UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM10-Q

(MARK ONE)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 20172018

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                    TO                    

COMMISSION FILE NUMBER1-9371

 

 

ALLEGHANY CORPORATION

EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER

 

 

DELAWARE

STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION

51-0283071

I.R.S. EMPLOYER IDENTIFICATION NO.

1411 BROADWAY, 34TH FLOOR, NY, NY 10018

ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE

212-752-1356

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE

NOT APPLICABLE

FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT

 

 

INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS.    YES  ☒    NO  ☐

INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS SUBMITTED ELECTRONICALLY AND POSTED ON ITS CORPORATE WEB SITE, IF ANY, EVERY INTERACTIVE DATA FILE REQUIRED TO BE SUBMITTED AND POSTED PURSUANT TO RULE 405 OF REGULATIONS-T (SECTION 232.405 OF THIS CHAPTER) DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO SUBMIT AND POST SUCH FILES).    YES  ☒    NO  ☐

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, ANON-ACCELERATED FILER, A SMALLER REPORTING COMPANY, OR AN EMERGING GROWTH COMPANY. SEE THE DEFINITIONS OF “LARGE ACCELERATED FILER,” “ACCELERATED FILER,” “SMALLER REPORTING COMPANY,” AND “EMERGING GROWTH COMPANY” IN RULE12b-2 OF THE EXCHANGE ACT.

 

LARGE ACCELERATED FILER    ☒  ACCELERATED FILER  EMERGING GROWTH COMPANY
NON-ACCELERATED FILER        ☐  SMALLER REPORTING COMPANY  

IF AN EMERGING GROWTH COMPANY, INDICATE BY CHECK MARK IF THE REGISTRANT HAS ELECTED NOT TO USE THE EXTENDED TRANSITION PERIOD FOR COMPLYING WITH ANY NEW OR REVISED FINANCIAL ACCOUNTING STANDARDS PROVIDED PURSUANT TO SECTION 13(A) OF THE EXCHANGE ACT.  ☐

INDICATE BY CHECK MARK WHETHER THE REGISRANT IS A SHELL COMPANY (AS DEFINED IN RULERULE 12b-2 OF THE ACT).    YES  ☐    NO  ☒

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER’S CLASSES OF COMMON STOCK, AS OF THE LAST PRACTICABLE DATE.

15,389,97014,836,571 SHARES, PAR VALUE $1.00 PER SHARE, AS OF OCTOBER 26, 201724, 2018

 

 


ALLEGHANY CORPORATION

TABLE OF CONTENTS

 

         Page     
PART I

ITEM 1.

 

Financial Statements

   1 

ITEM 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   2425 

ITEM 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   6670 

ITEM 4.

 

Controls and Procedures

   6771 
PART II

ITEM 1.

 

Legal Proceedings

   6972 

ITEM 1A.

 

Risk Factors

   6972 

ITEM 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   6972 

ITEM 4.

Mine Safety Disclosures

69

ITEM 6.

 

Exhibits

   7073 

SIGNATURES

   7174 


Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

 

 September 30,
2017
 December 31,
2016
   September 30,
2018
 December 31,
2017
 (unaudited)     (unaudited)  
 ($ in thousands, except share amounts)   

 

($ in thousands, except share amounts)

Assets

     

Investments:

     

Available-for-sale securities at fair value:

  

Equity securities (cost: 2017 – $3,174,837; 2016 – $2,816,572)

  $3,821,601     $3,109,523   

Debt securities (amortized cost: 2017 – $13,027,581; 2016 – $12,927,103)

 13,212,395    12,983,213   

Securities at fair value:

   

Equity securities (cost: 2018 – $3,655,220; 2017 – $3,170,673)

    $5,028,578    $4,099,467 

Debt securities (amortized cost: 2018 – $12,179,758; 2017 – $12,536,772)

   12,071,191  12,721,399 

Short-term investments

 547,787    778,410      690,627  578,054 
 

 

  

 

   

 

 

 

 17,581,783    16,871,146      17,790,396  17,398,920 

Commercial mortgage loans

 649,700    594,878      695,889  658,364 

Other invested assets

 739,339    645,245      556,438  743,358 
 

 

  

 

   

 

 

 

Total investments

 18,970,822    18,111,269      19,042,723  18,800,642 

Cash

 701,841    594,091      646,908  838,375 

Accrued investment income

 107,095    113,763      98,723  105,877 

Premium balances receivable

 877,780    743,692      839,017  797,346 

Reinsurance recoverables

 1,738,391    1,272,219      1,768,841  1,746,488 

Ceded unearned premiums

 208,391    201,023      228,459  190,252 

Deferred acquisition costs

 476,634    448,634      471,282  453,346 

Property and equipment at cost, net of accumulated depreciation and amortization

 130,524    112,920      196,314  125,337 

Goodwill

 333,748    284,974      346,022  334,905 

Intangible assets, net of amortization

 464,956    378,680      465,830  459,037 

Current taxes receivable

 83,634    25,950      100,130  31,085 

Net deferred tax assets

 266,267    354,852      -      136,489 

Funds held under reinsurance agreements

 685,824    591,602      755,734  706,042 

Other assets

 668,328    522,922      835,901  659,096 
 

 

  

 

   

 

 

 

Total assets

  $25,714,235     $23,756,591       $     25,795,884    $     25,384,317 
 

 

  

 

   

 

 

 

Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity

     

Loss and loss adjustment expenses

  $12,456,375     $11,087,199       $11,854,859    $11,871,250 

Unearned premiums

 2,295,954    2,175,498      2,300,788  2,182,294 

Senior Notes and other debt

 1,486,375    1,476,489      1,581,676  1,484,897 

Reinsurance payable

 143,283    90,659      160,625  156,376 

Net deferred tax liabilities

   6,198   -     

Other liabilities

 1,027,746    912,081      1,158,146  1,068,907 
 

 

  

 

   

 

 

 

Total liabilities

 17,409,733    15,741,926      17,062,292  16,763,724 
 

 

  

 

   

 

 

 

Redeemable noncontrolling interests

 103,479    74,720      138,507  106,530 

Common stock (shares authorized: 2017 and 2016 – 22,000,000; shares issued: 2017 and
2016 – 17,459,961)

 17,460    17,460   

Common stock (shares authorized: 2018 and 2017 – 22,000,000; shares issued: 2018 and
2017 – 17,459,961)

   17,460  17,460 

Contributed capital

 3,611,900    3,611,993      3,612,862  3,612,109 

Accumulated other comprehensive income

 438,403    109,284   

Treasury stock, at cost (2017 – 2,056,203 shares; 2016 – 2,049,797 shares)

 (817,618)   (812,840)  

Accumulated other comprehensive (loss) income

   (220,808 618,118 

Treasury stock, at cost (2018 – 2,541,581 shares; 2017 – 2,069,461 shares)

   (1,103,835 (824,906

Retained earnings

 4,950,878    5,014,048      6,289,406  5,091,282 
 

 

  

 

   

 

 

 

Total stockholders’ equity attributable to Alleghany stockholders

 8,201,023    7,939,945      8,595,085  8,514,063 
 

 

  

 

   

 

 

 

Total liabilities, redeemable noncontrolling interest and stockholders’ equity

  $      25,714,235     $      23,756,591       $25,795,884    $25,384,317 
 

 

  

 

   

 

 

 

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Earnings and Comprehensive Income

(unaudited)

 

 

Three Months Ended

September 30,

 
 2017 2016  Three Months Ended September 30,
 ($ in thousands, except per share amounts)  2018 2017
 

($ in thousands, except per share amounts)

 

Revenues

    

Net premiums earned

  $1,239,721     $1,253,515     $    1,225,346   $    1,239,721 

Net investment income

 104,663    120,603    127,329  104,663 

Change in the fair value of equity securities

 370,175   -     

Net realized capital gains

 32,921    27,221    16,230  32,921 

Other than temporary impairment losses

 (6,131)   (11,729)   (3 (6,131

Other revenue

 296,309    225,006   

Noninsurance revenue

 438,338  296,309 
 

 

  

 

  

 

 

 

Total revenues

      1,667,483         1,614,616    2,177,415  1,667,483 
 

 

  

 

  

 

 

 

Costs and Expenses

    

Net loss and loss adjustment expenses

 1,491,848    718,556    957,703  1,491,848 

Commissions, brokerage and other underwriting expenses

 398,163    423,042    407,679  398,163 

Other operating expenses

 277,918    228,408    415,378  277,918 

Corporate administration

 (4,689)   10,745    19,094  (4,689

Amortization of intangible assets

 5,765    6,008    5,500  5,765 

Interest expense

 20,804    20,682    22,189  20,804 
 

 

  

 

  

 

 

 

Total costs and expenses

 2,189,809    1,407,441    1,827,543  2,189,809 
 

 

  

 

  

 

 

 

(Losses) earnings before income taxes

 (522,326)   207,175   

Earnings (losses) before income taxes

 349,872  (522,326

Income taxes

 (212,379)   48,328    60,413  (212,379
 

 

  

 

  

 

 

 

Net (losses) earnings

 (309,947)   158,847   

Net earnings (losses)

 289,459  (309,947

Net earnings attributable to noncontrolling interest

 4,210    3,016    4,559  4,210 
 

 

  

 

  

 

 

 

Net (losses) earnings attributable to Alleghany stockholders

  $(314,157)    $155,831   

Net earnings (losses) attributable to Alleghany stockholders

  $284,900   $(314,157
 

 

  

 

  

 

 

 

Net (losses) earnings

  $(309,947)    $158,847   

Other comprehensive (loss) income :

  

Change in unrealized gains (losses), net of deferred taxes of $52,766 and $25,123 for 2017 and 2016, respectively

 97,994    46,657   

Less: reclassification for net realized capital gains and other than temporary impairment losses, net of taxes of ($9,377) and ($5,422) for 2017 and 2016, respectively

 (17,414)   (10,070)  

Change in unrealized currency translation adjustment, net of deferred taxes of $3,967 and ($1,637) for 2017 and 2016, respectively

 7,368    (3,041)  

Net earnings (losses)

  $289,459   $(309,947

Other comprehensive income (loss):

  

Change in unrealized gains (losses), net of deferred taxes of ($8,932) and $52,766 for 2018 and
2017, respectively

 (33,601 97,994 

Less: reclassification for net realized capital gains and other than temporary impairments,
net of taxes of ($3,408) and ($9,377) for 2018 and 2017, respectively

 (12,819 (17,414

Change in unrealized currency translation adjustment, net of deferred taxes of ($407) and
$3,967 for 2018 and 2017, respectively

 (1,530 7,368 

Retirement plans

 98    95    (551 98 
 

 

  

 

  

 

 

 

Comprehensive (loss) income

 (221,901)   192,488   

Comprehensive income attributable to noncontrolling interest

 4,210    3,016   

Comprehensive income (loss)

 240,958  (221,901

Comprehensive income attributable to noncontrolling interests

 4,559  4,210 
 

 

  

 

  

 

 

 

Comprehensive (loss) income attributable to Alleghany stockholders

  $(226,111)    $189,472   

Comprehensive income (loss) attributable to Alleghany stockholders

  $236,399   $(226,111
 

 

  

 

  

 

 

 

Basic (losses) earnings per share attributable to Alleghany stockholders

  $(20.38)    $10.09   

Diluted (losses) earnings per share attributable to Alleghany stockholders

 (20.90)   10.09   

Basic earnings (losses) per share attributable to Alleghany stockholders

  $19.07   $(20.38

Diluted earnings (losses) per share attributable to Alleghany stockholders

 19.07  (20.90

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Earnings and Comprehensive Income

(unaudited)

 

  

Nine Months Ended

September 30,

 
  2017  2016 
  ($ in thousands, except per share amounts) 

Revenues

  

Net premiums earned

  $      3,692,838     $      3,736,596   

Net investment income

  321,857     332,326   

Net realized capital gains

  101,840     117,126   

Other than temporary impairment losses

  (13,095)    (38,216)  

Other revenue

  650,413     527,765   
 

 

 

  

 

 

 

Total revenues

  4,753,853     4,675,597   
 

 

 

  

 

 

 

Costs and Expenses

  

Net loss and loss adjustment expenses

  2,926,039     2,198,512   

Commissions, brokerage and other underwriting expenses

  1,220,415     1,238,712   

Other operating expenses

  678,226     575,527   

Corporate administration

  26,601     33,938   

Amortization of intangible assets

  14,140     14,490   

Interest expense

  62,728     61,384   
 

 

 

  

 

 

 

Total costs and expenses

  4,928,149     4,122,563   
 

 

 

  

 

 

 

(Losses) earnings before income taxes

  (174,296)    553,034   

Income taxes

  (116,368)    162,274   
 

 

 

  

 

 

 

Net (losses) earnings

  (57,928)    390,760   

Net earnings attributable to noncontrolling interest

  5,242     3,353   
 

 

 

  

 

 

 

Net (losses) earnings attributable to Alleghany stockholders

  $(63,170)    $387,407   
 

 

 

  

 

 

 

Net (losses) earnings

  $(57,928)    $390,760   

Other comprehensive (loss) income :

  

Change in unrealized gains (losses), net of deferred taxes of  $196,336 and $128,379 for 2017 and 2016, respectively

  364,623     238,418   

Less: reclassification for net realized capital gains and other  than temporary impairment losses, net of taxes of ($31,061) and ($22,999) for 2017 and 2016, respectively

  (57,684)    (42,712)  

Change in unrealized currency translation adjustment, net of deferred  taxes of $12,050 and $10,318 for 2017 and 2016, respectively

  22,379     19,162   

Retirement plans

  (199)    452   
 

 

 

  

 

 

 

Comprehensive (loss) income

  271,191     606,080   

Comprehensive income attributable to noncontrolling interest

  5,242     3,353   
 

 

 

  

 

 

 

Comprehensive (loss) income attributable to Alleghany stockholders

  $265,949     $602,727   
 

 

 

  

 

 

 

Basic (losses) earnings per share attributable to Alleghany stockholders

  $(4.10)    $25.09   

Diluted (losses) earnings per share attributable to Alleghany stockholders

  (4.10)    25.08   

  Nine Months Ended September 30,
  2018 2017
  

($ in thousands, except per share amounts)

 

Revenues

  

Net premiums earned

  $    3,670,161   $    3,692,838 

Net investment income

  377,728   321,857 

Change in the fair value of equity securities

  512,771   -     

Net realized capital gains

  67,197   101,840 

Other than temporary impairment losses

  (514  (13,095

Noninsurance revenue

  1,032,690   650,413 
 

 

 

 

 

 

 

 

  Total revenues

  5,660,033   4,753,853 
 

 

 

 

 

 

 

 

Costs and Expenses

  

Net loss and loss adjustment expenses

  2,366,491   2,926,039 

Commissions, brokerage and other underwriting expenses

  1,216,057   1,220,415 

Other operating expenses

  1,023,440   678,226 

Corporate administration

  40,998   26,601 

Amortization of intangible assets

  16,730   14,140 

Interest expense

  65,997   62,728 
 

 

 

 

 

 

 

 

  Total costs and expenses

  4,729,713   4,928,149 
 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

  930,320   (174,296

Income taxes

  171,275   (116,368
 

 

 

 

 

 

 

 

Net earnings (losses)

  759,045   (57,928

  Net earnings attributable to noncontrolling interest

  7,454   5,242 
 

 

 

 

 

 

 

 

Net earnings (losses) attributable to Alleghany stockholders

  $751,591   $(63,170
 

 

 

 

 

 

 

 

Net earnings (losses)

  $759,045   $(57,928

Other comprehensive income (loss):

  

  Change in unrealized gains (losses), net of deferred taxes of ($56,690) and $196,336 for 2018 and
  2017, respectively

  (213,263  364,623 

  Less: reclassification for net realized capital gains and other than temporary impairments,
  net of taxes of ($4,398) and ($31,061) for 2018 and 2017, respectively

  (16,546  (57,684

  Change in unrealized currency translation adjustment, net of deferred taxes of ($1,848) and
  $12,050 for 2018 and 2017, respectively

  (6,953  22,379 

  Retirement plans

  (1,664  (199
 

 

 

 

 

 

 

 

Comprehensive income

  520,619   271,191 

  Comprehensive income attributable to noncontrolling interests

  7,454   5,242 
 

 

 

 

 

 

 

 

Comprehensive income attributable to Alleghany stockholders

  $513,165   $265,949 
 

 

 

 

 

 

 

 

Basic earnings (losses) per share attributable to Alleghany stockholders

  $49.55   $(4.10

Diluted earnings (losses) per share attributable to Alleghany stockholders

  49.53   (4.10

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)

 

  

Nine Months Ended

September 30,

 
  2017  2016 
  ($ in thousands) 

Cash flows from operating activities

  

Net (losses) earnings

  $(57,928)    $390,760   

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

  

Depreciation and amortization

  106,197     115,020   

Net realized capital (gains) losses

  (101,840)    (117,126)  

Other than temporary impairment losses

  13,095     38,216   

(Increase) decrease in reinsurance recoverables, net of reinsurance payable

  (413,548)    73,781   

(Increase) decrease in premium balances receivable

  (134,088)    (44,341)  

(Increase) decrease in ceded unearned premiums

  (7,368)    (17,588)  

(Increase) decrease in deferred acquisition costs

  (28,000)    (39,962)  

(Increase) decrease in funds held under reinsurance agreements

  (94,222)    (299,372)  

Increase (decrease) in unearned premiums

  120,456     164,078   

Increase (decrease) in loss and loss adjustment expenses

  1,369,176     258,861   

Change in unrealized foreign exchange losses (gains)

  (134,404)    78,615   

Other, net

  (211,479)    (27,283)  
 

 

 

  

 

 

 

Net adjustments

  483,975     182,899   
 

 

 

  

 

 

 

Net cash provided by (used in) operating activities

  426,047     573,659   
 

 

 

  

 

 

 

Cash flows from investing activities

  

Purchases of debt securities

      (4,181,182)        (4,665,980)  

Purchases of equity securities

  (3,218,941)    (1,163,687)  

Sales of debt securities

  2,836,272     3,953,367   

Maturities and redemptions of debt securities

  1,397,408     996,548   

Sales of equity securities

  2,970,760     1,197,612   

Net (purchases) sales of short-term investments

  174,501     (417,186)  

Net (purchases) sales and maturities of commercial mortgage loans

  (54,822)    (336,944)  

(Purchases) sales of property and equipment

  10,268     (18,982)  

Purchases of affiliates and subsidiaries, net of cash acquired

  (244,311)    (145,253)  

Other, net

  28,302     128,731   
 

 

 

  

 

 

 

Net cash provided by (used in) investing activities

  (281,745)    (471,774)  
 

 

 

  

 

 

 

Cash flows from financing activities

  

Treasury stock acquisitions

  (8,549)    (55,678)  

Increase (decrease) in other debt

  (27,202)    43,135   

Other, net

  (17,070)    (4,274)  
 

 

 

  

 

 

 

Net cash provided by (used in) financing activities

  (52,821)    (16,817)  
 

 

 

  

 

 

 

Effect of exchange rate changes on cash

  16,269     8,572   
 

 

 

  

 

 

 

Net increase (decrease) in cash

  107,750     93,640   

Cash at beginning of period

  594,091     475,267   
 

 

 

  

 

 

 

Cash at end of period

  $701,841     $568,907   
 

 

 

  

 

 

 

Supplemental disclosures of cash flow information

  

Cash paid during period for:

  

Interest paid

  $58,133     $56,423   

Income taxes paid (refund received)

  29,320     51,969   

   Nine Months Ended September 30,
   2018 2017
   

($ in thousands)

 

Cash flows from operating activities

   

Net earnings (losses)

   $    759,045   $    (57,928

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

   

Depreciation and amortization

   95,427   106,197 

Change in the fair value of equity securities

   (512,771  -     

Net realized capital (gains) losses

   (67,197  (101,840

Other than temporary impairment losses

   514   13,095 

(Increase) decrease in reinsurance recoverables, net of reinsurance payable

   (18,104  (413,548

(Increase) decrease in premium balances receivable

   (41,671  (134,088

(Increase) decrease in ceded unearned premiums

   (38,207  (7,368

(Increase) decrease in deferred acquisition costs

   (17,936  (28,000

(Increase) decrease in funds held under reinsurance agreements

   (49,692  (94,222

Increase (decrease) in unearned premiums

   118,494   120,456 

Increase (decrease) in loss and loss adjustment expenses

   (16,391  1,369,176 

Change in unrealized foreign currency exchange rate losses (gains)

   63,452   (134,404

Other, net

   48,819   (211,479
  

 

 

 

 

 

 

 

Net adjustments

   (435,263  483,975 
  

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

   323,782   426,047 
  

 

 

 

 

 

 

 

Cash flows from investing activities

   

Purchases of debt securities

   (3,206,369  (4,181,182

Purchases of equity securities

   (678,311  (3,218,941

Sales of debt securities

   2,279,104   2,836,272 

Maturities and redemptions of debt securities

   1,183,469   1,397,408 

Sales of equity securities

   532,864   2,970,760 

Net (purchases) sales of short-term investments

   (113,699  174,501 

Net (purchases) sales and maturities of commercial mortgage loans

   (37,525  (54,822

(Purchases) sales of property and equipment

   (38,866  10,268 

Purchases of affiliates and subsidiaries, net of cash acquired

   (110,636  (244,311

Other, net

   59,382   28,302 
  

 

 

 

 

 

 

 

Net cash provided by (used in) investing activities

   (130,587  (281,745
  

 

 

 

 

 

 

 

Cash flows from financing activities

   

Treasury stock acquisitions

   (282,053  (8,549

Increase (decrease) in other debt

   50,892   (27,202

Cash dividends paid

   (153,967  -     

Other, net

   7,854   (17,070
  

 

 

 

 

 

 

 

Net cash provided by (used in) financing activities

   (377,274  (52,821
  

 

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash

   (7,388  16,269 
  

 

 

 

 

 

 

 

Net increase (decrease) in cash

   (191,467  107,750 

Cash at beginning of period

   838,375   594,091 
  

 

 

 

 

 

 

 

Cash at end of period

   $646,908   $701,841 
  

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information

   

Cash paid during period for:

   

Interest paid

   $59,806   $58,133 

Income taxes paid (refund received)

   33,332   29,320 

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

1. Summary of Significant Accounting Principles

(a) Principles of Financial Statement Presentation

This Quarterly Report on Form10-Q (this “Form10-Q”) should be read in conjunction with the Annual Report onForm 10-K for the year ended December 31, 20162017 (the “2016“2017 Form10-K”) and the Quarterly Reports on Form10-Q for the quarters ended March 31, 20172018 and June 30, 20172018 of Alleghany Corporation (“Alleghany”).

Alleghany Corporation, a Delaware corporation, owns and manages certain operating subsidiaries and investments, anchored by a core position in property and casualty reinsurance and insurance. Through its wholly-owned subsidiary Transatlantic Holdings, Inc. (“TransRe”), Alleghany is engaged in the property and casualty reinsurance business. TransRe has been a subsidiary of Alleghany since March 2012. Through its wholly-owned subsidiary Alleghany Insurance Holdings LLC (“AIHL”) and its subsidiaries,, Alleghany is engaged in the property and casualty insurance business. AIHL’s insurance operations are principally conducted by its subsidiaries RSUI Group, Inc. (“RSUI”), and CapSpecialty, Inc. (“CapSpecialty”) and Pacific Compensation Corporation (“PacificComp”). CapSpecialty has been a subsidiary of AIHL since January 2002, RSUI has been a subsidiary of AIHL since July 2003 and PacificCompCapSpecialty has been a subsidiary of AIHL since July 2007.January 2002. AIHL Re LLC (“AIHL Re”), a captive reinsurance company which provides reinsurance to Alleghany’s current and former insurance operating subsidiaries and affiliates, has been a wholly-owned subsidiary of Alleghany since its formation in May 2006. Alleghany’s

Prior to December 31, 2017, AIHL’s insurance operations also included Pacific Compensation Corporation (“PacificComp”). On September 12, 2017, AIHL signed a definitive agreement to sell PacificComp to CopperPoint Mutual Insurance Company (“CopperPoint”) for total cash consideration of approximately $158 million. The transaction closed on December 31, 2017, at which time: (i) approximately $442 million of PacificComp assets, consisting primarily of debt securities, and approximately $316 million of PacificComp liabilities, consisting primarily of loss and loss adjustment expenses (“LAE”) reserves, were transferred to CopperPoint; and (ii) AIHL recorded an after-tax gain of approximately $16 million, which included a tax benefit. In connection with the transaction, AIHL Re will continue to provide adverse development reinsurance operations commencedcoverage on March 6, 2012 whenPacificComp’spre-acquisition claims, subject to certain terms and conditions. AIHL Re’s obligations, which are guaranteed by Alleghany, consummatedare subject to: (i) an aggregate limit of $150.0 million; and (ii) a merger with Transatlantic Holdings, Inc. (“TransRe”)final commutation and TransRe became onesettlement as of Alleghany’s wholly-owned subsidiaries.December 31, 2024.

Although Alleghany’s primary sources of revenues and earnings are its reinsurance and insurance operations and investments, Alleghany also sources, executes, manages and monitors certain private capital investments primarily through its wholly-owned subsidiary Alleghany Capital Corporation (“Alleghany Capital”). Alleghany Capital’s investments are included in other activities for segment reporting purposes and include:

 

Stranded Oil Resources Corporation (“SORC”), an exploration and production company focused on enhanced oil recovery, headquartered in Golden, Colorado;

Bourn & Koch, Inc. (“Bourn & Koch”), a manufacturer/remanufacturer of specialty machine tools and supplier of replacement parts, accessories and services for a variety of cutting technologies, headquartered in Rockford, Illinois;

 

R.C. Tway Company, LLC (“Kentucky Trailer”), a manufacturer of custom trailers and truck bodies for the moving and storage industry and other markets, headquartered in Louisville, Kentucky;

 

IPS-Integrated Project Services, LLC (“IPS”), a technical engineering-focused service provider focused on the global pharmaceutical and biotechnology industries, headquartered in Blue Bell, Pennsylvania;

 

Jazwares, LLC (together with its affiliates, “Jazwares”), a global toy, entertainment and musical instrument company, headquartered in Sunrise, Florida;

 

WWSC Holdings, LLC (“W&W|AFCO Steel”), a structural steel fabricator and erector, headquartered in Oklahoma City, Oklahoma, acquired on April 28, 2017;Oklahoma; and

 

a 45 percent equity interest in Wilbert Funeral Services, Inc. (“Wilbert”), a provider of products and services for the funeral and cemetery industries and precast concrete markets, headquartered in Overland Park, Kansas,Kansas.

