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. 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.

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 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 level. Manufacturing and service operations are conducted through Bourn & Koch, Kentucky Trailer, IPS and Jazwares. Oil and gas operations are conducted through SORC, and also included Alleghany Capital’s investment in ORX until it was sold on December 23, 2016. ORX was accounted for under the equity method of accounting.

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

In addition, corporate activities include interest expense associated with the Alleghany Senior Notes, whereas interest expense associated with the TransRe Senior Notes is included in “Total Segments” and interest expense associated with other debt is included in Alleghany Capital. Information related to Senior Notes and other debt can be found in Note 8.

(b) Results

Segment results for Alleghany’s two reportable segments and for corporate activities for 2016, 2015 and 2014 are shown in the tables below:


	Reinsurance Segment						Insurance Segment										Other Activities
Year Ended December 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	$	1,515.5	$	2,814.8	$	4,330.3	$	1,056.4	$	266.5	$	139.8	$	1,462.7	$	5,793.0	$	-	$	(25.9)	$	5,767.1
Net premiums written		1,237.2		2,732.2		3,969.4		734.1		250.0		138.3		1,122.4		5,091.8		-		-		5,091.8
Net premiums earned		1,168.0		2,677.0		3,845.0		754.5		237.5		138.8		1,130.8		4,975.8		-		-		4,975.8
Net loss and LAE		578.4		1,707.0		2,285.4		403.8		125.3		102.7		631.8		2,917.2		-		-		2,917.2
Commissions, brokerage and other underwriting expenses⁽³⁾		376.2		922.8		1,299.0		212.3		107.3		38.7		358.3		1,657.3		-		-		1,657.3

Underwriting profit (loss)⁽⁴⁾	$	213.4	$	47.2	$	260.6	$	138.4	$	4.9	$	(2.6)	$	140.7		401.3		-		-		401.3

Net investment income																433.1		(2.3)		7.7		438.5
Net realized capital gains																159.9		(86.0)		(10.7)		63.2
Other than temporary impairment losses																(45.2)		-		-		(45.2)
Other revenue																4.4		687.1		7.3		698.8
Other operating expenses																80.6		680.5		4.1		765.2
Corporate administration																1.0		-		42.0		43.0
Amortization of intangible assets																(3.1)		22.1		-		19.0
Interest expense																27.2		1.9		52.5		81.6

Earnings (losses) before income taxes															$	847.8	$	(105.7)	$	(94.3)	$	647.8


	Reinsurance Segment						Insurance Segment										Other Activities
Year Ended December 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	$	1,171.9	$	2,490.2	$	3,662.1	$	1,148.4	$	236.6	$	103.1	$	1,488.1	$	5,150.2	$	-	$	(28.0)	$	5,122.2
Net premiums written		953.6		2,433.7		3,387.3		779.4		220.6		101.9		1,101.9		4,489.2		-		-		4,489.2
Net premiums earned		887.4		2,228.1		3,115.5		809.8		205.0		100.0		1,114.8		4,230.3		-		-		4,230.3
Net loss and LAE		292.1		1,426.6		1,718.7		428.8		115.7		76.6		621.1		2,339.8		-		-		2,339.8
Commissions, brokerage and other underwriting expenses⁽³⁾		295.6		774.2		1,069.8		222.9		94.3		36.9		354.1		1,423.9		-		-		1,423.9

Underwriting profit (loss)⁽⁴⁾	$	299.7	$	27.3	$	327.0	$	158.1	$	(5.0)	$	(13.5)	$	139.6		466.6		-		-		466.6

Net investment income																427.6		5.4		5.8		438.8
Net realized capital gains																242.6		(25.6)		(3.1)		213.9
Other than temporary impairment losses																(125.5)		-		(8.4)		(133.9)
Other revenue																6.5		241.0		2.9		250.4
Other operating expenses																80.4		259.3		2.6		342.3
Corporate administration																0.9		-		45.6		46.5
Amortization of intangible assets																(5.3)		3.1		-		(2.2)
Interest expense																38.3		1.5		52.0		91.8

