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Alleghany's net earnings in the 2009 second quarter were $46.0 million, or $5.11 per common share (presented on a basic basis throughout), compared with net earnings of $17.8 million, or $1.59 per common share, in the second quarter of 2008. For the first six months of 2009, net earnings were $90.6 million, or $9.92 per common share, compared with net earnings of $113.7 million, or $12.36 per common share in the first six months of 2008. Net earnings amounts include the following components:
Three Months ended June30, Six Months ended June30,
Per Share Per Share
(in millions, except for per share amounts) 2009 2008 2009 2008 2009 2008 2009 2008
Net catastrophe losses after tax $3.3 $13.1 $0.39 $1.54 $6.4 $13.0 $0.75 $1.53
Net realized capital gains after tax $51.7 $16.4 $6.04 $1.93 $91.0 $74.8 $10.69 $8.80
Other than temporary impairment losses after tax $6.3 $30.6 $0.73 $3.60 $49.3 $40.4 $5.79 $4.75
A summary of Alleghany's results for the three and six months ended June 30, 2009 and 2008 is as follows:
Three months ended Six Months ended
June 30 June 30
(in millions) 2009 2008 Change 2009 2008 Change
AIHL insurance group (1):
Underwriting profit (loss) (2)
RSUI $ 40.8 $ 54.7 $ (13.9 ) $ 83.0 $ 93.3 $ (10.3 )
CATA 3.7 3.5 0.2 5.9 7.7 (1.8 )
EDC (54.1 ) (29.9 ) (24.2 ) (60.7 ) (33.0 ) (27.7 )
AIHL Re -- -- -- -- 0.1 (0.1 )
(9.6 ) 28.3 (37.9 ) 28.2 68.1 (39.9 )
Net investment income 27.7 30.6 (2.9 ) 54.7 62.2 (7.5 )
Net realized capital gains 19.0 24.3 (5.3 ) 26.5 35.9 (9.4 )
Other than temporary impairment losses (3) (9.7 ) (47.1 ) 37.4 (75.8 ) (62.1 ) (13.7 )
Other income, less other expenses (11.4 ) (11.5 ) 0.1 (19.8 ) (22.5 ) 2.7
Total AIHL insurance group 16.0 24.6 (8.6 ) 13.8 81.6 (67.8 )
Corporate activities (4)
Net investment income (3.0 ) 4.2 (7.2 ) (3.1 ) 7.9 (11.0 )
Net realized capital gains 60.5 1.0 59.5 113.5 79.1 34.4
Other than temporary impairment losses -- -- -- -- -- --
Other income 0.1 -- 0.1 0.1 -- 0.1
Corporate administration and other expenses 7.7 9.2 1.5 8.0 19.8 11.8
Interest expense 0.2 0.2 -- 0.3 0.3 --
Total 65.7 20.4 45.3 116.0 148.5 (32.5 )
Income taxes 19.7 7.4 (12.3 ) 25.4 44.9 19.5
Earnings from continuing operations 46.0 13.0 33.0 90.6 103.6 (13.0 )
Earnings from discontinued operations, net of tax (5) -- 4.8 (4.8 ) -- 10.1 (10.1 )
Net earnings $ 46.0 $ 17.8 $ 28.2 $ 90.6 $ 113.7 $ (23.1 )
(1) Alleghany Insurance Holdings LLC ("AIHL") the holding company for
Alleghany's property and casualty and surety insurance operating
units consisting of RSUI Group, Inc. ("RSUI"), Capitol Transamerica
Corporation and Platte River Insurance Company (collectively,
"CATA") and Employers Direct Corporation ("EDC"), as well as AIHL Re
LLC ("AIHL Re").
(2) Represents net premiums earned less loss and loss adjustment
expenses and underwriting expenses, all as determined in accordance
with GAAP, and does not include net investment income, net realized
capital gains (losses) or other income, less other expenses. Please
refer to "Comment on Regulation G" elsewhere herein.
