Segments of Business

6 Months Ended

Jun. 30, 2019

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 businesses into

three

reportable segments – reinsurance, insurance and Alleghany Capital.

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 2018 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 other reinsurers through brokers and on a direct basis to ceding companies. TransRe writes a modest amount of property and casualty 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 and CapSpecialty. 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 PCT, Kentucky Trailer, W&W|AFCO Steel and a 45 percent equity interest in Wilbert.

Non-industrial

operations are conducted through IPS, Jazwares and Concord.

October 1, 2018

, Alleghany Capital acquired approximately

percent of the equity in Concord for $136.6 million, consisting of $68.6 million in cash paid on

October 1, 2018

, $

38.2

million of potential contingent consideration based on future profitability and $29.8 million of incremental debt. In connection with the acquisition, Alleghany recorded $

83.0

million of goodwill and $70.8 million of finite-lived intangible assets related primarily to customer relationships.

February 7, 2018

, W&W|AFCO Steel acquired the outstanding equity of Hirschfeld Holdings, LP

(“Hirschfeld”),

a fabricator of steel bridges and structural steel for stadiums, airports and other large commercial and industrial projects, for $109.1 million, consisting of $94.4 million in cash and $14.7 million of incremental debt. The $94.4 million paid by W&W|AFCO Steel was funded by capital contributions from Alleghany and noncontrolling interests of $75.5 million and $18.9 million, respectively. In connection with the acquisition, Alleghany recorded $3.0 million of goodwill and $9.4 million of finite-lived intangible assets related primarily to customer relationships.

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 2018 Form

10-K.

(b) Results

The following tables present segment results for Alleghany’s three reportable segments and for corporate activities for the three and six months ended June 30, 2019 and 2018:


	Reinsurance Segment						Insurance Segment
Three Months Ended June 30, 2019	Property		Casualty & other (1)		Total		RSUI		Cap Specialty		Total		Subtotal		Alleghany Capital (2)		Total Segments		Corporate Activities (3)			Consolidated
	($ in millions)
Gross premiums written	$	381.6	$	829.1	$	1,210.7	$	372.4	$	93.8	$	466.2	$	1,676.9	$	-	$	1,676.9	$	(6.1	)	$	1,670.8
Net premiums written		305.9		807.0		1,112.9		246.9		86.7		333.6		1,446.5		-		1,446.5		-			1,446.5
Net premiums earned		303.2		771.7		1,074.9		202.4		78.7		281.1		1,356.0		-		1,356.0		-			1,356.0
Net loss and LAE		136.2		508.9		645.1		105.6		46.1		151.7		796.8		-		796.8		-			796.8
Commissions, brokerage and other underwriting expenses		103.8		250.1		353.9		57.9		32.5		90.4		444.3		-		444.3		-			444.3
Underwriting profit (4)	$	63.2	$	12.7	$	75.9	$	38.9	$	0.1	$	39.0		114.9		-		114.9		-			114.9
Net investment income														138.3		0.9		139.2		3.5			142.7
Change in the fair value of equity securities														143.3		-		143.3		0.4			143.7
Net realized capital gains														12.2		0.2		12.4		-			12.4
Other than temporary impairment losses														-		-		-		-			-
Noninsurance revenue														6.6		593.7		600.3		3.6			603.9
Other operating expenses														26.2		548.3		574.5		7.0			581.5
Corporate administration														1.8		-		1.8		24.2			26.0
Amortization of intangible assets														0.4		8.4		8.8		-			8.8
Interest expense														6.8		4.7		11.5		13.6			25.1
Earnings (losses) before income taxes													$	380.1	$	33.4	$	413.5	$	(37.3	)	$	376.2


	Reinsurance Segment						Insurance Segment
Three Months Ended June 30, 2018	Property		Casualty & other (1)		Total		RSUI		Cap Specialty		Total		Subtotal		Alleghany Capital (2)			Total Segments		Corporate Activities (3)			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 (4)	$	43.8	$	26.0	$	69.8	$	25.3	$	1.6	$	26.9		96.7		-			96.7		-			96.7
Net investment income														121.1		1.4			122.5		3.8			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	$	7.7		$	356.0	$	15.8		$	371.8