The results of W&W|AFCO Steel have been included in Alleghany’s consolidated results beginning with its acquisition by Alleghany Capital on April 28, 2017. On February 7, 2018, W&W|AFCO Steel acquired on August 1, 2017. Hirschfeld Holdings, LP (“Hirschfeld”).

Wilbert is accounted for under the equity method of accounting and is included in other invested assets.

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 The results of JazwaresWilbert have been included in Alleghany’s consolidated results. Prior to April 15, 2016, Jazwares was accounted for under the equity method of accounting.results beginning with its acquisition by Alleghany Capital on August 1, 2017.

In addition, Alleghany owns certain other holding-company investments. Alleghany’s wholly-owned subsidiary Stranded Oil Resources Corporation (“SORC”), is an exploration and manages propertiesproduction company focused on enhanced oil recovery, headquartered in the Sacramento, California region through itsGolden, Colorado. Alleghany’s wholly-owned subsidiary, Alleghany Properties Holdings LLC (“Alleghany Properties”)., owns and manages certain properties in the Sacramento, California region. Alleghany’s public equity investments are managed primarily through Alleghany’s wholly-owned subsidiary Roundwood Asset Management LLC.

On September 12, 2017, AIHL signed a definitive agreement to sell PacificComp to CopperPoint Mutual Insurance Company (“CopperPoint”) for total cash consideration of approximately $150 million. In connection with the transaction, AIHL Re will continue to provide adverse development reinsurance coverage on PacificComp’spre-acquisition claims, subject to certain terms and conditions. The transaction, which is subject to customary regulatory review and approvals, is expected to close on December 31, 2017. Upon closing, Alleghany expects to record an estimatedafter-tax gain of approximately $25 million, which amount includes a tax benefit. As of September 30, 2017, PacificComp’s total assets were $440.6 million, consisting primarily of debt securities, and PacificComp’s total liabilities were $313.7 million, consisting primarily of loss and loss adjustment expenses (“LAE”) reserves.

Unless the context otherwise requires, references to “Alleghany” include Alleghany together with its subsidiaries.

The accompanying consolidated financial statements include the results of Alleghany and its wholly-owned andmajority-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). All material inter-company balances and transactions have been eliminated in consolidation.

The portion of stockholders’ equity, net earnings and accumulated other comprehensive income that is not attributable to Alleghany stockholders is presented on the Consolidated Balance Sheets and the Consolidated Statements of Earnings and Comprehensive Income as noncontrolling interests. Because all noncontrolling interests have the option to sell their ownership interests to Alleghany in the future (generally through 2024), the portion of stockholders’ equity that is not attributable to Alleghany stockholders is presented on the Consolidated Balance Sheets as redeemable noncontrolling interests for all periods presented. During the first nine months of 2017,2018, the noncontrolling interests outstanding were approximately as follows: Bourn & Koch had approximately- 11 percent noncontrolling interests outstanding,percent; Kentucky Trailer had approximately- 21 percent noncontrolling interests outstanding,percent; IPS had approximately 16 percent noncontrolling interests outstanding- 15 percent; Jazwares - 23 percent; and Jazwares had approximately 20 percent noncontrolling interests outstanding. W&W|AFCO Steel had approximately- 20 percent noncontrolling interests outstanding from its April 28, 2017 acquisition date through September 30, 2017.percent.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Alleghany relies on historical experience and on various other assumptions that it believes to be reasonable under the circumstances to make judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from those reported results to the extent that those estimates and assumptions prove to be inaccurate. Changes in estimates are reflected in the Consolidated Statements of Earnings and Comprehensive Income in the period in which the changes are made.

(b) Other Significant Accounting Principles

Alleghany’s significant accounting principles can be found in Note 1 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 20162017 Form10-K.

(c) Recent Accounting Standards

Recently Adopted

In May 2015,February 2018, the Financial Accounting Standards Board (the “FASB”) issued guidance on certain tax effects caused by the Tax Cuts and Jobs Act of 2017 (the “Tax Act”), which was signed into law on December 22, 2017. The Tax Act, among other things, reduced the U.S. corporate federal income tax rate from 35.0 percent to 21.0 percent, effective January 1, 2018 for the 2018 tax year. Under such circumstances, GAAP requires that requires disclosures relatedthe value of deferred tax assets and liabilities be reduced through tax expense. The new guidance provides an option to short-duration insurance contracts. The guidance appliesreclassify any stranded tax amounts that remain in accumulated other comprehensive income to property and casualty insurance and reinsurance entities, among others, and requiresretained earnings, either retrospectively or at the following annual disclosure related to the liability for loss and LAE: (i) net incurred and paid claims development information by accident year for up to ten years; (ii) a reconciliation of incurred and paid claims development information to the aggregate carrying amountbeginning of the liability for loss and LAE; (iii) liabilities for losses that have been incurred but not yet reported by accident year andperiod in total; (iv) a description of reserving methodologies (as well as any changes to those methodologies); (v) quantitative information about claim frequency by accident year; and (vi)which the average annual percentage payout of incurred claims by age and accident year. In addition, the guidance also requires insurance entities to disclose for annual and interim reporting periods a roll-forward of the liability for loss and LAE.adoption is elected. This guidance wasbecame effective in the first quarter of 2018 for annual periods beginning after December 15, 2015 and interim periods within annual periods beginning after December 15, 2016,public entities, with early adoption permitted.permitted in 2017. Alleghany adopted this new guidance in the first quarter of 2018 and has elected to reclassify stranded tax amounts that remain in accumulated other comprehensive income, in the amount of approximately $135 million, to retained earnings as of December 31, 2016 and the implementation did not have an impact on its results of operations and financial condition.January 1, 2018. See Note 57(b) of this Form10-Q for further information on accumulated other comprehensive income, and see Note 1(k) and Note 69 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 20162017 Form10-K for additional information on the new disclosures.Tax Act and its impact on Alleghany.

Future ApplicationIn March 2017, the FASB issued guidance that reduces the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The guidance applies specifically to noncontingent call features that are callable at a predetermined and fixed price and date. The accounting for purchased callable debt securities held at a discount is not affected. This guidance is effective in the first quarter of Accounting Standards2019 for public entities with early adoption permitted. Alleghany adopted this guidance in the fourth quarter of 2017 and recorded a cumulative effect reduction of approximately $13 million directly to opening 2017 retained earnings and an offsetting increase in opening 2017 accumulated other comprehensive income. The implementation did not have a material impact on Alleghany’s results of operations and financial condition. See Note 7(b) of this Form 10-Q for further information on accumulated other comprehensive income.

In May 2014, the FASB, together with the International Accounting Standards Board, issued guidance on the recognition of revenue from contracts with customers. Under this guidance, revenue is recognized as the transfer of goods and services to customers takes place and in amounts that reflect the payment or payments that are expected to be received from the customers for those goods and services. This guidance also requires new disclosures about revenue. Revenues related to insurance and reinsurance contracts and revenues from investments are not impacted by this guidance, whereas noninsurance revenues arising from the sale of manufactured goods and services is generally included within the scope of this guidance. This guidance, isand all related amendments, became effective in the first quarter of 2018 for public entities, with early adoption permitted in 2017. Alleghany will adoptadopted this guidance in the first quarter of 2018 using the modified retrospective transition approach and does not currently believe that the implementation willdid not have a material impact on its results of operations and financial condition. See Note 10 of this Form10-Q for further information on Alleghany’s noninsurance revenues.

In January 2016, the FASB issued guidance that changes the recognition and measurement of certain financial instruments. This guidance requires investments in equity securities (except those accounted for under the equity method of accounting)accounting, but including partnership investments not accounted for under the equity method) to be measured at fair value with changes in fair value recognized in net income.earnings. For equity securities that do not have readily determinable fair values, measurement may be at cost, adjusted for any impairment and changes resulting from observable price changes for a similar investment of the same issuer. This guidance also changes the presentation and disclosure of financial instruments by: (i) requiring that financial instrument disclosures of fair value use the exit price notion; (ii) requiring separate presentation of financial assets and financial liabilities by measurement category and form, either on the balance sheet or the accompanying notes to the financial statements; (iii) requiring separate presentation in other comprehensive income for the portion of the change in a liability’s fair value resulting

from instrument-specific credit risk when an election has been made to measure the liability at fair value; and (iv) eliminating the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. This guidance is effective for fiscal years beginning after December 15, 2017 for public entities, including interim periods within those fiscal years. Except for the change in presentation for instrument-specific credit risk, this guidance does not permit early adoption. Alleghany will adoptadopted this guidance in the first quarter of 2018. As of January 1, 2018, approximately $736 million of net unrealized gains or losses of equity securities, net of deferred taxes, will bewere reclassified from accumulated other comprehensive income to retained earnings. Subsequently, all changes in unrealized gains or losses of equity securities, net of deferred taxes, will bewere presented in the Consolidated Statements of Earnings rather than the Consolidated Statements of Comprehensive Income. Alleghany doesIncome, under the caption “change in the fair value of equity securities.” Results arising from partnership investments, whether accounted for under the equity method or at fair value, continue to be reported as a component of net investment income. The implementation did not currently believe that the implementation will have a material impact on itsAlleghany’s financial condition. See Note 3(a)3 of this Form10-Q for further information on Alleghany’s unrealized gainsequity securities, and lossesNote 7(b) of equity securities.this Form 10-Q for further information on accumulated other comprehensive income.

Future Application of Accounting Standards

In February 2016, the FASB issued guidance on leases. Under this guidance, a lessee is required to recognize lease liabilities and correspondingright-of-use assets for leases with terms of more than one year, whereas under current guidance, a lessee is only required to recognize assets and liabilities for those leases qualifying as capital leases. This guidance also requires new disclosures about the amount, timing and uncertainty of cash flows arising from leases. The accounting by lessors is to remain largely unchanged. This guidance is effective in the first quarter of 2019 for public entities, with early adoption permitted. A modified retrospective transition approach is required for all leases in existence as of, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Alleghany will adopt this guidance in the first quarter of 2019 and does not currently believe that the implementation will have a material impact on its results of operations and financial condition. See Note 12(b) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 20162017 Form10-K for further information on Alleghany’s leases.

In June 2016, the FASB issued guidance on credit losses. Under this guidance, a company is required to measure all expected credit losses on loans, reinsurance recoverables and other financial assets accounted for at cost or amortized cost, as applicable. Estimates of expected credit losses are to be based on historical experience, current conditions and reasonable and supportable forecasts. Credit losses for securities accounted for on anavailable-for-sale (“AFS”) basis are to be measured in a manner similar to GAAP as currently applied and cannot exceed the amount by which the fair value is less than the amortized cost. Credit losses for all financial assets are to be recorded through an allowance for credit losses. Subsequent reversals in credit loss estimates are permitted and are to be recognized in earnings. This guidance also requires new disclosures about the significant estimates and judgments used in estimating credit losses, as well as the credit quality of financial assets. This guidance is effective in the first quarter of 2020 for public entities, with early adoption permitted. Alleghany will adopt this guidance in the first quarter of 2020 and does not currently believe that the implementation will have a material impact on its results of operations and financial condition.

In January 2017, the FASB issued guidance that simplifies the subsequent measurement of goodwill. Under this guidance, if an initial qualitative assessment indicates that the fair value of an operating subsidiary may be less than its carrying amount, an impairment charge is recognized for the amount by which the carrying amount of the operating subsidiary exceeds its estimated fair value. Any resulting impairment loss recognized cannot exceed the total amount of goodwill associated with the operating subsidiary. This guidance is effective in the first quarter of 2020 for public entities, with early adoption permitted. Alleghany will adopt this guidance in the first quarter of 2020 and does not currently believe that the implementation will have a material impact on its results of operations and financial condition.

In March See Note 2 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2017 the FASB issued guidance that reduces the amortization periodForm 10-K for the premiumfurther information on certain purchased callable debt securities to the earliest call date. The guidance applies specifically to noncontingent call features that are callable at a predetermined and fixed price and date. The accounting for purchased callable debt securities held at a discount is not affected. This guidance is effective in the first quarter of 2019 for public entities, with early adoption permitted. Alleghany will adopt this guidance in the fourth quarter of 2017, and will record a cumulative effect reduction directly to opening 2017 retained earnings and an offsetting increase in opening 2017 accumulated other comprehensive income at that time. Alleghany does not currently believe that the implementation will have a material impact on its results of operations and financial condition.Alleghany’s goodwill.

In August 2017, the FASB issued guidance that simplifies the requirements to achieve hedge accounting, better reflects the economic results of hedging in the financial statements and better alignsimproves the alignment between hedge accounting withand a company’s risk management activities. This guidance is effective in the first quarter of 2019 for public entities, with early adoption permitted. Alleghany will adopt this guidance in the first quarter of 2019 and does not currently believe that the implementation will have a material impact on its results of operations and financial condition.

In August 2018, the FASB issued guidance that changes the financial statement disclosure requirements for measuring fair value. With respect to financial instruments classified as “Level 3” in the fair value disclosure hierarchy, the guidance requires certain additional disclosures for public entities related to amounts included in other comprehensive income and significant unobservable inputs used in the valuation, while removing disclosure requirements related to an entity’s overall valuation processes. The guidance also removes certain disclosure requirements related to transfers between financial instruments classified as “Level 1” and “Level 2” and provides clarification on certain other existing disclosure requirements. This guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted with respect to any eliminated or modified disclosures. Alleghany will adopt this guidance in the first quarter of 2020 and does not currently believe that the implementation will have a material impact on its results of operations and financial condition.

2. Fair Value of Financial Instruments

The following table presents the carrying value and estimated fair value of Alleghany’s consolidated financial instruments as of September 30, 20172018 and December 31, 2016:2017:

 

  September 30, 2017  December 31, 2016 
  Carrying Value  Fair Value  Carrying Value  Fair Value 
  

 

($ in millions)

 

Assets

    

 

Investments (excluding equity method investments and loans)(1)

  $      17,590.2   $      17,590.2   $      16,899.2   $      16,899.2 

Liabilities

    

 

Senior Notes and other debt(2)

  $1,486.4   $1,655.5   $1,476.5   $1,584.3 

   September 30, 2018  December 31, 2017
    Carrying Value   Fair Value   Carrying Value   Fair Value
   

($ in millions)

 

Assets

        

Investments (excluding equity method investments and loans)(1)

   $     17,791.3    $     17,791.3    $     17,406.5    $     17,406.5 

Liabilities

        

Senior Notes and other debt(2)

   $     1,581.7    $1,701.8    $1,484.9    $1,614.6 

 

(1)

This table includes AFS investments (debtdebt and equity securities, as well as partnership andnon-marketable equity investments carried at fair value that are included in other invested assets).assets. This table excludes investments accounted for using the equity method and commercial mortgage loans that are carried at unpaid principal balance. The fair value of short-term investments approximates amortized cost. The fair value of all other categories of investments is discussed below.

(2)

See Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 20162017 Form10-K for additional information on the senior notes and other debt.

The following tables present Alleghany’s financial instruments measured at fair value and the level of the fair value hierarchy of inputs used as of September 30, 20172018 and December 31, 2016:2017:

 

 Level 1 Level 2 Level 3 Total   Level 1   Level 2   Level 3   Total 
 

 

($ in millions)

   

($ in millions)

 

 

As of September 30, 2017

    

As of September 30, 2018

        

Equity securities:

            

Common stock

  $3,815.2    $0.5    $0.9    $3,816.6     $5,016.7    $3.5    $-        $5,020.2 

Preferred stock

  -       -       5.0   5.0     -        -        8.4    8.4 
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total equity securities

 3,815.2   0.5   5.9   3,821.6     5,016.7    3.5    8.4    5,028.6 
 

 

  

 

  

 

  

 

 
  

 

   

 

   

 

   

 

 

Debt securities:

            

U.S. Government obligations

  -      1,020.7    -       1,020.7     -        1,028.6    -        1,028.6 

Municipal bonds

  -      4,131.7    -       4,131.7     -        2,604.3    -        2,604.3 

Foreign government obligations

  -      1,136.2   4.7   1,140.9     -        902.0    -        902.0 

U.S. corporate bonds

  -      2,202.2   278.8   2,481.0     -        2,040.7    403.0    2,443.7 

Foreign corporate bonds

  -      1,254.3   39.9   1,294.2     -        1,310.4    108.4    1,418.8 

Mortgage and asset-backed securities:

            

Residential mortgage-backed securities (“RMBS”)(1)

  -      948.8   5.4   954.2     -        1,115.6    -        1,115.6 

Commercial mortgage-backed securities (“CMBS”)

  -      505.5   11.4   516.9     -        523.9    -        523.9 

Other asset-backed securities(2)

  -      490.3   1,182.5   1,672.8     -        654.4    1,379.9    2,034.3 
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total debt securities

  -      11,689.7   1,522.7   13,212.4     -        10,179.9    1,891.3    12,071.2 
  

 

   

 

   

 

   

 

 

Short-term investments

  -      547.8    -       547.8     -        690.6    -        690.6 

Other invested assets(3)

  -       -       8.4   8.4     -        -        0.9    0.9 
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total investments (excluding equity method investments and loans)

  $    3,815.2    $    12,238.0    $    1,537.0    $    17,590.2     $   5,016.7    $   10,874.0    $   1,900.6    $   17,791.3 
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Senior Notes and other debt

  $-       $1,553.0    $102.5    $1,655.5     $-        $1,504.1    $197.7    $1,701.8 
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

  Level 1  Level 2  Level 3  Total 
  ($ in millions) 

As of December 31, 2016

    

Equity securities:

    

Common stock

  $3,105.2    $-       $4.3    $3,109.5  

Preferred stock

  -       -       -        -      
 

 

 

  

 

 

  

 

 

  

 

 

 

   Total equity securities

  3,105.2    -       4.3    3,109.5  
 

 

 

  

 

 

  

 

 

  

 

 

 

Debt securities:

    

U.S. Government obligations

  -       1,243.3    -       1,243.3  

Municipal bonds

  -       4,185.8    -       4,185.8  

Foreign government obligations

  -       1,047.1    -       1,047.1  

U.S. corporate bonds

  -       2,120.2    72.9    2,193.1  

Foreign corporate bonds

  -       1,088.4    0.4    1,088.8  

Mortgage and asset-backed securities:

    

  RMBS(1)

  -       994.5    5.9    1,000.4  

  CMBS

  -       730.5    4.3    734.8  

  Other asset-backed securities(2)

  -       586.1    903.8    1,489.9  
 

 

 

  

 

 

  

 

 

  

 

 

 

   Total debt securities

  -       11,995.9    987.3    12,983.2  

Short-term investments

  -       778.4    -        778.4  

Other invested assets(3)

  -       -       28.1    28.1  
 

 

 

  

 

 

  

 

 

  

 

 

 

   Total investments (excluding equity method investments and  loans)

  $      3,105.2   $      12,774.3    $      1,019.7    $      16,899.2  
 

 

 

  

 

 

  

 

 

  

 

 

 

Senior Notes and other debt

  $-       $1,491.5    $92.8    $1,584.3  
 

 

 

  

 

 

  

 

 

  

 

 

 

  Level 1 Level 2 Level 3 Total
  ($ in millions)

As of December 31, 2017

    

Equity securities:

    

Common stock

  $4,090.7   $3.8   $-       $4,094.5 

Preferred stock

   -        3.1   1.9   5.0 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity securities

  4,090.7   6.9   1.9   4,099.5 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

    

U.S. Government obligations

  -        948.0   -        948.0 

Municipal bonds

  -        3,682.1   -        3,682.1 

Foreign government obligations

  -        1,006.6   -        1,006.6 

U.S. corporate bonds

  -        2,173.0   260.0   2,433.0 

Foreign corporate bonds

  -        1,424.6   75.2   1,499.8 

Mortgage and asset-backed securities:

    

 RMBS(1)

  -        833.8   161.8   995.6 

 CMBS

  -        550.1   1.6   551.7 

 Other asset-backed securities(2)

  -        503.3   1,101.3   1,604.6 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt securities

  -        11,121.5   1,599.9   12,721.4 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short-term investments

  -        578.1   -        578.1 

Other invested assets(3)

  -        -       7.5   7.5 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments (excluding equity method investments and loans)

  $   4,090.7   $  11,706.5   $   1,609.3   $  17,406.5 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior Notes and other debt

  $-        $1,513.6   $101.0   $1,614.6 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Primarily includes government agency pass-through securities guaranteed by a government agency or government sponsored enterprise, among other types of RMBS.

(2)

Includes $1,146.2$1,368.9 million and $903.8$1,101.3 million of collateralized loan obligations as of September 30, 20172018 and December 31, 2016,2017, respectively.

(3)

Includes partnership andnon-marketable equity investments accounted for on an AFS basis,at fair value, and excludes investments accounted for using the equity method.

As further described in Note 3(h), on March 15, 2018, most of AIHL’s limited partnership interests in certain subsidiaries of Ares Management LLC (“Ares”) were converted into Ares common units. As a result of the conversion, as of March 15, 2018, $208.2 million of Ares common units, classified as equity securities, was transferred into Level 1, and $58.7 million of Ares limited partner interests, classified as other invested assets, was transferred into Level 3. On September 24, 2018, AIHL’s remaining $56.9 million of Ares limited partner interests were converted into Ares common units and, as a result, was transferred from Level 3 other invested assets into Level 1 common stocks.

Aside from the $56.9 million of Ares-related other invested assets transferred out of Level 3, in the nine months ended September 30, 2018, Alleghany transferred out of Level 3 an additional $153.7 million of financial instruments, principally due to an increase in observable inputs related to the valuation of such assets. Specifically, during the first nine months of 2018, there was a decrease in the weight given tonon-binding broker quotes, and as such, there was a corresponding increase in quoted prices for similar assets in active markets. Of the $153.7 million of transfers, $150.6 million related to RMBS, $1.6 million related to CMBS, $1.3 million related to U.S. corporate bonds and $0.2 million related to foreign corporate bonds.

In addition to the $58.7 million of Ares-related other invested assets transferred into Level 3, in the nine months ended September 30, 2018, Alleghany transferred into Level 3 $5.6 million of financial instruments, principally due to a decrease in observable inputs related to the valuation of such assets and, specifically, a decrease in broker quotes. Of the $5.6 million of transfers, $4.4 million related to preferred stock and $1.2 million related to U.S. corporate bonds. There were no other material transfers between Levels 1, 2 or 3 in the three and nine months ended September 30, 2018.

In the nine months ended September 30, 2017, Alleghany transferred out of Level 3 $7.2 million of financial instruments, out of Level 3 principally due to an increase in observable inputs related to the valuation of such assets and, specifically, an increase in broker quotes. Of the $7.2 million of transfers, $4.8 million related to U.S. corporate bonds and $2.4 million related to common stock. There were no transfers of financial instruments out of Level 3 in the third quarter of 2017.

In the three and nine months ended September 30, 2017, Alleghany transferred into Level 3 $0.8 million and $5.5 million, respectively, of financial instruments, into Level 3 principally due to a decrease in observable inputs related to the valuation of such assets and, specifically, a decrease in broker quotes. Of the $5.5 million of transfers, $3.8 million related to U.S. corporate bonds, $1.4 million related to common stock and $0.3 million related to foreign corporate bonds. There were no other material transfers between Levels 1, 2 or 3 in the three and nine months ended September 30, 2017.

In the three and nine months ended September 30, 2016, Alleghany transferred $5.1 million and $5.4 million, respectively, of debt securities out of Level 3 principally due to an increase in observable inputs related to the valuation of such assets and, specifically, an increase in broker quotes. Of the $5.4 million of transfers, $5.1 million related to U.S. corporate bonds and $0.3 million related to other invested assets.

In the three and nine months ended September 30, 2016, Alleghany transfered $5.7 million and $8.4 million, respectively, of securities into Level 3 principally due to a decrease in observable inputs related to the valuation of such assets, and specifically, a decrease in broker quotes. Of the $8.4 million of transfers, $5.5 million related to U.S. corporate bonds, $1.9 million related to foreign corporate bonds and $1.0 million related to common stock. There were no other material transfers between Levels 1, 2 or 3 in the three and nine months ended September 30, 2016.