(3) Reflects impairment charges for unrealized losses related to AIHL's
investment portfolio that are required to be charged against
earnings as realized losses.
(4) Corporate activities consist of Alleghany Properties Holdings LLC,
Alleghany's investments in Homesite Group Incorporated and ORX
Exploration, Inc., and corporate activities at the parent level.
(5) Discontinued operations consist of the operations of Darwin
Professional Underwriters, Inc. prior to its disposition in October
2008, net of minority interest expense and gain on disposition in
2008 for all periods presented.
2009 second quarter results, compared with results of the corresponding 2008 period, primarily reflect:
-- an increase in earnings from continuing operations before income taxes at Corporate activities, primarily due to an increase in net realized capital gains of $60.5 million resulting principally from sales at the parent level of Burlington Northern Santa Fe Corporation common stock in the 2009 period compared with no such sales in the 2008 period; partially offset by
-- a decrease in earnings from continuing operations before income taxes at AIHL, primarily due to lower underwriting profits; which reflect (i) an increase in EDC's underwriting loss, principally as a result of a substantial decrease in net premiums earned, a $34.5 million reserve increase in the 2009 period (compared with a $24.7 million reserve increase in the 2008 period), and an $8.0 million increase in its premium deficiency reserve; (ii) a decrease in underwriting profit at RSUI primarily due to lower net premiums earned resulting from the impact of continuing competition; and (iii) lower other than temporary impairment losses due in part to comparatively improved equity market returns in the 2009 period, which partially offset the impact of lower underwriting profits.
2009 six month results, compared with results of the corresponding 2008 period, primarily reflect:
-- a decrease in earnings from continuing operations before income taxes at AIHL primarily due to: (i) an increase in EDC's underwriting loss principally as a result of the factors discussed above with respect to the 2009 second quarter; (ii) a decrease in underwriting profit at RSUI primarily due to lower net premiums earned resulting from the impact of continuing competition, partially offset by a decrease in loss and loss adjustment expenses primarily as a result of lower net premium volume and lower property losses; and (iii) an increase in other than temporary impairment losses with respect to AIHL's investment portfolio; partially offset by
-- an increase in earnings from continuing operations before income taxes at Corporate activities, primarily due to an increase in net realized capital gains resulting from $113.1 million of sales at the parent level of Burlington Northern Santa Fe Corporation common stock in the 2009 first half compared with $78.1 million of such sales in the 2008 first half.
Mr. Hicks commented that "The first half of 2009 saw the continuation of a challenging investment environment and intense competition in the property and casualty insurance market. In this environment, Alleghany's approach is to manage expenses prudently, preserve capital where possible and remain positioned to participate in a recovery when such a recovery eventually emerges. In this regard, Alleghany saw some improvement in the market value of its equity portfolio in the 2009 second quarter and maintained its strong liquidity with approximately $726.3 million of marketable securities and cash at the parent level and AIHL."
"With respect to operating unit results, despite intense competition, RSUI and CATA produced underwriting profits in the second quarter and first six months of 2009. On the other hand, EDC's results in the first half of 2009 continued to be poor, with EDC reporting an underwriting loss of $60.7 million in the period, primarily reflecting a substantial decrease in net premiums earned, a $34.5 million reserve increase, and an $8.0 million increase in its premium deficiency reserve. In June, EDC determined that it was unable to write business at rates it deemed adequate due to the current state of the California workers' compensation market, and as a result, determined to cease soliciting new or renewal business on a direct basis commencing August 1, 2009. In light of such determination, EDC took corresponding expense reduction steps, including staff reductions. A.M. Best downgraded EDC's insurance company rating from A- (Excellent) with a negative outlook to B++ (Good) with a stable outlook. EDC intends to re-enter the market at such time as it determines that rates have returned to an adequate level."