	Reinsurance Segment						Insurance Segment
Six Months Ended June 30, 2019	Property		Casualty & other (1)		Total		RSUI		Cap Specialty		Total		Subtotal			Alleghany Capital (2)		Total Segments			Corporate Activities (3)			Consolidated
	($ in millions)
Gross premiums written	$	796.7	$	1,645.6	$	2,442.3	$	671.4	$	176.6	$	848.0	$	3,290.3		$	-	$	3,290.3		$	(12.9	)	$	3,277.4
Net premiums written		622.1		1,598.4		2,220.5		448.3		163.3		611.6		2,832.1			-		2,832.1			-			2,832.1
Net premiums earned		612.1		1,492.0		2,104.1		394.8		154.4		549.2		2,653.3			-		2,653.3			-			2,653.3
Net loss and LAE		298.8		999.5		1,298.3		199.9		91.1		291.0		1,589.3			-		1,589.3			-			1,589.3
Commissions, brokerage and other underwriting expenses		207.5		482.4		689.9		111.4		63.1		174.5		864.4			-		864.4			-			864.4
Underwriting profit (4)	$	105.8	$	10.1	$	115.9	$	83.5	$	0.2	$	83.7		199.6			-		199.6			-			199.6
Net investment income														256.3			2.2		258.5			7.3			265.8
Change in the fair value of equity securities														532.4			-		532.4			3.6			536.0
Net realized capital gains														16.2			0.6		16.8			-			16.8
Other than temporary impairment losses														(10.0	)		-		(10.0	)		-			(10.0	)
Noninsurance revenue														12.0			1,098.7		1,110.7			7.3			1,118.0
Other operating expenses														55.8			1,013.8		1,069.6			14.3			1,083.9
Corporate administration														2.8			-		2.8			42.5			45.3
Amortization of intangible assets														0.6			15.1		15.7			-			15.7
Interest expense														13.6			9.0		22.6			26.1			48.7
Earnings (losses) before income taxes													$	933.7		$	63.6	$	997.3		$	(64.7	)	$	932.6


	Reinsurance Segment						Insurance Segment
Six Months Ended June 30, 2018	Property		Casualty & other (1)		Total		RSUI		Cap Specialty		Total		Subtotal			Alleghany Capital (2)		Total Segments			Corporate Activities (3)			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 (4)	$	129.2	$	39.4	$	168.6	$	55.8	$	3.2	$	59.0		227.6			-		227.6			-			227.6
Net investment income														239.4			3.0		242.4			8.0			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		$	6.0	$	615.2		$	(34.7	)	$	580.5

(1)	Primarily consists of the following 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; mortgage reinsurance; surety; and credit.

(2)	Excludes certain minor, legacy investments that were previously reflected in Alleghany Capital in 2018 and prior periods, to align with management’s view of reportable segments.

(3)	Includes elimination of minor reinsurance activity between segments. Also, includes certain minor, legacy investments that were previously reflected in Alleghany Capital in 2018 and prior periods.

(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, 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.

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 reportable segments and for corporate activities as of June 30, 2019:


	Identifiable Assets		Invested Assets and Cash		Equity Attributable to Alleghany
	($ in millions)
Reinsurance segment	$	16,874.0	$	13,462.7	$	5,321.7
Insurance segment		7,122.3		5,535.2		3,096.5
Subtotal		23,996.3		18,997.9		8,418.2
Alleghany Capital		1,880.5		134.7		879.9
Total segments		25,876.8		19,132.6		9,298.1
Corporate activities		479.6		439.8		(612.2	)
Consolidated	$	26,356.4	$	19,572.4	$	8,685.9

The debt associated with Alleghany Capital’s operating subsidiaries totaled $330.6 million and $284.5 million as of June 30, 2019 and December 31, 2018, respectively, and is generally used to support working capital needs and to help finance acquisitions. As of June 30, 2019, the $

330.6

million includes:

•

113.1

million of borrowings by W&W|AFCO Steel under its available credit facilities and term loans (including borrowings incurred and assumed from its acquisition of Hirschfeld);

•

64.0

million of term loans at Kentucky Trailer primarily related to borrowings to finance small acquisitions, including its acquisition of a controlling interest in a certain manufacturer of aluminum feed transportation equipment in December 2018, and borrowings under its available credit facilities;

•

51.5

million of borrowings by IPS under its available credit facility and term loans, in part to finance a small acquisition in May 2019;

•

$35.4 million of borrowings by Jazwares under its available credit facility;

•

$33.4 million of term loans at Concord primarily related to borrowings to finance Alleghany Capital’s acquisition of Concord; and

•

$33.2 million of term loans at PCT primarily related to borrowings to finance the acquisition of a waterjet orifice and nozzle manufacturer in 2016 and the acquisition of a consumable cutting tool manufacturer in June 2019.

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, 2019 and 2018:


	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	($ in millions)
Industrial (1)	$	318.3	$	221.9	$	578.4	$	367.4
Non-Industrial (2)		275.1		107.1		520.0		204.2
Corporate & other		0.3		-		0.3		0.1

Alleghany Capital	$	593.7	$	329.0	$	1,098.7	$	571.7

(1)

For the three and six months ended June 30, 2019 and 2018, the vast majority of noninsurance revenue was recognized as goods and services transferred to customers over time. See Note 1(c) of this Form 10-Q for additional information on 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, 2019, approximately 77 percent and 72 percent, respectively, of noninsurance revenue was 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, 2018, approximately 70 percent of noninsurance revenue was recognized as services 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 on Alleghany’s adoption of new revenue recognition accounting guidance effective in the first quarter of 2018.