The following tables present reconciliations of the changes during the nine months ended September 30, 20172018 and 20162017 in Level 3 assets measured at fair value:

 

  Equity Securities   Debt Securities             Debt Securities    
                      Mortgage and asset-backed                 Mortgage and asset-backed    

Nine Months Ended September 30,

2017

    Common  
Stock
     Preferred  
Stock
   Foreign
 Government 
Obligations
   U.S.
  Corporate  
Bonds
   Foreign
  Corporate  
Bonds
       RMBS           CMBS       Other
Asset-
backed
  Securities  
   Other
  Invested  
Assets (1)
   Total 

Nine Months Ended September 30, 2018

    Preferred  
Stock
 U.S.
  Corporate  
Bonds
 Foreign
  Corporate  
Bonds
     RMBS         CMBS     Other Asset-
backed
    Securities    
 Other
  Invested  
Assets(1)
 Total
  ($ in millions)       

($ in millions)

 

Balance as of January 1, 2017

    $4.3      $-          $-          $72.9      $0.4      $5.9      $4.3      $903.8      $28.1      $1,019.7  

Balance as of January 1, 2018

  

 

  $

 

1.9

 

 

 

 

  $

 

260.0

 

 

 

 

$

 

75.2

 

 

 

 

$

 

161.8

 

 

 

 

$

 

1.6

 

 

 

 

$

 

1,101.3

 

 

 

 

$

 

7.5

 

 

 

 

$

 

1,609.3

 

 

Net realized/unrealized gains (losses) included in:

                             

Net earnings(2)

   0.2     (0.2)    -         (0.2)    -         0.2     -         3.9     10.8     14.7     -      -     (0.1 (0.3  -     1.5  1.2  2.3 

Other comprehensive income

   -         0.2     -         3.2     0.8     0.3     0.1     15.0     (8.9)    10.7  

Other comprehensive income (loss)

   0.2  (7.4 (2.5 (5.3  -     (10.3 (4.0 (29.3

Purchases

   -         5.6     4.7      220.4     38.6     -         9.6     746.7     -           1,025.6     2.0  153.7  38.9   -      -     705.3   -     899.9 

Sales

   (2.6)    (0.6)    -         (10.2)    (0.2)    -         (2.2)    (59.5)    (21.6)    (96.9)    (0.1  -      -      -      -     (56.7 (5.6 (62.4

Issuances

   -         -         -         -         -         -         -         -         -         -         -      -      -      -      -      -      -      -    

Settlements

   -         -         -         (6.3)    -         (1.0)    (0.4)    (427.4)    -         (435.1)    -     (3.2 (2.9 (5.6  -     (361.2  -     (372.9

Transfers into Level 3

   1.4     -         -         3.8     0.3     -         -         -         -         5.5     4.4  1.2   -      -      -      -     58.7  64.3 

Transfers out of Level 3

   (2.4)    -         -         (4.8)    -         -         -         -         -         (7.2)    -     (1.3 (0.2 (150.6 (1.6  -     (56.9 (210.6
  

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2017

    $0.9      $5.0      $4.7       $278.8      $39.9      $5.4      $11.4      $1,182.5      $8.4      $  1,537.0  

Balance as of September 30, 2018

    $8.4    $403.0    $108.4    $    -         $    -       $1,379.9    $0.9    $  1,900.6 
  

 

 

   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                                        
      Debt Securities          Equity Securities Debt Securities    
              Mortgage and asset-backed                    Mortgage and asset-backed    

Nine Months Ended September 30, 2016

      Common    
Stock
   U.S.
    Corporate    
Bonds
   Foreign
    Corporate    
Bonds
       RMBS           CMBS       Other
Asset-
backed
    Securities    
   Other
    Invested    
Assets (1)
   Total 

Nine Months Ended September 30, 2017

   Common  
Stock
   Preferred  
Stock
 Foreign
  Government  
Obligations
 U.S.
  Corporate  
Bonds
 Foreign
  Corporate  
Bonds
   RMBS     CMBS   Other
Asset-
backed
  Securities  
 Other
  Invested  
Assets(1)
 Total
  ($ in millions)  

($ in millions)

 

Balance as of January 1, 2016

    $-          $49.8      $        -          $      14.9      $20.2      $   953.0      $     29.9      $  1,067.8  

Balance as of January 1, 2017

   $4.3    $-       $    -       $72.9    $0.4    $5.9    $4.3    $903.8    $28.1    $1,019.7 

Net realized/unrealized gains (losses) included in:

                          

Net earnings(2)

   (0.1)    (0.5)    -         0.3     (0.1)    2.2     4.2     6.0   0.2  (0.2  -     (0.2  -     0.2   -     3.9  10.8  14.7 

Other comprehensive income

   1.8     1.4     -         (0.7)    0.8     25.1     (2.9)    25.5    -     0.2   -     3.2  0.8  0.3  0.1  15.0  (8.9 10.7 

Purchases

   2.2     39.4     -         -         -       32.1     -         73.7    -     5.6  4.7  220.4  38.6   -     9.6  746.7   -     1,025.6 

Sales

   -       (14.5)    -         (7.0)    (8.2)    (70.7)    (4.2)    (104.6)  (2.6 (0.6  -     (10.2 (0.2  -     (2.2 (59.5 (21.6 (96.9

Issuances

   -       -         -         -         -       -         -         -        -      -      -      -      -      -      -      -      -      -    

Settlements

   -       (1.7)    -         (1.5)    (0.5)    (33.6)    -         (37.3)   -      -      -     (6.3  -     (1.0 (0.4 (427.4  -     (435.1

Transfers into Level 3

   1.0     5.5     1.9     -         -       -         -         8.4   1.4   -      -     3.8  0.3   -      -      -      -     5.5 

Transfers out of Level 3

   -       (5.1)    -         -         -       -         (0.3)    (5.4)  (2.4  -      -     (4.8  -      -      -      -      -     (7.2
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2016

    $4.9      $74.3      $1.9      $6.0      $12.2      $908.1      $26.7      $1,034.1  

Balance as of September 30, 2017

   $0.9    $5.0    $4.7    $278.8    $39.9    $5.4    $11.4    $1,182.5    $8.4    $1,537.0 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Includes partnership andnon-marketable equity investments accounted for on an AFS basis.at fair value.

(2)

There were no other than temporary impairment (“OTTI”) losses recorded in net earnings related to Level 3 assets still held as of September 30, 20172018 and 2016.2017.

Net unrealized losses related to Level 3 assets as of September 30, 20172018 and December 31, 20162017 were not material.

The increase in Senior Notes and other debt included in Level 3 for the first nine months of 2018 primarily reflects increased borrowings at W&W|AFCO Steel, including its acquisition of Hirschfeld.

See Note 1(c) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 20162017 Form10-K for Alleghany’s accounting policy on fair value.

3. Investments

(a) Unrealized Gains and Losses

The following tables present the amortized cost or cost and the fair value of AFS securities as of September 30, 20172018 and December 31, 2016:2017:

 

                                                                            
  Amortized
Cost
or Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value  Amortized
Cost or Cost
 Gross
  Unrealized  
Gains
 Gross
  Unrealized  
Losses
 Fair Value
  

($ in millions)

 

  ($ in millions)

As of September 30, 2017

        

As of September 30, 2018

    

Debt securities:

    

U.S. Government obligations

  $    1,069.4   $    0.1   $    (40.9)   $    1,028.6 

Municipal bonds

 2,591.2  37.3  (24.2)  2,604.3 

Foreign government obligations

 905.8  5.5  (9.3)  902.0 

U.S. corporate bonds

 2,464.8  19.4  (40.5)  2,443.7 

Foreign corporate bonds

 1,428.7  10.6  (20.5)  1,418.8 

Mortgage and asset-backed securities:

    

RMBS

 1,147.8  3.0  (35.2)  1,115.6 

CMBS

 530.7  2.3  (9.1)  523.9 

Other asset-backed securities(1)

 2,041.4  2.9  (10.0)  2,034.3 
 

 

 

 

 

 

 

 

Total debt securities

 12,179.8  81.1  (189.7)  12,071.2 
 

 

 

 

 

 

 

 

Short-term investments

 690.6   -       -       690.6 
 

 

 

 

 

 

 

 

Total investments

  $    12,870.4   $        81.1   $        (189.7)   $    12,761.8 
 

 

 

 

 

 

 

 

 Amortized
Cost or Cost
 Gross
  Unrealized  
Gains
 Gross
  Unrealized  
Losses
 Fair Value
 ($ in millions)

As of December 31, 2017

    

Equity securities:

            

Common stock

    $3,170.0       $662.8       $(16.2)       $3,816.6     $3,165.8   $932.5   $(3.8)   $4,094.5 

Preferred stock

   4.8      0.2      -          5.0    4.9  0.1   -       5.0 
  

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

Total equity securities

   3,174.8      663.0      (16.2)      3,821.6    3,170.7  932.6  (3.8)  4,099.5 
  

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

Debt securities:

            

U.S. Government obligations

   1,033.1      1.6      (14.0)      1,020.7    963.9  1.7  (17.6)  948.0 

Municipal bonds

   4,039.6      106.9      (14.8)      4,131.7    3,578.9  109.8  (6.6)  3,682.1 

Foreign government obligations

   1,134.6      14.0      (7.7)      1,140.9    1,000.1  11.2  (4.7)  1,006.6 

U.S. corporate bonds

   2,425.6      63.6      (8.2)      2,481.0    2,381.1  61.6  (9.7)  2,433.0 

Foreign corporate bonds

   1,270.5      27.1      (3.4)      1,294.2    1,481.8  24.5  (6.5)  1,499.8 

Mortgage and asset-backed securities:

            

RMBS

   953.9      7.7      (7.4)      954.2    993.9  6.3  (4.6)  995.6 

CMBS

   509.2      10.0      (2.3)      516.9    545.0  9.0  (2.3)  551.7 

Other asset-backed securities(1)

   1,661.1      13.4      (1.7)      1,672.8    1,592.1  13.8  (1.3)  1,604.6 
  

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

Total debt securities

   13,027.6      244.3      (59.5)      13,212.4    12,536.8  237.9  (53.3)  12,721.4 
 

 

 

 

 

 

 

 

Short-term investments

   547.8      -          -          547.8    578.1   -       -       578.1 
  

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

Total investments

    $16,750.2       $907.3       $(75.7)       $17,581.8     $    16,285.6   $      1,170.5   $        (57.1)   $    17,399.0 
  

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

  Amortized
Cost
or Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
  

($ in millions)

 

 

As of December 31, 2016

        

Equity securities:

        

Common stock

    $2,816.6       $332.1       $(39.2)       $3,109.5   

Preferred stock

   -          -          -          -       
  

 

   

 

   

 

   

 

 

Total equity securities

   2,816.6      332.1      (39.2)      3,109.5   
  

 

   

 

   

 

   

 

 

Debt securities:

        

U.S. Government obligations

   1,265.7      2.2      (24.6)      1,243.3   

Municipal bonds

   4,161.0      66.9      (42.1)      4,185.8   

Foreign government obligations

   1,030.9      20.2      (4.0)      1,047.1   

U.S. corporate bonds

   2,168.9      43.5      (19.3)      2,193.1   

Foreign corporate bonds

   1,068.3      27.3      (6.8)      1,088.8   

Mortgage and asset-backed securities:

        

RMBS

   1,005.9      7.0      (12.5)     ��1,000.4   

CMBS

   728.8      9.6      (3.6)      734.8   

Other asset-backed securities(1)

   1,497.6      4.0      (11.7)      1,489.9   
  

 

   

 

   

 

   

 

 

Total debt securities

   12,927.1      180.7      (124.6)      12,983.2   

Short-term investments

   778.4      -          -          778.4   
  

 

   

 

   

 

   

 

 

Total investments

    $16,522.1       $512.8       $(163.8)       $16,871.1   
  

 

   

 

   

 

   

 

 

 

(1)

Includes $1,146.2$1,368.9 million and $903.8$1,101.3 million of collateralized loan obligations as of September 30, 20172018 and December 31, 2016,2017, respectively.

(b) Contractual Maturity

The following table presents the amortized cost or cost and estimated fair value of debt securities by contractual maturity as of September 30, 2017 are presented below.2018. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

                                      
  Amortized
Cost or Cost
  Fair Value 
  ($ in millions) 

As of September 30, 2017

  

Short-term investments due in one year or less

  $547.8     $547.8   
 

 

 

  

 

 

 

Mortgage and asset-backed securities(1)

  3,124.2     3,143.9   

Debt securities with maturity dates:

  

One year or less

  385.2     386.1   

Over one through five years

  3,089.6     3,124.6   

Over five through ten years

  3,359.4     3,414.9   

Over ten years

  3,069.2     3,142.9   
 

 

 

  

 

 

 

Total debt securities

  13,027.6     13,212.4   
 

 

 

  

 

 

 

Equity securities

  3,174.8     3,821.6   
 

 

 

  

 

 

 

Total

  $16,750.2     $17,581.8   
 

 

 

  

 

 

 
  Amortized
 Cost or Cost 
 Fair Value
  ($ in millions)

As of September 30, 2018

 

Short-term investments due in one year or less

   $690.6    $690.6 
 

 

 

 

 

 

 

 

Mortgage and asset-backed securities(1)

  3,719.9   3,673.8 

Debt securities with maturity dates:

  

One year or less

  230.8   230.4 

Over one through five years

  3,011.7   2,987.0 

Over five through ten years

  3,029.1   2,991.9 

Over ten years

  2,188.3   2,188.1 
 

 

 

 

 

 

 

 

Total debt securities

   $    12,179.8    $    12,071.2 
 

 

 

 

 

 

 

 

 

(1)

Mortgage and asset-backed securities by their nature do not generally have single maturity dates.

(c) Net Investment Income

The following table presents net investment income for the three and nine months ended September 30, 20172018 and 2016:2017:

 

                                                                                 Three Months Ended Nine Months Ended
 

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

  September 30, September 30,
 2017 2016 2017 2016  2018 2017 2018 2017
 ($ in millions)  ($ in millions)

Interest income

  $104.6     $99.0     $306.3     $299.0      $

 

106.4

 

 

 

   $

 

104.6

 

 

 

   $

 

313.2

 

 

 

   $

 

306.3

 

 

 

Dividend income

 6.7    12.2    27.9    35.5     

 

16.2

 

 

 

  

 

6.7

 

 

 

  

 

54.9

 

 

 

  

 

27.9

 

 

 

Investment expenses

 (5.8)   (6.2)   (20.1)   (19.8)    

 

(6.8

 

 

  

 

(5.8

 

 

  

 

(25.4

 

 

  

 

(20.1

 

 

Equity in results of Pillar Investments(1)

 (9.4)   5.9    (2.9)   12.9   

Equity in results of Ares(1)

 6.9    4.6    (0.4)   5.1   

Pillar Investments(1)

  

 

(0.8

 

 

  

 

(9.4

 

 

  

 

1.2

 

 

 

  

 

(2.9

 

 

Limited partnership interests in certain subsidiaries of Ares(1)

  

 

7.0

 

 

 

  

 

6.9

 

 

 

  

 

20.2

 

 

 

  

 

(0.4

 

 

Other investment results

 1.7    5.1    11.1    (0.4)   5.3  1.7  13.6  11.1 
 

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

Total

  $104.7     $120.6     $321.9     $332.3      $       127.3    $       104.7    $       377.7    $       321.9 
 

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

(1)

See Note 3(g)3(h) of this Form10-Q for discussion of the Pillar Investments, and the investment in Ares, each as defined therein.therein, and limited partnership interests in certain subsidiaries of Ares.

As of September 30, 2017,2018, non-income producing invested assets were immaterial.

(d) Change in the Fair Value of Equity Securities

In the first quarter of 2018, Alleghany adopted new investment accounting guidance, which requires changes in the fair value of equity securities, except those accounted for under the equity method, to be recognized in net earnings. In earlier periods, equity securities were considered to be AFS and were included in the analysis of OTTI. See Note 1(c) of this Form 10-Q for additional information regarding Alleghany’s adoption of this new guidance.

The following table presents increases in the fair value of equity securities for the three and nine months ended September 30, 2018:

  Three Months Ended Nine Months Ended
  September 30, 2018 September 30, 2018
  ($ in millions)

Change in the fair value of equity securities sold during the period

  $7.3   $23.3 

Change in the fair value of equity securities held at the end of the period

  362.9   489.5 
 

 

 

 

 

 

 

 

Change in the fair value of equity securities

  $          370.2   $          512.8 
 

 

 

 

 

 

 

 

(e) Realized Gains and Losses

The proceeds from sales of AFSdebt and equity securities were $1.6$0.9 billion and $0.8$1.6 billion for the three months ended September 30, 20172018 and 2016,2017, respectively, and $5.8$2.8 billion and $5.2$5.8 billion for the nine months ended September 30, 2018 and 2017, respectively.

Realized capital gains and 2016, respectively.losses for the first nine months of 2018 primarily reflect a $45.7 million gain on AIHL’s conversion of its limited partnership interests in certain subsidiaries of Ares into Ares common units. See Note 3(h) of this Form 10-Q for additional information on this conversion. Realized capital gains and losses for the three and nine months ended September 30, 2018 also reflect the sale of debt securities.

Realized capital gains and losses for the three and nine months ended September 30, 2017 primarily reflect salesthe sale of equity securities and certain exchange-tradedexchange traded funds. Realized capital gains infor the first nine months of 2017 include the sale of certain equity securities resulting from a partial restructuring of the equity portfolio. Realized capital gains and losses for the three and nine months ended September 30, 2016 primarily reflect sales of equity and debt securities. In addition, Alleghany Capital recognized a gain of $13.2 million on April 15, 2016 in connection with the acquisition of an additional 50 percent equity ownership in Jazwares, when itspre-existing 30 percent equity ownership was remeasured at estimated fair value (the “Jazwares Remeasurement Gain”).

The following table presents amounts of gross realized capital gains and gross realized capital losses for the three and nine months ended September 30, 20172018 and 2016:2017:

 

                                                        
  Three Months Ended
September 30,
   Nine Months Ended September 30,  Three Months Ended
September 30,
 Nine Months Ended
September 30,
  2017   2016   2017   2016  2018 2017 2018 2017
  ($ in millions)    ($ in millions)  

Gross realized capital gains

   $47.0      $32.7      $189.7      $217.7     $16.9    $47.0    $83.3    $189.7  

Gross realized capital losses

         (14.1)     (5.5)     (87.9)           (100.6)   (0.7)  (14.1)  (16.1)  (87.9) 
  

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

Net realized capital gains

   $32.9      $      27.2      $      101.8      $  117.1     $     16.2    $     32.9    $     67.2    $     101.8  
  

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

Gross realized loss amounts exclude OTTI losses, as discussed below.

(e)(f) OTTI Losses

Alleghany holds its equity and debt securities as AFS and, as such, these securities are recorded at fair value. Alleghany continually monitors the difference between amortized cost and the estimated fair value of its equity and debt investments, which involves uncertainty as to whether declines in value are temporary in nature. The analysis of a security’s decline in value is performed in its functional currency. If the decline is deemed temporary, Alleghany records the decline as an unrealized loss in stockholders’ equity. If the decline is deemed to be other than temporary, Alleghany writes its cost-basis or amortized cost-basis down to the fair value of the security and records an OTTI loss on its statement of earnings. In addition, any portion of such decline related to a debt security that is believed to arise from factors other than credit is recorded as a component of other comprehensive income rather than charged against earnings.

Management’s assessment of equity securities initially involves an evaluation of all securities that are in an unrealized loss position, regardless of the duration or severity of the loss, as of the applicable balance sheet date. Such initial review consists primarily of assessing whether: (i) there has been a negative credit or news event with respect to the issuer that could indicate the existence of an OTTI; and (ii) Alleghany has the ability and intent to hold an equity security for a period of time sufficient to allow for an anticipated recovery (generally considered to be 12 months from the balance sheet date).

To the extent that an equity security in an unrealized loss position is not impaired based on the initial review described above, Alleghany then further evaluates such equity security and deems it to be other than temporarily impaired if it has been in an unrealized loss position for 12 months or more or if its unrealized loss position is greater than 50 percent of its cost, absent compelling evidence to the contrary.

Alleghany then evaluates those equity securities where the unrealized loss is at least 20 percent of cost as of the balance sheet date or that have been in an unrealized loss position continuously for six months or more preceding the balance sheet date. This evaluation takes into account quantitative and qualitative factors in determining whether such securities are other than temporarily impaired including: (i) market valuation metrics associated with the equity security (such as dividend yield andprice-to-earnings ratio); (ii) current views on the equity security, as expressed by either Alleghany’s internal stock analysts and/or by third-party stock analysts or rating agencies; and (iii) credit or news events associated with a specific issuer, such as negative news releases and rating agency downgrades with respect to the issuer of the equity security.

Debt securities in an unrealized loss position are evaluated for OTTI if they meet any of the following criteria: (i) they are trading at a discount of at least 20 percent to amortized cost for an extended period of time (nine consecutive months or more); (ii) there has been a negative credit or news event with respect to the issuer that could indicate the existence of an OTTI; or (iii) Alleghany intends to sell, or it is more likely than not that Alleghany will sell, the debt security before recovery of its amortized cost basis.

If Alleghany intends to sell, or it is more likely than not that Alleghany will sell, a debt security before recovery of its amortized cost basis, the total amount of the unrealized loss position is recognized as an OTTI loss in earnings. To the extent that a debt security that is in an unrealized loss position is not impaired based on the preceding, Alleghany will consider a debt security to be impaired when it believes it to be probable that Alleghany will not be able to collect the entire amortized cost basis. For debt securities in an unrealized loss position as of the end of each quarter, Alleghany develops a best estimate of the present value of expected cash flows. If the results of the cash flow analysis indicate that Alleghany will not recover the full amount of its amortized cost basis in the debt security, Alleghany records an OTTI loss in earnings equal to the difference between the present value of expected cash flows and the amortized cost basis of the debt security. If applicable, the difference between the total unrealized loss position on the debt security and the OTTI loss recognized in earnings is thenon-credit related portion, which is recorded as a component of other comprehensive income.

In developing the cash flow analyses for debt securities, Alleghany considers various factors for the different categories of debt securities. For municipal bonds, Alleghany takes into account the taxing power of the issuer, source of revenue, credit risk and

enhancements andpre-refunding. For mortgage and asset-backed securities, Alleghany discounts its best estimate of future cash flows at an effective rate equal to the original effective yield of the security or, in the case of floating rate securities, at the current coupon. Alleghany’s models include assumptions about prepayment speeds, default and delinquency rates, underlying collateral (if any), credit ratings, credit enhancements and other observable market data. For corporate bonds, Alleghany reviews business prospects, credit ratings and available information from asset managers and rating agencies for individual securities.

OTTI losses in the first nine months of 2018 reflect $0.5 million of unrealized losses on debt securities that were deemed to be other than temporary and, as such, were required to be charged against earnings.

OTTI losses in the first nine months of 2017 reflect $13.1 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. Of the $13.1 million of OTTI losses, $11.8 million related to equity securities, primarily in the retail sector, and $1.3 million related to debt securities. The determination that unrealized losses on equity and debtthe securities were other than temporary was primarily due to the duration of the decline in the fair value of equity and debt securities relative to their costs. Of the $13.1 million of OTTI losses, $6.1 million was incurred in the third quarter of 2017.

OTTI losses in the first nine months of 2016 reflect $38.2 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. Of the $38.2 million of OTTI losses, $16.6 million related to equity securities, primarily in the retail, financial services, technology and chemical sectors, and $21.6 million related to debt securities, primarily in the energy sector. The determination that unrealized losses on equity and debt securities were other than temporary was primarily due to the severity and duration of the decline in the fair value of equity and debt securities relative to their costs. Of the $38.2 million of OTTI losses, $11.7 million was incurred in the third quarter of 2016.

Upon the ultimate disposition of the securities for which OTTI losses have been recorded, a portion of the loss may be recoverable depending on market conditions at the time of disposition. After adjusting the amortized cost basis of securities for the recognition of OTTI losses, the remaining gross unrealized investment losses for debt and equity securities as of September 30, 20172018 were deemed to be temporary, based on, among other factors: (i) the duration of time and the relative magnitude to which the fair value of these investments had been below cost were not indicative of an OTTI loss; (ii) the absence of compelling evidence that would cause Alleghany to call into question the financial condition or near-term business prospects of the issuer of the security; and (iii) Alleghany’s ability and intent to hold the security for a period of time sufficient to allow for any anticipated recovery.

Alleghany may ultimately record a realized loss after having originally concluded that the decline in value was temporary. Risks and uncertainties are inherent in the methodology. Alleghany’s methodology for assessing other than temporary declines in value contains inherent risks and uncertainties which could include, but are not limited to, incorrect assumptions about financial condition, liquidity or future prospects, inadequacy of any underlying collateral and unfavorable changes in economic conditions or social trends, interest rates or credit ratings.

(f)(g) Aging of Gross Unrealized Losses

The following tables present gross unrealized losses and related fair values for equity securities and debtAlleghany’s AFS securities, grouped by duration of time in a continuous unrealized loss position, as of September 30, 20172018 and December 31, 2016:2017:

 

  Less Than 12 Months   12 Months or More   Total  Less Than 12 Months 12 Months or More Total
  Fair Value   Gross
Unrealized
Losses
   Fair Value   Gross
Unrealized
Losses
   Fair Value   Gross
Unrealized
Losses
  Fair Value Gross
Unrealized
Losses
 Fair Value Gross
Unrealized
Losses
 Fair Value  Gross
Unrealized
Losses
  ($ in millions)  ($ in millions)

As of September 30, 2017

            

Equity securities:

            

Common stock

    $998.5       $16.2       $-           $-           $998.5       $16.2   

Preferred stock

   -          -          -          -          -          -       
  

 

   

 

   

 

   

 

   

 

   

 

 

Total equity securities

   998.5      16.2      -          -          998.5      16.2   
  

 

   

 

   

 

   

 

   

 

   

 

 

As of September 30, 2018

       

Debt securities:

                   

U.S. Government obligations

   626.0      5.9      242.9      8.1      868.9      14.0     $389.9   $7.8   $611.1   $33.1   $1,001.0    $40.9 

Municipal bonds

   404.5      2.5      358.4      12.3      762.9      14.8    695.0  12.2  261.7  12.0  956.7    24.2 

Foreign government obligations

   408.2      4.9      76.0      2.8      484.2      7.7    414.6  2.9  192.4  6.4  607.0    9.3 

U.S. corporate bonds

   399.3      5.0      206.3      3.2      605.6      8.2    1,238.9  27.0  294.9  13.5  1,533.8    40.5 

Foreign corporate bonds

   236.6      1.6      117.3      1.8      353.9      3.4    665.3  11.3  288.1  9.2  953.4    20.5 

Mortgage and asset-backed securities:

                   

RMBS

   429.7      4.7      132.8      2.7      562.5      7.4    891.7  28.1  130.3  7.1  1,022.0    35.2 

CMBS

   24.8      0.2      41.8      2.1      66.6      2.3    273.5  5.3  46.3  3.8  319.8    9.1 

Other asset-backed securities

   232.5      0.7      90.8      1.0      323.3      1.7    1,260.4  8.5  68.6  1.5  1,329.0    10.0 
  

 

   

 

   

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

 

 

  

 

Total debt securities

   2,761.6      25.5      1,266.3      34.0      4,027.9      59.5   
  

 

   

 

   

 

   

 

   

 

   

 

 

Total temporarily impaired securities

    $    3,760.1       $    41.7       $    1,266.3       $      34.0       $    5,026.4       $      75.7     $      5,829.3   $        103.1   $    1,893.4   $        86.6   $    7,722.7    $        189.7 
  

 

   

 

   

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

 

 

  

 

  Less Than 12 Months   12 Months or More   Total 
  Fair Value   Gross
Unrealized
Losses
   Fair Value   Gross
Unrealized
Losses
   Fair Value   Gross
Unrealized
Losses
 
  ($ in millions) 

As of December 31, 2016

            

Equity securities:

            

Common stock

    $619.4       $39.2       $-           $-           $619.4       $39.2   

Preferred stock

   -          -          -          -          -          -       
  

 

   

 

   

 

   

 

   

 

   

 

 

Total equity securities

   619.4      39.2      -          -          619.4      39.2   
  

 

   

 

   

 

   

 

   

 

   

 

 

Debt securities:

            

U.S. Government obligations

   975.0      24.6      -          -          975.0      24.6   

Municipal bonds

   1,464.5      39.7      41.6      2.4      1,506.1      42.1   

Foreign government obligations

   238.3      4.0      -          -          238.3      4.0   

U.S. corporate bonds

   727.9      18.1      52.6      1.2      780.5      19.3   

Foreign corporate bonds

   331.0      6.6      4.1      0.2      335.1      6.8   

Mortgage and asset-backed securities:

            

RMBS

   652.0      11.4      43.4      1.1      695.4      12.5   

CMBS

   148.9      1.4      117.7      2.2      266.6      3.6   

Other asset-backed securities

   334.7      1.6      550.4      10.1      885.1      11.7   
  

 

   

 

   

 

   

 

   

 

   

 

 

Total debt securities

   4,872.3      107.4      809.8      17.2      5,682.1      124.6   
  

 

   

 

   

 

   

 

   

 

   

 

 

Total temporarily impaired securities

    $5,491.7       $146.6       $809.8       $17.2       $6,301.5       $163.8   
  

 

   

 

   

 

   

 

   

 

   

 

 

  Less Than 12 Months 12 Months or More Total
  Fair Value Gross
Unrealized
Losses
 Fair Value Gross
Unrealized
Losses
 Fair Value Gross
Unrealized
Losses
  ($ in millions)

As of December 31, 2017

      

Equity securities:

 

Common stock

   $145.7    $3.8    $-        $-        $145.7    $3.8 

Preferred stock

  -        -       -       -       -       -     
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total equity securities

  145.7   3.8   -       -       145.7   3.8 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

      

U.S. Government obligations

  447.8   4.4   416.6   13.2   864.4   17.6 

Municipal bonds

  240.0   1.5   267.3   5.1   507.3   6.6 

Foreign government obligations

  321.9   2.7   72.2   2.0   394.1   4.7 

U.S. corporate bonds

  568.8   6.1   207.3   3.6   776.1   9.7 

Foreign corporate bonds

  417.4   3.0   159.4   3.5   576.8   6.5 

Mortgage and asset-backed securities:

      

RMBS

  284.2   1.6   131.5   3.0   415.7   4.6 

CMBS

  112.2   0.5   34.7   1.8   146.9   2.3 

Other asset-backed securities

  211.1   0.9   65.7   0.4   276.8   1.3 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total debt securities

  2,603.4   20.7   1,354.7   32.6   3,958.1   53.3 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total temporarily impaired securities

   $      2,749.1    $        24.5    $    1,354.7    $        32.6    $      4,103.8    $        57.1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2017,2018, Alleghany held a total of 1,1112,289 debt and equity securities that were in an unrealized loss position, of which 363, all debt617 securities were in an unrealized loss position continuously for 12 months or more. The unrealized losses

associated with these debt securities consisted primarily of losses related primarily to U.S. Government obligations, municipal bonds, U.S. corporate bonds, foreign corporate bonds and U.S. Government obligations.RMBS.

