10. Segments of Business

(a) Overview

Alleghany’s segments are reported in a manner consistent with the way management evaluates the business. 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 Alleghany Capital’s 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 at the Alleghany Capital level. Industrial operations are conducted through Bourn & Koch, Kentucky Trailer, W&W|AFCO Steel, beginning April 28, 2017 (the date on which Alleghany Capital acquired approximately 80 percent of the equity thereof), and a 45 percent equity interest in Wilbert, beginning August 1, 2017 (the date on which Alleghany Capital acquired a 45 percent equity interest therein). Non-industrial operations are conducted through IPS and Jazwares. On August 1, 2017, Alleghany Capital acquired a 45 percent equity interest in Wilbert.

On February 7, 2018, W&W|AFCO Steel acquired the outstanding equity of Hirschfeld, a 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 assumed 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 acquired assets and assumed liabilities, as well as the residual goodwill. The acquisition accounting for Hirschfeld is expected to be finalized later in 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 and six months ended June 30, 2018 and 2017:


	Reinsurance Segment						Insurance Segment
Three Months Ended June 30, 2018	Property		Casualty & Other⁽¹⁾		Total		RSUI		Cap Specialty		Total		Subtotal		Alleghany Capital			Total Segments		Corporate Activities⁽²⁾			Consolidated
	($ in millions)
Gross premiums written	$	345.1	$	726.6	$	1,071.7	$	318.8	$	88.7	$	407.5	$	1,479.2	$	-		$	1,479.2	$	(6.5	)	$	1,472.7
Net premiums written		275.9		700.7		976.6		216.9		82.3		299.2		1,275.8		-			1,275.8		-			1,275.8
Net premiums earned		292.1		689.2		981.3		184.7		71.0		255.7		1,237.0		-			1,237.0		-			1,237.0
Net loss and LAE		153.5		440.0		593.5		105.7		39.0		144.7		738.2		-			738.2		-			738.2
Commissions, brokerage and other underwriting expenses		94.8		223.2		318.0		53.7		30.4		84.1		402.1		-			402.1		-			402.1

Underwriting profit⁽³⁾	$	43.8	$	26.0	$	69.8	$	25.3	$	1.6	$	26.9		96.7		-			96.7		-			96.7

Net investment income														121.1		1.2			122.3		4.0			126.3
Change in the fair value of equity securities														146.8		-			146.8		38.4			185.2
Net realized capital gains														6.8		(0.1	)		6.7		(0.2	)		6.5
Other than temporary impairment losses														-		-			-		-			-
Noninsurance revenue														4.7		329.0			333.7		9.0			342.7
Other operating expenses														19.9		314.5			334.4		8.8			343.2
Corporate administration														0.8		-			0.8		13.3			14.1
Amortization of intangible assets														0.2		5.8			6.0		-			6.0
Interest expense														6.9		2.3			9.2		13.1			22.3

Earnings before income taxes													$	348.3	$	7.5		$	355.8	$	16.0		$	371.8


	Reinsurance Segment						Insurance Segment
Three Months Ended June 30, 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	$	369.1	$	676.3	$	1,045.4	$	295.1	$	73.3	$	41.9	$	410.3	$	1,455.7		$	-		$	1,455.7		$	(5.7	)	$	1,450.0
Net premiums written		317.2		661.6		978.8		204.6		68.4		41.3		314.3		1,293.1			-			1,293.1			-			1,293.1
Net premiums earned		270.5		686.9		957.4		178.5		64.1		43.9		286.5		1,243.9			-			1,243.9			-			1,243.9
Net loss and LAE		122.9		450.1		573.0		93.8		35.6		32.5		161.9		734.9			-			734.9			-			734.9
Commissions, brokerage and other underwriting expenses		87.9		234.3		322.2		53.0		27.2		11.3		91.5		413.7			-			413.7			-			413.7

Underwriting profit⁽³⁾	$	59.7	$	2.5	$	62.2	$	31.7	$	1.3	$	0.1	$	33.1		95.3			-			95.3			-			95.3

Net investment income																98.0			0.2			98.2			3.5			101.7
Change in the fair value of equity securities																-			-			-			-			-
Net realized capital gains																9.2			0.2			9.4			(0.1	)		9.3
Other than temporary impairment losses																(3.8	)		-			(3.8	)		-			(3.8	)
Noninsurance revenue																3.3			192.8			196.1			6.7			202.8
Other operating expenses																25.9			189.4			215.3			9.9			225.2
Corporate administration																0.8			-			0.8			13.6			14.4
Amortization of intangible assets																(0.4	)		5.0			4.6			-			4.6
Interest expense																6.8			1.0			7.8			13.2			21.0

Earnings (losses) before income taxes															$	168.9		$	(2.2	)	$	166.7		$	(26.6	)	$	140.1


	Reinsurance Segment						Insurance Segment
Six Months Ended June 30, 2018	Property		Casualty & Other⁽¹⁾		Total		RSUI		Cap Specialty		Total		Subtotal			Alleghany Capital		Total Segments			Corporate Activities⁽²⁾			Consolidated
											($ in millions)
Gross premiums written	$	742.3	$	1,445.0	$	2,187.3	$	593.4	$	163.2	$	756.6	$	2,943.9		$	-	$	2,943.9		$	(12.4	)	$	2,931.5
Net premiums written		581.0		1,392.7		1,973.7		403.8		151.7		555.5		2,529.2			-		2,529.2			-			2,529.2
Net premiums earned		567.2		1,374.3		1,941.5		365.6		137.7		503.3		2,444.8			-		2,444.8			-			2,444.8
Net loss and LAE		250.1		882.8		1,132.9		202.6		73.3		275.9		1,408.8			-		1,408.8			-			1,408.8
Commissions, brokerage and other underwriting expenses		187.9		452.1		640.0		107.2		61.2		168.4		808.4			-		808.4			-			808.4

