plan effective as of April 20, 1993 (provided that options granted thereunder prior to the approval of Alleghany's stockholders were conditioned upon such approval), 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. *10.11 Alleghany Directors' Equity Compensation Plan, effective as of January 16, 1995 (subject to the approval of Alleghany's stockholders). *10.12 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.
__________________________________ * Compensatory plan or arrangement. -4- 100 *10.13(a) Employment Agreement dated as of January 1, 1992, and Amendment to Employment Agreement dated as of January 1, 1993, among CT&T, Alleghany and Richard P. Toft, filed as Exhibit 10.12 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference. *10.13(b) Second Amendment to Employment Agreement dated as of January 1, 1994, among CT&T, Alleghany and Richard P. Toft, filed as Exhibit 10.11(b) of Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993 is incorporated herein by reference. *10.13(c) Third Amendment to Employment Agreement dated as of October 31, 1994, among CT&T, Alleghany and Richard P. Toft, filed as Exhibit 10.1 of Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1994, is incorporated herein by reference. *10.14 Split/Owner "Split Dollar" Life Insurance Plan Assignment dated March 19, 1986 by and between Richard P. Toft and CT&T, filed as Exhibit 10.10(c) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. *10.15 Description of CT&T Presidents' Plan, adopted and effective as of July 1, 1985 and as amended as of January 26, 1993, filed as Exhibit 10.14 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1992, is incorporated herein by reference.
__________________________________ * Compensatory plan or arrangement. -5- 101 *10.16 CT&T Performance Unit Incentive Plan, adopted and effective as of July 1, 1985, restated as the CT&T Performance Unit Incentive Plan of 1989, effective as of July 1, 1990, filed as Exhibit 10.12 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1990, is incorporated herein by reference. *10.17 CT&T Executive Performance Unit Incentive Plan of 1992, adopted and effective as of January 1, 1992, as amended and restated effective January 1, 1993, filed as Exhibit 10.15 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. *10.18 Description of CT&T Quality Business Management Incentive Program for the Presidents of CT&T and Chicago Title Insurance Company, effective as of January 1, 1989, as amended as of January 1, 1992, filed as Exhibit 10.16 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. *10.19 CT&T Excess Benefits Pension Plan, effective January 1, 1987, as amended by First Amendment to CT&T Excess Benefits Pension Plan dated May 5, 1994, effective as of January 1, 1994. *10.20 CT&T Executive Salary Continuation Plan effective as of January 1, 1979, as adopted on August 23, 1978, filed as Exhibit 10.15 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1990, is incorporated herein by reference.
__________________________________ * Compensatory plan or arrangement. -6- 102 *10.21(a) Description of compensatory arrangement between Alleghany Financial Inc. and Paul F. Woodberry. *10.21(b) Description of compensatory arrangement between Alleghany and Paul F. Woodberry. 10.22 Revolving Credit Loan Agreement dated as of July 9, 1991 among Alleghany, Chemical Bank and Manufacturers Hanover Trust Company, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1991, is incorporated herein by reference. 10.23(a) Stock Purchase Agreement dated as of June 18, 1985 by and among Old Alleghany, Alleghany, Alleghany Capital Corporation and Lincoln National Corporation (the "CT&T Stock Purchase Agreement"), filed as Exhibit (2)(i) to Old Alleghany's Current Report on Form 8-K dated July 11, 1985, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.23(b) List of Contents of Schedules to the CT&T Stock Purchase Agreement, filed as Exhibit (2)(ii) to Old Alleghany's Current Report on Form 8-K dated July 11, 1985, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371). 10.23(c) Amendment No. 1 dated December 20, 1985 to the CT&T Stock Purchase Agreement, filed as Exhibit 10.12(c) to Old Alleghany's Annual Report on Form 10-K for the year ended December 31, 1985, is incorporated herein by reference (Securities and Exchange Commission File No. 1-9371).
__________________________________ * Compensatory plan or arrangement. -7- 103 10.24 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). 10.25 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) 10.26(a) Agreement and Plan of Merger dated as of April 29, 1994 among Montag & Caldwell Associates, Inc., Alleghany Acquisition Corporation, Alleghany and the Shareholders of Montag & Caldwell Associates, Inc. (the "Montag & Caldwell Acquisition Agreement"), filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, is incorporated herein by reference. 10.26(b) List of Contents of Exhibits to the Montag & Caldwell Acquisition Agreement, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1994, is incorporated herein by reference. 10.27(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.
-8- 104 10.27(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. 10.28(a) Note Purchase Agreement dated as of January 15, 1995 by and among Alleghany Properties, Inc., Alleghany and Hartford Life Insurance Company Seperate Account CRC (the "Alleghany Properties Note Purchase Agreement"). 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. 10.28(b) List of Contents of Annexes and Exhibits to the Alleghany Properties Note Purchase Agreement which are not being filed herewith. Alleghany hereby agrees to furnish to the Commission supplementally a copy of any omitted Annex or Exhibit upon request. 10.29 Letter agreement dated January 24, 1995 among Alleghany, Santa Fe Pacific Corporation and Burlington Northern Inc., filed as Exhibit 2 to Amendment No. 3 to Alleghany's Schedule 13D relating to Santa Fe Pacific Corporation dated January 24, 1995, is incorporated herein by reference.
-9- 105 10.30(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). 10.30(b) Intercreditor and Collateral Agency Agreement dated as of August 1, 1990 among Manufacturers Hanover Trust Company, Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, is incorporated herein by reference. 10.30(c) Interest Rate and Currency Exchange Agreement dated as of August 14, 1990 between Barclays Bank PLC and Alleghany Funding Corporation, and related Confirmation dated August 13, 1990 between Barclays Bank PLC and Alleghany Funding Corporation, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, are incorporated herein by reference. 10.30(d) Indenture dated as of August 1, 1990 between Alleghany Funding Corporation and Manufacturers Hanover Trust Company, filed as Exhibit 10.3 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990, is incorporated herein by reference.
-10- 106 10.31(a) Acquisition Agreement dated as of November 29, 1990 by and between CT&T and Westwood Equities Corporation (the "Ticor Acquisition Agreement"), filed as Exhibit (2)(i) to Alleghany's Current Report on Form 8-K dated December 21, 1990, is incorporated herein by reference. 10.31(b) List of Contents of Schedules to the Ticor Acquisition Agreement, filed as Exhibit 2(ii) to Alleghany's Current Report on Form 8-K dated December 21, 1990, is incorporated herein by reference. 10.31(c) Amendment to the Ticor Acquisition Agreement dated as of January 9, 1991 by and between CT&T and Westwood Equities Corporation, filed as Exhibit (2)(iii) to Alleghany's Current Report on Form 8-K dated March 21, 1991, is incorporated herein by reference. 10.31(d) Amended and Restated Credit Agreement dated as of December 30, 1993 among CT&T, certain commercial lending institutions and Continental Bank, N.A. as agent, filed as Exhibit 10.28(d) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1993, is incorporated herein by reference. 10.31(e) Letter Agreement dated May 2, 1991 between CT&T and Continental Bank, N.A. relating to an interest rate swap effective May 6, 1991, filed as Exhibit 10.2 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1991, is incorporated herein by reference.
-11- 107 10.31(f) Letter Agreement dated December 13, 1994 between CT&T and Bank of America Illinois (previously known as Continental Bank) relating to the transfer of Continental Bank's risk management business to Bank of America National Trust and Savings Association. 10.32(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. 10.32(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. 10.33(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. 10.33(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.
-12- 108 10.34(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. 10.34(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. 10.34(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. 10.35(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. 10.35(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. 10.35(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.
-13- 109 10.36(a) Credit Agreement dated as of December 20, 1991 among Celite Holdings Corporation, Celite, Bank of America National Trust and Savings Association and Chemical Bank (the "Celite Credit Agreement"), filed as Exhibit 10.35(a) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10.36(b) List of Contents of Exhibits and Annexes to the Celite Credit Agreement which are not being filed herewith, filed as Exhibit 10.35(b) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10.36(c) Amendment No. 1 dated January 24, 1992 to the Celite Credit Agreement, filed as Exhibit 10.36 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10.36(d) Letter Agreement dated January 23, 1992 between Celite and Bank of America National Trust and Savings Association relating to an interest rate swap effective January 16, 1992, filed as Exhibit 10.37 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10.36(e) Letter Agreement dated January 13, 1992 between Celite and Chemical Bank relating to an interest rate swap effective January 13, 1992, filed as Exhibit 10.38 to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference.
-14- 110 10.37(a) Standstill Agreement dated as of September 24, 1991 between Armco Inc. and Alleghany (the "Standstill Agreement"), filed as Exhibit 10.39(e) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10.37(b) Amendment dated as of March 17, 1992 to the Standstill Agreement, filed as Exhibit 10.39(f) to Alleghany's Annual Report on Form 10-K for the year ended December 31, 1991, is incorporated herein by reference. 10.37(c) Amendment No. 2 dated as of April 24, 1992 to the Standstill Agreement, as amended as of March 17, 1992, filed as Exhibit 10.1 to Alleghany's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, is incorporated herein by reference. 10.38(a) Stock Purchase Agreement dated as of October 31, 1991 among Associated Insurance Companies, Inc., Alleghany and The Shelby Insurance Group, Inc. (the "Shelby Stock Purchase Agreement"), filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, is incorporated herein by reference. 10.38(b) List of Contents of Exhibits and Schedules to the Shelby Stock Purchase Agreement, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, is incorporated herein by reference. 10.39(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
-15- 111 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. 10.39(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. 10.39(c) Stock Purchase Related Agreement dated as of July 28, 1993 (the "Underwriters Stock Purchase Related Agreement") among certain persons named therein and Alleghany, filed as Exhibit 10.3(c) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. 10.39(d) List of Exhibits and Schedules to the Underwriters Stock Purchase Related Agreement, filed as Exhibit 10.3(d) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, is incorporated herein by reference. 10.39(e) Supplement to Underwriters Stock Purchase Related Agreement dated as of August 12, 1993 among certain persons named therein and Alleghany, filed as Exhibit 10.1(a) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, is incorporated herein by reference. 10.39(f) Amendment to Underwriters Stock Purchase Related Agreement made as of October 7, 1993 among certain persons named therein and Alleghany, filed as Exhibit 10.1(b) to Alleghany's Quarterly Report on Form 10-Q for the quarter ended September 30, 1993, is incorporated herein by reference.
-16- 112 13 Pages 2 through 4, pages 6 through 15, and pages 19 through 41 of the Annual Report to Stockholders of Alleghany for the year 1994. 21 List of subsidiaries of Alleghany. 23 Consent of KPMG Peat Marwick LLP, independent certified public accountants, to the incorporation by reference of their reports relating to the financial statements and related schedules of Alleghany and subsidiaries in Alleghany's Registration Statements on Form S-8 (Registration No. 27598) and Form S-3 (Registration No. 55707). 27 Financial Data Schedule. 28 Information from reports furnished to state insurance regulatory authorities by Underwriters Reinsurance Company, Commercial Underwriters Insurance Company, and Underwriters Insurance Company is filed under cover of Form SE, pursuant to Rule 311(c) of Regulation S-T.
-17- EX-3.02 2 BY-LAWS OF ALLEGHANY AS AMENDED JAN. 16, 1995 1 Exhibit 3.02 =============================================================================== BY-LAWS OF ALLEGHANY CORPORATION -------------- DELAWARE ================================================================================ 2 ARTICLE I. STOCKHOLDERS SECTION 1. ANNUAL MEETING The annual meeting of stockholders for the election of directors and for the transaction of any other business that may properly come before the meeting shall be held at such hour and at such place or places within or without the State of Delaware as may from time to time be determined by the Board of Directors, on the fourth Friday of April in each year or such other date as may be set by the Board of Directors not more than 15 days before, nor 15 days after, the fourth Friday of April. SECTION 2. SPECIAL MEETINGS At any time in the interval between regular meetings, special meetings of stockholders may be called by the Chairman, or by a majority of the Board of Directors, to be held at such times and at such places within or without the State of Delaware as may be specified in the notices of such meetings. The notice of any special meeting shall state the purpose of the meeting and specify the action to be taken at said meeting and no business shall be transacted thereat except that specifically named in the notice. SECTION 3. NOTICE OF MEETING Notice of the time and place of every meeting of stockholders shall be delivered personally or mailed at least ten days and not more than sixty days prior thereto to each stockholder of record entitled to vote at his address as it appears on the records of the Corporation. Such further notice shall be given as may be required by law. Business transacted at any special meeting shall be confined to the purpose or purposes stated in the notice of such special meeting. Meetings may be held without notice if all stockholders entitled to vote are present or if notice is waived by those not present. SECTION 4. VOTING At all meetings of stockholders any stockholder entitled to vote may vote in person or by proxy. Such proxy or any revocation or amendment thereof, shall be in writing, but need not be sealed, witnessed or acknowledged, and shall be filed with the Secretary at or before the meeting. The Corporation may require that such proxy indicate whether such stock is beneficially owned by a Substantial Stockholder, as defined in Article NINTH of the Certificate of Incorporation. 3 SECTION 5. QUORUM Unless otherwise required by statute or the Restated Certificate of Incorporation of the Corporation (the "Certificate of Incorporation"), at any annual or special meeting of stockholders the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at the meeting (after giving effect to the provisions of Article NINTH of the Certificate of Incorporation) shall constitute a quorum, but if at any meeting of the stockholders there be less than a quorum present, the stockholders present at such meeting may, without further notice, adjourn, the same from time to time until a quorum shall attend, but no business shall be transacted at any such adjournment except such as might have been lawfully transacted had the meeting not been adjourned. SECTION 6. ACTION AT MEETINGS Except as otherwise required by law, the Certificate of Incorporation or these By-Laws, a majority of the votes (after giving effect to the provisions of Article NINTH of the Certificate of Incorporation) cast at a meeting at which a quorum is present shall be sufficient to take or authorize action upon any matter which may properly come before the meeting, and the stockholders shall not be entitled to cumulate their votes upon the election of directors, or upon any other matter. Any action required or permitted to be taken by the stockholders must be effected at an annual or special meeting of stockholders and may not be effected by any consent in writing by such stockholders. SECTION 7. PROCEDURE AT MEETINGS The Board of Directors may appoint two or more persons to serve as inspectors of election at any meeting of stockholders. In the absence of such appointment, the Chairman of the Meeting may make such appointment. The inspectors of election shall receive, examine and tabulate all ballots, and proxies, including proxies filed with the Secretary, shall determine the presence or absence of a quorum and shall report to the officer of the Corporation or other person presiding over the meeting the result of all voting taken at the meeting by ballot. The order of business and all other matters of procedure at every meeting of the stockholders may be determined by the officer of the Corporation or other person presiding over the meeting. -2- 4 SECTION 8. BUSINESS OF THE MEETING At any annual meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors or (ii) by any stockholder who is entitled to vote with respect thereto and who complies with the notice procedures set forth in this Section 8. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered or mailed to and received at the principal executive offices of the Corporation not less than 30 days prior to the date of the annual meeting; provided, however, that in the event that less than 40 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be received not later than the close of business on the 10th day following the day on which such notice of the date of the annual meeting was mailed or such public disclosure was made. A stockholder's notice to the Secretary shall set forth as to each matter such stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder and (iv) any material interest of such stockholder in such business. Notwithstanding anything in the By- Laws to the contrary, no business shall be brought before or conducted at the annual meeting except in accordance with the provisions of this Section 8. The officer of the Corporation or other person presiding over the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 8 and, if he shall so determine, he shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be so transacted. At any special meeting of stockholders, only such business shall be conducted as shall have been brought before the meeting by or at the direction of the Board of Directors. -3- 5 SECTION 9. NOMINATION OF DIRECTORS Only persons who are nominated in accordance with the procedures set forth in these By-Laws shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders at which directors are to be elected only (i) by or at the direction of the Board of Directors or (ii) by any stockholder of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 9. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made by timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered or mailed to and received at the principal executive offices of the Corporation not less than 30 days prior to the date of the meeting, provided, however, that in the event that less than 40 days' notice or prior disclosure of the date of the meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the 10th day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made. Such stockholder's notice shall set forth (i) as to each person whom such stockholder proposes to nominate for election as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving the notice (x) the name and address, as they appear on the Corporation's books, of such stockholder and (y) the class and number of shares of the Corporation's capital stock that are beneficially owned by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the provisions of this Section 9. The officer of the Corporation or other person presiding at the meeting shall, if the facts so warrant, determine and declare to the meeting that a nomination was not made in accordance with such provisions and, if he shall so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. -4- 6 SECTION 10. ADJOURNMENTS Any meeting of stockholders may be adjourned from time to time, whether or not a quorum is present, by the affirmative vote of a majority of the votes present and entitled to be cast at the meeting, or by the officer of the Corporation presiding over the meeting, or by the Board of Directors. ARTICLE II. DIRECTORS SECTION 1. NUMBER AND ELECTION Directors (other than such directors, if any, as are elected by holders of preferred stock of the Corporation voting as a separate class) shall be divided into three classes, which shall be as nearly equal in number as practicable. Unless changed by the Board of Directors pursuant hereto the number of directors shall be nine and each class shall consist of three directors. The number of directors and the number of which each class is to consist may be increased or decreased from time to time by a resolution adopted by the vote of in excess of three-quarters (75%) of the Whole Board (as defined in the Certificate of Incorporation); and provided that no decrease in the number of directors shall affect the tenure of office of any existing director. The term of office of the first class shall expire at the 1987 annual meeting of stockholders, the term of office of the second class shall expire at the 1988 annual meeting of stockholders and the term of office of the third class shall expire at the 1989 annual meeting of stockholders, with each director to hold office until his or her successor shall have been duly elected and qualified. At each annual meeting of stockholders, commencing with the 1987 annual meeting, directors elected to succeed those directors whose terms then expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, with each director to hold office until his or her successor shall have been duly elected and qualified. SECTION 2. VACANCIES Subject to the rights of the holders of any series of Preferred Stock, and unless the Board of Directors otherwise determines, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office, though less than a quorum, and any director so chosen shall hold office for a term -5- 7 expiring at the annual meeting of stockholders at which the term of office of the class to which such director has been elected expires and until such director's successor shall have been duly elected and qualified. SECTION 3. REGULAR MEETINGS Regular meetings of the Board of Directors shall be held at such times and places as the Board of Directors may from time to time determine. SECTION 4. SPECIAL MEETINGS Special meetings of the Board of Directors may be called at any time, at any place and for any purpose by the Chairman of the Board or by any three directors. SECTION 5. NOTICE OF MEETING Notice of regular meetings of the Board of Directors need not be given. Notice of every special meeting of the Board of Directors shall be given to each director, by (a) deposit in the mail at least seventy-two hours before the meeting, or (b) telephone communication directly with such person, the dispatch of a telegraphic communication to his address, or actual delivery to his address, at least forty-eight hours before the meeting. If given to a director by mail, telegraph or actual delivery to his address, such notice shall be sent or delivered to his business or residential address as shown on the records of the Secretary or an Assistant Secretary of the Corporation, or to such other address as shall have been furnished to the Secretary or an Assistant Secretary of the Corporation by him for the purpose. Such notice need not include a statement of the business to be transacted at, or the purpose of, any such meeting. SECTION 6. QUORUM; ACTION AT MEETINGS A majority of the Board of Directors shall constitute a quorum for the transaction of business, but if, at any meeting of the Board, there be less than a quorum present, the members at the meeting may, without further notice, adjourn the same from time to time until a quorum shall attend. Except as herein or in the Certificate of Incorporation provided or as required by law, a majority of such quorum shall decide any questions that may come before the meeting. -6- 8 SECTION 7. PARTICIPATING IN MEETING BY CONFERENCE TELEPHONE Members of the Board of Directors, or any committee thereof, may participate in a meeting of such Board or committee by means of conference telephone or similar equipment by means of which all persons participating in the meeting can hear each other at the same time and such participation shall constitute presence in person at such meeting. SECTION 8. DIVIDENDS Anything in these By-Laws to the contrary notwithstanding, the declaration of dividends or other distributions on the capital stock of the Corporation, whether in cash or property (other than the dividend preference payable on any preferred stock of the Corporation outstanding from time to time), may be authorized only by vote of in excess of three-quarters (75%) of the directors present at a meeting duly called at which a quorum is present. ARTICLE III. COMMITTEES OF THE BOARD OF DIRECTORS SECTION 1. ELECTION The Board of Directors may appoint an Executive Committee and other committees composed of two or more of its members, and may appoint one of the members of each such committee to the office of chairman thereof. Members of the committees of the Board of Directors shall hold office for a term of one year and until their successors are appointed and qualify or until they shall cease to be directors. SECTION 2. POWERS Subject to such limitations as may from time to time be established by resolution of the Board of Directors, the Executive Committee shall have any and may exercise all of the powers of the Board of Directors when the Board of Directors is not in session except that it shall have no power to (a) declare dividends, (b) issue stock of the Corporation, (c) recommend to the stockholders any action which requires stockholder approval, (d) alter, amend or repeal any resolution of the Board of Directors relating to the Executive Committee, or (e) take any other action which legally may be taken only by the Board of Directors. Other committees of the Board of Directors shall have such powers as shall be properly delegated to them by the Board of Directors. -7- 9 SECTION 3. VACANCIES If the office of any member of any committee becomes vacant by death, resignation, or otherwise, such vacancy may be filled from the members of the Board by the Board of Directors. SECTION 4. SUBSTITUTE MEMBERS In the event that a member of any committee is absent from a meeting of the committee, the members of the committee present at the meeting whether or not they constitute a quorum may appoint another director to act in place of the absent member. SECTION 5. ELECTION AND NUMBER The Executive Committee shall meet from time to time on call of the Chairman of the Board, or on call of any three or more members of the Executive Committee, for the transaction of any business. Notice of every meeting of the Executive Committee shall be given to each member, by (a) deposit in the mail at least seventy-two hours before the meeting, or (b) telephonic communication directly with such person, the dispatch of a telegraphic communication to his address, or actual delivery to his address, at least forty-eight hours before the meeting. If given to a member by mail, telegraph or actual delivery to his address, such notice shall be sent or delivered to his business or residential address as shown on the records of the Secretary or an Assistant Secretary of the Corporation, or to such other address as shall have been furnished to the Secretary or an Assistant Secretary of the Corporation by him for this purpose. Such notice need not include a statement of the business to be transacted at, or the purpose of, any such meeting. All other committees of the Board of Directors shall meet at such times and upon such notice as they may determine. SECTION 6. QUORUM; ACTION AT MEETINGS At any meeting of any committee, however called, a majority of the members shall constitute a quorum for the transaction of business. A majority of such quorum shall decide any questions that may come before the meeting. -8- 10 ARTICLE IV. OFFICERS SECTION 1. ELECTION AND NUMBER The Board of Directors may appoint one of its number as Chairman of the Board. The Board of Directors shall appoint a President from among the directors, and a Secretary and a Treasurer, who need not be directors. The Board of Directors may also appoint one or more Senior Vice Presidents and/or Vice Presidents, who need not be directors. All officers of the Corporation shall hold office at the pleasure of the Board of Directors. Any two or more offices, except those of President and Vice President, may, at the discretion of the Board of Directors, be held by the same person. The Board of Directors may from time to time appoint such other officers and agents with such powers and duties as the Board may prescribe. SECTION 2. CHAIRMAN OF THE BOARD The Chairman of the Board shall preside at all meetings of the Board of Directors and shall perform such other duties and exercise such other powers as may be assigned to him from time to time by the Board of Directors. SECTION 3. PRESIDENT The President shall be the chief executive officer and the chief operating officer of the Corporation. He shall preside at all meetings of stockholders and, in the absence of the Chairman of the Board, he shall preside at all meetings of the Board of Directors. Subject to the control of the Board of Directors, he shall have direct power and authority over the business and affairs of the Corporation. The President shall perform such other duties and exercise such other powers as may be assigned to him from time to time by the Board of Directors. SECTION 4. SENIOR VICE PRESIDENTS The Senior Vice President or Senior Vice Presidents shall perform the duties of the President in his absence or during his disability to act. In addition, the Senior Vice President or Senior Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and/or such other duties and powers as may be properly assigned to them from time to time by the Board of Directors, the Chairman of the Board or the President. -9- 11 SECTION 5. VICE PRESIDENTS The Vice President or Vice Presidents shall perform the duties of the Senior Vice President or Senior Vice Presidents in his or their absence or disability to act. In addition, the Vice President or Vice Presidents shall perform the duties and exercise the powers usually incident to their respective offices and such other duties and powers as may be properly assigned to them from time to time by the Board of Directors, the Chairman of the Board, the President, or any Senior Vice President having supervisory authority over them. SECTION 6. SECRETARY The Secretary shall issue notices of meetings, keep the minutes of the Board of Directors and its committees, have charge of the corporate seal, and perform such other duties and exercise such other powers as are usually incident to such office or are properly assigned thereto by the Board of Directors, the Chairman of the Board, the President or any Senior Vice President or Vice President having supervisory authority over him. SECTION 7. TREASURER The Treasurer shall have charge of all monies and securities of the Corporation, other than monies and securities of any division of the Corporation which has a treasurer or financial officer appointed by the Board of Directors, and shall keep regular books of account. The funds of the Corporation shall be deposited in the name of the Corporation by the Treasurer with such banks or trust companies as the Board of Directors or the Executive Committee from time to time shall designate. He shall sign or countersign such instruments as require his signature, shall perform all such duties and have all such powers as are usually incident to such office or are properly assigned to him by the Board of Directors, the Chairman of the Board, the President or any Senior Vice President or Vice President having supervisory authority over him, and may be required to give bond for the faithful performance of his duties in such sum and with such surety as may be required by the Board of Directors. SECTION 8. CONTROLLER The Controller shall be responsible for the accounting policies and practices of the Corporation, maintain its financial records, collect and consolidate the financial results of its subsidiaries and other operating units, prepare its financial reports, determine the amount and source of the funds required to meet its financial obliga- -10- 12 tions, and perform such other duties and exercise such other powers as are usually incident to such office or are properly assigned thereto by the Board of Directors, the Chairman of the Board, the President or any Senior Vice President or Vice President having supervisory authority over him. SECTION 9. ASSISTANT SECRETARY; ASSISTANT TREASURER The Board of Directors may appoint one or more assistant secretaries and one or more assistant treasurers, or one appointee to both such positions, which officers shall have such powers and shall perform such duties as are provided in these By-Laws to the Secretary or Treasurer, as the case may be, or as are properly assigned thereto by the Board of Directors, the Chairman of the Board, the President, the Secretary or Treasurer as the case may be, or any other officer having supervisory authority over them. ARTICLE V. FISCAL YEAR The fiscal year of the Corporation shall end on the thirty-first day of December in each year, or on such other day as may be fixed from time to time by the Board of Directors. ARTICLE VI. SEAL The Board of Directors shall provide a suitable seal, containing the name of the Corporation, which seal shall be in the charge of the Secretary or an Assistant Secretary. ARTICLE VII. STOCK SECTION 1. CERTIFICATES OF STOCK Certificates of stock shall be issued in such form as may be approved by the Board of Directors and shall be signed, manually or by facsimile, by the Chairman of the Board, President, or a Vice President, and by the Treasurer, Assistant Treasurer, Secretary or Assistant Secretary, and sealed with the seal of the Corporation or a facsimile thereof. -11- 13 SECTION 2. TRANSFERS The Board of Directors shall have power and authority to make all such rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificates of stock. The Board of Directors may appoint Transfer Agents and Registrars thereof. SECTION 3. RECORD DATE; CLOSING OF TRANSFER BOOKS The Board of Directors may fix a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to stockholders, including which stockholders are entitled to notice of or to vote at a meeting or any adjournment thereof, receive payment of any dividend or other distribution, or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock. The record date may not be more than sixty (60) nor less than ten (10) days before the date on which the action requiring the determination will be taken; the transfer books may not be closed for a period longer than twenty (20) days; and, in the case of a meeting of stockholders, the closing of the transfer books shall be at least ten (10) days before the date of the meeting. SECTION 4. LOST CERTIFICATES The Board of Directors may determine the conditions upon which a new certificate of stock will be issued to replace a certificate which is alleged to have been lost, stolen, mutilated or destroyed, and the Board of Directors may delegate to any officer of the Corporation the power to make such determinations and to cause such replacement certificates to be issued. SECTION 5. WARRANTS The foregoing provisions relative to certificates of stock shall also apply to allotment certificates or other certificates or warrants representing rights with respect to stock in the Corporation, which certificates or warrants may be issued from time to time by a vote of the Board of Directors in such form as they may approve. -12- 14 SECTION 6. STOCK LEDGER The Corporation shall maintain a stock ledger which contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any other form which can be converted within a reasonable time into written form for visual inspection. The original stock ledger shall be kept at the office of the Corporation's Transfer Agent. ARTICLE VIII. SIGNATURES SECTION 1. NEGOTIABLE INSTRUMENTS All checks, drafts, notes, or other obligations of the Corporation shall be signed (a) by any two officers of the Corporation of the rank of Chairman of the Board, President, or Vice President, (b) by the Chairman of the Board, President, or any Vice President and by the Treasurer or Assistant Treasurer or Secretary or Assistant Secretary, or (c) as otherwise authorized by the Board of Directors or the Executive Committee; provided, however, that bonds, debentures or notes issued under a mortgage indenture or trust agreement with a bank or trust company as trustee and coupons attached or pertaining to any such bonds, debentures or notes may be executed manually or by facsimile. SECTION 2. STOCK TRANSFERS All endorsements, assignments, transfers, stock powers or other instruments of transfer of securities standing in the name of the Corporation shall be executed for and in the name of the Corporation (a) by any two officers of the Corporation of the rank of Chairman of the Board, President, or Vice President, or (b) by the Chairman of the Board, President, or any Vice President, and by the Secretary or an Assistant Secretary, or (c) as otherwise authorized by the Board of Directors. -13- 15 ARTICLE IX. WAIVER OF NOTICE OF MEETINGS SECTION 1. STOCKHOLDERS Notice of the time, place and/or purpose of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy; and if any stockholder shall, in a writing filed with the records of the meeting, either before or after the holding thereof, waive notice of any stockholders' meeting, notice thereof need not be given to him. SECTION 2. DIRECTORS Notice of any meeting of the Board of Directors or of any committee thereof need not be given to any director if he shall attend such meeting in person, or shall in a writing filed with the records of the meeting, either before or after the holding thereof, waive such notice; and any meeting of the Board of Directors or of any committee thereof shall be a legal meeting without any notice thereof having been given if all such directors shall be present at such meeting. ARTICLE X. VOTING OF STOCKS Unless otherwise ordered by the Board of Directors, the Chairman of the Board, the President, any Senior Vice President or any Vice President of this Corporation shall have full power and authority, on behalf of the Corporation, to attend, act and vote at any meeting of the stockholders of any corporation in which this Corporation may hold stock and at such meeting may exercise any or all rights and powers incident to the ownership of such stock and which as owner thereof the Corporation might exercise if present, and to execute on behalf of the Corporation a proxy or proxies empowering others to act as aforesaid. The Board of Directors by resolution from time to time may confer like powers upon any other person or persons. -14- 16 ARTICLE XI. CHECKS, NOTES, ETC. All checks on the Corporation's bank accounts and all drafts, bills of exchange and promissory notes, and all acceptances, obligations and other instruments for the payment of money, shall be signed by such person or persons as shall be authorized to do so from time to time by the Board of Directors or by the committee or officer or officers of the Corporation to whom the Board shall have delegated the power to authorize such signing; provided, however, that the signature of any person so authorized on checks and drafts drawn on the Corporation's dividend and special accounts may be in facsimile if the Board of Directors or such committee or officer or officers, whichever shall have authorized such person to sign such checks or drafts, shall have authorized such person to sign in facsimile, and provided further that in case notes or other instruments for the payment of money (other than notes, bonds or debentures issued under a trust instrument of the Corporation) are required to be signed by two persons, the signature thereon of only one of the persons signing any such note or other instrument may be in facsimile, and that in the case of notes, bonds or debentures issued under a trust instrument of the Corporation and required to be signed by two officers of the Corporation, the signatures of both such officers may be in facsimile if specifically authorized and directed by the Board of Directors of the Corporation and if such notes, bonds or debentures are required to be authenticated by a corporate trustee which is a party to the trust instrument and provided further that in case any person or persons who shall have signed any such note or other instrument, either manually or in facsimile, shall have ceased to be a person or persons so authorized to sign any such note or other instrument, whether because of death or by reason of any other fact or circumstance, before such note or other instrument shall have been delivered by the Corporation, such note or other instrument may, nevertheless, be adopted by the Corporation and be issued and delivered as though the person or persons who so signed such note or other instrument had not ceased to be such a person or persons. ARTICLE XII. OFFICES The Corporation may have offices outside the State of Delaware at such places as shall be determined from time to time by the Board of Directors. -15- 17 ARTICLE XIII. AMENDMENTS Subject to the provisions of the Certificate of Incorporation, (1) these By-Laws may be amended, altered or repealed by the stockholders at any annual or special meeting by the affirmative vote of at least 75% of the voting power of the outstanding shares of Voting Stock (after giving effect to the provisions of Article NINTH of the Certificate of Incorporation) and (2) these By-Laws may be amended, altered or repealed by the Board of Directors by the affirmative vote of a majority of the Whole Board. [As amended January 16, 1995] -16- EX-10.03 3 AGREEMENT DATED AUG. 18, 1994 -- SOMERVILLE 1 Exhibit 10.03 [ON ALLEGHANY CORPORATION LETTERHEAD] August 18, 1994 Theodore E. Somerville, Esq. 870 United Nations Plaza Apt. 11-B New York, New York 10017 Dear Ted: This letter sets forth the terms and conditions of your continued employment and subsequent retirement at the end of this year from Alleghany Corporation ("Alleghany") and our mutual agreements relating thereto. We have agreed that you shall continue in Alleghany's employ as a Vice President thereof through December 31, 1994, with no change in your current compensation or fringe benefits, performing such duties and functions as shall be assigned to you by the board of directors or the senior officers of Alleghany. Your employment with Alleghany will terminate as of December 31, 1994. You shall be paid for any accrued, unused vacation which remains at December 31, 1994, promptly thereafter, and you shall be paid your entitlement under the Alleghany Corporation Management Incentive Plan for 1994 at the same time as the other participants therein. Your accrued savings benefit under the Alleghany Corporation Deferred Compensation Plan, together with interest accrued thereon through the date of payment as provided in such Plan, shall be paid to you in March of the first year after 1996 in which you receive no payment under the Alleghany Corporation 1983 Long-Term Incentive Plan or 1993 Long-Term Incentive Plan (the "Savings Benefit Payment Date"). This will acknowledge that you are 100% "vested" in your benefits accrued under the Alleghany Corporation Retirement Plan based upon your service and compensation through the date of your termination of employment, which 2 accrued benefits (subject to any actuarial adjustment for early commencement as provided therein) you may elect until June 1, 1995 (which date is your Early Retirement Date, as defined therein) to receive in any of the forms provided therein. Further, if you execute the attached Waiver and Release prior to twenty-one days after the receipt of this letter and do not revoke the Waiver and Release within seven days thereafter, but subject to approval (which approval shall be recommended by the senior officers of Alleghany) by the Compensation Committee of the Board of Directors of Alleghany (and notwithstanding the terms thereof to the contrary or inconsistent therewith), Alleghany shall pay to you the amounts which would have been due to you in respect of the awards previously made to you under the 1983 Long-Term Incentive Plan and the 1993 Long-Term Incentive Plan (collectively, the "Long-Term Plans"), at the times thereunder provided, as if you had remained continuously in the employ of Alleghany through the relevant payment dates with respect to such awards, and, with respect to those awards, you shall be treated in a manner identical to that of other officers of Alleghany as to any dilution or other adjustments made by the Committee or the Board of Directors. Also, during 1995 and 1996 you shall be entitled to (x) the continuation of all fringe benefits provided to you during 1994, including the life insurance currently maintained on your life (including that maintained pursuant to the Alleghany Corporation Supplemental Death Benefit Plan), the payment by Alleghany of the premiums thereon and the related income and employment taxes on such premiums (and the "gross-up" for the taxes on the foregoing), and (y) continue to have credited to your account the savings benefit (and interest thereon) provided for in the Deferred Compensation Plan (which shall be calculated as if your base annual salary were $245,000 and as if you had continued therein as an "Officer Participant"), and the amounts so credited shall be paid to you on the Savings Benefit Payment Date. Moreover, until you attain age 65, Alleghany will provide you and your dependents with medical, dental and hospitalization benefits, on the same terms and conditions as such benefits are provided to officers of Alleghany. In addition, Alleghany will pay to you, in part as severance pay and in part for the consulting services hereinafter specified, the sum of $490,000 (the "Severance-Consulting Payment"). The Severance-Consulting Payment will be paid to you in approximately 48 equal bimonthly payments, -2- 3 commencing January 1995, reduced only by any income tax withholding and employment taxes required, in Alleghany's sole judgment, to be deducted and withheld. For the Severance-Consulting Payment you agree to make yourself available (except in the event, and to the extent, that you are prevented from doing so by a temporary or permanent disability) during calendar years 1995 and 1996 (such period being referred to herein as the "Consulting Term") to consult with the directors, officers or employees of, or advisors to, Alleghany with respect to any matters relating to or affecting Alleghany, including making yourself available when requested to testify in any court or legal proceeding or to provide information with respect thereto. Any such consulting services shall be rendered by you at such times and at such locations as shall be mutually convenient, it being agreed that the consulting services required of you shall not be such as would substantially interfere with your full-time employment by any other employer during the Consulting Term. The Severance-Consulting Payment shall constitute your compensation for the consulting services to be provided by you during the Consulting Term. Alleghany shall also reimburse you for your reasonable expenses (including travel) incurred in providing such consulting services promptly following submission of the customary documentation therefor. If following the expiration of the Consulting Term, Alleghany has a continuing need for consulting services by you, you shall in good faith consider Alleghany's request, but Alleghany recognizes that your availability to provide any such consulting services will be a function, among other things, of your then current employment and other commitments. In the event of your death after December 31, 1994 but prior to having received the entire amount of the Severance-Consulting Payment provided above, Alleghany shall continue the remainder of the bimonthly payments to the person or entity designated by you, or, in the absence of any designation, to your estate. Furthermore, if you die during any applicable "award period," as defined under the Long-Term Plans, Alleghany shall cause your beneficiary or estate, as the case may be, to receive the same amounts at the same times provided under the Long-Term Plans as would have been payable under the Long-Term Plans if you had remained continuously in Alleghany's employ until the time of your death. In addition, at the end of the Consulting Term, Alleghany shall, if you so desire, sell, transfer or assign -3- 4 to you any of the life insurance owned by Alleghany on your life, provided that if such life insurance has a cash surrender value, you pay to Alleghany such cash surrender value. Finally, if you die before attaining age 65 leaving a spouse or one or more dependents, the medical, dental and hospitalization benefits provided to you shall be continued to your surviving spouse and such dependents (in the case of such dependents, only so long as each such dependent may be continued under the standard terms of such policy or policies of insurance) on the same terms as if you had survived until age 65. Additionally, you agree to keep confidential and not to disclose any information concerning the business or affairs of Alleghany acquired by you during the course of your employment by Alleghany, during the Consulting Term or thereafter by reasons of your consulting services, except to the extent such information has become public (other than by your unauthorized disclosure) or is required by legal process after giving Alleghany such advance notice as is practicable under the circumstances. This letter agreement (and each plan or arrangement of Alleghany specifically referred to herein, as the same may be modified by this letter agreement) contains the entire agreement relating to, or arising by reason of, the termination of your employment with Alleghany, the benefits to which you will be entitled after such termination, and the obligations to which you will be subject, all by reason thereof. Nothing contained herein shall deprive you of the benefits of the provisions of Alleghany's Restated Certificate of Incorporation or any insurance maintained by Alleghany relating to the indemnification or insuring, as the case may be, of present or former officers and directors of Alleghany for actual or alleged acts or omissions arising out of or during their service as officers or directors of Alleghany. This letter agreement will be governed by the laws of the State of New York applicable to agreements to be performed wholly therein. -4- 5 If this letter agreement accurately reflects the agreement between us, please confirm the foregoing by signing the enclosed copy and returning it to the undersigned. Alleghany Corporation By: /s/ John J. Burns, Jr. ------------------------- John J. Burns, Jr. President Accepted and Agreed To: /s/ Theodore E. Somerville - ---------------------------- Dated: August 18, 1994 Theodore E. Somerville -5- 6 WAIVER AND RELEASE I, Theodore E. Somerville, have had the opportunity since August 18, 1994 to review and consider this Waiver and Release and the letter agreement, dated August 18, 1994 (the "Letter Agreement") to which this Waiver and Release Form was attached as an exhibit. I also have had the opportunity since that date to discuss the Letter Agreement and this Waiver and Release Form fully with whomever I wished, and have been advised that I could consult an attorney of my own choice. I have voluntarily elected to take advantage of the Letter Agreement and to sign this Waiver and Release Form. In return for the additional benefits available to me under the Letter Agreement, I fully and finally waive, discharge and release any and all claims of whatever nature, known and unknown, including claims arising out of or in connection with my employment with Alleghany Corporation ("Alleghany") or arising out of or in connection with the termination of my employment with Alleghany, other than my rights under the Letter Agreement and the plans or arrangements of Alleghany referred to therein, against Alleghany, its current and future subsidiaries and divisions, and their respective directors, officers, employees, attorneys and agents (all of which shall be referred to collectively hereinafter in this document as "Alleghany"). Such claims shall include, without limitation, any and all rights and claims (including any eligibility for reinstatement or reemployment with Alleghany) whether in law or in equity, which I or anyone acting through me or on behalf of me or my estate might otherwise have had or asserted, including but not limited to claims, or the right to collect damages, under Title VII of the Civil Rights Act of 1964, the Civil Rights Act of 1866, the Age Discrimination in Employment Act of 1967, the Employment Retirement Income Security Act of 1974, Executive Orders 111246 and 11141, and all other federal, state and local claims, whether statutory or common law, including, but not limited to, those under the laws of the State of New York (including, but not limited to, the New York State Human Rights Law). In order to induce Alleghany to extend the additional benefits available to me under the Letter Agreement, I hereby represent and warrant to Alleghany that: (1) I voluntarily elect to take advantage of the Letter Agreement and to execute this Waiver and Release Form and have had at least twenty-one (21) days to consider and review 7 the Letter Agreement and a sample of this Waiver and Release Form; (2) the only consideration for executing this document are the additional benefits to be provided to me under the Letter Agreement, which additional benefits I acknowledge I am not entitled to unless I execute this Waiver and Release Form; (3) no other promise, inducement, threat, agreement or understanding of any kind or description whatsoever has been made with or to me by any person or entity whomsoever to cause me to execute this document; (4) I fully understand the meaning and intent of this document; and (5) I understand that this document will be final and binding on me unless I properly revoke the election I have made in this document before the close of business on the seventh day after the date I set forth in this document as the date I execute this document. Dated: August 18, 1994 Signed: /s/ Theodore E. Somerville ------------------------------ -2- EX-10.06.B 4 ALLEGHANY 1993 LONG-TERM INCENTIVE PLAN 1 Exhibit 10.06(b) ALLEGHANY CORPORATION 1993 LONG-TERM INCENTIVE PLAN (As Amended and Restated effective as of January 1, 1994) 1. PURPOSES OF THE PLAN. The purposes of the Alleghany Corporation 1993 Long-Term Incentive Plan ("the Plan") are to further the long-term growth of Alleghany Corporation ("the Corporation"), to the benefit of its stockholders, by providing incentives to the officers and employees of the Corporation and its subsidiaries who will be largely responsible for such growth, and to assist the Corporation in attracting and retaining executives of experience and ability on a basis competitive with industry practices. The Plan permits the Corporation to provide 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. 