As of September 30, 2017,2018, the vast majority of Alleghany’s debt securities were rated investment grade, with 7.34.2 percent of debt securities having issuer credit ratings that were below investment grade or not rated, compared with 5.15.3 percent as of December 31, 2016.2017.

(g)(h) Investments in Certain Other Invested Assets

In December 2012, TransRe obtained an ownership interest in Pillar Capital Holdings Limited (“Pillar Holdings”), a Bermuda-basedBermuda- based insurance asset manager focused on collateralized reinsurance and catastrophe insurance-linked securities. Additionally, TransRe invested $175.0 million and AIHL invested $25.0 million in limited partnership funds managed by Pillar Holdings (the “Funds”). The objective of the Funds is to create portfolios with attractive risk-reward characteristics and low correlation with other asset classes, using the extensive reinsurance and capital market experience of the principals of Pillar Holdings. Alleghany has concluded that both Pillar Holdings and the Funds (collectively, the “Pillar Investments”) represent variable interest entities and that Alleghany is not the primary beneficiary, as it does not have the ability to direct the activities that most significantly impact each entity’s economic performance. Therefore, the Pillar Investments are not consolidated and are accounted for under the equity method of accounting. Alleghany’s potential maximum loss in the Pillar Investments is limited to its cumulative net investment. As of September 30, 2017,2018, Alleghany’s carrying value in the Pillar Investments, as determined under the equity method of accounting, was $216.7$201.3 million, which is net of returns of capital received from the Pillar Investments.

In July 2013, AIHL invested $250.0 million in Ares, Management LLC (“Ares”), an asset manager, in exchange for a 6.25 percent equity stake in Ares, with an agreement to engage Ares to manage up to $1.0 billion in certain investment strategies. In May 2014, Ares completed an initial public offering of its common units. Upon completion of the initial public offering, Alleghany’s equity investment in Ares converted tointo limited partner interests in certain Ares subsidiaries that arewere convertible into an aggregate 5.9 percent interest in Ares common units. These interests may be converted at any time at Alleghany’s discretion. Until Alleghany determines to convert itsOn March 15, 2018, most of AIHL’s limited partner interests were converted into Ares common units. As a result of the conversion and with respect to the limited partnership interests that were converted into Ares common units, Alleghany classifiesAIHL: (i) reclassified its investmentconverted interests from other invested assets to equity securities; (ii) increased its carrying value to $208.2 million to reflect the fair value of Ares common units; and (iii) recorded the $45.7 million increase in carrying value as a realized capital gain as of March 15, 2018. As a result of the conversion and with respect to the unconverted limited partnership interests, AIHL: (i) changed its accounting from the equity method to fair value; (ii) increased its carrying value to $58.7 million to reflect the fair value of Ares limited partnership interests; and (iii) recorded the $12.9 million increase in carrying value as a component of net investment income as of March 15, 2018. On September 24, 2018, AIHL’s remaining Ares limited partner interests were converted into Ares common units and, as a result, AIHL reclassified the remaining $56.9 million of its converted interests from other invested assets and accounts for its investment using theto equity method of accounting. As of September 30, 2017, AIHL’s carrying value in Ares was $213.9 million, which is net of returns of capital received from Ares.securities.

(h)(i) Investments in Commercial Mortgage Loans

As of September 30, 2017,2018, the carrying value of Alleghany’s commercial mortgage loan portfolio was $649.7$695.9 million, representing the unpaid principal balance on the loans. As of September 30, 2017,2018, there was no allowance for loan losses. The commercial mortgage loan portfolio consists primarily of first mortgages on commercial properties in major metropolitan areas in the U.S. The loans earn interest atfixed- and floating-rates, mature in two to ten years from loan origination and the principal amounts of the loans were no more than approximatelytwo-thirds of the property’s appraised value at the time the loans were made.

4. Reinsurance Ceded

Alleghany’s reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite in order to reduce the effect of individual or aggregate exposure to losses, manage capacity, protect capital resources, reduce volatility in specific lines of business, improve risk-adjusted portfolio returns and enable them to increase gross premium writings and risk capacity without requiring additional capital. Alleghany’s reinsurance and insurance subsidiaries purchase reinsurance and retrocessional coverages from highly-rated highly- ratedthird-party reinsurers. If the assuming reinsurers are unable or unwilling to meet the obligations assumed under the applicable reinsurance agreements, Alleghany’s reinsurance and insurance subsidiaries would remain liable for such reinsurance portion not paid by these reinsurers. As such, funds, trust agreements and letters of credit are held to collateralize a portion of Alleghany’s reinsurance recoverables and Alleghany’s reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite or assume with multiple reinsurance programs.

TransRe enters into retrocession arrangements, including property catastrophe retrocession arrangements, in order to reduce the effect of individual or aggregate exposure to losses, reduce volatility in specific lines of business, improverisk-adjusted portfolio returns and increase gross premium writings and risk capacity without requiring additional capital.

As discussed in Note 5(d) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2016 Form10-K,RSUI reinsures its property lines of business through a program consisting of surplus share treaties, facultative placements, per risk and catastrophe excess of loss treaties. RSUI’s catastrophe reinsurance program and property per risk reinsurance program run on an annual basis from May 1 to the following April 30 and portions expired on April 30, 2017.2018. Both programs were renewed on May 1, 20172018 with substantially similar terms as the expired programs.

5. Liability for Loss and LAE

(a) Liability Rollforward

The following table presents the activity in the liability for loss and LAE in the nine months ended September 30, 20172018 and 2016:2017:

 

  Nine Months Ended
September 30,
  

Nine Months Ended

September 30,

   2018 2017
  2017   2016   ($ in millions)
  ($ in millions) 

Reserves as of January 1

    $11,087.2       $10,799.2       $    11,871.3    $    11,087.2 

Less: reinsurance recoverables(1)

   1,236.2      1,169.3      1,650.1  1,236.2 
  

 

 

 

  

 

   

 

 

Net reserves as of January 1

   9,851.0      9,629.9      10,221.2  9,851.0 
  

 

   

 

   

 

 

 

Other adjustments

   (0.7)     3.2      1.2  (0.7
  

 

   

 

   

 

 

 

Incurred loss and LAE, net of reinsurance, related to:

       

Current year

   3,099.0      2,460.2      2,579.3  3,099.0 

Prior years

   (173.0)     (261.7)     (212.8 (173.0
  

 

 

 

  

 

   

 

 

Total incurred loss and LAE, net of reinsurance

   2,926.0      2,198.5      2,366.5  2,926.0 
  

 

   

 

   

 

 

 

Paid loss and LAE, net of reinsurance, related to:(2)

       

Current year

   390.6      206.0      444.9  390.6 

Prior years

   1,743.2      1,702.7      1,928.9  1,743.2 
  

 

 

 

  

 

   

 

 

Total paid loss and LAE, net of reinsurance

   2,133.8      1,908.7      2,373.8  2,133.8 
  

 

   

 

   

 

 

 

Foreign exchange effect

   120.5      (22.6)  

Foreign currency exchange rate effect

   (77.0 120.5 
  

 

   

 

   

 

 

 

Net reserves as of September 30

   10,763.0      9,900.3      10,138.1  10,763.0 

Reinsurance recoverables as of September 30(1)

   1,693.4      1,157.8      1,716.8  1,693.4 
  

 

 

 

  

 

   

 

 

Reserves as of September 30

    $    12,456.4       $    11,058.1       $11,854.9    $12,456.4 
  

 

   

 

   

 

 

 

 

(1)

Reinsurance recoverables in this table include only ceded loss and LAE reserves.

(2)

Includes paid losses, net of reinsurance, related to commutations.

Gross loss and LAE reserves and reinsurance recoverables as of September 30, 2017 increased2018 decreased from December 31, 2016,2017, primarily reflecting significantpayments on catastrophe losses. Catastrophelosses incurred in 2017 and favorable prior accident year loss reserve development, partially offset by catastrophe losses in September 2018. Such 2018 catastrophe losses, net of reinsurance, in the third quarter and first nine months of 2017 included $264.6include $87.7 million related to Typhoon Jebi, $80.2 million related to Hurricane Harvey in August 2017, $312.0Florence and $38.5 million related to Hurricane Irma in September 2017, and $170.3 million related to Hurricane Maria in September 2017.Typhoon Trami.

(b) Liability Development

The following table presents the (favorable) unfavorable prior accident year loss reserve development for the three and nine months ended September 30, 20172018 and 2016:2017:

 

                                                                
 Three Months Ended
September 30,
 

Nine Months Ended

September 30,

   Three Months Ended
September 30,
 Nine Months Ended
September 30,
 
 2017 2016 2017 2016   2018 2017 2018 2017 
 ($ in millions)   ($ in millions) 

Reinsurance Segment

         

Property:

         

Catastrophe events

  $(7.8) (1)    $(1.2) (2)    $(12.2) (1)    $(9.0) (2)   $9.6(1)   $(7.8)(2)   $(15.6)(3)   $(12.2)(2)  
 

Non-catastrophe

 (0.3)    (9.6) (3)   (50.4) (4)   (70.3) (3)    (12.4)(4)    (0.3)   (42.2)(4)    (50.4)(5)  
  

 

  

 

  

 

  

 

 
 

 

  

 

  

 

  

 

 

Total property

 (8.1)   (10.8)   (62.6)   (79.3)     (2.8)   (8.1)   (57.8)   (62.6) 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Casualty & other:

         

Malpractice Treaties(5)

  -        (2.0)   (2.0)   (10.8)  

Ogden rate impact(6)

  -         -        24.4     -       

Malpractice Treaties(6)

   -       -       (3.4)   (2.0) 

Ogden rate impact(7)

   -       -       -       24.4  

Other

  (41.7) (7)   (56.2) (8)   (100.6) (9)   (127.9) (8)    (38.7)(8)    (41.7)(9)    (102.5)(10)    (100.6)(11)  
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total casualty & other

 (41.7)   (58.2)   (78.2)   (138.7)     (38.7)   (41.7)   (105.9)   (78.2) 
  

 

  

 

  

 

  

 

 
 

 

  

 

  

 

  

 

 

Total Reinsurance Segment

 (49.8)   (69.0)   (140.8)   (218.0)     (41.5)   (49.8)   (163.7)   (140.8) 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Insurance Segment

         

RSUI:

         

Casualty

  (6.9) (10)   (11.9) (11)   (28.5) (10)   (32.1) (11)    (4.3)(12)    (6.9)(13)    (16.8)(12)    (28.5)(13)  
 

Property and other

  (1.7) (12)   (4.6) (13)   1.2  (14)   (8.4) (13)    (27.7)(14)    (1.7)(15)    (27.7)(14)    1.2(16)  
  

 

  

 

  

 

  

 

 
 

 

  

 

  

 

  

 

 

Total RSUI

 (8.6)   (16.5)   (27.3)   (40.5)     (32.0)   (8.6)   (44.5)   (27.3) 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

CapSpecialty:

    

Asbestos-related illness and environmental impairment liability

  -         -         -        (2.0)  

Other

  (2.3) (15)   (0.9) (16)   (3.1) (15)   (1.2) (16) 
 

 

  

 

  

 

  

 

 

Total CapSpecialty

 (2.3)   (0.9)   (3.1)   (3.2)  
 

 

  

 

  

 

  

 

 

CapSpecialty

   (1.5)(17)    (2.3)(18)    (4.6)(17)    (3.1)(18)  
 

PacificComp

  (0.8) (17)   -         (1.8) (17)   -          -       (0.8)(19)    -       (1.8)(19)  
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total incurred related to prior years

  $      (61.5)     $      (86.4)     $      (173.0)     $      (261.7)    $(75.0)  $(61.5)  $(212.8)  $(173.0) 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

 

(1)Reflects

Primarily reflects unfavorable prior accident year loss reserve development related to Hurricanes Maria and Irma in the 2017 accident year.

(2)

Primarily reflects favorable prior accident year loss reserve development fromrelated to several catastrophes that occurred in the 2010 through 2016 accident years.

(2)(3)Reflects

Primarily reflects favorable prior accident year loss reserve development from several catastrophes that occurredrelated to Hurricane Harvey in the 2010 through 20152017 accident years.year and catastrophes in the 2016 accident year, partially offset by unfavorable prior accident year loss reserve development related to Hurricanes Maria and Irma in the 2017 accident year.

(3)(4)Reflects

Primarily reflects favorable prior accident year loss reserve development primarily related toin the 2014 through 20152017 accident years.year.

(4)(5)Reflects

Primarily reflects favorable prior accident year loss reserve development primarily related toin the 2013 through 2016 accident years.

(5)(6)

Represents certain medical malpractice treaties pursuant to which the increased underwriting profits created by the favorable prior accident year loss reserve development are largely retained by the cedants. As a result, the favorable prior accident year loss reserve development is largely offset by an increase in profit commission expense incurred when such favorable prior accident year loss reserve development occurs.

(6)(7)

Represents unfavorable prior accident year loss reserve development arising fromrelated to the U.K. Ministry of Justice’s decision to significantly reducereduction in the discount rate, referred to as the Ogden rate, used to calculatelump-sum bodily injury payouts in personal injury insurance claims in the U.K. AsU.K to negative 0.75 percent as of March 20, 2017 the Ogden rate changed from 2.50 percent to negative 0.75 percent.

(7)(8)

Primarily reflects favorable prior accident year loss reserve development in the longer-tailed casualty lines of business in the 2007 and earlier accident years, partially offset by unfavorable prior accident year loss reserve development in the longer-tailed casualty lines of business in the 2014 through 2016 accident years.

(9)

Primarily reflects favorable prior accident year loss reserve development in thelonger-tailed U.S. professional liability lines of business related to older accident years and shorter-tailed casualty lines of business in the U.K. related to recent accident years.

(8)(10)Generally

Primarily reflects favorable prior accident year loss reserve development in a variety ofthe shorter-tailed casualty & other lines of business primarily related toin the 2005, 20062016 and 2008 through 20152017 accident years.years and in the longer-tailed casualty lines of business in the 2010 and earlier accident years, partially offset by unfavorable prior accident year loss reserve development in the longer-tailed casualty lines of business in the 2014 accident year.

(9)(11)

Primarily reflects favorable prior accident year loss reserve development in longer-tailed U.S. professional liability lines of business related toin the 2005 through 2014 accident years, partially offset by net unfavorable prior accident year loss reserve development in shorter-tailed casualty lines of business related toin the 2015 accident year in the U.S. and the U.K.

(10)(12)

Primarily reflects favorable prior accident year loss reserve development in the umbrella/excess lines of business related toin the 2005 through 20112012 accident years, partially offset by unfavorable prior accident year loss reserve development in the directors’ and officers’ liability lines of business in the 2009, 2012 and 2016 accident years.

(11)(13)

Primarily reflects favorable prior accident year loss reserve development in the umbrella/excess general liability and professional liability lines of business related toin the 20062005 through 20122011 accident years.

(12)(14)Primarily reflects favorable unallocated LAE development.
(13)

Primarily reflects favorable prior accident year loss reserve development related to Hurricane Irma in thenon-catastrophe property lines of business 2017 accident year and, to a lesser extent, Hurricane Matthew that occurred in the 2016 accident year, as well as various other losses not classified as catastrophes in recent accident years.

(15)

Primarily reflects favorable unallocated LAE development.

(14)(16)

Primarily reflects unfavorable prior accident year property loss reserve development inrelated to the binding authority lines of business primarily related toin the 2015 and 2016 accident years, partially offset by favorable catastrophe prior accident year loss reserve development related to the 2016 accident year.

(15)Primarily reflects favorable prior accident yearcatastrophe loss reserve development in the casualty lines of business related to the 2010, 2014, 2015 and 2016 accident years.
(16)Primarily reflects favorable prior accident year loss reserve development in the surety lines of business related to the 2015 accident year.

(17)

Primarily reflects favorable prior accident year loss reserve development related to the surety lines of business in the 2016 and 2017 accident years.

(18)

Primarily reflects favorable prior accident year loss reserve development related to the casualty lines of business in the 2010, 2014, 2015 and 2016 accident years.

(19)

Primarily reflects favorable prior accident year loss reserve development in the 2013 and prior accident years.

6. Income Taxes

The effective tax rate on earnings before income taxes for the first nine months of 20172018 was 66.818.4 percent, compared with 29.366.8 percent for the first nine months of 2016.2017. The 66.8 percent effective tax rate isfor the first nine months of 2017 was calculated based on actual results through September 30, 2017 because management was not able to reliably estimate the annual effective tax rate in light of the recentsignificant catastrophe losses incurred.incurred in the third quarter of 2017. The decrease in the effective tax rate in the first nine months of 2017 compared with2018 from the first nine months of 20162017 primarily reflects the decrease in the U.S. corporate federal income tax benefitsrate from taxable35.0 percent to 21.0 percent due to the Tax Act and losses arising from Hurricanes Harvey, Irma and Mariabefore income taxes in the first nine months of 2017, which magnified the impact of certain tax adjustments, partially offset by new limitations on certain deductions as a result of the Tax Act. There continues to be a degree of uncertainty as to how certain provisions of the Tax Act will be interpreted and prior period income tax expense adjustmentsimplemented in practice in the first nine months of 2016, which include $16.1 million ofout-of-period reductions to current and deferred TransRe tax assets recorded in the first nine months of 2016 that related primarily to periods prior to Alleghany’s merger with TransRe in 2012.future.

Alleghany believes that, as of September 30, 2017,2018, it had no material uncertain tax positions. Interest and penalties relatingrelated to unrecognized tax expenses (benefits) are recognized in income tax expense, when applicable. There were no material liabilities for interest or penalties accrued as of September 30, 2017.2018.

7. Stockholders’ Equity

(a) Common Stock Repurchases

In July 2014,November 2015, the Alleghany Board of Directors authorized the repurchase of shares of common stock of Alleghany, par value $1.00 per share (“Common Stock”), at such times and at prices as management determines to be advisable, up to an aggregate of $350.0$400.0 million (the “2014“2015 Repurchase Program”). In November 2015,June 2018, the Alleghany Board of Directors authorized, the repurchase, upon the completion of the 20142015 Repurchase Program, the repurchase of additional shares of Common Stock, at such times and at prices as management determines to be advisable, up to an aggregate of $400.0 million (the “2015 Repurchase Program”). In the first quarter of 2016, Alleghany completed the 2014 Repurchase Program and subsequent repurchases have been made pursuant to the 2015 Repurchase Program.million. As of September 30, 2017,2018, Alleghany had $370.7$481.1 million remaining under itsboth share repurchase authorization.authorization programs.

The following table presents the shares of Common Stock that Alleghany repurchased in the three and nine months ended September 30, 20172018 and 20162017 pursuant to the 2014 Repurchase Program and the 2015 Repurchase Program, as applicable:Program:

 

 Three Months Ended Nine Months Ended 
  Three Months Ended
September 30,
   Nine Months Ended
September 30,
  September 30, September 30, 
  2017   2016   2017   2016          2018                 2017                 2018                 2017        

Shares repurchased

   15,916      4,621      15,916          117,721 ��  76,299   15,916   479,922   15,916  

Cost of shares repurchased (in millions)

  $8.5     $2.4     $8.5     $55.7     $46.0    $8.5    $282.1    $8.5  

Average price per share repurchased

  $    537.14     $    517.40     $    537.14     $472.97     $      602.24    $      537.14    $      587.70    $      537.14  

(b) Accumulated Other Comprehensive Income (Loss)

The following tables presentpresents a reconciliation of the changes during the nine months ended September 30, 20172018 and 20162017 in accumulated other comprehensive income (loss) attributable to Alleghany stockholders:

 

  Unrealized
  Appreciation  
of
Investments
  Unrealized
Currency
  Translation  
Adjustment
  Retirement
Plans
  Total
  ($ in millions)

Balance as of January 1, 2018

    $      718.2      $    (84.6)     $      (15.5)     $      618.1  
  

 

  

 

  

 

  

 

Cumulative effect of adoption of new accounting pronouncements(1):

        

Reclassification of net unrealized gains on equity securities, net of tax

   (735.6)    -       -       (735.6) 

Reclassification of stranded taxes

   156.6     (18.2)    (3.3)    135.1  
  

 

  

 

  

 

  

 

Total

   (579.0)    (18.2)    (3.3)    (600.5) 
  

 

  

 

  

 

  

 

Other comprehensive income (loss), net of tax:

        

Other comprehensive income (loss) before reclassifications

   (213.3)    (6.9)    (1.7)    (221.9) 

Reclassifications from accumulated other comprehensive income

   (16.5)    -       -       (16.5) 
  

 

  

 

  

 

  

 

Total

   (229.8)    (6.9)    (1.7)    (238.4) 
  

 

  

 

  

 

  

 

Balance as of September 30, 2018

  

 

  $

 

(90.6)

 

 

    $(109.7)     $(20.5)     $(220.8) 
  

 

  

 

  

 

  

 

  Unrealized
Appreciation
of Investments
   Unrealized
Currency
Translation
Adjustment
   Retirement
Plans
   Total   Unrealized
Appreciation
of
Investments
  Unrealized
Currency
Translation
Adjustment
  Retirement
Plans
  Total
  ($ in millions)   ($ in millions)

Balance as of January 1, 2017

  $232.2     $      (111.2)    $      (11.7)    $      109.3       $232.2      $(111.2)     $(11.7)     $109.3  

Cumulative effect of adoption of new accounting pronouncements(1)

   12.9     -       -        12.9  

Other comprehensive income (loss), net of tax:

                

Other comprehensive income (loss) before reclassifications

   364.6      22.4      (0.2)     386.8      364.6     22.4     (0.2)    386.8  

Reclassifications from accumulated other comprehensive income

   (57.7)     -         -          (57.7)     (57.7)    -       -        (57.7) 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

Total

   306.9      22.4      (0.2)     329.1      306.9     22.4     (0.2)    329.1  
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

Balance as of September 30, 2017

  $      539.1     $(88.8)    $(11.9)    $438.4     

 

  $

 

552.0 

 

 

    $(88.8)     $(11.9)     $451.3  
  

 

   

 

   

 

   

 

   

 

  

 

  

 

  

 

 

   Unrealized
Appreciation
of Investments
   Unrealized
Currency
Translation
Adjustment
   Retirement
Plans
   Total 
   ($ in millions) 

Balance as of January 1, 2016

  $231.9     $      (104.0)    $      (11.6)    $      116.3   

Other comprehensive income (loss), net of tax:

        

Other comprehensive income (loss) before reclassifications

   238.4      19.2      0.4      258.0   

Reclassifications from accumulated other comprehensive income

   (42.7)     -         -          (42.7)  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   195.7      19.2      0.4      215.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of September 30, 2016

  $      427.6     $(84.8)    $(11.2)    $331.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)

See Note 1(c) of this Form10-Q for additional information regarding Alleghany’s adoption of new investment accounting guidance and new guidance on certain tax effects caused by the Tax Act.

The following table presents reclassifications out of accumulated other comprehensive income attributable to Alleghany stockholders during the three and nine months ended September 30, 20172018 and 2016:2017:

 

Accumulated Other
Comprehensive Income Component

   Three Months Ended
September 30,
 Nine Months Ended
September 30,
 

    Line in Consolidated Statement of  Earnings    

 2017 2016 2017 2016 
Accumulated Other     

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

Comprehensive Income Component

  

  Line in Consolidated Statement of Earnings  

  2018  2017  2018  2017
   ($ in millions)      ($ in millions)

Unrealized appreciation of investments:

  Net realized capital gains(1) $    (32.9)   $(27.2)   $    (101.8)   $    (103.9)    Net realized capital gains(1)    $(16.2)     $    (32.9)     $      (21.5)     $(101.8) 
  Other than temporary impairment losses 6.1    11.7    13.1    38.2     Other than temporary impairment losses   -       6.1     0.5     13.1  
  Income taxes 9.4    5.4    31.0    23.0     Income taxes           3.4     9.4     4.5             31.0  
   

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

Total reclassifications:

  Net earnings $    (17.4)   $    (10.1)   $(57.7)   $(42.7)    Net earnings    $(12.8)     $(17.4)     $(16.5)     $(57.7) 
   

 

  

 

  

 

  

 

     

 

  

 

  

 

  

 

 

(1)Net realized capital gains for

For the nine monthsmonth period ended September 30, 2016 exclude the Jazwares Remeasurement Gain2018, excludes a $45.7 millionpre-tax gain from AIHL’s conversion of $13.2 million.its limited partnership interests in certain subsidiaries of Ares into Ares common units. See Note 3(h) of this Form10-Q for additional information.

