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. Other activities include Alleghany Capital and corporate activities. In addition, reinsurance and insurance underwriting activities are evaluated separately from investment and other 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 2015 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. Over one-third 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 components of other activities are Alleghany Capital and corporate activities. Alleghany Capital consists of manufacturing and service operations, oil and gas operations and corporate operations and investments at the Alleghany Capital parent level. Manufacturing and service operations are conducted through Bourn & Koch, Kentucky Trailer, IPS, beginning October 31, 2015, and Alleghany Capital’s investment in Jazwares. Oil and gas operations are conducted through SORC and Alleghany Capital’s investment in ORX. Jazwares and ORX are accounted for under the equity method of accounting.

The primary components of corporate activities are Alleghany Properties and other activities at the parent level.

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 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K.

(b) Results

Segment results for Alleghany’s two reportable segments and for other activities for the three months ended March 31, 2016 and 2015 are shown in the tables below:


	Reinsurance Segment						Insurance Segment										Other Activities
Three Months Ended March 31, 2016	Property		Casualty & other⁽¹⁾		Total		RSUI		Cap Specialty		Pacific Comp		Total		Total Segments		Alleghany Capital		Corporate Activities⁽²⁾		Consolidated
	($ in millions)
Gross premiums written	$	383.2	$	759.2	$	1,142.4	$	256.9	$	62.9	$	34.1	$	353.9	$	1,496.3	$	-	$	(6.7)	$	1,489.6
Net premiums written		309.5		746.4		1,055.9		173.6		58.9		33.8		266.3		1,322.2		-		-		1,322.2
Net premiums earned		253.1		685.9		939.0		192.3		55.4		34.8		282.5		1,221.5		-		-		1,221.5
Net loss and LAE		96.1		430.0		526.1		85.1		26.9		26.5		138.5		664.6		-		-		664.6
Commissions, brokerage and other underwriting expenses		77.9		239.5		317.4		53.2		26.4		9.7		89.3		406.7		-		-		406.7

Underwriting profit (loss)⁽³⁾	$	79.1	$	16.4	$	95.5	$	54.0	$	2.1	$	(1.4)	$	54.7		150.2		-		-		150.2

Net investment income																102.8		(0.1)		2.2		104.9
Net realized capital gains																39.4		(0.1)		(3.4)		35.9
Other than temporary impairment losses																(20.8)		-		-		(20.8)
Other revenue																0.2		136.9		0.3		137.4
Other operating expenses																22.0		139.5		0.7		162.2
Corporate administration																0.2		-		9.5		9.7
Amortization of intangible assets																(1.0)		4.1		-		3.1
Interest expense																6.9		0.3		13.1		20.3

Earnings (losses) before income taxes															$	243.7	$	(7.2)	$	(24.2)	$	212.3


	Reinsurance Segment						Insurance Segment										Other Activities
Three Months Ended March 31, 2015	Property		Casualty & other⁽¹⁾		Total		RSUI		Cap Specialty		Pacific Comp		Total		Total Segments		Alleghany Capital		Corporate Activities⁽²⁾		Consolidated
	($ in millions)
Gross premiums written	$	271.6	$	630.6	$	902.2	$	288.2	$	54.5	$	21.5	$	364.2	$	1,266.4	$	-	$	(7.5)	$	1,258.9
Net premiums written		210.1		618.7		828.8		190.5		50.6		21.2		262.3		1,091.1		-		-		1,091.1
Net premiums earned		215.6		531.3		746.9		203.1		47.6		19.6		270.3		1,017.2		-		-		1,017.2
Net loss and LAE		63.2		343.2		406.4		100.8		24.4		15.3		140.5		546.9		-		-		546.9
Commissions, brokerage and other underwriting expenses		66.9		189.8		256.7		55.3		22.8		8.8		86.9		343.6		-		-		343.6

Underwriting profit (loss)⁽³⁾	$	85.5	$	(1.7)	$	83.8	$	47.0	$	0.4	$	(4.5)	$	42.9		126.7		-		-		126.7

Net investment income																110.8		1.0		1.6		113.4
Net realized capital gains																48.8		(0.1)		(5.6)		43.1
Other than temporary impairment losses																(52.3)		-		-		(52.3)
Other revenue																1.4		34.6		0.2		36.2
Other operating expenses																26.6		40.2		0.6		67.4
Corporate administration																0.3		-		12.4		12.7
Amortization of intangible assets																(1.8)		0.1		-		(1.7)
Interest expense																9.7		0.4		13.0		23.1

Earnings (losses) before income taxes															$	200.6	$	(5.2)	$	(29.8)	$	165.6

(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 elimination of minor reinsurance activity between segments.

(3)

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 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 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 March 31, 2016, the identifiable assets of the reinsurance segment, insurance segment and other activities were $15.8 billion, $6.4 billion and $0.9 billion, respectively, of which cash and invested assets represented $13.3 billion, $4.8 billion and $0.4 billion, respectively. As of March 31, 2016, Alleghany’s equity attributable to the reinsurance segment, insurance segment and other activities was $5.3 billion, $2.7 billion and ($0.2) billion, respectively.

Included in other activities is debt associated with Alleghany Capital’s operating subsidiaries. This includes $40.4 million of borrowings by Kentucky Trailer as of March 31, 2016 related primarily to a mortgage loan, borrowings to finance small acquisitions and borrowings under its available credit facility. None of these liabilities are guaranteed by Alleghany or Alleghany Capital, and they are classified as a component of other liabilities on Alleghany’s consolidated balance sheets.