2. ADMINISTRATION OF THE PLAN. The Plan shall be administered by the Compensation Committee of the Board of Directors of the Corporation (the "Committee"). No member of the Committee, during the one year period prior to such membership or during such membership, shall be granted or awarded equity securities pursuant to the Plan or any other plan of the Corporation or any of its affiliates, except as permitted by Rule 16b-3(c)(2)(i) promulgated under the Securities Exchange Act of 1934, as amended, as such Rule may be amended from time to time. Subject to the provisions of the Plan, the Committee shall have exclusive power to select the employees to participate in the Plan, to determine the type, size and terms of awards to be made to each participant selected, and to determine the time or times when awards will be granted. The Committee's interpretation of the Plan or of any awards granted thereunder shall be final and binding on all parties concerned, including the Corporation and any participant. The Committee shall have authority, subject to the provisions of the Plan, to establish, adopt and revise such rules, regulations, guidelines, forms of agreements and instruments relating to the Plan as it may deem necessary or advisable for the administration of the Plan. 2 3. PARTICIPATION. Participants in the Plan shall be selected by the Committee from among the employees of the Corporation and its subsidiaries. The term "employee" shall mean any person (including any officer or director) employed by the Corporation or a subsidiary on a salaried basis. The term "subsidiary" shall mean any corporation a majority of whose outstanding voting securities is beneficially owned, directly or indirectly, by the Corporation. Participants may receive multiple awards under the Plan. 4. AWARDS. (a) Types. Awards under the Plan may include, but need not be limited to, cash and/or shares of the Corporation's common stock, $1.00 par value ("Common Stock"), rights to receive cash and/or shares of Common Stock, and options ("Options") to purchase shares of Common Stock, including options intended to qualify as incentive stock options under section 422 of the Internal Revenue Code of 1986, as amended, and options not intended so to qualify. The Committee may also make any other type of award deemed by it to be consistent with the purposes of the Plan. (b) Certain Qualifying Awards. The Committee, in its sole discretion, may grant an award to any participant with the intent that such award qualifies as "performance-based compensation" under Section 162(m) of the Internal Revenue Code of 1986, as amended (a "Qualifying Award"). The right to receive (or retain) any award granted as a Qualifying Award shall be conditional upon the achievement of performance goals established by the Committee in writing at the time such award is granted. Such performance goals, which may vary from participant to participant and award to award, shall be based upon the attainment of specific amounts of, or increases in, one or more of the following: revenues, operating income, cash flow, income before income taxes, net income, earnings per share, net worth, stockholders' equity, return on equity or assets or total return to stockholders, whether applicable to the Corporation or any relevant subsidiary or business unit or entity in which the Corporation has a significant investment, or any combination thereof as the Committee may deem appropriate. Prior to the payment of any award granted as a Qualifying Award, the Committee shall certify in writing that the performance goals were satisfied. The maximum number of shares of Common Stock with respect to which Qualifying Awards may be granted to any participant in any calendar year shall be 15,000 shares of Common Stock, subject to adjustment as provided in section 7(a) hereof. (c) Deferred Payments. In awarding any right to receive cash and/or shares of Common Stock, the Committee may specify that the payment of all or any portion of such -2- 3 cash and/or shares of Common Stock shall be deferred until a later date. Deferrals shall be for such periods and upon such other terms as the Committee may determine. (d) Vesting, Other Performance Requirements and Forfeiture. In awarding any Options or any rights to receive cash and/or shares of Common Stock (including Qualifying Awards), the Committee (1) may specify that the right to exercise such Options or the right to receive payment of such cash and/or shares of Common Stock shall be conditional upon the fulfillment of specified conditions, including, without limitation, completion of specified periods of service in the employ of the Corporation or its subsidiaries, and the achievement of specified business and/or personal performance goals, and (2) may provide for the forfeiture of all or any portion of any such Options or rights in specified circumstances. The Committee may also specify by whom and/or in what manner the accomplishment of any such performance goals shall be determined. (e) Agreements. Any award under the Plan may, in the Committee's discretion, be evidenced by an agreement, which, subject to the provisions of the Plan, may contain such terms and conditions as may be approved by the Committee, and shall be executed by an officer on behalf of the Corporation and by the recipient of the award. 5. SHARES OF STOCK SUBJECT TO THE PLAN. Subject to adjustment as provided in section 7(a) hereof, the number f shares of Common Stock which may be paid to participants under the Plan and/or purchased pursuant to Options granted under the Plan shall not exceed an aggregate of 300,000 shares. Shares to be delivered or purchased under the Plan may be either authorized but unissued shares of Common Stock or shares of Common Stock held by the Corporation as treasury shares. 6. OPTIONS. (a) Term of Options. The term of any Option shall be determined by the Committee, but in no event shall any Option be exercisable more than twelve years after the date on which it was granted. (b) Option Price; Fair Market Value. The price ("Option Price") at which shares of Common Stock may be purchased pursuant to any Option shall be determined by the Committee at the time the Option is granted, but in no event shall the Option Price be less than 100 per cent of the Fair Market Value of such shares on the date the Option is granted. For purposes of the Plan, Fair Market Value is the -3- 4 mean of the high and low sales prices of the Common Stock on the relevant date as reported on the stock exchange or market on which the Common Stock is primarily traded, or, if no sale is made on such date, then Fair Market Value is the weighted average of the mean of the high and low sales prices of the Common Stock on the next preceding day and the next succeeding day on which such sales were made as reported on the stock exchange or market on which the Common Stock is primarily traded. (c) Payment Upon Exercise. Upon exercise of an Option, the Option Price shall be payable to the Corporation in cash, or, at the discretion of the Committee, in shares of Common Stock valued at the Fair Market Value thereof on the date of payment, or in a combination of cash and shares of Common Stock. (d) Stock Appreciation Rights; Surrender of Options. The Corporation may, if the Committee so determines, accept the surrender by a participant, or the personal representative of a participant, of an Option, in consideration of a payment by the Corporation equal to the difference obtained by subtracting the aggregate Option Price from the aggregate Fair Market Value of the Common Stock covered by the Option on the date of such surrender, such payment to be in cash, or, if the Committee so provides, in shares of Common Stock valued at Fair Market Value on the date of such surrender, or partly in shares of Common Stock and partly in cash. (e) Effect of Expiration, Termination or Surrender of Options. If an Option shall expire or terminate unexercised as to any shares of Common Stock covered thereby, such shares of Common Stock shall not be deducted from the number available under section 5 hereof. If an Option shall be surrendered as provided in section 6(d) hereof, the shares of Common Stock (if any) paid in consideration of such surrender, but not the shares which had been covered by the Option, shall be deducted from the number available under section 5 hereof. 7. DILUTION AND OTHER ADJUSTMENTS. (a) Changes in Capital Structure. In the event of any subdivision or combination of the outstanding shares of Common Stock, stock dividend, capital reorganization, liquidation, reclassification of shares, merger, consolidation, or sale, lease or transfer of substantially all of the assets of the Corporation, the Board of Directors of the Corporation shall make such equitable adjustments as it may deem appropriate in the Plan and the awards thereunder, including, without limitation, an adjustment in -4- 5 the total number of shares of Common Stock which may thereafter be delivered or purchased under the Plan and in the maximum number of shares of Common Stock with respect to which awards may be granted to any participant in any year under Section 4 (b) hereof. Agreements evidencing Options may include such provisions as the Committee may deem appropriate with respect to the adjustments to be made to the terms of such Options upon the occurrence of any of the foregoing events. (b) Tender Offers and Exchange Offers. In the event of any tender offer or exchange offer, by any person other than the Corporation, for shares of Common Stock, the Committee may make such adjustments in outstanding awards and authorize such further action as it may deem appropriate to enable the recipients of outstanding awards to avail themselves of the benefits of such offer, including, without limitation, acceleration of the exercise date of outstanding Options so that they become immediately exercisable in whole or in part, or offering to acquire all or any portion of specified categories of Options for a price determined pursuant to section 6(d) hereof, or acceleration of the payment of outstanding awards payable, in whole or in part, in shares of Common Stock. (c) Limits on Discretion to Make Adjustments. Notwithstanding any provision of this section 7 to the contrary, no adjustment shall be made in any outstanding Qualifying Awards to the extent that such adjustment would adversely affect the status of that Qualifying Award as "performance-based compensation" under Section 162(m) of the Internal Revenue Code of 1986, as amended. 8. MISCELLANEOUS PROVISIONS. (a) Right to Awards. No employee or other person shall have any claim or right to be granted any award under the Plan. (b) Rights as Stockholders. A participant shall have no rights as a holder of Common Stock by reason of awards under the Plan, unless and until certificates for shares of Common Stock are issued to the participant. (c) No Assurance of Employment. Neither the Plan nor any action taken thereunder shall be construed as giving any employee any right to be retained in the employ of the Corporation or any subsidiary. (d) Costs and Expenses. All costs and expenses incurred in administering the Plan shall be borne by the Corporation. -5- 6 (e) Unfunded Plan. The Plan shall be unfunded. The Corporation shall not be required to establish any special or separate fund nor to make any other segregation of assets to assure the payment of any award under the Plan. (f) Withholding Taxes. The Corporation shall have the right to deduct from all awards hereunder paid in cash any federal, state, local or foreign taxes required by law to be withheld with respect to such payments and, with respect to awards paid in stock, to require the payment (through withholding from the participant's salary or otherwise) of any such taxes, but the Committee may make such arrangements for the payment of such taxes as the Committee in its discretion shall determine, including payment with shares of Common Stock. (g) Assignment or Transfer. No awards under the Plan nor any rights or interests therein shall be assignable or transferable by the recipient thereof except, in the event of a participant's death, to his designated beneficiary as hereinafter provided, or by will or the laws of descent and distribution. During the lifetime of the recipient, awards under the Plan requiring exercise shall be exercisable only by such holder or by the guardian or legal representative of such holder. (h) Beneficiary. Any payments on account of awards under the Plan to a deceased participant shall be paid to such beneficiary as has been designated by the participant in writing to the Secretary of the Corporation or, in the absence of such designation, according to the laws of descent and distribution. (i) Nature of Benefits. Awards under the Plan, and payments made pursuant thereto, are not a part of salary or base compensation. (j) Compliance with Legal Requirements. The obligation of the Corporation to issue or deliver shares of Common Stock upon exercise of Options or otherwise shall be subject to satisfaction of all applicable legal and securities exchange requirements, including, without limitation, the provisions of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The Corporation shall endeavor to satisfy all such requirements in such a manner as to permit at all times the exercise of all outstanding Options in accordance with their terms, and to permit the issuance and delivery of shares of Common Stock whenever provided for by the terms of any award made under the Plan. -6- 7 9. AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors of the Corporation, without the consent of any participant, may at any time terminate or from time to time amend the Plan in whole or in part, provided, however, that no such action shall adversely affect any rights or obligations with respect to any awards theretofore made under the Plan, and provided further, that no amendment, without approval of the holders of Common Stock by an affirmative vote of a majority of the shares of Common Stock voted thereon in person or by proxy, shall (i) increase the aggregate number of shares subject to the Plan (other than increases pursuant to section 7 hereof), (ii) extend the period during which awards may be granted under the Plan, (iii) increase the maximum term for which Options may be issued under the Plan, (iv) decrease the minimum Option Price at which Options may be issued under the Plan, or (v) materially modify the requirements for eligibility to participate in the Plan. With the consent of the participants affected, the Committee may amend outstanding agreements evidencing awards under the Plan, and may amend the terms of awards not evidenced by such agreements, in any manner not inconsistent with the terms of the Plan. 10. EFFECTIVE DATE AND TERM OF PLAN. The Plan, as amended and restated, shall be effective as to awards granted on or after January 1, 1994, and awards with performance periods which begin in 1994, and shall become effective when approved at a meeting of stockholders by a majority of the voting power of the Voting Stock (all as defined in the Corporation's Restated Certificate of Incorporation) present in person or represented by proxy and entitled to vote at such meeting. The Plan shall terminate at the close of business on December 31, 2002, unless sooner terminated by action of the Board of Directors of the Corporation. No award may be granted hereunder after termination of the Plan, but such termination shall not affect the validity of any award then outstanding. 11. LAW GOVERNING. The validity and construction of the Plan and any agreements entered into thereunder shall be governed by the laws of the State of New York, but without regard to the conflict laws of the State of New York except to the extent that such conflict laws require application of the laws of the State of Delaware. -7- EX-10.08.C 5 ALLEGHANY RETIREMENT PLAN AMENDED AND RESTATED 1 EXHIBIT 10.08(C) ALLEGHANY CORPORATION RETIREMENT PLAN (As Amended and Restated) 2 ARTICLE I DEFINITIONS 1.01. "Actuarial Equivalent" means with respect to a benefit, an equivalent amount or amounts computed on the basis of the factors or rates contained in Exhibit I attached hereto. 1.02. "Applicable Exclusion Ratio" means the exclusion ratio provided for in Section 72 of the Code and the Treasury Regulations thereunder which is applicable to the target annual retirement benefit payable to a Participant as an annuity for his life at the Participant's Early, Normal, Late or Disability Retirement Date, as the case may be (or in the event of his death, applicable to his surviving spouse based upon the date the Participant is deemed to have retired under Section 6.03). 1.03. "Average Salary" means the average of a Participant's Compensation for the three consecutive calendar years of the ten calendar years ending with the calendar year in which occurs his date of death or other separation from service which results in the highest average annual Compensation for any such three year period. If at such a date a Participant has less than three years of such service, then his Average Salary shall be the annual average of his -1- 3 Compensation for all such full calendar years of service, or if he has no full calendar year of service, then for all such service. 1.04. "Beneficiary" means the person or persons last designated by a Participant to receive benefits under Article VI following the Participant's death. If all the persons so designated are individuals and if there is no such individual living at the death of the Participant, or if no such person has been designated, then the Participant's Beneficiary shall be his estate. 1.05. "Benefit Accrual Service" means the number of years determined under Section 4.02. In general, Benefit Accrual Service is used to determine the amount of the annual retirement benefit to which a Participant is entitled pursuant to Article V. 1.06. "Board" means the Board of Directors of the Company or the Executive Committee thereof. 1.07. "Code" means the Internal Revenue Code of 1986, as amended. 1.08. "Company" means Alleghany Corporation excluding any operating divisions of Alleghany Corporation. -2- 4 1.09. "Compensation" means the base salary earned by an Employee for the relevant period (whether or not such compensation is currently payable or deferred) for his services as such, which base salary shall not include (by way of illustration and not limitation) any non-cash compensation, annual incentive bonuses, long term incentive bonuses, restricted stock or other extraordinary compensation, payments, allowances, or reimbursements. 1.10. "Component Members" means (a) the Company; (b) any corporation which is a member of a controlled group of corporations (within the meaning of Section 1563(a) of the Code, determined without regard to Sections 1563(a)(4) and (e)(3)(C), provided such group includes the Company; and (c) any trade or business (whether or not incorporated) which is controlled by or under common control with the Company under the regulations promulgated pursuant to Section 210(b) or (c) of ERISA. 1.11. "Disability Retirement Date" means the first day of the first month following the date as of which a Participant became eligible to receive disability benefits under the Social Security laws. 1.12. "Early Retirement Date" means, with respect to any Participant, the first day of the calendar month -3- 5 coinciding with or next following the later of (a) the date on which his employment with Component Members terminates, (b) the day he attains age 55, or (c) the day (not later than his Normal Retirement Date) selected by him. 1.13. "Effective Date" means January 1, 1989. 1.14. "Employee" means any individual in the employ of the Company. 1.15. "Employment Commencement Date" means the first day on which an Employee performs an Hour of Service with the Company. 1.16. "ERISA" means the Employee Retirement Income Security Act of 1974 and regulations thereunder, as from time to time amended and in effect. 1.17. "Fund" means the property or cash from time to time held by the Funding Agent, to which contributions hereunder are paid and from which benefits and expenses hereunder are paid. The Fund may comprise either a trust fund or a group annuity contract or contracts, or other form of insurance contract including a deposit administration contract or contracts, or any combination thereof. -4- 6 1.18. "Funding Agent" means the person or persons selected by the Investment Committee to receive contributions under the Plan and to hold, manage or invest Plan assets, and/or to distribute benefits and pay expenses. 1.19. "Gross-Up Payment" means a payment made under this Plan pursuant to Article VII in an amount equal to the sum necessary to reimburse a Participant for Income Taxes incurred in respect of the inclusion in the Participant's gross income for such Plan Year of the Income Amount or certain retirement benefits. 1.20. "Hour of Service" (a) An "Hour of Service" means each hour for which either: (i) An Employee is directly or indirectly paid or entitled to payment by a Component Member for the performance of duties; (ii) Back pay, irrespective of mitigation of damages, has been awarded him or agreed to be paid him by a Component Member; or (iii) Each hour (but not in excess of 501 hours in any continuous period) for which he is directly or indirectly paid or entitled to payment for reasons (such -5- 7 as vacation, sickness or disability) other than the performance of duties. (b) Hours of Service shall be credited whether occurring before or after the Effective Date, except that such hours shall not be credited if the employer was not a Component Member at the time they would otherwise be counted. Hours of Service shall be determined pursuant to rules and regulations of the Plan Administrator which are in accordance with ERISA and Department of Labor regulations, including regulation sections 2530.200b-2 and 2530.200b-3. 1.21. "Income Taxes" means all Federal, state and local income or employment taxes which may be imposed upon a Participant by reason of participation in the Plan other than by reason of tax distributions under Article VII. 1.22. "Income Amount" means that amount which is currently includable under the Code (or applicable State or local tax law) in gross income during any Plan Year by reason of the participation of a Participant in the Plan other than by reason of distributions of retirement benefits under the Plan and any tax distributions pursuant to Article VII. 1.23 "Investment Committee" means the committee of three or more persons selected by the Board from time to -6- 8 time to exercise the powers herein granted with respect to the investment of the Fund. 1.24. "Late Retirement Date" means the first day of the calendar month next following a Participant's termination of employment with Component Members after his Normal Retirement Date. 1.25. "Normal Retirement Date" means the first day of the calendar month coinciding with or next following a date on which a Participant attains age 65. 1.26. "Officer" means the Chairman of the Board, the President, all Vice Presidents, the Controller and any other Employee who has been elected by the Board to the position of an officer of the Company, as provided in the By-Laws of the Company, but shall not include the positions of Assistant Secretary and Assistant Treasurer unless the Board specifically provides otherwise. 1.27. "One-Year Break-in-Service" means a Plan Year in which a person does not complete more than 500 Hours of Service. For purposes of determining whether a One-Year Break-in-Service has occurred for participation and vesting purposes, an Employee, upon provision of a certification -7- 9 satisfactory to the Plan Administrator which sets forth the reasons for the leave, will be deemed to have completed Hours of Service for periods the Employee is absent from work if the Employee is absent from work: (1) by reason of the pregnancy of the Employee, (2) by reason of the birth of a child of the Employee, (3) by reason of the placement of a child in connection with the adoption of the child by the Employee, or (4) for purposes of caring for the child during the period immediately following the birth or placement for adoption ("Maternity/Paternity Leave of Absence"). During such period of Maternity/Paternity Leave of Absence, the Employee will be treated as having completed (1) the number of Hours of Service that normally would have credited but for the absence, or (2) if the normal hours are unknown, eight Hours of Service for each normal workday during such leave. The total number of Hours of Service required to be treated as completed for any such period shall not exceed 501 hours. An authorized leave of absence, not exceeding 12 months, shall not be considered a Break-in-Service. 1.28. "Participant" means a person who has been selected to participate in the Plan as provided in Article II and who has any accrued retirement benefits under the Plan which have not been distributed in full to him (or his Beneficiary). -8- 10 1.29. "Plan" means the plan set forth herein as modified or amended from time to time. 1.30. "Plan Administrator" means the person serving from time to time as the Treasurer of the Company, or if no person is so serving at the time of reference, then the Company. 1.31. "Plan Year" means a calendar year. 1.32. "Prior Plan" means the Retirement Plan of Alleghany Corporation in effect on December 31, 1988 and any plan designated therein as a "Prior Plan". 1.33. "Prior Plan Accrued Benefit" means that benefit payable annually in the form of a straight life annuity, commencing at age 65, to a Participant by reason of an accrued benefit under the Prior Plan in an amount set forth opposite his name on Exhibit II attached hereto. 1.34. "Totally Disabled" means a condition of disability in connection with which an individual is (after the waiting period required thereunder) receiving disability benefits under the Social Security laws. -9- 11 ARTICLE II PARTICIPATION 2.01. Participation. Each Employee who is designated by the Board to participate in the Plan shall become a Participant effective on the later of the date he completes his first Hour of Service or the date specified by the Board. 2.02. Re-Employment of Former Participant. If a Participant who terminated his employment shall again become an Employee and he is again designated by the Board to participate in the Plan, such Employee shall again become a Participant, effective on the later of the date he completes his first Hour of Service following his re-employment or the date specified by the Board. A former Participant who again becomes an Employee, but is not designated by the Board to participate in the Plan, shall not again become a Participant and his Benefit Accrual Service and Compensation during his subsequent period of employment shall be disregarded in calculating his benefits under this Plan. -10- 12 ARTICLE III VESTING 3.01. Vesting at Age 55. An Employee's right to his retirement benefit as determined pursuant to Article V shall be nonforfeitable upon his attainment of age 55 while he is employed by a Component Member. 3.02. Vesting before Age 55. An Employee who has not attained age 55 has a nonforfeitable right to 100 percent of his retirement benefit as determined pursuant to Article V when he has completed 5 years of Vesting Service, provided, however, that: (a) Such benefit shall be forfeited (except as provided in Article VI) in the event of his death; and (b) Payment of such benefit may be suspended for such period as the Employee is employed, subsequent to commencement of payment thereof, by a Component Member. 3.03. Year of Vesting Service. For purposes of this Article III, a Year of Vesting Service means each Plan Year (whether before or after the Effective Date) during which the Employee has completed 1,000 Hours of Service; provided, however, that: (a) In the case of any Employee who has any One-Year Break-in-Service, Years of Vesting Service -11- 13 before such break shall not be taken into account until he has completed a Year of Vesting Service after his return; (b) In the case of any Employee, no portion of whose retirement benefit is vested pursuant to Sections 3.01 or 3.02, Years of Vesting Service before any One-Year Break-in-Service shall not be taken into account if the number of consecutive One-Year Breaks-in-Service equals or exceeds the greater of (i) five, or (ii) the aggregate number of Years of Service earned before the consecutive Breaks-in-Service. Such aggregate number of Years of Service shall not include any Years of Service not taken into account under the preceding sentence by reason of any prior One-Year Break-in-Service; and (c) Years of Service or Years of Vesting Service before the Effective Date shall be disregarded if such service would have been disregarded under the rules of the Prior Plan with regard to Breaks-in-Service as in effect on the applicable date. 3.04. Termination before Vesting. An Employee who terminates his employment with a Component Member prior to age 55 and before he has completed 5 years of Vesting Service shall not be entitled to any -12- 14 benefits under this Plan unless he is thereafter re-employed by a Component Member. 3.05 Special Grants of Vesting Service. The Board by resolution may grant Vesting Service to an Employee for such period prior to the Employee's employment with a Component Member as the Board shall determine, which grant for such period shall be set forth opposite his name on Exhibit III attached hereto. -13- 15 ARTICLE IV ACCRUAL OF BENEFITS 4.01. Service Required for Benefits. The amount of any benefit payable to a Participant or former Participant following his termination of employment shall be based on his Benefit Accrual Service and his Average Salary. 4.02. Benefit Accrual Service. Benefit Accrual Service shall be determined as follows: (a) For Plan Years beginning prior to the Effective Date, a Participant shall be credited with that period of Benefit Accrual Service which is opposite his name as set forth on Exhibit II attached hereto; (b) For each Plan Year beginning with the Effective Date, a Participant shall be credited with one year of Benefit Accrual Service if he has 1,000 Hours of Service with the Company, including any such hours occurring after his Normal Retirement Date; provided, however, that: (i) A Participant who incurs a One-Year Break-in-Service (determined without regard to the Maternity/Paternity Leave of Absence rule) shall not be credited with Benefit Accrual Service before such -14- 16 One-Year Break-in-Service until he has completed a Year of Vesting Service (as provided in Section 3.03); and (ii) In the case of any Employee, no portion of whose retirement benefit is vested pursuant to Article III, years of Benefit Accrual Service before any One-Year Break-in-Service (determined without regard to the Maternity/Paternity Leave of Absence rule) shall not be taken into account if the number of consecutive One-Year Breaks-in-Service equals or exceeds the greater of (i) five or (ii) the aggregate number of years of Benefit Accrual Service earned before the consecutive Breaks-in-Service. Such aggregate number of years of Benefit Accrual Service shall not include any years of Benefit Accrual Service not taken into account under the preceding sentence by reason of any prior One-Year Break-in-Service (determined without regard to the Maternity/Paternity Leave of Absence rule). -15- 17 4.03 Special Grants of Benefit Accrual Service. The Board by resolution may grant Benefit Accrual Service to a Participant for such period prior to the Participant's employment with a Component Member as the Board shall determine, which grant for such period shall be set forth opposite his name on Exhibit III attached hereto. -16- 18 ARTICLE V RETIREMENT BENEFITS 5.01. Retirement Benefit at Normal Retirement Date. (a) Officers. The target annual retirement benefit of a Participant who at any time during his employment by the Company was an Officer, in the form of an annuity for his life payable monthly beginning on his Normal Retirement Date, shall equal the difference between: (x) the product of (i) 52.7625% of the Participant's Average Salary reduced by 33.5% of the amount the Participant would receive as a primary benefit under the Social Security Act as in effect on the date of calculation if he continued to work until his Normal Retirement Date with wages, for purposes of that Act, equal to his most recent rate of Compensation; times (ii) a fraction, not greater than one, the numerator of which is the number of his Years of Benefit Accrual Service and the denominator of which is 15; and (y) 67% of his Prior Plan Accrued Benefit. (b) Non Officers. The target annual retirement benefit of a Participant who at no time during his employment by the Company was an Officer, in the form of an annuity for his life payable monthly beginning on his -17- 19 Normal Retirement Date, shall equal the difference between: (x) the product of (i) 32.16% of the Participant's Average Salary reduced by 33.5% of the amount the Participant would receive as a primary benefit under the Social Security Act as in effect on the date of calculation if he continued to work until his Normal Retirement Date with wages, for purposes of that Act, equal to his most recent rate of Compensation; times (ii) a fraction, not greater than one, the numerator of which is the number of his years of Benefit Accrual Service and the denominator of which is 15; and (y) 67% of his Prior Plan Accrued Benefit. 5.02. Retirement Benefit at Late Retirement Date. The target annual retirement benefit of a Participant who terminates employment with a Component Member after his Normal Retirement Date, in the form of an annuity for his life payable monthly beginning on his Late Retirement Date, shall be equal to the benefit determined in accordance with the formula in Section 5.01 based on the Participant's Prior Plan Accrued Benefit calculated at his Normal Retirement Date and his years of Benefit Accrual Service, Social Security benefit and Average Salary calculated as of -18- 20 his Late Retirement Date, then increased by the percentage which the annuity factor on Exhibit I at age 65 bears to the annuity factor at his age at his Late Retirement Date; provided, however, that for any Participant who had attained his Normal Retirement Date on or before March 31, 1995, his retirement income as of his Late Retirement Date shall equal the product of: (a) the Actuarial Equivalent, determined at the earlier of (i) March 31, 1995 or (ii) his Late Retirement Date, of the benefit determined in accordance with the formula in Section 5.01(a)(x) on the Effective Date, minus 67% of the Actuarial Equivalent of his Prior Plan Accrued Benefit payable at the earlier of (i) March 31, 1995 or (ii) his Late Retirement Date, times (b) the percentage which the annuity factor on Exhibit I based upon his age on March 31, 1995, bears to the annuity factor at his age at his Late Retirement Date. 5.03. Retirement Benefit before Normal Retirement Date. The target annual retirement benefit of a Participant who terminated his employment with a right to a nonforfeitable retirement benefit and who has attained age 55, in the form of an annuity for his life payable monthly beginning on his Early Retirement Date, shall be the Actuarial Equivalent of the annual benefit determined under Section 5.01. -19- 21 In the event that the Actuarial Equivalent of a Participant's Prior Plan Accrued Benefit, payable as a life annuity beginning prior to the Participant's Normal Retirement Date, exceeds the maximum amount payable under Section 415 of the Code on December 31, 1988, his target annual benefit shall be increased by 67% of such excess. 5.04. Disability Retirement Benefit. A benefit shall be payable to a Participant who becomes Totally Disabled while he is employed by a Component Member and who has completed five years of Benefit Accrual Service in the form of an annuity beginning on his Disability Retirement Date and continuing until his death or his recovery (if such recovery is prior to age 65) and the target annual rate thereof shall be as set forth in Section 5.01, except that the target retirement benefit payable prior to his recovery or the attainment of age 65, whichever is earlier, shall be calculated without reduction for his Prior Plan Accrued Benefit and thereafter the target retirement benefit shall be calculated with reduction for his Prior Plan Accrued Benefit. The Plan Administrator may require that a Participant receiving disability benefits submit, not more often than once each six months, evidence acceptable to the Plan Administrator, that he continues to be Totally Disabled. In the event that he fails to fulfill such requirement, the -20- 22 disability benefits shall be discontinued and he shall not be entitled to any further disability benefits whatsoever. In the event that he shall thereafter comply with this requirement, he shall again be paid such benefits on the first day of the first month following the date of such compliance. 5.05. Retirement Benefit Following Return from Disability Retirement. The target annual retirement benefit payable to a Participant who retired on his Disability Retirement Date and who upon recovery returned to employment with the Company before his Normal Retirement Date shall, upon subsequent retirement, be determined in accordance with Sections 5.01, 5.02 or 5.03, whichever is applicable, without regard to payments theretofore made pursuant to Section 5.04. 5.06. Actual Annuity Benefit Payments. The benefits actually provided as life annuities under this Article V are intended, as near as may be, to provide an income which, after taking into account income taxes at presently applicable rates on the taxable portion of the benefits actually received, is equivalent to the target annual retirement benefit provided in this Article V, which benefit is already expressed as an after-tax amount. Accordingly, the actual retirement benefit payable to a Participant (or his surviving spouse) shall equal (x) the -21- 23 product of (i) the target annual retirement benefit payable at the Participant's Early, Normal, Late or Disability Retirement Date or the Annuity Starting Date following an election under Section 6.09(b), as the case may be, pursuant to Article V, divided by (y) the sum of (i) 0.67 and (ii) 0.33 times the Applicable Exclusion Ratio. 5.07. Social Security Calculations and Reduction. With respect to a Participant (or Beneficiary) who is receiving a benefit under the Plan or a Participant who terminates employment with a vested right to such a benefit, such benefit shall not be reduced by any increase in the level of benefits payable under Title II of the Social Security Act or in the wage base under Title II of the Social Security Act which occurs subsequent to the commencement of benefit payments or termination of employment. For purposes of all calculations of Social Security benefits under the Plan, all earnings with Component Members shall be included and the Participant's earnings in calendar years preceding the earliest complete calendar year of employment with Component Members shall be deemed to reflect a progression equivalent to that used for indexing earnings under the provisions of the Social Security Act. -22- 24 5.08. Minimum Benefit. In no event shall a Participant's target annual benefit be less than 67% of the benefit which would have been payable as a life annuity, determined as if the Participant had retired as of December 31, 1988 under the terms and conditions of the Alleghany Corporation Deferred Compensation Plan and the Alleghany Corporation Supplemental Pension Benefit Plan. -23- 25 ARTICLE VI FORMS OF RETIREMENT BENEFITS 6.01. Calculation of Amount of Benefit Payments. All forms of benefit distribution under this Article VI shall be the Actuarial Equivalent of an annuity for the Participant's life as determined in accordance with Section 5.06 hereof. 6.02. Automatic Forms of Benefit. (a) Unless he shall elect to the contrary, a Participant who is married on the first day on which an amount is payable in accordance with Section 6.12 (the "Annuity Starting Date") shall receive a benefit for his life payable monthly with a survivor annuity payable for the life of his spouse to whom he was married on the Annuity Starting Date which is equal to 50% of the benefit for the Participant's life. (b) Unless he shall elect to the contrary, a Participant who is not married on the Annuity Starting Date shall receive for his life the benefit as provided in Section 5.01, 5.02, or 5.03, as the case may be, adjusted as determined in accordance with Section 5.06. 6.03. Retirement Death Benefit for Spouse. -24- 26 (a) Prior to Normal Retirement Date. If a Participant (i) has a nonforfeitable retirement benefit under Article III, (ii) dies before the earlier of (x) his Annuity Starting Date and (y) his Normal Retirement Date, and (iii) has a surviving spouse, then his surviving spouse shall receive a Pre-Normal Retirement Survivor Annuity (as defined below). For purposes of this Article, a Pre-Normal Retirement Survivor Annuity shall mean an annuity for the life of the surviving spouse of the Participant where the target amount of the retirement benefit to the surviving spouse shall be the same as the target amount of the retirement benefit that would have been paid to the spouse under Section 6.02(a) after application of Section 5.06 if: (i) in the case of a Participant who dies after attaining age 55, the Participant had retired with an immediate joint and 50% survivor annuity on the day before his or her death; or (ii) in the case of a Participant who dies on or before attaining age 55, the Participant had separated from service on the date of his or her death, survived until age 55, and retired at that time with a joint and 50% survivor annuity as determined under Section 6.02(a). -25- 27 (b) After Normal Retirement Date. If a Participant (i) dies after attaining his Normal Retirement Date, (ii) has not elected under Section 6.09(b) to receive, or commence receiving, his retirement benefits and (iii) has a surviving spouse, then his surviving spouse shall receive a Post-Normal Retirement Survivor Annuity (as defined below). For purposes of this Article, a Post-Normal Retirement Survivor Annuity shall mean an annuity for the life of the surviving spouse of the Participant where the target amount of the retirement benefit to the surviving spouse shall be the same as the target amount of the retirement benefit that would have been paid to the spouse under Section 6.06 if the Participant had retired with an immediate joint and 100% survivor annuity on the day before his or her death. 6.04. Single Life Option. In lieu of the form of benefit provided for elect to receive the single life option, under which the Participant's benefit shall consist of monthly payments which shall continue for as long as the Participant lives after retirement. 6.05. Period Certain Option. In lieu of the form of benefit provided for by Section 6.02, a Participant may -26- 28 elect to receive the period certain option, under which the Participant shall receive a benefit payable in equal monthly installments during his lifetime and ending with the payment due on the first day of the month in which the Participant's death occurs, but with the provision that not less than 120 monthly installments shall be made to him or to his Beneficiary or alternate Beneficiary. If such Participant and Beneficiaries all die before the 120 monthly payments have been made, the commuted value of the balance shall be paid in a lump sum to the estate of the last to survive of the Participant and his Beneficiaries. 6.06. Joint and Survivor Option. In lieu of the form of benefit provided for by Section 6.02, a Participant who so elects shall receive a monthly benefit for his life with a survivor annuity for the life of his Beneficiary which is equal to 50% or 100% of the monthly benefit for the Participant's life. 6.07. Lump Sum Option. In lieu of the form of benefit provided for by Section 6.02, a Participant who is (or at the time he terminated his employment with the Company was) an Officer and who so elects shall receive a lump sum distribution of the retirement benefits to which he would be entitled. -27- 29 6.08. Other Forms of Benefits. Subject to the election rules set forth in Section 6.10, the Plan Administrator may, in his discretion, provide for or permit the election of any other optional form of retirement benefit. 6.09. Cash-out of Benefits Election. (a) The Plan Administrator, in his discretion, may allow an election to be made pursuant to Section 6.10 by a Participant who ceases to be an Employee prior to his Early or Normal Retirement Date and who has a right to nonforfeitable retirement benefits under Article III, to receive, in lieu of the periodic payment of benefits as provided in this Article VI commencing at his Early or Normal Retirement Date, a lump sum which is the Actuarial Equivalent of the benefits to which he would become entitled at age 65. (b) If the Participant remains an employee on or after his Normal Retirement Date, he may elect to commence receiving his retirement benefits in any form permitted under this Plan (including as a lump sum) prior to his Late Retirement Date, calcuated as if the date of the commencement of his retirement income were his Normal or Late Retirement Date, as the case may be. The retirement income of a Participant who elects commencement of payment of his -28- 30 retirement income under this Section 6.09(b) shall not be recomputed until his Late Retirement Date for any additional Benefit Accrual Service or Average Salary after the date of commencement of his retirement income. Upon the Participant's Late Retirement Date, the Participant's target annual retirement income at his Late Retirement Date shall be calculated under Section 5.02 (without regard to any payments of retirement income theretofore made), which retirement income shall then be reduced (but not below zero) by the Actuarial Equivalent of the retirement income paid to him prior to his Late Retirement Date. If the Participant previously elected to receive his retirement income as a lump sum and the additional retirement income to which he is entitled as a lump sum at his Late Retirement Date in accordance with the preceding sentence shall be less than $25,000, the additional retirement income shall be paid to him as a lump sum on his Late Retirement Date. Otherwise, the Participant may revoke (notwithstanding Section 6.10 to the contrary) his election of the form of his retirement benefits and make a new election in accordance with Section 6.10 of the form of his retirement benefits, as calculated in accordance with the second preceding sentence, commencing on his Late Retirement Date. -29- 31 (c) A former Participant who has received a payment or payments under Section 6.09(a) or Section 6.13 and later becomes re-employed by the Company, subject to the rules of Section 4.02(b), upon his subsequent retirement shall be entitled to a benefit based on the total amount of his Benefit Accrual Service at the time he again terminates his employment with Component Members but reduced by the then Actuarial Equivalent of the lump sum previously distributed to him. 6.10. Elections. Any election under this Article VI must be made or revoked prior to the Annuity Starting Date (as defined in Section 6.02). Each election or revocation shall be in writing on a form provided by the Plan Administrator, and the Plan Administrator shall provide a written explanation of the terms of any available form of benefit and the effect of an election to take or not to take any form of benefit. A Participant may elect not to receive the automatic form of benefit provided by Section 6.02(a) only if (i) the Participant's spouse identified in Section 6.02 consents to such election in writing, (ii) the election is witnessed by the Plan Administrator or a notary public, and (iii) the spouse's consent acknowledges the effect of the election. Spousal consent is not required, however, if the Participant establishes to the satisfaction of the Plan -30- 32 Administrator that such consent cannot be obtained because there is no spouse or the spouse cannot be located. Any consent by a spouse shall be effective only with respect to that spouse. The election must be made during the 90-day period ending on the date benefit payments commence. There shall be no limit on the number of times a Participant may make or revoke an election. 6.11. Death Benefits. No benefits shall be payable under the Plan after death unless specifically provided for in the Plan. 6.12. Commencement of Benefits. Payment of retirement benefits shall commence on (a) in the case of a Participant who has made the election in Section 6.09(b) to begin receiving his retirement benefits, the first day of the calendar month coinciding with or next following the date his written election is filed with the Plan Administrator and (b) in all other cases, the later of (x) the first day of the calendar month coinciding with or next following the date the Participant terminates his employment with Component Members, (y) the date he attains his Early, Disability or Normal Retirement Date, as the case may be, or (z) the date the Participant (or in the event of his death, his surviving -31- 33 spouse) elects to commence payment of his retirement benefits. In the case of a Participant who dies before his Annuity Starting Date and who has a surviving spouse who is entitled to receive a Pre- or Post-Normal Retirement Survivor Annuity, such Pre- or Post-Normal Retirement Survivor Annuity shall commence (unless his surviving spouse elects otherwise), in the case of a Participant who dies after attaining age 55, as of the first day of the month coinciding with or next following the Participant's death, or, in the case of a Participant who dies on or before attaining age 55, the first day of the month coinciding with or next following the date the Participant would have attained age 55. 6.13. Small Benefits. If any monthly installment that shall be payable to any person under the Plan shall be less than $20, then, if the Plan Administrator shall so direct, the aggregate of the amounts which shall be payable to such person in any year shall be paid in quarterly, semiannual or annual installments. If the present value of the nonforfeitable accrued benefit of any Participant who has ceased to be an Employer prior to age 55 is less than $3,500, then the Plan Administrator may at any time direct that the Actuarial Equivalent of such retirement benefits shall be paid to him in a lump sum in lieu of any benefits which he -32- 34 may be entitled to under Article V. For purposes of determining whether the present value of the nonforfeitable accrued benefit of any Participant is less than $3,500, present value shall be measured using the interest rate which would be used (as of the date of distribution) by the Pension Benefit Guaranty Corporation for determining the present value of a lump sum distribution on plan termination. 6.14. Termination of Benefit. If the period of any retirement benefit is measured by the life of an individual, the last payment shall be the last payment due prior to the death of the individual. -33- 35 ARTICLE VII TAX DISTRIBUTIONS 7.01. Annual Tax Distributions. Each Plan Year there shall be distributed to each Participant an amount equal to the sum necessary to reimburse the Participant for the entire amount of Income Taxes incurred in respect of the inclusion in the Participant's gross income for such Plan Year of (i) the Income Amount and (ii) the Gross-Up Payment. In addition, if the number of payments of retirement benefits received by the Participant exceeds the number of payments taken into account in calculating his Applicable Exclusion Ratio, then thereafter there shall also be distributed each Plan Year to such Participant an amount equal to the sum necessary to reimburse the Participant for the entire amount of Income Taxes incurred in respect of the inclusion in the Participant's gross income of (i) the amount of the retirement benefits thereafter received in such Plan Year times such Applicable Exclusion Ratio plus (ii) the Gross-Up Payment. 7.02. Calculation of Gross-Up Payment. In calculating the amount of annual tax distributions provided in Section 7.01 to a Participant, the Plan Administrator shall assume that the Federal income tax rate applicable to such Participant is the highest marginal rate specified in -34- 36 Section 1(a) of the Code that would apply to such Participant if his compensation income from the Company (without giving regard to any deferred compensation arrangement) and any distribution of retirement benefits from the Plan ("Alleghany Income") were his only source of income. The Plan Administrator shall further assume that any Participant who is subject to state or local income tax in respect of his Alleghany Income is taxable at the highest marginal rate that would apply if his Alleghany Income were his only source of income in each such state or local jurisdiction in which he is taxable for such year on his Alleghany Income; provided that the Plan Administrator shall give effect to any Federal income tax deductions available with respect to such state and local income taxes. In determining the amount of any employment taxes, the Plan Administrator shall take into account the actual state of facts which exists with respect to such Participant's Alleghany Income. The sum of the federal tax rate, the tax-effected state and local income tax rates and the appropriate rate of employment taxes shall be known as the "Blended Tax Rate". Notwithstanding the foregoing provisions of this Section 7.02, if a Participant demonstrates to the satisfaction of the Plan Administrator (by providing a copy of such Participant's income tax return or otherwise) that his actual Blended Tax Rate differs from -35- 37 the Blended Tax Rate determined by the Plan Administrator, the Plan Administrator, the Plan Administrator shall base the computation of the Gross-Up Payment on the actual Blended Tax Rate established by the Participant. 7.03. Form and Payment. Distributions pursuant to this Article VII shall be made by depositing the same for the benefit of the Participant with the appropriate tax authorities. 7.04. Tax Distributions to Surviving Spouses and Beneficiaries. If any Income Amount shall be includable in the gross income of any surviving spouse or Beneficiary following the death of a Participant, then such surviving spouse or Beneficiary also shall be entitled to receive tax distributions in accordance with the provisions of Section 7.01 to the same extent that tax distributions would have been made to the Participant. 7.05. Repayment of Tax Distributions. As a condition to receiving tax distributions pursuant to this Article VII, each Participant, and his surviving spouse and Beneficiary, if applicable (in this Section 7.05, collectively the "Participants"), shall enter into an agreement, in form and substance satisfactory to the Plan Administrator, agreeing to pay to the Company an amount equal to any savings in Income Taxes and refunds thereof which may -36- 38 be available to the Participants as a result of the receipt by the Participants of distributions of retirement benefits under the Plan that were not includable in the gross income of the Participants by reason of the application of an exclusion ratio pursuant to Section 72 of the Code and which in the aggregate are less than the aggregate Income Amount theretofore includable in the income of the Participants. -37- 39 ARTICLE VIII CONTRIBUTIONS 8.01. Company Contributions. The Company agrees as a contractual obligation with the Participants to contribute to the Fund from time to time amounts actuarially sufficient to provide to Participants the retirement and other benefits specified in the Plan, including without limitation amounts necessary to make the tax distributions provided in Article VII. In furtherance and not in limitation of the foregoing, the Company shall cause the accrued retirement benefit (calculated as a life annuity) of each Participant to be fully funded no later than such Participant's Annuity Starting Date. 8.02. Investment of Contributions. All contributions under the Plan shall be made to the Funding Agent to become part of the Fund. The Funding Agent shall hold, invest, or distribute the Fund in accordance with the Plan. 8.03. Forfeitures. Any forfeitures which arise under the Plan for any reason whatsoever shall be used to reduce the cost of the Plan to the Company and shall not be used to increase benefits to any Participant or Beneficiary. -38- 40 8.04. Prohibition against Reversion. All contributions made by the Company shall be applied to provide benefits to Participants as described herein and at no time shall any contribution (or portion thereof) revert to the Company prior to the discharge of all liabilities under the Plan except as provided in Section 12.04 and as follows: (a) A contribution which is made by the Company by a mistake of fact may be returned to the Company within one year after the payment of the contribution; and (b) A contribution conditioned on deductibility thereof under Section 404 of the Code may, to the extent that the deduction is not allowed, be returned to the Company within one year after the disallowance of that deduction. For this purpose, all contributions are declared to be conditioned upon their deductibility under Section 404 of the Code. 8.05 Separate Accounts. A separate account shall be maintained for each Participant to which the contributions by the Company to provide the retirement benefits of each Participant, and any income earned thereon, are credited and to which distributions from the Plan are debited. Such accounts shall be maintained in accordance with the Treasury Regulations under Section 404(a)(5) and 663(c) of the Code. -39- 41 In the event that (i) a Participant makes an election under Section 6.09(b), (ii) the Participant has elected to receive his retirement benefits as a lump sum and (iii) after paying to the Participant the entire retirement benefits to which he is then entitled, there remains a balance in the separate account of such Participant, then such balance shall be reallocated from the separate account of such Participant to the separate accounts of each other Participant whose separate account is less than his estimated accrued retirement benefit as of the end of such Plan Year, which amount shall be allocated in the ratio by which each separate account is not so fully funded, and after all such separate accounts are fully funded, the remainder shall then be reallocated in accordance with the ratio which each such Participant's separate account bears to the separate account of all other Participants whose retirement benefits have not theretofore commenced. -40- 42 ARTICLE IX APPOINTMENT OF NAMED FIDUCIARIES 9.01. Named Fiduciaries. The named fiduciaries of the Plan (within the meaning of Section 402(a)(2) of ERISA) are the Plan Administrator and the Investment Committee. The Plan Administrator shall have fiduciary responsibility with respect to the administration of the Plan. The Investment Committee shall have fiduciary responsibility with respect to the investment of the Fund. In the administration of the Plan, the Plan Administrator shall adopt from time to time a funding policy with respect to the Plan and shall communicate such funding policy to the Investment Committee. 