(c) Special Dividend

In February 2018, the Alleghany Board of Directors declared a special dividend of $10 per share for stockholders of record on March 5, 2018. On March 15, 2018, Alleghany paid dividends to stockholders totaling $154.0 million.

8. Earnings Per Share of Common Stock

The following istable presents a reconciliation of the earnings and share data used in the basic and diluted (losses) earnings per share computations for the three and nine months ended September 30, 20172018 and 2016:2017:

 

 Three Months Ended
September 30,
 Nine Months Ended
September 30,
  

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

 2017 2016 2017 2016  2018 2017 2018 2017
 ($ in millions, except share amounts)  ($ in millions, except share amounts)

Net (losses) earnings available to Alleghany stockholders

 $(314.2)   $155.8    $(63.2)   $387.4   

Net earnings (losses) available to Alleghany stockholders

   $284.9     $(314.2   $751.6     $(63.2

Effect of dilutive securities

 (8.9)    -         -         -         -       (8.9  -        -     
 

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

(Losses) Income available to common stockholders for diluted earnings per share

 $(323.1)   $155.8    $(63.2)   $387.4   

Income (loss) available to common stockholders for diluted earnings per share

   $284.9     $(323.1   $751.6     $(63.2
 

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

Weighted average common shares outstanding applicable to basic earnings per share

 15,416,014    15,438,399    15,416,249    15,443,150    14,937,135   15,416,014  15,168,831   15,416,249 

Effect of dilutive securities

 42,310     -         -        6,330       42,310  4,849    - 
 

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

Adjusted weighted average common shares outstanding applicable to diluted earnings per share

 15,458,324    15,438,399    15,416,249    15,449,480    14,937,135   15,458,324  15,173,680   15,416,249 
 

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

63,56761,285 and 70,88163,567 contingently issuable shares were potentially available during the first nine months of 20172018 and 2016,2017, respectively, but were not included in the diluted earnings per share computations because the impact was anti-dilutive to the earnings per share calculation.

9. Commitments and Contingencies

(a) Legal Proceedings

Certain of Alleghany’s subsidiaries are parties to pending litigation and claims in connection with the ordinary course of their businesses. Each such subsidiary makes provisions for estimated losses to be incurred in such litigation and claims, including legal costs. In the opinion of management, such provisions are adequate.adequate, and management does not believe that any pending litigation will have a material adverse effect on Alleghany’s consolidated results of operations, financial position or cash flows.

(b) Leases

Alleghany and its subsidiaries lease certain facilities, furniture and equipment under long-term lease agreements. Additional information about leases can be found in Note 12(b) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 20162017 Form10-K.

(c) Energy Holdings

As of September 30, 2017,2018, Alleghany had holdings in energy sector businesses of $519.3$896.8 million, comprised of $319.4$294.0 million of debt securities, $50.7$483.5 million of equity securities and $149.2$119.3 million of Alleghany’s equity attributable to SORC.

10. Segments of Business

(a) Overview

Alleghany’s segments are reported in a manner consistent with the way management evaluates the businesses.business. As such, Alleghany classifies its business into twothree reportable segments – reinsurance, insurance and insurance. Other activities includeAlleghany 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 corporate activities. In addition, reinsuranceits projected growth.

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 20162017 Form10-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. Overone-thirdA 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 components of other activities are Alleghany Capital and corporate activities. Alleghany Capitalsegment consists of manufacturing and serviceindustrial operations, oil and gasnon-industrial operations and corporate operations and investments at the Alleghany Capital level. Manufacturing and serviceIndustrial 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,(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 February 7, 2018, W&W|AFCO Steel acquired the outstanding equity of Hirschfeld, a fabricator of steel bridges and structural steel for $164.5stadiums, airports and other large commercial and industrial projects, for $111.3 million, including $163.9consisting of $96.6 million in cash paid on May 1, 2017 and $0.6$14.7 million of estimatedincremental debt. The acquisition-date consideration transferred and purchase price adjustments. In connection withallocation to the acquisition, Alleghany recorded $39.9 million, $25.3 million and $70.0 million of goodwill, indefinite-lived intangibleacquired assets and finite-lived intangibleassumed 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 respectively. Indefinite-lived intangible assets relateand assumed liabilities, as well as the residual goodwill. The acquisition accounting for Hirschfeld is expected to trade name and finite-lived intangible assets relate to customer relationships. The customer relationship asset is estimated to havebe finalized later in 2018.

Corporate activities are not classified as 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.

segment. The primary components of corporate activities are Alleghany Properties, SORC 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 20162017Form 10-K.

(b) Results

The following tables present the results for Alleghany’s twothree reportable segments and for othercorporate activities for the three and nine months ended September 30, 20172018 and 2016:2017:

 

 Reinsurance Segment Insurance Segment   Other Activities    Reinsurance Segment Insurance Segment          

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 

Three Months Ended
September 30, 2018

 Property Casualty
& Other(1)
 Total RSUI Cap
Specialty
 Total Subtotal Alleghany
Capital
 Total
Segments
 Corporate
Activities(2)
 Consolidated
 ($ in millions)   ($ 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     $      451.4    $      685.9     $    1,137.3    $    260.8     $      83.9     $    344.7     $      1,482.0    $-        $      1,482.0    $      (6.7)    $      1,475.3 

Net premiums written

 329.0   649.5   978.5   170.8   69.5   41.5   281.8   1,260.3    -      -       1,260.3   331.1  654.1   985.2  176.0   77.9   253.9   1,239.1   -    1,239.1   -     1,239.1 

Net premiums earned

 310.8   642.4   953.2   179.0   66.1   41.4   286.5   1,239.7    -      -       1,239.7   326.5  635.0   961.5  190.6   73.3   263.9   1,225.4   -    1,225.4   -     1,225.4 

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   387.6  421.4   809.0  107.0   41.7   148.7   957.7   -    957.7   -     957.7 

Commissions, brokerage and other underwriting expenses

 105.2   203.7   308.9   50.3   28.4   10.6   89.3   398.2    -      -       398.2   113.3  211.6   324.9  52.8   30.0   82.8   407.7   -    407.7   -     407.7 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting (loss) profit(3)

  $    (454.3)   $    (20.6)   $    (474.9)   $(176.7)   $0.7    $0.5    $    (175.5)  (650.4)   -      -       (650.4)    $(174.4   $2.0     $(172.4   $30.8     $1.6     $32.4   (140.0  -    (140.0  -     (140.0
 

 

  

 

  

 

  

 

  

 

  

 

  

 

      

 

 

 

 

 

 

 

 

 

 

 

     

Net investment income

Net investment income

 

 101.4   1.6   1.7   104.7         122.5  0.7  123.2  4.1  127.3 

Change in the fair value of equity securities

Change in the fair value of equity securities

 

      373.9   -    373.9  (3.7 370.2 

Net realized capital gains

Net realized capital gains

 

 21.5   0.7   10.7   32.9         16.2   -    16.2   -     16.2 

Other than temporary impairment losses

Other than temporary impairment losses

 

 (6.1)   -      -       (6.1) 

Other than temporary impairment losses

 

       -     -     -     -      -   

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  

Noninsurance revenue

       6.2      407.5  413.7  24.6  438.3 

Other operating expenses

Other operating expenses

 

 23.6   203.6   1.2   228.4         23.6  382.5  406.1  9.2  415.3 

Corporate administration

Corporate administration

 

 0.3    -      10.4   10.7         1.3   -    1.3  17.8  19.1 

Amortization of intangible assets

Amortization of intangible assets

 

 (0.7)  6.7    -       6.0  

Amortization of intangible assets

 

      (0.3 5.8  5.5   -     5.5 

Interest expense

Interest expense

 

 6.8   0.6   13.3   20.7         6.7  2.6  9.3  12.9  22.2 
 

 

  

 

  

 

  

 

        

 

 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

Earnings (losses) before income taxes

 

   $216.3     $7.8     $(16.9)    $207.2  

Earnings (losses) before income taxes

 

        $347.5    $17.3    $364.8    $(14.9   $349.9 
 

 

  

 

  

 

  

 

        

 

 

 

 

 

 

 

 

 

 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  
 

 

 

  

 

 

  

 

 

  

 

 

 

  Reinsurance Segment Insurance Segment          

Three Months Ended
September 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

   $445.5    $681.1    $1,126.6    $234.6    $74.3    $41.6    $350.5    $1,477.1    $-      $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   -     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   -     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   -     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   -     398.2 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting (loss) profit(3)

   $(454.3   $(20.6   $(474.9   $(176.7   $0.7    $0.5    $(175.5  (650.4  -     (650.4  -     (650.4
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

Net investment income

         101.4   1.6   103.0   1.7   104.7 

Change in the fair value of equity securities

 

        -     -     -     -     -    

Net realized capital gains

         21.5   0.7   22.2   10.7   32.9 

Other than temporary impairment losses

 

        (6.1  -     (6.1  -     (6.1

Noninsurance revenue

         4.7   289.3   294.0   2.3   296.3 

Other operating expenses

         8.3   260.0   268.3   9.6   277.9 

Corporate administration

         (1.5  -     (1.5  (3.2  (4.7

Amortization of intangible assets

         (0.3  6.0   5.7   -     5.7 

Interest expense

         6.6   1.2   7.8   13.0   20.8 
        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

          $(542.0   $24.4    $(517.6   $(4.7   $(522.3
        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    Reinsurance Segment Insurance Segment          

Nine Months Ended
September 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

    $1,193.7    $2,130.9    $3,324.6    $854.2    $247.1    $1,101.3    $4,425.9    $-      $4,425.9    $(19.2   $4,406.7 

Net premiums written

   912.1   2,046.8   2,958.9   579.8   229.6   809.4   3,768.3   -     3,768.3   -     3,768.3 

Net premiums earned

   893.7   2,009.3   2,903.0   556.2   211.0   767.2   3,670.2   -     3,670.2   -     3,670.2 

Net loss and LAE

   637.7   1,304.3   1,942.0   309.6   114.9   424.5   2,366.5   -     2,366.5   -     2,366.5 

Commissions, brokerage and other
underwriting expenses

   301.2   663.6   964.8   160.0   91.2   251.2   1,216.0   -     1,216.0   -     1,216.0 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting (loss) profit(3)

    $(45.2   $41.4    $(3.8   $86.6    $4.9    $91.5   87.7   -     87.7   -     87.7 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

Net investment income

         362.0   3.7   365.7   12.0   377.7 

Change in the fair value of equity securities

 

        506.7   -     506.7   6.1   512.8 

Net realized capital gains

         66.8   0.6   67.4   (0.2  67.2 

Other than temporary impairment losses

 

        (0.5  -     (0.5  -     (0.5

Noninsurance revenue

         16.7   979.2   995.9   36.8   1,032.7 

Other operating expenses

         60.6   937.0   997.6   25.9   1,023.5 

Corporate administration

         1.8   -     1.8   39.2   41.0 

Amortization of intangible assets

         (0.2  17.0   16.8   -     16.8 

Interest expense

         20.5   6.1   26.6   39.4   66.0 
        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

          $956.7    $23.4    $980.1    $(49.8   $930.3 
        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Reinsurance Segment Insurance Segment          

Nine Months Ended
September 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

   $1,190.0    $2,037.7    $3,227.7    $794.1    $213.2    $124.2    $1,131.5    $4,359.2    $-      $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   -     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   -     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   -     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   -     1,220.4 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting (loss) profit(3)

   $(320.2   $(38.9   $(359.1   $(97.7   $3.2    $-      $(94.5  (453.6  -     (453.6  -     (453.6
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

     

Net investment income

         311.7   2.1   313.8   8.1   321.9 

Change in the fair value of equity securities

 

        -     -     -     -     -   

Net realized capital gains

         90.8   0.9   91.7   10.1   101.8 

Other than temporary impairment losses

 

        (13.1  -     (13.1  -     (13.1

Noninsurance revenue

         10.5   626.8   637.3   13.1   650.4 

Other operating expenses

         57.4   591.0   648.4   29.8   678.2 

Corporate administration

         0.2   -     0.2   26.4   26.6 

Amortization of intangible assets

         (1.2  15.4   14.2   -     14.2 

Interest expense

         20.2   3.0   23.2   39.5   62.7 
        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

 

         $(130.3   $20.4    $(109.9   $(64.4   $(174.3
        

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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, othernoninsurance 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 assetsAssets and equityEquity

As of September 30, 2017, theThe following table presents identifiable assets, the portion of the reinsurance segment, insurance segment and other activities were $16.9 billion, $7.0 billion and $1.8 billion, respectively, of whichidentifiable assets related to cash and invested assets, represented $13.6 billion, $5.4 billion and $0.7 billion, respectively. Asequity attributable to Alleghany, for Alleghany’s reportable segments and for corporate activities 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.2018:

  Identifiable
Assets
   Invested Assets
and Cash
   Equity
Attributable to
Alleghany
  ($ in millions)

Reinsurance segment

   $16,740.1     $13,461.2     $5,167.6  

Insurance segment

  7,056.8    5,586.2    3,092.8  
 

 

 

 

  

 

 

 

  

 

 

 

Subtotal

  23,796.9    19,047.4    8,260.4  

Alleghany Capital

  1,476.6    195.4    855.8  
 

 

 

 

  

 

 

 

  

 

 

 

Total segments

  25,273.5    19,242.8    9,116.2  

Corporate activities

  522.4    446.8    (521.1)  
 

 

 

 

  

 

 

 

  

 

 

 

Consolidated

   $      25,795.9     $      19,689.6     $        8,595.1  
 

 

 

 

  

 

 

 

  

 

 

 

Included in other activitiesAlleghany Capital is debt associated with Alleghany Capital’sits operating subsidiaries, which totaled $102.5$197.7 million as of September 30, 2017.2018. The $102.5$197.7 million includes $31.2 million of borrowings by Jazwares under its available credit facility, $23.0$102.3 million of borrowings by W&W|AFCO Steel under its available credit facility and term loans $17.0(including borrowings incurred and assumed from its acquisition of Hirschfeld), $43.0 million of debtborrowings by Jazwares under its available credit facility, $21.5 million of term loans at Kentucky Trailer primarily related primarily to a mortgage loan, borrowings to finance small acquisitions and borrowings under its available credit facility, $15.9$16.5 million of borrowings by IPS under its available credit facility, and $15.4$14.4 million of term loans at Bourn & Koch related to borrowings to finance an acquisition.acquisition and borrowings under its available credit facility. None of these liabilities are guaranteed by Alleghany or Alleghany Capital.

11. Credit Agreement(d) Alleghany Capital Noninsurance Revenue

On July 31, 2017,For Alleghany entered into a five-year credit agreement (the “Credit Agreement”) with certain lenders party thereto, which providesCapital’s industrial andnon-industrial operations, noninsurance revenue consists of the sale of manufactured goods and services. The following table presents noninsurance revenue for an unsecured revolving credit facility in an aggregate principal amount of up to $300.0 million. The credit facility is scheduled to expire on July 31, 2022, unless earlier terminated. Borrowings under the Credit Agreement will be availableAlleghany Capital segment for working capitalthe three and general corporate purposes, including permitted acquisitions and repurchases of Common Stock. Borrowings under the Credit Agreement bear a floating rate of interest based in part on Alleghany’s credit rating, among other factors. The Credit Agreement contains representations, warranties and covenants customary for bank loan facilities of this nature. There were no borrowings under the Credit Agreement from July 31, 2017 throughnine months ended September 30, 2017.2018 and 2017:

The Credit Agreement replaced Alleghany’s previous four-year credit agreement (the “Prior Credit Agreement”), which provided for an unsecured revolving credit facility in an aggregate principal amount of up to $200.0 million. The Prior Credit Agreement was terminated on July 31, 2017 in advance of its scheduled October 15, 2017 expiration date. There were no borrowings under the Prior Credit Agreement in the seven months ended July 31, 2017.

   

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

   2018    2017    2018    2017
   ($ in millions)

Industrial(1)

    $224.2      $137.9      $591.6      $254.2 

Non-Industrial(2)

   183.7     150.9     387.9     372.1 

Corporate & other

   (0.4    0.5     (0.3    0.5 
  

 

 

 

   

 

 

 

   

 

 

 

   

 

 

 

  Alleghany Capital

    $      407.5      $      289.3      $      979.2      $      626.8 
  

 

 

 

   

 

 

 

   

 

 

 

   

 

 

 

  (1)

For the three and nine months ended September 30, 2018, the vast majority of noninsurance revenues were recognized as goods and services transferred to customers over time. For the three and nine months ended September 30, 2017, approximately 77 percent and 67 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 nine months ended September 30, 2018, approximately 60 percent and 65 percent, respectively, 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 nine months ended September 30, 2017, approximately 56 percent and 69 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 20172018 and 2016.2017. This discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Quarterly Report on Form10-Q for the quarter ended September 30, 2017,2018, or this “Form10-Q,” and our audited consolidated financial statements and Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the Annual Report on Form10-K for the year ended December 31, 2016,2017, or the “2016“2017 Form10-K.”

References in this Form10-Q to the “Company,” “Alleghany,” “we,” “us,” and “our” refer to Alleghany Corporation and its consolidated subsidiaries unless the context otherwise requires. In addition, unless the context otherwise requires, references to

 

“TransRe” are to our wholly-owned reinsurance holding company subsidiary Transatlantic Holdings, Inc. and its subsidiaries;

 

“AIHL” are to our wholly-owned insurance holding company subsidiary Alleghany Insurance Holdings LLC;

 

“RSUI” are to our wholly-owned subsidiary RSUI Group, Inc. and its subsidiaries;

 

“CapSpecialty” are to our wholly-owned subsidiary CapSpecialty, Inc. and its subsidiaries;

 

“PacificComp” are to our former wholly-owned subsidiary Pacific Compensation Corporation and its subsidiary;subsidiary, which were sold on December 31, 2017;

 

“AIHL Re” are to our wholly-owned subsidiary AIHL Re LLC;

 

“Roundwood” are to our wholly-owned subsidiary Roundwood Asset Management LLC;

 

“SORC” are to our wholly-owned subsidiary Stranded Oil Resources Corporation and its subsidiaries;

“Alleghany Capital” are to our wholly-owned subsidiary Alleghany Capital Corporation and its subsidiaries;

 

“SORC” are to our wholly-owned subsidiary Stranded Oil Resources Corporation and its subsidiaries;

“Bourn & Koch” are to our majority-owned subsidiary Bourn & Koch, Inc. and its subsidiary;

 

“Kentucky Trailer” are to our majority-owned subsidiary R.C. Tway Company, LLC and its subsidiaries;

 

“IPS” are to our majority-owned subsidiaryIPS-Integrated Project Services, LLC and its subsidiaries;

 

“Jazwares” are to ourmajority-owned subsidiary Jazwares, LLC and its subsidiaries and affiliates;

 

“W&W|AFCO Steel” are to our majority-owned subsidiary WWSC Holdings, LLC and its subsidiaries; and

 

“Alleghany Properties” are to our wholly-owned subsidiary Alleghany Properties Holdings LLC and its subsidiaries.

Note on Forward-Looking Statements

Certain statements contained in this Form10-Q may be deemed to be “forward-looking“forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.Forward-looking statements may be identified by the use of words such as “may,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “believe,” “potential,” “should” or the negative versions of those words or other comparable words.Forward-looking statements do not relate solely to historical or current facts, rather they are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at the time. These statements are not guarantees of future performance. These forward-looking statements are based upon Alleghany’s current expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and Alleghany’s future financial condition and results. Factors that could cause theseforward-looking statements to differ, possibly materially, from that currently contemplated include:

 

significantweather-related or other natural orman-made catastrophes and disasters;

 

the cyclical nature of the property and casualty reinsurance and insurance industries;

 

changes in market prices of our significant equity investments and changes in value of our debt securities portfolio;

 

adverse loss development for events insured by our reinsurance and insurance subsidiaries in either the current year or prior years;

 

the long-tail and potentially volatile nature of certain casualty lines of business written by our reinsurance and insurance subsidiaries;

 

the cost and availability of reinsurance;

 

the reliance by our reinsurance and insurance operating subsidiaries on a limited number of brokers;

 

legal, political, judicial and regulatory changes;

 

increases in the levels of risk retention by our reinsurance and insurance subsidiaries;

 

changes in the ratings assigned to our reinsurance and insurance subsidiaries;

 

claims development and the process of estimating reserves;

 

exposure to terrorist acts and acts of war;

 

the willingness and ability of our reinsurance and insurance subsidiaries’ reinsurers to pay reinsurance recoverables owed to our reinsurance and insurance subsidiaries;

 

the uncertain nature of damage theories and loss amounts;

 

the loss of key personnel of our reinsurance or insurance operating subsidiaries;

 

fluctuation in foreign currency exchange rates;

 

the failure to comply with the restrictive covenants contained in the agreements governing our indebtedness;

 

the ability to make payments on, or repay or refinance, our debt;

 

risks inherent in international operations; and

 

difficult and volatile conditions in the global market.

Additional risks and uncertainties include general economic and political conditions, including the effects of a prolonged U.S. or global economic downturn or recession; changes in costs; variations in political, economic or other factors; risks relating to conducting operations in a competitive environment; effects of acquisition and disposition activities, inflation rates, or recessionary or expansive trends; changes in interest rates; extended labor disruptions, civil unrest, or other external factors over which we have no control; changes in our plans, strategies, objectives, expectations, or intentions, which may happen at any time at our discretion; and other factors discussed in the 20162017 Form10-K and subsequent filings with the Securities and Exchange Commission, or the “SEC.” All forward-looking statements speak only as of the date they are made and are based on information available at that time. Alleghany does not undertake any obligation to update or revise anyforward-looking statements to reflect subsequent circumstances or events. See Part I, Item 1A, “Risk Factors” of the 20162017 Form10-K for additional information.

Comment onNon-GAAP Financial Measures

Throughout this Form10-Q, our analysis of our financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the U.S., or “GAAP.” Our results of operations have been presented in the way that we believe will be the most meaningful and useful to investors, analysts, rating agencies and others who use financial information in evaluating our performance. This presentation includes the use of underwriting profit and Adjusted EBITDA,operating earnings before income taxes, which are“non-GAAP financial measures,” as such term is defined in Item 10(e) of RegulationS-K promulgated by the SEC. The presentation of these financial measures is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. These measures may also be different fromnon-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes. A discussion of our calculation and use of these financial measures is provided below.

Underwriting profit is anon-GAAP financial measure for our reinsurance and insurance segments. Underwriting profit represents net premiums earned less net loss and loss adjustment expenses, or “LAE,” and commissions, brokerage and other underwriting expenses, all as determined in accordance with GAAP and does not include: (i) net investment income; (ii) change in the fair value of equity securities; (iii) net realized capital gains; (iii)(iv) other than temporary impairment, or “OTTI,” losses; (iv) other(v) noninsurance revenue; (v)(vi) other operating expenses; (vi)(vii) corporate administration; (vii)(viii) amortization of intangible assets; and (viii)(ix) interest expense. We consistently use underwriting profit as a supplement to earnings before income taxes, the most comparable GAAP financial measure, to evaluate the performance of our reinsurance and insurance segments and believe that underwriting profit provides useful additional information to investors because it highlights net earnings attributable to a segment’sour reinsurance and insurance segments’ underwriting performance. Earnings before income taxes may show a profit despite an underlying underwriting loss, and when underwriting losses persist over extended periods, a reinsurance or an insurance company’s ability to continue as an ongoing concern may be at risk. A reconciliation of underwriting profit to earnings before income taxes is presented within “Consolidated Results of Operations.”

Adjusted EBITDAOperating earnings before income taxes is anon-GAAP financial measure for ournon-insurance noninsurance operating subsidiaries and investments held byin the Alleghany Capital. Adjusted EBITDACapital segment. Operating earnings before income taxes represents othernoninsurance revenue less certain otherall operating expenses, and does not include: (i) depreciation expense (a component of other operating expenses); (ii) amortization of intangible assets; (ii) change in the fair value of equity securities; (iii) interest expense; (iv) net realized capital gains; (v)(iv) OTTI losses; and (vi)(v) income taxes. Because Adjusted EBITDAoperating earnings before income taxes excludes interest, income taxes,amortization of intangible assets, change in the fair value of equity securities, net realized capital gains, OTTI losses depreciation and amortization,income taxes, it provides an indication of economic performance that is not affected by investment activity, levels of debt, interest rates, effective tax rates or levels of depreciation and amortization resulting from acquisition accounting. We use Adjusted EBITDAoperating earnings before income taxes as a supplement to earnings before income taxes, the most comparable GAAP financial measure, to evaluate the performance of certain of ournon-insurance noninsurance operating subsidiaries and investments. A reconciliation of Adjusted EBITDAoperating earnings before income taxes to earnings before income taxes is presented within “Consolidated Results of Operations.”

In prior filings, we have used Adjusted EBITDA as a non-GAAP financial measure for our noninsurance operating subsidiaries held by Alleghany Capital. We believe that operating earnings before income taxes is a more usefulnon-GAAP financial measure, as it reflects: (i) ongoing capital expenditures through the inclusion of depreciation expense (a component of other operating expenses); and (ii) ongoing levels of debt through the inclusion of interest expense.

Overview

The following overview does not address all of the matters covered in the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to our stockholders or the investing public. This overview should be read in conjunction with the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Net earnings attributable to Alleghany stockholders were $284.9 million in the third quarter of 2018, compared with net losses attributable to Alleghany stockholders wereof $314.2 million in the third quarter of 2017, compared withand net earnings attributable to Alleghany stockholders of $155.8were $751.6 million in the third quarterfirst nine months of 2016, and2018, compared with net losses attributable to Alleghany stockholders wereof $63.2 million in the first nine months of 2017, compared with net earnings attributable to Alleghany stockholders of $387.4 million in the first nine months of 2016.2017.

 

Losses before income taxes were $522.3 million in the third quarter of 2017, compared with earnings before income taxes of $207.2 million in the third quarter of 2016, and losses before income taxes were $174.3 million in the first nine months of 2017, compared with net earnings before income taxes of $553.0 million in the first nine months of 2016.

Net investment income decreasedincreased by 13.221.6 percent and 3.117.3 percent in the third quarter and first nine months of 2017,2018, respectively, from the corresponding 20162017 periods.

