Segments of Business

9 Months Ended

Sep. 30, 2014

Segments of Business

9. 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 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2013 10-K.

The reinsurance segment consists of property and casualty reinsurance operations conducted by TransRe’s reinsurance operating subsidiaries and is further reported by major product lines – property and casualty & other. TransRe provides property and casualty reinsurance to insurers and reinsurers through brokers and on a direct basis to ceding companies. TransRe also writes a modest amount of insurance business, which is included in the reinsurance segment. Approximately half 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 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, CapSpecialty and PacificComp. RSUI also writes a modest amount of assumed reinsurance business, which is included in the insurance segment.

The primary components of “corporate activities” are Alleghany Properties, SORC, BKI, Alleghany’s investments in Homesite (prior to its sale on December 31, 2013) and ORX and other activities at the parent level. Beginning August 30, 2013 and July 31, 2014, corporate activities also includes the operating results of Kentucky Trailer and Alleghany’s investment in Jazwares, respectively. On August 30, 2013, Alleghany invested $24.9 million in Kentucky Trailer for a controlling equity interest, consisting of a preferred equity interest and a 35.4 percent common equity interest. On January 2, 2014, for an additional investment of $15.0 million, Alleghany exercised its option to increase its common equity interest in Kentucky Trailer to 80.0 percent, and to increase its preferred equity interest by $1.6 million to $15.9 million.

In addition, corporate activities include interest expense associated with senior notes issued by Alleghany, whereas interest expense associated with senior notes issued by TransRe is included in “Total Segments.” Information related to Alleghany’s and TransRe’s senior notes can be found in Note 10 below and in Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2013 10-K.

(b) Results

Segment results for Alleghany’s two reportable segments and for corporate activities for the three and nine months ended September 30, 2014 and 2013 are shown in the tables below:

	Reinsurance Segment						Insurance Segment
Three Months Ended September 30, 2014	Property		Casualty & Other(1)		Total		RSUI		Cap Specialty			Pacific Comp(2)			Total		Total Segments			Corporate Activities(3)			Consolidated
	(in millions)
Gross premiums written	$	324.8	$	597.9	$	922.7	$	282.0	$	52.8		$	19.4		$	354.2	$	1,276.9		$	(7.6	)	$	1,269.3
Net premiums written		286.1		580.6		866.7		193.4		48.2			19.2			260.8		1,127.5			—			1,127.5
Net premiums earned		278.2		581.0		859.2		210.9		48.0			18.1			277.0		1,136.2			—			1,136.2
Net loss and LAE		113.4		361.0		474.4		106.9		25.8			16.0			148.7		623.1			—			623.1
Commissions, brokerage and other underwriting expenses		87.5		197.1		284.6		56.5		23.0			8.2			87.7		372.3			—			372.3
Underwriting profit (loss)(4)	$	77.3	$	22.9	$	100.2	$	47.5	$	(0.8	)	$	(6.1	)	$	40.6		140.8			—			140.8
Net investment income																		113.0			5.3			118.3
Net realized capital gains																		56.3			3.1			59.4
Other than temporary impairment losses																		(0.7	)		—			(0.7	)
Other income																		0.9			37.9			38.8
Other operating expenses																		18.4			41.2			59.6
Corporate administration																		0.1			9.4			9.5
Amortization of intangible assets																		(1.2	)		0.1			(1.1	)
Interest expense																		12.2			10.5			22.7
Earnings (losses) before income taxes																	$	280.8		$	(14.9	)	$	265.9

	Reinsurance Segment							Insurance Segment
Three Months Ended September 30, 2013	Property		Casualty & Other(1)			Total		RSUI		Cap Specialty			Pacific Comp(2)			Total		Total Segments			Corporate Activities(3)			Consolidated
	(in millions)
Gross premiums written	$	288.7	$	550.1		$	838.8	$	281.0	$	49.0		$	11.5		$	341.5	$	1,180.3		$	(6.2	)	$	1,174.1
Net premiums written		248.6		541.5			790.1		185.9		46.3			11.1			243.3		1,033.4			—			1,033.4
Net premiums earned		246.1		546.7			792.8		197.2		39.9			10.0			247.1		1,039.9			—			1,039.9
Net loss and LAE		77.8		409.1			486.9		121.6		21.5			14.5			157.6		644.5			—			644.5
Commissions, brokerage and other underwriting expenses		82.3		167.6			249.9		55.4		20.0			8.3			83.7		333.6			—			333.6
Underwriting profit (loss)(4)	$	86.0	$	(30.0	)	$	56.0	$	20.2	$	(1.6	)	$	(12.8	)	$	5.8		61.8			—			61.8
Net investment income																			106.1			9.2			115.3
Net realized capital gains																			30.8			(13.0	)		17.8
Other than temporary impairment losses																			(0.7	)		—			(0.7	)
Other income																			2.1			15.1			17.2
Other operating expenses																			19.0			20.0			39.0
Corporate administration																			—			3.7			3.7
Amortization of intangible assets																			(0.8	)		—			(0.8	)
Interest expense																			12.4			9.1			21.5
Earnings (losses) before income taxes																		$	169.5		$	(21.5	)	$	148.0