9.02. Plan Administrator Records. The Plan Administrator shall keep or cause to be kept all data, records and documents relating to the administration of the Plan. 9.03. Employment of Experts. The Plan Administrator and the Investment Committee may employ or engage such independent actuary, accountant, counsel, other experts or persons as either may deem necessary in connection with discharging their duties under the Plan. -41- 43 9.04. Plan Administrator and Investment Committee Compensation. Neither the Plan Administrator nor the members of the Investment Committee shall be compensated by the Plan or the Fund for their services as such. 9.05. Payment of Expenses. All expenses incurred in connection with the administration of the Plan or the investment of any assets of the Fund, including, but not limited to, the compensation of any Funding Agent or investment manager and of any actuary, accountant, counsel, other experts or persons who shall be employed by the Plan Administrator in connection with the administration thereof or by the Investment Committee in connection with the investment of the Fund, shall be paid out of the Fund to the extent not paid by the Company. 9.06. Indemnification of Plan Administrator and Investment Committee. The Company shall indemnify and hold harmless to the fullest extent permitted by law the Plan Administrator, the members of the Investment Committee and any Employee of the Company to whom fiduciary responsibilities are delegated by the Plan Administrator or the Investment Committee from and against any liabilities, damages, costs and expenses (including attorneys' fees and amounts paid in settlement of any claims approved by the -42- 44 Company) incurred by or asserted against him by reason of his occupying or having occupied fiduciary positions in connection with the Plan, except that no indemnification shall be provided if the Plan Administrator, a member of the Investment Committee or any Employee personally profited from any act or transaction in respect of which indemnification is sought. 9.07. Binding Action. To the fullest extent permitted by law, all actions taken and decisions made by the Plan Administrator shall be final, conclusive and binding on all persons having any interest in the Plan or in any benefits payable thereunder. -43- 45 ARTICLE X POWERS AND DUTIES OF NAMED FIDUCIARY 10.01. Investment Committee-Investment Powers. The Investment Committee shall have the authority to appoint, remove or change, from time to time, persons to act as the Funding Agent. The Investment Committee shall also have the authority to appoint, remove or change, from time to time, persons constituting "investment managers", as defined in Section 3(38) of ERISA, and delegate to such investment managers the exclusive authority to manage all or such portions of the Fund as the Investment Committee shall from time to time designate and to advise any Funding Agent or any investment manager of the investment objectives which such person should observe. The Investment Committee shall have the power to take all actions and to make all decisions necessary or proper to carry out its duties and responsibilities under the provisions of the Plan, including without limitation, to delegate to one or more persons the authority to act as a fiduciary under the Plan, with such duties, powers and authority relative to the investment of the Fund as the Investment Committee shall determine, and in so doing to limit its own duties and responsibilities to the extent specified in such appointment. Action of the Investment Committee shall be taken by a majority of the -44- 46 members of the Investment Committee then in office, which action may be taken with or without a meeting and in accordance with such rules and procedures as the Investment Committee may from time to time adopt. The Investment Committee shall report to the Board each year concerning the investment performance of the Fund and the individual performance of the Funding Agent and any investment manager. 10.02. Plan Administrator-Administration Powers. The Plan Administrator shall have the power to take all action and to make all decisions necessary or proper in order to carry out his duties and responsibilities under the provisions of the Plan, including without limitation, the following: (a) To make and enforce such rules and regulations as he shall deem necessary or proper for the efficient administration of the Plan; (b) To interpret the Plan and its regulations; and (c) To delegate to one or more persons the authority to act as a fiduciary under the Plan, with such duties, powers and authority relative to the administration of the Plan as the Plan Administrator shall determine, and in so doing to limit his own duties and responsibilities to the extent specified in such appointment. -45- 47 The Plan Administrator shall report to the Board each year concerning the administration and operation of the Plan. 10.03. Plan Administrator-Claims Review Authority and Procedures. Except to the extent otherwise provided herein, the Plan Administrator shall determine benefits under the Plan and, within 90 days after receipt of a claim for benefits, provide any claimant whose claim is wholly or partially denied written notice of such decision setting forth: (i) the specific reason or reasons for the denial; (ii) specific references to the pertinent Plan provisions, if any, on which the denial is based; (iii) a description of any additional material or information which may be necessary for the claimant to perfect the claim and an explanation of why such material or information is necessary; and (iv) an explanation of the following claims review procedure: Any claimant whose claim has been denied in whole or in part, or his duly authorized representative, may appeal such denial by making within 60 days a written application to the Plan Administrator. In connection with any such appeal the claimant or his duly authorized representative may review pertinent documents and submit issues and comments in writing. The Plan Administrator -46- 48 shall review and make the final decision with respect to any claim so appealed. The decision on review shall be made no later than 60 days after the Plan Administrator's receipt of a request for review. Such decision shall be in writing and shall include specific reference to the pertinent plan provisions on which the decision is based. 10.04. Conflicts of Interest. No person who is an Employee of the Company and who is the Plan Administrator shall participate in the resolution of any question which relates directly or indirectly to him and which, if applied to him, would significantly vary his eligibility for, or the amount of, any benefit to him. In cases involving the disqualification under this Section 10.04 of the Plan Administrator, the questions at issue shall be certified to the Board for resolution. -47- 49 ARTICLE XI LIMITATION OF RIGHTS AND OBLIGATIONS 11.01. Plan is Voluntary. Although it is the intention of the Company that the Plan shall be continued, the Plan is entirely voluntary on the part of the Company and the Plan's continuance is not a contractual obligation of the Company. Notwithstanding any termination of the Plan by the Company, the Company agrees as a contractual obligation with the Participants to pay or to cause to be paid to the Fund all amounts as shall be necessary to fund the retirement benefits provided by the Plan to the date of any such termination of the Plan and the amount of tax distributions provided for in Article VII hereof whether before or after the date of such termination. 11.02. Creation of Certain Employment Rights. The Plan shall be deemed to constitute a contract between the Company and each Participant and is consideration or inducement for the employment of the Participant by the Company. Notwithstanding the foregoing, nothing contained in the Plan shall be deemed (a) to give any person the right to be retained in the service of the Company or (b) to interfere with the right of the Company to discharge any person at any time without regard to the effect which such discharge shall -48- 50 have upon his rights or potential rights, if any, under the Plan. 11.03. Distributions Only from Fund or Company. Each Participant and any other person who shall claim any rights under the Plan shall be entitled to look only to the Fund or the Company for any payment or benefit, and no member of the Board, officer or employee of the Company or any fiduciary hereunder shall, except as required by ERISA, be liable in any manner if the Fund shall be insufficient to provide for any such payment or benefit or the Company shall fail to meet its obligations hereunder. -49- 51 ARTICLE XII AMENDMENT AND TERMINATION 12.01. Amendment. The Board may, at time, or from time to time, whether upon termination or otherwise, modify or amend the Plan in any manner, whether prospectively or retroactively, in whole or in part, provided, however, that no amendment may reduce the accrued benefit of any Participant or other person or eliminate or modify the obligations of the Company under Sections 8.01 and 11.01 hereof. 12.02. Termination. The Board may at any time terminate the Plan, in whole or part, except that the Company's obligation under Sections 8.01 and 11.01 hereof shall survive such termination. 12.03. Payment of Benefits upon Termination. Upon termination of the Plan benefits may be paid directly from the Fund or by the Company or by means of insurance and/or annuity contracts purchased from one or more insurance companies either (a) by payment of the benefits when and as called for under the Plan until such time as the Fund is exhausted or all benefits are paid, or (b) by distribution of the Actuarial Equivalent (calculated in accordance with Article VI) of the accrued retirement benefits of each -50- 52 Participant, in cash in one lump sum or (c) by the purchase of annuity contracts of such type as the Plan Administrator shall determine. 12.04. Reversion to Company. If, after all the payments described in the preceding sections to the Participants and their Beneficiaries, there is any balance remaining, such balance shall be distributed to the Company. -51- 53 ARTICLE XIII LIMITATION OF ASSIGNMENT 13.01. Spendthrift Provision. In order that the benefits hereunder shall be fully protected against claims of all sorts, direct or otherwise, none of the benefits provided hereunder to any person shall be assignable or transferable voluntarily, nor shall they be subject to the claims of any creditor whatsoever, nor subject to attachment, garnishment or other legal process by any creditor or to the jurisdiction of any bankruptcy court or any insolvency proceedings by operation of law, or otherwise, and no person shall have any right to alienate, anticipate, pledge, commute, or encumber any of such benefits voluntarily or involuntarily; provided, however, the creation, assignment, or recognition or a right to any benefit payable with respect to a Participant pursuant to a Qualified Domestic Relations Order (as defined in Section 206(d)(3) of ERISA) shall not be treated as an assignment or alienation prohibited in this Section 13.01. 13.02. Incompetence of Participant or Beneficiary. If the Plan Administrator receives evidence satisfactory to him that a person entitled to receive any payment under the Plan is legally incompetent to receive such payment and to give valid release therefor, such payment may be made to the -52- 54 guardian, committee, or other representative of such person duly appointed by a court of competent jurisdiction. If a person or institution other than a guardian, committee, or other representative of such person who has been duly appointed by a court of competent jurisdiction is then maintaining or has custody of such incompetent person, the payment may be made to such other person or institution and the release of such other person or institution shall be valid and complete discharge for the payment. -53- 55 ARTICLE XIV MISCELLANEOUS 14.01. Governing Laws. Except as otherwise provided by section 514 of ERISA, this Plan and all provisions thereof shall be construed and administered according to the laws of the State of New York. 14.02. Necessary Parties. The Company, the Plan and the Plan Administrator or the Investment Committee, as the case may be, shall be the only necessary parties in any litigation involving the Plan or assets of the Plan, unless otherwise required by law. 14.03. Name. The name of this Plan is the "Alleghany Corporation Retirement Plan". 14.04. Titles and Heading not to Control. The titles to the Articles and the headings of Sections in the Plan are placed herein for convenience of reference only, and in case of any conflict, the text of this instrument, rather that such titles or headings, shall control. 14.05. Gender and Person. The masculine pronoun shall include the feminine, the feminine pronoun shall include the masculine and the singular shall include the plural wherever the context so requires. -54- 56 14.06. Merger or Consolidation. No merger or consolidation of the Plan with, or transfer of assets or liabilities of the Plan to, any other Plan shall be permitted unless each Participant would (if the Plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consolidation, or transfer (if the Plan had then terminated). 14.07. Evidence of Survivor. If the Plan Administrator cannot make payment of any amount to a Participant or Beneficiary within five years after such amount becomes payable because the identity or whereabouts of such Participant or Beneficiary cannot be ascertained notwithstanding the mailing of a notice to such Participant or Beneficiary by registered mail to his last known address, the Plan Administrator at the end of such five year period shall direct that all unpaid amounts which would have been payable to such Participant or Beneficiary be forfeited and treated as actuarial gains hereunder. Notwithstanding the foregoing, the forfeited benefits of any Participant or Beneficiary shall be reinstated and payment of such benefits -55- 57 shall commence upon the filing at any time of a claim for such benefits by such Participant or Beneficiary. 14.08. Elections and Payment. All payments or benefits under the Plan shall commence as of the dates herein set forth; provided, however, that if any payment shall be conditional upon an election of a Participant as to time, or the amount of such payment is dependent upon the election of a Participant as to the form of his benefit or cannot be determined until the receipt of information or additional information or additional information from the Participant, his surviving spouse or Beneficiary, the Plan Administrator may defer commencement of the payment of such benefits for 90 days from the receipt of such election or information. Notwithstanding any such delay in the commencement of the payment of benefits, such Participant, surviving spouse or Beneficiary shall receive all such amounts to which he is entitled, including any amounts the payment of which is permitted to be delayed hereunder. -56- 58 ALLEGHANY CORPORATION RETIREMENT PLAN EXHIBIT I Actuarial Equivalent 1. For all purposes of Section 5.02: UP-1984 Mortality Table 7.75% Interest Rate 2. For purposes of Section 5.03 (early retirement reduction factors): .25% per month for each month that the date as of which benefit payments commence precedes age 65. 3. For all purposes of Article VI: Based on the unisex annuity purchase rates from a qualified insurance company, in effect on the date of determination. In no event shall any lump sum calculated in accordance with the preceding sentence be less than the lump sum determined based upon the UP-1984 Mortality Table and an interest rate equal to the appropriate limitation in Section 205(g)(3) of ERISA using the interest rates promulgated by the Pension Benefit Guaranty Corporation for purposes of determining the present value of a lump sum distribution on plan termination. -57- 59 ALLEGHANY CORPORATION RETIREMENT PLAN EXHIBIT II Benefit Accrual Service and Prior Plan Accrued Benefit
Prior Plan Accrued Benefit Benefit Accrual Monthly Life Annuity Service at Benefit Payable Name 12/31/88 At Age 65 - ---- -------- -------------------- Burns, John 20.7500 $7,835.25 Campos, Andrea 9.0000 393.23 Conway, John 10.0000 2,578.50 Cuming, David 12.0000 4,512.70 Flaherty, Carolyn 1.0000 38.02 Gaietto, Vernice 15.5833 718.96 Hrubant, Frank 34.3333 713.67 Kirby, F. M. 21.3333 11,481.25* Sismondo, Peter 1.0000 175.41 Somerville, Theodore 15.7500 5,105.21 Stark, Carol 14.6667 800.80 Stuart, Winifred 32.5833 1,387.81* Wheeler, Mary 9.0000 200.25
* Monthly Benefit Payable Beginning January 1, 1989 -58- 60 ALLEGHANY CORPORATION RETIREMENT PLAN EXHIBIT III Special Grants of Vesting Service and Benefit Accrual Service
Years of Additional Years of Additional Name Vesting Service Benefit Accrual Service ---- ------------------- ----------------------- Hart, Robert M. 5 5
-59- EX-10.11 6 ALLEGHANY DIRECTORS' EQUITY COMPENSATION PLAN 1 Exhibit 10.11 ALLEGHANY CORPORATION DIRECTORS' EQUITY COMPENSATION PLAN 1. Purpose. The purpose of the Alleghany Corporation Directors' Equity Compensation Plan (the "Plan") is to advance the interests of Alleghany Corporation (the "Company") and its stockholders by encouraging increased stock ownership by members of the Board of Directors (the "Board") of the Company who are not employees of the Company or any of its subsidiaries, in order to promote long-term stockholder value through continuing ownership of the Company's common stock. 2. Administration. The Plan shall be administered by the Board. The Board shall have all the powers vested in it by the terms of the Plan, such powers to include authority (within the limitations described herein) to prescribe the form of the agreement embodying payments in shares of the Company's common stock made under the Plan. The Board shall have the power to construe the Plan, to determine all questions arising thereunder and, subject to the provisions of the Plan, to adopt and amend such rules and regulations for the administration of the Plan as it may deem desirable. Any decision of the Board in the administration of the Plan shall be final and conclusive. The Board may act only by a majority of its members in office, except that the members thereof may authorize any one or more of their number or the Secretary or any other officer of the Company to execute and deliver documents on behalf of the Company. No member of the Board shall be liable for anything done or omitted to be done by him or by any other member of the Board in connection with the Plan, except for his own willful misconduct or as expressly provided by statute. 3. Participation. Each member of the Board of the Company who is not an employee of the Company or any of its subsidiaries (a "Non-Employee Director") shall be eligible to receive stock payments (each, a "Stock Payment") as a portion of the annual retainer payable to such Non-Employee Director in shares of the Company's common stock, $1.00 par value ("Common Stock"), in accordance with Paragraph 5 below. As used herein, the term "subsidiary" means any corporation at least 40 percent of whose outstanding voting stock is owned, directly or indirectly, by the Company. 4. Shares of Stock Subject to Plan. Subject to adjustment as provided in Paragraph 6 below, the shares of Common Stock paid to Non-Employee Directors under the Plan shall not exceed an aggregate of 10,000 shares. Shares to 2 be delivered under the Plan may be either authorized but unissued shares of Common Stock or shares of Common Stock held by the Company as treasury shares. 5. Annual Retainer. (a) Annual Retainer. Commencing in May 1995 and in each May thereafter, each Non-Employee Director shall receive for the following year's service as a director of the Company his annual retainer, exclusive of any per meeting fees, committee fees or expense reimbursements, as set from time to time by the Board ("Annual Retainer") fifty percent in the form of a Stock Payment and fifty percent in cash. (b) Date of Payment, Number of Shares Comprising Stock Payment. The Annual Retainer shall be paid in May of each year. The total number of shares of Common Stock included in each Stock Payment shall be determined by dividing the amount of a Non-Employee Director's Annual Retainer that is to be paid in shares of Common Stock by the Market Price of a share of Common Stock. For purposes of the Plan, Market Price is the average of the high and low sales prices of a share of Common Stock as reported on the New York Stock Exchange Composite Transactions Tape for all trading days during the immediately preceding April. No fractional shares will be issued by the Company. An amount in lieu thereof shall be paid in cash based upon the Market Price of such fractional share. (c) Adjustment of Annual Retainer. If a Non-Employee Director's services as a board member are terminated prior to the next annual meeting of the Company's stockholders, for any reason, a pro rata portion of the Annual Retainer reflecting payment for service during the remainder of such annual term shall be repaid to the Company by such Non-Employee Director promptly after such termination. 6. Dilution and Other Adjustments. In the event of any change in the outstanding shares of Common Stock of the Company by reason of any stock split, stock dividend, recapitalization, merger, consolidation, reorganization, combination or exchange of shares or other similar event, the number or kind of shares that may be issued under the Plan pursuant to Paragraph 4 above shall be automatically adjusted to give effect to the occurrence of such event. -2- 3 7. Miscellaneous Provisions. (a) Except as expressly provided for in the Plan, no Non-Employee Director or other person shall have any claim or right to receive Stock Payments. Neither the Plan nor any action taken hereunder shall be construed as giving any Non-Employee Director any right to be retained in the service of the Company. (b) No shares of Common Stock shall be issued hereunder unless counsel for the Company shall be satisfied that such issuance will be in compliance with applicable federal, state and other securities laws. (c) It shall be a condition to the obligation of the Company to issue shares of Common Stock pursuant to a Stock Payment, that the participant pay to the Company, upon its demand, such amount as may be requested by the Company for the purpose of satisfying any liability to withhold federal, state, local or foreign income or other taxes. (d) The expenses of the Plan shall be borne by the Company. 8. Amendment or Discontinuance. The Plan may be amended or modified at any time and from time to time by the Board as the Board shall deem advisable, provided, however, that no amendment or modification may become effective without approval by the stockholders of the Company in accordance with Paragraph 10 below if stockholder approval is required to enable the Plan to satisfy any applicable statutory or regulatory requirements, or if the Company, on the advice of counsel, determines that stockholder approval is otherwise necessary or desirable, and provided further, that no amendment or modification shall be made more than once every six months, other than to comport with changes in the Internal Revenue Code of 1986, as amended, the Employment Retirement Income Security Act of 1974, as amended, or the rules promulgated thereunder. No amendment or modification of the Plan shall materially and adversely affect any right of any participant with respect to any Annual Retainer theretofore paid, without such participant's written consent. 9. Termination. The Plan shall terminate upon the earlier of the following dates or events to occur: (a) upon the adoption of a resolution of the Board terminating the Plan; or (b) December 31, 2005. -3- 4 No termination of the Plan shall materially and adversely affect any of the rights or obligations of any person, without his consent, with respect to any Annual Retainer theretofore paid under the Plan. 10. Stockholder Approval. The Plan shall be submitted to the stockholders of the Company for their approval. Except to the extent otherwise required by the Company's Restated Certificate of Incorporation or the Company's By-Laws, the stockholders shall be deemed to have approved the Plan if and when it is approved at a meeting of the stockholders by a majority of the voting power of the Voting Stock (all as defined in the Company's Restated Certificate of Incorporation) present in person or represented by proxy and entitled to vote at such meeting. January 16, 1995 -4- EX-10.19 7 CT&T EXCESS BENEFITS PENSION PLAN 1 Exhibit 10.19 CHICAGO TITLE AND TRUST COMPANY EXCESS BENEFITS PENSION PLAN January 1, 1987 2 Chicago Title and Trust Company Excess Benefits Pension Plan Section One Establishment of Plan 1.1 Effective Date. Effective January 1, 1987, Chicago Title and Trust Company (CT&T) hereby establishes the Chicago Title and Trust Company Excess Benefits Pension Plan (Plan). 1.2 Plan Purpose. The Plan is for those participants of the Chicago Title and Trust Company Pension Plan (Pension Plan) who are affected by the maximum benefit limitations imposed by Section 415 of the Internal Revenue Code (Code) as amended. The purpose of this Plan is to restore for those participants those benefits reduced by said maximum benefit limitations. 1.3 Employer. The Company and any of its affiliated corporations which with the consent of the Company adopt the Plan are referred to below collectively as the "Employers" and individually as an "Employer." 1.4 Non-Tax Qualified Plan. This Plan is completely independent from the Pension Plan and is not funded or qualified for special tax treatment under the Internal Revenue Code. The Plan is intended to constitute an excess benefit plan within meaning of Section 3(36) of the Employees Retirement Income Security Act of 1974, as amended. Section Two Eligibility 2.1 Eligibility. Any participant in the Pension Plan who is affected by the maximum benefit limitations of that Plan shall be entitled to an excess benefit, payable hereunder in accordance with Section Three of this Plan, equal to the excess, if any, of (A) The amount of such participant's annual benefit (or lump sum equivalent) under the Pension Plan computed under the provisions of the said plan, without regard to the above-mentioned limitations of section 415 of the Internal Revenue Code less (B) The amount of such participant's annual benefit (or lump sum equivalent) actually payable for each year under the Pension Plan, computed under the 3 provisions of the said retirement plan and subject to the above-mentioned limitations of section 415 of the Internal Revenue Code. 2.2 Time and Method of Payment. The excess benefits under this Plan shall become payable when a participant begins to receive payments as a retiree or terminated vested employee under the Chicago Title and Trust Company Pension Plan and shall be payable in the same manner and at the same time as the participant's benefits under said Pension Plan are paid. 2.3 Incompetency. In the event that a person entitled to benefits under the Plan is declared incompetent and a conservator or other person legally charged with the care of this person or of his estate is appointed, any benefits to which such person is entitled under the Plan shall be paid to such conservator or other person legally charged with the care of this person or of his estate. 2.4 Employee Rights. The amount of any benefit payable under the Plan with respect to any Participant shall be paid from the general revenues of the Employer that last employed that Participant. 2.5 Beneficiary. In the event of a participant's death, the participant's beneficiary under the Pension Plan shall be entitled to receive the benefits payable under this Plan. Section Three Operation of Plan 3.1 Promise To Pay. The Employer promises to pay to the participant the excess pension benefits established under this Plan at the times and under the terms provided herein. The Plan is deemed to be an unfunded plan and no Employer has any obligation to set aside, earmark, or entrust any fund, policy, or money with which to pay any obligations under the Plan. A participant shall have no vested right or claim to any assets of an Employer for benefits payable under this Plan. Section Four Miscellaneous 4.1 Not a Contract of Employment. The Plan does not constitute a contract of employment and participation in the Plan will not give any employee the right to be retained in the employ of any Employer nor any right to 4 or claim to any benefit under the Plan, unless such right or claim has specifically accrued under the terms of the Plan. 4.2 Amendment - Termination. Chicago Title and Trust Company may amend or terminate this Plan at any time, but such amendment or termination shall not adversely affect the rights of any participant or beneficiary then receiving benefits, or the beneficiary of any participant then receiving benefits under this Plan. Any participant not yet in a pay status may lose any future right to payments under this Plan should the Company terminate this Plan and not make provision for the payment of such benefits. 4.3 Assignment. The benefits payable to any participant under this Plan may not be voluntarily or involuntarily assigned or alienated. 4.4 Controlling Law. This Agreement shall be interpreted under and governed by the laws of the State of Illinois. Executed this 17th day of February, 1987 to evidence the adoption of the Chicago Title and Trust Company Excess Pension Benefits Plan. CHICAGO TITLE AND TRUST COMPANY By: /s/ LaNette Zimmerman --------------------------- Vice President Executed this 17th of February, 1987 to evidence Chicago Title Insurance Company's participation in the Chicago Title and Trust Company Excess Benefit Plan. CHICAGO TITLE INSURANCE COMPANY By: /s/ Thomas J. Adams --------------------------- Vice President Executed this 23rd of February, 1987 to evidence Chicago Title Company's participation in the Chicago Title and Trust Company Excess Benefits Plan. 5 CHICAGO TITLE COMPANY By: /s/ E. Russell Sherman --------------------------- Vice President 6 FIRST AMENDMENT TO CHICAGO TITLE AND TRUST COMPANY EXCESS BENEFITS PENSION PLAN MAY 5, 1994 The undersigned, being the President of Chicago Title and Trust Company (Company) and acting pursuant to the authority granted to the President under certain resolutions duly adopted by the Board of Directors of Chicago Title and Trust Company under the dates of April 22, 1986 and April 27, 1993, does hereby consent to and approve on behalf of Chicago Title and Trust Company the following First Amendment of the Chicago Title and Trust Company Excess Benefits Pension Plan, with an effective date of January 1, 1994: 1. Be amending Section 1.2 to read as follows: "1.2 Plan Purpose. The Plan is for those participants of the Chicago Title and Trust Company Pension Plan (Pension Plan) who are affected by the maximum benefit limitations imposed by Section 415 of the Internal Revenue Code (Code), as amended, and by the maximum compensation limitations imposed by Section 401(a)(17) of the Code. The purpose of this Plan is to restore for those participants those benefits reduced by said maximum benefit and compensation limitations." 2. By amending Section 1.4 to read as follows: "1.4 Non-Tax Qualified Plan. This Plan is completely independent from the Pension Plan and is not funded or qualified for special tax treatment under the Internal Revenue Code. The Plan is intended to constitute an excess benefit plan within the meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended (ERISA) and an unfunded deferred compensation plan for a select group of management or highly compensated employees within the meaning of 201(2) of ERISA." 3. By amending Section 2.1 to read as follows: "2.1 Eligibility. Any participant in the Pension Plan who is affected by the maximum benefit or compensation limitations of that Plan and who is approved by the President of the Company shall be entitled to an excess benefit, payable hereunder in accordance with Section Three of this Plan, equal to the excess, if any, of 7 (A) The amount of such participant's annual benefit (or lump sum equivalent) under the Pension Plan computed under the provisions of the said Plan, without regard to the above-mentioned limitations of Section 415 and Section 401(a)(17) of the Code less (B) The amount of such participant's annual benefit (or lump sum equivalent) actually payable for each year under the Pension Plan, computed under the provisions of the said Plan and subject to the above-mentioned limitations of Section 415 and Section 401(a)(17) of the Code." 4. By adding the following sentence at the end of Section 3.1: "Any discretionary determination of eligibility or the amount payable hereunder by the President of the Company or an Employer is final and binding." 5. By amending Section 4.4 to read as follows: "4.4 Controlling Law. To the extent not superseded by the laws of the United States, this Agreement shall be interpreted under and governed by the laws of the State of Illinois." Executed this 9th day of May, 1994. CHICAGO TITLE AND TRUST COMPANY By: /s/ Richard P. Toft --------------------------- Richard P. Toft President -2- EX-10.21.A 8 DESC. OF COMP. ARR. BET. ALLEG. FIN. - WOODBERRY 1 Exhibit 10.21(a) DESCRIPTION OF COMPENSATORY ARRANGEMENT BETWEEN ALLEGHANY FINANCIAL INC. AND PAUL F. WOODBERRY Until the merger of Alleghany Financial Inc. ("AFI"), formerly a wholly owned subsidiary of Alleghany, into Alleghany on October 28, 1994, Mr. Woodberry received $100,000 per year from AFI for consulting services relating to the real estate investments of AFI's subsidiaries Sacramento Savings Bank and Sacramento Properties Holdings, Inc. EX-10.21.B 9 DESC. OF COMP. ARR. BET. ALLEG. - WOODBERRY 1 Exhibit 10.21(b) DESCRIPTION OF COMPENSATORY ARRANGEMENT BETWEEN ALLEGHANY CORPORATION AND PAUL F. WOODBERRY Effective October 31, 1994, Mr. Woodberry receives $290,000 per year from Alleghany for consulting services relating to (i) possible investments and acquisitions which may be made by Alleghany and/or its subsidiaries and (ii) the disposition of the real estate and real estate-related assets of Alleghany's subsidiaries Alleghany Properties, Inc. and Sacramento Properties Holdings, Inc. Prior thereto, Mr. Woodberry received $190,000 per year from Alleghany for consulting services relating to possible investments and acquisitions which may be made by Alleghany and/or its subsidiaries. EX-10.28.A 10 NOTE PURCHASE AGREEMENT DATED 1/15/95 1 Exhibit 10.28(a) ================================================================================ ALLEGHANY CORPORATION ALLEGHANY PROPERTIES, INC. ----------------------- NOTE PURCHASE AGREEMENT ----------------------- DATED AS OF JANUARY 15, 1995 $50,000,000 8.62% SENIOR NOTES OF ALLEGHANY PROPERTIES, INC. DUE FEBRUARY 23, 2000 ================================================================================ 2 TABLE OF CONTENTS
PAGE 1. PURCHASE AND SALE OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.1 Issue of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 The Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Purchase for Investment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.4 Failure To Deliver, Failure of Conditions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.5 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2. WARRANTIES AND REPRESENTATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.1 Nature of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 2.2 Financial Statements; Indebtedness; Material Adverse Change. . . . . . . . . . . . . . . . . . . . . 4 2.3 Subsidiaries and Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.4 Pending Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.5 Title to Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.6 Patents, Trademarks, Licenses, etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.7 Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.8 Full Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.9 Corporate Organization and Authority. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.10 Restrictions on Parent, Company and SPHI. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.11 Compliance with Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.12 Pension Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 2.13 Certain Laws. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.14 Environmental Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 2.15 Sale is Legal and Authorized; Obligations are Enforceable. . . . . . . . . . . . . . . . . . . . . . 11 2.16 Governmental Consent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.17 Private Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 2.18 No Defaults. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 2.19 Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 3. CLOSING CONDITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.1 Opinions of Counsel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.2 Warranties and Representations True. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.3 Officers' Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 3.4 Legality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.5 Private Placement Number. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.6 Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.7 Other Purchasers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.8 Proceedings Satisfactory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 3.9 Compliance with this Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4. PURCHASERS' SPECIAL RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.1 Direct Payment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.2 Delivery Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 4.3 Issuance Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
i 3 5. PREPAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.1 Required Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 5.2 Optional Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.3 Prepayment upon a Downgrade Event. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 5.4 Partial Prepayment Pro Rata. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.5 Notation of Notes on Prepayment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 5.6 No Other Optional Prepayments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.1 Registration of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.2 Exchange of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.3 Replacement of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 7. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.1 Payment of Taxes and Claims. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 7.2 Maintenance of Properties; Corporate Existence; etc. . . . . . . . . . . . . . . . . . . . . . . . . 20 7.3 Payment of Notes and Maintenance of Office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7.4 Pension Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 7.5 Line of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 7.6 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 7.7 Restricted Investments and Restricted Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7.8 Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7.9 Merger and Consolidation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 7.10 Transfers of Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7.11 Purchase Obligation of the Parent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 7.12 Transactions with Affiliates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 7.13 Liens. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 7.14 Private Offering. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8. INFORMATION AS TO PARENT AND COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.1 Financial and Business Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 8.2 Officers' Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 8.3 Accountants' Certificates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.4 Inspection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 8.5 Confidential Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9. EVENTS OF DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.1 Nature of Events. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9.2 Default Remedies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 9.3 Annulment of Acceleration of Notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 10. INTERPRETATION OF THIS AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 10.1 Terms Defined. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 10.2 GAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 10.3 Directly or Indirectly. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 10.4 Section Headings and Table of Contents and Construction. . . . . . . . . . . . . . . . . . . . . . . 55 10.5 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
ii 4 11. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 11.1 Communications. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 11.2 Reproduction of Documents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 11.3 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 11.4 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 11.5 Amendment and Waiver. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 11.6 Payments, When Received. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 11.7 Entire Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 11.8 Duplicate Originals, Execution in Counterpart. . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
iii 5 ALLEGHANY CORPORATION ALLEGHANY PROPERTIES, INC. --------------------------- NOTE PURCHASE AGREEMENT --------------------------- $50,000,000 8.62% SENIOR NOTES OF ALLEGHANY PROPERTIES, INC. DUE FEBRUARY 23, 2000 Dated as of January 15, 1995 Hartford Life Insurance Company Separate Account CFC Ladies and Gentlemen: ALLEGHANY CORPORATION (together with its successors and assigns, the "Parent"), a Delaware corporation, and ALLEGHANY PROPERTIES, INC. (together with its successors and assigns, the "Company"), a Delaware corporation, hereby agree with you as follows: 1. PURCHASE AND SALE OF NOTES 1.1 ISSUE OF NOTES. The Company will authorize the issuance of Fifty Million Dollars ($50,000,000) in aggregate principal amount of its eight and sixty-two one-hundredths percent (8.62%) Senior Notes due February 23, 2000 (the "Notes"). Each Note shall: (a) bear interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal balance thereof from the date of such Note at the rate of eight and sixty-two one-hundredths percent (8.62%) per annum, payable semi-annually on the twenty-third (23rd) day of each February and August in each year commencing on the later of August 23, 1995 or the payment date next succeeding the date of such Note, until the principal amount thereof shall be due and payable, and (b) bear interest, payable on demand, on any overdue principal (including any overdue prepayment of principal) and Make-Whole Amount, if any, and (to the extent permitted by applicable law) on any overdue installment of interest, at a rate equal to the lesser of (i) the highest rate allowed by applicable law or 1 6 (ii) nine and sixty-two one-hundredths percent (9.62%) per annum, (c) mature on February 23, 2000; and (d) be in the form of the Note set out in Exhibit A. The term "Note" as used herein shall include each Note delivered pursuant to this Agreement and each Note delivered in substitution or exchange for any such Note pursuant to Section 6.2 or Section 6.3. 1.2 THE CLOSING. (a) PURCHASE AND SALE OF NOTES. The Company hereby agrees to sell to you and you hereby agree to purchase from the Company, in accordance with the provisions hereof, the aggregate principal amount of Notes set forth below your name on Annex 1 at one hundred percent (100%) of the principal amount thereof. (b) THE CLOSING. The closing (the "Closing") of the Company's sale of Notes shall be held on February 23, 1995 (the "Closing Date") at 10:00 a.m., Hartford, Connecticut time, at the office of your special counsel, Hebb & Gitlin, a Professional Corporation (the "Special Counsel"), One State Street, Hartford, Connecticut 06103. At the Closing, the Company shall deliver to you one or more Notes (as set forth below your name on Annex 1), in the denominations indicated on Annex 1, in the aggregate principal amount of your purchase, dated the Closing Date and payable to you or payable as indicated on Annex 1, against payment by federal funds wire transfer in immediately available funds of the purchase price thereof, as directed by the Company on Annex 2. All transactions contemplated by this Agreement will be considered to have taken place simultaneously on the Closing Date and no delivery of documents or payments will be considered to have been made until all such transactions are completed. (c) OTHER PURCHASERS. Contemporaneously with the execution and delivery hereof, the Company is entering into a separate Note Purchase Agreement identical (except for the name and signature of the purchaser) hereto (this Agreement and such other separate Note Purchase Agreements being herein sometimes referred to collectively as the "Note Purchase Agreement") with each other purchaser (the "Other Purchasers") listed on Annex 1, providing for the sale to each Other Purchaser of Notes in the aggregate principal amount set forth below its name on such Annex. The sales of the Notes to you and to each Other Purchaser are to be separate sales. 1.3 PURCHASE FOR INVESTMENT. (a) PURCHASE FOR INVESTMENT. You represent to the Company that you are purchasing the Notes listed on Annex 1 below your name for your own account for investment and with no present intention of distributing the Notes or any part thereof, but without prejudice to your right at all times to 2 7 (i) sell or otherwise dispose of all or any part of the Notes under a registration statement filed under the Securities Act, or in a transaction exempt from the registration requirements of the Securities Act, and (ii) have control over the disposition of all of your assets to the fullest extent required by any applicable insurance law. It is understood that, in making the representations set out in Section 2.15(a) and Section 2.16, the Company is relying, to the extent applicable, upon your representation in the immediately preceding sentence. (B) ERISA. You represent, with respect to the funds with which you are acquiring the Notes, that all of such funds are from or attributable to your general account assets or assets of one or more segments of such general account, as the case may be, and that, solely for purposes of determining whether such acquisition is a "prohibited transaction" (as provided for in section 406(a) of ERISA or section 4975 of the IRC), no part of such assets constitutes assets of an "employee pension benefit plan" (as defined in section 3 of ERISA) maintained by the Company or any ERISA Affiliate or of a "plan" (as defined in section 4975 of the IRC) maintained by the Company or any ERISA Affiliate (it is understood that, in making the representation set out in this clause (b)(i), you are relying on DOL Interpretive Bulletin 29 C.F.R. Section 2509.75-2(b) and the representations of the Parent and the Company set forth in Section 2.12(a)(ii)). 1.4 FAILURE TO DELIVER, FAILURE OF CONDITIONS. If at the Closing the Company fails to tender to you the Notes to be purchased by you thereat, or if the conditions specified in Section 3 to be fulfilled at the Closing have not been fulfilled, you may thereupon elect to be relieved of all further obligations hereunder. Nothing in this Section 1.4 shall operate to relieve the Parent or the Company from any of its obligations hereunder or to waive any of your rights against the Parent or the Company. 1.5 EXPENSES. (a) GENERALLY. Whether or not the Notes are sold, the Company shall promptly (and in any event within thirty (30) days of receiving any statement or invoice therefor) pay all reasonable fees, expenses and costs relating hereto, including but not limited to: (i) the cost of reproducing this Agreement and the Notes; (ii) the reasonable fees and disbursements of the Special Counsel; (iii) the cost of delivering to your home office or custodian bank, insured to your satisfaction, the Notes purchased by you at the Closing; (iv) the reasonable fees, expenses and costs incurred complying with each of the conditions to closing set forth in Section 3; and 3 8 (v) the expenses relating to the consideration, negotiation, preparation or execution of any amendments, waivers or consents pursuant to the provisions hereof (including, without limitation, the reasonable allocated cost of your counsel who are your employees or your affiliates' employees), whether or not any such amendments, waivers or consents are executed. (b) COUNSEL. Without limiting the generality of the foregoing, it is agreed and understood that the Company will pay, at the Closing, the statement for reasonable fees and disbursements of the Special Counsel presented at the Closing and the Company will also pay upon receipt of any statement thereof, each additional statement for reasonable fees and disbursements of the Special Counsel rendered after the Closing in connection with the issuance of the Notes or of your other counsel rendered after the Closing in connection with the matters referred to in Section 1.5(a)(v). (c) SURVIVAL. The obligations of the Company under this Section 1.5 shall survive the payment or prepayment of the Notes and the termination hereof. 2. WARRANTIES AND REPRESENTATIONS To induce you to enter into this Agreement and to purchase the Notes listed on Annex 1 below your name, each of the Parent and the Company warrants and represents, as of the Closing Date, as follows: 2.1 NATURE OF BUSINESS. The Placement Memorandum (together with all exhibits and annexes thereto, the "Placement Memorandum"), dated November 1994 and prepared by BA Securities, Inc., (a copy of which previously has been delivered to you), correctly describes the general nature of the business and principal Properties of the Parent, the Company and the Subsidiaries as of the Closing Date, other than the sale, paydown or repayment of certain of the Real Estate Assets as described in Part 2.1 of Annex 3. The Company received net proceeds from such sale, paydown or repayment of Real Estate Assets in the aggregate amount of approximately Six Million Two Hundred Thousand Dollars ($6,200,000), approximately One Million Seven Hundred Thousand Dollars ($1,700,000) of which was retained by the Company in cash or Permitted Investments or used for Operating Expenses and Four Million Five Hundred Thousand Dollars ($4,500,000) of which was paid by the Company to the Parent as a dividend. 2.2 FINANCIAL STATEMENTS; INDEBTEDNESS; MATERIAL ADVERSE CHANGE. (a) FINANCIAL STATEMENTS. The following financial statements (copies of which have been delivered to you): (i) the consolidated balance sheets of the Parent and its consolidated subsidiaries as of December 31 in the years 1993, 1992 and 1991, and the related consolidated statements of earnings, stockholders' equity and cash 4 9 flows for the fiscal years ended on such dates, all accompanied by opinions thereon by KPMG Peat Marwick, independent certified public accountants, and (ii) the unaudited consolidated balance sheet of the Parent and its consolidated subsidiaries as of September 30, 1994, and the related unaudited consolidated statements of earnings and cash flows for the nine (9) months ended on such date, have been prepared in accordance with GAAP consistently applied, as at the end of, and for, each such period (with respect to the financial statements referenced in Section 2.2(a)(ii) above, subject to normal year-end adjustments) and present fairly, in all material respects, the consolidated financial position of the Parent and its consolidated subsidiaries as of such dates and the results of their operations and cash flows for such periods. (b) INDEBTEDNESS. Part 2.2(b) of Annex 3 correctly lists all outstanding Indebtedness of the Parent, the Company and SPHI as of the Closing Date, and provides the following information with respect to each item of such Indebtedness: (i) the type thereof, (ii) the holder thereof, (iii) the outstanding amount, (iv) the current portion, if any, and (v) the collateral securing such Indebtedness, if any. (c) MATERIAL ADVERSE CHANGE. Since December 31, 1993, other than the sale of Sacramento Savings Bank by the Parent and the related purchase of the Real Estate Assets by the Company, there has been no material change in the business, profits, Properties or condition (financial or otherwise) of the Parent, the Company or any of the Subsidiaries except changes in the ordinary course of business that, in the aggregate, have not had a Material Adverse Effect. 2.3 SUBSIDIARIES AND AFFILIATES. Part 2.3 of Annex 3 sets forth: (a) the name of each of the Significant Subsidiaries, its jurisdiction of incorporation and the percentage of its Voting Stock owned by the Parent and each other Subsidiary, and (b) the name of each of the Affiliates that are corporations, partnerships or joint ventures (other than Subsidiaries) and the nature of the affiliation. 5 10 Each of the Parent and the Company has good and marketable title to all of the shares it purports to own of the stock of each Significant Subsidiary, free and clear in each case of any Lien except as described in Part 2.3 of Annex 3, and all such shares have been duly issued and are fully paid and nonassessable. To the best of the Parent's knowledge, each of the Parent and the Subsidiaries has good and marketable title to all of the shares it purports to own of the stock of each other Subsidiary and all such shares have been duly issued and are fully paid and nonassessable. 2.4 PENDING LITIGATION. There are no proceedings, actions or investigations pending or, to the knowledge of the Parent or the Company, threatened against or affecting the Parent, the Company or any Subsidiary in any court or before any Governmental Authority or arbitration board or tribunal that, in the aggregate, could reasonably be expected to have a Material Adverse Effect. None of the Parent, the Company or any Subsidiary is in default with respect to any judgment, order, writ, injunction, or decree of any court, Governmental Authority or arbitration board or tribunal that, in the aggregate, could reasonably be expected to have a Material Adverse Effect. 