Underwriting profit⁽³⁾	$	129.2	$	39.4	$	168.6	$	55.8	$	3.2	$	59.0		227.6			-		227.6			-			227.6

Net investment income														239.4			3.1		242.5			7.9			250.4
Change in the fair value of equity securities														132.7			-		132.7			9.9			142.6
Net realized capital gains														50.7			0.5		51.2			(0.2	)		51.0
Other than temporary impairment losses														(0.5	)		-		(0.5	)		-			(0.5	)
Noninsurance revenue														10.4			571.7		582.1			12.3			594.4
Other operating expenses														37.0			554.4		591.4			16.7			608.1
Corporate administration														0.5			-		0.5			21.4			21.9
Amortization of intangible assets														-			11.2		11.2			-			11.2
Interest expense														13.6			3.6		17.2			26.6			43.8

Earnings (losses) before income taxes													$	609.2		$	6.1	$	615.3		$	(34.8	)	$	580.5


	Reinsurance Segment							Insurance Segment
Six Months Ended June 30, 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	$	744.5	$	1,356.6		$	2,101.1	$	559.6	$	138.8	$	82.6		$	781.0	$	2,882.1		$	-		$	2,882.1		$	(11.2	)	$	2,870.9
Net premiums written		602.4		1,325.8			1,928.2		387.2		129.4		81.4			598.0		2,526.2			-			2,526.2			-			2,526.2
Net premiums earned		557.3		1,326.2			1,883.5		361.2		126.2		82.2			569.6		2,453.1			-			2,453.1			-			2,453.1
Net loss and LAE		244.7		885.4			1,130.1		174.4		68.7		61.0			304.1		1,434.2			-			1,434.2			-			1,434.2
Commissions, brokerage and other underwriting expenses		178.7		459.0			637.7		107.9		54.9		21.7			184.5		822.2			-			822.2			-			822.2

Underwriting profit (loss)⁽³⁾	$	133.9	$	(18.2	)	$	115.7	$	78.9	$	2.6	$	(0.5	)	$	81.0		196.7			-			196.7			-			196.7

Net investment income																		210.3			0.5			210.8			6.4			217.2
Change in the fair value of equity securities																		-			-			-			-			-
Net realized capital gains																		69.4			0.1			69.5			(0.6	)		68.9
Other than temporary impairment losses																		(7.0	)		-			(7.0	)		-			(7.0	)
Noninsurance revenue																		5.8			337.6			343.4			10.7			354.1
Other operating expenses																		49.1			331.0			380.1			20.2			400.3
Corporate administration																		1.6			-			1.6			29.7			31.3
Amortization of intangible assets																		(0.9	)		9.3			8.4			-			8.4
Interest expense																		13.6			1.8			15.4			26.5			41.9

Earnings (losses) before income taxes																	$	411.8		$	(3.9	)	$	407.9		$	(59.9	)	$	348.0

(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, 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 June 30, 2018:


	Identifiable Assets		Invested Assets and Cash		Equity Attributable to Alleghany
	($ in millions)
Reinsurance segment	$	16,356.9	$	13,387.8	$	5,208.5
Insurance segment		6,837.9		5,263.3		2,891.5

Subtotal		23,194.8		18,651.1		8,100.0
Alleghany Capital		1,328.3		130.5		777.2

Total segments		24,523.1		18,781.6		8,877.2
Corporate activities		562.8		485.6		(472.8)

Consolidated	$	25,085.9	$	19,267.2	$	8,404.4

Included in Alleghany Capital is debt associated with its operating subsidiaries, which totaled $185.4 million as of June 30, 2018. The $185.4 million includes $95.0 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, $19.1 million of term loans at Kentucky Trailer primarily related to borrowings to finance small acquisitions and borrowings under its available credit facility, $15.7 million of borrowings by IPS under its available credit facility, and $14.6 million of term loans at Bourn & Koch related to borrowings to finance an acquisition and borrowings under its available credit facility. 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 and six months ended June 30, 2018 and 2017:


	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2017		2018		2017
	($ in millions)
Industrial⁽¹⁾	$	221.9	$	74.5	$	367.4	$	116.4
Non-industrial⁽²⁾		107.1		118.3		204.2		221.2
Corporate & other		-		-		0.1		-

Alleghany Capital	$	329.0	$	192.8	$	571.7	$	337.6

(1)

For the three and six months ended June 30, 2018, the vast majority of noninsurance revenues were recognized as goods and services transferred to customers over time. For the three and six months ended June 30, 2017, approximately 66 percent and 57 percent, respectively, of noninsurance revenues were recognized as services were transferred to customers over time, with the remainder recognized as goods transferred at a point in time. See Note 1(c) of this Form 10-Q for additional information regarding Alleghany’s adoption of new revenue recognition accounting guidance effective in the first quarter of 2018.

(2)

For the three and six months ended June 30, 2018, approximately 70 percent of noninsurance revenues were recognized as services transferred to customers over time, with the remainder recognized as goods transferred at a point in time. For the three and six months ended June 30, 2017, approximately 75 percent and 78 percent, respectively, of noninsurance revenues were recognized as services were transferred to customers over time, with the remainder recognized as goods were transferred at a point in time. See Note 1(c) of this Form 10-Q for additional information regarding Alleghany’s adoption of new revenue recognition accounting guidance effective in the first quarter of 2018.