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 three reportable segments – reinsurance, insurance and Alleghany Capital. Alleghany determined that Alleghany Capital qualified as a reportable segment in the first quarter of 2018, reflecting the increased significance of its business to Alleghany and its projected growth.

Reinsurance and insurance underwriting activities are evaluated separately from investment and other activities. 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 2017 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. A significant portion 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, prior to its sale on December 31, 2017, PacificComp. RSUI also writes a modest amount of assumed reinsurance business, which is included in the insurance segment.

The Alleghany Capital segment consists of industrial operations, non-industrial operations and corporate operations and investments at the Alleghany Capital level. Industrial operations are conducted through Bourn & Koch, Kentucky Trailer, W&W|AFCO Steel, beginning April 28, 2017, and Alleghany Capital’s investment in Wilbert, beginning August 1, 2017. Non-industrial operations are conducted through IPS and Jazwares. On August 1, 2017, Alleghany Capital acquired a 45 percent equity interest in Wilbert. On April 28, 2017, Alleghany Capital acquired approximately 80 percent of the equity in W&W|AFCO Steel.

On February 7, 2018, W&W|AFCO Steel acquired the outstanding equity of Hirschfeld, a leading fabricator of steel bridges and structural steel for stadiums, airports and other large commercial and industrial projects, for $111.3 million, consisting of $96.6 million in cash and $14.7 million of incremental debt. The acquisition-date consideration transferred and purchase price allocation to the acquired assets and liabilities of Hirschfeld were based on estimated fair values that have not been finalized. As a result, the fair value recorded for these items is a provisional estimate and may be subject to adjustment. Once completed, any adjustment resulting from the valuations may impact the individual amounts recorded for assets acquired and liabilities assumed, as well as the residual goodwill. The acquisition accounting for Hirschfeld is expected to be finalized during the second quarter of 2018.

Corporate activities are not classified as a segment. The primary components of corporate activities are Alleghany Properties, SORC and 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 2017 Form 10-K.

(b) Results

The following tables present the results for Alleghany’s three reportable segments and for corporate activities for the three months ended March 31, 2018 and 2017:


	Reinsurance Segment						Insurance Segment
Three Months ended March 31, 2018	Property		Casualty & Other⁽¹⁾		Total		RSUI		Cap Specialty		Total		Subtotal		Alleghany Capital		Total Segments		Corporate Activities⁽²⁾		Consolidated
	($ in millions)
Gross premiums written	$	397.2	$	718.4	$	1,115.6	$	274.6	$	74.5	$	349.1	$	1,464.7	$	-	$	1,464.7	$	(6.0)	$	1,458.7
Net premiums written		305.1		691.9		997.0		187.0		69.3		256.3		1,253.3		-		1,253.3		-		1,253.3
Net premiums earned		275.1		685.1		960.2		180.9		66.7		247.6		1,207.8		-		1,207.8		-		1,207.8
Net loss and LAE		96.6		442.8		539.4		96.9		34.3		131.2		670.6		-		670.6		-		670.6
Commissions, brokerage and other underwriting expenses		93.1		228.9		322.0		53.5		30.8		84.3		406.3		-		406.3		-		406.3

Underwriting profit⁽³⁾	$	85.4	$	13.4	$	98.8	$	30.5	$	1.6	$	32.1		130.9		-		130.9		-		130.9

Net investment income														118.4		1.9		120.3		3.8		124.1
Change in the fair value of equity securities														(13.9)		-		(13.9)		(28.6)		(42.5)
Net realized capital gains														43.8		0.7		44.5		-		44.5
Other than temporary impairment losses														(0.5)		-		(0.5)		-		(0.5)
Noninsurance revenue														5.7		242.7		248.4		3.2		251.6
Other operating expenses														17.0		240.0		257.0		7.9		264.9
Corporate administration														(0.3)		-		(0.3)		8.1		7.8
Amortization of intangible assets														(0.1)		5.4		5.3		-		5.3
Interest expense														6.7		1.3		8.0		13.5		21.5

Earnings (losses) before income taxes													$	261.1	$	(1.4)	$	259.7	$	(51.1)	$	208.6


