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Segments of Business

9 Months Ended

Sep. 30, 2019

10. Segments of Business

(a) Overview

Alleghany’s segments are reported in a manner consistent with the way management evaluates the businesses. As such, Alleghany classifies its businesses into three reportable segments – reinsurance, insurance and Alleghany Capital.

Reinsurance and insurance underwriting activities are evaluated separately from investment and other activities. Segment accounting policies are described in Note 1 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2018 Form 10-K.

The reinsurance segment consists of property and casualty reinsurance operations conducted by TransRe’s reinsurance operating subsidiaries and is further reported through two major product lines – property and casualty & other. TransRe provides property and casualty reinsurance to insurers and other reinsurers through brokers and on a direct basis to ceding companies. TransRe writes a modest amount of property and casualty insurance business, which is included in the reinsurance segment. A significant portion of the premiums earned by TransRe’s operations are generated by offices located in Canada, Europe, Asia, Australia, Africa and those serving Latin America and the Caribbean. Although the majority of the premiums earned by these offices typically relate to the regions where they are located, a significant portion may be derived from other regions of the world, including the U.S. In addition, although a significant portion of the assets and liabilities of these foreign offices generally relate to the countries where the ceding companies and reinsurers are located, most investments are located in the country of domicile of these offices.

The insurance segment consists of property and casualty insurance operations conducted in the U.S. by AIHL through its insurance operating subsidiaries RSUI and CapSpecialty. RSUI also writes a modest amount of assumed reinsurance business, which is included in the insurance segment.

The Alleghany Capital segment consists of industrial operations, non-industrial operations and corporate operations at the Alleghany Capital level. Industrial operations are conducted through PCT, Kentucky Trailer, W&W|AFCO Steel and a 45 percent equity interest in Wilbert. Non-industrial operations are conducted through IPS, Jazwares and Concord.

On October 1, 2018, Alleghany Capital acquired approximately 85 percent of the equity in Concord for $136.6 million, consisting of $68.6 million in cash paid on October 1, 2018, $38.2 million of potential contingent consideration based on future profitability and $29.8 million of incremental debt. In connection with the acquisition, Alleghany recorded $83.0 million of goodwill and $70.8 million of finite-lived intangible assets related primarily to customer relationships.

On February 7, 2018, W&W|AFCO Steel acquired the outstanding equity of Hirschfeld Holdings, LP (“Hirschfeld”), a fabricator of steel bridges and structural steel for stadiums, airports and other large commercial and industrial projects, for $109.1 million, consisting of $94.4 million in cash and $14.7 million of incremental debt. The $94.4 million paid by W&W|AFCO Steel was funded by capital contributions from Alleghany and noncontrolling interests of $75.5 million and $18.9 million, respectively. In connection with the acquisition, Alleghany recorded $3.0 million of goodwill and $9.4 million of finite-lived intangible assets related primarily to customer relationships.

Corporate activities are not classified as a segment. The primary components of corporate activities are Alleghany Properties, SORC and activities at the Alleghany parent company.

In addition, corporate activities include interest expense associated with the senior notes issued by Alleghany, whereas interest expense associated with senior notes issued by TransRe is included in “Total Segments” and interest expense associated with other debt is included in Alleghany Capital. Information related to the senior notes and other debt can be found in Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2018 Form 10-K.

(b) Results

The following tables present segment results for Alleghany’s three reportable segments and for corporate activities for the three and nine months ended September 30, 2019 and 2018:

		Reinsurance Segment							Insurance Segment
Three Months Ended September 30, 2019		Property			Casualty & other ⁽¹⁾		Total		RSUI		Cap Specialty			Total		Subtotal			Alleghany Capital ⁽²⁾			Total Segments			Corporate Activities ⁽³⁾			Consolidated
	($ in millions)
Gross premiums written		$	455.9		$	787.4	$	1,243.3	$	319.7	$	95.6		$	415.3	$	1,658.6		$	-		$	1,658.6		$	(7.5	)	$	1,651.1
Net premiums written			339.0			772.7		1,111.7		213.4		88.8			302.2		1,413.9			-			1,413.9			-			1,413.9
Net premiums earned			327.0			770.6		1,097.6		208.9		83.5			292.4		1,390.0			-			1,390.0			-			1,390.0
Net loss and LAE			225.1			505.6		730.7		125.9		51.1			177.0		907.7			-			907.7			-			907.7
Commissions, brokerage and other underwriting expenses			108.3			252.6		360.9		55.7		32.9			88.6		449.5			-			449.5			-			449.5
Underwriting (loss) profit⁽⁴⁾		$	(6.4	)	$	12.4	$	6.0	$	27.3	$	(0.5	)	$	26.8		32.8			-			32.8			-			32.8
Net investment income																	145.1			1.2			146.3			1.5			147.8
Change in the fair value of equity securities																	(16.7	)		-			(16.7	)		-			(16.7	)
Net realized capital gains																	4.1			(0.2	)		3.9			-			3.9
Other than temporary impairment losses																	(3.6	)		-			(3.6	)		-			(3.6	)
Noninsurance revenue																	7.5			628.0			635.5			3.0			638.5
Other operating expenses																	32.5			578.2			610.7			6.6			617.3
Corporate administration																	1.5			-			1.5			20.8			22.3
Amortization of intangible assets																	0.4			7.7			8.1			-			8.1
Interest expense																	6.8			5.2			12.0			13.7			25.7
Earnings (losses) before income taxes																$	128.0		$	37.9		$	165.9		$	(36.6	)	$	129.3

		Reinsurance Segment								Insurance Segment
Three Months Ended September 30, 2018		Property			Casualty & other ⁽¹⁾		Total			RSUI		Cap Specialty		Total		Subtotal			Alleghany Capital ⁽²⁾		Total Segments			Corporate Activities ⁽³⁾			Consolidated
	($ in millions)
Gross premiums written		$	451.4		$	685.9	$	1,137.3		$	260.8	$	83.9	$	344.7	$	1,482.0		$	-	$	1,482.0		$	(6.7	)	$	1,475.3
Net premiums written			331.1			654.1		985.2			176.0		77.9		253.9		1,239.1			-		1,239.1			-			1,239.1
Net premiums earned			326.5			635.0		961.5			190.6		73.3		263.9		1,225.4			-		1,225.4			-			1,225.4
Net loss and LAE			387.6			421.4		809.0			107.0		41.7		148.7		957.7			-		957.7			-			957.7
Commissions, brokerage and other underwriting expenses			113.3			211.6		324.9			52.8		30.0		82.8		407.7			-		407.7			-			407.7
Underwriting (loss) profit⁽⁴⁾		$	(174.4	)	$	2.0	$	(172.4	)	$	30.8	$	1.6	$	32.4		(140.0	)		-		(140.0	)		-			(140.0	)
Net investment income																	122.5			0.8		123.3			4.0			127.3
Change in the fair value of equity securities																	373.9			-		373.9			(3.7	)		370.2
Net realized capital gains																	16.2			-		16.2			-			16.2
Other than temporary impairment losses																	-			-		-			-			-
Noninsurance revenue																	6.2			407.5		413.7			24.6			438.3
Other operating expenses																	23.6			382.5		406.1			9.2			415.3
Corporate administration																	1.3			-		1.3			17.8			19.1
Amortization of intangible assets																	(0.3	)		5.8		5.5			-			5.5
Interest expense																	6.7			2.6		9.3			12.9			22.2
Earnings (losses) before income taxes																$	347.5		$	17.4	$	364.9		$	(15.0	)	$	349.9