	Reinsurance Segment						Insurance Segment
Nine Months Ended September 30, 2014	Property		Casualty & Other(1)		Total		RSUI		Cap Specialty			Pacific Comp(2)			Total		Total Segments			Corporate Activities(3)			Consolidated
	(in millions)
Gross premiums written	$	933.7	$	1,877.4	$	2,811.1	$	961.7	$	158.8		$	50.9		$	1,171.4	$	3,982.5		$	(20.1	)	$	3,962.4
Net premiums written		808.0		1,828.5		2,636.5		641.3		143.0			50.2			834.5		3,471.0			—			3,471.0
Net premiums earned		771.4		1,713.1		2,484.5		620.5		136.1			48.1			804.7		3,289.2			—			3,289.2
Net loss and LAE		296.5		1,124.5		1,421.0		324.4		79.5			38.7			442.6		1,863.6			—			1,863.6
Commissions, brokerage and other underwriting expenses		233.6		564.9		798.5		165.8		68.1			23.7			257.6		1,056.1			—			1,056.1
Underwriting profit (loss)(4)	$	241.3	$	23.7	$	265.0	$	130.3	$	(11.5	)	$	(14.3	)	$	104.5		369.5			—			369.5
Net investment income																		334.7			8.3			343.0
Net realized capital gains																		173.2			24.5			197.7
Other than temporary impairment losses																		(6.9	)		—			(6.9	)
Other income																		2.8			104.0			106.8
Other operating expenses																		63.6			115.6			179.2
Corporate administration																		0.4			31.4			31.8
Amortization of intangible assets																		(4.2	)		0.3			(3.9	)
Interest expense																		36.7			29.7			66.4
Earnings (losses) before income taxes																	$	776.8		$	(40.2	)	$	736.6

	Reinsurance Segment							Insurance Segment
Nine Months Ended September 30, 2013	Property		Casualty & Other(1)			Total		RSUI		Cap Specialty			Pacific Comp(2)			Total		Total Segments			Corporate Activities(3)			Consolidated
	(in millions)
Gross premiums written	$	873.3	$	1,769.6		$	2,642.9	$	962.1	$	134.6		$	30.0		$	1,126.7	$	3,769.6		$	(17.5	)	$	3,752.1
Net premiums written		756.3		1,743.1			2,499.4		630.8		126.4			29.3			786.5		3,285.9			—			3,285.9
Net premiums earned		748.1		1,733.3			2,481.4		560.3		114.4			27.1			701.8		3,183.2			—			3,183.2
Net loss and LAE		232.4		1,240.9			1,473.3		302.2		57.2			29.7			389.1		1,862.4			—			1,862.4
Commissions, brokerage and other underwriting expenses		220.7		539.5			760.2		155.1		60.9			22.6			238.6		998.8			—			998.8
Underwriting profit (loss)(4)	$	295.0	$	(47.1	)	$	247.9	$	103.0	$	(3.7	)	$	(25.2	)	$	74.1		322.0			—			322.0
Net investment income																			295.5			39.0			334.5
Net realized capital gains																			109.5			(13.9	)		95.6
Other than temporary impairment losses																			(41.9	)		—			(41.9	)
Other income																			3.9			33.9			37.8
Other operating expenses																			57.0			40.0			97.0
Corporate administration																			—			26.0			26.0
Amortization of intangible assets																			11.6			—			11.6
Interest expense																			37.1			27.9			65.0
Earnings (losses) before income taxes																		$	583.3		$	(34.9	)	$	548.4

(1) Primarily consists of the following assumed 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; surety; and credit.

(2) Includes underwriting results of AIHL Re.

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

(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, net realized capital gains, OTTI losses, other income, 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 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.

(c) Identifiable assets and equity

As of September 30, 2014, the identifiable assets of the reinsurance segment, insurance segment and corporate activities were $16.6 billion, $6.4 billion and $0.9 billion, respectively, of which cash and invested assets represented $14.3 billion, $4.8 billion and $0.7 billion, respectively. As of September 30, 2014, Alleghany’s equity attributable to the reinsurance segment, insurance segment and corporate activities was $4.8 billion, $2.8 billion and ($0.2) billion, respectively.

Included in corporate activities is debt associated with ACC’s operating subsidiaries. In this regard, SORC had $5.2 million of borrowings as of September 30, 2014, representing its current borrowing capacity pursuant to a secured $250.0 million bank credit facility that was obtained in April 2014. In addition, Kentucky Trailer had $20.2 million of borrowings as of September 30, 2014 related to a mortgage loan and borrowings under its available credit facility. None of these liabilities are guaranteed by Alleghany or ACC, and they are classified as a component of other liabilities.