 

Net premiums written increaseddecreased by 1.91.7 percent and decreased by 2.70.5 percent in the third quarter and first nine months of 2017,2018, respectively, from the corresponding 20162017 periods.

 

Underwriting loss was $140.0 million in the third quarter of 2018, compared with $650.4 million in the third quarter of 2017, and underwriting profit was $87.7 million in the first nine months of 2018, compared with underwriting profitloss of $111.9 million in the third quarter of 2016, and underwriting loss was $453.6 million in the first nine months of 2017, compared with underwriting profit of $299.4 million in the first nine months of 2016.2017.

 

The combined ratio for our reinsurance and insurance segments was 111.5 percent in the third quarter of 2018, compared with 152.4 percent in the third quarter of 2017, compared with 91.0and 97.6 percent in the third quarterfirst nine months of 2016, and2018, compared with 112.2 percent in the first nine months of 2017, compared with 92.0 percent in the first nine months of 2016.2017.

 

Catastrophe losses, net of reinsurance, were $237.8 million in the third quarter of 2018, compared with $792.5 million in the third quarter of 2017, compared with $32.1and $256.2 million in the third quarterfirst nine months of 2016, and2018, compared with $807.9 million in the first nine months of 2017, compared with $160.0 million in the first nine months of 2016.2017.

 

Net favorable prior accident year loss reserve development was $75.0 million in the third quarter of 2018, compared with $61.5 million in the third quarter of 2017, compared with $86.4and $212.8 million in the third quarterfirst nine months of 2016, and2018, compared with $173.0 million in the first nine months of 2017,2017.

Noninsurance revenues for Alleghany Capital were $407.5 million in the third quarter of 2018, compared with $261.7$289.3 million in the third quarter of 2017, and $979.2 million in the first nine months of 2016.

Sales revenues for Alleghany Capital were $291.7 million in the third quarter of 2017,2018, compared with $218.6 million in the third quarter of 2016, and $634.3$626.8 million in the first nine months of 2017, compared with $517.3 million in the first nine months of 2016.2017.

 

Earnings before income taxes for Alleghany Capital were $17.7$17.3 million in the third quarter of 2018, compared with $24.4 million in the third quarter of 2017, compared with $7.8 million in the third quarter of 2016, and earnings before income taxes were $0.7$23.4 million in the first nine months of 2017,2018, compared with $4.2$20.4 million in the first nine months of 2016. Adjusted EBITDA was $31.32017. Operating earnings before income taxes were $23.1 million in the third quarter of 2018, compared with $29.7 million in the third quarter of 2017, compared with $20.3 million in the third quarter of 2016, and $35.8$39.8 million in the first nine months of 2017,2018, compared with $24.9$34.9 million in the first nine months of 2016.2017.

As of September 30, 2017,2018, we had total assets of $25.7$25.8 billion and total stockholders’ equity attributable to Alleghany stockholders of $8.2$8.6 billion. As of September 30, 2017,2018, we had consolidated total investments of approximately $19.0 billion, consisting of $13.2$12.1 billion invested in debt securities, $3.8$5.0 billion invested in equity securities, $0.6$0.7 billion invested in short-term investments, $0.7 billion invested in commercial mortgage loans and $0.7$0.5 billion invested in other invested assets.

We incurred catastrophe losses in the third quarter of 2018, primarily from Hurricane Florence, which caused widespread property damage and flooding in September 2018, primarily in the State of North Carolina, and Typhoons Jebi and Trami, each of which caused widespread property damage and flooding in September 2018, primarily in Japan. We incurred significant catastrophe losses in the third quarter of 2017, primarily arising from three major hurricanes. Hurricane Harvey caused widespread property damage and flooding in August 2017, primarily in the State of Texas. Hurricane Irma caused widespread property damage and flooding in September 2017, primarily in the State of Florida. Hurricane Maria caused widespread property damage and flooding in September 2017, primarily in the Commonwealth of Puerto Rico. Our loss estimates for all of these catastrophes arewere based on information available at the time, including an analysis of reported claims, an underwriting review ofin-force contracts, estimates of losses resulting from wind and other perils, including storm surge and flooding to the extent covered by applicable policies, and other factors requiring considerable judgment. The ultimate amount of our actual losses from these catastrophes may be materially different from these estimates due to the size and complexity of the events and the preliminary nature of the information available to prepare the estimates.

The following table presentstables present the impact of our catastrophe losses, net of reinsurance, for the 2017 third quarter:three months ended September 30, 2018 and 2017:

 

    Reinsurance
Segment
   Insurance
Segment
   Total
Segments
 
Three Months Ended September 30, 2018        ($ in millions)     

Net loss and LAE:

        

Typhoon Jebi

      $87.7      $-         $87.7  

Hurricane Florence

     46.2     34.0    80.2  

Typhoon Trami

     38.5     -        38.5  

Other

     23.4(1)     8.0(2)     31.4  
    

 

   

 

   

 

 

Total net loss and LAE

     195.8     42.0    237.8  

Net reinstatement premiums (earned)(3)

     (10.8)    -        (10.8) 
    

 

   

 

   

 

 

Losses before income taxes

     185.0     42.0    227.0  

Income taxes

     38.9     8.8    47.7  
    

 

   

 

   

 

 

Net losses attributable to Alleghany stockholders

      $    146.1      $33.2     $179.3  
    

 

   

 

   

 

 

Three Months Ended September 30, 2017

  Reinsurance
Segment
 Insurance
Segment
 Total
Segments
                  
  ($ in millions)   

Net loss and LAE:

              

Hurricane Harvey

   $    181.0     $     83.6   (1)  $    264.6           $181.0      $83.6     $264.6  

Hurricane Irma

   208.3     103.7   (2)  312.0          208.3     103.7    312.0  

Hurricane Maria

   156.0     14.3   (2)  170.3          156.0     14.3    170.3  

Other

   30.7   (3)  14.9    45.6          30.7(4)     14.9    45.6  
  

 

  

 

  

 

       

 

   

 

   

 

 

Total net loss and LAE

   576.0    216.5    792.5          576.0     216.5    792.5  

Net reinstatement premiums (earned) (4)

   (37.1)    -        (37.1)    

Net reinstatement premiums (earned)(3)

     (37.1)    -        (37.1) 
    

 

   

 

   

 

 
  

 

  

 

  

 

   

Losses before income taxes

   538.9    216.5    755.4          538.9     216.5    755.4  

Income taxes

   188.6    75.8    264.4          188.6     75.8    264.4  
  

 

  

 

  

 

        

 

   

 

   

 

 

Net losses attributables to Alleghany stockholders

   $    350.3    $    140.7    $    491.0     

Net losses attributable to Alleghany stockholders

      $350.3      $    140.7     $    491.0  
  

 

  

 

  

 

       

 

   

 

   

 

 

 

(1)

Relates to several severe weather events in East Asia.

(2)

Includes $83.3$7.1 million attributable to RSUI and $0.3$0.9 million attributable to CapSpecialty.

(2)All attributable to RSUI.(3)

Represents an increase in net premiums earned.

(3)(4)

Attributable to earthquakes in Mexico.

(4)Represents an increase to net premiums earned.

Our catastrophe losses are more fully described in the following pages.

Consolidated Results of Operations

The following table presents our consolidated revenues, costs and expenses and earnings:

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2017   2016   2017   2016 
   ($ in millions) 

Revenues

        

Net premiums earned

   $    1,239.7      $  1,253.5      $  3,692.8      $  3,736.6   

Net investment income

   104.7      120.6      321.9      332.3   

Net realized capital gains

   32.9      27.2      101.8      117.1   

Other than temporary impairment losses

   (6.1)     (11.7)     (13.1)     (38.2)  

Other revenue

   296.3      225.0      650.4      527.8   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   1,667.5      1,614.6      4,753.8      4,675.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and Expenses

        

Net loss and loss adjustment expenses

   1,491.9      718.6      2,926.0      2,198.5   

Commissions, brokerage and other underwriting expenses

   398.2      423.0      1,220.4      1,238.7   

Other operating expenses

   277.9      228.4      678.2      575.5   

Corporate administration

   (4.7)     10.7      26.6      34.0   

Amortization of intangible assets

   5.7      6.0      14.2      14.5   

Interest expense

   20.8      20.7      62.7      61.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

   2,189.8      1,407.4      4,928.1      4,122.6   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Losses) earnings before income taxes

   (522.3)     207.2      (174.3)     553.0   

Income taxes

   (212.3)     48.4      (116.3)     162.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (losses) earnings

   (310.0)     158.8      (58.0)     390.7   

Net earnings attributable to noncontrolling interest

   4.2      3.0      5.2      3.3   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (losses) earnings attributable to Alleghany stockholders

   $     (314.2)     $     155.8      $     (63.2)     $     387.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

   Three Months Ended Nine Months Ended
   September 30, September 30,
   2018  2017 2018 2017
   ($ in millions)

Revenues

      

Net premiums earned

    $    1,225.4     $    1,239.7    $    3,670.2    $    3,692.8 

Net investment income

   127.3    104.7   377.7   321.9 

Change in the fair value of equity securities

   370.2    -       512.8   -     

Net realized capital gains

   16.2    32.9   67.2   101.8 

Other than temporary impairment losses

   -        (6.1  (0.5  (13.1

Noninsurance revenue

   438.3    296.3   1,032.7   650.4 
  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

      Total revenues

   2,177.4    1,667.5   5,660.1   4,753.8 
  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Costs and Expenses

      

Net loss and loss adjustment expenses

   957.7    1,491.9   2,366.5   2,926.0 

Commissions, brokerage and other underwriting expenses

   407.7    398.2   1,216.0   1,220.4 

Other operating expenses

   415.3    277.9   1,023.5   678.2 

Corporate administration

   19.1    (4.7  41.0   26.6 

Amortization of intangible assets

   5.5    5.7   16.8   14.2 

Interest expense

   22.2    20.8   66.0   62.7 
  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

      Total costs and expenses

   1,827.5    2,189.8   4,729.8   4,928.1 
  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

   349.9    (522.3  930.3   (174.3

Income taxes

   60.4    (212.3  171.2   (116.3
  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Net earnings (losses)

   289.5    (310.0  759.1   (58.0

      Net earnings attributable to noncontrolling interests

   4.6    4.2   7.5   5.2 
  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Net earnings (losses) attributable to Alleghany stockholders

    $284.9     $(314.2   $751.6    $(63.2
  

 

 

 

  

 

 

 

 

 

 

 

 

 

 

 

Alleghany’s segments are reported in a manner consistent with the way management evaluates the businesses.business. As such, we classify our businessesAlleghany classifies its business into twothree reportable segments – reinsurance, insurance and insurance. Other activities includeAlleghany 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 corporate activities. its projected growth. Corporate activities are not classified as a segment.

See Note 10 to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form10-Q for additional detail on our segments and other activities. The tables below present the results for our segments and for other activities for the three and nine months ended September 30, 20172018 and 2016.2017.

  Segments  Other Activities    

Three Months Ended September 30, 2017

 Reinsurance
Segment
  Insurance
Segment
  Total
Segments
  Alleghany
Capital
  Corporate
Activities(1)
  Consolidated 
  ($ in millions) 

Gross premiums written

  $1,126.6       $350.5       $1,477.1       $-        $(5.3)   $1,471.8  

Net premiums written

  978.5       281.8       1,260.3       -        -        1,260.3  

Net premiums earned

  953.2       286.5       1,239.7       -        -        1,239.7  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss and LAE:

      

Current year (excluding catastrophe losses)

  593.0       167.9       760.9       -        -        760.9  

Current year catastrophe losses

  576.0       216.5       792.5       -        -        792.5  

Prior years

  (49.8)      (11.7)      (61.5)      -        -        (61.5) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total net loss and LAE

  1,119.2       372.7       1,491.9       -        -        1,491.9  

Commissions, brokerage and other underwriting expenses

  308.9       89.3       398.2       -        -        398.2  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Underwriting (loss)(2)

  $  (474.9)      $  (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  
 

 

 

  

 

 

  

 

 

  

 

 

 

Earnings (losses) before income taxes

    $  (542.0)      $    17.7    $    2.0    $    (522.3) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Loss ratio(3):

      

Current year (excluding catastrophe losses)

  62.3%    58.6%    61.4%     

Current year catastrophe losses

  60.4%    75.6%    63.9%     

Prior years

  (5.2%)   (4.1%)   (5.0%)    
 

 

 

  

 

 

  

 

 

    

Total net loss and LAE

  117.5%    130.1%    120.3%     

Expense ratio(4)

  32.3%    31.2%    32.1%     
 

 

 

  

 

 

  

 

 

    

Combined ratio(5)

  149.8%    161.3%    152.4%     
 

 

 

  

 

 

  

 

 

    
   Segments      

Three Months Ended September 30, 2018

  Reinsurance
Segment
  Insurance
Segment
  Subtotal  Alleghany
Capital
  Total
Segments
  Corporate
Activities(1)
  Consolidated
   ($ in millions)   

Gross premiums written

   $  1,137.3     $  344.7     $  1,482.0     $-        $  1,482.0     $(6.7)    $  1,475.3  

Net premiums written

   985.2     253.9     1,239.1     -        1,239.1     -        1,239.1  

Net premiums earned

   961.5     263.9     1,225.4     -        1,225.4     -        1,225.4  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Net loss and LAE:

              

Current year (excluding catastrophe losses)

   654.7     140.2     794.9     -        794.9     -        794.9  

Current year catastrophe losses

   195.8     42.0     237.8     -        237.8     -        237.8  

Prior years

   (41.5)    (33.5)    (75.0)    -        (75.0)    -        (75.0) 
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Total net loss and LAE

   809.0     148.7     957.7     -        957.7     -        957.7  

Commissions, brokerage and other

underwriting expenses

   324.9     82.8     407.7     -        407.7     -        407.7  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Underwriting (loss) profit(2)

    $        (172.4)     $      32.4     (140.0)    -        (140.0)    -        (140.0) 
  

 

 

 

  

 

 

 

          

Net investment income

 

   122.5     0.7    123.2     4.1     127.3  

Change in the fair value of equity securities

 

   373.9     -        373.9     (3.7)    370.2  

Net realized capital gains

 

   16.2     -        16.2     -        16.2  

Other than temporary impairment losses

 

   -        -        -        -        -     

Noninsurance revenue

 

   6.2     407.5    413.7     24.6     438.3  

Other operating expenses

 

   23.6     382.5    406.1     9.2     415.3  

Corporate administration

 

   1.3     -        1.3     17.8     19.1  

Amortization of intangible assets

 

   (0.3)    5.8    5.5     -        5.5  

Interest expense

 

   6.7     2.6    9.3     12.9     22.2  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Earnings (lossses) before income taxes

 

    $        347.5      $        17.3     $        364.8     $        (14.9)     $        349.9  
  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

  

 

 

 

Loss ratio(3):

              

 Current year (excluding catastrophe losses)

   68.1%     53.1%     64.9%          

 Current year catastrophe losses

   20.4%     15.9%     19.4%          

 Prior years

   (4.4%)    (12.7%)    (6.1%)         
  

 

 

 

  

 

 

 

  

 

 

 

        

  Total net loss and LAE

   84.1%     56.3%     78.2%          

Expense ratio(4)

   33.8%     31.4%     33.3%          
  

 

 

 

  

 

 

 

  

 

 

 

        

Combined ratio(5)

   117.9%     87.7%     111.5%          
  

 

 

 

  

 

 

 

  

 

 

 

        

  Segments  Other Activities    

Three Months Ended September 30, 2016

 Reinsurance
Segment
  Insurance
Segment
  Total
Segments
  Alleghany
Capital
  Corporate
Activities(1)
  Consolidated 
  ($ in millions) 

Gross premiums written

  $  1,065.4       $    350.0       $  1,415.4       $-        $(7.5)   $  1,407.9  

Net premiums written

  966.9       269.8       1,236.7       -        -        1,236.7  

Net premiums earned

  969.4       284.1       1,253.5       -        -        1,253.5  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss and LAE:

      

Current year (excluding catastrophe losses)

  609.6       163.3       772.9       -        -        772.9  

Current year catastrophe losses

  21.6       10.5       32.1       -        -        32.1  

Prior years

  (69.0)      (17.4)      (86.4)      -        -        (86.4) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total net loss and LAE

  562.2       156.4       718.6       -        -        718.6  

Commissions, brokerage and other underwriting expenses

  333.1       89.9       423.0      -        -        423.0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Underwriting profit(2)

  $74.1       $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  
 

 

 

  

 

 

  

 

 

  

 

 

 

Loss ratio(3):

      

Current year (excluding catastrophe losses)

  62.8%    57.5%    61.7%     

Current year catastrophe losses

  2.2%    3.7%    2.6%     

Prior years

  (7.1%)   (6.1%)   (7.0%)    
 

 

 

  

 

 

  

 

 

    

Total net loss and LAE

  57.9%    55.1%    57.3%     

Expense ratio(4)

  34.4%    31.7%    33.7%     
 

 

 

  

 

 

  

 

 

    

Combined ratio(5)

  92.3%    86.8%    91.0%     
 

 

 

  

 

 

  

 

 

    

  Segments    

Three Months Ended September 30, 2017

 Reinsurance
Segment
 Insurance
Segment
 Subtotal Alleghany
Capital
 Total
Segments
 Corporate
Activities(1)
 Consolidated
  ($ in millions)

Gross premiums written

   $      1,126.6    $      350.5    $  1,477.1    $-        $  1,477.1    $(5.3   $      1,471.8 

Net premiums written

  978.5   281.8   1,260.3   -       1,260.3   -       1,260.3 

Net premiums earned

  953.2   286.5   1,239.7   -       1,239.7   -       1,239.7 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and LAE:

       

Current year (excluding catastrophe losses)

  593.0   167.9   760.9   -       760.9   -       760.9 

Current year catastrophe losses

  576.0   216.5   792.5   -       792.5   -       792.5 

Prior years

  (49.8  (11.7  (61.5  -       (61.5  -       (61.5
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

  1,119.2   372.7   1,491.9   -       1,491.9   -       1,491.9 

Commissions, brokerage and other

underwriting expenses

  308.9   89.3   398.2   -       398.2   -       398.2 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting (loss)(2)

   $(474.9   $(175.5  (650.4  -       (650.4  -       (650.4
 

 

 

 

 

 

 

 

     

Net investment income

 

  101.4   1.6   103.0   1.7   104.7 

Change in the fair value of equity securities

 

  -       -       -       -       -     

Net realized capital gains

 

  21.5   0.7   22.2          10.7   32.9 

Other than temporary impairment losses

 

  (6.1  -       (6.1  -       (6.1

Noninsurance revenue

 

  4.7   289.3   294.0   2.3   296.3 

Other operating expenses

 

  8.3   260.0   268.3   9.6   277.9 

Corporate administration

 

  (1.5  -       (1.5  (3.2  (4.7

Amortization of intangible assets

 

  (0.3  6.0   5.7   -       5.7 

Interest expense

 

  6.6   1.2   7.8   13.0   20.8 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

 

   $(542.0   $        24.4    $(517.6   $(4.7   $(522.3
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio(3):

       

 Current year (excluding catastrophe losses)

  62.3  58.6  61.4    

 Current year catastrophe losses

  60.4  75.6  63.9    

 Prior years

  (5.2%)   (4.1%)   (5.0%)     
 

 

 

 

 

 

 

 

 

 

 

 

    

  Total net loss and LAE

  117.5  130.1  120.3    

Expense ratio(4)

  32.3  31.2  32.1    
 

 

 

 

 

 

 

 

 

 

 

 

    

Combined ratio(5)

  149.8  161.3  152.4    
 

 

 

 

 

 

 

 

 

 

 

 

    

  Segments  Other Activities��   

Nine Months Ended September 30, 2017

 Reinsurance
Segment
  Insurance
Segment
  Total
Segments
  Alleghany
Capital
  Corporate
Activities(1)
  Consolidated 
  ($ in millions) 

Gross premiums written

  $  3,227.7       $  1,131.5       $  4,359.2       $-       $      (16.5)   $  4,342.7  

Net premiums written

  2,906.7       879.8       3,786.5       -       -       3,786.5  

Net premiums earned

  2,836.8       856.0       3,692.8       -       -       3,692.8  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss and LAE:

      

Current year (excluding catastrophe losses)

  1,814.1       477.0       2,291.1       -       -       2,291.1  

Current year catastrophe losses

  576.0       231.9       807.9       -       -       807.9  

Prior years

  (140.8)      (32.2)      (173.0)      -       -       (173.0) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total net loss and LAE

  2,249.3       676.7       2,926.0       -       -       2,926.0  

Commissions, brokerage and other underwriting expenses

  946.6       273.8       1,220.4       -       -       1,220.4  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Underwriting (loss)(2)

  $(359.1)      $(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  
 

 

 

  

 

 

  

 

 

  

 

 

 

Earnings (losses) before income taxes

    $(130.3)      $0.7    $(44.7)   $(174.3) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Loss ratio(3):

      

Current year (excluding catastrophe losses)

  63.9%    55.8%    62.0%     

Current year catastrophe losses

  20.3%    27.1%    21.9%     

Prior years

  (5.0%)   (3.8%)   (4.7%)    
 

 

 

  

 

 

  

 

 

    

Total net loss and LAE

  79.2%    79.1%    79.2%     

Expense ratio(4)

  33.4%    32.0%    33.0%     
 

 

 

  

 

 

  

 

 

    

Combined ratio(5)

  112.6%    111.1%    112.2%     
 

 

 

  

 

 

  

 

 

    

  Segments    

Nine Months Ended September 30, 2018

 Reinsurance
Segment
 Insurance
Segment
 Subtotal Alleghany
Capital
 Total
Segments
 Corporate
Activities(1)
 Consolidated
  ($ in millions)

Gross premiums written

   $    3,324.6    $  1,101.3    $4,425.9    $-        $4,425.9    $(19.2   $4,406.7 

Net premiums written

  2,958.9   809.4   3,768.3   -       3,768.3   -       3,768.3 

Net premiums earned

  2,903.0   767.2   3,670.2   -       3,670.2   -       3,670.2 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and LAE:

       

Current year (excluding catastrophe losses)

  1,909.9   413.2   2,323.1   -       2,323.1   -       2,323.1 

Current year catastrophe losses

  195.8   60.4   256.2   -       256.2   -       256.2 

Prior years

  (163.7  (49.1  (212.8  -       (212.8  -       (212.8
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

  1,942.0   424.5   2,366.5   -       2,366.5   -       2,366.5 

Commissions, brokerage and other

underwriting expenses

  964.8   251.2   1,216.0   -       1,216.0   -       1,216.0 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting (loss) profit(2)

   $(3.8   $91.5   87.7   -       87.7   -       87.7 
 

 

 

 

 

 

 

 

     

Net investment income

 

  362.0   3.7   365.7   12.0   377.7 

Change in the fair value of equity securities

 

  506.7   -       506.7   6.1   512.8 

Net realized capital gains

 

  66.8   0.6   67.4   (0.2  67.2 

Other than temporary impairment losses

 

  (0.5  -       (0.5  -       (0.5

Noninsurance revenue

 

  16.7   979.2   995.9   36.8   1,032.7 

Other operating expenses

 

  60.6   937.0   997.6   25.9   1,023.5 

Corporate administration

 

  1.8   -       1.8            39.2   41.0 

Amortization of intangible assets

 

  (0.2  17.0   16.8   -       16.8 

Interest expense

 

  20.5   6.1   26.6   39.4   66.0 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

 

    $        956.7    $        23.4    $        980.1    $(49.8   $        930.3 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio(3):

       

Current year (excluding catastrophe losses)

  65.8  53.9  63.3    

Current year catastrophe losses

  6.7  7.8  7.0    

Prior years

  (5.6%)   (6.4%)   (5.8%)     
 

 

 

 

 

 

 

 

 

 

 

 

    

Total net loss and LAE

  66.9  55.3  64.5    

Expense ratio(4)

  33.2  32.7  33.1    
 

 

 

 

 

 

 

 

 

 

 

 

    

Combined ratio(5)

  100.1  88.0  97.6    
 

 

 

 

 

 

 

 

 

 

 

 

    

  Segments  Other Activities    

Nine Months Ended September 30, 2016

 Reinsurance
Segment
  Insurance
Segment
  Total
Segments
  Alleghany
Capital
  Corporate
Activities(1)
  Consolidated 
  ($ in millions) 

Gross premiums written

  $  3,310.0       $  1,115.7       $  4,425.7       $-        $      (19.0)   $   4,406.7  

Net premiums written

  3,033.4       859.8       3,893.2       -        -        3,893.2  

Net premiums earned

  2,888.5       848.1       3,736.6       -        -        3,736.6  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net loss and LAE:

      

Current year (excluding catastrophe losses)

  1,838.2       462.0       2,300.2       -        -        2,300.2  

Current year catastrophe losses

  117.4       42.6       160.0       -        -        160.0  

Prior years

  (218.0)      (43.7)      (261.7)      -        -        (261.7) 
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total net loss and LAE

  1,737.6       460.9       2,198.5       -        -        2,198.5  

Commissions, brokerage and other underwriting expenses

  969.2       269.5       1,238.7       -        -        1,238.7  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Underwriting profit(2)

  $181.7       $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  
 

 

 

  

 

 

  

 

 

  

 

 

 

Loss ratio(3):

      

Current year (excluding catastrophe losses)

  63.6%    54.5%    61.6%     

Current year catastrophe losses

  4.1%    5.0%    4.3%     

Prior years

  (7.4%)   (5.2%)   (7.1%)    
 

 

 

  

 

 

  

 

 

    

Total net loss and LAE

  60.3%    54.3%    58.8%     

Expense ratio(4)

  33.6%    31.8%    33.2%     
 

 

 

  

 

 

  

 

 

    

Combined ratio(5)

  93.9%    86.1%    92.0%     
 

 

 

  

 

 

  

 

 

    

  Segments    

Nine Months Ended September 30, 2017

 Reinsurance
Segment
 Insurance
Segment
 Subtotal Alleghany
Capital
 Total
Segments
 Corporate
Activities(1)
   Consolidated  
    ($ in millions)        

Gross premiums written

     $      3,227.7      $    1,131.5      $    4,359.2      $-        $  4,359.2    $(16.5    $  4,342.7 

Net premiums written

  2,906.7   879.8   3,786.5   -       3,786.5   -       3,786.5 

Net premiums earned

  2,836.8   856.0   3,692.8   -       3,692.8   -       3,692.8 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and LAE:

       

Current year (excluding catastrophe losses)

  1,814.1   477.0   2,291.1   -       2,291.1   -       2,291.1 

Current year catastrophe losses

  576.0   231.9   807.9   -       807.9   -       807.9 

Prior years

  (140.8  (32.2  (173.0  -       (173.0  -       (173.0
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

  2,249.3   676.7   2,926.0   -       2,926.0   -       2,926.0 

Commissions, brokerage and other

underwriting expenses

  946.6   273.8   1,220.4   -       1,220.4   -       1,220.4 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting (loss)(2)

     $(359.1     $(94.5  (453.6  -       (453.6  -       (453.6
 

 

 

 

 

 

 

 

     

Net investment income

 

  311.7   2.1   313.8   8.1   321.9 

Change in the fair value of equity securities

 

  -       -       -       -       -     

Net realized capital gains

 

  90.8   0.9   91.7   10.1   101.8 

Other than temporary impairment losses

 

  (13.1  -       (13.1  -       (13.1

Noninsurance revenue

 

  10.5   626.8   637.3   13.1   650.4 

Other operating expenses

 

  57.4   591.0       648.4   29.8   678.2 

Corporate administration

 

  0.2   -       0.2   26.4   26.6 

Amortization of intangible assets

 

  (1.2  15.4   14.2   -       14.2 

Interest expense

 

  20.2   3.0   23.2   39.5   62.7 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

 

     $  (130.3    $        20.4    $(109.9   $        (64.4    $(174.3
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio(3):

       

Current year (excluding catastrophe losses)

  63.9  55.8  62.0    

Current year catastrophe losses

  20.3  27.1  21.9    

Prior years

  (5.0%)   (3.8%)   (4.7%)     
 

 

 

 

 

 

 

 

 

 

 

 

    

Total net loss and LAE

  79.2  79.1  79.2    

Expense ratio(4)

  33.4  32.0  33.0    
 

 

 

 

 

 

 

 

 

 

 

 

    

Combined ratio(5)

  112.6  111.1  112.2    
 

 

 

 

 

 

 

 

 

 

 

 

    

 

(1)

Includes elimination of minor reinsurance activity between segments.