	Reinsurance Segment						Insurance Segment
Nine Months Ended September 30, 2019	Property		Casualty & other ⁽¹⁾		Total		RSUI		Cap Specialty			Total		Subtotal			Alleghany Capital ⁽²⁾		Total Segments			Corporate Activities ⁽³⁾			Consolidated
	($ in millions)
Gross premiums written	$	1,252.6	$	2,433.0	$	3,685.6	$	991.1	$	272.3		$	1,263.4	$	4,949.0		$	-	$	4,949.0		$	(20.5	)	$	4,928.5
Net premiums written		961.1		2,371.0		3,332.1		661.7		252.2			913.9		4,246.0			-		4,246.0			-			4,246.0
Net premiums earned		939.1		2,262.6		3,201.7		603.7		237.9			841.6		4,043.3			-		4,043.3			-			4,043.3
Net loss and LAE		523.8		1,505.1		2,028.9		325.8		142.3			468.1		2,497.0			-		2,497.0			-			2,497.0
Commissions, brokerage and other underwriting expenses		315.8		735.0		1,050.8		167.2		96.0			263.2		1,314.0			-		1,314.0			-			1,314.0
Underwriting profit (loss)⁽⁴⁾	$	99.5	$	22.5	$	122.0	$	110.7	$	(0.4	)	$	110.3		232.3			-		232.3			-			232.3
Net investment income															401.5			3.4		404.9			8.7			413.6
Change in the fair value of equity securities															515.7			-		515.7			3.6			519.3
Net realized capital gains															20.4			0.3		20.7			0.1			20.8
Other than temporary impairment losses															(13.6	)		-		(13.6	)		-			(13.6	)
Noninsurance revenue															19.5			1,726.8		1,746.3			10.2			1,756.5
Other operating expenses															88.3			1,592.0		1,680.3			20.9			1,701.2
Corporate administration															4.4			-		4.4			63.2			67.6
Amortization of intangible assets															1.0			22.8		23.8			-			23.8
Interest expense															20.3			14.2		34.5			39.9			74.4
Earnings (losses) before income taxes														$	1,061.8		$	101.5	$	1,163.3		$	(101.4	)	$	1,061.9

	Reinsurance Segment								Insurance Segment
Nine Months Ended September 30, 2018	Property			Casualty & other ⁽¹⁾		Total			RSUI		Cap Specialty		Total		Subtotal			Alleghany Capital ⁽²⁾		Total Segments			Corporate Activities ⁽³⁾			Consolidated
	($ in millions)
Gross premiums written	$	1,193.7		$	2,130.9	$	3,324.6		$	854.2	$	247.1	$	1,101.3	$	4,425.9		$	-	$	4,425.9		$	(19.2	)	$	4,406.7
Net premiums written		912.1			2,046.8		2,958.9			579.8		229.6		809.4		3,768.3			-		3,768.3			-			3,768.3
Net premiums earned		893.7			2,009.3		2,903.0			556.2		211.0		767.2		3,670.2			-		3,670.2			-			3,670.2
Net loss and LAE		637.7			1,304.3		1,942.0			309.6		114.9		424.5		2,366.5			-		2,366.5			-			2,366.5
Commissions, brokerage and other underwriting expenses		301.2			663.6		964.8			160.0		91.2		251.2		1,216.0			-		1,216.0			-			1,216.0
Underwriting (loss) profit⁽⁴⁾	$	(45.2	)	$	41.4	$	(3.8	)	$	86.6	$	4.9	$	91.5		87.7			-		87.7			-			87.7
Net investment income																362.0			3.7		365.7			12.0			377.7
Change in the fair value of equity securities																506.7			-		506.7			6.1			512.8
Net realized capital gains																66.8			0.6		67.4			(0.2	)		67.2
Other than temporary impairment losses																(0.5	)		-		(0.5	)		-			(0.5	)
Noninsurance revenue																16.7			979.2		995.9			36.8			1,032.7
Other operating expenses																60.6			937.0		997.6			25.9			1,023.5
Corporate administration																1.8			-		1.8			39.2			41.0
Amortization of intangible assets																(0.2	)		17.0		16.8			-			16.8
Interest expense																20.5			6.1		26.6			39.4			66.0
Earnings (losses) before income taxes															$	956.7		$	23.4	$	980.1		$	(49.8	)	$	930.3

(1)	Primarily consists of the following reinsurance lines of business: directors’ and officers’ liability; errors and omissions liability; general liability; medical malpractice; ocean marine and aviation; auto liability; accident and health; mortgage reinsurance; surety; and credit.

(2)	Excludes certain minor, legacy investments that were previously reflected in Alleghany Capital in 2018 and prior periods, to align with management’s view of reportable segments.

(3)	Includes elimination of minor reinsurance activity between segments. Also, includes certain minor, legacy investments that were previously reflected in Alleghany Capital in 2018 and prior periods.