2.5 TITLE TO PROPERTIES. Each of the Parent, the Company and the Subsidiaries has good and marketable title, of a quality commensurate with prudent standards of business practice, to all of the Property reflected in the most recent audited statement of financial condition referred to in Section 2.2(a) (except the sale of Sacramento Savings Bank by the Parent and as sold or otherwise disposed of in the ordinary course of business), free from Liens not otherwise permitted by Section 7.13. Each Real Estate Property owned of record and beneficially by the Company (and not held through or on behalf of a joint venture or other contracting parties) is covered by an owners title insurance policy insuring the Company's title in fee simple to such Real Estate Property in substantially the amount of the Designated Disposition Value of such Real Estate Property. 2.6 PATENTS, TRADEMARKS, LICENSES, ETC. Each of the Parent, the Company and the Subsidiaries owns, possesses or has the right to use all of the patents, trademarks, service marks, trade names, copyrights, licenses, and rights with respect thereto, necessary for the present and currently planned future conduct of its business, without any known conflict with the rights of others, except where the failure to own, possess or have such right, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. 2.7 TAXES. (a) RETURNS FILED; TAXES PAID. All federal and state income tax returns and all other material tax returns required to be filed by each of the Parent and the Company and all federal and material state income tax returns and all other material tax returns required to be filed by each Subsidiary and any other Person with which the Parent, the Company or any Subsidiary files or has filed a consolidated return in 6 11 any jurisdiction have in fact been filed on a timely basis (giving effect to any timely extensions), and all taxes, assessments, fees and other governmental charges upon each of the Parent, the Company, such Subsidiary and any such Person, and upon any of their respective Properties, income or franchises, that are due and payable have been paid, except for any taxes, proposed assessments, fees or charges (i) the amount of which is not individually or in the aggregate material in relation to the business, profits, Properties or condition (financial or otherwise) of the Parent, the Company and the Subsidiaries, taken as a whole, or (ii) that are being contested in good faith and by appropriate proceedings and for which adequate reserves have been established and exist. Neither the Parent nor the Company knows of any other proposed additional tax assessment against it or any such Person. All liabilities of the Parent, the Company and such Persons with respect to federal income taxes have been finally determined for the fiscal years ending prior to 1991. (b) BOOK PROVISIONS ADEQUATE. The amount of the liability for taxes reflected in the consolidated balance sheet of the Parent and its consolidated subsidiaries as of December 31, 1993 referred to in Section 2.2(a) is an adequate provision for taxes (including, without limitation, any payment due pursuant to any tax sharing agreement) as are or may become payable by any one or more of the Parent and its consolidated subsidiaries in respect of all tax periods ending on or prior to such date. 2.8 FULL DISCLOSURE. The financial statements referred to in Section 2.2(a) do not, nor does this Agreement, the Placement Memorandum or any written statement furnished by or on behalf of the Parent or the Company to you in connection with the negotiation of the sale of the Notes, contain any untrue statement of a material fact or omit a material fact necessary to make the statements contained therein or herein not misleading. There is no fact known to the Parent or the Company that the Parent or the Company has not disclosed to you in writing that has had or, so far as the Parent or the Company can now reasonably foresee, will have a Material Adverse Effect. 2.9 CORPORATE ORGANIZATION AND AUTHORITY. Each of the Parent, the Company and the Significant Subsidiaries: (a) is a corporation duly incorporated, validly existing and in good standing under the laws of its jurisdiction of incorporation, (b) has all legal and corporate power and authority to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted, (c) has all licenses, certificates, permits, franchises and other governmental authorizations necessary to own and operate its Properties and to carry on its business as now conducted and as presently proposed to be conducted, except where the failure to have such licenses, certificates and permits, in the aggregate, could not reasonably be expected to have a Material Adverse Effect, and 7 12 (d) has duly qualified or has been duly licensed, and is authorized to do business and is in good standing, as a foreign corporation, in each state where the failure to be so qualified or licensed and authorized and in good standing could reasonably be expected to have a Material Adverse Effect. 2.10 RESTRICTIONS ON PARENT, COMPANY AND SPHI. None of the Parent, the Company or SPHI: (a) is a party to any contract or agreement, or subject to any charter or other corporate restriction that could reasonably be expected to have a Material Adverse Effect, (b) is a party to any contract or agreement that restricts the right or ability of such corporation to incur Indebtedness, other than this Agreement and the agreements listed in Part 2.10(b) of Annex 3, the terms of none of which is violated by the issuance and sale of the Notes or the execution and delivery of, or compliance with, this Agreement by the Parent and the Company, and true, correct and complete copies of each of which have been provided to you, and (c) has agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of the Property of the Company or SPHI, whether now owned or hereafter acquired, to be subject to a Lien not permitted by Section 7.13. 2.11 COMPLIANCE WITH LAW. None of the Parent, the Company or any Subsidiary is in violation of any law, ordinance, governmental rule or regulation to which it is subject, which violations, in the aggregate, could reasonably be expected to have a Material Adverse Effect. 2.12 PENSION PLANS. (a) DISCLOSURE. (i) MATERIAL EVENTS. There are no events or circumstances under ERISA or the IRC relating to any Pension Plan or Multiemployer Plan that currently exist that the Parent or the Company has not disclosed to you in writing, except for events and circumstances that, in the aggregate, could not reasonably be expected to have a Material Adverse Effect. (ii) PLANS AND ERISA AFFILIATES. There are no Pension Plans maintained by any one or more of the Parent, the Company or any ERISA Affiliate whose assets, in whole or in part, are currently managed or invested by any one or more of the Purchasers. (b) PROHIBITED TRANSACTIONS. Neither the execution of this Agreement nor the purchase of the Notes by you will constitute a "prohibited transaction" (as such term 8 13 is defined in section 406 of ERISA or section 4975 of the IRC). The representation by the Parent and the Company in the immediately preceding sentence is made in reliance upon and subject to the accuracy of the representations in Section 1.3(b) as to the source of funds used by you and in reliance upon DOL Interpretive Bulletin 29 C.F.R. Section 2509.75-2(b). (c) COMPLIANCE WITH ERISA. The Parent, the Company and the ERISA Affiliates and each Pension Plan are in compliance with ERISA, except for such failures to comply that in the aggregate for all such failures could not reasonably be expected to have a Material Adverse Effect. (d) PENSION PLAN FUNDING STATUS AND LIABILITIES. (i) FUNDING STATUS. The present value of all benefits, as reflected in the most recent actuarial valuation report issued in accordance with Section 7.4, vested under each Pension Plan does not exceed, by more than Five Hundred Thousand Dollars ($500,000), the value of the assets of such Pension Plan allocable to such vested benefits, as reflected in such report. (ii) CLOSING DATE LIABILITIES. All contributions to all Pension Plans arising under the terms of such Pension Plans that are due and payable by the plan sponsor as of the Closing Date have been paid. Neither the Parent, the Company nor any ERISA Affiliate has incurred any liability pursuant to Title I or Title IV of ERISA or the penalty or excise tax or security provisions of the IRC relating to "employee benefit plans" (as defined in section 3 of ERISA), and no event, transaction, or condition has occurred or exists that could result in the imposition of any Lien on any of the Properties of the Parent, the Company or any ERISA Affiliate, in either case pursuant to Title I or Title IV of ERISA or pursuant to such penalty, excise tax or security provisions of the IRC, except for such liabilities and Liens that, in the aggregate for all such liabilities and Liens, could not reasonably be expected to have a Material Adverse Effect. (iii) PBGC. No circumstance exists that constitutes grounds under section 4042 of ERISA entitling the PBGC to institute proceedings to terminate, or appoint a trustee to administer, any Pension Plan or trust created thereunder, nor has the PBGC instituted any such proceeding. (e) REPORTABLE EVENTS. No Pension Plan or trust created thereunder has been terminated, and there have been no "reportable events" (as such term is defined in section 4043 of ERISA) with respect to any Pension Plan or trust created thereunder, which reportable event or events will or could result in the termination of such Pension Plan and give rise to a material liability of the Parent, the Company or any ERISA Affiliate in respect thereof. (f) MULTIEMPLOYER PLANS. Neither the Parent, the Company nor any ERISA Affiliate has incurred or presently expects to incur any withdrawal liability. 9 14 (G) MULTIPLE EMPLOYER PENSION PLANS. Neither the Parent, the Company nor any ERISA Affiliate has ever been a "contributing sponsor" (as such term is defined in section 4001 of ERISA) in any Multiple Employer Pension Plan. (H) FOREIGN PENSION PLANS. Neither the Parent nor the Company has any Foreign Pension Plans. 2.13 CERTAIN LAWS. (A) INVESTMENT COMPANY ACT. None of the Parent, the Company or SPHI is, or is directly or indirectly controlled by, or acting on behalf of any Person which is, an "investment company" within the meaning of the Investment Company Act of 1940, as amended. (B) HOLDING COMPANY STATUS. None of the Parent, the Company or SPHI is a "holding company" or an "affiliate" of a "holding company," or a "subsidiary company" of a "holding company," or a "public utility" within the meaning of the Public Utility Holding Company Act of 1935, as amended. 2.14 ENVIRONMENTAL COMPLIANCE. (A) COMPLIANCE. Each of the Parent, the Company and the Subsidiaries is in compliance with all Environmental Protection Laws in effect in each jurisdiction where it is presently doing business, and with which the failure so to comply, in the aggregate for all such failures, could reasonably be expected to have a Material Adverse Effect. (B) LIABILITY. None of the Parent, the Company or any of the Subsidiaries is subject to any liability under any Environmental Protection Law that, in the aggregate for all such liabilities, could reasonably be expected to have a Material Adverse Effect. (C) NOTICES. None of the Parent, the Company or any Subsidiary has received any (i) notice from any Governmental Authority by which any of its present or previously-owned or leased Properties has been designated, listed, or identified in any manner by any Governmental Authority charged with administering or enforcing any Environmental Protection Law as a Hazardous Substance disposal or removal site, "Super Fund" clean-up site, or candidate for removal or closure pursuant to any Environmental Protection Law, (ii) notice of any Lien arising under or in connection with any Environmental Protection Law that has attached to any revenues of, or to, any of its owned or leased Properties, or (iii) summons, citation, notice, directive, letter, or other communication, written or oral, from any Governmental Authority concerning any intentional or unintentional action or omission by the Parent, the Company 10 15 or such Subsidiary in connection with its ownership or leasing of any Property resulting in the releasing, spilling, leaking, pumping, pouring, emitting, emptying, dumping, or otherwise disposing of any Hazardous Substance into the environment resulting in any material violation of any Environmental Protection Law, where the effect of which, in the aggregate for all such notices and communications, could reasonably be expected to have a Material Adverse Effect. 2.15 SALE IS LEGAL AND AUTHORIZED; OBLIGATIONS ARE ENFORCEABLE. (A) SALE IS LEGAL AND AUTHORIZED. Each of the issuance, sale and delivery of the Notes by the Company, the execution and delivery hereof by the Parent and the Company and compliance by the Parent and the Company with all of the provisions hereof and of the Notes: (i) is within the corporate powers of the Parent and the Company; and (ii) is legal and does not conflict with, result in any breach in any of the provisions of, constitute a default under, or result in the creation of any Lien upon any Property of the Parent, the Company or SPHI under the provisions of, any agreement, charter instrument, bylaw or other instrument to which they are a party or by which they or any of their Property may be bound. (B) OBLIGATIONS ARE ENFORCEABLE. Each of this Agreement and the Notes has been duly authorized by all necessary action on the part of the Parent and the Company, has been executed and delivered by duly authorized officers of the Parent and the Company, and constitutes a legal, valid and binding obligation of the Parent and the Company, enforceable in accordance with its terms, except that the enforceability hereof and of the Notes may be: (i) limited by applicable bankruptcy, reorganization, arrangement, insolvency, moratorium, or other similar laws affecting the enforceability of creditors' rights generally; and (ii) subject to the availability of equitable remedies. 2.16 GOVERNMENTAL CONSENT. Neither the nature of the Parent, the Company or any Subsidiary, or of any of their respective businesses or Properties, nor any relationship between the Parent, the Company or any Subsidiary and any other Person, nor any circumstance in connection with the offer, issuance, sale or delivery of the Notes and the execution and delivery of this Agreement, is such as to require a consent, approval or authorization of, or filing, registration or qualification with, any Governmental Authority on the part of the Parent or the Company as a condition to the execution and delivery of this Agreement or the offer, issuance, sale or delivery of the Notes. 11 16 2.17 PRIVATE OFFERING. None of the Parent, the Company or BA Securities, Inc. (the only Person authorized or employed by the Parent or the Company as agent, broker, dealer or otherwise in connection with the offering or sale of the Notes or any similar Security of the Company, other than employees of the Parent and the Company) has offered any of the Notes or any similar Security of the Company for sale to, or solicited offers to buy any thereof from, or otherwise approached or negotiated with respect thereto with, any prospective purchaser, other than the Purchasers and one hundred twenty (120) other institutional investors, each of whom was offered all or a portion of the Notes at private sale for investment. 2.18 NO DEFAULTS. (A) THE NOTES. No event has occurred and no condition exists that, upon the issuance of the Notes and the execution and delivery of this Agreement, would constitute a Default or an Event of Default. (B) CHARTER INSTRUMENT, OTHER AGREEMENTS. None of the Parent, the Company or SPHI is in violation in any respect of any term of any charter instrument or bylaw. No other Subsidiary is in violation in any respect of any term of any charter instrument or bylaw and none of the Parent, the Company or any Subsidiary is in violation in any respect of any term in any agreement or other instrument to which it is a party or by which it or any of its Property may be bound, which violations, in the aggregate, could reasonably be expected to have a Material Adverse Effect. 2.19 USE OF PROCEEDS. (A) USE OF PROCEEDS. The Company will apply the proceeds from the sale of the Notes in the manner specified in Part 2.19(a) of Annex 3 and, in connection with the application of approximately Eight Million Dollars ($8,000,000) of such proceeds to the repayment of Indebtedness of SPHI to First Interstate Bank of California, the Parent and the Company will take all reasonable actions necessary to cause First Interstate Bank of California to release all Liens in Property of SPHI. (B) MARGIN SECURITIES. None of the transactions contemplated herein and in the Notes (including, without limitation, the use of the proceeds from the sale of the Notes) violates, will violate or will result in a violation of section 7 of the Securities Exchange Act of 1934, as amended, or any regulations issued pursuant thereto, including, without limitation, Regulations G, T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II. None of the Parent, the Company or SPHI owns, or with the proceeds of the sale of the Notes intends to own, carry or purchase, or refinance borrowings that were used to own, carry or purchase, any Margin Security, including Margin Securities originally issued by the Parent, the Company or SPHI. The respective obligations of the Parent and the Company under the Financing Documents are not and will not be secured by any Margin Security, and no Notes are being sold on the basis of any such collateral. 12 17 (C) ABSENCE OF FOREIGN OR ENEMY STATUS. Neither the Parent, the Company nor any Subsidiary is an "enemy" or an "ally of the enemy" within the meaning of section 2 of the Trading with the Enemy Act (50 U.S.C. App. Sections 1 et seq.), as amended. Neither the Parent, the Company nor any Subsidiary is in violation of, and neither the issuance and sale of the Notes by the Company nor its use of the proceeds thereof as contemplated by this Agreement, will violate, the Trading with the Enemy Act, as amended, or any executive orders, proclamations or regulations issued pursuant thereto, including, without limitation, regulations administered by the Office of Foreign Asset Control of the Department of the Treasury (31 C.F.R., Subtitle B, Chapter V). 3. CLOSING CONDITIONS Your obligation to purchase and pay for the Notes to be delivered to you at the Closing is subject to the following conditions precedent: 3.1 OPINIONS OF COUNSEL. You shall have received from (a) Donovan Leisure Newton & Irvine, counsel for the Parent and the Company, and (b) Hebb & Gitlin, a Professional Corporation, your special counsel, closing opinions, each dated as of the Closing Date, and substantially in the respective forms set forth in Exhibit B1 and Exhibit B2, and as to such other matters as you may reasonably request. This Section 3.1 shall constitute direction by the Parent and the Company to such counsel named in the foregoing clause (a) to deliver such closing opinion to you. 3.2 WARRANTIES AND REPRESENTATIONS TRUE. The warranties and representations contained in Section 2 shall be true on the Closing Date with the same effect as though made on and as of that date. 3.3 OFFICERS' CERTIFICATES. You shall have received (a) a certificate dated the Closing Date and signed by the President or a Vice-President and the Treasurer or an Assistant Treasurer of the Parent, substantially in the form of Exhibit C1, certifying that the conditions specified in Section 3.2 and Section 3.9 have been fulfilled, (b) a certificate dated the Closing Date and signed by the President or a Vice-President and the Treasurer or an Assistant Treasurer of the Company, substantially in the form of Exhibit C2, certifying that the conditions specified in Section 3.2 and Section 3.9 have been fulfilled, 13 18 (c) a certificate dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Parent, substantially in the form of Exhibit D1, with respect to the matters therein set forth, and (d) a certificate dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, substantially in the form of Exhibit D2, with respect to the matters therein set forth. 3.4 LEGALITY. The Notes shall on the Closing Date qualify as a legal investment for you under applicable insurance law (without regard to any "basket" or "leeway" provisions) and you shall have received such evidence as you may reasonably request to establish compliance with this condition. 3.5 PRIVATE PLACEMENT NUMBER. The Company shall have obtained or caused to be obtained a private placement number for the Notes from the CUSIP Service Bureau of Standard & Poor's, a division of McGraw-Hill, Inc. and you shall have been informed of such private placement number. 3.6 EXPENSES. All fees and disbursements required to be paid pursuant to Section 1.5(b) shall have been paid in full. 3.7 OTHER PURCHASERS. None of the Purchasers other than you shall have failed to execute and deliver a Note Purchase Agreement or to accept delivery of or make payment for the Notes to be purchased by it on the Closing Date. 3.8 PROCEEDINGS SATISFACTORY. All proceedings taken in connection with the issuance and sale of the Notes and all documents and papers relating thereto shall be satisfactory to you and the Special Counsel. You and the Special Counsel shall have received copies of such documents and papers as you or they may reasonably request in connection therewith or in connection with the Special Counsel's closing opinion, all in form and substance satisfactory to you and the Special Counsel. 3.9 COMPLIANCE WITH THIS AGREEMENT. Each of the Parent and the Company shall have performed and complied with all agreements and conditions contained herein that are required to be performed or complied with by the Parent and the Company on or prior to the Closing Date, and such performance and compliance shall remain in effect on the Closing Date. 14 19 4. PURCHASERS' SPECIAL RIGHTS 4.1 DIRECT PAYMENT. Notwithstanding anything to the contrary herein or in the Notes, the Company shall pay all amounts payable to any Institutional Investor with respect to each Note held by such Institutional Investor (without any presentment of such Notes and without any notation of such payment being made thereon) by crediting, by federal funds bank wire transfer, the account of such Institutional Investor in any bank in the United States of America as may be designated in writing by such Institutional Investor, or in such other manner as may be reasonably directed or to such other address in the United States of America as may be reasonably designated in writing by such Institutional Investor. Your address on Annex 1 shall be deemed to constitute notice, direction or designation (as appropriate) to the Company with respect to direct payments as aforesaid. In all other cases, all amounts payable with respect to each Note shall be made by check mailed and addressed to the registered holder of each Note at the address shown in the register maintained by the Company pursuant to Section 6.1. Each holder of Notes agrees that in the event it shall sell or transfer any Note (a) it shall, prior to the delivery of such Note (unless it shall have already done so), make a notation thereon of all principal, if any, prepaid on such Note and shall also note thereon the date to which interest shall have been paid on such Note, and (b) it shall promptly notify the Company of the name and address of the transferee of any such Note so transferred (or, if such holder does not have such information, the name and address of the Person effecting such transfer) and the effective date of such transfer. 4.2 DELIVERY EXPENSES. If any holder of Notes surrenders any Note to the Company pursuant hereto, the Company shall pay the cost of delivering to or from such holder's home office or custodian bank from or to the Company, insured to the reasonable satisfaction of such holder, the surrendered Note and any Note issued in substitution or replacement for the surrendered Note. 4.3 ISSUANCE TAXES. The Company shall pay all taxes in connection with the issuance and sale of the Notes and in connection with any modification of this Agreement and the Notes and shall save each holder of Notes harmless without limitation as to time against any and all liabilities with respect to all such taxes. The obligations of the Company under this Section 4.3 shall survive the payment or prepayment of the Notes and the termination hereof. 15 20 5. PREPAYMENTS 5.1 REQUIRED PREPAYMENTS. In addition to paying the entire principal amount and the interest due on the Notes outstanding on the maturity date thereof, the Company shall prepay, and there shall become due and payable, Ten Million Dollars ($10,000,000) principal amount of the Notes on February 23 in each year beginning on February 23, 1996 and ending on February 23, 2000, inclusive. Each such prepayment shall be at one hundred percent (100%) of the principal amount prepaid, together with interest accrued thereon to the date of prepayment. Without limitation of the foregoing, all of the principal of the Notes remaining outstanding on February 23, 2000 (if any), together with interest accrued thereon, shall become due and payable on February 23, 2000. 5.2 OPTIONAL PREPAYMENTS. (a) OPTIONAL PREPAYMENTS. The Company may prepay the principal amount of the Notes in whole or in part, at any time, in multiples of One Million Dollars ($1,000,000) (or, if the aggregate outstanding principal amount of the Notes is less than One Million Dollars ($1,000,000) at such time, then such principal amount), together with (i) an amount equal to the Make-Whole Amount at such time in respect of the principal amount of the Notes being so prepaid, and (ii) interest on such principal amount then being prepaid accrued to the prepayment date. (b) NOTICE OF OPTIONAL PREPAYMENT. The Company will give notice of any optional prepayment of the Notes to each holder of the Notes not less than thirty (30) days or more than sixty (60) days before the date fixed for prepayment, specifying: (i) such date; (ii) the Section hereof under which the prepayment is to be made; (iii) the principal amount of each Note to be prepaid on such date; (iv) the interest to be paid on each such Note, accrued to the date fixed for payment; and (v) a reasonably detailed calculation of an estimated Make-Whole Amount for such Notes, if any (calculated as if the date of such notice were the date of prepayment), due in connection with such prepayment. Notice of prepayment having been so given, the aggregate principal amount of the Notes specified in such notice, together with the Make-Whole Amount, if any, and accrued interest thereon shall become due and payable on the specified prepayment 16 21 date. Contemporaneously with such prepayment the Company shall deliver to each holder of Notes a certificate of the President, a Vice President or the Treasurer of the Company specifying the calculation of such Make-Whole Amount as of the specified prepayment date, accompanied by a copy of the Applicable H.15 used in determining the Make-Whole Discount Rate (as both such terms are defined in the definition of Make-Whole Amount) in respect of such prepayment. (c) EFFECT OF PARTIAL PREPAYMENTS. Each prepayment of the Notes pursuant to this Section 5.2 shall be applied to reduce ratably each of the then unpaid mandatory principal prepayments required by Section 5.1 remaining after the date of such prepayment. 5.3 PREPAYMENT UPON A DOWNGRADE EVENT. (a) NOTICE AND OFFER. In the event a Downgrade Event shall occur or exist, the Parent and the Company will, within three (3) Business Days of the first occurrence or existence of such Downgrade Event, give written notice of such Downgrade Event to each holder of Notes by registered mail and, simultaneously with the sending of such written notice, send a copy of such notice to each such holder via an overnight courier of national reputation. Such written notice shall contain, and such written notice shall constitute, an irrevocable offer by the Company to prepay all, but not less than all, the Notes held by such holder on a date specified in such notice (the "Downgrade Prepayment Date") that is not less than thirty (30) days and not more than sixty (60) days after the date of such notice. If the Downgrade Prepayment Date shall not be specified in such notice, the Downgrade Prepayment Date shall be the thirtieth (30th) day after the date of such holder's receipt of such notice. (b) ACCEPTANCE AND PAYMENT. To accept such offered prepayment, a holder of Notes shall cause a notice of such acceptance to be delivered to the Company not later than twenty (20) days after the date of receipt by such holder of the written offer of such prepayment (it being understood that the failure by a holder to respond to such written offer of prepayment within such period of twenty (20) days shall be deemed to constitute an acceptance of such offer). If so accepted, such offered prepayment shall be due and payable on the Downgrade Prepayment Date. Such offered prepayment shall be made at one hundred percent (100%) of the principal amount of such Notes, together with any Make-Whole Amount as of the Downgrade Prepayment Date with respect thereto and interest on the Notes then being prepaid accrued to the Downgrade Prepayment Date. Contemporaneously with the making of any such prepayment, the Company shall deliver to each holder of such Notes by facsimile transmission a certificate of the President, a Vice President or the Treasurer of the Company specifying the details of the calculation of such Make-Whole Amount as of the specified Downgrade Prepayment Date, together with a copy of the Applicable H.15 used in determining the Make-Whole Discount Rate (as both such terms are defined in the definition of Make-Whole Amount) in respect of such prepayment. 17 22 (c) OFFICER'S CERTIFICATE. Each offer to prepay the Notes pursuant to this Section 5.3 shall be accompanied by a certificate, executed by the President or a Vice President of the Company and dated the date of such offer, specifying: (i) the Downgrade Prepayment Date; (ii) the Section hereof under which such offer is made; (iii) the principal amount of each Note offered to be prepaid; (iv) the unpaid interest that would be due on each such Note offered to be prepaid, accrued to the date fixed for payment; (v) a reasonably detailed calculation of an estimated Make-Whole Amount, if any (calculated as if the date of such notice was the date of prepayment), that would be due in connection with such offered prepayment; and (vi) in reasonable detail, the cause of the Downgrade Event. (d) EFFECT OF PREPAYMENT. Each prepayment of the Notes pursuant to this Section 5.3 shall be applied to reduce ratably each of the then unpaid mandatory principal prepayments required by Section 5.1 remaining after the date of such prepayment. 5.4 PARTIAL PREPAYMENT PRO RATA. If at the time any required or optional prepayment under Section 5.1 or Section 5.2 is due there is more than one Note outstanding, the aggregate principal amount of each required or optional partial prepayment of the Notes shall be allocated among the holders of the Notes at the time outstanding in proportion to the respective unpaid principal amounts of the Notes then outstanding. 5.5 NOTATION OF NOTES ON PREPAYMENT. Upon any partial prepayment of a Note, such Note may, at the option of the holder thereof, be (a) surrendered to the Company pursuant to Section 6.2 in exchange for a new Note in a principal amount equal to the principal amount remaining unpaid on the surrendered Note, (b) made available to the Company for notation thereon of the portion of the principal so prepaid, or (c) marked by such holder with a notation thereon of the portion of the principal so prepaid, provided that such holder shall notify the Company that it has made such notation. 18 23 In case the entire principal amount of any Note is prepaid, such Note shall be surrendered to the Company for cancellation and shall not be reissued, and no Note shall be issued in lieu of the prepaid principal amount of any Note. 5.6 NO OTHER OPTIONAL PREPAYMENTS. Except as provided in Section 5.2, neither the Parent, the Company, any Subsidiary nor any Affiliate may make any optional prepayment (whether directly or indirectly by purchase or other acquisition) in respect of the Notes. 6. REGISTRATION; EXCHANGE; SUBSTITUTION OF NOTES 6.1 REGISTRATION OF NOTES. The Company shall cause to be kept at its office, maintained pursuant to Section 7.3, a register for the registration and transfer of Notes. The name and address of each holder of one or more Notes, each transfer thereof and the name and address of each transferee of one or more Notes shall be registered in the register. The Person in whose name any Note shall be registered shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. 6.2 EXCHANGE OF NOTES. Upon surrender of any Note at the office of the Company maintained pursuant to Section 7.3 duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Note or its attorney-in-fact duly authorized in writing, the Company shall execute and deliver, at the Company's expense (except as provided below), new Notes in exchange therefor, in an aggregate principal amount equal to the unpaid principal amount of the surrendered Note. Each such new Note shall be payable, in accordance with the terms of this Agreement, to such Person as such holder may request and shall be substantially in the form of Exhibit A. Each such new Note shall be dated and bear interest from the date to which interest shall have been paid on the surrendered Note or dated the date of the surrendered Note if no interest shall have been paid thereon. The Company may require payment of a sum sufficient to cover any stamp tax or governmental charge imposed in respect of any such transfer of Notes. As a condition precedent to any such transfer of Notes, the Company may require the transferee to disclose the source of funds with which it is acquiring Notes and, if such transfer would constitute a "prohibited transaction" (as provided for in section 406(a) of ERISA or section 4975 of the IRC), the Company shall not be obligated to effect such transfer. 6.3 REPLACEMENT OF NOTES. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Note (which evidence shall be, in the case of an Institutional Investor, notice from such Institutional Investor of such ownership and such loss, theft, destruction or mutilation) and 19 24 (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Note is an Institutional Investor, such holder's own agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Note, dated and bearing interest from the date to which interest shall have been paid on such lost, stolen, destroyed or mutilated Note or dated the date of such lost, stolen, destroyed or mutilated Note if no interest shall have been paid thereon. 7. COVENANTS Each of the Parent and the Company covenants that on and after the Closing Date and so long as any of the Notes shall be outstanding: 7.1 PAYMENT OF TAXES AND CLAIMS. Each of the Parent and the Company will, and the Company will cause SPHI to, pay before they become delinquent, (a) all taxes, assessments and governmental charges or levies imposed upon it or its Property, and (b) all claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons that, if unpaid, might result in the creation of a Lien upon its Property, provided, that items of the foregoing description need not be paid (i) while being contested in good faith and by appropriate proceedings as long as adequate book reserves have been established and maintained and exist with respect thereto, and (ii) so long as the title of the Parent, the Company or SPHI, as the case may be, to, and its right to use, such Property, is not materially adversely affected thereby. 7.2 MAINTENANCE OF PROPERTIES; CORPORATE EXISTENCE; ETC. Each of the Parent and the Company will, and the Company will cause SPHI to, (a) PROPERTY -- maintain, preserve and keep its Property in good condition, ordinary wear and tear excepted, and make all necessary renewals, replacements, additions, betterments and improvements thereto, except where the failure to do so (i) could not reasonably be expected to have a Material Adverse Effect and (ii) is in 20 25 conformity with the marketing strategy of the Company (A) to maximize proceeds from the sale of Real Estate Assets or (B) to sell the Real Estate Assets on an "as is" basis; (b) INSURANCE -- maintain, with financially sound and reputable insurers, insurance with respect to its Property and business against such casualties and contingencies, of such types (including, without limitation, insurance with respect to losses arising out of Property loss or damage, public liability, business interruption, larceny, workers' compensation, embezzlement or other criminal misappropriation) and in such amounts as is customary in the case of corporations of established reputations engaged in the same or a similar business and similarly situated, it being understood that the Parent, the Company and SPHI may self-insure against hazards and risks with respect to which, and in such amounts as, the Parent, the Company or SPHI in good faith determines to be prudent and consistent with sound financial and business practice; (c) FINANCIAL RECORDS -- keep accurate and complete books of records and accounts in which full and correct entries shall be made of all its business transactions and which will permit the provision of accurate and complete financial statements in accordance with GAAP, and the Parent will cause each other Subsidiary to keep accurate and complete books of records and accounts in which full and correct entries shall be made of all its business transactions and which will permit the provision of accurate and complete financial statements in accordance with GAAP, to the extent required by the provisions of Section 8.1(a); (d) CORPORATE EXISTENCE AND RIGHTS -- do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights (charter and statutory) and franchises, subject to Section 7.9, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect; and (e) COMPLIANCE WITH LAW -- be in compliance with all laws, ordinances or governmental rules or regulations to which it is subject (including, without limitation, any Environmental Protection Law) and obtain any licenses, certificates, permits, franchises or other governmental authorizations necessary to the ownership of its Properties or to the conduct of its business if such non-compliance or failure to obtain could reasonably be expected to have a Material Adverse Effect or materially adversely affect the ability of the Parent, the Company or SPHI to conduct in the future the business it conducts at the time of such violation or failure to obtain. 7.3 PAYMENT OF NOTES AND MAINTENANCE OF OFFICE. The Company will punctually pay, or cause to be paid, the principal of and interest (and Make-Whole Amount, if any) on, the Notes, as and when the same shall become due according to the terms hereof and of the Notes, and will maintain an office at the address of the Company set forth in Section 11.1 where notices, presentations and demands in respect hereof or of the Notes may be made upon it. Such office will be maintained at such address until such time as the Company shall notify the holders of the Notes in writing of any change of location of such office, which will in any event be located within the United States of America. 21 26 7.4 PENSION PLANS. (A) COMPLIANCE. Each of the Parent and the Company will, and will cause each ERISA Affiliate to, at all times with respect to each Pension Plan, make timely payment of contributions required to meet the minimum funding standard set forth in ERISA or the IRC with respect thereto, and to comply with all other applicable material provisions of ERISA and the IRC. (B) RELATIONSHIP OF VESTED BENEFITS TO PENSION PLAN ASSETS. The Parent or an ERISA Affiliate will contribute sufficient amounts to each Pension Plan so that the present value of all employee benefits vested under each Pension Plan at any time will not exceed, by more than Two Million Five Hundred Thousand Dollars ($2,500,000), the assets of such Pension Plan allocable to such vested benefits at such time, in each case determined pursuant to Section 7.4(c). (C) VALUATIONS. All assumptions and methods used to determine the actuarial valuation of vested employee benefits under Pension Plans and the present value of assets of Pension Plans will be reasonable in the good faith judgment of the Parent, the Company or the actuary engaged by the Parent or the Company, as the case may be, and will comply with all requirements of law. (D) PROHIBITED ACTIONS. Each of the Parent and the Company will not, and will not permit any ERISA Affiliate to: (i) engage in any "prohibited transaction" (as such term is defined in section 406 of ERISA or section 4975 of the IRC) that would result in the imposition of a material tax or penalty; (ii) incur with respect to any Pension Plan any material "accumulated funding deficiency" (as such term is defined in section 302 of ERISA), whether or not waived; (iii) terminate any Pension Plan in a manner that could result in the imposition of a Lien on the Property of the Parent, the Company or any Subsidiary pursuant to section 4068 of ERISA or the creation of any liability under section 4062 of ERISA; (iv) fail to make any payment required by section 515 of ERISA; or (v) at any time be an "employer" (as such term is defined in section 3 of ERISA) required to contribute to any Multiemployer Plan or a "substantial employer" (as such term is defined in section 4001 of ERISA) required to contribute to any Multiple Employer Pension Plan if, at such time, it could reasonably be expected that the Parent, the Company or any Subsidiary will incur withdrawal liability in respect of such Multiemployer Plan or Multiple Employer Pension Plan and such liability, if incurred, together with the aggregate amount of all other withdrawal liability as to which there is a reasonable expectation of incurrence by the Parent, the Company or any 22 27 Subsidiary under any one or more Multiemployer Plans or Multiple Employer Pension Plans, could reasonably be expected to have a Material Adverse Effect. 7.5 LINE OF BUSINESS. The Company will not, and will not permit SPHI to, engage in any business other than the ownership, operation and disposition of Real Estate Assets and activities reasonably related thereto. 7.6 INDEBTEDNESS. (A) TOTAL INDEBTEDNESS. The Company will not, and will not permit SPHI to, incur or in any manner be or become liable in respect of any Indebtedness, on and after the Closing Date, except (i) Indebtedness evidenced by the Notes, and (ii) an additional amount of Indebtedness of the Company and SPHI, determined on a consolidated basis for such Persons, not exceeding Two Million Dollars ($2,000,000) in the aggregate at any time outstanding. (B) INDEBTEDNESS COVERAGE. The Company will not at any time permit the ratio of (i) Qualified Indebtedness Coverage Assets at such time to (ii) the sum of (A) the aggregate of all Indebtedness of the Company and SPHI at such time, determined on a consolidated basis for such Persons, plus (B) Scheduled Interest Payments at such time to be less than 1.0 to 1.0. 7.7 RESTRICTED INVESTMENTS AND RESTRICTED PAYMENTS. The Company will not, and will not permit SPHI to, make any Restricted Investment and the Company will not declare or make, or become obligated to declare or make, any Restricted Payment, unless: (a) immediately after, and after giving effect to, such Restricted Investment or such Restricted Payment, as the case may be, the aggregate amount of all Restricted Investments of the Company and SPHI at such time plus all Restricted Payments declared, made or obligated to be declared or made by the Company on and after the November 1, 1994 would not exceed the sum of 23 28 (i) Thirty-Seven Million Dollars ($37,000,000), plus (ii) Excess Cumulative Net Proceeds at such time, plus (iii) the greater of (A) Zero Dollars ($0) and (B) the result of (1) Cumulative Non-Essential Contributions at such time minus (2) the Transfer Contribution Amount at such time; (b) immediately prior to, immediately after, and after giving effect to, such Restricted Investment or such Restricted Payment, as the case may be, the ratio of (i) Qualified Restricted Payment Assets at such time to (ii) the aggregate of all Indebtedness of the Company and SPHI at such time would not be less than 2.0 to 1.0; and (c) at the time of such declaration, making or becoming obligated and immediately before, and after giving effect to, such Restricted Investment or such Restricted Payment and any concurrent transactions, no Default or Event of Default exists or would exist. Notwithstanding the requirements of clause (b) above, a cash dividend may be declared by the Company in respect of its capital stock in an amount, when added to the aggregate of other cash dividends made by the Company after the Closing Date, that does not exceed the aggregate amount of Cumulative Non-Essential Contributions at such time minus the Transfer Contribution Amount at such time. 7.8 OPERATING EXPENSES. The Company will not, and will not permit SPHI to: (a) incur any Operating Expense unless Cumulative Operating Expenses at such time would not exceed the sum of (i) Thirty Million Dollars ($30,000,000), plus (ii) Operating Expense Contributions at such time; or (b) permit, at any time, the sum of 24 29 (i) Cumulative Operating Expenses at such time minus Operating Expense Contributions at such time, plus (ii) the aggregate amount outstanding on all Seller Notes at such time to exceed Fifty-Five Million Dollars ($55,000,000). 7.9 MERGER AND CONSOLIDATION. The Company will not, and will not permit SPHI to, merge into, consolidate with, or sell, lease, transfer or otherwise dispose of all or substantially all of its Property (except as permitted under Section 7.10) to, any other Person or permit any other Person to consolidate with or merge into it (except that SPHI may merge into or consolidate with the Company if the Company is the surviving corporation); provided that the foregoing restriction does not apply to the merger or consolidation of the Company with, or the sale, lease, transfer or other disposition by the Company of all or substantially all of its Property to, another corporation, if: (a) the Company is the surviving corporation that results from such merger or consolidation; and (b) immediately prior to, and immediately after the consummation of the transaction, and after giving effect thereto, no Default or Event of Default exists or would exist. 7.10 TRANSFERS OF PROPERTY. The Company will not, and will not permit SPHI to, sell, lease as lessor, transfer or otherwise dispose of any Property (collectively, "Transfers") (provided that "Transfers" shall not include transfers of cash for the purpose of paying Operating Expenses, interest, principal or Make-Whole Amount, if any, relating to the Notes and any other Indebtedness, Restricted Payments to the Parent and Permitted Investments), except: (a) Transfers of Property, other than Real Estate Assets, if the sum of (i) the book value of such Property at the time of such Transfer, plus (ii) the aggregate book value of all other Property of the Company and SPHI, other than Real Estate Assets, that has been the subject of a Transfer (in each case measured at the time of the Transfer of such Property) during the period commencing on the Closing Date and ended at the time of such Transfer, would be less than Two Hundred Thousand Dollars ($200,000), provided that the Company will not Transfer any shares of the stock (or any warrants, rights or options to purchase stock or other Securities exchangeable for or convertible into stock) of SPHI; and 25 30 (b) any Transfer of Real Estate Assets for cash consideration or Seller Notes, or a combination of cash consideration and Seller Notes, so long as the aggregate amount outstanding with respect to all Seller Notes does not exceed Thirty Million Dollars ($30,000,000) and if either of the following conditions would be satisfied with respect to such Transfer: (i) the Transfer Consideration with respect to such Transfer is at least equal to the Designated Disposition Value of the Real Estate Asset which is the subject of such Transfer, or (ii) the sum of (A) the Transfer Consideration with respect to such Transfer, plus (B) the aggregate Transfer Consideration received by the Company and SPHI with respect to all other Real Estate Assets that have been the subject of a Transfer on and after the Closing Date, plus (C) Cumulative Non-Essential Contributions at such time would exceed the aggregate Designated Disposition Values of all Real Estate Assets that have been the subject of Transfers (in each case measured at the time of such Transfer) on and after the Closing Date. 7.11 PURCHASE OBLIGATION OF THE PARENT. The Parent will purchase Real Estate Assets, selected by the Parent and for cash consideration equal to the Designated Disposition Value of such Real Estate Assets, in an amount sufficient to provide the Company with net cash proceeds, as necessary, to pay (a) the principal of and interest (and Make-Whole Amount, if any) on, the Notes, as and when the same shall become due according to the terms hereof and of the Notes (including, without limitation, the terms of Section 5.3), or (b) Operating Expenses due and payable at such time. 7.12 TRANSACTIONS WITH AFFILIATES. The Company will not, and will not permit SPHI to, enter into any material transaction or material arrangement, including, without limitation, the purchase, sale or exchange of Property or the rendering of any service, with any Affiliate, except the sales contemplated by Section 7.11 or in the ordinary course of and pursuant to the reasonable requirements of the Company's or SPHI's business and upon fair and reasonable terms no less favorable to the Company or SPHI than would be obtained in a comparable arm's-length transaction with a Person not an Affiliate. 