13.

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 business into two reportable segments – reinsurance and insurance. In addition, reinsurance and insurance underwriting activities are evaluated separately from investment and corporate activities. Net realized capital gains and OTTI losses are not considered relevant in evaluating investment performance on an annual basis. Segment accounting policies are described in Note 1.

The reinsurance segment consists of property and casualty reinsurance operations conducted by Transatlantic’s reinsurance operating units (see Note 2 for additional information on Transatlantic) and is further reported by major product lines (“property” and “casualty & other”). Transatlantic provides property and casualty reinsurance to insurers and reinsurers through brokers and on a direct basis to ceding companies.

The insurance segment consists of property and casualty insurance operations conducted by AIHL through its insurance operating units RSUI, CATA and PCC. RSUI also writes a modest amount of business on an assumed basis, which is included in the insurance segment.

The primary components of “corporate activities” are Alleghany Properties, Alleghany’s investments in Homesite and ORX and strategic investments and other activities at the parent level. As of April 26, 2012, corporate activities also includes the operating results of Bourn & Koch. Corporate activities also includes interest expense associated with the Alleghany Senior Notes, whereas interest expense associated with the Transatlantic Senior Notes is included in “Total Segments.”

(b) Results

Segment results for Alleghany’s two reportable segments and for corporate activities for the three and nine months ended September 30, 2012 (which include Transatlantic from the Acquisition Date through September 30, 2012) and September 30, 2011 are shown in the tables below:


	Reinsurance Segment						Insurance Segment
Three Months Ended September 30, 2012	Property		Casualty & Other⁽¹⁾		Total		RSUI		CATA			PCC			Total		Total Segments		Corporate Activities⁽²⁾			Consolidated
	(in millions)
Gross premiums written	$	281.9	$	604.6	$	886.5	$	248.9	$	40.6		$	6.3		$	295.8	$	1,182.3	$	(5.9	)	$	1,176.4
Net premiums written		248.0		594.9		842.9		155.1		38.4			6.1			199.6		1,042.5		—			1,042.5

Net premiums earned	$	264.7	$	616.4	$	881.1	$	169.8	$	37.0		$	4.9		$	211.7	$	1,092.8	$	—		$	1,092.8
Net loss and LAE		103.7		458.8		562.5		82.9		23.1			4.5			110.5		673.0		—			673.0
Commissions, brokerage and other underwriting expenses		55.4		125.7		181.1		46.1		19.7			6.9			72.7		253.8		—			253.8

Underwriting profit (loss)⁽³⁾	$	105.6	$	31.9	$	137.5	$	40.8	$	(5.8	)	$	(6.5	)	$	28.5		166.0		—			166.0

Net investment income																		90.1		0.4			90.5
Net realized capital gains																		12.4		—			12.4
OTTI losses																		—		—			—
Gain on bargain purchase																		—		—			—
Other income																		24.2		9.6			33.8
Other operating expenses																		36.3		11.1			47.4
Corporate administration																		—		9.3			9.3

Amortization of intangible assets																		73.3		—			73.3
Interest expense																		12.5		9.3			21.8

Earnings before income taxes																	$	170.6	$	(19.7	)	$	150.9


	Reinsurance Segment						Insurance Segment
Three Months Ended September 30, 2011	Property		Casualty & Other⁽¹⁾		Total		RSUI		CATA		PCC			Total		Total Segments			Corporate Activities			Consolidated
	(in millions)
Gross premiums written	$	—	$	—	$	—	$	230.2	$	38.8	$	1.4		$	270.4	$	270.4		$	—		$	270.4
Net premiums written		—		—		—		151.8		36.6		1.5			189.9		189.9			—			189.9

Net premiums earned	$	—	$	—	$	—	$	152.2	$	36.7	$	1.3		$	190.2	$	190.2		$	—		$	190.2
Net loss and LAE		—		—		—		101.0		19.0		1.8			121.8		121.8			—			121.8
Commissions, brokerage and other underwriting expenses		—		—		—		44.1		17.6		6.5			68.2		68.2			—			68.2

Underwriting profit (loss)⁽³⁾	$	—	$	—	$	—	$	7.1	$	0.1	$	(7.0	)	$	0.2		0.2			—			0.2

Net investment income																	29.7			(7.6	)		22.1
Net realized capital gains																	22.1			0.6			22.7
OTTI losses																	(2.8	)		—			(2.8	)
Gain on bargain purchase																	—			—			—
Other income																	0.3			—			0.3
Other operating expenses																	0.7			1.1			1.8
Corporate administration																	—			2.7			2.7

Amortization of intangible assets																	0.8			—			0.8
Interest expense																	—			4.3			4.3

Earnings before income taxes																$	48.0		$	(15.1	)	$	32.9


	Reinsurance Segment						Insurance Segment
Nine Months Ended September 30, 2012	Property		Casualty & Other⁽¹⁾		Total		RSUI		CATA			PCC			Total		Total Segments			Corporate Activities⁽²⁾			Consolidated
	(in millions)
Gross premiums written	$	660.8	$	1,436.1	$	2,096.9	$	861.4	$	120.8		$	12.6		$	994.8	$	3,091.7		$	(12.9	)	$	3,078.8
Net premiums written		608.6		1,413.5		2,022.1		551.7		114.1			12.5			678.3		2,700.4			—			2,700.4