(4)

Underwriting profit represents net premiums earned less net loss and LAE and commissions, brokerage and other underwriting expenses, all as determined in accordance with GAAP, and does not include net investment income, change in the fair value of equity securities, net realized capital gains, OTTI losses, noninsurance revenue, other operating expenses, corporate administration, amortization of intangible assets or interest expense. Underwriting profit does not replace earnings before income taxes determined in accordance with GAAP as a measure of profitability. Rather, Alleghany believes that underwriting profit enhances the understanding of its reinsurance and insurance segments’ operating results by highlighting net earnings attributable to their underwriting performance. Earnings before income taxes (a GAAP measure) may show a profit despite an underlying underwriting loss. Where underwriting losses persist over extended periods, a reinsurance or an insurance company’s ability to continue as an ongoing concern may be at risk. Therefore, Alleghany views underwriting profit as an important measure in the overall evaluation of performance.

The following table presents identifiable assets, the portion of identifiable assets related to cash and invested assets and equity attributable to Alleghany for Alleghany’s reportable segments and for corporate activities as of September 30, 2019:

	Identifiable Assets		Invested Assets and Cash		Equity Attributable to Alleghany
	($ in millions)
Reinsurance segment	$	16,914.1	$	13,540.7	$	5,347.8
Insurance segment		7,166.5		5,615.8		3,141.8
Subtotal		24,080.6		19,156.5		8,489.6
Alleghany Capital		1,914.5		148.4		901.5
Total segments		25,995.1		19,304.9		9,391.1
Corporate activities		495.7		457.8		(562.4	)
Consolidated	$	26,490.8	$	19,762.7	$	8,828.7

The debt associated with Alleghany Capital’s operating subsidiaries totaled $311.3 million and $284.5 million as of September 30, 2019 and December 31, 2018, respectively, and is generally used to support working capital needs and to help finance acquisitions. As of September 30, 2019, the $311.3 million includes:

•

$80.4 million of borrowings by W&W|AFCO Steel under its available credit facilities and term loans (including borrowings incurred and assumed from its acquisition of Hirschfeld);

•

$74.6 million of term loans at Kentucky Trailer primarily related to borrowings to finance small acquisitions, including its acquisitions of controlling interests in certain manufacturers of aluminum feed transportation equipment in December 2018 and July 2019, and borrowings under its available credit facilities;

•

$48.9 million of borrowings by Jazwares under its available credit facility;

•

$41.9 million of borrowings by IPS under its available credit facility and term loans, in part to finance a small acquisition in May 2019; $

•

$32.9 million of term loans at PCT primarily related to borrowings to finance the acquisition of a waterjet orifice and nozzle manufacturer in 2016 and the acquisition of a consumable cutting tool manufacturer in June 2019; and

•

$32.6 million of term loans at Concord primarily related to borrowings to finance Alleghany Capital’s acquisition of Concord.

None of these liabilities are guaranteed by Alleghany or Alleghany Capital.

(d) Alleghany Capital Noninsurance Revenue

For Alleghany Capital’s industrial and non-industrial operations, noninsurance revenue consists of the sale of manufactured goods and services. The following table presents noninsurance revenue for the Alleghany Capital segment for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2019		2018			2019		2018
	($ in millions)
Industrial⁽¹⁾	$	286.8	$	224.2		$	865.2	$	591.6
Non-Industrial⁽²⁾		341.2		183.7			861.2		387.9
Corporate & other		-		(0.4	)		0.4		(0.3	)
Alleghany Capital	$	628.0	$	407.5		$	1,726.8	$	979.2

(1)

For the three and nine months ended September 30, 2019 and 2018, the vast majority of noninsurance revenue was recognized as goods and services transferred to customers over time. See Note 1(c) of this Form 10-Q for additional information on Alleghany’s adoption of new revenue recognition accounting guidance effective in the first quarter of 2018.

(2)

For the three and nine months ended September 30, 2019, approximately 71 percent 71 percent, respectively, of noninsurance revenue was recognized as services transferred to customers over time, with the remainder recognized as goods transferred at a point in time. For the three and nine months ended September 30, 2018, approximately 60 percent and 65 percent, respectively, of noninsurance revenue was recognized as services transferred to customers over time, with the remainder recognized as goods transferred at a point in time. See Note 1(c) of this Form 10-Q for additional information on Alleghany’s adoption of new revenue recognition accounting guidance effective in the first quarter of 2018.