26 31 7.13 LIENS. (A) NEGATIVE PLEDGE. The Company will not, and will not permit SPHI to, cause or permit to exist, or agree or consent to cause or permit to exist in the future (upon the happening of a contingency or otherwise), any of its Property, whether now owned or hereafter acquired, to be subject to a Lien except: (i) Liens described in Part 7.13(a)(i) of Annex 3; (ii) Liens (A) arising from judicial attachments and judgments, (B) securing appeal bonds or supersedeas bonds, and (C) arising in connection with court proceedings (including, without limitation, surety bonds and letters of credit or any other instrument serving a similar purpose), provided that (1) such Liens are fully released within sixty (60) days of their creation or the execution or other enforcement of such Liens is effectively stayed, (2) the claims secured thereby are being contested in good faith and by appropriate proceedings and (3) adequate book reserves in accordance with GAAP shall have been established and maintained and shall exist with respect thereto; (iii) Liens incurred or deposits made in the ordinary course of business to secure the performance of letters of credit, bids, tenders, sales contracts, leases, statutory obligations, construction obligations, bonds and assessments or improvements, surety and performance bonds (of a type other than set forth in Section 7.13(a)(ii)) and other similar obligations not incurred in connection with the borrowing of money, the obtaining of advances or the payment of the deferred purchase price of Property, provided that, after giving effect to any enhancement in value and use of other Property related to such Property as a result of such Lien, (1) such Liens do not in the aggregate materially detract from the value of such Property and (2) the title of the Company or SPHI to, and its right to use, such Property, is not materially adversely affected thereby; (iv) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance, social security and other like laws; (v) Liens securing Property taxes, assessments or governmental charges or levies or the claims or demands of materialmen, mechanics, carriers, warehousemen, vendors, landlords and other like Persons, provided that the payment thereof is not at the time required by Section 7.1; and 27 32 (vi) Liens in the nature of reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions or encumbrances affecting real Property, provided that such exceptions and encumbrances do not in the aggregate detract from the value of such Property or interfere with the use of such Property in the ordinary conduct of the business of the Company and SPHI in a manner that has or could reasonably be expected to have a Material Adverse Effect. (B) EQUAL AND RATABLE LIEN; EQUITABLE LIEN. In case any Property shall be subjected to a Lien in violation of this Section 7.13, the Company will forthwith make or cause to be made, to the fullest extent permitted by applicable law, provision whereby the Notes will be secured equally and ratably with all other obligations secured thereby pursuant to such agreements and instruments as shall be approved by the Required Holders, and the Company will cause to be delivered to each holder of a Note an opinion of independent counsel to the effect that such agreements and instruments are enforceable in accordance with their terms, and in any such case the Notes shall have the benefit, to the full extent that, and with such priority as, the holders of Notes may be entitled under applicable law, of an equitable Lien on such Property securing the Notes. Such violation of this Section 7.13 will constitute an Event of Default hereunder, whether or not any such provision is made pursuant to this Section 7.13(b). (C) FINANCING STATEMENTS. The Company will not, and will not permit SPHI to, sign or file a financing statement under the Uniform Commercial Code of any jurisdiction that names the Company or SPHI as debtor, or sign any security agreement authorizing any secured party thereunder to file any such financing statement, except, in any such case, a financing statement filed or to be filed to perfect or protect a security interest that the Company or SPHI is entitled to create, assume or incur, or permit to exist, under the foregoing provisions of this Section 7.13 or to evidence for informational purposes a lessor's interest in Property leased to the Company or SPHI. 7.14 PRIVATE OFFERING. Neither the Parent nor the Company will, nor will they permit any Person acting on their behalf to, offer the Notes or any part thereof or any similar Securities for issue or sale to, or solicit any offer to acquire any of the same from, any Person so as to bring the issuance and sale of the Notes within the provisions of section 5 of the Securities Act. 8. INFORMATION AS TO PARENT AND COMPANY 8.1 FINANCIAL AND BUSINESS INFORMATION. (a) INFORMATION AS TO THE PARENT. The Parent shall deliver to each holder of Notes: (i) Quarterly Statements -- as soon as practicable after the end of each quarterly fiscal period in each fiscal year of the Parent (other than the last 28 33 quarterly fiscal period of each such fiscal year), and in any event within ninety (90) days thereafter: (A) an unaudited consolidated balance sheet of the Parent and its consolidated subsidiaries as at the end of such quarter, and (B) unaudited consolidated statements of earnings and cash flows of the Parent and its consolidated subsidiaries, for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods in the previous fiscal year, and certified by a principal financial officer of the Parent that said financial statements fairly present the consolidated financial condition and results of operations and cash flows of the Parent and its consolidated subsidiaries, in accordance with GAAP consistently applied, as at the end of, and for, such period (subject to normal year-end adjustments), and accompanied by the certificate required by Section 8.2; (ii) Annual Statements -- as soon as practicable after the end of each fiscal year of the Parent, and in any event within one hundred twenty (120) days thereafter: (A) a consolidated balance sheet of the Parent and its consolidated subsidiaries, as at the end of such year, and (B) consolidated statements of earnings, changes in stockholders' equity and cash flows of the Parent and its consolidated subsidiaries for such year, setting forth in each case in comparative form the corresponding figures for the previous fiscal year, and accompanied by (1) an opinion thereon of the accountants named in Section 2.2(a) or other independent certified public accountants of recognized national standing selected by the Parent, which opinion shall, without qualification, state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion, (2) a certification by a principal financial officer of the Parent that such consolidated statements are complete and correct in all material respects, and 29 34 (3) the certificate required by Section 8.2. (b) INFORMATION AS TO THE COMPANY. The Company shall deliver to each holder of Notes: (i) Quarterly Statements -- as soon as practicable after the end of each quarterly fiscal period in each fiscal year of the Company (other than the last quarterly fiscal period of each such fiscal year), and in any event within ninety (90) days thereafter: (A) an unaudited consolidated balance sheet of the Company and its consolidated subsidiaries as at the end of such quarter, and (B) unaudited consolidated statements of earnings and cash flows of the Company and its consolidated subsidiaries for such quarter and (in the case of the second and third quarters) for the portion of the fiscal year ending with such quarter, setting forth in each case in comparative form the corresponding figures for the corresponding periods in the previous fiscal year, and certified by a principal financial officer of the Company that said financial statements fairly present the consolidated financial condition and results of operations and cash flows of the Company and its consolidated subsidiaries, in accordance with GAAP consistently applied, as at the end of, and for, such period (subject to normal year-end adjustments), and accompanied by the certificate required by Section 8.2; (ii) Annual Statements -- as soon as practicable after the end of each fiscal year of the Company, and in any event within one hundred twenty (120) days thereafter: (A) a consolidated balance sheet of the Company and its consolidated subsidiaries as at the end of such year, and (B) consolidated statements of earnings, changes in stockholders' equity and cash flows of the Company and its consolidated subsidiaries for such year, setting forth in each case in comparative form the corresponding figures for the previous fiscal year, and accompanied by (1) an opinion thereon of the accountants named in Section 2.2(a) or other independent certified public accountants of recognized national standing selected by the Company, which opinion shall, without qualification, state that such financial statements present fairly, in all material respects, the financial position of the companies being reported upon and their results of operations and cash flows and have been 30 35 prepared in conformity with GAAP, and that the examination of such accountants in connection with such financial statements has been made in accordance with generally accepted auditing standards, and that such audit provides a reasonable basis for such opinion, (2) a certification by a principal financial officer of the Company that such consolidated statements are complete and correct in all material respects, (3) the certificates required by Section 8.2 and Section 8.3, and (4) such other information as may be reasonably be requested by any holder of Notes, (c) INFORMATION AS TO THE PARENT AND THE COMPANY. The Parent and the Company shall deliver to each holder of Notes: (i) AUDIT REPORTS -- promptly upon receipt thereof, a copy of each report submitted to the Company or SPHI by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company or SPHI; (ii) SEC AND OTHER REPORTS -- promptly upon their becoming available, one copy of each financial statement, report, notice or proxy statement sent by the Parent, the Company or any Subsidiary to stockholders generally, and of each regular or periodic report and any registration statement, prospectus or written communication (other than transmittal letters), and each amendment thereto, in respect thereof filed by the Parent, the Company or any Subsidiary with, or received by, such Person in connection therewith from, the National Association of Securities Dealers, any securities exchange or the Securities and Exchange Commission or any successor agency; (iii) ERISA -- promptly upon becoming aware of the occurrence of any (A) "reportable event" (as such term is defined in section 4043 of ERISA) or (B) "prohibited transactions" (as such term is defined in section 406 or section 4975 of the IRC) in connection with any Pension Plan or any trust created thereunder, a written notice specifying the nature thereof, what action the Parent or the Company, as the case may be, is taking or proposes to take with respect thereto, and, when known, any action taken by the IRS, the DOL or the PBGC with respect thereto; 31 36 (iv) ERISA WAIVERS -- prompt written notice of and a description of any request pursuant to section 303 of ERISA or section 412 of the IRC for, or notice of the granting pursuant to said section 303 or section 412 of, a waiver in respect of all or part of the minimum funding standard set forth in ERISA or the IRC, as the case may be, of any Pension Plan, and, in connection with the granting of any such waiver, the amount of any waived funding deficiency (as such term is defined in said section 303 or said section 412) and the terms of such waiver, in each of the cases specified in this clause (iv), where the effect of such conditions or events or of events or conditions related thereto would reasonably be expected to have a Material Adverse Effect; (v) OTHER ERISA NOTICES -- prompt written notice of and, where applicable, a description of (A) any notice from the PBGC in respect of the commencement of any proceedings pursuant to section 4042 of ERISA to terminate any Pension Plan or for the appointment of a trustee to administer any Pension Plan, (B) any distress termination notice delivered to the PBGC under section 4041 of ERISA in respect of any Pension Plan, and any determination of the PBGC in respect thereof, (C) the placement of any Multiemployer Plan in reorganization status under Title IV of ERISA, (D) any Multiemployer Plan becoming "insolvent" (as such term is defined in section 4245 of ERISA) under Title IV of ERISA, (E) the whole or partial withdrawal of the Parent or the Company or any ERISA Affiliate from any Multiemployer Plan and the withdrawal liability incurred in connection therewith, and (F) the withdrawal of the Parent or the Company or any ERISA Affiliate from any Multiple Employer Pension Plan and the withdrawal liability under ERISA incurred in connection therewith; (vi) NOTICE OF DEFAULT OR EVENT OF DEFAULT -- within five (5) Business Days of becoming aware of the existence of any condition or event which constitutes a Default or an Event of Default, a written notice specifying the nature and period of existence thereof and what action the Parent or the Company, as the case may be, is taking or proposes to take with respect thereto; (vii) NOTICE OF CLAIMED DEFAULT -- within five (5) Business Days of becoming aware that the holder of any Note, or of any evidence of Indebtedness or other Security of the Parent, the Company or SPHI, shall have given notice or taken any other action with respect to a claimed Default, Event 32 37 of Default, default or event of default, a written notice specifying the notice given or action taken by such holder and the nature of the claimed Default, Event of Default, default or event of default and what action the Parent or the Company, as the case may be, is taking or proposes to take with respect thereto; (viii) ACTIONS, PROCEEDINGS -- promptly after the commencement thereof, notice of any action or proceeding relating to the Parent, the Company or any Subsidiary in any court or before any Governmental Authority or arbitration board or tribunal as to which there is a reasonable possibility of an adverse determination and that, if adversely determined, would have a Material Adverse Effect; (ix) CERTAIN ENVIRONMENTAL MATTERS -- prompt written notice of and a description of any event or circumstance that, had such event or circumstance occurred or existed immediately prior to the Closing Date, would have been required to be disclosed as an exception to any statement set forth in Section 2.14; and (x) REQUESTED INFORMATION -- with reasonable promptness, such other data and information as from time to time may be reasonably requested by any holder of Notes, including, without limitation, (A) copies of any statement, report or certificate furnished to any holder of any Indebtedness or any Security of the Parent, the Company or SPHI, (B) information requested to comply with any request of the National Association of Insurance Commissioners in respect of the designation of the Notes, and (C) information requested to comply with 17 C.F.R. Section 230.144A, as amended from time to time; provided that any such request with respect to any of the data and information referred to in the foregoing clauses (A), (B) and (C) shall be deemed to be reasonable for purposes of this Section 8.1(c)(x). 8.2 OFFICERS' CERTIFICATES. Each set of financial statements delivered to each holder of Notes pursuant to Section 8.1(a) or Section 8.1(b) shall be accompanied by a certificate of the President or a Vice-President and the Treasurer or an Assistant Treasurer of the Parent (in the case of statements delivered pursuant to Section 8.1(a)) or the Company (in the case of statements delivered pursuant to Section 8.1(b)), setting forth: (a) COVENANT COMPLIANCE -- the information (including detailed calculations) required in order to establish whether the Parent or the Company, as the case may be, 33 38 was in compliance with the requirements of Section 7.6 through Section 7.10, inclusive, during the period covered by the earnings statement then being furnished (including with respect to each such Section, where applicable, the calculations of the maximum or minimum amount, ratio or percentage, as the case may be, permissible under the terms of such Sections, and the calculation of the amounts, ratio or percentage then in existence); (b) EVENT OF DEFAULT -- a statement that the signers have reviewed the relevant terms hereof and have made, or caused to be made, under their supervision, a review of the transactions and conditions of the Parent, the Company and SPHI from the beginning of the accounting period covered by the earnings statements being delivered therewith to the date of the certificate and that such review did not disclose the existence during such period of any condition or event which constitutes a Default or an Event of Default or, if any such condition or event existed or exists, specifying the nature and period of existence thereof and what action the Parent or the Company, as the case may be, has taken or proposes to take with respect thereto; and (C) REAL ESTATE ASSETS -- in the case of certificates of the officers of the Company, a complete and correct list of each of the Real Estate Assets and the Designated Disposition Value with respect thereto, in each case as at the date of such certificate, together with a detailed calculation and explanation of each reduction in the Designated Disposition Value of any Real Estate Asset effected during such period and the "Pro-Rata Basis" on which such reduction shall have been made. If, at any time within sixty (60) days after receipt by the holders of the Notes of any certificate containing information required by this clause (c), the holders of at least fifty percent (50%) in principal amount of the Notes (exclusive of Notes held by any one or more of the Parent, the Company, any Subsidiary and any Affiliate) at the time outstanding shall disagree with the reduction in the Designated Disposition Value of any Real Estate Asset effected during the period covered by such certificate, the Company shall, in its discretion, either (i) adjust such reduction to the satisfaction of such holders or (ii) employ, at the expense of the Company, an independent appraiser satisfactory to such holders to determine the appropriate Pro-Rata Basis of such reduction. Any such determination by an independent appraiser shall be binding upon the Company and the holders of the Notes. 8.3 ACCOUNTANTS' CERTIFICATES. Each set of annual financial statements delivered pursuant to Section 8.1(b)(ii) shall be accompanied by a certificate of the accountants who certify such financial statements, stating that they have reviewed Section 7.1 through Section 7.14, inclusive, of this Agreement insofar as such Sections relate to accounting matters and stating further, whether, in making their audit, such accountants have become aware of any condition or event which then constitutes a Default or an Event of Default, and, if such accountants are aware that any such condition or event then exists, specifying the nature and period of existence thereof, provided that nothing in this Section 8.3 shall obligate such accountants to review any Section of this Agreement other than the aforesaid Section 7.1 through Section 7.14 and the related definitions. 34 39 8.4 INSPECTION. (A) PARENT, COMPANY AND SPHI. The Parent and the Company shall permit the representatives of each holder of Notes, at the expense of such holder (or, if a Default or Event of Default shall exist at such time, at the expense of the Company) to visit and inspect any of the Properties of the Parent, the Company or SPHI to examine all their respective books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants (and by this provision the Parent and the Company authorize said accountants to discuss the finances and affairs of the Parent, the Company and SPHI) all at such reasonable times and as often as may be reasonably requested. (B) OTHER SUBSIDIARIES. The Parent shall use its best efforts to provide the representatives of each holder of Notes, at the expense of such holder (or, if a Default or Event of Default shall exist at such time, at the expense of the Company) access to and inspection of the Properties of each other Subsidiary to examine such Subsidiary's books of account, records, reports and other papers, to make copies and extracts therefrom, and to discuss such Subsidiary's affairs, finances and accounts with such Subsidiary's officers, employees and independent public accountants (and by this provision the Parent authorizes said accountants to discuss the finances and affairs of the Subsidiaries) all at such reasonable times and as often as may be reasonably requested. 8.5 CONFIDENTIAL INFORMATION. For the purposes of this Section 8.5, "Confidential Information" means information delivered to you by or on behalf of the Parent, the Company or any Subsidiary in connection with the transactions contemplated by or otherwise pursuant to this Agreement that is proprietary in nature and that was clearly marked or labeled or otherwise adequately identified when received by you as being confidential information of the Parent, the Company or such Subsidiary, provided that such term does not include information that (a) was publicly known or otherwise known to you prior to the time of such disclosure, (b) subsequently becomes publicly known through no act or omission by you or any Person acting on your behalf, (c) otherwise becomes known to you other than through disclosure by the Parent, the Company or any Subsidiary or (d) constitutes financial statements delivered to you under Section 8.1 that are otherwise publicly available. You will maintain the confidentiality of such Confidential Information in accordance with procedures adopted by you in good faith to protect confidential information of third parties delivered to you, provided that you may deliver or disclose Confidential Information to 35 40 (i) your directors, officers, employees, agents, attorneys and affiliates (to the extent such disclosure reasonably relates to the administration of the investment represented by your Notes) who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 8.5 to the extent contemplated by such confidentiality procedures, (ii) your financial advisors and other professional advisors who agree to hold confidential the Confidential Information substantially in accordance with the terms of this Section 8.5, (iii) any other holder of any Note, (iv) any Institutional Investor to which you sell or offer to sell your Notes or any part thereof or any participation therein (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 8.5), (v) any Person from which you offer to purchase any Security of the Parent, the Company or any Subsidiary (if such Person has agreed in writing prior to its receipt of such Confidential Information to be bound by the provisions of this Section 8.5), (vi) any federal or state regulatory authority having jurisdiction over you, (vii) the National Association of Insurance Commissioners or any similar organization, or any nationally recognized rating agency that requires access to information about your investment portfolio or (viii) any other Person to which such delivery or disclosure may be necessary or appropriate (A) to effect compliance with any law, rule, regulation or order applicable to you, (B) in response to any subpoena or other legal process, (C) in connection with any litigation to which you are a party or (D) if an Event of Default has occurred and is continuing, to the extent you may reasonably determine such delivery and disclosure to be necessary or appropriate in the enforcement or for the protection of the rights and remedies under your Notes and this Agreement. Each holder of a Note, by its acceptance of a Note, will be deemed to have agreed to be bound by and to be entitled to the benefits of this Section 8.5 as though it were a party to this Agreement. On reasonable request by the Company in connection with the delivery to 36 41 any holder of a Note of information required to be delivered to such holder under this Agreement or requested by such holder (other than a holder that is a party to this Agreement or its nominee), such holder will enter into an agreement with the Parent and the Company embodying the provisions of this Section 8.5. 9. EVENTS OF DEFAULT 9.1 NATURE OF EVENTS. An "Event of Default" shall exist if any of the following occurs and is continuing: (a) PRINCIPAL OR MAKE-WHOLE AMOUNT PAYMENTS -- the Company shall fail to make any payment of principal or Make-Whole Amount on any Note on or before the date such payment is due or the Company shall fail to comply with any of its obligations set forth in Section 5.3; (b) INTEREST PAYMENTS -- the Company shall fail to make any payment of interest on any Note on or before five (5) Business Days after the date such payment is due; (c) PARTICULAR COVENANT DEFAULTS -- the Parent, the Company or SPHI shall fail to perform or observe any covenant contained in Section 7.6 through Section 7.13, inclusive, or in Section 8.1(c)(vi) or Section 8.1(c)(vii); (d) OTHER DEFAULTS -- the Parent, the Company or SPHI shall fail to comply with any other provision hereof and such failure shall continue for more than thirty (30) days after the date on which such failure shall first become known to any officer of the Parent or the Company; (e) WARRANTIES OR REPRESENTATIONS -- any warranty, representation or other statement by or on behalf of the Parent or the Company contained herein or in any document or instrument furnished in compliance with or in reference hereto shall have been false or misleading in any material respect when made; (f) DEFAULT ON INDEBTEDNESS OR SECURITY -- (i) the Parent, the Company or SPHI shall fail to make any payment on any Indebtedness or any Security at final maturity, or (ii) any event shall occur or any condition shall exist in respect of any Indebtedness or any Security of the Parent, the Company or SPHI, or under any agreement securing or relating to any such Indebtedness or Security, that has caused the holders of such Indebtedness or Security, or a portion thereof, to accelerate the payment of such Indebtedness or Security prior to its stated maturity or prior to its regularly scheduled date or dates of payment, 37 42 provided that the aggregate amount of all obligations in respect of all such Indebtedness and Securities referred to in this clause (f) exceeds at such time Five Million Dollars ($5,000,000); (g) INVOLUNTARY BANKRUPTCY PROCEEDINGS -- (i) a receiver, liquidator, custodian or trustee of the Parent, the Company, or SPHI, or of all or any of the Property of any of the foregoing, shall be appointed by court order and such order remains in effect for more than thirty (30) days; or an order for relief shall be entered with respect to the Parent, the Company or SPHI, or the Parent, the Company or SPHI shall be adjudicated a bankrupt or insolvent; or (ii) any of the Real Estate Assets shall be sequestered by court order and such order remains in effect for more than thirty (30) days (provided that the temporary inability of the Company or SPHI to enforce its rights with respect to any Real Estate Loan resulting from the operation of the automatic stay in connection with bankruptcy proceedings of the related obligor on such Real Estate Loan shall not be deemed to be a sequestration of such Real Estate Loan), or any other Property of the Parent, the Company or SPHI shall be sequestered by court order and such order remains in effect for more than thirty (30) days and the sequestration of such Property could reasonably be expected to have a Material Adverse Effect; or (iii) a petition shall be filed against the Parent, the Company or SPHI under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and shall not be dismissed within thirty (30) days after such filing; (h) VOLUNTARY PETITIONS -- the Parent, the Company or SPHI shall file a petition in voluntary bankruptcy or seeking relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or shall consent to the filing of any petition against it under any such law, excluding any such filing for the purpose of a reconstruction, reorganization, merger, consolidation or other arrangement on terms approved, prior to such filing, by the holders of at least fifty percent (50%) in principal amount of the Notes (exclusive of Notes held by any one or more of the Parent, the Company, any Subsidiary and any Affiliate) at the time outstanding; (i) ASSIGNMENTS FOR BENEFIT OF CREDITORS, ETC. -- the Parent, the Company or SPHI shall make an assignment for the benefit of its creditors, or shall admit in writing its inability, or fails, to pay its debts generally as they become due, or shall consent to the appointment of a receiver, liquidator or trustee of the Parent, the Company or SPHI or of all or any part of the Property of the Parent, the Company or SPHI; or 38 43 (j) UNDISCHARGED FINAL JUDGMENTS -- a final judgment or final judgments for the payment of money aggregating in excess of One Million Dollars ($1,000,000) shall be outstanding against one or more of the Parent, the Company and SPHI and any one of such judgments shall have been outstanding for more than sixty (60) days from the date of its entry and shall not have been stayed or discharged in full, provided that the calculation of the aforesaid One Million Dollars ($1,000,000) shall exclude any final judgment to the extent, but only to the extent, such judgment will be covered by payments from insurance maintained by the Parent, the Company or SPHI and (i) the issuer of such insurance has agreed, in writing, to make such payment in respect of such judgment or (ii) if the issuer of such insurance has not agreed to make such payment in respect of such judgment, (A) the liability of such issuer to make such payment is being contested in good faith by appropriate proceedings, (B) adequate reserves have been established in respect of such judgment and (C) nonpayment of such judgment could not reasonably be expected to have a Material Adverse Effect. 9.2 DEFAULT REMEDIES. (a) ACCELERATION ON EVENT OF DEFAULT. (i) If an Event of Default specified in clause (g), clause (h) or clause (i) of Section 9.1 shall exist, all of the Notes at the time outstanding shall automatically become immediately due and payable together with interest accrued thereon and, to the extent permitted by law, the Make-Whole Amount at such time with respect to the principal amount of such Notes, without presentment, demand, protest or notice of any kind, all of which are hereby expressly waived. (ii) If an Event of Default other than those specified in clause (g), clause (h) and clause (i) of Section 9.1 shall exist, the Required Holders may exercise any right, power or remedy permitted to such holder or holders by law, and shall have, in particular, without limiting the generality of the foregoing, the right to declare the entire principal of, and all interest accrued on, all the Notes then outstanding to be, and such Notes shall thereupon become, forthwith due and payable, without any presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith pay to the holder or holders of all the Notes then outstanding the entire principal of, and interest accrued on, the Notes and, to the extent permitted by law, the Make-Whole Amount at such time with respect to such principal amount of such Notes. 39 44 (b) ACCELERATION ON PAYMENT DEFAULT. During the existence of an Event of Default described in Section 9.1(a) or Section 9.1(b), and irrespective of whether the Notes then outstanding shall have been declared to be due and payable pursuant to Section 9.2(a)(ii), any holder of Notes that shall have not consented to any waiver with respect to such Event of Default may, at such holder's option, by notice in writing to the Company, declare the Notes then held by such holder to be, and such Notes shall thereupon become, forthwith due and payable together with all interest accrued thereon, without any presentment, demand, protest or other further notice of any kind, all of which are hereby expressly waived, and the Company shall forthwith pay to such holder the entire principal of and interest accrued on such Notes and, to the extent permitted by law, the Make-Whole Amount at such time with respect to such principal amount of such Notes. (c) VALUABLE RIGHTS. The Company acknowledges, and the parties hereto agree, that the right of each holder to maintain its investment in the Notes free from repayment by the Company (except as herein specifically provided for) is a valuable right and that the provision for payment of a Make-Whole Amount by the Company in the event that the Notes are prepaid or are accelerated as a result of an Event of Default, is intended to provide compensation for the deprivation of such right under such circumstances. (d) OTHER REMEDIES. During the existence of an Event of Default and irrespective of whether the Notes then outstanding shall have been declared to be due and payable pursuant to Section 9.2(a)(ii) and irrespective of whether any holder of Notes then outstanding shall otherwise have pursued or be pursuing any other rights or remedies, any holder of Notes may proceed to protect and enforce its rights hereunder and under such Notes by exercising such remedies as are available to such holder in respect thereof under applicable law, either by suit in equity or by action at law, or both, whether for specific performance of any agreement contained herein or in aid of the exercise of any power granted herein, provided that the maturity of such holder's Notes may be accelerated only in accordance with Section 9.2(a) and Section 9.2(b). (e) NONWAIVER AND EXPENSES. No course of dealing on the part of any holder of Notes nor any delay or failure on the part of any holder of Notes to exercise any right shall operate as a waiver of such right or otherwise prejudice such holder's rights, powers and remedies. If the Company shall fail to pay when due any principal of, or Make-Whole Amount or interest on, any Note, or shall fail to comply with any other provision hereof, the Company shall pay to each holder of Notes, to the extent permitted by law, (i) such further amounts as shall be sufficient to cover the costs and expenses, including but not limited to reasonable attorneys' fees and expenses, incurred by such holder in collecting any sums due on such Notes, and (ii) all expenses incurred by any holder of Notes in connection with the enforcement, assessment or analysis of any rights under this Agreement and the Notes and any rights or remedies that are or may be available to such 40 45 holder (including in each such case, without limitation, all reasonable attorneys' and financial advisors' fees and expenses and the allocated reasonable cost of such holder's counsel who are its employees or its affiliates' employees). 9.3 ANNULMENT OF ACCELERATION OF NOTES. If a declaration is made pursuant to Section 9.2(a)(ii), then and in every such case, the Required Holders may, by written instrument filed with the Company, rescind and annul such declaration, and the consequences thereof, provided that at the time such declaration is annulled and rescinded: (a) no judgment or decree shall have been entered for the payment of any moneys due on or pursuant hereto or the Notes; (b) all arrears of interest upon all the Notes and all other sums payable hereunder and under the Notes (except any principal of, or interest or Make-Whole Amount on, the Notes which shall have become due and payable by reason of such declaration under Section 9.2(a)(ii)) shall have been duly paid; and (c) each and every other Default and Event of Default shall have been waived pursuant to Section 11.5 or otherwise made good or cured, and provided further that no such rescission and annulment shall extend to or affect any subsequent Default or Event of Default or impair any right consequent thereon. 10. INTERPRETATION OF THIS AGREEMENT 10.1 TERMS DEFINED. As used herein, the following terms have the respective meanings set forth below or set forth in the Section hereof following such term: AFFILIATE -- means, at any time, the Parent and any other Person (other than SPHI) (a) for the purposes of Section 5.6, Section 8.2(c), Section 9.1(h), the definition of "Required Holders" in Section 10.1, Section 11.5(a) and Section 11.5(b)(iii), (i) that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Parent or the Company, (ii) that beneficially owns or holds five percent (5%) or more of any class of the Voting Stock of the Parent or the Company, or (iii) five percent (5%) or more of the Voting Stock (or in the case of a Person that is not a corporation, five percent (5%) or more of 41 46 the equity interest) of which is beneficially owned or held by the Parent, the Company or a Subsidiary, at such time, and (b) for the purposes of Section 2.3, Section 7.12 and as otherwise used in this Agreement, (i) that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, the Company, (ii) that beneficially owns or holds five percent (5%) or more of any class of the Voting Stock of the Company, or (iii) five percent (5%) or more of the Voting Stock (or in the case of a Person that is not a corporation, five percent (5%) or more of the equity interest) of which is beneficially owned or held by the Company, at such time. As used in this definition, Control -- means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise. AGREEMENT, THIS -- means this agreement, as it may be amended and restated from time to time. BUSINESS DAY -- means, at any time, a day other than a Saturday, a Sunday or, in the case of any Note with respect to which the provisions of Section 4.1 are applicable, a day on which the bank designated (by the holder of such Note) to receive (for such holder's account) payments on such Note is required by law (other than a general banking moratorium or holiday for a period exceeding four (4) consecutive days) to be closed. CAPITAL LEASE -- means, at any time, a lease with respect to which the lessee is required to recognize the acquisition of an asset and the incurrence of a liability at such time. CLOSING -- Section 1.2. CLOSING DATE -- Section 1.2. COMPANY -- has the meaning specified in the introductory sentence. 42 47 CONFIDENTIAL INFORMATION -- Section 8.5. CONSOLIDATED NET WORTH -- means, at any time, total stockholders' equity as would be shown on a consolidated balance sheet of the Parent and the Subsidiaries at such time, determined on a consolidated basis for such Persons in accordance with GAAP. CONTRIBUTIONS -- means cash contributions made by the Parent to the capital of the Company after the Closing Date. CUMULATIVE CONTRIBUTIONS -- means, at any time, the aggregate of all Contributions at or prior to such time. CUMULATIVE NON-ESSENTIAL CONTRIBUTIONS -- means, at any time, the aggregate of all Contributions (other than Operating Expense Contributions or Contributions directly or indirectly utilized to enable the Company to pay principal, interest, Make-Whole Amount or other amounts due in respect of the Notes) at or prior to such time. CUMULATIVE OPERATING EXPENSES -- means, at any time, the aggregate amount of Operating Expenses of the Company and SPHI, determined on a consolidated basis for such Persons, paid, or due and payable, from and including October 31, 1994 to such time. DEFAULT -- means an event or condition the occurrence of which would, with the lapse of time or the giving of notice or both, become an Event of Default. DESIGNATED DISPOSITION VALUE -- means, at any time, with respect to each Real Estate Asset, the amount set forth on Annex 4 pertaining to such Real Estate Asset, adjusted as follows: the Designated Disposition Value shall, subject to the provisions of Section 8.2(c), be reduced (a) with respect to any Real Estate Property, on a Pro-Rata Basis in the event that a portion or portions of such Real Estate Property shall have been sold at or prior to such time, or (b) with respect to any Real Estate Loan, on a dollar-for-dollar basis to the extent that principal reductions shall have been made on such Real Estate Loan at or prior to such time. As used herein, the term "Pro-Rata Basis" means, with respect to any portion of any Real Estate Property sold, the relationship of such portion sold to the portion retained by the Company on a basis which is reasonably related to the respective fair market values of the portions sold and retained at the time of such sale, provided that the sum of the Designated Disposition Value assigned to the portion sold plus the Designated Disposition Value assigned the portion retained shall equal the Designated Disposition Value of such Real Estate Property prior to adjustment. DOL -- means the Department of Labor and any successor agency. 43 48 DOWNGRADE EVENT -- means the existence or occurrence of any one or more of the following conditions: (a) the Parent shall have senior unsecured debt obligations with an actual credit rating of lower than "BBB-" by S&P or lower than "Baa3" by Moody's, (b) the Parent shall have subordinated unsecured debt obligations with an actual credit rating of lower than "BB+" by S&P or lower than "Ba1" by Moody's or (c) the Parent shall fail to have any unsecured debt obligations with a credit rating issued by S&P or Moody's, unless (i) the Company shall have obtained, and shall maintain on an ongoing basis, at its expense, private letter ratings of the Notes of at least "BBB-" from S&P and of at least "Baa3" from Moody's and (ii) Consolidated Net Worth shall, at all times, be at least Eight Hundred Million Dollars ($800,000,000). DOWNGRADE PREPAYMENT DATE -- Section 5.3(a). ENVIRONMENTAL PROTECTION LAW -- means any federal, state, county, regional or local law, statute, or regulation (including, without limitation, CERCLA, RCRA and SARA) enacted in connection with or relating to the protection or regulation of the environment, including, without limitation, those laws, statutes, and regulations regulating the disposal, removal, production, storing, refining, handling, transferring, processing, or transporting of Hazardous Substances, and any regulations, issued or promulgated in connection with such statutes by any Governmental Authority and any orders, decrees or judgments issued by any court of competent jurisdiction in connection with any of the foregoing. As used in this definition: CERCLA -- means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended from time to time (by SARA or otherwise), and all rules and regulations promulgated in connection therewith; RCRA -- means the Resource Conservation and Recovery Act of 1976, as amended, and any rules and regulations issued in connection therewith; and SARA -- means the Superfund Amendments and Reauthorization Act of 1986, as amended from time to time, and all rules and regulations promulgated in connection therewith. 44 49 ERISA -- means the Employee Retirement Income Security Act of 1974, as amended from time to time. ERISA AFFILIATE -- means any corporation or trade or business that (a) is a member of the same controlled group of corporations (within the meaning of section 414(b) of the IRC) as the Parent or the Company, (b) is under common control (within the meaning of section 414(c) of the IRC) with the Parent or the Company, (c) is a member of the same affiliated service group (within the meaning of section 414(m) of the IRC) as the Parent or the Company, or (d) is combined or otherwise aggregated with the Parent or the Company pursuant to regulations issued under section 414(o) of the IRC. EVENT OF DEFAULT -- Section 9.1. EXCESS CUMULATIVE NET PROCEEDS -- means, at any time, an amount equal to the result of (a) the aggregate net proceeds received by the Company and SPHI from all Real Estate Assets sold, paid down or repaid at or prior to such time minus (b) the aggregate of the Designated Disposition Values for such Real Estate Assets, in each case determined as of the date of sale, pay down or repayment of such Real Estate Asset. FINANCING DOCUMENTS -- means the Note Purchase Agreements, the Notes, and any other agreements and instruments to be executed pursuant to the terms of each of such documents, as each may be amended from time to time. FOREIGN PENSION PLAN -- means any plan, fund or other similar program (a) established or maintained outside of the United States of America by any one or more of the Parent, the Company or the Subsidiaries primarily for the benefit of the employees (substantially all of whom are aliens not residing in the United States of America) of the Parent, the Company or such Subsidiaries which plan, fund or other similar program provides for retirement income for such employees or results in a deferral of income for such employees in contemplation of retirement and (b) not otherwise subject to ERISA. GAAP -- means accounting principles as promulgated from time to time in statements, opinions and pronouncements by the American Institute of Certified Public 45 50 Accountants and the Financial Accounting Standards Board and in such statements, opinions and pronouncements of such other entities with respect to financial accounting of for-profit entities as shall be accepted by a substantial segment of the accounting profession in the United States. GOVERNMENTAL AUTHORITY -- means (a) the government of (i) the United States of America and any state or other political subdivision thereof, or (ii) any jurisdiction (y) in which the Parent, the Company or any Subsidiary conducts all or any part of its business or (z) that asserts jurisdiction over the conduct of the affairs or Properties of the Parent, the Company or any Subsidiary, and (b) any entity exercising executive, legislative, judicial, regulatory or administrative functions of, or pertaining to, any such government. GUARANTY -- means with respect to any Person (for the purposes of this definition, the "Guarantor") any obligation (except the endorsement in the ordinary course of business of negotiable instruments for deposit or collection) of such Person guaranteeing or in effect guaranteeing (including, without limitation, by means of a surety bond, letter of credit or other similar instrument, whether or not designated as a "guaranty") any indebtedness, dividend or other obligation of any other Person (the "Primary Obligor") in any manner, whether directly or indirectly, including, without limitation, obligations incurred through an agreement, contingent or otherwise, by the Guarantor: (a) to purchase such indebtedness or obligation or any Property or assets constituting security therefor; (b) to advance or supply funds (i) for the purpose of payment of such indebtedness or obligation, or (ii) to maintain working capital or other balance sheet condition, statement of financial condition or any income statement condition of the Primary Obligor or otherwise to advance or make available funds for the purchase or payment of such indebtedness or obligation; (c) to lease Property or to purchase Securities or other Property or services primarily for the purpose of assuring the owner of such indebtedness 46 51 or obligation of the ability of the Primary Obligor to make payment of the indebtedness or obligation; or (d) otherwise to assure the owner of the indebtedness or obligation of the Primary Obligor against loss in respect thereof. For purposes of computing the amount of any Guaranty, in connection with any computation of indebtedness or other liability, it shall be assumed that the indebtedness or other liabilities that are the subject of such Guaranty are direct obligations of the issuer of such Guaranty. HAZARDOUS SUBSTANCES -- means any and all pollutants, contaminants, toxic or hazardous wastes or any other substances that might pose a hazard to health or safety, the removal of which is required, or the generation, manufacture, refining, production, processing, treatment, storage, handling, transportation, transfer, use, disposal, release, discharge, spillage, seepage, or filtration of which is restricted, prohibited or penalized by any applicable law (including, without limitation, asbestos, urea formaldehyde foam insulation and polychlorinated biphenyls). INDEBTEDNESS -- with respect to any Person means, at any time, without duplication, (a) its liabilities for borrowed money (whether or not evidenced by a Security); (b) any liabilities for borrowed money secured by any Lien existing on Property owned by such Person (whether or not such liabilities have been assumed); (c) its liabilities in respect of Capital Leases; (d) the present value of all its liabilities for payments due under any arrangement for retention of title or any conditional sale agreement (other than a Capital Lease) discounted at the implicit rate, if known, with respect thereto or, if unknown, at eight percent (8%) per annum; and (e) all obligations of such Person in respect of Guaranties, letters of credit or instruments serving a similar function and endorsements, in each case in respect of or in support of the obligations of any other Person of the type set forth in clause (a) through clause (d) of this definition. INSTITUTIONAL INVESTOR -- means the Purchasers, any affiliate of any of the Purchasers, and any holder of Notes that is an "accredited investor" as defined in section 2(15) of the Securities Act. INVESTMENT -- means any investment, made in cash or by delivery of Property, by the Parent, the Company or SPHI: 47 52 (a) in any Person, whether by acquisition of stock, indebtedness or other obligation or Security, or by loan, Guaranty, advance, capital contribution or otherwise, or (b) in any Property. Investments shall be valued at cost less any net return of capital through the sale or liquidation thereof or other return of capital thereon. IRC -- means the Internal Revenue Code of 1986, together with all rules and regulations promulgated pursuant thereto, as amended from time to time. IRS -- means the Internal Revenue Service and any successor agency. LIEN -- means any interest in Property securing an obligation owed to, or a claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including but not limited to the security interest lien arising from a mortgage, encumbrance, pledge, conditional sale or trust receipt or a consignment or bailment for security purposes, and the filing of any financing statement under the Uniform Commercial Code of any jurisdiction, or an agreement to give any of the foregoing. The term "Lien" includes reservations, exceptions, encroachments, easements, rights-of-way, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting real property. For the purposes hereof, the Parent, the Company and each Subsidiary is deemed to be the owner of any Property that it shall have acquired or holds subject to a conditional sale agreement, Capital Lease or other arrangement pursuant to which title to the Property has been retained by or vested in some other Person for security purposes, and such retention or vesting is deemed a Lien. The term "Lien" does not include negative pledge clauses in agreements relating to the borrowing of money. MAKE-WHOLE AMOUNT -- means, with respect to any date (a "Prepayment Date") and any principal amount ("Prepaid Principal") of Notes required or desired for any reason to be paid prior to the regularly scheduled maturity thereof on such Prepayment Date, the greater of (a) Zero Dollars ($0), or (b) (i) the sum of the present values of the then remaining scheduled payments of principal and interest that would be payable in respect of such Prepaid Principal but for such prepayment or acceleration, minus (ii) the sum of (A) the amount of such Prepaid Principal, plus 48 53 (B) the amount of interest accrued on such Prepaid Principal since the scheduled interest payment date immediately preceding such Prepayment Date. In determining such present values, a discount rate equal to the Make-Whole Discount Rate with respect to such Prepayment Date and Prepaid Principal divided by two (2), and a discount period of six (6) months of thirty (30) days each, shall be used. As used in this definition: Make-Whole Discount Rate -- means, with respect to any Prepayment Date and Prepaid Principal, the sum of (a) the per annum percentage rate (rounded to the nearest three (3) decimal places) equal to the bond equivalent yield to maturity derived from the annual yield to maturity of the United States Treasury obligation listed in the Applicable H.15 as of such Prepayment Date for the then most recently available day in such Applicable H.15 with a Treasury Constant Maturity (as defined in such Applicable H.15) equal to the Weighted Average Life to Maturity of such Prepaid Principal determined as of such Prepayment Date, plus (b) fifty one-hundredths percent (0.50%) per annum. For purposes of clause (a) of the preceding sentence, if no United States Treasury obligation with a Treasury Constant Maturity corresponding exactly to the Weighted Average Life to Maturity of such Prepaid Principal is listed, the yields for the two (2) published United States Treasury obligations with Treasury Constant Maturities most closely corresponding to such Weighted Average Life to Maturity (one (1) with a longer maturity and one (1) with a shorter maturity, if available) shall be calculated pursuant to the immediately preceding sentence and the Make-Whole Discount Rate shall be interpolated or extrapolated from such yields on a straight-line basis. Applicable H.15 -- means, at any time, United States Federal Reserve Statistical Release H.15(519) or its successor publication then most recently published and available to the public or, if no such successor publication is available, then any other source of current information in respect of interest rates on securities of the United States of America that is generally available and, in the judgment of the Required Holders, provides information reasonably comparable to the H.15(519) report. Weighted Average Life to Maturity -- means, with respect to any Prepayment Date and Prepaid Principal, the number of years obtained by dividing the Remaining Dollar-Years of such Prepaid Principal determined on such Prepayment Date by such Prepaid Principal. 49 54 Remaining Dollar-Years -- means, with respect to any Prepayment Date and Prepaid Principal, the result obtained by (a) multiplying, in the case of each required payment of principal (including payment at maturity) that would be payable in respect of such Prepaid Principal but for such prepayment, (i) an amount equal to such required payment of principal, by (ii) the number of years (calculated to the nearest one-twelfth (1/12) that will elapse between such Prepayment Date and the date such required principal payment would be due if such Prepaid Principal had not been so prepaid, and (b) calculating the sum of each of the products obtained in the preceding subsection (a). MARGIN SECURITY -- means "margin stock" within the meaning of Regulations G, T, U and X of the Board of Governors of the Federal Reserve System, 12 C.F.R., Chapter II, as amended from time to time. MATERIAL ADVERSE EFFECT -- means a material adverse effect on the business, profits, Properties or condition (financial or otherwise) of the Parent, the Company and the Subsidiaries, taken as a whole, or the ability of the Parent or the Company to perform their respective obligations under the Financing Documents. MOODY'S -- Section 10.1 (in the definition of "Nationally Recognized Rating Agency"). MULTIEMPLOYER PLAN -- means any multiemployer plan (as defined in section 3(37) of ERISA) in respect of which the Parent, the Company or any ERISA Affiliate is an "employer" (as such term is defined in section 3 of ERISA). MULTIPLE EMPLOYER PENSION PLAN -- means any employee benefit plan within the meaning of section 3(3) of ERISA (other than a Multiemployer Plan), subject to Title IV of ERISA, constituting a "single-employer plan" (as defined in section 4001 of ERISA) which has two (2) or more "contributing sponsors" (as defined in section 4001 of ERISA), at least two (2) of which are not under "common control" (as defined in section 4001 of ERISA) and to which the Parent, the Company or any ERISA Affiliate contribute. NATIONALLY RECOGNIZED RATING AGENCY -- means either Standard & Poor's Ratings Group, a division of McGraw-Hill, Inc. ("S&P"), or Moody's Investors Service ("Moody's"), or Duff & Phelps Credit Rating Co. NOTE -- Section 1.1. 50 55 NOTE PURCHASE AGREEMENT -- Section 1.2(c). OPERATING EXPENSE CONTRIBUTIONS -- means, at any time, the aggregate amount of Contributions (a) directly applied by the Company or SPHI to the payment of Operating Expenses after the Closing Date and prior to such time and (b) which the Company is under no obligation to repay to the Parent. OPERATING EXPENSES -- means any and all expenses and other amounts incurred or expended by the Company or SPHI in the operation of its business, including, without limitation, property taxes, construction bonds and assessments, legal expenses, rental and lease payments, employee salaries, telephone and utility costs and similar items. OTHER PURCHASERS -- Section 1.2(c). PARENT -- has the meaning specified in the introductory sentence. PBGC -- means the Pension Benefit Guaranty Corporation and any successor corporation or governmental agency. PENSION PLAN -- means, at any time, any "employee pension benefit plan" (as defined in section 3 of ERISA) maintained at such time by the Parent, the Company or any ERISA Affiliate for employees of the Parent, the Company or such ERISA Affiliate, excluding any Multiemployer Plan, but including, without limitation, any Multiple Employer Pension Plan. PERMITTED INVESTMENTS -- means, at any time, the following: (a) Investments in direct obligations of, or obligations guarantied by, the United States of America or any agency of the United States of America the obligations of which agency carry the full faith and credit of the United States of America, provided that such obligations mature within three (3) years from the date of acquisition thereof; (b) Investments in commercial paper of corporations that at the time of acquisition thereof have an assigned rating in one of the top two rating classifications by a Nationally Recognized Rating Agency, provided that such commercial paper matures within two hundred seventy (270) days from the date of acquisition thereof; (c) Investments in any open-ended money market mutual fund that invests solely in so-called "money market" instruments maturing not more than one (1) year after the acquisition thereof, which fund has total assets in excess of One Billion Dollars ($1,000,000,000) and which is regulated by the 51 56 Investment Company Act of 1940, as amended, and which Investments would be classified as a current asset under GAAP; (d) Investments in any mutual fund that invests solely in preferred stocks of corporations that have an assigned rating in one of the top two rating categories by a Nationally Recognized Rating Agency and which fund is regulated by the Investment Company Act of 1940, as amended; (e) Investments in certificates of deposit, eurodollar deposits, repurchase agreements and bankers' acceptances maturing within one (1) year from the date of acquisition, issued by a commercial bank organized under the laws of the United States of America or any state thereof and having capital, surplus and undivided profits aggregating at least One Hundred Million Dollars ($100,000,000); (f) Investments in any obligation of any state of the United States of America, or municipality thereof, that at the time of acquisition thereof have an assigned rating in one of the top two rating categories by a Nationally Recognized Rating Agency; provided that such obligations mature within three (3) years of the date of acquisition thereof; (g) Investments in local deposit accounts maintained for operating funds of the Company and SPHI; and (h) Investments existing on the Closing Date and disclosed in Part 10.1 of Annex 3. Investments shall be valued at cost less any net return of capital through the sale or liquidation thereof or other return of capital thereon, in any case without giving effect to any write-down in the value thereof. PERSON -- means an individual, partnership, corporation, trust, unincorporated organization, or a government or agency or political subdivision thereof. PLACEMENT MEMORANDUM -- Section 2.1. PROPERTY -- means any interest in any kind of property or asset, whether real, personal or mixed, and whether tangible or intangible. PURCHASER -- means the Persons listed as purchasers of Notes on Annex 1. QUALIFIED INDEBTEDNESS COVERAGE ASSETS -- means, at any time, the sum (without duplication) of (a) the aggregate Allowable Value of all Real Estate Assets held by the Company and SPHI at such time, plus (b) cash of the Company and SPHI at such time, plus 52 57 (c) Permitted Investments (other than cash and Real Estate Assets) of the Company and SPHI at such time. As used in this definition: Allowable Value -- means, with respect to any Real Estate Asset, the lesser of (i) the Designated Disposition Value of such Real Estate Asset at such time and (ii) the net book value (determined in accordance with GAAP) of such Real Estate Asset at such time. QUALIFIED RESTRICTED PAYMENT ASSETS -- means, at any time, the sum (without duplication) of (a) the lesser of (i) the aggregate Designated Disposition Value of all Real Estate Assets held by the Company and SPHI at such time and (ii) the Reserve for Disposition at such time plus the aggregate net book value (each as determined in accordance with GAAP) of all Real Estate Assets held by the Company and SPHI at such time, plus (b) cash of the Company and SPHI at such time, plus (c) Permitted Investments (other than cash and Real Estate Assets) of the Company and SPHI at such time. As used in this definition: Reserve for Disposition -- means, at any time, the lesser of (i) Twenty-Nine Million Six Hundred Four Thousand Eight Hundred Fifty-Two Dollars ($29,604,852) and (ii) the aggregate amount of reserves for disposition reflected on Annex 4 and attributable to Real Estate Assets owned by the Company and SPHI at such time. REAL ESTATE ASSETS -- means the collective reference to Real Estate Properties and Real Estate Loans. 