Information regarding the pre-tax results from continuing operations of AIHL's operating units is attached as Exhibit A. During the first six months of 2009, Alleghany purchased in the open market an aggregate of 141,035 shares of its common stock for approximately $35.7 million, at an average price per share of $253.06, and an aggregate of 442,998 shares of its 5.75% Mandatory Convertible Preferred Stock for approximately $117.4 million, at an average price per share of $264.92, pursuant to the previously announced authorization by its Board of Directors to repurchase up to $300.0 million of Alleghany's common and preferred stock. On June 15, 2009, all outstanding shares of the 5.75% Mandatory Convertible Preferred Stock were mandatorily converted into shares of Alleghany common stock. Each outstanding share of the 5.75% Mandatory Convertible Preferred Stock was automatically converted into 1.0139 shares of Alleghany common stock, and Alleghany issued approximately 698,009 shares of its common stock for the 688,621 shares of the 5.75% Mandatory Convertible Preferred Stock that were outstanding at the date of the mandatory conversion. As of June 30, 2009, Alleghany had 9,013,587 shares of its common stock outstanding, adjusted to reflect the common stock dividend declared in February 2009.
Additional information regarding the results for the second quarter and first six months of 2009 of Alleghany and its operating units will be contained in Alleghany's Quarterly Report on Form 10-Q for the period ended June 30, 2009, to be filed with the U.S. Securities and Exchange Commission on or about August 6, 2009. A copy of the Form 10-Q will be available on Alleghany's website at www.alleghany.com or on the Securities and Exchange Commission's website at www.sec.gov. Readers are urged to review the Form 10-Q for a more complete discussion of Alleghany's financial performance in the second quarter and first six months of 2009.
Comment on Regulation G
This press release includes certain non-GAAP financial measures. The reconciliations of such measures to the most comparable GAAP financial measures are included in Exhibit A of this press release. Throughout this press release Alleghany presents its operations in the way it believes will be most meaningful and useful to the investing public and others who use such information in evaluating Alleghany's results.
Alleghany shows earnings from continuing operations, before income taxes (a GAAP financial measure), as well as underwriting profit (a non-GAAP financial measure), which is earnings from continuing operations, before income taxes, adjusted to exclude the impact of net investment income, net realized capital gains and losses, and other income, less other expenses. The presentation of underwriting profit is intended to enhance the understanding of AIHL's insurance operating units' operating results by highlighting earnings attributable to their underwriting performance. With respect to AIHL's insurance operating units, earnings from continuing operations, before income taxes, may show a profit despite an underlying underwriting loss. If underwriting losses persist over extended periods, an insurance company's ability to continue as an ongoing concern may be at risk. Investors should consider the non-GAAP measures contained herein in addition to, and not as a substitute for, measures of financial performance prepared in accordance with GAAP.
Forward-looking Statements
This release contains disclosures which are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as "may," "will," "expect," "project," "estimate," "anticipate," "plan," "believe," "potential," "should," "continue" or the negative versions of those words or other comparable words. These forward-looking statements are based upon Alleghany's current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and Alleghany's future financial condition and results. These statements are not guarantees of future performance, and Alleghany has no specific intention to update these statements. The uncertainties and risks include, but are not limited to, risks relating to
-- significant weather-related or other natural or human-made catastrophes and disasters;
-- the cyclical nature of the property and casualty industry;
-- changes in market prices of our significant equity investments and changes in value of our debt securities portfolio;
-- the long-tail and potentially volatile nature of certain casualty lines of business written by Alleghany's insurance operating units;
-- the cost and availability of reinsurance;
-- exposure to terrorist acts;
-- the willingness and ability of Alleghany's insurance operating units' reinsurers to pay reinsurance recoverables owed to such insurance operating units;
-- changes in the ratings assigned to Alleghany's insurance operating units;
-- claims development and the process of estimating reserves;
-- legal and regulatory changes;
-- the uncertain nature of damage theories and loss amounts;
-- increases in the levels of risk retention by Alleghany's insurance operating units; and
-- adverse loss development for events insured by Alleghany's insurance operating units in either the current year or prior years.