		Reinsurance Segment						Insurance Segment
Three Months ended March 31, 2017	Property		Casualty & Other⁽¹⁾		Total		RSUI		Cap Specialty		Pacific Comp		Total		Subtotal		Alleghany Capital		Total Segments		Corporate Activities⁽²⁾		Consolidated
	($ in millions)
Gross premiums written	$	375.4	$	680.3	$	1,055.7	$	264.4	$	65.6	$	40.7	$	370.7	$	1,426.4	$	-	$	1,426.4	$	(5.6)	$	1,420.8
Net premiums written		285.2		664.2		949.4		182.6		61.0		40.1		283.7		1,233.1		-		1,233.1		-		1,233.1
Net premiums earned		286.8		639.3		926.1		182.7		62.1		38.3		283.1		1,209.2		-		1,209.2		-		1,209.2
Net loss and LAE		121.8		435.3		557.1		80.6		33.1		28.5		142.2		699.3		-		699.3		-		699.3
Commissions, brokerage and other underwriting expenses		90.8		224.8		315.6		54.8		27.7		10.4		92.9		408.5		-		408.5		-		408.5

Underwriting profit (loss)⁽³⁾	$	74.2	$	(20.8)	$	53.4	$	47.3	$	1.3	$	(0.6)	$	48.0		101.4		-		101.4		-		101.4

Net investment income																112.2		0.4		112.6		2.9		115.5
Change in the fair value of equity securities																-		-		-		-		-
Net realized capital gains																60.2		(0.1)		60.1		(0.5)		59.6
Other than temporary impairment losses																(3.2)		-		(3.2)		-		(3.2)
Noninsurance revenue																2.5		144.7		147.2		4.1		151.3
Other operating expenses																23.2		141.5		164.7		10.4		175.1
Corporate administration																0.8		-		0.8		16.1		16.9
Amortization of intangible assets																(0.5)		4.3		3.8		-		3.8
Interest expense																6.8		0.9		7.7		13.2		20.9

Earnings (losses) before income taxes															$	242.8	$	(1.7)	$	241.1	$	(33.2)	$	207.9

(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)

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, change in the fair value of equity securities, net realized capital gains, OTTI losses, noninsurance 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 reinsurance and insurance 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

The following table presents identifiable assets, the portion of identifiable assets related to cash and invested assets, and equity attributable to Alleghany, for Alleghany’s three reportable segments and for corporate activities as of March 31, 2018:


	Identifiable Assets		Invested Assets and Cash		Equity Attributable to Alleghany
	($ in millions)
Reinsurance segment	$	16,515.3	$	13,422.5	$	5,155.3
Insurance segment		6,692.9		5,143.1		2,854.3

Subtotal		23,208.2		18,565.6		8,009.6
Alleghany Capital		1,306.0		149.8		797.1

Total segments		24,514.2		18,715.4		8,806.7
Corporate activities		583.0		484.9		(433.3)

Consolidated	$	25,097.2	$	19,200.3	$	8,373.4

Included in Alleghany Capital is debt associated with its operating subsidiaries, which totaled $156.9 million as of March 31, 2018. The $156.9 million includes $78.9 million of borrowings by W&W|AFCO Steel under its available credit facility and term loans (including borrowings incurred and assumed from its acquisition of Hirschfeld), $41.0 million of borrowings by Jazwares under its available credit facility, $14.8 million of term loans at Bourn & Koch related to borrowings to finance an acquisition and borrowings under its available credit facility, $13.3 million of borrowings by IPS under its available credit facility, and $8.9 million of debt at Kentucky Trailer related primarily to borrowings to finance small acquisitions. None of these liabilities are guaranteed by Alleghany or Alleghany Capital.

(d) Alleghany Capital Noninsurance Revenue

For Alleghany Capital’s industrial and non-industrial operations, noninsurance revenue consists of the sale of manufactured goods and services. The following table presents noninsurance revenue for the Alleghany Capital segment for the three months ended March 31, 2018 and 2017:


	Three months ended March 31,
	2018		2017
	($ in millions)
Industrial	$	145.5	$	41.9
Non-Industrial		97.1		102.8
Corporate & other		0.1		-

Alleghany Capital	$	242.7	$	144.7