53 58 REAL ESTATE LOANS -- means loans to be repaid to the Company that are secured by unimproved or improved land with no significant building improvements, which loans are available for sale by the Company. REAL ESTATE PROPERTIES -- means real Properties or investments in real Properties (other than Real Estate Loans) owned by the Company or SPHI and available for sale by the Company or SPHI. REQUIRED HOLDERS -- means, at any time, the holders of at least sixty-six and two-thirds percent (66 2/3%) in principal amount of the Notes at the time outstanding (exclusive of Notes then owned by any one or more of the Parent, the Company, any Subsidiary and any Affiliate). RESTRICTED INVESTMENTS -- means, at any time, all Investments except Permitted Investments. RESTRICTED PAYMENT -- means: (a) any dividend or other distribution, direct or indirect, on account of any shares of capital stock of the Company now or hereafter outstanding, whether in cash or other Property, except a dividend or other distribution payable solely in shares of common stock of the Company, and (b) any redemption, retirement, purchase or other acquisition, direct or indirect, of any shares of capital stock of the Company now or hereafter outstanding, or of any warrants, rights or options to acquire any shares of such stock. S&P -- Section 10.1 (in the definition of "Nationally Recognized Rating Agency"). SCHEDULED INTEREST PAYMENTS -- means, at any time, the sum of (a) all future unpaid scheduled payments of interest in respect of the Notes at such time plus (b) the aggregate amount of all future unpaid scheduled payments of interest in respect of all other Indebtedness of the Company and SPHI outstanding at such time, in each case without application of any "present value" discount thereto and assuming for such calculation that all principal payments on the Notes and such other Indebtedness will be paid in accordance with the regularly scheduled terms. SECURITIES ACT -- means the Securities Act of 1933, as amended. SECURITY -- means "security" as defined by section 2(1) of the Securities Act. 54 59 SELLER NOTE -- means a promissory note received by the Company or SPHI in connection with, and as consideration for, a Transfer of Real Estate Assets and (a) naming the Company or SPHI as the payee, (b) requiring a monthly or a quarterly payment of interest at a per annum rate equal to or greater than the lesser of (i) nine percent (9%), or (ii) the rate of interest publicly announced by Bank of America from time to time as its prime rate at the time of such Transfer, and (c) secured by a perfected first priority Lien in favor of the Company or SPHI in the Real Estate Assets that are the subject of the Transfer related to the delivery of such promissory note. SIGNIFICANT SUBSIDIARY -- means a Subsidiary which is a "Significant Subsidiary" of the Parent within the meaning set forth in Regulation S-X of the Securities and Exchange Commission. SPECIAL COUNSEL -- Section 1.2(b). SPHI -- means Sacramento Properties Holdings, Inc., a California corporation and a wholly-owned subsidiary of the Company. SUBSIDIARY -- means, at any time, a corporation of which the Parent owns, directly or indirectly, more than fifty percent (50%) (by number of votes) of each class of Voting Stock at such time. TRANSFER CONSIDERATION -- means, with respect to any Transfer of any Real Estate Asset, an amount equal to the sum of (a) cash received by the Company or SPHI at the time of such Transfer plus (b) the principal amount of Seller Notes issued to the Company or SPHI at the time of such Transfer. TRANSFER CONTRIBUTION AMOUNT -- means, at any time, an amount equal to the greater of (a) Zero Dollars ($0) and (b) the result of 55 60 (i) the Designated Disposition Value of all Real Estate Assets which shall have been the subject of a Transfer on and after the Closing Date and prior to such time minus (ii) the aggregate Transfer Consideration received by the Company or SPHI in respect of all Real Estate Assets which shall have been the subject of a Transfer on and after the Closing Date and prior to such time. TRANSFERS -- Section 7.10. VOTING STOCK -- means capital stock of any class or classes of a corporation the holders of which are ordinarily, in the absence of contingencies, entitled to elect corporate directors (or Persons performing similar functions). 10.2 GAAP. Where the character or amount of any asset or liability or item of income or expense, or any consolidation or other accounting computation is required to be made for any purpose hereunder, it shall be done in accordance with GAAP as in effect on the date of, or at the end of the period covered by, the financial statements from which such asset, liability, item of income, or item of expense, is derived, or, in the case of any such computation, as in effect on the date as of which such computation is required to be determined, provided, that if any term defined herein includes or excludes amounts, items or concepts that would not be included in or excluded from such term if such term were defined with reference solely to GAAP, such term will be deemed to include or exclude such amounts, items or concepts as set forth herein. 10.3 DIRECTLY OR INDIRECTLY. Where any provision herein refers to action to be taken by any Person, or which such Person is prohibited from taking, such provision shall be applicable whether such action is taken directly or indirectly by such Person, including actions taken by or on behalf of any partnership in which such Person is a general partner. 10.4 SECTION HEADINGS AND TABLE OF CONTENTS AND CONSTRUCTION. (a) SECTION HEADINGS AND TABLE OF CONTENTS, ETC.. The titles of the Sections and the Table of Contents appear as a matter of convenience only, do not constitute a part hereof and shall not affect the construction hereof. The words "herein," "hereof," "hereunder" and "hereto" refer to this Agreement as a whole and not to any particular Section or other subdivision. (b) CONSTRUCTION. Each covenant contained herein shall be construed (absent an express contrary provision herein) as being independent of each other covenant contained herein, and compliance with any one covenant shall not (absent such an express contrary provision) be deemed to excuse compliance with one or more other covenants. 56 61 10.5 GOVERNING LAW. THIS AGREEMENT AND THE NOTES SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, NEW YORK LAW, WITHOUT REFERENCE TO NEW YORK LAW REGARDING CHOICE OF LAW. 11. MISCELLANEOUS 11.1 COMMUNICATIONS. (a) METHOD; ADDRESS. All communications hereunder or under the Notes (i) shall be in writing, (ii) shall be either (A) hand delivered, (B) deposited into the United States mail (registered or certified mail), postage prepaid, (C) sent by overnight courier or (D) electronically transmitted by way of "telecopy" or "fax transmission" and, on the date of such electronic transmission, sent by overnight courier and (iii) shall be addressed, (1) if to the Parent, Alleghany Corporation Park Avenue Plaza New York, New York 10055 Attention: Robert M. Hart, Esq. Facsimile: (212) 759-8149 (2) if to the Company, Alleghany Properties, Inc. 2150 River Plaza Drive Suite 145 Sacramento, California 95833 Attention: Mr. Eric B. Olsen Facsimile: (916) 648-7739 with a copy to: Alleghany Corporation Park Avenue Plaza New York, New York 10055 Attention: Robert M. Hart, Esq. Facsimile: (212) 759-8149 or at such other address as the Parent and/or the Company, as the case may be, shall have furnished in writing to all holders of the Notes at the time outstanding, and (3) if to any of the holders of the Notes, 57 62 (y) if such holders are the Purchasers, at their respective addresses set forth on Annex 1, and further including any parties referred to on such Annex 1 that are required to receive notices in addition to such holders of the Notes, and (z) if such holders are not the Purchasers, at their respective addresses set forth in the register for the registration and transfer of Notes maintained pursuant to Section 6.1, or to any such party at such other address as such party may designate by notice duly given in accordance with this Section 11.1 to the Company (which other address shall be entered in such register). (b) WHEN GIVEN. Any communication so addressed and deposited in the United States mail, postage prepaid, by registered or certified mail (in each case, with return receipt requested) shall be deemed to be received on the third (3rd) succeeding Business Day after the day of such deposit (not including the date of such deposit). Any notice so addressed and otherwise delivered shall be deemed to be received when actually received at the address of the addressee. 11.2 REPRODUCTION OF DOCUMENTS. This Agreement and all documents relating hereto, including, without limitation, (a) consents, waivers and modifications that may hereafter be executed, (b) documents received by you at the closing of your purchase of the Notes (except the Notes themselves), and (c) financial statements, certificates and other information previously or hereafter furnished to you or any other holder of Notes, may be reproduced by any holder of Notes by any photographic, photostatic, microfilm, micro-card, miniature photographic, digital or other similar process and each holder of Notes may destroy any original document so reproduced. The Parent and the Company agree and stipulate that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding (whether or not the original is in existence and whether or not such reproduction was made by such holder of Notes in the regular course of business) and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. Nothing in this Section 11.2 shall prohibit the Parent, the Company or any holder of Notes from contesting the accuracy of any such reproduction. 11.3 SURVIVAL. All warranties, representations, certifications and covenants made by the Parent and the Company herein or in any certificate or other instrument delivered by it or on its behalf hereunder shall be considered to have been relied upon by you and shall survive the delivery to you of the Notes regardless of any investigation made by you or on your behalf. All 58 63 statements in any such certificate or other instrument shall constitute warranties and representations by the Parent and the Company hereunder. 11.4 SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. The provisions hereof are intended to be for the benefit of all holders, from time to time, of Notes, and shall be enforceable by any such holder, whether or not an express assignment to such holder of rights hereunder shall have been made by you or your successor or assign. 11.5 AMENDMENT AND WAIVER. (a) REQUIREMENTS. This Agreement may be amended, and the observance of any term hereof may be waived, with (and only with) the written consent of the Parent, the Company and the Required Holders; provided that no such amendment or waiver of any of the provisions of Section 1 through Section 5, inclusive, or any defined term used therein, shall be effective as to any holder of Notes unless consented to by such holder in writing; and provided further that no such amendment or waiver shall, without the written consent of the holders of all Notes (exclusive of Notes held by the Parent, the Company, any Subsidiary or any Affiliate) at the time outstanding, (i) subject to Section 9, change the amount or time of any prepayment or payment of principal or Make-Whole Amount or the rate or time of payment of interest, (ii) amend Section 9, (iii) amend the definition of Required Holders, or (iv) amend this Section 11.5. The holder of any Note may specify that any such written consent executed by it shall be effective only with respect to a portion of the Notes held by it (in which case it shall specify, by dollar amount, the aggregate principal amount of Notes with respect to which such consent shall be effective) and in the event of any such specification such holder shall be deemed to have executed such written consent only with respect to the portion of the Notes so specified. (b) SOLICITATION OF NOTEHOLDERS. (i) SOLICITATION. Neither the Parent nor the Company shall solicit, request or negotiate for or with respect to any proposed waiver or amendment of any of the provisions hereof or the Notes unless each holder of the Notes (irrespective of the amount of Notes then owned by it) shall be provided by the Parent or the Company with sufficient information to enable it to make an informed decision with respect thereto. Executed or true and correct copies of 59 64 any waiver or consent effected pursuant to the provisions of this Section 11.5 shall be delivered by the Parent or the Company to each holder of outstanding Notes immediately following the date on which the same shall have been executed and delivered by all holders of outstanding Notes required to consent or agree to such waiver or consent. (ii) PAYMENT. The Parent and the Company shall not, directly or indirectly, pay or cause to be paid any remuneration, whether by way of supplemental or additional interest, fee or otherwise, or grant any security, to any holder of Notes as consideration for or as an inducement to the entering into by any holder of Notes of any waiver or amendment of any of the terms and provisions hereof unless such remuneration is concurrently paid, or security is concurrently granted, on the same terms, ratably to the holders of all Notes then outstanding. (iii) SCOPE OF CONSENT. Any consent made pursuant to this Section 11.5 by a holder of Notes that has transferred or has agreed to transfer its Notes to the Parent, the Company, any Subsidiary or any Affiliate and has provided or has agreed to provide such written consent as a condition to such transfer shall be void and of no force and effect except solely as to such holder, and any amendments effected or waivers granted or to be effected or granted that would not have been or would not be so effected or granted but for such consent (and the consents of all other holders of Notes that were acquired under the same or similar conditions) shall be void and of no force and effect, retroactive to the date such amendment or waiver initially took or takes effect, except solely as to such holder. (c) BINDING EFFECT. Except as provided in Section 11.5(b), any amendment or waiver consented to as provided in this Section 11.5 shall apply equally to all holders of Notes and shall be binding upon them and upon each future holder of any Note and upon the Parent and the Company whether or not such Note shall have been marked to indicate such amendment or waiver. No such amendment or waiver shall extend to or affect any obligation, covenant, agreement, Default or Event of Default not expressly amended or waived or impair any right consequent thereon. 11.6 PAYMENTS, WHEN RECEIVED. (a) PAYMENTS DUE ON HOLIDAYS. If any payment due on, or with respect to, any Note shall fall due on a day other than a Business Day, then such payment shall be made on the first Business Day following the day on which such payment shall have so fallen due; provided that if all or any portion of such payment shall consist of a payment of interest, for purposes of calculating such interest, such payment shall be deemed to have been originally due on such first following Business Day, such interest shall accrue and be payable to (but not including) the actual date of payment, and the amount of the next succeeding interest payment shall be adjusted accordingly. (b) PAYMENTS, WHEN RECEIVED. Any payment to be made to the holders of Notes hereunder or under the Notes shall be deemed to have been made on the 60 65 Business Day such payment actually becomes available to such holder at such holder's bank prior to 1:00 p.m. (Eastern time). 11.7 ENTIRE AGREEMENT. This Agreement constitutes the final written expression of all of the terms hereof and is a complete and exclusive statement of those terms. 11.8 DUPLICATE ORIGINALS, EXECUTION IN COUNTERPART. Two or more duplicate originals hereof may be signed by the parties, each of which shall be an original but all of which together shall constitute one and the same instrument. This Agreement may be executed in one or more counterparts and shall be effective when at least one counterpart shall have been executed by each party hereto, and each set of counterparts which, collectively, show execution by each party hereto shall constitute one duplicate original. [REMAINDER OF PAGE INTENTIONALLY BLANK. NEXT PAGE IS SIGNATURE PAGE.] 61 66 If this Agreement is satisfactory to you, please so indicate by signing the acceptance at the foot of a counterpart hereof and returning such counterpart to the Company, whereupon this Agreement shall become binding between us in accordance with its terms. Very truly yours, ALLEGHANY CORPORATION By /s/ David B. Cuming Name: David B. Cuming Title: Senior Vice President ALLEGHANY PROPERTIES, INC. By /s/ David B. Cuming Name: David B. Cuming Title: President Accepted: HARTFORD LIFE INSURANCE COMPANY SEPARATE ACCOUNT CRC By /s/ Andrew W. Kohnke Name: Andrew W. Kohnke Title: Vice President [SIGNATURE PAGE FOR THE NOTE PURCHASE AGREEMENT IN CONNECTION WITH THE ISSUANCE OF THE 8.62% SENIOR NOTES OF ALLEGHANY PROPERTIES, INC.] EX-10.28.B 11 LIST OF CONTENTS OF ANNEXES AND EXHIBITS 1 Exhibit 10.28(b) LIST OF ANNEXES 1 Information as to Purchasers 2 Payment Instructions at Closing 3 Information as to Company 4 Designated Disposition Values and Reserves for Disposition LIST OF EXHIBITS A Form of 8.62% Senior Note Due February 23, 2000 B1 Form of Company Counsel's Closing Opinion B2 Form of Special Counsel's Closing Opinion C1 Form of Officers' Certificate - Parent C2 Form of Officers' Certificate - Company D1 Form of Secretary's Certificate - Parent D2 Form of Secretary's Certificate - Company EX-10.31.F 12 LETTER AGREEMENT DATED DEC. 14, 1994 1 Exhibit 10.31(f) [ON CONTINENTAL BANK LETTERHEAD] December 13, 1994 Chicago Title and Trust Company of Chicago 171 N. Clark Street Chicago, IL 60601-3294 Attention: Mr. A. Larry Sisk Vice President and Treasurer Re: Transfer of Continental Bank's Risk Management Business to Bank of America NT&SA Dear Mr. Sisk: This letter will (1) update the information provided to your organization by Continental Bank Executive Vice President Kenneth W. Cunningham in his letter dated August 17, 1994 regarding the status of the merger of Continental Bank Corporation ("CBC") into BankAmerica Corporation ("BankAmerica"), (2) inform you of the planned transfer and assignment of the risk management business of CBC's banking subsidiary Continental Bank (formerly known as Continental Bank, N.A. and renamed Bank of America Illinois but referred to herein as "Continental Bank") to BankAmerica's largest banking subsidiary Bank of America National Trust and Savings Association ("Bank of America") and (3) request your consent to, among other things, the transfer and assignment to Bank of America of your Risk Management Contracts (as defined below) with Continental Bank. As you may know, in January 1994, BankAmerica and CBC announced they had reached a definitive agreement providing for BankAmerica's acquisition of CBC and its banking subsidiary Continental Bank. On July 18, 1994, the transaction was approved by the Federal Reserve Board. The transaction was completed on August 31, 1994, effective September 1, 1994 (the "Completion Date"). As of June 30, 1994, Bank of America was the second largest bank in the United States, with assets of $146 billion and total equity capital of $11.4 billion. Bank of America is a major 2 provider of risk management products and services through its offices located throughout the world. The existing risk management business of Continental Bank is currently being transferred to Bank of America. After Bank of America has received your acknowledgment of, and agreement and consent to, the terms outlined in this letter, Bank of America will notify you of the date scheduled for the transfer (the "Transfer Date") to Bank of America of all of your then outstanding cross currency swaps, forward rate agreements, interest rate swaps, currency options, currency swaps, cap, floor and collar contracts, interest rate options, commodity and equity swaps and options, swaptions and other similar products (collectively, "Risk Management Contracts"). On the Transfer Date, Continental Bank will assign and transfer to Bank of America, and Bank of America will fully assume and agree to perform, as if it were an original party to the contracts, all of your Risk Management Contracts. Accompanying this letter is a letter from Bank of America notifying you of its intent to assume all obligations and liabilities of Continental Bank under such Risk Management Contracts entered into pursuant to (1) your most recently executed International Swap Dealers Association Master Agreement, Interest Rate and Currency Exchange Agreement or Interest Rate Agreement with Continental Bank (collectively, the "Continental Master Agreement") and (2) any other agreement or arrangement pertaining to Risk Management Contracts ("Other Continental Agreements"). Risk Management Contracts transferred to Bank of America will be booked in San Francisco except for those denominated in a currency other than U.S. dollars which will be booked in Bank of America's branch in London. The Continental Master Agreement incorporates by reference certain covenants and events of default from that certain Credit Agreement, dated as of March 28, 1991, among Chicago Title and Trust Company of Chicago, certain commercial lending institutions as lenders therein and Continental Bank as agent, (as the same may be amended, modified or supplemented from time to time). It is anticipated that such covenants and events of default as are incorporated by reference in the Continental Master Agreement will inure to the benefit of Bank of America with respect to the Assigned Contracts (as defined below) and will also be applicable to any Risk Management Contracts entered into between you and Bank of America in the future. Continental Bank hereby requests your agreement and consent (1) to the transfer and assignment by Continental Bank to Bank of America on the Transfer Date of all of the then outstanding Risk Management Contracts between you and Continental Bank (the "Assigned Contracts"), (2) to the assumption by Bank of America of all of Continental Bank's obligations with respect to the -2- 3 Assigned Contracts, (3) to the unconditional release of Continental Bank from all obligations and liabilities with respect to the Assigned Contacts, (4) to the assignment to Bank of America of, and the substitution of Bank of America as the counterparty under, the Continental Master Agreement and any other Continental Agreements and, (5) that the covenants and events of default incorporated by reference in the Continental Master Agreement inure to the benefit of Bank of America as if it were the original counterparty to the Assigned Contracts and the Continental Master Agreement. After the Transfer Date, unless the confirmation relating to a Risk Management Contract specifically provides otherwise, all existing Risk Management Contracts will continue to be governed by the Continental Master Agreement, and Bank of America will have all the same interests, rights and benefits as those enjoyed by Continental Bank prior to the Transfer Date. Other Continental Agreements shall continue to be governed by the terms of such agreements except for the substitution of Bank of America in place of Continental Bank. Unless otherwise provided in a confirmation relating to a future Risk Management Contract, after the Transfer Date, the Continental Master Agreement will govern all future Risk Management Contracts, modified to reflect Bank of America's offices designated for trading. Continental Bank also hereby requests your acknowledgment that, upon such transfer, all of your obligations and liabilities under the Continental Master Agreement, the Other Continental Agreements and the Assigned Contracts will be transferred to Bank of America and thereafter will be owed by you solely to Bank of America, not to Continental Bank. On the Transfer Date, you will be automatically unconditionally released by Continental Bank from all of your obligations and liabilities owed to it with respect to the Assigned Contracts and you will thereafter owe those obligations and liabilities solely to Bank of America. Please confirm your acknowledgment of, and agreement and consent to, the above by signing both enclosed copies of this letter where indicated below and returning one signed copy to Mary Beth Knight. Please retain this copy for your files. WE WOULD GREATLY APPRECIATE YOUR REPLY AS SOON AS POSSIBLE. Your counterparty for all new Risk Management Contracts executed on and after the Completion Date will be Bank of America. Approximately ten days prior to the Transfer Date, you will receive under separate cover, notice of the Transfer Date, Bank of America's standard settlement instructions, information regarding Bank of America's risk management operations and procedures, and a request for your settlement instructions. Although Bank of America will handle your risk management business in the future, other transactions you may have with Continental Bank may remain at Continental Bank, which, as mentioned above, has been renamed Bank of America Illinois. By -3- 4 your acknowledgment, agreement and consent below, you also agree that BankAmerica and any of its various subsidiaries (including Continental Bank) handling your business after the merger may share with each other credit and other relevant information about your business and operations. If you have any questions regarding this matter, please do not hesitate to call Mary Beth Knight of Continental Bank at (312) 828-2041, Ken Wiersum of Continental Bank at (312) 828-5213 or Jerry Bolick of Bank of America at (415) 622-3227. Thank you for your prompt attention to this matter. Very truly yours, BANK OF AMERICA ILLINOIS By: /s/ Kenneth Wiersum -------------------------- Title: Vice President ------------------ Acknowledged, agreed and consented to this 25 day of January, 1995. CHICAGO TITLE AND TRUST COMPANY OF CHICAGO By: /s/ A. Larry Sisk ---------------------------------- Title: Vice President & Treasurer -------------------------- Enclosure -4- 5 [ON BANK OF AMERICA LETTERHEAD] December 13, 1994 Chicago Title and Trust Company of Chicago 171 N. Clark Street Chicago, Illinois 60601-3294 Attention: Mr. A. Larry Sisk Vice President and Treasurer Re: Notice of Assumption by Bank of America National Trust and Savings Association ("Bank of America") of certain Risk Management Contracts Dear Mr. Sisk: Continental Bank has requested your agreement and consent to the planned transfer and assignment to Bank of America of the Assigned Contracts, the Continental Master Agreement and the Other Continental Agreements (modified to reflect Bank of America's offices designated for trading), and the substitution of Bank of America for Continental Bank as the counterparty thereunder (capitalized terms used herein are defined in the preceding letter to you from Continental Bank). Continental Bank has also requested your acknowledgment that, upon such transfer, all of your obligations and liabilities under the Continental Master Agreement, the Other Continental Agreements and the Assigned Contracts will be transferred to Bank of America and thereafter will be owed by you to Bank of America, not to Continental Bank. If you agree and consent to these transfers and acknowledge that, upon such transfer, your obligations and liabilities will be owed to Bank of America, then Bank of America intends, as of the Transfer Date, to assume all the obligations and liabilities of Continental Bank under such agreements. Please do not hesitate to call Jerry Bolick of Bank of America at (415) 622-3227 if you have any questions regarding the foregoing. Very truly yours, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ John Staecchett ---------------------------- Title: Senior Authorized Officer ------------------------- EX-13 13 PAGES 2 - 4, 6 - 15 AND 19 - 41 OF ANNUAL REPORT 1 Exhibit 13 TO OUR STOCKHOLDERS In 1994 Alleghany Corporation's net earnings reached a record level for the third consecutive year: $137.5 million, or $20.12 per share, compared with $97.6 million, or $14.37 a share, in 1993. Financial highlights of both years are summarized in the first table on page 5 of this report. The excellent 1994 results are due in large part to the sale in October of Alleghany's retail banking subsidiary, Sacramento Savings Bank, for $331 million in cash. Net earnings in 1994 included $69.1 million, or $10.12 per share, representing the gain on the sale (net of transaction-related expenses, taxes and provisions related to real estate assets retained by Alleghany), and Sacramento Savings' earnings prior to the sale. Net earnings in 1993 reflect a credit of $20 million, or $2.94 a share, resulting from an adjustment of Alleghany's tax reserves. This adjustment was explained in detail in our 1993 Annual Report to Stockholders. Alleghany's principal operating unit, Chicago Title and Trust Company, recorded pre-tax earnings in 1994 that were the second highest in its history. However, those earnings represent a 26 percent drop from 1993's record established with the help of a record level of refinancings. Beginning in February 1994, the Federal Reserve Board implemented a series of increases in short-term interest rates, bringing to an abrupt end one of the longest refinancing surges in history. While the decline in refinancing activity was partially offset by a healthy increase in conventional sales and resales and by a modest improvement in commercial real estate activity, the overall industry-wide decline in revenues and volume of orders from 1993 to 1994 was the steepest downturn the industry experienced since it began keeping those statistics in the early 1960's. Interest rates have continued to rise, further depressing real estate markets. Thus far in 1995, title These graphs illustrate the experience of a hypothetical investor who purchased "old" Alleghany common stock in 1967 and, throughout the period 1967-94, retained his investment together with all dividends and other distributions received as a result of the investment. Although values are shown on a per-share basis (i.e., per share of old Alleghany common stock acquired in 1967), it is assumed that the investor's holdings were such that all distributions of stock were received in whole shares (without cash in lieu of fractions). The distributions reflected in the graphs consist of (1) cash dividends paid from 1967 through 1983, (2) annual 2% stock dividends paid from 1985 through 1994, (3) cash distributed upon the liquidation of old Alleghany on December 31, 1986, (4) common stock of new Alleghany distributed in the same transaction, (5) common stock of Cyclops Industries, Inc., which was spun off to new Alleghany's stockholders in 1987, and (6) cash and common stock of Armco Inc. distributed upon the merger of Cyclops into a wholly owned subsidiary of Armco in 1992. The graphs do not reflect any earnings resulting from reinvestment of cash distributions or taxes payable with respect thereto. COMMON STOCKHOLDERS' EQUITY PER SHARE AT YEAR-END (IN DOLLARS)
Old New Alleghany Alleghany Cyclops Armco Cash Total --------- --------- ------- ----- ----- ------ 1967 15.61 -- -- -- 0.20 15.81 1968 20.03 -- -- -- 0.40 20.43 1969 15.02 -- -- -- 0.67 15.69 1970 15.47 -- -- -- 0.87 16.34 1971 17.68 -- -- -- 1.07 18.75 1972 18.12 -- -- -- 1.35 19.47 1973 15.95 -- -- -- 1.71 17.66 1974 21.60 -- -- -- 2.16 23.76 1975 21.38 -- -- -- 2.66 24.04 1976 22.71 -- -- -- 3.41 26.12 1977 24.34 -- -- -- 4.46 28.80 1978 26.59 -- -- -- 5.51 32.10 1979 30.55 -- -- -- 6.56 37.11 1980 33.38 -- -- -- 7.64 41.02 1981 37.32 -- -- -- 8.72 46.04 1982 42.56 -- -- -- 9.80 52.36 1983 46.91 -- -- -- 10.88 57.79 1984 75.47 -- -- -- 10.88 86.35 1985 88.72 -- -- -- 10.88 99.60 1986 -- 81.11 -- -- 55.67 136.78 1987 -- 85.71 -- -- 55.67 141.38 1988 -- 93.49 5.28 -- 55.67 154.44 1989 -- 105.77 11.00 -- 55.67 172.44 1990 -- 116.57 10.55 -- 55.67 182.79 1991 -- 130.09 4.50 -- 55.67 190.26 1992 -- 142.74 -- 2.68 67.34 212.76 1993 -- 165.15 -- -- 67.34 232.49 1994 -- 180.24 -- -- 67.14 247.38
MARKET VALUE OF STOCK AND CASH AT YEAR-END (IN DOLLARS)
Old New Alleghany Alleghany Cyclops Armco Cash Total --------- --------- ------- ----- ----- ------ 1967 13.75 -- -- -- 0.20 13.95 1968 23.50 -- -- -- 0.40 23.90 1969 13.25 -- -- -- 0.67 13.92 1970 11.50 -- -- -- 0.87 12.37 1971 13.62 -- -- -- 1.07 14.69 1972 14.37 -- -- -- 1.35 15.72 1973 9.75 -- -- -- 1.71 11.46 1974 6.62 -- -- -- 2.16 8.78 1975 7.50 -- -- -- 2.66 10.16 1976 12.87 -- -- -- 3.41 16.28 1977 15.25 -- -- -- 4.46 19.71 1978 21.50 -- -- -- 5.51 27.01 1979 27.00 -- -- -- 6.56 33.56 1980 33.00 -- -- -- 7.64 40.64 1981 48.50 -- -- -- 8.72 57.22 1982 49.62 -- -- -- 9.80 59.42 1983 63.87 -- -- -- 10.88 74.75 1984 77.62 -- -- -- 10.88 88.50 1985 90.14 -- -- -- 10.88 101.02 1986 -- 70.23 -- -- 55.67 125.90 1987 -- 76.94 26.80 -- 55.67 159.41 1988 -- 76.85 24.81 -- 55.67 157.33 1989 -- 101.02 33.96 -- 55.67 190.65 1990 -- 95.86 11.94 -- 55.67 163.47 1991 -- 127.50 20.43 -- 55.67 203.60 1992 -- 156.71 -- 14.25 67.34 238.30 1993 -- 171.50 -- 12.93 67.34 251.77 1994 -- 185.29 -- 13.99 67.14 266.42
2 2 orders and activity have been at low levels and, absent an improvement in real estate markets, Chicago Title's 1995 first quarter earnings are likely to be materially lower than the record established in the first quarter of 1994; 1995 full year results are also expected to be lower than in 1994. Management of Chicago Title will have a real challenge to keep costs in line with this reduced volume of available business. Alleghany's other major operating businesses - Underwriters Reinsurance Company and World Minerals Inc. - recorded higher pre-tax earnings in 1994 than in the prior year. Underwriters completed its first full year as part of the Alleghany group of companies with pre-tax earnings of $8.6 million. These results reflect modest increases in written premiums despite highly competitive reinsurance markets, and commendable underwriting discipline by Underwriters' management. World Minerals deserves special mention. After struggling with sluggish demand in 1992 and 1993, World Minerals more than doubled its pre-tax earnings contribution to Alleghany in 1994. These results reflect not only stronger economic activity in the markets served by World Minerals, but also the benefits of strategic acquisitions and capital spending projects, an intense focus on marketing and customer service and rigorous efforts to improve production efficiencies and achieve other cost reductions. The comparative contributions to Alleghany's earnings from continuing operations before income taxes made by these operating units and by Alleghany's parent-company operations were as follows (in millions):
- ------------------------------------------------------------------------------- Year Ended Quarter Ended December 31 December 31 - ------------------------------------------------------------------------------- 1994 1993 1994 1993 - ------------------------------------------------------------------------------- Chicago Title $65.7 $88.6 $16.1 $27.3 Underwriters 8.6 3.0 5.7 3.0 World Minerals 18.2 8.2 5.2 1.7 Parent company 0.5 (10.3) (7.9) (4.4) - ------------------------------------------------------------------------------- Earnings from continuing operations, before income taxes $93.0 $89.5 $19.1 $27.6 ===============================================================================
Sacramento Savings, founded in 1874, had been a valuable contributor to Alleghany's results since its acquisition in 1989. While struggling in recent years with the effects of a local real estate recession and with increasingly burdensome regulatory restrictions, Sacramento Savings maintained its premier franchise in northern California. First Interstate Bank of California saw the strategic value of this unique franchise, and proposed a transaction that we concluded was in Alleghany's best interests. We extend our sincere gratitude to William G. Hegg, who served as President, David L. Crespi, who served as Executive Vice President, the other members of the management team and all of the employees of Sacramento Savings for their dedicated service to Sacramento Savings and cooperation in completing the sale. For the ten months that Sacramento Savings was part of Alleghany in 1994, Sacramento Savings contributed to Alleghany pre-tax earnings of $11.3 million on revenues of $150.3 million, compared with $29.6 million on revenues of $210.3 million in 1993 and $34.1 million on revenues of $239.6 million in 1992. Returning to its roots in the railroad industry, in 1994 Alleghany acquired a substantial investment position in Santa Fe Pacific Corporation, totalling 18.1 million shares, or about 11.8 percent of Santa Fe's outstanding common stock, as of March 1, 1995. Santa Fe stock represented, in our view, a unique long-term investment opportunity, and this was validated by a contest waged during the fall and winter between Burlington Northern Inc. and Union Pacific Corp. to acquire Santa Fe. Burlington Northern won the contest and stockholders of Burlington Northern and Santa Fe approved the proposed merger in February. It is awaiting approval by the Interstate Commerce Commission. Based on its current holdings, Alleghany would own about 4.8 percent of the combined companies upon consummation of the merger. Alleghany supported the Santa Fe/Burlington Northern merger proposal because it saw an attractive opportunity to participate in the long-term growth of Santa Fe and 3 3 the enhanced value of a combined Santa Fe/ Burlington Northern. Our Santa Fe shares were acquired at a cost of $251.3 million and, on March 1, 1995, had a market value of $381.6 million. Another significant accomplishment in 1994 was the enhancement of Underwriters' financial strength with Alleghany's contribution of $100 million in shares of Santa Fe. As of December 31, 1994, Underwriters' statutory surplus was $361 million, making Underwriters the twelfth largest domestic professional reinsurer in terms of statutory surplus at 1994 year-end, according to the Reinsurance Association of America. This augmented financial strength is particularly important to Underwriters in light of the trend toward consolidation in the reinsurance market. After many years of dedicated service to Alleghany, John E. Conway, Vice President, Secretary and Treasurer, and Theodore E. Somerville, Vice President and General Counsel, retired in the past year. Robert M. Hart, a partner of the law firm of Donovan Leisure Newton & Irvine who has worked closely with Alleghany for over two decades, became Senior Vice President, General Counsel and Secretary. Peter R. Sismondo, Vice President, Controller and Assistant Secretary, took on the additional role of Treasurer. We also added two Vice Presidents: Benson J. Chapman, previously a partner with KPMG Peat Marwick LLP, and Jefferson W. Kirby, formerly director of corporate development of Alleghany. Alleghany common stockholders' equity per share was $147.86 at 1994 year-end. Common stockholders' equity per share at 1993 year-end was $135.48, after adjustment to reflect dividends paid in common stock. We had another excellent year in 1994 thanks in large measure to the dedicated efforts of people at all levels of our organization. To all of the directors, officers and employees of the Alleghany family of companies, we express sincere thanks for their many contributions in 1994. Yours sincerely, /s/ John J. Burns, Jr. /s/ F.M. Kirby President Chairman of the Board March 15, 1995 JOHN J. BURNS, JR., PRESIDENT F.M. KIRBY, CHAIRMAN [PHOTO -- SEE EDGAR APPENDIX] [PHOTO -- SEE EDGAR APPENDIX] 4 4 CHICAGO TITLE AND TRUST COMPANY Headquartered in Chicago, CT&T is engaged in the sale and underwriting of title insurance through the CT&T Family of Title Insurers, consisting of Chicago Title Insurance Company, Security Union Title Insurance Company and Ticor Title Insurance Company and their respective subsidiaries. The CT&T Family of Title Insurers is the largest title insurance organization in the world, with approximately 250 full-service offices, 7,650 employees and more than 3,500 policy-issuing agents in 49 states, Puerto Rico, the Virgin Islands and Canada. CT&T contributed pre-tax earnings of $65.7 million on revenues of $1.35 billion in 1994, the second best year in CT&T's history despite a 26 percent drop in pre-tax earnings from 1993's record of $88.6 million on record revenues of $1.4 billion. CT&T's pre-tax earnings in 1992 totalled $85.8 million on revenues of $1.35 billion, but included a one-time gain of $22.6 million representing its share of a recovery in litigation against California Canadian Bank. (The beneficial effect of this recovery on Alleghany's net earnings was almost entirely offset by tax provisions and other previously anticipated charges.) BELOW: CHICAGO TITLE, TICOR TITLE AND SECURITY UNION BELONG TO THE CT&T FAMILY OF TITLE INSURERS. POLICYHOLDERS' PROTECTION ($ IN MILLIONS) SURPLUS PLUS STATUTORY PREMIUM RESERVE OF TEN TITLE INSURERS AT SEPTEMBER 30, 1994 Chicago Title $382.2 First American 336.5 Commonwealth 280.7 Lawyers 256.0 Stewart 221.3 Old Republic 194.8 Ticor Title 172.3 Transamerica 100.8 Fidelity National 86.3 Security Union 66.4
Beginning in February 1994, the Federal Reserve Board implemented a series of increases in short-term interest rates in an effort to forestall inflation. This action brought to an abrupt end one of the longest refinancing surges in history. Such refinancings accounted for about 13 percent of title revenues in 1994 (mostly in the first quarter), compared with 26 percent in 1993 and 21 percent in 1992. While the decline in refinancing activity in 1994 was partially offset by a 10.1 percent increase from 1993 in revenues from conventional sales and resales and by a modest improvement in commercial real estate activity, the overall industry-wide decline in revenues and volume of orders from 1993 to 1994 was the steepest downturn the industry experienced since it began keeping those statistics in the early 1960's. CT&T's 1994 revenues included a larger contribution from its agency operations (as distinguished from its company-owned offices) than in prior years, and the resulting increase in agents' commission expenses caused a significant decrease in profit margins. Although CT&T experienced a 26 percent drop in pre-tax earnings in 1994 compared with 1993, this was by far the smallest year-to-year earnings drop of any of CT&T's principal competitors. CT&T's substantial investment in automation enabled it to handle the surge in refinancings with a more modest increase in staffing levels. CT&T also benefitted from a more even geographic distribution of its business, and was well positioned to exploit the modest improvement in commercial activity. CT&T has responded quickly to bring costs into line with its reduced revenues. In particular, CT&T's workforce levels have been reduced by 12 percent from the peak levels reached in March 1994, and are now at their lowest point since the acquisition of Ticor Title Insurance Company in March 1991. Interest rates have continued to rise in 1995, further depressing real estate markets. Thus far in 1995, title orders have been at a low level and, absent an improvement in real estate markets, CT&T's 1995 first quarter earnings are likely to be materially lower than the record established 6 5 in the first quarter of 1994; 1995 full year earnings are also expected to be lower than in 1994. The first priority of CT&T's management in 1995 will be to keep costs in line with the anticipated reduced volume of title business. As CT&T's title insurance operations have grown, CT&T has sought to improve the effectiveness and efficiency of the company as a whole. One initiative was the development and implementation of Quest for Excellence, a customer-focused assessment of product quality. This project identified issues that are important to CT&T's customers in their relationships with CT&T, and provided training and support to CT&T's personnel to enable them to be more responsive to their customers' title insurance needs. In late 1994, CT&T's title insurance operations were realigned to improve CT&T's service to customers at both the local and national levels. The CT&T Family of Title Insurers' nationwide network of branch office and agency operations was restructured into eight geographic areas: the Northeast, Southeast, Great Lakes, Southwest, Chicago Central, Chicago Metro and Pacific Northwest regions, and the Western division. CT&T also restructured its national operations organization in 1994 to address emerging market trends reflecting the increasing importance of national residential lenders, and regional and THE CT&T FAMILY OF TITLE INSURERS IS THE LARGEST TITLE INSURANCE ORGANIZATION IN THE WORLD, WITH APPROXIMATELY 250 FULL-SERVICE OFFICES AND MORE THAN 3,500 POLICY-ISSUING AGENTS IN 49 STATES, PUERTO RICO, THE VIRGIN ISLANDS AND CANADA. [MAP -- SEE EDGAR APPENDIX] CT&T LOCATIONS Corporate headquarters: Chicago, IL Principal offices: Chicago, IL New York, NY Portland, OR Rosemead, CA Regional offices: Chicago, IL Cleveland, OH Dallas, TX New York, NY Seattle, WA West Palm Beach, FL Western division office: Rosemead, CA Area offices: Buffalo, NY Riverhead, NY Iselin, NJ Boston, MA McLean, VA Phoenix, AZ San Francisco, CA Irvine, CA Rosemead, CA Fresno, CA Sacramento, CA San Luis Obispo, CA Field offices:* Alabama Birmingham Arizona Tucson California Bakersfield Bishop Cameron Park El Centro Fairfield Hanford
- -------------------- * Some locations have more than one office for CTI, Ticor Title and/or Security Union. California (continued) Hayward Los Angeles Madera Mammoth Lakes Merced Modesto Napa Quincy Red Bluff Redding Redwood City Riverside Roseville Salinas San Bernardino San Diego San Jose Santa Barbara Santa Rosa Stockton Susanville Ventura Visalia Walnut Creek West Sacramento Connecticut Danbury Hartford Stamford Delaware Dover Wilmington Florida Ft. Lauderdale Ft. Myers Jacksonville Kissimmee Madeira Beach Merritt Island Miami Orlando Sarasota Stuart Tampa West Palm Beach Georgia Atlanta Idaho Boise Illinois Arlington Heights Aurora Belleville Champaign Chicago Crystal Lake Edwardsville Geneva Hillside Joliet Libertyville Mt. Vernon Naperville Northbrook Oak Brook Oak Forest Oak Lawn Orland Park Park Ridge Peoria Schaumburg Skokie South Holland Springfield St. Charles Sycamore Vernon Hills Waukegan Wheaton Woodstock Yorkville Indiana Crown Point Franklin Indianapolis Michigan City Valparaiso Kansas Olathe Kentucky Louisville Maryland Baltimore Rockville Towson Michigan Southfield Minnesota Boon Rapids Bloomington Eden Prairie Minneapolis Missouri Kansas City Liberty Montana Billings Great Falls New Hampshire Bedford New Jersey East Brunswick Freehold Hackensack Morristown Northfield Roseland Toms River Union New York Albany Bath Lockport Lyons Mineola Oswego Rochester Syracuse White Plains North Carolina Charlotte Greensboro Raleigh Winston-Salem Ohio Akron Cincinnati Cleveland Columbus Dayton Dublin Hesterville Painesville Oregon Astoria Blackamas Coos Bay Covallis Dallas McMinnville Oregon City Portland Salem Seaside St. Helens Tillamook Pennsylvania Philadelphia Pittsburgh Rhode Island Providence South Carolina Columbia Tennesee Memphis Nashville Texas Amarillo Dallas El Paso Houston San Antonio Virginia Arlington Newport News Richmond Washington Bellingham Ephrata Everett Kennewick Longview Ritzville Seattle Tacoma Vancouver Wisconsin Milwaukee Waukesha Washington, DC
7 6 national players in the commercial market. Among these trends is the preference among national residential lenders for bundled services from suppliers as a means of reducing costs and enhancing efficiency. Accordingly, a new national Mortgage Services Unit was established to develop and provide a range of ancillary mortgage services including appraisals, flood plain certifications, and credit reports. To meet more effectively the needs of national commercial customers, the National Business Unit and National Title Services offices were restructured and now report centrally to an expanded corporate marketing operation. These offices, which serve as a one-stop source of title services for both single-site and multi-site commercial and industrial real estate ventures, generated $55.5 million in revenues in 1994, up 20 percent from 1993. Other business components of the national operations organization include the National Accounts Unit, a one-stop source for national residential lenders and low liability commercial accounts, which more than doubled its revenues in 1994 to $6.6 million; and SAFETRANS, which provides one-stop title services to employee relocation firms and which posted 1994 revenues of $5.0 million in 1994, representing a 20 percent increase from 1993. CT&T's title insurance operations in the state of California have inaugurated Action'95, an ambitious program to create a customer-focused organization that better insulates CT&T's California operation from market cycles, while enhancing the operation's profitability and competitive position. The financial strength of title insurers has become an increasingly important factor in title insurance purchase decisions, particularly in multi-site transactions and in investment decisions regarding real estate-related investment vehicles such as real estate investment trusts and real estate mortgage investment conduits. CT&T's principal title insurance subsidiaries each carry a claims-paying ability rating of "A-" from Standard & Poor's Corporation and a rating of "A" from Duff & Phelps Credit Rating Co. CT&T paid cash dividends to Alleghany totalling $235.5 million in 1993 (most of which was used for Alleghany's acquisition of Underwriters) and $66.5 million in 1994. Combined cash and marketable securities, as reflected in insurance regulatory filings, were $620.1 million at 1994 year-end, representing a decline of about $35 million from $655.2 million at 1993 year-end, and a decline of about $174.5 million from $794.6 million at 1992 year-end. The strong results posted by CT&T in 1993 and 1994 helped to minimize the decline in cash and marketable securities, which produce investment income that mitigates the cyclical nature of title operations. CT&T's combined statutory premium reserves, as reflected in insurance regulatory filings, totalled $376 million in 1994, compared with $365.6 million in 1993 and $354.5 million in 1992. As of December 31, 1994, CT&T's largest title insurance subsidiary - Chicago Title Insurance Company - had a statutory liquidity ratio of more than 1.0, indicating that its statutory premium reserves and surplus as regards policyholders were more than covered by its cash and marketable securities. Title insurance loss reserves at 1994 year-end were at their strongest level ever, $536.1 million (based on generally accepted accounting principles). More than seven times the estimated amount of claims then in process, these reserves reflect continued conservatism in CT&T's reserving methods, as well as a significant decline in claims payments resulting from more stringent underwriting standards and quality controls over the past several years. CT&T'S FINANCIAL SERVICES GROUP CT&T is a qualified Illinois trust company and conducts certain other financial services businesses through its Financial Services Group. This group includes Montag & Caldwell, Inc., an Atlanta-based investment counseling firm acquired by Alleghany in July 1994 and subsequently contributed to CT&T. The Financial Services Group comprises six businesses: - - The institutional investment management group manages equity and fixed income institutional assets primarily for employee benefit plans, foundations and insurance companies. 8 7 - - The employee benefits services group offers profit sharing plans, matching savings plans, money purchase pensions and consulting services, and 401(k) salary deferral plans to mid-sized companies in the upper Midwest and South. - - The personal trust and investment services group provides investment management and trust and estate planning services primarily for accounts in the $250,000 to $15 million range. - - The real estate trust services group offers land trusts which permit real estate to be conveyed to a trustee while reserving to the beneficiaries the full management and control of the property. This group also facilitates tax-deferred exchanges of income-producing real property. - - Montag & Caldwell, founded in 1945, manages equity, fixed income and balanced portfolios for institutional, corporate and individual investors. As of December 31, 1994, Montag & Caldwell managed assets totalling $3.22 billion. - - In December 1993, CT&T received clearance from the Securities and Exchange Commission to establish a new investment management company, CT&T Funds. Currently, CT&T Funds offers seven no-load, open-end mutual funds to the general public: the CT&T Growth and Income Fund, the Montag & Caldwell Growth Fund, the CT&T Talon Fund, the Montag & Caldwell Balanced Fund, the CT&T Intermediate Fixed Income Fund, the CT&T Intermediate Municipal Bond Fund, and the CT&T Money Market Fund. While available to the general public, fund marketing is focused on attracting rollover funds from existing clients in CT&T's 401(k) and pension fund programs, and marketing to title insurance policyholders and other company affinity groups. CT&T also owns Security Trust Company, a California corporation, which is a full-service trust company offering a wide array of fiduciary and financial services including tax-deferred exchanges, title holding trusts, personal investments and retirement plan services. CT&T's Financial Services Group posted revenues of $31.7 million in 1994, compared with $26.5 million in 1993 and $26.0 million in 1992. As of December 31, 1994, CT&T and Montag & Caldwell together managed $7.06 billion in assets. CT&T BOND RESULTS VS. LEHMAN AGGREGATE INDEX ANNUALIZED RATES OF RETURN FOR THE PERIOD ENDING 12/31/94
1 YEAR 3 YEARS 5 YEARS 10 YEARS ------ ------- ------- -------- CT&T Bond Composite -2.0% 5.8% 8.5% 10.7% Lehman Aggregate Index -2.9% 4.6% 7.7% 10.0%
MONTAG & CALDWELL EQUITY RESULTS VS. THE S&P 500 INDEX Growth of $100
Montag & Caldwell S&P 500 -------- ------- 1988 $100.00 $100.00 1989 126.60 131.70 1990 129.89 127.49 1991 189.90 166.37 1992 207.94 179.01 1993 232.48 197.09 1994 232.48 200.00
9 8 UNDERWRITERS REINSURANCE COMPANY Underwriters, a New Hampshire corporation headquartered in Woodland Hills, California, provides reinsurance to property and casualty insurers and reinsurers. Although it writes many lines of business, Underwriters concentrates on coverages requiring specialized underwriting expertise and a high degree of actuarial analysis. Underwriters is licensed in 37 states, Puerto Rico and the District of Columbia, is authorized to engage in business in three additional states and Canada, and has branch offices in Atlanta, Chicago, Houston, New York and Woodland Hills. Property and casualty reinsurance comprised about 24 percent and 69 percent, respectively, of Underwriters' net premiums written in 1994, with primary property and casualty insurance comprising the remainder. Underwriters provides reinsurance coverages on both a treaty basis (pursuant to a standing agreement with a reinsured to reinsure a specified amount of all risks originally underwritten by the reinsured) and a facultative basis (pursuant to a contract issued to cover specific risks). Treaty operations represented 76 percent of 1994 net reinsurance premiums written and were conducted primarily by the headquarters staff; facultative underwriting, most of which was done at the branch offices, accounted for the remaining 24 percent. To capitalize on advantageous market conditions for certain primary insurance business lines and on Underwriters' expertise in specialized coverages, Underwriters established Commercial Underwriters Insurance Company, a California corporation, at the end of 1992, and acquired Underwriters Insurance Company (formerly known as Pinnacle Property and Casualty Insurance Company), a Nebraska corporation, in December 1994. Commercial Underwriters is a property and casualty insurance company that focuses on specialized primary insurance lines in California on an admitted basis and in other states on an approved non-admitted basis. Underwriters Insurance is a property and casualty insurance company licensed in 31 states and the District of Columbia that will focus primarily on specialized primary insurance lines outside California. BELOW: COMBINED RATIO IS A MEASURE OF UNDERWRITING EFFICIENCY. IT RELATES LOSS AND EXPENSE TO PREMIUM. OPERATING RATIO IS A MEASURE OF OVERALL PROFITABILITY. IT IS THE RESULT OF DEDUCTING INVESTMENT INCOME FROM THE COMBINED RATIO. STATUTORY COMBINED RATIOS
1990 1991 1992 1993 1994 ------------------------------------------------------------------------------------ Underwriters 108.3% 108.7% 107.5% 107.0% 107.0% Reinsurers in general 106.1% 106.5% 117.4% 107.3% 106.7%
Underwriters 5-year average - 107% Reinsurers in general 5-year Average - 111% STATUTORY OPERATING RATIOS
1990 1991 1992 1993 1994 ------------------------------------------------------------------------------------ Underwriters 62.6% 65.4% 74.9% 82.1% 84.1% Reinsurers in general 80.4% 81.6% 84.2% 87.5% 87.0%