Additional risks and uncertainties include general economic and political conditions, including the effects of a prolonged U.S. or global economic downturn or recession; changes in costs; variations in political, economic or other factors; risks relating to conducting operations in a competitive environment; effects of acquisition and disposition activities, inflation rates or recessionary or expansive trends; changes in interest rates; extended labor disruptions, civil unrest or other external factors over which Alleghany has no control; and changes in Alleghany's plans, strategies, objectives, expectations or intentions, which may happen at any time at Alleghany's discretion. As a consequence, current plans, anticipated actions and future financial condition and results may differ from those expressed in any forward-looking statements made by Alleghany or on its behalf.
Exhibit A AIHL Operating Unit Pre-Tax Results (in millions, except ratios) RSUI AIHL Re CATA EDC AIHL Three months ended June 30, 2009 Gross premiums written $337.0 -- $45.1 $15.6 $397.7 Net premiums written 209.5 -- 43.4 11.7 264.6 Net premiums earned (1) $159.2 -- $41.2 $4.1 $204.5 Loss and loss adjustment expenses 76.0 -- 19.0 48.9 143.9 Commission, brokerage and other underwriting expenses (2) 42.4 -- 18.5 9.3 70.2 Underwriting profit (loss) (3) $40.8 -- $3.7 $(54.1 ) $(9.6 ) Net investment income (1) 27.7 Net realized capital gains (1) 19.0 Other than temporary impairment losses (1) (9.7 ) Other income (1) 0.4 Other expenses (2) (11.8 ) Earnings from continuing operations, before income taxes $16.0 Loss ratio (4) 47.8 % -- 46.1 % n/m 70.4 % Expense ratio (5) 26.6 % -- 45.0 % n/m 34.4 % Combined ratio (6) 74.4 % -- 91.1 % n/m 104.8 % Three months ended June 30, 2008 Gross premiums written $314.4 -- $56.9 $19.7 $391.0 Net premiums written 192.1 -- 49.2 18.9 260.2 Net premiums earned (1) $174.2 -- $48.0 $18.0 $240.2 Loss and loss adjustment expenses 76.1 -- 23.9 39.4 139.4 Commission, brokerage and other underwriting expenses (2) 43.4 -- 20.6 8.5 72.5 Underwriting profit (loss) (3) $54.7 -- $3.5 $(29.9 ) $28.3 Net investment income (1) 30.6 Net realized capital gains (1) 24.3 Other than temporary impairment losses (1) (47.1 ) Other income (1) 0.1 Other expenses (2) (11.6 ) Earnings from continuing operations, before income taxes $24.6 Loss ratio (4) 43.7 % -- 49.8 % 218.2 % 58.0 % Expense ratio (5) 24.9 % -- 43.0 % 47.3 % 30.2 % Combined ratio (6) 68.6 % -- 92.8 % 265.5 % 88.2 %
Exhibit A AIHL Operating Unit Pre-Tax Results (in millions, except ratios) RSUI AIHL Re CATA EDC AIHL Six months ended June 30, 2009 Gross premiums written $587.1 -- $87.2 $32.1 $706.4 Net premiums written 359.2 -- 81.6 27.0 467.8 Net premiums earned (1) $319.9 -- $83.2 $19.5 $422.6 Loss and loss adjustment expenses 153.5 -- 39.9 63.3 256.7 Commission, brokerage and other underwriting expenses (2) 83.4 -- 37.4 16.9 137.7 Underwriting profit (loss) (3) $83.0 -- $5.9 $(60.7 ) $28.2 Net investment income (1) 54.7 Net realized capital gains (1) 26.5 Other than temporary impairment losses (1) (75.8 ) Other income (1) 0.9 Other expenses (2) (20.7 ) Earnings from continuing operations, before income taxes $13.8 Loss ratio (4) 48.0 % -- 48.0 % 324.7 % 60.8 % Expense ratio (5) 26.1 % -- 44.9 % 87.1 % 32.6 % Combined ratio (6) 74.1 % -- 92.9 % 411.8 % 93.4 % Six months ended June 30, 2008 Gross premiums written $569.5 $0.2 $112.1 $43.0 $724.8 Net premiums written 344.5 0.2 95.2 40.0 479.9 Net premiums earned (1) $352.0 $0.2 $94.9 $38.6 $485.7 Loss and loss adjustment expenses 170.6 -- 47.4 56.6 274.6 Commission, brokerage and other underwriting expenses (2) 88.1 0.1 39.8 15.0 143.0 Underwriting profit (loss) (3) $93.3 $0.1 $7.7 $(33.0 ) $68.1 Net investment income (1) 62.2 Net realized capital gains (1) 35.9 Other than temporary impairment losses (1) (62.1 ) Other income (1) 0.2 Other expenses (2) (22.7 ) Earnings from continuing operations, before income taxes $81.6 Loss ratio (4) 48.5 % -- 50.0 % 146.6 % 56.6 % Expense ratio (5) 25.0 % 28.4 % 41.9 % 38.8 % 29.4 % Combined ratio (6) 73.5 % 28.4 % 91.9 % 185.4 % 86.0 %
(1) Represent components of total revenues.