(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, OTTI losses, othernoninsurance revenue, other operating expenses, corporate administration, amortization of intangible assets and interest expense. Underwriting profit is anon-GAAP financial measure and does not replace earnings before income taxes determined in accordance with GAAP as a measure of profitability. See “Comment onNon-GAAP Financial Measures” herein for additional detail on the presentation of our results of operations.

(3)

The loss ratio is derived by dividing the amount of net loss and LAE by net premiums earned, all as determined in accordance with GAAP.

(4)

The expense ratio is derived by dividing the amount of commissions, brokerage and other underwriting expenses by net premiums earned, all as determined in accordance with GAAP.

(5)

The combined ratio is the sum of the loss ratio and the expense ratio, all as determined in accordance with GAAP. The combined ratio represents the percentage of each premium dollar a reinsurance or an insurance company has to spend on net loss and LAE, and commissions, brokerage and other underwriting expenses.

Comparison of the Three and Nine Months Ended September 30, 20172018 and 20162017

Premiums.The following table presents our consolidated premiums:

 

  Three Months Ended       Nine Months Ended   
 Three Months Ended
September 30,
   Nine Months Ended
September 30,
     September 30,  Percent    September 30,  Percent
         2017                   2016         Percent Change         2017                   2016         Percent Change   2018  2017  Change    2018  2017  Change
 

($ in millions)

 

   ($ in millions)

Premiums written:

                     

Gross premiums written

 $1,471.8   $1,407.9  4.5 $4,342.7   $4,406.7  (1.5%)     $  1,475.3      $  1,471.8             0.2%      $  4,406.7      $  4,342.7              1.5% 

Net premiums written

 1,260.3   1,236.7  1.9 3,786.5   3,893.2  (2.7%)    1,239.1     1,260.3            (1.7%    3,768.3     3,786.5              (0.5%

Net premiums earned

 1,239.7   1,253.5  (1.1%)  3,692.8   3,736.6  (1.2%)    1,225.4     1,239.7            (1.2%    3,670.2     3,692.8             (0.6%

The increases in gross and net premiums written in the third quarter and first nine months of 20172018 from the third quarter of 2016corresponding 2017 periods are mainlyprimarily attributable to increases at our reinsurance segment, as well as growth at CapSpecialty and RSUI, partially offset by the impact of the sale of PacificComp. The increase in the third quarter at our reinsurance segment is primarily reflectingdue to the impact of TransRe’s purchase of renewal rights associated with a certain block of U.S. treaty reinsurance business focused on regional property and casualty, accident and health and personal auto lines of business, on August 29, 2018, or the “Renewal Rights Purchase,” and an increase in premiums written by the Asia-Pacific operations, partially offset by lower reinstatement premiums written relateddue to the significantsignificantly lower catastrophe losses that occurred in the third quarter of 2017. The increase2018 and the impact of changes in net premiums written in the third quarter of 2017 from the third quarter of 2016 is also due to an increase at our insurance segment, reflecting growth at PacificComp, CapSpecialty and, to a lesser extent, RSUI.foreign currency exchange rates.

The decreases in gross and net premiums writtenincrease in the first nine months of 2017 from the first nine months of 2016 are mainly attributable to decreases2018 at our reinsurance segment primarily related to cancellations,non-renewalsreflects increases in casualty premiums written by the European and reduced participations in certain international treaties,Asia-Pacific operations, the impact of rate pressuresthe Renewal Rights Purchase and increased retentions by cedants and, to a lesser extent, the impact of changes in foreign currency exchange rates, partially offset by gross and neta decrease in reinstatement premiums written due to significantly lower catastrophe losses in the third quarter of 20172018. Gross premiums written related to reinstatement premiums written. The decrease at our reinsurance segment in gross and net premiums written in the first nine months of 2017 from the first nine months of 2016 also reflects lower premiums related to a certain large whole account quota share treaty, or the “Quota Share Treaty.Treaty,Premiums related to the Quota Share Treaty were $205.8$207.2 million and $199.4$205.8 million in the third quarter of 20172018 and 2016,2017, respectively, and $579.9were $578.9 million and $624.2$579.9 million in the first nine months of 2018 and 2017, and 2016, respectively. Premiums related to the Quota Share Treaty

The decreases in net premiums written in the third quarter and first nine months of 20162018 from the corresponding 2017 periods primarily reflect elevatedhigher ceded premiums written in the first quarter of 2016 due to differences between initial premium estimatesan increase in retrocessional coverage purchased in 2018 at contract inception, which were recorded in the fourth quarter of 2015, and actual data subsequently reported. As a consequence of this change in estimate,our reinsurance segment, as well as higher ceded premiums written in the fourth quarter of 2015 were understated andat RSUI, partially offset by higher gross premiums written in the first quarter of 2016 were correspondingly increased. In general, when actual data has not been reported by ceding companies, premiums written are estimated based on historical patterns and other relevant factors. Any differences between these estimates and actual data subsequently reported are recorded in the period when actual data becomes available.written.

The decreases in net premiums earned in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods are primarily reflectattributable to decreases at our insurance segment due to the impact of the sale of PacificComp, partially offset by increases at our reinsurance segment primarily due mainly to a decreaseincreases in netgross premiums written in recent quarters.

quarters, partially offset by higher ceded premiums earned due to an increase in retrocessional coverage purchased in 2018 and lower reinstatement premiums earned due to significantly lower catastrophe losses in the third quarter of 2018. A detailed comparison of premiums by segment for the third quarter and first nine months of 2018 and 2017 and 2016 is more fully describedcontained in the following pages.

Net loss and LAE.The following table presents our consolidated net loss and LAE:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
    
             2017                  2016          Percent Change          2017                  2016          Percent Change 
     

 

($ in millions)

 

 

Net loss and LAE:

       

Current year (excluding catastrophe losses)

   $760.9       $772.9       (1.6%)   $2,291.1       $2,300.2       (0.4%) 

Current year catastrophe losses

   792.5       32.1       2,368.8  807.9       160.0       404.9%  

Prior years

   (61.5)      (86.4)      (28.8%)   (173.0)      (261.7)      (33.9%) 
  

 

 

  

 

 

   

 

 

  

 

 

  

Total net loss and LAE

   $    1,491.9       $    718.6       107.6  $    2,926.0       $    2,198.5       33.1%  
  

 

 

  

 

 

   

 

 

  

 

 

  

Loss ratio:

       

Current year (excluding catastrophe losses)

   61.4%    61.7%     62.0%    61.6%   

Current year catastrophe losses

   63.9%    2.6%     21.9%    4.3%   

Prior years

   (5.0%)   (7.0%)    (4.7%)   (7.1%)  
  

 

 

  

 

 

   

 

 

  

 

 

  

Total net loss and LAE

   120.3%    57.3%     79.2%    58.8%   
  

 

 

  

 

 

   

 

 

  

 

 

  

  Three Months Ended      Nine Months Ended    
  September 30,      Percent       September 30,       Percent    
  2018    2017       Change       2018   2017       Change    
  ($ in millions) 

Net loss and LAE:

           

Current year (excluding catastrophe losses)

   $    794.9         $    760.9                 4.5%     $  2,323.1         $  2,291.1        1.4%  

Current year catastrophe losses

  237.8        792.5        (70.0%)     256.2        807.9        (68.3%) 

Prior years

  (75.0)       (61.5)       22.0%      (212.8)       (173.0)       23.0%  
 

 

 

   

 

 

 

    

 

 

 

  

 

 

 

  

Total net loss and LAE

   $    957.7         $  1,491.9        (35.8%)    $  2,366.5         $  2,926.0        (19.1%) 
 

 

 

   

 

 

 

    

 

 

 

  

 

 

 

  

Loss ratio:

           

Current year (excluding catastrophe losses)

  64.9%     61.4%       63.3%     62.0%    

Current year catastrophe losses

  19.4%     63.9%       7.0%     21.9%    

Prior years

  (6.1%)    (5.0%)      (5.8%)    (4.7%)   
 

 

 

   

 

 

 

    

 

 

 

  

 

 

 

  

Total net loss and LAE

  78.2%     120.3%       64.5%     79.2%    
 

 

 

   

 

 

 

    

 

 

 

  

 

 

 

  

The increasesdecreases in net loss and LAE in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect significant increases insignificantly lower catastrophe losses at our reinsurance and insurance segments.segments, the impact of the sale of PacificComp at our insurance segment and increases in favorable prior accident year loss reserve development, partially offset by increases innon-catastrophe losses at our reinsurance

segment. The catastrophe losses in the third quarter and first nine months of 2018 include $87.7 million related to Typhoon Jebi, $80.2 million related to Hurricane Florence and $38.5 million related to Typhoon Trami. Catastrophe losses in the third quarter and first nine months of 2017 include $264.6 million related to Hurricane Harvey, $312.0 million related to Hurricane Irma and $170.3 million related to Hurricane Maria.

The catastrophe losses in the third quarter of 2016 related primarily to typhoons and floods in China and flooding and severe weather primarily in the State of Louisiana. In addition to the losses in the third quarter of 2016, the catastrophe losses in the first nine months of 2016 included wildfire losses in Alberta, Canada and earthquake losses in Japan and Ecuador.

Net loss and LAE in the first nine months of 2017 for the reinsurance segment includesinclude $24.4 million of unfavorable prior accident year loss reserve development arising fromrelated to the U.K. Ministry of Justice’s decision to significantly reducereduction in the discount rate, referred to as the Ogden rate, used to calculatelump-sum bodily injury payouts in personal injury insurance claims in the U.K.

A detailed comparison of net loss and LAE by segment for the third quarter and first nine months of 2018 and 2017 and 2016 is more fully describedcontained in the following pages.

Commissions, brokerage and other underwriting expenses.The following table presents our consolidated commissions, brokerage and other underwriting expenses:

 

  

Three Months Ended

September 30,

     

Nine Months Ended

September 30,

    
  2017  2016  Percent Change  2017  2016  Percent Change 
  ($ in millions) 

Commissions, brokerage and other underwriting expenses

  $    398.2      $    423.0      (5.9%)   $    1,220.4      $    1,238.7      (1.5%) 

Expense ratio

  32.1%   33.7%    33.0%   33.2%  

 

The decreases in commissions, brokerage and other underwriting expenses in the third quarter and first nine months of 2017 from the corresponding 2016 periods reflect the impact of lower net premiums earned and the impact of losses arising from Hurricanes Harvey, Irma and Maria on short-term incentive compensation expense accruals at our reinsurance segment and RSUI.

 

A comparison of commissions, brokerage and other underwriting expenses for the third quarter and first nine months of 2017 and 2016 is more fully described in the following pages.

 

Underwriting profit. The following table presents our consolidated underwriting (loss) profit:

 

 

 

 

  

Three Months Ended

September 30,

     

Nine Months Ended

September 30,

    
  2017  2016  Percent Change  2017  2016  Percent Change 
  ($ in millions) 

Underwriting (loss) profit

  $    (650.4)     $    111.9      (681.2%)   $    (453.6)     $    299.4      (251.5%) 

Combined ratio

  152.4%   91.0%    112.2%   92.0%  

 

The underwriting losses in the third quarter and first nine months of 2017, compared with underwriting profits in the corresponding 2016 periods primarily reflect significant catastrophe losses from Hurricanes Harvey, Irma and Maria at our reinsurance and insurance segments, as discussed above.

 

A comparison of underwriting profit for the third quarter and first nine months of 2017 and 2016 is more fully described in the following pages.

 

Investment results. The following table presents our consolidated investment results:

 

 

 

 

  

Three Months Ended

September 30,

     

Nine Months Ended

September 30,

    
  2017  2016  Percent Change  2017  2016  Percent Change 
  ($ in millions) 

Net investment income

  $    104.7    $    120.6    (13.2%)   $    321.9    $    332.3    (3.1%) 

Net realized capital gains

  32.9    27.2    21.0%    101.8    117.1    (13.1%) 

Other than temporary impairment losses

  (6.1)   (11.7)   (47.9%)   (13.1)   (38.2)   (65.7%) 

   Three Months Ended    Nine Months Ended   
   September 30,    Percent   September 30,    Percent  
   2018  2017          Change         2018  2017          Change        
   ($ in millions)

Commissions, brokerage and other underwriting expenses

    $    407.7            $    398.2                 2.4   $    1,216.0            $    1,220.4                   (0.4%) 

Expense ratio

   33.3%        32.1%         33.1%        33.0%       

The decreasesincrease in commissions, brokerage and other underwriting expenses in the third quarter of 2018 from the third quarter of 2017 primarily reflects the impact of significantly lower catastrophe losses on short-term incentive compensation accruals at our reinsurance segment and RSUI and an increase in commissions, brokerage and other underwriting expenses at CapSpecialty due primarily to the impact of higher net premiums earned, partially offset by the impact of the sale of PacificComp. The slight decrease in commissions, brokerage and other underwriting expenses in the first nine months of 2018 from first nine months of 2017 primarily reflects the impact of the sale of PacificComp, partially offset by the impact of lower catastrophe losses on short-term incentive compensation accruals at our reinsurance segment and RSUI, and an increase at CapSpecialty in commissions, brokerage and other underwriting expenses due primarily to the impact of higher net premiums earned.

A detailed comparison of commissions, brokerage and other underwriting expenses by segment for the three and nine months ended September 30, 2018 and 2017 is contained in the following pages.

Underwriting profit.The following table presents our consolidated underwriting profit:

   Three Months Ended    Nine Months Ended   
   September 30,  Percent September 30,  Percent
   2018 2017      Change     2018  2017  Change
   ($ in millions)

Underwriting (loss) profit

    $    (140.0)            $    (650.4)                (78.5%)    $    87.7           $    (453.6)                 (119.3%) 

Combined ratio

   111.5%         152.4%           97.6%       112.2%         

The significant decrease in underwriting loss in the third quarter of 2018 from the third quarter of 2017, and the underwriting profit in the first nine months of 2018 compared with the underwriting loss in the first nine months of 2017, primarily reflect significantly lower catastrophe losses at our reinsurance and insurance segments and, to a lesser extent, increases in favorable prior accident year loss reserve development, partially offset by increases innon-catastrophe losses at our reinsurance segment, all as discussed above.

A detailed comparison of underwriting profit by segment for the three and nine months ended September 30, 2018 and 2017 is contained in the following pages.

Investment results.The following table presents our consolidated investment results:

   Three Months Ended    Nine Months Ended   
   September 30,  Percent September 30,  Percent
   2018  2017  Change 2018  2017  Change
   ($ in millions)

Net investment income

     $    127.3         $    104.7        21.6    $    377.7          $    321.9        17.3%    

Change in the fair value of equity securities

   370.2       -            -   512.8        -          -    

Net realized capital gains

   16.2       32.9        (50.8%)   67.2        101.8        (34.0%)   

Other than temporary impairment losses

   -          (6.1)       (100.0%)   (0.5)       (13.1)       (96.2%)   

The increases in net investment income in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily relatereflect increases in partnership income, increases in dividend income resulting from an increase in the size of the equity securities portfolio and, to a lesser extent, higher interest income. The increase in interest income primarily reflects higher yields onshort-term investments and floating-rate debt securities, partially offset by the impact of the sale of PacificComp.

Partnership income in the first nine months of 2018 includes a $12.9 million increase in the carrying value of AIHL’s limited partnership interests in certain subsidiaries of Ares Management LLC, or “Ares,” as of March 15, 2018. See Note 3(h) to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form 10-Q for additional information.

Partnership income in the third quarter and first nine months of 2017 includes losses incurred on our equity interests in Pillar Capital Holdings Limited, or “Pillar Holdings,” and related funds or “Pillar Investments,” arising from significant catastrophe losses incurred in August and September 2017. The decrease in net investmentPartnership income in the first nine months of 2017 also relates toincludes a $12.6 million charge on our equity investment in Ares, Management LLC, or “Ares.” The charge on our equity investment in Ares reflectsreflecting our share of aone-time payment recorded by Ares related to an acquisition by its affiliated entity. In connection with this acquisition, Ares agreed to make certain transaction support payments to the sellers of the acquired entity. Ares expects

In the first quarter of 2018, we adopted new investment accounting guidance which required changes in the fair value of equity securities, except those accounted for under the equity method, to receive future management fees derived frombe recognized in net earnings. In earlier periods, equity securities were considered to be available-for-sale, or “AFS,” and were included in the assets under managementanalysis of the acquired entity.OTTI. See Note 1(c) to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form 10-Q for additional information regarding our adoption of this new guidance.

The increasechanges in the fair value of equity securities in the third quarter and first nine months of 2018 reflect appreciation in the value of our equity securities portfolio, primarily from our holdings in the technology and industrial sectors. To a lesser extent, the changes in the fair value of equity securities in the third quarter and first nine months of 2018 also reflect appreciation in the value of our equity holdings in the healthcare and consumer discretionary sectors, respectively.

The decreases in net realized capital gains in the third quarter and first nine months of 20172018 from the third quartercorresponding 2017 periods primarily reflect a lack of 2016 primarily reflects gains on the sale of certain exchange-traded funds in the third quarter of 2017 that exceeded gains for the equity and bond portfolio in the third quarter of 2016. The decrease in net realized capital gains from equity securities in 2018 as a result of our adoption of the new investment accounting guidance discussed above. The decrease for the first nine months of 2017 from the first nine months of 2016 primarily reflects lower gains for the equity and bond portfolio and aone-time $13.2 million realized gain recorded on April 15, 2016 by Alleghany Capital, as more fully described in the following pages,2018 was partially offset by gainsa $45.7 million gain on the saleAIHL’s conversion of its limited partnership interests in certain exchange-traded fundssubsidiaries of Ares into Ares common units. See Note 3(h) to Notes to Unaudited Consolidated Financial Statements set forth in the third quarterPart I, Item 1, “Financial Statements” of 2017.this Form 10-Q for additional information on AIHL’s conversion.

The decreasesdecrease in OTTI losses in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods reflect decreasesprimarily reflects an absence of impairments from equity securities in OTTI losses related to debt and equity securities.2018 resulting from our adoption of the new investment accounting guidance, as discussed above.

A detailed comparison of investment results for the third quarterthree and first nine months ofended September 30, 2018 and 2017 and 2016 is more fully describedcontained in the following pages.

OtherNoninsurance revenue and expenses.The following table presents our consolidated othernoninsurance revenue and expenses:

 

  

Three Months Ended

September 30,

      

Nine Months Ended

September 30,

      Three Months Ended     Nine Months Ended   
  

2017

  2016   

Percent Change

  2017   2016   

Percent Change

  September 30,  Percent  September 30,  Percent
  ($ in millions)  2018  2017  Change  2018  2017  Change

Other revenue

  $      296.3    $      225.0     31.7%    $      650.4     $      527.8     23.2%  
  ($ in millions)

Noninsurance revenue

    $    438.3        $    296.3       47.9%       $    1,032.7       $    650.4      58.8%   

Other operating expenses

  277.9     228.4     21.7%     678.2      575.5     17.8%     415.3       277.9       49.4%      1,023.5      678.2      50.9%   

Corporate administration

  (4.7)    10.7     (143.9%)    26.6      34.0     (21.8%) 

Corporation administration

   19.1       (4.7)      (506.4%)     41.0      26.6      54.1%   

Amortization of intangible assets

  5.7     6.0     (5.0%)    14.2      14.5     (2.1%)    5.5       5.7       (3.5%)     16.8      14.2      18.3%   

Interest expense

  20.8     20.7     0.5%     62.7      61.4     2.1%     22.2       20.8       6.7%      66.0      62.7      5.3%   

OtherNoninsurance revenue and Other operating expenses. OtherNoninsurance revenue and other operating expenses primarily include sales revenues and expenses associated with our Alleghany Capital.Capital segment. Other operating expenses also include the long-term incentive compensation atof our reinsurance and insurance segments, which totaled $5.4$19.9 million and $19.4$5.4 million in the third quarter of 20172018 and 2016,2017, respectively, and $50.4$52.5 million and $61.5$50.4 million in the first nine months of 20172018 and 2016,2017, respectively. The decreasesincreases in long-term incentive compensation at our reinsurance and insurance segments in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect the impact of significantly lower catastrophe losses arising from Hurricanes Harvey, Irma and Maria on long-term incentive compensation expenseaccruals at TransRe and RSUI, partially offset by the impact of declines in unrealized appreciation on our debt securities portfolio in the third quarter and first nine months of 2018 on long-term incentive compensation accruals at TransRe and RSUI.

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 Holdings, LP, or “Hirschfeld,” a fabricator of steel bridges and structural steel for $164.5 million, including $163.9 million in cash paid on May 1, 2017stadiums, airports and $0.6 million of estimated purchase price adjustments.other large commercial and industrial projects, for $111.3 million.

The increases in othernoninsurance revenue in the third quarter and first nine months of 2017 from the corresponding 2016 periods primarily reflect the acquisition of W&W|AFCO Steel. The increases in other operating expenses in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect the acquisition of Hirschfeld and, for the first nine months of 2018, the acquisition of W&W|AFCO Steel, partially offset by decreases in the long-term incentive compensation of our reinsurance and insurance segments.Steel. The increase in other operating expenses in the first nine monthsthird quarter of 2018 from the third quarter of 2017 from the first nine months of 2016 also reflects finders fees, legalan increase in long-term incentive compensation at our reinsurance and accounting costs and other transaction-related expenses at the Alleghany Capital level.insurance segments, as discussed above.

Corporate administration.The corporate administration expense in the third quarter of 2018, compared with negative corporate administration expense in the third quarter of 2017, compared with corporate administration expense in the third quarter of 2016, and the decreaseincrease in corporate administration expense in the first nine months of 20172018 from the first nine months of 2016,2017, primarily reflect increases in Alleghany’s long-term incentive compensation accruals. Such increases in accruals primarily reflect the impact of significantly lower catastrophe losses arising from Hurricanes Harvey, Irma and Mariaincreases in the price per share of our common stock during the 2018 periods, partially offset by the impact of declines in unrealized appreciation on long-term incentive compensation expense accruals at Alleghany.

Amortization of intangible assets.The decreases in amortization expensesour debt securities portfolio in the third quarter and first nine months of 2017 from the corresponding 2016 periods primarily reflect decreases2018.

Amortization of intangible assets.The increase in amortization expense at IPS, as certainin the first nine months of IPS’s intangible assets were fully amortized as2018 from the first nine months of December 31, 2016, partially offset by2017 primarily reflects the amortization of net intangible assets related to the acquisition ofHirschfeld and W&W|AFCO Steel.Steel acquisitions.

Interest expense.The increases in interest expense in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect new or increased borrowings at Bourn & Koch and Jazwares and borrowings at W&W|AFCO Steel.Steel and Hirschfeld.

A detailed comparison of noninsurance revenues and expenses for the three and nine months ended September 30, 2018 and 2017 is contained in the following pages.

Income taxes.The following table presents our consolidated income tax expense:

 

  

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

  
  

2017

 2016  

Percent Change

 

2017

 

2016

 

Percent Change

  ($ in millions)

Income taxes

   $    (212.3)    $    48.4    (538.6%)    $    (116.3)     $    162.3    (171.7%) 

Effective tax rate

    66.8% 29.3% 

 

The income tax benefits in the third quarter and first nine months of 2017 compared with income tax expenses in the corresponding 2016 periods reflect the impact of taxable losses arising from Hurricanes Harvey, Irma and Maria. The 66.8 percent effective tax rate is calculated based on actual results through September 30, 2017, because management was not able to reliably estimate the annual effective tax rate in light of the recent catastrophe losses incurred. In addition, income taxes in the first nine months of 2016 include prior period income tax expense adjustments. The effective tax rate in the first nine months of 2017 compared with the first nine months of 2016 primarily reflects income tax benefits from taxable losses arising from Hurricanes Harvey, Irma and Maria in the first nine months of 2017, and prior period income tax expense adjustments in the first nine months of 2016, which include $16.1 million ofout-of-period reductions to current and deferred TransRe tax assets recorded in the first nine months of 2016 that relate primarily to periods prior to our merger with TransRe in 2012.