10 9 Underwriters contributed pre-tax earnings of $8.6 million on revenues of $225.4 million in 1994. After its acquisition by Alleghany on October 7, 1993, Underwriters contributed pre-tax earnings of $3.0 million on revenues of $40.7 million in the remaining three months of 1993. Underwriters has continued to show modest increases in written premiums despite highly competitive reinsurance markets. Investment income totalled $41.2 million in 1994 compared with $10.4 million for the three months ended December 31, 1993. The 1994 results reflect a charge (before reinsurance recoveries and taxes) of about $5.0 million for estimated losses associated with the earthquake in Northridge, California in January of that year. In addition, Underwriters recorded pre-tax losses of $6.1 million on sales of fixed-maturity investments during 1994, compared with $2.4 million for the three months ended December 31, 1993. Most of the losses in 1994 were due to portfolio restructurings in the first and third quarters to respond to changes in interest rates and to capitalize on a more favorable tax-exempt market. To enhance Underwriters' financial strength, Alleghany, through the holding company which owns Underwriters, contributed to the capital of Underwriters approximately $51 million in cash and shares of Armco Inc. common stock in 1993 and $100 million in shares of Santa Fe Pacific Corporation common stock in 1994. As of December 31, 1994, Underwriters' statutory surplus was $361 million, making Underwriters the twelfth largest domestic professional reinsurer in terms of statutory surplus at 1994 year-end, according to the Reinsurance Association [MAP -- SEE EDGAR APPENDIX] UNDERWRITERS LOCATIONS Headquarters: Woodland Hills, CA Branch offices: Atlanta, GA Chicago, IL Houston, TX New York, NY Woodland Hills, CA Underwriters is licensed in the following jurisdictions: Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maryland Michigan Mississippi Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island Tennessee Texas Utah Washington Wisconsin Wyoming District of Columbia Puerto Rico 11 10 of America. Underwriters' enhanced financial strength will allow it to benefit from the recent trend toward consolidation in the domestic reinsurance market, resulting from the tendency of reinsurance buyers to purchase coverage from larger and more financially secure reinsurers. Underwriters writes most of its business through reinsurance brokers and only a small portion of its business directly with reinsureds. As a result, Underwriters does not need to maintain a large sales organization which, during periods of reduced premium volume, could comprise a significant and non-productive part of overhead. In addition, Underwriters believes that submissions from the broker market, including certain targeted specialty coverages, are more numerous and diverse than would be available through a salaried sales organization, and Underwriters is able to exercise greater selectivity than would usually be possible in dealing directly with reinsureds. Underwriters maintains a disciplined underwriting strategy with a focus on generating profitable business rather than on increasing market share. An important element of this strategy is to respond quickly to market opportunities (such as increased demand or more favorable pricing) by adjusting the mix of the different lines of property and casualty business it writes. As an example, between 1989 and 1994 the worldwide reinsurance industry experienced unusual catastrophic losses, in terms of both frequency and severity, from a variety of natural disasters, including Hurricanes Hugo, Andrew and Iniki and the Northridge earthquake. This extended period of unusual catastrophic losses has caused many reinsurers to reduce the amount of property catastrophe coverage they are prepared to write, which has led to improved terms available in the reinsurance market for such risks. Underwriters has increased its writings and retentions of this business because it believes that substantial increases in premium rates for property catastrophe coverage, combined, in certain instances, with higher deductibles retained by reinsureds, have improved the risk/reward relationship on such coverage. Underwriters also writes certain unusual professional, environmental and directors and officers' liability risks, again in the belief that these risks offer greater potential for favorable results than more general risks, based upon current premium rates. Underwriters has maintained a defensive underwriting posture by withdrawing from certain other lines of business that it considers to offer inadequate contract terms. Underwriters is currently rated "A (Excellent)" by A.M. Best Company, Inc., an independent insurance industry rating organization. Best's publications indicate that this rating is assigned to companies which Best's believes have achieved excellent overall performance and have a strong ability to meet their obligations over a long period of time. Commercial Underwriters and Underwriters Insurance are also rated "A (Excellent)" by Best's. STATUTORY SURPLUS ($ IN MILLIONS) 1990 $164.7 1991 171.4 1992 180.7 1993 247.7 1994 361.5
12 11 WORLD MINERALS, INC. World Minerals, headquartered in Lompoc, California, conducts a worldwide industrial minerals business through its subsidiaries, Celite Corporation and Harborlite Corporation. Celite is believed to be the world's largest producer of filter-grade diatomite, a silica-based mineral consisting of the fossilized remains of microscopic freshwater or marine plants. [MAP -- SEE EDGAR APPENDIX] WORLD MINERALS LOCATIONS World headquarters: Lompoc, California European headquarters: Rueil, France Diatomite mines and plants: Alicante, Spain Arica, Chile Guadalajara, Mexico Lompoc, California Murat, France Myvatn, Iceland Quincy, Washington Perlite plants: Escondido, California Fort Worth, Texas Green River, Wyoming Hessle, England LaPorte, Texas Quincy, Florida Reserve, Louisiana Vicksburg, Michigan Wissembourg, France Perlite mines and mills: Antonito, Colorado/ No Agua, New Mexico Superior, Arizona Sales offices: Atlanta, Georgia Burr Ridge, Illinois Hessle, England Husavik, Iceland Lompoc, California Mexico City, Mexico Milan, Italy Rueil, France Santiago, Chile Toronto, Canada
13 12 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; it is used as a filler, mainly in paints, and as an anti-block agent in plastic film. Celite is also a producer of calcium and magnesium silicate products, which are used to convert liquid, semi-solid and sticky ingredients into dry, free-flowing powders in the production of rubber, sweeteners, flavorings and pesticides. World Minerals believes that Harborlite is one of the world's leading producers of perlite filter aids and a significant producer of perlite ore, a volcanic rock containing a small amount of water that causes the ore to "pop" when heated, expanding it up to twenty times its original volume. Harborlite sells perlite ore to companies that expand it for use primarily in the manufacture of roofing board, formed pipe insulation and acoustical ceiling tile. Harborlite also expands perlite in its own expansion plants in the United States and Europe. Most of Harborlite's 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 contributed pre-tax earnings of $18.2 million on revenues of $162.6 million in 1994, compared with $8.2 million on revenues of $149.5 million in 1993, and $11.6 million on revenues of $141.1 million in 1992. The increase in revenues was due to stronger domestic perlite volume, improved European diatomite shipments and generally better economic conditions in markets served by World Minerals. Pre-tax earnings in 1994 were favorably impacted not only by higher sales volume, but also improved production efficiencies and other cost reduction measures at most locations. In contrast to 1992 and especially 1993, which were characterized by sluggish demand in virtually all market sectors, 1994 was a period of resurgent economic activity in the United States, Europe and Latin America. This occurred at a time when World Minerals was positioned to take advantage of economic growth as a result of programs instituted by management from 1991 through 1993 that strengthened the organization. Domestic and international operations are now consolidated into a single, centrally managed worldwide business under the direction of a highly capable management team. Financial systems and controls have been upgraded, and the Celite and Harborlite sales forces have been consolidated to improve efficiency and take advantage of synergies. World Minerals has enhanced its position in the diatomaceous earth mining business through the strategic acquisition by Celite of additional mining and processing facilities in the United States and Chile. World Minerals' position in the perlite business has been enhanced by the acquisition by Harborlite of three additional expansion plants and additional ore reserves in the United States. Celite owns a diatomite mine and processing plant in Mexico through a Mexican subsidiary. The decline in value of the Mexican peso, which began in late December 1994, did not have any significant impact on World Minerals' 1994 earnings, and is not expected to have a significant impact on 1995 earnings primarily because almost half of the customers of the Mexican subsidiary are billed in United States dollars. EARNINGS BEFORE TAXES ($ IN MILLIONS) 1992 $11.6 1993 8.2 1994 18.2
14 13 HEADS AND THREADS Though a relatively small part of the Alleghany family of companies, the Heads and Threads division of Alleghany, headquartered in Northbrook, Illinois, is believed to be the nation's leading distributor of imported steel fasteners. Nuts, bolts, screws and washers imported by Heads and Threads are resold to fastener manufacturers and distributors through a network of sales offices and warehouses located in sixteen states. The strength of Heads and Threads lies in its five major warehouses and fourteen regional satellite warehouses, and its long years of association with suppliers and customers. Heads and Threads has been consistently profitable since its acquisition by Alleghany in 1974, despite the cyclical nature of its business and changing market conditions. Its earnings contribution to Alleghany increased in each of the years 1992, 1993 and 1994. The contribution in 1994 was the highest since 1979, and resulted from higher sales and lower operating costs than in 1993 and 1992. Since Heads and Threads imports virtually all of its fasteners, its costs are subject to foreign currency fluctuations and increases in import duties. The earthquake in Japan in January 1995, coupled with indigenous material cost increases, have caused Taiwanese manufacturers, the main source of supply for Heads and Threads, to increase their prices. Some shortages have also developed. These are expected to be offset by other marketing factors. Costs may also be impacted by rules that have been proposed to implement the Fastener Quality Assurance Act, which became law in 1990 but has not yet gone into effect. [MAP -- SEE EDGAR APPENDIX] HEADS AND THREADS DISTRIBUTION CENTERS Headquarters and major facility: Northbrook, IL Major facilities: Brooklyn Heights, OH College Point, GA Los Angeles, CA Woodside, NY Satellite facilities: Charlotte, NC Cherry Hill, NJ Earth City, MO Edina, MN Grand Prairie, TX Houston, TX Medley, FL Oak Park, MI Phoenix, AZ Pittsburgh, PA Portland, OR Sharonville, OH So. San Francisco, CA Stoughton, MA
15 14 SELECTED FINANCIAL DATA
(in thousands, except share and per share amounts) - ------------------------------------------------------------------------------------------------------------------------- Years Ended December 31 - ------------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------- OPERATING DATA Revenues from continuing operations $1,827,105 $1,698,147 $1,548,820 $1,144,794 $ 964,052 ========================================================================================================================= Earnings from continuing operations $ 68,372 $ 80,849 $ 44,366 $ 8,100 $ 39,430 Earnings from discontinued operations 69,134 16,703 20,255 55,873 29,161 Cumulative effect of accounting change -- -- 8,216 -- -- - ------------------------------------------------------------------------------------------------------------------------- Net earnings $ 137,506 $ 97,552 $ 72,837 $ 63,973 $ 68,591 ========================================================================================================================= Earnings per share of common stock:* Continuing operations $ 10.00 $ 11.91 $ 6.53 $ 1.19 $ 5.62 Discontinued operations 10.12 2.46 2.98 8.24 4.16 Cumulative effect of accounting change -- -- 1.21 -- -- - ------------------------------------------------------------------------------------------------------------------------- Net earnings $ 20.12 $ 14.37 $ 10.72 $ 9.43 $ 9.78 ========================================================================================================================= Average number of shares of common stock* 6,834,751 6,789,118 6,791,789 6,784,066 7,015,721 ========================================================================================================================= December 31 - ------------------------------------------------------------------------------------------------------------------------ 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------- BALANCE SHEET Total assets $3,587,891 $3,469,123 $2,226,637 $2,018,474 $1,576,508 ========================================================================================================================= Long-term debt $ 335,073 $ 405,303 $ 352,075 $ 357,431 $ 313,474 ========================================================================================================================= Common stockholders' equity $1,021,193 $ 915,734 $ 796,268 $ 724,184 $ 648,241 ========================================================================================================================= Common stockholders' equity per share of common stock* $ 147.86 $ 135.48 $ 117.10 $ 106.72 $ 95.63 =========================================================================================================================
The Company acquired Ticor Title Insurance Company of California on March 8, 1991, most of the businesses of World Minerals Inc. on July 31, 1991, and Underwriters Reinsurance Company on October 7, 1993. The Company sold The Shelby Insurance Company on December 31, 1991 and Sacramento Savings Bank on October 31, 1994; accordingly, the operations of Shelby and Sacramento Savings have been classified as discontinued operations. * Restated to reflect subsequent common stock dividends. DIVIDENDS, MARKET PRICES AND RELATED SECURITY HOLDER MATTERS As of December 31, 1994, there were approximately 2,400 holders of record of Alleghany common stock. The following table indicates quarterly high and low prices of the common stock in 1994 and 1993 on the New York Stock Exchange. Alleghany's ticker symbol is Y.
- -------------------------------------------------------------------------------------------------------------- 1994 1993 - -------------------------------------------------------------------------------------------------------------- QUARTER ENDED High Low High Low - -------------------------------------------------------------------------------------------------------------- March 31 $146 1/2 $136 3/4 $142 $131 June 30 150 138 1/2 148 1/2 125 September 30 152 141 152 133 7/8 December 31 152 7/8 142 1/2 153 1/2 136 1/2 - --------------------------------------------------------------------------------------------------------------
In each of 1993, 1994 and 1995, 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 1993 and 1994 stock dividends were paid in April of each of those years. Alleghany's ability to pay cash dividends is restricted by the terms of a revolving credit loan agreement. At December 31,1994, this agreement permitted the payment of dividends aggregating approximately $408 million. At that date about $896 million of Alleghany's consolidated common stockholders' equity of $1.021 billion was unavailable for dividends or advances to Alleghany from its subsidiaries, due to limitations imposed by statutes and agreements with regulators and lenders to which those subsidiaries are subject. 19 15 FINANCIAL CONDITION In recent years, Alleghany has followed a policy of maintaining a relatively liquid financial condition, in the form of cash and cash equivalents, 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 October 31, 1994, Alleghany completed the sale of Sacramento Savings Bank ("Sacramento Savings") and an ancillary company to First Interstate Bank of California for $331 million in cash. During 1994 and early 1995, with temporary borrowings under Alleghany's revolving credit agreement, the proceeds from the sale of Sacramento Savings and cash on hand, Alleghany and its subsidiaries acquired a substantial number of shares of common stock of Santa Fe Pacific Corporation ("Santa Fe"). As of March 1, 1995, Alleghany and its subsidiaries owned about 18.1 million shares, or 11.8 percent of the outstanding common stock of Santa Fe, at a cost of $251.3 million and a market value of $381.6 million. Santa Fe is a party to a merger agreement with Burlington Northern Inc. ("Burlington"), pursuant to which shareholders of Santa Fe would receive a minimum of 0.40 shares of Burlington common stock for each share of Santa Fe common stock. As of March 1, 1995, the market price of Burlington common stock was $56.125 per share. The merger is conditioned, among other matters, upon the approval of the Interstate Commerce Commission. On July 31, 1994, Alleghany acquired Montag & Caldwell, Inc. ("Montag & Caldwell"), a privately held investment counseling firm based in Atlanta, Georgia. The transaction was effected through an exchange of stock, and was accounted for by Alleghany as a pooling of interests. After the acquisition, Alleghany contributed Montag & Caldwell to CT&T. In October 1993, Alleghany acquired Underwriters for a purchase price of about $201 million in cash. After the acquisition, Alleghany, through the holding company which owns Underwriters, contributed to the capital of Underwriters approximately $51 million in cash and shares of Armco Inc. common stock in 1993 and $100 million in shares of Santa Fe common stock in 1994. As of December 31, 1994, Underwriters' statutory surplus was $361 million. At December 31, 1994, about $125 million of the equity of Alleghany's subsidiaries was available for dividends or advances to Alleghany. At that date about $896 million of Alleghany's equity of $1.021 billion was unavailable for dividends or advances to Alleghany from its subsidiaries, due to limitations imposed by statutes and agreements with regulators and lenders to which those subsidiaries are subject. These limitations have not affected Alleghany's ability to meet its obligations. Alleghany gives high priority to maintaining its financial strength. These efforts were recognized by The Value Line Investment Survey, which gave Alleghany a ranking of "A" for financial strength in 1993 and 1994. Alleghany also received Value Line's highest ranking of "1" for safety in those years. Alleghany has declared stock dividends in lieu of cash dividends every year since 1987, which have helped to conserve Alleghany's financial strength and, in particular, the liquid assets available to finance internal growth and operating-company acquisitions and investments. On April 26, 1995, Alleghany will pay to stockholders of record on April 3, as its dividend on its common stock for 1995, a dividend of one share of Alleghany common stock for every 50 shares outstanding. In addition to its liquid financial assets, Alleghany has a revolving credit agreement with a bank which provides a commitment for revolving credit loans in an aggregate principal amount of $200 million. Borrowings have been repaid promptly in order to keep the facility available for future acquisitions. No amounts were outstanding under this facility at 1993 or 1994 year-end. This agreement expires in July 1995; any amounts outstanding at that time will be converted into a term loan. Alleghany has initiated discussions looking toward the renewal or extension of this agreement. Alleghany has announced that it may purchase shares of its common stock in open market transactions from time to time. In 1994, Alleghany purchased an aggregate of 69,509 shares of its common stock for about $10.1 million, at an average cost of about $146 per share. In 1993, Alleghany purchased an aggregate of 55,200 shares of its common stock for about $7.9 million, at an average cost of about $143 per share. Financial strength is also a high priority of Alleghany's subsidiaries, whose assets stand behind their financial commitments to their customers and vendors. The financial strength of CT&T is illustrated by the following statistics from its insurance regulatory filings. CT&T's combined statutory premium reserves increased to $376 million in 1994 from $365.6 million in 1993. Incurred claims were $80.6 million in 1994, representing a decline of 6 percent from the preceding year. CT&T's combined surplus as regards policyholders was $156.7 million in 1994, an increase of approximately $6.3 million from $150.4 million in 1993. Combined cash and marketable securities were $620.1 million in 1994, representing a decline of about $35 million from 1993 levels. CT&T paid cash dividends to Alleghany totalling $235.5 million in 1993 (most of which was used for Alleghany's acquisition of Underwriters) and $66.5 20 16 million in 1994. The strong results posted by CT&T in 1993 and 1994, CT&T's two best years ever, helped to minimize the impact of the dividends to Alleghany. As of December 31, 1994, CT&T's largest title insurance subsidiary -- Chicago Title Insurance Company -- had a statutory liquidity ratio of 1.0 or more, indicating that its statutory premium reserves and surplus as regards policyholders were more than covered by its cash and marketable securities. Title insurance loss reserves at 1994 year-end totalled $536.1 million (based on generally accepted accounting principles), the highest level ever and more than seven times the estimated amount of claims then in process. At December 31, 1994, CT&T's investment portfolio had a market value of $848.6 million and consisted primarily of short and intermediate maturity investment grade rated debt securities. Modest investment is made in preferred stocks, convertible and lower quality bonds, and publicly traded equity securities, including 200,000 shares of Santa Fe common stock with a market value of $4.2 million at March 1, 1995. A relatively short average portfolio maturity is maintained so that investment income responds to changes in the level of interest rates, offsetting to some degree the cyclicality of title insurance operations. Overall portfolio quality is maintained at a Moody's rating of Aa3 or higher, with over 97 percent of all securities rated investment grade by Moody's and less than one percent in derivative instruments as of 1994 year-end. Confirming the financial strength of the CT&T Family of Title Insurers, each of CT&T's principal title insurance subsidiaries was assigned a claims-paying ability of "A-" by Standard & Poor's Corporation in 1993 and again in 1994. These subsidiaries were rated by Duff & Phelps Credit Rating Co. for the first time in 1994 and were assigned a claims-paying ability of "A". As of December 31, 1994, $60.5 million was outstanding under a loan agreement among CT&T and several banks. The loan calls for annual principal payments, with final maturity in December 2000. At December 31, 1994, Underwriters' investment portfolio had a market value of $812 million and consisted primarily of high quality fixed-maturity securities and a limited number of publicly traded equity securities, including about six million shares of Santa Fe common stock with a market value of $127.1 million at March 1, 1995. Underwriters' entire portfolio of long-term fixed-maturity securities was rated investment grade by Moody's as of December 31, 1994. Underwriters' portfolio contains no investments of a derivative nature. Underwriters is currently rated "A (Excellent)" by A.M. Best Company, Inc., an independent insurance industry rating organization. Best's publications indicate that this rating is assigned to companies which Best's believes have achieved excellent overall performance and have a strong ability to meet their obligations over a long period of time. Commercial Underwriters and Underwriters Insurance are also rated "A (Excellent)" by Best's. During 1994, Underwriters decreased its long-term indebtedness under a credit agreement with several banks from $79 million to $66 million. The principal amount outstanding is required to be reduced periodically, with final maturity in December 1998. World Minerals has a credit facility with three banks providing for borrowings and/or letters of credit totalling up to $64 million. As of December 31, 1994, $57.0 million of indebtedness and $4.7 million of letters of credit were outstanding under this facility. In March 1995, the facility was amended to increase the combined borrowing and letter of credit limit from $64 million to $117 million, to lower the effective borrowing rate, and to incorporate less stringent debt covenant requirements. As part of the sale of Sacramento Savings, Alleghany, through its wholly owned subsidiary Alleghany Properties, Inc. ("API"), purchased real estate and real estate-related assets of Sacramento Savings for about $116 million. Alleghany's intention with respect to such assets, the bulk of which is raw land, is to dispose of them in an orderly fashion, which may take several years. Based on Alleghany's liquidation plan and anticipated higher carrying costs for such assets, Alleghany expects to realize less than $116 million. Accordingly, and in recognition that no general loss reserves of Sacramento Savings were transferred, Alleghany reduced the carrying value of such assets by about $20 million, net of related tax benefits. API is Alleghany's only subsidiary holding substantial passive real estate investments. On February 23, 1995, API issued $50 million aggregate principal amount of 8.62 percent senior notes due 2000 (the "Notes"). The Notes will be repaid in five equal annual principal amortization payments beginning on the first anniversary of the issue of the Notes in amounts sufficient to retire the Notes in full upon maturity. A portion of the proceeds from the sale of the Notes was used to pay a dividend of $37 million to Alleghany and to repay outstanding indebtedness to a subsidiary in the amount of $8 million; the balance will be used for API's working capital. Heads and Threads has a credit facility with a bank providing for letters of credit totalling up to $25 million. As of March 1, 1995, Alleghany and its subsidiaries owned 5,643,355 shares of Armco common stock, or 5.3 percent of the outstanding common stock of Armco. Alleghany management believes that Alleghany and its subsidiaries have and will have adequate internally generated funds, cash resources and unused credit facilities to provide for the currently foreseeable needs of its and their businesses. Alleghany and its subsidiaries have no material commitments for capital expenditures. 21 17 CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993 - ------------------------------------------------------------------------------------------------------------------------- (in thousands, except share and per share amounts) 1994 1993 - ------------------------------------------------------------------------------------------------------------------------- ASSETS Investments Fixed maturities: Available for sale (amortized cost: 1994 $1,655,437; 1993 $1,642,623) $1,578,514 $1,656,003 Equity securities (cost: 1994 $262,292; 1993: $120,390) 357,220 154,666 - ------------------------------------------------------------------------------------------------------------------------- 1,935,734 1,810,669 - ------------------------------------------------------------------------------------------------------------------------- Cash 107,942 109,166 Notes receivable 91,536 91,536 Funds held, accounts and other receivables 211,451 177,669 Title records and indexes 156,293 155,121 Property and equipment -- at cost, less accumulated depreciation and amortization 202,918 205,042 Reinsurance receivable 422,683 353,903 Other assets 459,334 364,416 Net assets of discontinued business -- 201,601 - ------------------------------------------------------------------------------------------------------------------------- $3,587,891 $3,469,123 ========================================================================================================================= LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Title losses and other claims 537,073 533,190 Property and casualty losses and loss adjustment expenses 940,527 861,204 Other liabilities 436,180 400,678 Long-term debt of parent company 59,600 59,600 Long-term debt of subsidiaries 275,473 345,703 Trust and escrow deposits secured by pledged assets 317,845 353,014 - ------------------------------------------------------------------------------------------------------------------------- Total liabilities 2,566,698 2,553,389 Commitments and contingent liabilities Common stockholders' equity (common shares issued and outstanding: 1994 -- 6,906,281; 1993 -- 6,759,142) 1,021,193 915,734 - ------------------------------------------------------------------------------------------------------------------------- $3,587,891 $3,469,123 =========================================================================================================================
See accompanying Notes to Consolidated Financial Statements. 22 18 CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31, - ------------------------------------------------------------------------------------------------------------------------- (in thousands, except share and per share amounts) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------- REVENUES Title premiums, escrow and trust fees $1,306,708 $1,379,463 $1,252,843 Net reinsurance premiums earned 190,279 32,703 -- Interest, dividend and other income 158,950 122,009 148,752 Net mineral and filtration sales 162,427 148,719 139,951 Net gain on investment transactions 8,741 15,253 7,274 - ------------------------------------------------------------------------------------------------------------------------- Total revenues 1,827,105 1,698,147 1,548,820 - ------------------------------------------------------------------------------------------------------------------------- COSTS AND EXPENSES Salaries, commissions and other employee benefits 982,324 973,172 873,630 Administrative, selling and other operating expenses 339,078 330,441 331,950 Provisions for title losses and other claims 98,185 126,329 114,119 Property and casualty losses and loss adjustment expenses 153,056 25,131 -- Cost of mineral and filtration sales 109,433 107,846 98,805 Interest expense 29,285 28,828 29,845 Corporate administration 22,750 16,897 14,956 - ------------------------------------------------------------------------------------------------------------------------- Total costs and expenses 1,734,111 1,608,644 1,463,305 - ------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations, before income taxes 92,994 89,503 85,515 Income taxes 24,622 8,654 41,149 - ------------------------------------------------------------------------------------------------------------------------- Earnings from continuing operations 68,372 80,849 44,366 DISCONTINUED OPERATIONS Earnings from discontinued operations, net of tax 6,265 16,703 20,255 Gain on sale of Sacramento Savings, net of tax 62,869 -- -- - ------------------------------------------------------------------------------------------------------------------------- Earnings before cumulative effect of a change in accounting for income taxes 137,506 97,552 64,621 Cumulative effect on prior years of a change in accounting for income taxes -- -- 8,216 - ------------------------------------------------------------------------------------------------------------------------- Net earnings $ 137,506 $ 97,552 $ 72,837 ========================================================================================================================= EARNINGS PER SHARE OF COMMON STOCK:* Continuing operations $ 10.00 $ 11.91 $ 6.53 Discontinued operations 0.92 2.46 2.98 Gain on sale of Sacramento Savings 9.20 -- -- Cumulative effect of accounting change -- -- 1.21 - ------------------------------------------------------------------------------------------------------------------------- Net earnings $ 20.12 $ 14.37 $ 10.72 =========================================================================================================================
* Restated to reflect subsequent common stock dividends. See accompanying Notes to Consolidated Financial Statements. 23 19 CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
Three Years Ended December 31, 1994 - ---------------------------------------------------------------------------------------------------------------------------------- Unrealized Appreciation Total (Depreciation) Cumulative Common Common Contributed of Treasury Retained Translation Stockholders' (in thousands, except share amounts) Stock Capital Securities Stock Earnings Gain (Loss) Equity - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1991 $6,638 $426,540 $ (56) $(19,247) $307,809 $ 2,500 $ 724,184 (7,044,020 shares of common stock issued; 258,025 in treasury)* ADD (DEDUCT): Net earnings -- -- -- -- 72,837 -- 72,837 Purchase of treasury shares -- -- -- (1,240) -- -- (1,240) Performance share plan distributions -- 685 -- 1,402 -- -- 2,087 Common stock dividend -- 6,032 -- 10,102 (16,261) -- (127) Stock purchase plan distributions -- 15 -- 601 -- -- 616 Cumulative translation loss -- -- -- -- -- (3,291) (3,291) Change in unrealized appreciation of equity securities, net -- -- 1,202 -- -- -- 1,202 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1992 6,638 433,272 1,146 (8,382) 364,385 (791) 796,268 (6,905,902 shares of common stock issued; 105,837 in treasury)* ADD (DEDUCT): Net earnings -- -- -- -- 97,552 -- 97,552 Purchase of treasury shares -- -- -- (7,897) -- -- (7,897) Performance share plan distributions -- 322 -- 966 -- -- 1,288 Common stock dividend 130 17,450 -- -- (17,716) -- (136) Stock purchase plan distributions -- 51 -- 550 -- -- 601 Cumulative translation loss -- -- -- -- -- (2,042) (2,042) Change in unrealized appreciation of investments, net** -- -- 30,100 -- -- -- 30,100 - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1993 6,768 451,095 31,246 (14,763) 444,221 (2,833) 915,734 (6,902,868 shares of common stock issued; 143,726 in treasury) ADD (DEDUCT): Shares issued in pooling 212 850 -- -- 838 -- 1,900 Net earnings -- -- -- -- 137,506 -- 137,506 Purchase of treasury shares -- -- -- (10,127) -- -- (10,127) Performance share plan distributions -- 24 -- 620 -- -- 644 Common stock dividend -- 4,601 -- 13,834 (18,556) -- (121) Stock purchase plan distributions -- 12 -- 34 -- -- 46 Cumulative translation loss -- -- -- -- -- (4,849) (4,849) Change in unrealized appreciation of investments, net -- -- (19,540) -- -- -- (19,540) - ---------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 $6,980 $456,582 $11,706 $(10,402) $564,009 $(7,682) $1,021,193 (6,980,284 shares of common stock issued; 74,003 in treasury) ==================================================================================================================================
* Adjusted to reflect subsequent common stock dividends. ** Includes the effect of the adoption of FAS 115, "Accounting for Certain Investments in Debt and Equity Securities," of $30,249, net. See accompanying Notes to Consolidated Financial Statements. 24 20 CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Years Ended December 31, - --------------------------------------------------------------------------------------------------------------------------- (in thousands) 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES Earnings from continuing operations $ 68,372 $ 80,849 $ 44,366 Adjustments to reconcile earnings from continuing operations to cash provided by (used in) continuing operations: Depreciation and amortization 44,778 38,916 53,085 Net gain on investment transactions (8,741) (15,253) (7,274) Other charges to continuing operations, net 6,827 5,582 5,918 Increase in funds held, accounts and other receivables (29,193) (3,644) (18,112) (Increase) decrease in reinsurance receivable (68,780) 9,614 -- Increase in title losses and other claims 3,883 20,738 9,316 Increase (decrease) in property and casualty loss and loss adjustment expenses 79,323 (10,040) -- (Increase) decrease in other assets (11,428) 1,202 2,417 Increase in other liabilities 5,527 29,198 36,759 (Decrease) increase in trust and escrow deposits (35,169) 40,237 95,360 - --------------------------------------------------------------------------------------------------------------------------- Net adjustments (12,973) 116,550 177,469 - --------------------------------------------------------------------------------------------------------------------------- Cash provided by continuing operations 55,399 197,399 221,835 Cash provided by discontinued operations 5,502 6,095 9,177 - --------------------------------------------------------------------------------------------------------------------------- Cash provided by operations 60,901 203,494 231,012 - --------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Purchase of investments (929,961) $(1,531,866) $(1,320,905) Maturities of investments 139,156 326,283 478,242 Sales of investments 634,385 1,201,956 704,466 Purchases of property and equipment (30,541) (38,249) (30,276) Disposition of property and equipment 4,397 2,023 5,241 Net (purchases) sales of title records and indexes (1,172) 4,390 (25,381) Proceeds from sale of Sacramento Savings, net of expenses 316,348 -- -- Purchase of real estate and real estate related assets (116,089) -- -- Net assets acquired in pooling 1,900 -- -- Purchase of Underwriters Re -- (203,865) -- Cash of purchased subsidiaries -- 10,159 -- Purchase of other subsidiaries, net of cash acquired -- -- (18,669) - --------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities $ 18,423 $ (229,169) $ (207,282) ===========================================================================================================================
25 21 CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three Years Ended December 31, 1994 - ------------------------------------------------------------------------------------------------------------------------- (in thousands) 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Decrease in notes receivable $ -- $ -- $ 1,156 Principal payments on long-term debt (379,818) (33,081) (23,674) Proceeds of long-term debt 309,472 1,050 21,818 Purchase of treasury shares (10,127) (7,897) (1,240) Common stock distributions (75) 1,753 489 - ------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (80,548) (38,175) (1,451) - ------------------------------------------------------------------------------------------------------------------------- Net (decrease) increase in cash (1,224) (63,850) 22,279 Cash at beginning of year 109,166 173,016 150,737 - ------------------------------------------------------------------------------------------------------------------------- Cash at end of year $ 107,942 $ 109,166 $ 173,016 - ------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest $ 28,038 $ 28,139 $ 28,661 Income taxes $ 49,526 $ 55,539 $ 56,127 - -------------------------------------------------------------------------------------------------------------------------
See accompanying Notes to Consolidated Financial Statements. 26 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES a. PRINCIPLES OF FINANCIAL STATEMENT PRESENTATION Alleghany Corporation, a Delaware corporation ("Alleghany" or together with its subsidiaries, the "Company") owns Chicago Title and Trust Company ("CT&T") whose principal subsidiaries are Chicago Title Insurance Company ("CTI"), Security Union Title Insurance Company ("Security Union") and Ticor Title Insurance Company ("Ticor Title"); Alleghany Funding Corporation ("AFC"); World Minerals Inc. ("World Minerals"); URC Holdings Corp. ("Underwriters Re") whose principal subsidiaries are Underwriters Reinsurance Company ("Underwriters Reinsurance"), Commercial Underwriters Insurance Company ("CUIC") and Underwriters Insurance Company ("UIC"); Alleghany Capital Corporation; and Alleghany Properties Inc. ("API"). Sacramento Savings Bank ("Sacramento Savings") was sold on October 31, 1994, respectively, and accordingly its operations are shown as discontinued operations for all periods presented. See Note 3. The accompanying consolidated financial statements include the accounts of Alleghany and its subsidiaries. All significant intercompany items have been eliminated in consolidation. b. INVESTMENTS Marketable investment securities at December 31, 1994 and 1993 consist of U.S. Treasury securities, U.S. government agencies, municipal obligations, mortgage-backed securities, corporate debt securities, certificates of deposit, and equity securities. The Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" at December 31, 1993. Under Statement No. 115, the Company classifies its debt and marketable equity securities into one of three categories: trading, available for sale, or held to maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. The Company has no trading securities as of December 31, 1994 and 1993. Held to maturity securities are those fixed maturity securities which the Company has the ability and intent to hold until maturity. Securities held for indefinite periods of time which may not be held to maturity are classified as available for sale. Available for sale securities are recorded at fair value. Unrealized holding gains and losses, net of the related tax effect, on available for sale securities are excluded from earnings and are reported as a separate component of stockholders' equity until realized. A decline in the fair value of an available for sale security below 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 lives of the respective assets or the life of the lease, whichever is less. d. TITLE RECORDS AND INDEXES Title records and indexes are recorded at cost. The cost is not being amortized and, in the opinion of management, has not diminished in value. Costs of maintaining title records and indexes are expensed in the year incurred. e. TITLE LOSSES AND OTHER CLAIMS Liabilities for title losses and other claims are estimated based on the title insurance subsidiaries' experience. These amounts include both case-basis evaluations and formula calculations and represent the estimated net cost of all unpaid losses. In the opinion of management, reserves for title losses and other claims are adequate. f. PROPERTY AND CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES The liability for outstanding losses and loss adjustment expenses includes estimated provisions for all reported and unreported claims incurred and is reduced by allowances for salvage and subrogation. In the opinion of management, reserves for property and casualty losses and loss adjustment expenses are adequate. g. REVENUE RECOGNITION Title insurance premiums are recognized as revenues principally at the time of the real estate closing. Escrow and trust fees are recognized principally when billed. Property and casualty reinsurance premiums are reflected in income generally on a daily pro rata basis for facultative business and as reported by the ceding company for treaty business. 27 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) h. POST-RETIREMENT AND POST-EMPLOYMENT BENEFITS Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Post-retirement Benefits Other than Pensions." Statement No. 106 requires that the expected cost of post-retirement benefits, other than pensions, be charged to expense during the period that the employee renders service. Previously, these costs were recognized by expensing, at the time of retirement, the amount necessary to fund the estimated cost of these benefits. The adoption of Statement No. 106 had an insignificant impact on the Company's financial position and results of operations. Effective January 1, 1993, the Company adopted Statement of Financial Accounting No. 112, "Employers' Accounting for Post-employment Benefits," which, similar to Statement No. 106, requires accrual of a liability representing the cost of certain benefits earned by employees over their employment period. Statement No. 112 applies to vested benefits provided to former or inactive employees, their beneficiaries and covered dependents, after employment but before retirement. The adoption of Statement No. 112 had an insignificant impact on the Company's financial position and results of operations. i. DERIVATIVES In October 1994, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments." This Statement amends Statement of Financial Accounting Standards No. 105, "Disclosure of Information about Financial Instruments with Off-Balance-Sheet-Risk and Financial Instruments with Concentrations of Credit Risk" and Statement No. 107 and provides specific disclosure requirements for derivative financial instruments. Statement No. 119 is effective for financial statements issued for fiscal years ending after December 15, 1994. This Statement applies to interest rate swap agreements ("swaps") entered into by the Company. 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. j. INCOME TAXES The Company files a consolidated federal income tax return with its domestic subsidiaries. Effective January 1, 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" and has separately reported in 1992 the cumulative effect of the change in the method of accounting for income taxes. Statement No. 109 required a change from the deferred method of accounting for income taxes under Accounting Principles Board Opinion No. 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement No. 109, 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. Under Statement No. 109, 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. k. 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. l. ACQUISITION COSTS Acquisition costs related to unearned property and casualty reinsurance premiums are deferred by major underwriting lines and amortized over the period in which the premiums are earned. The method fol- 28 24 lowed 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. m. REINSURANCE Underwriters Re follows the provisions of statement of Financial Accounting Standard No. 113, "Accounting and Reporting for Reinsurance for Short-Duration and Long-Duration Contracts." Reinsurance receivables (including amounts related to claims incurred but not reported) and prepaid reinsurance premiums are reported as assets. Reinsurance contracts that do not result in a reasonable possibility that the reinsurer may realize a significant loss from the insurance risk assumed and that do not provide for the transfer of significant insurance risk generally do not meet the conditions for reinsurance accounting and are accounted for as deposits. n. CASH For purposes of the consolidated statements of cash flows, cash includes only funds on deposit which are available for immediate withdrawal. o. NET EARNINGS PER SHARE OF COMMON STOCK Net earnings per share of common stock are based on the average number of shares of Alleghany common stock outstanding during the years ended December 31, 1994, 1993, and 1992, respectively, as adjusted for stock dividends. The average number of shares of common stock outstanding, as adjusted for stock dividends, were 6,834,751 in 1994, 6,789,118 in 1993, and 6,791,789 in 1992. p. RECLASSIFICATION Certain prior year amounts have been reclassified to conform to the 1994 presentation. 2. ACQUISITIONS a. MONTAG & CALDWELL, INC. On July 31, 1994, the Company acquired Montag & Caldwell, Inc., a privately held investment counseling firm based in Atlanta, in an exchange of stock whereby the Company issued 212,757 shares of its common stock. Montag & Caldwell currently manages assets exceeding $3 billion for clients that include institutional as well as individual investors. The acquisition was accounted for as a pooling of interests; the consolidated financial statements of Alleghany for prior periods were not restated because the effect is immaterial. b. UNDERWRITERS RE On October 7, 1993, the Company acquired approximately 93% of the issued and outstanding capital stock of a new holding company which owned all of the issued and outstanding capital stock of Underwriters Reinsurance, a New Hampshire corporation headquartered in California, which provides reinsurance to property and casualty insurers and reinsurers. Underwriters Reinsurance also owned a recently formed property and casualty insurance subsidiary, Commercial Underwriters Insurance Company, which concentrates on specialized insurance lines. The purchase price was approximately $204 million, including capitalized costs. The acquisition of Underwriters Reinsurance was effective for accounting purposes as of October 1, 1993, and has been accounted for by the purchase method of accounting. Accordingly, the accounts of Underwriters Reinsurance, after adjustment to reflect fair values assigned to assets and liabilities, have been included in the consolidated financial statements of the Company after the effective date of the acquisition. The net assets of Underwriters Reinsurance, at their acquisition date, after adjustment to reflect fair value assigned to assets and liabilities, are presented below (in millions): - -------------------------------------------------------------------------------------------------------------------------- Cash, investment securities, and other receivables $ 781 Reinsurance receivable 364 Other assets (including goodwill) 134 Property and casualty losses and loss adjustment expenses (871) Long-term debt and other liabilities (including minority interest) (204) - -------------------------------------------------------------------------------------------------------------------------- Net assets acquired $ 204 ==========================================================================================================================
29 25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The unaudited pro forma results of operations for the years ended December 31, 1993 and 1992, presented as if the acquisition of Underwriters Reinsurance was made at the beginning of 1992, are as follows (in millions, except per share data):
- -------------------------------------------------------------------------------------------------------------------------- 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- Total revenues $2,092 $1,987 ========================================================================================================================== Earning before cumulative effect of a change in accounting for income taxes $ 87 $ 83 ========================================================================================================================== Net earnings $ 87 $ 100 ========================================================================================================================== Net earnings per share of common stock $12.84 $14.79 ==========================================================================================================================
The unaudited pro forma results of operations do not purport to be indicative of results that actually would have been obtained had the operations been consolidated during these periods. The above amounts primarily reflect adjustments for the income effect of revaluation of the assets and liabilities of the purchased businesses, and decreased investment income resulting from the financing of such acquisitions. During 1994, Underwriters Reinsurance acquired an inactive North Carolina insurance company for $10 million, which represented the approximate carrying value of its investment portfolio and other intangible assets, with licenses to write primary property and casualty insurance in 31 states and the District of Columbia. The company was renamed Underwriters Insurance Company. A capital contribution of $100 million, consisting principally of five million shares of Santa Fe common stock was made to UIC, which increased UIC's statutory surplus to $107.5 million at 1994 year end. 3. SALE OF SACRAMENTO SAVINGS On October 31, 1994, Alleghany sold its wholly owned retail banking subsidiary, Sacramento Savings, and an ancillary company, to First Interstate Bank of California for a cash purchase price of approximately $331 million in cash. The operations of Sacramento Savings and the ancillary company are presented as discontinued operations in the accompanying consolidated financial statements. Alleghany Financial Inc. ("AFI"), the holding company of Sacramento Savings and ancillary companies, was dissolved prior to the sale. Net proceeds from the sale were used to repay borrowings under Alleghany's revolving credit loan agreement which had been drawn on to purchase investment securities and to repay an AFI note payable. Condensed information relating to discontinued operations is as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- Revenues $150,277 $210,305 $239,604 ========================================================================================================================== Pre-tax earnings from discontinued operations $ 11,305 $ 29,624 $ 34,118 Income taxes 5,040 12,921 14,792 - -------------------------------------------------------------------------------------------------------------------------- Earnings from discontinued operations, net 6,265 16,703 19,326 Gain on sale of Sacramento Savings, net of tax of $31,946 62,869 -- -- Cumulative effect on prior years of a change in accounting for income taxes -- -- 929 - -------------------------------------------------------------------------------------------------------------------------- Earnings from discontinued operations $ 69,134 $ 16,703 $ 20,255 ==========================================================================================================================
The net assets of the discontinued operations at December 31, 1993 were $201.6 million consisting of $2,072.6 million in loans receivable, $634.9 million in investments, $309.9 million in other assets, and $2,815.8 million in deposits and other liabilities. Additionally, as part of the transaction, the Company purchased real estate and real estate related assets for about $116 million. These assets were contributed to a newly formed subsidiary, API. The Company intends to dispose of the assets in an orderly fashion, which may take several years. Based on the Company's liquidation plan and anticipated higher carrying costs for the real estate and real estate related assets, the Company expects to realize less than $116 million. Accordingly, and in recognition that no general loss reserves of Sacramento Savings were transferred to the Company, the carrying value of the assets was reduced by about $20 million, net of tax. This charge is reflected in the gain on sale of Sacramento Savings. 30 26 4. INVESTMENTS Investments at December 31, 1994 and 1993 are summarized as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- 1994 - -------------------------------------------------------------------------------------------------------------------------- Amortized Cost Fair CONSOLIDATED or Cost Value - -------------------------------------------------------------------------------------------------------------------------- Available for sale: U.S. Government, government agency and municipal obligations $1,063,523 $1,006,421 Certificates of deposit 64,832 64,832 Commercial paper 42,250 42,250 Bonds, notes and other 484,832 465,011 - -------------------------------------------------------------------------------------------------------------------------- 1,655,437 1,578,514 Equity securities 262,292 357,220 - -------------------------------------------------------------------------------------------------------------------------- $1,917,729 $1,935,734 ========================================================================================================================== INDUSTRY SEGMENT - -------------------------------------------------------------------------------------------------------------------------- Title, trust and escrow $ 863,494 $ 848,566 Property and casualty reinsurance 838,490 812,083 Mining and filtration 468 468 Corporate activities 215,277 274,617 - -------------------------------------------------------------------------------------------------------------------------- $1,917,729 $1,935,734 ==========================================================================================================================
- -------------------------------------------------------------------------------------------------------------------------- 1993 - -------------------------------------------------------------------------------------------------------------------------- Amortized Cost Fair CONSOLIDATED or Cost Value - -------------------------------------------------------------------------------------------------------------------------- Available for sale: U.S. Government, government agency and municipal obligations $1,031,409 $1,041,333 Certificates of deposit 93,297 93,297 Commercial paper 140,552 140,552 Bonds, notes and other 377,365 380,821 - -------------------------------------------------------------------------------------------------------------------------- 1,642,623 1,656,003 Equity securities 120,390 154,666 - -------------------------------------------------------------------------------------------------------------------------- $1,763,013 $1,810,669 ========================================================================================================================== INDUSTRY SEGMENT - -------------------------------------------------------------------------------------------------------------------------- Title, trust and escrow $ 929,521 $ 946,534 Property and casualty reinsurance 770,240 770,092 Mining and filtration 6,562 6,562 Corporate activities 56,690 87,481 - -------------------------------------------------------------------------------------------------------------------------- $1,763,013 $1,810,669 ==========================================================================================================================