(2) Commission, brokerage and other underwriting expenses represent
commission and brokerage expenses and that portion of salaries,
administration and other operating expenses attributable to
underwriting activities, whereas the remainder constitutes other
expenses.
(3) Represents net premiums earned less loss and loss adjustment
expenses and underwriting expenses, all as determined in accordance
with GAAP, and does not include net investment income and other
income or net realized capital gains. Underwriting profit does not
replace net income determined in accordance with GAAP as a measure
of profitability; rather, we believe that underwriting profit, which
does not include net investment income and other income or net
realized capital gains, enhances the understanding of AIHL's
insurance operating units' operating results by highlighting net
income attributable to their underwriting performance. With the
addition of net investment income and other income and net realized
capital gains, reported pre-tax net income (a GAAP measure) may show
a profit despite an underlying underwriting loss. Where underwriting
losses persist over extended periods, an insurance company's ability
to continue as an ongoing concern may be at risk. Therefore, we view
underwriting profit as an important measure in the overall
evaluation of performance.
(4) Loss and loss adjustment expenses divided by net premiums earned,
all as determined in accordance with GAAP.
(5) Underwriting expenses divided by net premiums earned, all as
determined in accordance with GAAP.
(6) The sum of the loss ratio and expense ratio, all as determined in
accordance with GAAP, representing the percentage of each premium
dollar an insurance company has to spend on losses (including loss
adjustment expenses) and underwriting expenses.
ALLEGHANY CORPORATION
COMBINING STATEMENTS OF EARNINGS
(dollars in thousands)
(unaudited)
THREE MONTHS ENDED 6/30/09 THREE MONTHS ENDED 6/30/08
ALLEGHANY ALLEGHANY
INSURANCE CORPORATE INSURANCE CORPORATE
HOLDINGS ACTIVITIES COMBINED HOLDINGS ACTIVITIES COMBINED
Revenues
Net premiums earned $204,530 $0 $204,530 $240,238 $0 $240,238
Net investment income 27,659 (3,135 ) 24,524 30,613 4,155 34,768
Net realized capital gains 18,949 60,543 79,492 24,215 1,066 25,281
Other than temporary impairment losses (9,675 ) 0 (9,675 ) (47,064 ) 0 (47,064 )
Other income 435 136 571 123 (1 ) 122
Total revenues 241,898 57,544 299,442 248,125 5,220 253,345
Costs and expenses
Loss and loss adjustment expenses 143,917 0 143,917 139,455 0 139,455
Commissions, brokerage and other underwriting expenses 70,272 0 70,272 72,542 0 72,542
Other operating expenses 11,730 455 12,185 11,482 820 12,302
Corporate administration 3 7,227 7,230 0 8,466 8,466
Interest expense 0 169 169 0 179 179
Total costs and expenses 225,922 7,851 233,773 223,479 9,465 232,944
Earnings from continuing operations,
before income taxes $15,976 $49,693 65,669 $24,646 ($4,245 ) 20,401
Income taxes 19,668 7,380
Earnings from continuing operations 46,001 13,021
Discontinued operations
Earnings from discontinued operations 0 10,662
Income taxes 0 5,843