Earnings (losses) before income taxes															$	903.5	$	(43.1)	$	(103.0)	$	757.4


	Reinsurance Segment						Insurance Segment										Other Activities
Year Ended December 31, 2014	Property		Casualty & Other⁽¹⁾		Total		RSUI		Cap Specialty		Pacific Comp		Total		Total Segments		Alleghany Capital		Corporate Activities⁽²⁾		Consolidated
	($ in millions)
Gross premiums written	$	1,205.4	$	2,394.7	$	3,600.1	$	1,242.1	$	212.7	$	70.5	$	1,525.3	$	5,125.4	$	-	$	(28.8)	$	5,096.6
Net premiums written		1,073.4		2,336.7		3,410.1		825.5		192.4		69.5		1,087.4		4,497.5		-		-		4,497.5
Net premiums earned		1,048.6		2,282.1		3,330.7		828.2		184.4		67.3		1,079.9		4,410.6		-		-		4,410.6
Net loss and LAE		423.2		1,486.0		1,909.2		427.3		103.0		55.0		585.3		2,494.5		-		-		2,494.5
Commissions, brokerage and other underwriting expenses⁽³⁾		319.3		757.2		1,076.5		220.8		92.0		32.0		344.8		1,421.3		-		-		1,421.3

Underwriting profit (loss)⁽⁴⁾	$	306.1	$	38.9	$	345.0	$	180.1	$	(10.6)	$	(19.7)	$	149.8		494.8		-		-		494.8

Net investment income																448.9		2.8		8.2		459.9
Net realized capital gains																230.0		2.8		14.3		247.1
Other than temporary impairment losses																(36.3)		-		-		(36.3)
Other revenue																4.0		145.6		0.9		150.5
Other operating expenses																85.7		164.5		2.5		252.7
Corporate administration																1.3		-		45.8		47.1
Amortization of intangible assets																(6.1)		0.4		-		(5.7)
Interest expense																46.8		0.9		42.3		90.0

Earnings (losses) before income taxes															$	1,013.7	$	(14.6)	$	(67.2)	$	931.9

(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)	Includes amortization associated with deferred acquisition costs of $1,253.2 million, $1,024.5 million and $1,042.0 million for the years ended December 31, 2016, 2015 and 2014, respectively.

(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 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) Foreign operations

Information associated with Alleghany’s foreign operations in its reinsurance segment (representing the vast majority of Alleghany’s foreign operations), is as follows:

•

Foreign gross premiums written in 2016, 2015 and 2014 were approximately $1.5 billion, $1.6 billion and $1.7 billion, respectively.

•

Foreign net premiums earned in 2016, 2015 and 2014 were approximately $1.4 billion, $1.4 billion and $1.5 billion, respectively. The foreign country in which Alleghany generates the largest amount of premium revenues is the U.K. Net premiums earned by operations in the U.K. in 2016, 2015 and 2014 were $622.3 million, $640.4 million and $654.8 million, respectively.

(d) Identifiable assets and equity

As of December 31, 2016, the identifiable assets of the reinsurance segment, insurance segment and other activities were $15.7 billion, $6.7 billion and $1.4 billion, respectively, of which cash and invested assets represented $13.1 billion, $5.1 billion and $0.5 billion, respectively. As of December 31, 2016, Alleghany’s equity attributable to the reinsurance segment, insurance segment and other activities was $5.2 billion, $2.8 billion and ($0.1) billion, respectively.

(e) Concentration

Significant portions of the reinsurance segment’s gross premiums written are produced by a limited number of brokers. Gross premiums written produced by the reinsurance segment’s three largest brokers were approximately 25 percent, 20 percent, and 16 percent in 2016, 26 percent, 20 percent and 10 percent in 2015 and approximately 29 percent, 22 percent and 11 percent in 2014.

A large whole account quota share treaty entered into in the fourth quarter of 2015 accounted for approximately 20 percent in 2016 and 6 percent in 2015 of gross premiums written in the reinsurance segment.