Segments of Business

6 Months Ended

Jun. 30, 2020

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 2019 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 the 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, which include certain hotel development projects. Industrial operations are conducted through PCT, Kentucky Trailer, W&W|AFCO Steel and, starting April 1, 2020, Wilbert. Non-industrial operations are conducted through IPS, Jazwares and Concord.

On April 1, 2020, Alleghany Capital acquired an additional approximately 55 percent of Wilbert it previously did not own, bringing its equity interest in Wilbert to approximately 100 percent, for $121.3 million, consisting of $46.3 million in cash and $75.0 million of incremental debt. In connection with the acquisition, Alleghany recorded $62.9 million of goodwill, $21.5 million of finite-lived customer relationship intangible assets, $14.9 million of finite-lived license agreements intangible assets and $26.2 million of indefinite-lived trade name intangible assets. The acquisition-date consideration transferred and purchase price allocation to the acquired assets and liabilities of Wilbert 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 Wilbert is expected to be finalized later in 2020. In connection with the acquisition accounting, Alleghany Capital recorded the Wilbert Remeasurement Gain. See Note 3(e) of this Form 10-Q for information on the Wilbert Remeasurement Gain.

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. Corporate activities also include the elimination of minor activity between segments.

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 11 of this Form 10-Q.

(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, 2020 and 2019:

		Reinsurance Segment								Insurance Segment
Three Months Ended June 30, 2020		Property			Casualty & other ⁽¹⁾		Total			RSUI			Cap Specialty			Total			Subtotal			Alleghany Capital		Total Segments			Corporate Activities			Consolidated
	($ in millions)
Gross premiums written		$	413.3		$	740.6	$	1,153.9		$	474.7		$	101.2		$	575.9		$	1,729.8		$	—	$	1,729.8		$	(8.6	)	$	1,721.2
Net premiums written			355.8			730.7		1,086.5			300.0			91.5			391.5			1,478.0			—		1,478.0			—			1,478.0
Net premiums earned			328.7			742.3		1,071.0			241.5			82.4			323.9			1,394.9			—		1,394.9			—			1,394.9
Net loss and LAE			273.4			504.8		778.2			196.0			50.2			246.2			1,024.4			—		1,024.4			—			1,024.4
Commissions, brokerage and other underwriting expenses			96.8			226.3		323.1			52.7			34.2			86.9			410.0			—		410.0			—			410.0
Underwriting (loss) profit⁽²⁾		$	(41.5	)	$	11.2	$	(30.3	)	$	(7.2	)	$	(2.0	)	$	(9.2	)		(39.5	)		—		(39.5	)		—			(39.5	)
Net investment income																				115.4			—		115.4			3.3			118.7
Change in the fair value of equity securities																				242.2			—		242.2			—			242.2
Net realized capital gains																				(10.1	)		16.4		6.3			(44.4	)		(38.1	)
Change in allowance for credit losses on available for sale securities																				16.6			—		16.6			0.4			17.0
Noninsurance revenue																				8.3			483.2		491.5			1.2			492.7
Other operating expenses																				33.3			473.6		506.9			3.4			510.3
Corporate administration																				0.5			—		0.5			18.1			18.6
Amortization of intangible assets																				0.2			11.9		12.1			—			12.1
Interest expense																				6.8			4.3		11.1			11.1			22.2
Earnings (losses) before income taxes																			$	292.1		$	9.8	$	301.9		$	(72.1	)	$	229.8

		Reinsurance Segment						Insurance Segment
Three Months Ended June 30, 2019		Property		Casualty & other ⁽¹⁾		Total		RSUI		Cap Specialty		Total		Subtotal		Alleghany Capital		Total Segments		Corporate Activities			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⁽²⁾		$	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
Change in allowance for credit losses on available for sale securities															—		—		—		—			—
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
Six Months Ended June 30, 2020		Property			Casualty & other ⁽¹⁾			Total			RSUI		Cap Specialty			Total		Subtotal			Alleghany Capital		Total Segments			Corporate Activities			Consolidated
	($ in millions)
Gross premiums written		$	825.9		$	1,655.5		$	2,481.4		$	840.6	$	186.7		$	1,027.3	$	3,508.7		$	—	$	3,508.7		$	(16.9	)	$	3,491.8
Net premiums written			668.7			1,628.8			2,297.5			544.5		169.7			714.2		3,011.7			—		3,011.7			—			3,011.7
Net premiums earned			650.1			1,554.0			2,204.1			470.9		164.3			635.2		2,839.3			—		2,839.3			—			2,839.3
Net loss and LAE			521.3			1,119.1			1,640.4			311.9		99.5			411.4		2,051.8			—		2,051.8			—			2,051.8
Commissions, brokerage and other underwriting expenses			202.2			470.7			672.9			110.6		67.9			178.5		851.4			—		851.4			—			851.4
Underwriting (loss) profit⁽²⁾		$	(73.4	)	$	(35.8	)	$	(109.2	)	$	48.4	$	(3.1	)	$	45.3		(63.9	)		—		(63.9	)		—			(63.9	)
Net investment income																			225.0			1.8		226.8			3.9			230.7
Change in the fair value of equity securities																			(279.4	)		—		(279.4	)		(1.4	)		(280.8	)
Net realized capital gains																			35.1			21.4		56.5			(81.6	)		(25.1	)
Change in allowance for credit losses on available for sale securities																			(14.1	)		—		(14.1	)		(0.3	)		(14.4	)
Noninsurance revenue																			15.6			940.5		956.1			4.5			960.6
Other operating expenses																			43.1			924.3		967.4			9.6			977.0
Corporate administration																			(1.6	)		—		(1.6	)		5.8			4.2
Amortization of intangible assets																			0.5			21.2		21.7			—			21.7
Interest expense																			13.5			8.1		21.6			19.0			40.6
Earnings (losses) before income taxes																		$	(137.2	)	$	10.1	$	(127.1	)	$	(109.3	)	$	(236.4	)

		Reinsurance Segment						Insurance Segment
Six Months Ended June 30, 2019		Property		Casualty & other ⁽¹⁾		Total		RSUI		Cap Specialty		Total		Subtotal			Alleghany Capital		Total Segments			Corporate Activities			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⁽²⁾		$	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
Change in allowance for credit losses on available for sale securities															(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

(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)

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, change in allowance for credit losses on available for sale securities, 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, 2020:

	Identifiable Assets		Invested Assets and Cash		Equity Attributable to Alleghany
	($ in millions)
Reinsurance segment	$	17,356.0	$	13,990.7	$	5,154.2
Insurance segment		7,072.2		5,324.3		2,572.5
Subtotal		24,428.2		19,315.0		7,726.7
Alleghany Capital		2,273.0		72.5		1,013.2
Total segments		26,701.2		19,387.5		8,739.9
Corporate activities		919.7		874.7		(283.7	)
Consolidated	$	27,620.9	$	20,262.2	$	8,456.2

(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, 2020 and 2019:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
	($ in millions)
Industrial⁽¹⁾	$	280.6	$	318.3	$	523.1	$	578.4
Non-Industrial⁽²⁾		202.6		275.1		417.3		520.0
Corporate & other		—		0.3		0.1		0.3
Alleghany Capital	$	483.2	$	593.7	$	940.5	$	1,098.7

(1)	For the three and six months ended June 30, 2020 and 2019, the vast majority of noninsurance revenue was recognized as goods and services transferred to customers over time.

(2)

For the three and six months ended June 30, 2020, approximately 74 percent and 78 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, 2019, 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.