Earnings from discontinued operations, net 0 4,819
Net earnings $46,001 $17,840
Net earnings $46,001 $17,840
Preferred dividends 2,250 4,305
Net earnings available to common stockholders $43,751 $13,535
ALLEGHANY CORPORATION
COMBINING STATEMENTS OF EARNINGS
(dollars in thousands)
(unaudited)
SIX MONTHS ENDED 6/30/09 SIX MONTHS ENDED 6/30/08
ALLEGHANY ALLEGHANY
INSURANCE CORPORATE INSURANCE CORPORATE
HOLDINGS ACTIVITIES COMBINED HOLDINGS ACTIVITIES COMBINED
Revenues
Net premiums earned $422,574 $0 $422,574 $485,719 $0 $485,719
Net investment income 54,681 (3,088 ) 51,593 62,168 7,872 70,040
Net realized capital gains 26,464 113,510 139,974 35,904 79,160 115,064
Other than temporary impairment losses (75,801 ) 0 (75,801 ) (62,135 ) 0 (62,135 )
Other income 887 133 1,020 190 (5 ) 185
Total revenues 428,805 110,555 539,360 521,846 87,027 608,873
Costs and expenses
Loss and loss adjustment expenses 256,754 0 256,754 274,686 0 274,686
Commissions, brokerage and other underwriting expenses 137,722 0 137,722 142,951 0 142,951
Other operating expenses 20,491 907 21,398 22,602 1,431 24,033
Corporate administration 20 7,118 7,138 0 18,414 18,414
Interest expense 0 332 332 0 336 336
Total costs and expenses 414,987 8,357 423,344 440,239 20,181 460,420
Earnings from continuing operations,
before income taxes $13,818 $102,198 116,016 $81,607 $66,846 148,453
Income taxes 25,441 44,885
Earnings from continuing operations 90,575 103,568
Discontinued operations
Earnings from discontinued operations 0 22,196
Income taxes 0 12,064
Earnings from discontinued operations, net 0 10,132
Net earnings $90,575 $113,700
Net earnings $90,575 $113,700
Preferred dividends 6,158 8,610
Net earnings available to common stockholders $84,417 $105,090
ALLEGHANY CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS JUNE 30, DECEMBER 31,
2009 2008
(unaudited)
Investments
Available for sale securities at fair value:
Equity securities $611,814 $629,518
Debt securities 2,987,702 2,760,019
Short-term investments 341,989 636,197
$3,941,505 $4,025,734
Other invested assets 243,286 250,407
Total investments $4,184,791 $4,276,141
Cash 74,941 18,125
Premium balances receivable 210,737 154,022
Reinsurance recoverables 1,016,532 1,056,438
Ceded unearned premium reserves 198,593 185,402
Deferred acquisition costs 74,265 71,753
Property and equipment - at cost, net of accumulated depreciation 21,101 23,310
and amortization
Goodwill and other intangibles, net of amortization 138,200 151,223
Current taxes receivable 4,171 14,338
Net deferred tax assets 143,645 130,293
Other assets 108,159 100,783
$6,175,135 $6,181,828
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses $2,584,975 $2,578,590
Unearned premiums 672,688 614,067
Reinsurance payable 80,778 53,541
Other liabilities 269,441 288,941
Total liabilities $3,607,882 $3,535,139
Stockholders' equity 2,567,253 2,646,689
$6,175,135 $6,181,828
Shares of common stock outstanding (adjusted for stock dividends) 9,013,587 8,438,226
SOURCE: Alleghany Corporation
Alleghany Corporation R.M. Hart, 212-752-1356
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