The amortized cost and estimated fair values of debt securities at December 31, 1994 and 1993 are summarized as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- Gross Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value - -------------------------------------------------------------------------------------------------------------------------- 1994 - -------------------------------------------------------------------------------------------------------------------------- Available for sale U.S. Government, government agency and municipal obligations $1,063,523 $ 1,238 $(58,340) $1,006,421 Commercial paper 42,250 -- -- 42,250 Bonds, notes and other 387,158 301 (20,123) 367,336 - -------------------------------------------------------------------------------------------------------------------------- $1,492,931 $ 1,539 $(78,463) $1,416,007 ========================================================================================================================== 1993 - -------------------------------------------------------------------------------------------------------------------------- Available for sale U.S. Government, government agency and municipal obligations $1,031,409 $15,059 $ (5,135) $1,041,333 Commercial paper 140,552 -- -- 140,552 Bonds, notes and other 353,741 6,123 (2,666) 357,198 - -------------------------------------------------------------------------------------------------------------------------- $1,525,702 $21,182 $ (7,801) $1,539,083 ==========================================================================================================================
The amortized cost and estimated fair value of debt securities classified as available for sale at December 31, 1994, by contractual maturity, are shown below. 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 - -------------------------------------------------------------------------------------------------------------------------- Available for sale Due in one year or less $ 309,648 $ 308,010 Due after one year through five years 340,426 331,062 Due after five years through ten years 207,754 192,009 Due after ten years 278,142 251,338 Mortgage-backed securities 356,961 333,588 - -------------------------------------------------------------------------------------------------------------------------- $1,492,931 $1,416,007 ==========================================================================================================================
The proceeds from sales of available for sale securities were $634 million, $1,202 million, and $704 million, respectively, which included the proceeds from sales of investments in debt securities of $476 million, $792 million, and $419 million, in 1994, 1993, and 1992, respectively. 31 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Gross realized gains and gross realized losses of available for sale investments were $24.3 million and $15.6 million, $22.8 million and $7.5 million, and $8.1 million and $0.8 million, respectively, in 1994, 1993, and 1992. These amounts include gross realized gains and gross realized losses on sales of investments in debt securities of $0.9 million and $10.7 million, $3.4 million and $2.6 million, and $2.8 million and $0.7 million, respectively, in 1994, 1993, and 1992. During 1994 and 1993, Alleghany had 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 $3.1 million and $4.6 million, respectively, for these investments. The Company owns 13,494,000 shares of Santa Fe Pacific Corporation at December 31, 1994 with a cost basis of $166.5 million and a fair value of $236.1 million. At December 31, 1994 and 1993, investments totalling approximately $376 million and $366 million, respectively, were pledged principally to secure unearned title insurance premium liabilities computed under statutory insurance regulations, as required by law. Assets pledged to secure trust and escrow deposits at December 31, 1994 and 1993, carried at fair value, as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- Cash $ 60,445 $ 68,392 U.S. Government and municipal obligations 196,538 191,076 Certificates of deposit 59,522 22,000 Equity securities 9,520 10,050 Money market funds -- 68,019 - -------------------------------------------------------------------------------------------------------------------------- $326,025 $359,537 ==========================================================================================================================
Additionally, Alleghany's title insurance subsidiaries administer escrow deposits generally related to customers' real estate transactions. The funds are not considered assets and liabilities of the Company and, accordingly, amounts aggregating approximately $832 million and $791 million are excluded from the accompanying consolidated balance sheets at December 31, 1994 and 1993, respectively. 5. REINSURANCE In the ordinary course of business, Underwriters Reinsurance assumes and cedes reinsurance for purposes of risk diversification and limiting maximum loss exposure of 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, 1994 and 1993 consist of the following (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- Reinsurance recoverable on paid losses $ 18,473 $ 2,074 ========================================================================================================================== Ceded outstanding losses and loss adjustment expenses $404,210 $351,829 ==========================================================================================================================
For the year 1994 and the three months ended December 31, 1993, Underwriters Reinsurance ceded losses and loss adjustment expenses of $51.4 million and $19.6 million, respectively. The following table indicates premiums assumed and ceded for the year 1994 and the three months ended December 31, 1993 (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- Written Earned - -------------------------------------------------------------------------------------------------------------------------- 1994 - -------------------------------------------------------------------------------------------------------------------------- Premiums assumed $254,832 $250,757 Premiums ceded $ 64,493 $ 69,299 ========================================================================================================================== 1993 - -------------------------------------------------------------------------------------------------------------------------- Premiums assumed $ 36,435 $ 38,479 Premiums ceded $ 6,166 $ 9,994 ==========================================================================================================================
Effective January 1, 1988, Underwriters Reinsurance, on behalf of Underwriters Re, purchased for $57.5 million two excess of loss reinsurance contracts ("the reinsurance contracts") from Continental Re. Under the reinsurance contracts, Continental Re will assume the risk of losses incurred by Underwriters Re to the extent that Underwriters Re's net ultimate incurred losses, including unrecoverable reinsurance, for pre-1987 business which exceeds the aggregate deductible as defined, subject to a limit of $200 million. The limit was fully utilized prior to October 1993. During 1994, approximately $12 million was received under these reinsurance contracts and the remaining $188 million is included in the reinsurance receivable balance as of December 31, 1994. Loss reserves ceded under the reinsurance contracts must be secured by a trust fund or other acceptable security. As of December 31, 1994 and 1993, loss reserves ceded are secured by $151.7 million and $120.6 million, respectively, deposited in a trust fund and letters of credit totalling $155.4 million and $82.1 million, respectively. 32 28 6. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES Activity in the liability for unpaid claims and claim adjustment expenses is summarized as follows:
- -------------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- TITLE LOSSES - -------------------------------------------------------------------------------------------------------------------------- Balance at January 1 $532,123 $511,455 $509,091 Less reinsurance recoverables -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Net balance at January 1 532,123 511,455 509,091 - -------------------------------------------------------------------------------------------------------------------------- Incurred related to: Current year 94,845 121,864 109,235 Prior years -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Total incurred 94,845 121,864 109,235 - -------------------------------------------------------------------------------------------------------------------------- Paid related to: Current year 3,105 2,866 3,301 Prior years 87,795 98,330 103,570 - -------------------------------------------------------------------------------------------------------------------------- Total paid 90,900 101,196 106,871 - -------------------------------------------------------------------------------------------------------------------------- Net balance at December 31 536,068 532,123 511,455 Plus reinsurance recoverables -- -- -- - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31 $536,068 $532,123 $511,455 ==========================================================================================================================
- -------------------------------------------------------------------------------------------------------------------------- 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- PROPERTY AND CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES - -------------------------------------------------------------------------------------------------------------------------- Balance at January 1, 1994 and October 1, 1993 $861,204 $871,244 Less reinsurance recoverables 351,829 359,124 - -------------------------------------------------------------------------------------------------------------------------- Net balance at January 1, 1994 and October 1, 1993 509,375 512,120 - -------------------------------------------------------------------------------------------------------------------------- Incurred related to: Current year 146,426 23,826 Prior years 6,630 1,305 - -------------------------------------------------------------------------------------------------------------------------- Total incurred 153,056 25,131 - -------------------------------------------------------------------------------------------------------------------------- Paid related to: Current year 13,826 3,056 Prior years 112,288 24,820 - -------------------------------------------------------------------------------------------------------------------------- Total paid 126,114 27,876 - -------------------------------------------------------------------------------------------------------------------------- Net balance at December 31 536,317 509,375 Plus reinsurance recoverables 404,210 351,829 - -------------------------------------------------------------------------------------------------------------------------- Balance at December 31 $940,527 $861,204 ==========================================================================================================================
The above reserves for title losses excludes trust and escrow reserves of $1.0 million, $1.1 million, and $1.0 million in 1994, 1993, and 1992, respectively. Underwriters' reserve for unpaid losses and loss adjustment expenses include $112.6 million and $95.0 million gross reserves and $95.6 and $88.4 million net reserves at December 31, 1994 and 1993, 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 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 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 call 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 bulk reserves. 33 29 7. LONG-TERM DEBT Long-term debt at December 31, 1994 and 1993 is summarized as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- ALLEGHANY Debentures at 6.50%, due 2014, exchangeable for common shares of American Express at an exchange rate of 22.8833 common shares per $1,000 principal amount of debentures $ 59,600 $ 59,600 AFC Notes payable at 4.10% to 6.41% due 1999 80,000 80,000 AFI Note payable at 12.65% -- 39,210 CT&T Capital lease obligations at 10.49% to 13.90%, less amounts representing interest of $18 in 1994 and $9 in 1993, due through 1996 115 72 Bank borrowings at 3.88% to 8.73%, due through 2000 60,500 71,000 Other loans payable at 5.00% to 9.50%, due through 1997 3,826 3,894 UNDERWRITERS RE Notes payable at 4.50% to 7.49%, due through 1998 66,000 79,000 WORLD MINERALS Notes payable at 8.15% to 8.27%, due through 1998 57,000 65,000 Capital lease obligations at 8.15%, less amounts representing interest of $43 in 1994, due through 1998 389 -- Harborlite redeemable preferred stock 7,643 7,527 - -------------------------------------------------------------------------------------------------------------------------- $335,073 $405,303 ==========================================================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Under the terms of a revolving credit loan agreement dated July 9, 1991 with a bank, Alleghany may borrow up to $200 million until July 1995. At Alleghany's option, borrowings bear interest at a rate based on the purchase of negotiable certificates of deposit, prevailing rates for dollar deposits in the London interbank market or the greatest of the Federal funds rate, the bank's prime rate or a specified certificate of deposit rate. No amounts were outstanding under this agreement at December 31, 1994 or 1993. A commitment fee of 1/4 of 1% per annum of the unused commitment is charged. In July 1995, or at such earlier date as Alleghany requests, any amounts outstanding will be converted to a term loan payable in 12 quarterly installments. The revolving credit agreement, among other things, requires Alleghany to maintain tangible net worth not less than $500 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. AFC notes are primarily secured by a $91.5 million installment note receivable. AFC has entered into a related interest rate swap agreement with a notional amount of $88 million for the purpose of matching interest expense with interest income. This swap is pay variable, receive variable. Alleghany pays a variable rate equal to the one month commercial paper rate plus 0.125% and receives a variable rate equal to the three month LIBOR rate plus 0.85%. The swap matures on January 20, 1999. AFC is exposed to credit risk in the unlikely event of nonperformance of the swap counterparty. On March 28, 1991, CT&T borrowed $42 million, without recourse to Alleghany, to repay bridge financing used for the Ticor Title acquisition. On May 2, 1991, CT&T entered into a swap agreement with a notional amount of $42 million for the purpose of converting variable interest rate exposure to a fixed rate. The notional amount was reset on December 31, 1994 at $31.5 million. This swap is pay fixed, receive variable. The fixed rate is 8.73% and the variable rate is equal to the three month LIBOR rate. The swap matures on December 31, 1997. CT&T is exposed to credit risk in the unlikely event of nonperformance of the swap counterparty. Under the terms of the bank loan agreement, CT&T is required to maintain certain financial ratios and balances and is limited on the amount of additional indebtedness or future mergers and acquisitions except as permitted by the agreements. The agreements also contain restrictions with respect to the mortgaging or pledging of assets. On November 16, 1992, Underwriters Re entered into a six-year, $100 million reducing revolving bank credit agreement ("the credit agreement") without recourse to Alleghany. Under the terms of the credit agreement, Underwriters Re may borrow up to the maximum commitment available, which is reduced quarterly. Underwriters Re is required to make principal payments so the total loan balance is no greater than the maximum commitment available. In addition to the mandatory payments, Underwriters Re may permanently reduce the aggregate commitment in whole or in part at its sole discretion. At December 31, 1994 and 1993, the maximum commitment available was $75 million and $90 million, respectively. Amounts borrowed bear interest at either the LIBOR rate plus 1.75% or the higher of (a) the Corporate Base 34 30 Rate of the bank or (b) the Federal funds effective rate plus .5%. The credit agreement also contains covenants relating to, among other things, restrictions on debt, mergers, acquisitions, disposition of assets, capital expenditures, paying dividends, liens and investments. Additionally, the credit agreement requires Underwriters Re to maintain certain financial ratios and minimum levels of consolidated tangible net worth, statutory surplus and pre-tax statutory income. The credit agreement is secured primarily by a pledge of the capital stock of Underwriters Reinsurance. On December 20, 1991, World Minerals entered into a bank loan agreement, providing for borrowings of up to $70 million, pursuant to which it borrowed $50 million, without recourse to Alleghany. The loan proceeds were used to repay part of an acquisition-related advance from Alleghany. In January 1992, World Minerals entered into two interest rate swap agreements each with a notional amount of $30 million. These swaps mature on January 15, 1997 and January 15, 1999. These swaps were entered into for the purpose of converting variable interest rate exposure to a fixed rate. One such swap was entered into as a condition of a related variable rate loan agreement which required that hedging or interest rate protection agreements be maintained with respect to not less than 50% of the variable rate borrowing commitment. World Minerals is exposed to credit risk, in the unlikely event of nonperformance of the swap counterparty. 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 the last three fiscal years. The impact of Alleghany's hedging activities has been to increase the weighted average borrowing rates by 0.86%, 0.97%, and 0.86% and to increase reported interest expense by $3.2 million, $3.7 million, and $3.1 million for the years ending 1994, 1993, and 1992, respectively. Scheduled aggregate annual maturities of long-term debt for each of the next five years and thereafter are as follows (in thousands): - -------------------------------------------------------------------------------------------------------------------------- 1995 $ 30,293 1996 41,958 1997 43,244 1998 41,697 1999 100,971 Thereafter 76,910 - -------------------------------------------------------------------------------------------------------------------------- $335,073 ==========================================================================================================================
8. INCOME TAXES As discussed in Note 1, the Company adopted Statement No. 109 as of January 1, 1992. The cumulative effect of this change in accounting for income taxes, as determined as of January 1, 1992, approximated $8.2 million, and is separately reported in the 1992 statement of earnings. Pre-tax earnings from continuing operations include $11.5 million from foreign operations. Income tax expense (benefit) from continuing operations consists of the following (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- Federal State Foreign Total - -------------------------------------------------------------------------------------------------------------------------- 1994 - -------------------------------------------------------------------------------------------------------------------------- Current $11,719 $ 837 $3,665 $16,221 Deferred 7,846 572 (17) 8,401 - -------------------------------------------------------------------------------------------------------------------------- $19,565 $1,409 $3,648 $24,622 ========================================================================================================================== 1993 - -------------------------------------------------------------------------------------------------------------------------- Current $14,365 $1,091 $2,306 $17,762 Deferred (9,158) (105) 155 (9,108) - -------------------------------------------------------------------------------------------------------------------------- $ 5,207 $ 986 $2,461 $ 8,654 ========================================================================================================================== 1992 - -------------------------------------------------------------------------------------------------------------------------- Current $23,464 $1,123 $1,657 $26,244 Deferred 13,566 582 31 14,179 Charge equivalent to income taxes -- -- 726 726 - -------------------------------------------------------------------------------------------------------------------------- $37,030 $1,705 $2,414 $41,149 ==========================================================================================================================
The 1992 charge equivalent to income taxes relates to the utilization of World Minerals' pre-acquisition net operating loss carryforwards. Utilization of the net operating loss carryforwards results in a reduction of World Minerals' goodwill. The difference between the federal income tax rate and the effective income tax rate on continuing operations is as follows:
- -------------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- Federal income tax rate 35.0% 35.0% 34.0% Goodwill amortization 2.0 1.3 4.4 Income subject to dividends-received deduction (1.6) (0.5) (1.3) State taxes, net of federal tax benefit 0.9 0.2 1.5 Tax-exempt interest income (8.8) (4.0) (1.4) Reversal of previously accrued tax expenses -- (22.3) -- Other, net (1.0) -- 10.9 - -------------------------------------------------------------------------------------------------------------------------- 26.5% 9.7% 48.1% ==========================================================================================================================
35 31 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1994 and 1993 are as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- DEFERRED TAX ASSETS Title losses, trust, and other claim reserves $165,362 $160,183 Property and casualty loss reserves 52,375 53,231 Net operating loss carryforwards 8,184 34,515 Reserves for impaired assets 29,846 7,488 Expenses deducted for tax purposes when paid 35,794 31,577 Other 6,976 2,158 - -------------------------------------------------------------------------------------------------------------------------- 298,537 289,152 ========================================================================================================================== Valuation allowance 4,360 -- - -------------------------------------------------------------------------------------------------------------------------- Total deferred tax assets 294,177 289,152 - -------------------------------------------------------------------------------------------------------------------------- DEFERRED TAX LIABILITIES Unearned premium reserves 77,948 76,719 Deferred revenues and gains 51,594 67,570 Title plant 29,085 28,355 Tax over book depreciation 20,389 20,746 Other 15,799 15,236 - -------------------------------------------------------------------------------------------------------------------------- Total gross deferred tax liabilities 194,815 208,626 - -------------------------------------------------------------------------------------------------------------------------- Net deferred tax asset* $ 99,362 $ 80,526 ==========================================================================================================================
* Included in Other assets on the Consolidated Balance Sheet. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. The Company has established a valuation allowance of $4.4 million, for certain deferred state tax assets which it believes will not be realizable. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The amount of operating loss and tax credit carryforwards available to offset future federal taxable income is approximately $23.4 million, expiring through 2005. The Company utilized approximately $76.6 million of operating loss and tax credit carryforwards during 1994. The Internal Revenue Service had examined Alleghany's federal income tax returns through 1990. The Internal Revenue Service asserted substantial federal income tax deficiencies for the years 1984 and 1985. During 1993, the issues were settled resulting in a credit to earnings for previously accrued tax expenses of $20 million. Tax years 1984 and 1985 are now closed. 9. STOCKHOLDERS' EQUITY The total number of shares of all classes of capital stock which Alleghany has authority to issue is 30,000,000, of which 8,000,000 shares are preferred stock, par value of $1.00, and 22,000,000 shares are common stock, par value of $1.00. Stockholder's equity and surplus of CT&T, CTI, Security Union and Ticor Title are restricted by borrowing agreements and statutory limitations as to payment of dividends. At December 31, 1994 approximately $116.5 million was available for dividends to Alleghany. CT&T's statutory surplus at December 31, 1994 and 1993 was $157 million and $150 million, respectively, and statutory net income for the years ending December 31, 1994, 1993, and 1992 was $51 million, $71 million, and $47 million, respectively. Stockholders' equity and surplus of Underwriters Re is also restricted by borrowing agreements and statutory limitations as to payment of dividends. At December 31, 1994 approximately $1.2 million was available for dividends to Alleghany. Underwriters Reinsurance statutory surplus at December 31, 1994 and 1993 was $361 million and $248 million, respectively, and statutory net income for the year ended December 31, 1994 and the three months ended December 31, 1993 was $24 million and $12 million, respectively. Stockholders' equity of World Minerals is restricted by a borrowing agreement as to payment of dividends. At December 31, 1994 $7.5 million of World Minerals stockholders' equity was available for dividend payment to Alleghany. Additionally, payments of dividends (other than stock dividends) by Alleghany to its stockholders are limited by the terms of the revolving credit loan agreement which stipulates that Alleghany can pay dividends up to the sum of cumulative net earnings after 1990, proceeds from the issuance of stock after 1990 and $35 million, provided that Alleghany maintains certain financial ratios as defined in the agreement. At December 31, 1994 approximately $408 million of capital was available for dividends. In April 1993, stockholders of Alleghany approved a Long-Term Incentive Plan effective as of January 1, 1993 ("Incentive Plan"). The Incentive Plan replaces the 1983 Long-Term Incentive Plan which terminated 36 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) by its terms on December 31, 1992. The Incentive Plan is substantially similar to the 1983 Long-Term Incentive Plan. A maximum of 300,000 shares of Alleghany common stock can be paid to participants under the Incentive Plan through December 31, 2002 (subject to anti-dilution and other adjustments). The incentive plans permit Alleghany to provide 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 these plans to employees of the Company were 42,355 in 1994, 14,983 in 1993, and 16,741 in 1992 (as adjusted for stock dividends). Under the incentive plans, participants are entitled, at the end of a four-year award period, to the fair value of an equal number of shares of Alleghany's common stock (adjusted for anti-dilution from date of award), 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, 1994 (for all award periods through the award period 1994), approximately 239,000 performance shares were granted, of which 116,000 have been paid out, none have expired, and 123,000 have not matured. The amounts charged to the Company's earnings with respect to this and the prior plan were $4.5 million in 1994, $3.3 million in 1993, and $3.5 million in 1992. In April 1994, stockholders of Alleghany approved a stock option plan effective in April 1993 under which options to purchase a maximum of 75,000 shares (subject to anti-dilution and other adjustments) of Alleghany's common stock are awarded to non-employee directors. The plan replaces a substantially similar plan which terminated in April 1993. The plans provide for the automatic grant of non-qualified stock options to purchase 1,000 shares of common stock in each year after 1987 to each non-employee director. Options to purchase 7,000 shares at the then fair market value of $141.75 were granted in 1994. Options to purchase 7,000 shares at the then fair market value of $147.00 were granted in 1993. Through December 31, 1994, as adjusted for stock dividends, 54,000 options were granted, 13,000 options have been exercised, and 41,000 options remain outstanding. Alleghany has reserved 71,649 shares at December 31, 1994 for the satisfaction of exercises of options (as adjusted for stock dividends). The Board of Directors has authorized the purchase from time to time of additional shares of common stock for the treasury. During 1994, 1993, and 1992, Alleghany repurchased 69,509 shares, 55,200 shares, and 10,500 shares of its common stock at a cost of $10.1 million, $7.9 million, and $1.2 million, respectively. 10. PERMITTED STATUTORY ACCOUNTING PRACTICES The Company's insurance subsidiaries are required to file annual statutory statements with insurance regulatory authorities which are prepared on an accounting basis prescribed or permitted by such authorities. Prescribed statutory accounting principles include state laws, regulations, and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners. Permitted statutory accounting practices encompass all accounting practices that are not prescribed; such practices differ from state to state, may differ from company to company within a state, and may change in the future. The Company's insurance subsidiaries have prepared their annual statutory statements using the following permitted statutory accounting practices, which differ from prescribed accounting practices, but which have been approved by their respective states of domicile: - - CTI is permitted to include a deferred tax asset attributable to net operating loss carryforwards of a merged affiliate company as an admitted asset. Under prescribed statutory accounting practices, deferred tax assets are not recognized as admitted assets and would be charged off to surplus as regards policyholders. The inclusion of this deferred tax asset as an admitted asset increased CTI's surplus as regards policyholders by $9.2 million as of December 31, 1994. 37 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - - CTI's Statutory Premium Reserve ("SPR") is determined by a formula as prescribed by regulations of the state of Missouri, its domiciliary state. The formula prescribes a calculation which requires use of policy liability statistics. The Company's operating systems capture the appropriate liability statistics on approximately 85% of all policies written. The remaining information is not yet available. Accordingly, CTI has calculated the required provision to be SPR on the remaining 15% of written policies via an interpolation model. CTI has been granted permission to continue to use this interpolation model until all liabilities statistics become available. We are unable to quantify the effect on surplus as regards policy holders which results from using the interpolation model versus actual liability statistics. - - CTI's SPR includes amounts attributable to former affiliate companies which were merged into CTI in 1992. With the approval of CTI's regulators, CTI has recorded annual drawdowns of the reserves attributable to the merged entities using the SPR formulas formerly used by those entities as prescribed by their domiciliary states. These formulas differ from the SPR formula as prescribed by the State of Missouri. Management is unable to quantify the effect on surplus as regards policyholders which results from this permitted practice. - - Ticor has a co-insurance agreement with its New York domiciled subsidiary company. As a result, Ticor calculates its SPR using the formula prescribed by the state of New York rather than the SPR formula prescribed by the state of California, Ticor's domiciliary state. The New York SPR formula results in a higher provision and reserve. This practice has been acknowledged by regulators from the state of California. The amount of the difference between the SPR as determined under the New York and California formulas is not known, but use of the California SPR formula would have significantly increased Ticor's surplus as regards policyholders. - - Underwriters Reinsurance has no permitted statutory accounting practices that individually or in the aggregate materially affect statutory surplus. 11. RETIREMENT PLANS The Company has profit sharing and several noncontributory defined benefit pension plans covering substantially all of its employees. The defined benefits are based on years of service and the employee's average compensation generally during the last five years of employment. The Company's funding policy is to contribute annually the amount necessary to satisfy the Internal Revenue Service's funding standards. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. CT&T is a qualified trust company and, as such, serves as trustee for the assets of certain of the pension plans. The following table sets forth the defined benefit plans' funded status at December 31, 1994 and 1993 (in millions):
- -------------------------------------------------------------------------------------------------------------------------- 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS Vested benefit obligation $107.6 $116.7 ========================================================================================================================== Accumulated benefit obligation $114.6 $128.1 ========================================================================================================================== Projected benefit obligation $130.6 $149.0 Plan assets at fair value 114.4 122.9 - -------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation, more than plan assets (16.2) (26.1) Unrecognized net loss 26.5 49.8 Unrecognized prior service cost 6.1 5.8 Unrecognized net asset (4.5) (9.0) - -------------------------------------------------------------------------------------------------------------------------- Pension asset recognized in the balance sheet $ 11.9 $ 20.5 ========================================================================================================================== 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- NET PENSION COST FOR 1994, 1993 AND 1992 INCLUDED THE FOLLOWING EXPENSE (INCOME) COMPONENTS Service cost - benefits earned during the year $ 7.9 $ 6.7 $ 6.2 Interest cost on projected benefit obligation 10.9 9.9 9.7 Actual return on plan assets 1.9 (7.2) (6.0) Net amortization and deferral (8.9) (1.5) (3.2) ========================================================================================================================== Net periodic pension cost included in cost and expenses $ 11.8 $ 7.9 $ 6.7 ========================================================================================================================== 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- 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%-10.0% Range of weighted average discount rates 8.0%-8.8% 6.0%-7.5% Range of expected long-term rates of return 4.0%-9.0% 4.0%-9.0% ==========================================================================================================================
Alleghany and its subsidiaries also provide supplemental retirement benefits through deferred compensation programs and profit sharing plans for certain of its officers and employees for which earnings were charged $12.5 million in 1994, $17.3 million in 1993, and $13.0 million in 1992. 38 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities 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 2049. Rent expense was $66.5 million in 1994, $65.7 million in 1993, and $60.0 million in 1992. The aggregate minimum payments under operating leases with initial or remaining terms of more than one year are $41 million, $34 million, $29 million, $25 million, $20 million, and $136 million in 1995, 1996, 1997, 1998, 1999 and thereafter, respectively. The Company's subsidiaries and division are parties to pending litigation and claims in connection with the ordinary course of their businesses. Each such operating unit makes provisions for estimated losses to be incurred in such litigation and claims, including legal costs. In the opinion of management, based in part on advice of counsel, such provision is adequate. 13. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- Calculated Carrying Fair Amount Value - -------------------------------------------------------------------------------------------------------------------------- Assets Notes receivable $ 91,536 $ 91,536 Liabilities Long-term debt $335,073 $334,819 ==========================================================================================================================
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: NOTES RECEIVABLE: The carrying amount approximates fair value because interest rates approximate market rates. LONG-TERM DEBT: The fair value of the Company's long-term debt is estimated based on the quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. The fair value includes the effects of the interest rate swaps. 14. SEGMENTS OF BUSINESS Information concerning the Company's continuing operations by industry segment as of and for the years ended December 31, 1994, 1993, and 1992, respectively, is summarized as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- 1994 1993 1992 - -------------------------------------------------------------------------------------------------------------------------- REVENUES Title, trust and escrow $1,352,646 $1,440,151 $1,345,724 Property and casualty reinsurance* 225,390 40,712 -- Mining and filtration 162,636 149,545 141,072 Corporate activities 86,433 67,739 62,024 - -------------------------------------------------------------------------------------------------------------------------- Total $1,827,105 $1,698,147 $1,548,820 ========================================================================================================================== EARNINGS FROM CONTINUING OPERATIONS, BEFORE INCOME TAXES Title, trust and escrow $ 72,510 $ 98,171 $ 96,489 Property and casualty reinsurance* 12,504 4,058 -- Mining and filtration 23,539 13,745 16,504 Corporate activities 36,476 19,527 17,758 - -------------------------------------------------------------------------------------------------------------------------- 145,029 135,501 130,751 Interest expense 29,285 29,101 30,280 Corporate administration 22,750 16,897 14,956 - -------------------------------------------------------------------------------------------------------------------------- Total $ 92,994 $ 89,503 $ 85,515 ========================================================================================================================== IDENTIFIABLE ASSETS AT DECEMBER 31 Title, trust and escrow $1,407,840 $1,515,746 $1,611,136 Property and casualty reinsurance* 1,510,335 1,339,824 -- Mining and filtration 215,204 208,377 194,840 Corporate activities 454,512 405,176 420,661 - -------------------------------------------------------------------------------------------------------------------------- Total $3,587,891 $3,469,123 $2,226,637 ========================================================================================================================== CAPITAL EXPENDITURES Title, trust and escrow $ 19,427 $ 12,350 $ 24,026 Property and casualty reinsurance* 1,396 199 -- Mining and filtration 9,501 25,457 5,967 Corporate Activities 217 243 283 - -------------------------------------------------------------------------------------------------------------------------- Total $ 30,541 $ 38,249 $ 30,276 ========================================================================================================================== DEPRECIATION AND AMORTIZATION Title, trust and escrow $ 25,540 $ 29,161 $ 42,084 Property and casualty reinsurance * 8,916 2,201 -- Mining and filtration 9,657 6,823 8,202 Corporate activities 665 731 1,491 - -------------------------------------------------------------------------------------------------------------------------- Total $ 44,778 $ 38,916 $ 51,777 ==========================================================================================================================
* Includes results of operations from October 1, 1993. 39 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Selected quarterly financial data for 1994 and 1993 are presented below (in thousands, except per share amounts):
- -------------------------------------------------------------------------------------------------------------------------- Quarter Ended ------------------------------------------------------------------- Mar. 31 Jun. 30 Sep. 30 Dec. 31 - -------------------------------------------------------------------------------------------------------------------------- 1994 - -------------------------------------------------------------------------------------------------------------------------- Revenues from continuing operations $479,983 $468,170 $447,642 $431,310 ========================================================================================================================== Earnings from continuing operations $ 16,989 $ 16,330 $ 21,195 $ 13,858 Earnings from discontinued operations 2,950 2,275 1,040 -- Gain on sale of Sacramento Savings, net -- 16,800 -- 46,069 - -------------------------------------------------------------------------------------------------------------------------- Net earnings $ 19,939 $ 35,405 $ 22,235 $ 59,927 ========================================================================================================================== Net earnings per share of common stock:* Continuing operations $ 2.51 $ 2.42 $ 3.04 $ 2.00 Discontinued operations .44 .33 .16 -- Gain on sale of Sacramento Savings, net -- 2.49 -- 6.66 - -------------------------------------------------------------------------------------------------------------------------- Net earnings $ 2.95 $ 5.24 $ 3.20 $ 8.66 ========================================================================================================================== 1993 - -------------------------------------------------------------------------------------------------------------------------- Revenues from continuing operations $365,987 $396,900 $428,355 $506,905 ========================================================================================================================== Earnings from continuing operations $ 29,163 $ 16,355 $ 16,187 $ 19,144 Earnings from discontinued operations 4,180 4,972 4,177 3,374 - -------------------------------------------------------------------------------------------------------------------------- Net earnings $ 33,343 $ 21,327 $ 20,364 $ 22,518 ========================================================================================================================== Net earnings per share of common stock: * Continuing operations $ 4.28 $ 2.41 $ 2.38 $ 2.83 Discontinued operations .62 .73 .62 .50 - -------------------------------------------------------------------------------------------------------------------------- Net earnings $ 4.90 $ 3.14 $ 3.00 $ 3.33 ==========================================================================================================================
* Restated to reflect subsequent stock dividends. The $16.8 million gain on sale of Sacramento Savings recognized in the second quarter of 1994 represents a tax benefit which reflected the excess of the Company's tax basis in Sacramento Savings over its book basis. The sum of the four quarters of the net earnings per share for 1994 presented above do not agree to the total net earnings per share for 1994. This difference is due to the distribution of 212,757 shares of Alleghany common stock on July 31, 1994 in connection with the acquisition of Montag & Caldwell, Inc. 16. OTHER INFORMATION a. Other assets shown in the consolidated balance sheets at December 31, 1994 and 1993 include goodwill, net of accumulated amortization, as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- Amortization 1994 1993 Period - -------------------------------------------------------------------------------------------------------------------------- CT&T $ 55,770 $ 56,166 10-40 years Underwriters Re 51,880 54,046 20 years World Minerals 16,784 15,389 40 years - -------------------------------------------------------------------------------------------------------------------------- $124,434 $125,601 ==========================================================================================================================
Goodwill is reviewed for impairment whenever events or circumstances provide evidence that suggests that the carrying amount of the asset may not be recoverable. In addition, other assets shown at December 31, 1994 and 1993 includes $11.3 million and $10.4 million, respectively, of deferred acquisition costs. Amortization of deferred acquisition costs included in the 1994 and 1993 statement of earnings were $ 1.0 million and $1.2 million, respectively. b. Other liabilities shown in the consolidated balance sheets at December 31, 1994 and 1993 include $88.5 million and $82.6 million, respectively, of accounts payable and $ 52.8 million and $49.1 million, respectively, of unearned premiums. c. Property and equipment, net of accumulated depreciation and amortization at December 31, 1994 and 1993, is as follows (in thousands):
- -------------------------------------------------------------------------------------------------------------------------- 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- Land $ 21,403 $ 23,035 Buildings and improvements 62,349 59,450 Furniture and equipment 174,010 158,781 Leasehold improvements 25,187 23,920 - -------------------------------------------------------------------------------------------------------------------------- 282,949 265,186 Less: Accumulated depreciation and amortization (79,966) (60,144) - -------------------------------------------------------------------------------------------------------------------------- $202,983 $205,042 ==========================================================================================================================
40 36 INDEPENDENT AUDITORS' REPORT (LOGO) KPMG Peat Marwick LLP Certified Public Accountants 345 Park Avenue New York, NY 10154 THE BOARD OF DIRECTORS AND STOCKHOLDERS ALLEGHANY CORPORATION: We have audited the accompanying consolidated balance sheets of Alleghany Corporation and subsidiaries as of December 31, 1994 and 1993, 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, 1994. These consolidated financial statements, appearing on pages 22 through 40, 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, 1994 and 1993, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company adopted the provisions of the Financial Accounting Standards Board's Statements of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and No. 109, "Accounting for Income Taxes" at December 31, 1993 and in 1992, respectively. /S/ KPMG PEAT MARWICK LLP KPMG Peat Marwick LLP February 28, 1995 Member Firm of Klynveld Peat Marwick Goerdeler 41 37 APPENDIX --------
Page Narrative Description of Graphic or Image Material - ---- -------------------------------------------------- 2 A table of common stockholders' equity per share at year-end for the years 1967-94 appears in the electronic format version, replacing a bar chart that appears in the paper format version. 2 A table of market value of stock and cash at year-end for the years 1967-94 appears in the electronic format version, replacing a bar chart that appears in the paper format version. 4 Photographs of John J. Burns, Jr., President, and F.M. Kirby, Chairman, appear in the paper format version. 6 A table of surplus plus statutory premium reserve of ten title insurers at September 30, 1994 appears in the electronic format version, replacing a bar chart that appears in the paper format version. 7 A list of CT&T locations in the United States appears in the electronic format version, replacing a map that appears in the paper format version. 9 A table of CT&T bond results as compared with the Lehman Aggregate Index, based on annualized rates of return for the one-year, three-year, five-year and ten-year periods ending December 31, 1994, appears in the electronic format version, replacing a chart that appears in the paper format version. 9 A table of Montag & Caldwell equity results as compared with the S&P 500 Index, based on growth of $100 during the years 1988-94, appears in the electronic format version, replacing a chart that appears in the paper format version. 10 A table of statutory combined ratios of Underwriters as compared with reinsurers in general at year-end for the years 1990-94 appears in the electronic format version, replacing a chart that appears in the paper format version.
38
Page Narrative Description of Graphic or Image Material - ---- -------------------------------------------------- 10 A table of statutory operating ratios of Underwriters compared with reinsurers in general at year-end for the years 1990-94 appears in the electronic format version, replacing a chart that appears in the paper format version. 11 A list of Underwriters locations in the United States appears in the electronic format version, replacing a map that appears in the paper format version. 12 A table of statutory surplus of Underwriters for the years 1990-94 appears in the electronic format version, replacing a bar chart that appears in the paper format version. 13 A list of World Minerals locations in North America, South America and Europe appears in the electronic format version, replacing a map that appears in the paper format version. 14 A table of earnings before taxes of World Minerals for the years 1992-94 appears in the electronic format version, replacing a bar chart that appears in the paper format version. 15 A list of Heads and Threads distribution centers in the United States appears in the electronic format version, replacing a map that appears in the paper format version.
-2- EX-21 14 LIST OF SUBSIDIARIES OF ALLEGHANY 1 Exhibit 21 SUBSIDIARIES OF ALLEGHANY Chicago Title and Trust Comepany (Illinois) Chicago Title Insurance Company (Missouri) Alexander Title Agency, Inc. (Virginia) CATCO, Inc. (Oklahoma - 50%) Chicago Title Company (California) Tri-Safe, Inc. (California - 25%) Chicago Title Company of Alameda County (California - 80%) Chicago Title Insurance Company of Puerto Rico (Puerto Rico - 99.2%) Creative Land Services, Inc. (Minnesota) CTOA, Inc. (Texas) Johnson County Title Company (Kansas) Liberty Title Company (Minnesota) Liberty Escrow Services Company (Minnesota) McHenry County Title Company (Illinois) Meade Title Agency, Inc. (Ohio) Service Title of Virginia, Inc. (Virginia - 30%) White River Abstract & Title Co., Inc. (Indiana) Joint Title Plants and Associations CTP, Inc. (Florida - 16%) Dallas Seven Index, Inc. (Texas - 14%) SKLD, Inc. (Colorado - 12.91%) Title Data, Inc. (Texas - 6.25%) Spring Services Corporation (California) Spring Services Texas, Inc. (Texas) TPO, Inc. (Oklahoma) Title and Trust Company (Idaho) The Title Guarantee Company (Maryland) Maryland Escrow, Inc. (Maryland) Heritage American Insurance Services, Inc. (California) Chicago Deferred Exchange Corporation (Illinois) Chicago Title and Trust Company Foundation (Illinois)* Title Accounting Services Corporation (Illinois) Iowa Land Services Corporation (Iowa) Lake County Investment Corporation (Indiana) The Lake County Trust Company (Indiana) Montag & Caldwell Associates, Inc. (Georgia) Montag & Caldwell Inc. (Georgia) Chicago Technology Services Corp. (Illinois) RealInfo, Inc. (Illinois LLC - 50%) - ----------------------- * A charitable foundation in which Chicago Title and Trust Company possesses no ownership interest. 2 Ticor Financial Company (California) Chicago Title Agency of Central Ohio (Ohio) Security Union Title Insurance Company (California) Charter Title Company (California) Land Escrow and Safe Deposit Company (California) Land Title of Pierce County (Washington) Los Angeles Escrow Company (California) Merchants Title Company (California) Northwest Equities, Inc. (Texas) Guardian Title Company of Houston (Texas) RJW Development Company (New Jersey) Chicago Title Insurance Company of Oregon (Oregon) Real Estate Exchange, Inc. (Oregon) Security Trust Company (California) Southern California Escrow Company (California) Title-Tax, Inc. (California) Ticor Title Insurance Company (California) Altico, Inc. (Alaska) Commonwealth Title Co. (Washington) Ticor Title Guarantee Company (New York) Washington Title Company (Washington) Alleghany Financial Inc. (Delaware) Sacramento Savings Bank (California) SSB Financial Services (California) Central Valley Security Company (California) Superior California Insurance Agency (California) Alleghany Funding Corporation (Delaware) Alleghany Capital Corporation (Delaware) Alleghany Properties, Inc. (Delaware) Sacramento Properties Holdings, Inc. (California) Mineral Holdings Inc. (Delaware - 93.8%) World Minerals Inc. (Delaware) Celite Corporation (Delaware) Celite Europe Corporation (Delaware) Celite France, S.A. (France) Celite Italiana S.r.L. (Italy) Celite Hispanica, S.A. (Spain) -2- 3 Celite (U.K.) Limited (United Kingdom) Celite Mexico, Inc. (New York) Celite Canada Inc. (Canada) Celite Island, h.f. (Iceland) Kisilidjan, h.f. (Iceland - 48.56%) Celite Mexico S.A. de C.V. (Mexico) Almeria, S.A. de C.V. (Mexico) Diatomita San Nicolas, S.A. de C.V. (Mexico) Celite Pacific Limited (Hong Kong) Celite China Inc. (Delaware) Linjiang Celite Diatomite Company Limited (People's Republic of China 70%) Celite Jilin, Inc. (Delaware) Changbai Celite Diatomite Company Limited (People's Republic of China 65%) Harborlite Corporation (Delaware) Perlite, Inc. (Delaware) Harborlite (U.K.) Limited (United Kingdom) Harborlite France (France) Bibb Steel and Supply Company (Delaware) MSL Property Holdings, Inc. (Delaware) MSL Capital Recovery Corp. (Delaware) J & E Corporation (Tennessee) Allied Structural Steel Corporation (Tennessee) URC Holdings Corp. (Delaware - 96.4%) Underwriters Reinsurance Company (New Hampshire) Commercial Underwriters Insurance Company (California) Underwriters Insurance Company (Nebraska) URC Risk Managers, Inc. (Delaware) -3- EX-23 15 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Alleghany Corporation: We consent to incorporation by reference in the Registration Statements No. 33-27598 on Form S-8 and No. 33-55707 on Form S-3 of our reports dated February 28, 1995 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, 1994. Our reports refer to the adoption of the provisions of Financial Accounting Standards Board Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and No. 109, "Accounting for Income Taxes" at December 31, 1993 and in 1992, respectively. We also consent to the reference to our Firm under the headings "Financial Statements" in Registration Statement No. 33-27598 and "Experts" in Registration Statement No. 33-55707. KPMG Peat Marwick LLP /s/ KPMG Peat Marwick LLP New York, New York March 17, 1995 EX-27 16 FINANCIAL DATA SCHEDULE
7 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ALLEGHANY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1994 AND THE RELATED CONSOLIDATED STATEMENT OF EARNINGS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1994 JAN-1-1994 DEC-31-1994 1,578,514 0 0 357,220 0 0 1,935,734 107,942 0 0 3,587,891 1,477,600 0 0 0 335,073 0 0 0 1,021,193 3,587,891 1,496,987 158,950 8,741 162,427 251,241 0 0 92,994 24,622 68,372 69,134 0 0 137,506 20.12 20.12 1,041,498 241,271 6,630 16,931 200,288 1,072,385 0
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