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 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 2016 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 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, Jazwares, W&W|AFCO Steel, beginning April 28, 2017, and Alleghany Capital’s investment in Wilbert, beginning August 1, 2017. Oil and gas operations are conducted through SORC.

On August 1, 2017, Alleghany Capital acquired a 45 percent equity interest in Wilbert for $72.3 million.

On April 28, 2017, Alleghany Capital acquired approximately 80 percent of the equity in W&W|AFCO Steel for $164.5 million, including $163.9 million in cash paid on May 1, 2017 and $0.6 million of estimated purchase price adjustments. In connection with the acquisition, Alleghany recorded $39.9 million, $25.3 million and $70.0 million of goodwill, indefinite-lived intangible assets and finite-lived intangible assets, respectively. Indefinite-lived intangible assets relate to trade name and finite-lived intangible assets relate to customer relationships. The customer relationship asset is estimated to have a useful life of ten years.

On April 15, 2016, Alleghany Capital acquired an additional 50 percent of Jazwares’ outstanding equity, bringing its equity ownership interest to 80 percent and, as of that date, the results of Jazwares have been included in Alleghany’s consolidated results. Prior to April 15, 2016, Jazwares 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 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 2016 Form 10-K.

(b) Results

The following tables present the results for Alleghany’s two reportable segments and for other activities for the three and nine months ended September 30, 2017 and 2016:


	Reinsurance Segment						Insurance Segment										Other Activities
Three Months ended September 30, 2017	Property		Casualty & Other⁽¹⁾		Total		RSUI		Cap Specialty		Pacific Comp		Total		Total Segments		Alleghany Capital		Corporate Activities⁽²⁾		Consolidated
	($ in millions)
Gross premiums written	$	445.5	$	681.1	$	1,126.6	$	234.6	$	74.3	$	41.6	$	350.5	$	1,477.1	$	-	$	(5.3)	$	1,471.8
Net premiums written		329.0		649.5		978.5		170.8		69.5		41.5		281.8		1,260.3		-		-		1,260.3
Net premiums earned		310.8		642.4		953.2		179.0		66.1		41.4		286.5		1,239.7		-		-		1,239.7
Net loss and LAE		659.9		459.3		1,119.2		305.4		37.0		30.3		372.7		1,491.9		-		-		1,491.9
Commissions, brokerage and other underwriting expenses		105.2		203.7		308.9		50.3		28.4		10.6		89.3		398.2		-		-		398.2

Underwriting (loss) profit ⁽³⁾	$	(454.3)	$	(20.6)	$	(474.9)	$	(176.7)	$	0.7	$	0.5	$	(175.5)		(650.4)		-		-		(650.4)

Net investment income																101.4		1.6		1.7		104.7
Net realized capital gains																21.5		0.7		10.7		32.9
Other than temporary impairment losses																(6.1)		-		-		(6.1)
Other revenue																4.7		291.7		(0.1)		296.3
Other operating expenses																8.3		269.1		0.5		277.9
Corporate administration																(1.5)		-		(3.2)		(4.7)
Amortization of intangible assets																(0.3)		6.0		-		5.7
Interest expense																6.6		1.2		13.0		20.8

(Losses) earnings before income taxes															$	(542.0)	$	17.7	$	2.0	$	(522.3)


	Reinsurance Segment						Insurance Segment										Other Activities
Three Months ended September 30, 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	$	400.2	$	665.2	$	1,065.4	$	243.7	$	68.5	$	37.8	$	350.0	$	1,415.4	$	-	$	(7.5)	$	1,407.9
Net premiums written		320.5		646.4		966.9		168.3		64.4		37.1		269.8		1,236.7		-		-		1,236.7
Net premiums earned		314.6		654.8		969.4		186.8		61.6		35.7		284.1		1,253.5		-		-		1,253.5
Net loss and LAE		157.6		404.6		562.2		94.8		34.5		27.1		156.4		718.6		-		-		718.6
Commissions, brokerage and other underwriting expenses		105.4		227.7		333.1		53.9		26.4		9.6		89.9		423.0		-		-		423.0

Underwriting profit (loss)⁽³⁾	$	51.6	$	22.5	$	74.1	$	38.1	$	0.7	$	(1.0)	$	37.8		111.9		-		-		111.9

Net investment income																118.7		-		1.9		120.6
Net realized capital gains																27.1		0.1		-		27.2
Other than temporary impairment losses																(11.7)		-		-		(11.7)
Other revenue																0.3		218.6		6.1		225.0
Other operating expenses																23.6		203.6		1.2		228.4
Corporate administration																0.3		-		10.4		10.7
Amortization of intangible assets																(0.7)		6.7		-		6.0
Interest expense																6.8		0.6		13.3		20.7