Net premiums earned	$	603.6	$	1,413.9	$	2,017.5	$	487.6	$	107.3		$	10.5		$	605.4	$	2,622.9		$	—		$	2,622.9
Net loss and LAE		215.5		1,055.5		1,271.0		239.8		67.0			10.0			316.8		1,587.8			—			1,587.8
Commissions, brokerage and other underwriting expenses		121.1		256.2		377.3		136.7		58.5			20.3			215.5		592.8			—			592.8

Underwriting profit (loss)⁽³⁾	$	267.0	$	102.2	$	369.2	$	111.1	$	(18.2	)	$	(19.8	)	$	73.1		442.3			—			442.3

Net investment income																		226.0			8.6			234.6
Net realized capital gains																		81.2			38.6			119.8
OTTI losses																		(2.9	)		—			(2.9	)
Gain on bargain purchase																		—			494.9			494.9
Other income																		25.2			18.2			43.4
Other operating expenses																		73.9			24.0			97.9
Corporate administration																		—			67.7			67.7

Amortization of intangible assets																		213.4			—			213.4
Interest expense																		28.2			18.3			46.5

Earnings before income taxes																	$	456.3		$	450.3		$	906.6


	Reinsurance Segment						Insurance Segment
Nine Months Ended September 30, 2011	Property		Casualty & Other⁽¹⁾		Total		RSUI		CATA			PCC			Total		Total Segments			Corporate Activities			Consolidated
	(in millions)
Gross premiums written	$	—	$	—	$	—	$	763.1	$	115.0		$	2.5		$	880.6	$	880.6		$	—		$	880.6
Net premiums written		—		—		—		489.2		108.3			3.6			601.1		601.1			—			601.1

Net premiums earned	$	—	$	—	$	—	$	438.2	$	113.9		$	3.0		$	555.1	$	555.1		$	—		$	555.1
Net loss and LAE		—		—		—		236.3		60.6			18.5			315.4		315.4			—			315.4
Commissions, brokerage and other underwriting expenses		—		—		—		126.3		54.2			18.4			198.9		198.9			—			198.9

Underwriting profit (loss)⁽³⁾	$	—	$	—	$	—	$	75.6	$	(0.9	)	$	(33.9	)	$	40.8		40.8			—			40.8

Net investment income																		90.9			(8.7	)		82.2
Net realized capital gains																		63.3			0.6			63.9
OTTI losses																		(2.8	)		—			(2.8	)
Gain on bargain purchase																		—			—			—
Other income																		0.6			0.9			1.5
Other operating expenses																		16.1			2.9			19.0
Corporate administration																		—			14.1			14.1

Amortization of intangible assets																		2.5			—			2.5
Interest expense																		0.1			13.0			13.1

Earnings before income taxes																	$	174.1		$	(37.2	)	$	136.9

(1)	Casualty & other primarily consists of assumed: D&O liability; errors and omissions liability; general liability; medical malpractice; ocean marine and aviation; auto liability; accident and health; surety; and credit.

(2)	Includes elimination of minor reinsurance activity between segments.

(3)

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, net realized capital gains, OTTI losses, other income, other operating expenses, 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 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 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.

(c) Foreign operations

Approximately half of the premiums earned by Transatlantic’s operations, which constitute the reinsurance segment, 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 United States. In addition, although a significant portion of the assets and liabilities of these foreign offices generally relate to the countries where ceding companies and reinsurers are located, most investments are located in the country of domicile of these offices.

Information associated with Alleghany’s foreign operations which relates to its reinsurance segment is as follows:

•

Foreign gross premiums written for the third quarter of 2012 and from the Acquisition Date through September 30, 2012 were $444.2 million and $1,046.6 million, respectively.

•

Foreign net premiums earned for the third quarter of 2012 and from the Acquisition Date through September 30, 2012 were $421.8 million and $989.1 million, respectively. The foreign country in which Alleghany generates the largest amount of premium revenues is the United Kingdom. Net premiums earned by the London office for the third quarter of 2012 and from the Acquisition Date through September 30, 2012 were $165.1 million and $381.9 million, respectively.

(d) Identifiable assets and equity

As of September 30, 2012, the identifiable assets of the reinsurance segment, insurance segment and corporate activities were $16.5 billion, $5.3 billion and $1.0 billion, respectively, of which cash and invested assets represented $14.4 billion, $3.8 billion and $0.8 billion, respectively. As of September 30, 2012, Alleghany’s equity attributable to the reinsurance segment, insurance segment and corporate activities was $4.4 billion, $2.1 billion and $0.1 billion, respectively.

(e) Concentration

From the Acquisition Date through September 30, 2012, three large international brokers accounted for approximately 34 percent, 26 percent and 17 percent of gross premiums written in the reinsurance segment.