Earnings (losses) before income taxes															$	216.3	$	7.8	$	(16.9)	$	207.2


	Reinsurance Segment						Insurance Segment										Other Activities
Nine Months ended September 30, 2017	Property		Casualty & Other⁽¹⁾		Total		RSUI		Cap Specialty		Pacific Comp		Total		Total Segments		Alleghany Capital		Corporate Activities⁽²⁾		Consolidated
	($ in millions)
Gross premiums written	$	1,190.0	$	2,037.7	$	3,227.7	$	794.1	$	213.2	$	124.2	$	1,131.5	$	4,359.2	$	-	$	(16.5)	$	4,342.7
Net premiums written		931.4		1,975.3		2,906.7		558.0		198.9		122.9		879.8		3,786.5		-		-		3,786.5
Net premiums earned		868.1		1,968.7		2,836.8		540.3		192.2		123.5		856.0		3,692.8		-		-		3,692.8
Net loss and LAE		904.6		1,344.7		2,249.3		479.7		105.7		91.3		676.7		2,926.0		-		-		2,926.0
Commissions, brokerage and other underwriting expenses		283.7		662.9		946.6		158.3		83.3		32.2		273.8		1,220.4		-		-		1,220.4

Underwriting (loss) profit ⁽³⁾	$	(320.2)	$	(38.9)	$	(359.1)	$	(97.7)	$	3.2	$	-	$	(94.5)		(453.6)		-		-		(453.6)

Net investment income																311.7		2.1		8.1		321.9
Net realized capital gains																90.8		0.9		10.1		101.8
Other than temporary impairment losses																(13.1)		-		-		(13.1)
Other revenue																10.5		634.3		5.6		650.4
Other operating expenses																57.4		618.2		2.6		678.2
Corporate administration																0.2		-		26.4		26.6
Amortization of intangible assets																(1.2)		15.4		-		14.2
Interest expense																20.2		3.0		39.5		62.7

(Losses) earnings before income taxes															$	(130.3)	$	0.7	$	(44.7)	$	(174.3)

	Reinsurance Segment						Insurance Segment										Other Activities
Nine Months ended September 30, 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	$	1,173.3	$	2,136.7	$	3,310.0	$	808.3	$	201.5	$	105.9	$	1,115.7	$	4,425.7	$	-	$	(19.0)	$	4,406.7
Net premiums written		945.1		2,088.3		3,033.4		566.3		189.0		104.5		859.8		3,893.2		-		-		3,893.2
Net premiums earned		857.9		2,030.6		2,888.5		567.4		175.8		104.9		848.1		3,736.6		-		-		3,736.6
Net loss and LAE		454.9		1,282.7		1,737.6		289.0		92.4		79.5		460.9		2,198.5		-		-		2,198.5
Commissions, brokerage and other underwriting expenses		275.6		693.6		969.2		161.9		78.7		28.9		269.5		1,238.7		-		-		1,238.7

Underwriting profit (loss)⁽³⁾	$	127.4	$	54.3	$	181.7	$	116.5	$	4.7	$	(3.5)	$	117.7		299.4		-		-		299.4

Net investment income																326.4		-		5.9		332.3
Net realized capital gains																107.6		13.0		(3.5)		117.1
Other than temporary impairment losses																(38.2)		-		-		(38.2)
Other revenue																3.8		517.3		6.7		527.8
Other operating expenses																65.1		508.0		2.4		575.5
Corporate administration																1.0		-		33.0		34.0
Amortization of intangible assets																(2.4)		16.9		-		14.5
Interest expense																20.6		1.2		39.6		61.4

Earnings (losses) before income taxes															$	614.7	$	4.2	$	(65.9)	$	553.0

(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 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, 2017, the identifiable assets of the reinsurance segment, insurance segment and other activities were $16.9 billion, $7.0 billion and $1.8 billion, respectively, of which cash and invested assets represented $13.6 billion, $5.4 billion and $0.7 billion, respectively. As of September 30, 2017, Alleghany’s equity attributable to the reinsurance segment, insurance segment and other activities was $5.1 billion, $2.8 billion and $0.3 billion, respectively.

Included in other activities is debt associated with Alleghany Capital’s operating subsidiaries, which totaled $102.5 million as of September 30, 2017. The $102.5 million includes $31.2 million of borrowings by Jazwares under its available credit facility, $23.0 million of borrowings by W&W|AFCO Steel under its available credit facility and term loans, $17.0 million of debt at Kentucky Trailer related primarily to a mortgage loan, borrowings to finance small acquisitions and borrowings under its available credit facility, $15.9 million of borrowings by IPS under its available credit facility and $15.4 million of term loans at Bourn & Koch related to borrowings to finance an acquisition. None of these liabilities are guaranteed by Alleghany or Alleghany Capital.