 

Earnings.The following table presents our consolidated earnings:

 

  

Three Months Ended

September 30,

    

Nine Months Ended

September 30,

  
  

2017

 2016  

Percent Change

 

2017

 

2016

 

Percent Change

  ($ in millions)

(Losses) earnings before income taxes

   $    (522.3)    $    207.2    (352.1%)    $    (174.3)     $    553.0    (131.5%) 

Net (losses) earnings attributable to Alleghany
stockholders

 (314.2)   155.8    (301.7%)  (63.2)   387.4    (116.3%) 
   Three Months Ended      Nine Months Ended    
   September 30,   Percent  September 30,   Percent
   2018   2017  Change  2018   2017   Change
   ($ in millions) 

Income taxes

    $    60.4       $    (212.3)      (128.5%)        $    171.2           $    (116.3)        (247.2%)   

Effective tax rate

         18.4%      66.8%      

The income taxes in the third quarter and first nine months of 2018, compared with income tax benefits in the corresponding 2017 periods, primarily reflect the impact of significantly lower taxable catastrophe losses and the taxable income from appreciation in the value of our equity securities portfolio resulting from our adoption of new investment accounting guidance in 2018, all as discussed above. The 66.8 percent effective tax rate for the first nine months of 2017 was calculated based on actual results through September 30, 2017 because management was not able to reliably estimate the annual effective tax rate in light of the significant catastrophe losses incurred in the third quarter of 2017. The decrease in the effective tax rate in the first nine months of 2018 from the first nine months of 2017 primarily reflects the decrease in the U.S. corporate federal income tax rate from 35.0 percent to 21.0 percent due to the Tax Cuts and Jobs Act of 2017, or the “Tax Act,” and losses before income taxes in the first nine months of 2017, which magnified the impact of certain tax adjustments, partially offset by new limitations on certain deductions as a result of the Tax Act.

Net earnings.The following table presents our consolidated earnings:

  Three Months Ended       Nine Months Ended    
  September 30,   Percent   September 30,  Percent 
  2018   2017   Change   2018   2017  Change 
  ($ in millions) 

Earnings (losses) before income taxes

    $    349.9        $  (522.3)          (167.0%)      $    930.3        $  (174.3)     (633.7%)   

Net earnings (losses) attributable to Alleghany stockholders

  284.9      (314.2)      (190.7%)      751.6      (63.2)       (1,289.2%)   

The earnings before income taxes and net earnings attributable to Alleghany stockholders in the third quarter and first nine months of 2018, compared with the losses before income taxes and net losses attributable to Alleghany stockholders in the third quarter and first nine months ofcorresponding 2017 compared with earnings before income taxes and net earnings attributable to Alleghany stockholders in the corresponding 2016 periods, primarily reflect significantsignificantly lower catastrophe losses and appreciation in the value of our equity securities portfolio resulting from Hurricanes Harvey, Irma and Maria at our reinsurance and insurance segments,adoption of new investment accounting guidance in 2018, all as discussed above.

Reinsurance Segment Underwriting Results

The reinsurance segment is comprised of TransRe’s property and casualty & other lines of business. TransRe also writes a modest amount of property and casualty insurance business, which is included in the reinsurance segment. For a more detailed description of our reinsurance segment, see Part I, Item 1, “Business—Segment Information—Reinsurance Segment” of the 20162017 Form 10-K.

The underwriting results of the reinsurance segment are presented below.

 

Three Months Ended September 30, 2017

  Property   Casualty &
Other(1)
   Total 

Three Months Ended September 30, 2018

  Property   Casualty &
Other(1)
   Total 
  ($ in millions)   ($ in millions) 

Gross premiums written

    $    445.5          $    681.1          $    1,126.6           $       451.4           $     685.9           $      1,137.3      

Net premiums written

   329.0         649.5         978.5         331.1         654.1         985.2      

Net premiums earned

   310.8         642.4         953.2         326.5         635.0         961.5      
  

 

   

 

   

 

 

Net loss and LAE:

            

Current year (excluding catastrophe losses)

   162.0         431.0         593.0         194.6         460.1         654.7      

Current year catastrophe losses

   506.0         70.0         576.0         195.8         -            195.8      

Prior years

   (8.1)        (41.7)        (49.8)        (2.8)        (38.7)        (41.5)     
  

 

   

 

   

 

   

 

   

 

   

 

 

Total net loss and LAE

   659.9         459.3         1,119.2         387.6         421.4         809.0      

Commissions, brokerage and other underwriting expenses

   105.2         203.7         308.9         113.3         211.6         324.9      
  

 

   

 

   

 

   

 

   

 

   

 

 

Underwriting (loss)(2)

    $    (454.3)         $    (20.6)         $    (474.9)     

Underwriting (loss) profit(2)

     $      (174.4)          $         2.0           $       (172.4)     
  

 

   

 

   

 

   

 

   

 

   

 

 

Loss ratio(3):

            

Current year (excluding catastrophe losses)

   52.1%      67.1%      62.3%      59.6%       72.5%       68.1%    

Current year catastrophe losses

   162.8%      10.9%      60.4%      60.0%       -    %       20.4%    

Prior years

   (2.6%)     (6.5%)     (5.2%)     (0.9%)     (6.1%)     (4.4%)  
  

 

   

 

   

 

   

 

   

 

   

 

 

Total net loss and LAE

   212.3%      71.5%      117.5%      118.7%       66.4%       84.1%    

Expense ratio(4)

   33.8%      31.7%      32.3%      34.7%       33.3%       33.8%    
  

 

   

 

   

 

   

 

   

 

   

 

 

Combined ratio(5)

   246.1%      103.2%      149.8%      153.4%       99.7%       117.9%    
  

 

   

 

   

 

   

 

   

 

   

 

 

Three Months Ended September 30, 2016

  Property   Casualty &
Other(1)
   Total 
   ($ in millions) 

Gross premiums written

    $    400.2          $    665.2          $    1,065.4      

Net premiums written

   320.5         646.4         966.9      

Net premiums earned

   314.6         654.8         969.4      

Net loss and LAE:

      

Current year (excluding catastrophe losses)

   147.0         462.6         609.6      

Current year catastrophe losses

   21.4         0.2         21.6      

Prior years

   (10.8)        (58.2)        (69.0)     
  

 

 

   

 

 

   

 

 

 

Total net loss and LAE

   157.6         404.6         562.2      

Commissions, brokerage and other underwriting expenses

   105.4         227.7         333.1      
  

 

 

   

 

 

   

 

 

 

Underwriting profit(2)

    $    51.6          $    22.5          $    74.1      
  

 

 

   

 

 

   

 

 

 

Loss ratio(3):

      

Current year (excluding catastrophe losses)

   46.7%      70.6%      62.8%   

Current year catastrophe losses

   6.8%      -  %      2.2%   

Prior years

   (3.4%)     (8.9%)     (7.1%)  
  

 

 

   

 

 

   

 

 

 

Total net loss and LAE

   50.1%      61.7%      57.9%   

Expense ratio(4)

   33.5%      34.8%      34.4%   
  

 

 

   

 

 

   

 

 

 

Combined ratio(5)

   83.6%      96.5%      92.3%   
  

 

 

   

 

 

   

 

 

 

Nine Months Ended September 30, 2017

  Property   Casualty &
Other(1)
   Total 
   ($ in millions) 

Gross premiums written

    $    1,190.0          $    2,037.7          $    3,227.7      

Net premiums written

   931.4         1,975.3         2,906.7      

Net premiums earned

   868.1         1,968.7         2,836.8      

Net loss and LAE:

      

Current year (excluding catastrophe losses)

   461.2         1,352.9         1,814.1      

Current year catastrophe losses

   506.0         70.0         576.0      

Prior years

   (62.6)        (78.2)        (140.8)     
  

 

 

   

 

 

   

 

 

 

Total net loss and LAE

   904.6         1,344.7         2,249.3      

Commissions, brokerage and other underwriting expenses

   283.7         662.9         946.6      
  

 

 

   

 

 

   

 

 

 

Underwriting (loss)(2)

    $    (320.2)         $    (38.9)         $    (359.1)     
  

 

 

   

 

 

   

 

 

 

Loss ratio(3):

      

Current year (excluding catastrophe losses)

   53.1%      68.7%      63.9%   

Current year catastrophe losses

   58.3%      3.6%      20.3%   

Prior years

   (7.2%)     (4.0%)     (5.0%)  
  

 

 

   

 

 

   

 

 

 

Total net loss and LAE

   104.2%      68.3%      79.2%   

Expense ratio(4)

   32.7%      33.7%      33.4%   
  

 

 

   

 

 

   

 

 

 

Combined ratio(5)

   136.9%      102.0%      112.6%   
  

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2017

  Property Casualty &
Other(1)
 Total
   ($ in millions)

Gross premiums written

    $      445.5    $      681.1    $      1,126.6 

Net premiums written

   329.0   649.5   978.5 

Net premiums earned

   310.8   642.4   953.2 
  

 

 

 

 

 

 

 

 

 

 

 

Net loss and LAE:

    

Current year (excluding catastrophe losses)

   162.0   431.0   593.0 

Current year catastrophe losses

   506.0   70.0   576.0 

Prior years

   (8.1  (41.7  (49.8
  

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

   659.9   459.3   1,119.2 

Commissions, brokerage and other underwriting expenses

   105.2   203.7   308.9 
  

 

 

 

 

 

 

 

 

 

 

 

Underwriting (loss)(2)

  

 

  $

 

        (454.3

 

   $(20.6   $(474.9
  

 

 

 

 

 

 

 

 

 

 

 

Loss ratio(3):

    

Current year (excluding catastrophe losses)

   52.1  67.1  62.3

Current year catastrophe losses

   162.8  10.9  60.4

Prior years

   (2.6%)   (6.5%)   (5.2%) 
  

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

   212.3  71.5  117.5

 

Expense ratio(4)

   33.8  31.7  32.3
  

 

 

 

 

 

 

 

 

 

 

 

Combined ratio(5)

  

 

 

 

246.1

 

  103.2  149.8
  

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2018

  Property Casualty &
Other(1)
 Total
   ($ in millions)

Gross premiums written

    $        1,193.7    $2,130.9    $3,324.6 

Net premiums written

   912.1   2,046.8   2,958.9 

Net premiums earned

   893.7   2,009.3   2,903.0 
  

 

 

 

 

 

 

 

 

 

 

 

Net loss and LAE:

    

Current year (excluding catastrophe losses)

   499.7   1,410.2   1,909.9 

Current year catastrophe losses

   195.8   -       195.8 

Prior years

   (57.8  (105.9  (163.7
  

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

   637.7   1,304.3   1,942.0 

Commissions, brokerage and other underwriting expenses

   301.2   663.6   964.8 
  

 

 

 

 

 

 

 

 

 

 

 

Underwriting (loss) profit(2)

  

 

  $

 

(45.2

 

   $41.4    $(3.8
  

 

 

 

 

 

 

 

 

 

 

 

Loss ratio(3):

    

Current year (excluding catastrophe losses)

   55.9  70.2  65.8

Current year catastrophe losses

   21.9  -      6.7

Prior years

   (6.5%)   (5.3%)   (5.6%) 
  

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

   71.3  64.9  66.9

 

Expense ratio(4)

   33.7  33.0  33.2
  

 

 

 

 

 

 

 

 

 

 

 

Combined ratio(5)

  

 

 

 

105.0

 

  97.9  100.1
  

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 Property  Casualty &
Other(1)
  Total 
  ($ in millions) 

Gross premiums written

   $    1,173.3         $    2,136.7         $    3,310.0      

Net premiums written

  945.1        2,088.3        3,033.4      

Net premiums earned

  857.9        2,030.6        2,888.5      

Net loss and LAE:

   

Current year (excluding catastrophe losses)

  418.7        1,419.5        1,838.2      

Current year catastrophe losses

  115.5        1.9        117.4      

Prior years

  (79.3)       (138.7)       (218.0)     
 

 

 

  

 

 

  

 

 

 

Total net loss and LAE

  454.9        1,282.7        1,737.6      

Commissions, brokerage and other underwriting expenses

  275.6        693.6        969.2      
 

 

 

  

 

 

  

 

 

 

Underwriting profit(2)

   $    127.4         $    54.3         $    181.7      
 

 

 

  

 

 

  

 

 

 

Loss ratio(3):

   

Current year (excluding catastrophe losses)

  48.8%     69.9%     63.6%   

Current year catastrophe losses

  13.5%     0.1%     4.1%   

Prior years

  (9.2%)    (6.8%)    (7.4%)  
 

 

 

  

 

 

  

 

 

 

Total net loss and LAE

  53.1%     63.2%     60.3%   

Expense ratio(4)

  32.1%     34.2%     33.6%   
 

 

 

  

 

 

  

 

 

 

Combined ratio(5)

  85.2%     97.4%     93.9%   
 

 

 

  

 

 

  

 

 

 

Nine Months Ended September 30, 2017

  Property Casualty &
Other(1)
 Total
   ($ in millions)

Gross premiums written

    $      1,190.0    $      2,037.7    $      3,227.7 

Net premiums written

   931.4   1,975.3   2,906.7 

Net premiums earned

   868.1   1,968.7   2,836.8 
  

 

 

 

 

 

 

 

 

 

 

 

Net loss and LAE:

    

Current year (excluding catastrophe losses)

   461.2   1,352.9   1,814.1 

Current year catastrophe losses

   506.0   70.0   576.0 

Prior years

   (62.6  (78.2  (140.8
  

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

   904.6   1,344.7   2,249.3 

Commissions, brokerage and other underwriting expenses

   283.7   662.9   946.6 
  

 

 

 

 

 

 

 

 

 

 

 

Underwriting (loss)(2)

  

 

  $

 

    (320.2

 

   $      (38.9   $    (359.1
  

 

 

 

 

 

 

 

 

 

 

 

Loss ratio(3):

    

Current year (excluding catastrophe losses)

   53.1  68.7  63.9

Current year catastrophe losses

   58.3  3.6  20.3

Prior years

   (7.2%)   (4.0%)   (5.0%) 
  

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

   104.2  68.3  79.2

Expense ratio(4)

   32.7  33.7  33.4
  

 

 

 

 

 

 

 

 

 

 

 

Combined ratio(5)

  

 

 

 

136.9

 

  102.0  112.6
  

 

 

 

 

 

 

 

 

 

 

 

 

(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)

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, othernoninsurance revenue, other operating expenses, corporate administration, amortization of intangible assets and interest expense. Underwriting profit is anon-GAAP financial measure and does not replace earnings before income taxes determined in accordance with GAAP as a measure of profitability. See “Comment onNon-GAAP Financial Measures” herein for additional detail on the presentation of our results of operations.

(3)

The loss ratio is derived by dividing the amount of net loss and LAE by net premiums earned, all as determined in accordance with GAAP.

(4)

The expense ratio is derived by dividing the amount of commissions, brokerage and other underwriting expenses by net premiums earned, all as determined in accordance with GAAP.

(5)

The combined ratio is the sum of the loss ratio and the expense ratio, all as determined in accordance with GAAP. The combined ratio represents the percentage of each premium dollar a reinsurance or an insurance company has to spend on net loss and LAE, and commissions, brokerage and other underwriting expenses.

Reinsurance Segment: Premiums.The following table presents premiums for the reinsurance segment:

 

  Three Months Ended   Nine Months Ended   
  Three Months Ended
September 30,
       Nine Months Ended
September 30,
       September 30, Percent September 30, Percent 
  2017   2016   Percent Change   2017   2016   Percent Change   2018 2017       Change       2018 2017       Change       
  ($ in millions)   ($ in millions) 

Property

                   

Premiums written:

                   

Gross premiums written

    $    445.5       $    400.2      11.3%       $    1,190.0       $    1,173.3      1.4%       $451.4      $445.5    1.3%      $  1,193.7      $  1,190.0    0.3%   

Net premiums written

   329.0      320.5      2.7%      931.4      945.1      (1.4%)     331.1    329.0    0.6%    912.1    931.4    (2.1%)  

Net premiums earned

   310.8      314.6      (1.2%)     868.1      857.9      1.2%      326.5    310.8    5.1%    893.7    868.1    2.9%   

Casualty & other

                   

Premiums written:

                   

Gross premiums written

    $    681.1       $    665.2      2.4%       $    2,037.7       $    2,136.7      (4.6%)      $685.9      $681.1    0.7%      $  2,130.9      $  2,037.7    4.6%   

Net premiums written

   649.5      646.4      0.5%      1,975.3      2,088.3      (5.4%)     654.1    649.5    0.7%    2,046.8    1,975.3    3.6%   

Net premiums earned

   642.4      654.8      (1.9%)     1,968.7      2,030.6      (3.0%)     635.0    642.4    (1.2%)   2,009.3    1,968.7    2.1%   

Total

                   

Premiums written:

                       

Gross premiums written

    $    1,126.6       $    1,065.4      5.7%       $    3,227.7       $    3,310.0      (2.5%)      $  1,137.3      $  1,126.6    0.9%      $  3,324.6      $3,227.7    3.0%   

Net premiums written

   978.5      966.9      1.2%      2,906.7      3,033.4      (4.2%)     985.2    978.5    0.7%    2,958.9    2,906.7    1.8%   

Net premiums earned

   953.2      969.4      (1.7%)     2,836.8      2,888.5      (1.8%)     961.5    953.2    0.9%    2,903.0    2,836.8    2.3%   

Property.The increase in gross premiums written in the third quarter of 20172018 from the third quarter of 20162017 primarily reflects reinstatementhigher property-related premiums written related to the significant catastrophe losses that occurred in the third quarter of 2017 and, to a lesser extent,Quota Share Treaty, partially offset by the impact of changes in foreign currency exchange rates.rates and lower reinstatement premiums written due to significantly lower catastrophe losses in the third quarter of 2018. The increase in gross premiums written forin the first nine months of 2018 from the first nine months of 2017 from the first nine months of 2016 primarily reflects reinstatementincreases in premiums written partially offset by cancellations,non-renewals and reduced participations in certain international treatiesthe Asia-Pacific operations and the impact of changes in foreign currency exchange rates.rates, partially offset by a decline in property-related premiums written related to the Quota Share Treaty and lower reinstatement premiums written due to significantly lower catastrophe losses in the first nine months of 2018. Gross premiums written related to the Quota Share Treaty were $92.5$113.4 million and $93.5$92.5 million in the third quarter of 20172018 and 2016,2017, respectively, and $263.2$224.0 million and $265.3$263.2 million in the first nine months of 20172018 and 2016,2017, respectively. Excluding the impact of changes in foreign currency exchange rates, gross premiums written increased 10.92.7 percent and decreased 0.1 percent, respectively, in the third quarter of 2017 from the third quarter of 2016, and 1.7 percent in the first nine months of 20172018 from the first nine months of 2016.corresponding 2017 periods.

The decreaseincrease in net premiums earned in the third quarter of 20172018 from the third quarter of 20162017 primarily reflects a decreasean increase in netgross premiums written in recent quarters, partially offset by $32.1 million of netlower reinstatement premiums earned relatedwritten due to the significantsignificantly lower catastrophe losses that occurred in the third quarter of 2017.2018 and the impact of changes in foreign currency exchange rates. The increase in net premiums earned in the first nine months of 20172018 from the first nine months of 2016 primarily reflects increased premiums earned related to the Quota Share Treaty and $32.1 million of net reinstatement premiums earned, partially offset by a decrease in net premiums written in recent quarters. Excluding the impact of changes in foreign currency exchange rates, net premiums earned decreased 1.5 percent in the third quarter of 2017 from the third quarter of 2016, and increased 1.7 percent in the first nine months of 2017 from the first nine months of 2016.

Casualty & other. The increase in gross premiums written in the third quarter of 2017 from the third quarter of 2016 primarily reflects an increase in premiums written related to the Quota Share Treaty and reinstatement premiums written related to the significant catastrophe losses that occurred in the third quarter of 2017. The decrease in gross premiums written in the first nine months of 2017 from the first nine months of 2016 primarily reflects cancellations,non-renewals and reduced participations in certain international treaties, as well as the impact of rate pressures and increased retentions by cedants, the impact of changes in foreign currency exchange rates and a decrease in casualty-related premiums written related to the Quota Share Treaty, partially offset by reinstatement premiums written related to the significant catastrophe losses that occurred in the third quarter of 2017. Gross premiums written related to the Quota Share Treaty were $113.3 million and $105.9 million in the third quarter of 2017 and 2016, respectively, and $316.7 million and $358.9 million in the first nine months of 2017 and 2016, respectively. Premiums related to the Quota Share Treaty in the first nine months of 2016 reflect elevated premiums written in the first quarter of 2016 due to differences between initial premium estimates at contract inception, which were recorded in the fourth quarter of 2015, and actual data subsequently reported. As a consequence of this change in estimate, premiums written in the fourth quarter of 2015 were understated and premiums written in the first quarter of 2016 were correspondingly increased. In general, when actual data has not been reported by ceding companies, premiums written are estimated based on historical patterns and other relevant factors. Any differences between these estimates and actual data subsequently reported are recorded in the period when actual data becomes available. Excluding the impact of changes in foreign currency exchange

rates, gross premiums written increased 2.3 percent in the third quarter of 2017 from the third quarter of 2016, and decreased 3.9 percent in the first nine months of 2017 from the first nine months of 2016.

The decrease in net premiums earned in the third quarter of 2017 from the third quarter of 2016 primarily reflects a decrease in net premiums written in recent quarters, partially offset by $5.0 million of net reinstatement premiums earned related to the significant catastrophe losses that occurred in the third quarter of 2017. The decrease in net premiums earned in the first nine months of 2017 from the first nine months of 2016 primarily reflects the decline in net premiums written in recent quarters and the impact of changes in foreign currency exchange rates, partially offset by $5.0 million of nethigher ceded premiums earned due to an increase in retrocessional coverage purchased and lower reinstatement premiums earned.written due to significantly lower catastrophe losses in the first nine months of 2018. Reinstatement premiums earned on 2018 catastrophe losses in the third quarter and first nine months of 2018 were $10.8 million, compared with $32.1 million on 2017 catastrophe losses in the third quarter and first nine months of 2017. Excluding the impact of changes in foreign currency exchange rates, net premiums earned increased 6.5 percent and 2.3 percent, respectively, in the third quarter and first nine months of 2018 from the corresponding 2017 periods.

Casualty & other.The increase in gross premiums written in the third quarter of 2018 from the third quarter of 2017 primarily reflects increases in premiums written by the Asia-Pacific operations and the impact of the Renewal Rights Purchase, partially offset by lower casualty-related premiums written related to the Quota Share Treaty, the impact of changes in foreign currency exchange rates and lower reinstatement premiums written due to significantly lower catastrophe losses in the third quarter of 2018. The increase in gross premiums written in the first nine months of 2018 from the first nine months of 2017 primarily reflects increases in premiums written by the European and Asia-Pacific operations, higher casualty-related premiums written related to the Quota Share Treaty, the impact of the Renewal Rights Purchase and the impact of changes in foreign currency exchange rates, partially offset by reinstatement premiums written from catastrophe losses in the third quarter of 2017. Gross premiums written related to the Quota Share Treaty were $93.8 million and $113.3 million in the third quarter of 2018 and 2017, respectively, and $354.9 million and $316.7 million in the first nine months of 2018 and 2017, respectively. Excluding the impact of changes in foreign currency exchange rates, gross premiums written increased 1.6 percent and 3.9 percent, respectively, in the third quarter and first nine months of 2018 from the corresponding 2017 periods.

The decrease in net premiums earned in the third quarter of 2018 from the third quarter of 2017 primarily reflects the impact of changes in foreign currency exchange rates and reinstatement premiums earned from catastrophe losses in the third quarter of 2017, partially offset by an increase in gross premiums written in recent quarters. The increase in net premiums earned in the first nine months of 2018 from the first nine months of 2017 primarily reflects an increase in gross premiums written in recent quarters and the impact of changes in foreign currency exchange rates, partially offset by reinstatement premiums earned from catastrophe losses in the first nine months of 2017. Excluding the impact of changes in foreign currency exchange rates, net premiums earned decreased 2.00.2 percent in the third quarter of 20172018 from the third quarter of 2016,2017, and decreased 2.1increased 1.5 percent in the first nine months of 20172018 from the first nine months of 2016.2017.

Reinsurance Segment: Net loss and LAE.The following table presents net loss and LAE for the reinsurance segment:

 

 Three Months Ended   Nine Months Ended  
 Three Months Ended
September 30,
   Nine Months Ended
September 30,
    September 30,     Percent     September 30,       Percent      
 2017 2016 Percent Change 2017 2016 Percent Change  2018 2017     Change     2018 2017       Change      
 ($ in millions)    ($ in millions)

Property

            

Net loss and LAE:

            

Current year (excluding catastrophe losses)

   $    162.0         $    147.0       10.2%      $    461.2         $    418.7       10.2%      $194.6    $162.0  20.1   $499.7    $461.2  8.3

Current year catastrophe losses

 506.0       21.4       2,264.5%    506.0       115.5       338.1%    195.8  506.0  (61.3%)  195.8  506.0  (61.3%) 

Prior years

 (8.1)      (10.8)      (25.0%)   (62.6)      (79.3)      (21.1%)   (2.8 (8.1 (65.4%)  (57.8 (62.6 (7.7%) 
 

 

  

 

   

 

  

 

   

 

 

 

  

 

 

 

 

Total net loss and LAE

   $    659.9         $    157.6       318.7%      $    904.6         $    454.9       98.9%      $387.6    $659.9  (41.3%)    $637.7    $904.6  (29.5%) 
 

 

  

 

   

 

  

 

   

 

 

 

  

 

 

 

 

Loss ratio:

            

Current year (excluding catastrophe losses)

 52.1%    46.7%     53.1%    48.8%     59.6 52.1  55.9 53.1 

Current year catastrophe losses

 162.8%    6.8%     58.3%    13.5%     60.0 162.8  21.9 58.3 

Prior years

 (2.6%)   (3.4%)    (7.2%)   (9.2%)    (0.9%)  (2.6%)   (6.5%)  (7.2%)  
 

 

  

 

   

 

  

 

   

 

 

 

  

 

 

 

 

Total net loss and LAE

 212.3%    50.1%     104.2%    53.1%     118.7 212.3  71.3 104.2 
 

 

  

 

   

 

  

 

   

 

 

 

  

 

 

 

 

Casualty & other

            

Net loss and LAE:

            

Current year (excluding catastrophe losses)

   $    431.0         $    462.6       (6.8%)     $    1,352.9         $    1,419.5       (4.7%)     $460.1    $431.0  6.8   $1,410.2    $1,352.9  4.2

Current year catastrophe losses

 70.0       0.2       34,900%    70.0       1.9       3,584%     -      70.0  (100.0%)   -      70.0  (100.0%) 

Prior years

 (41.7)      (58.2)      (28.4%)   (78.2)      (138.7)      (43.6%)   (38.7 (41.7 (7.2%)  (105.9 (78.2 35.4
 

 

  

 

   

 

  

 

   

 

 

 

  

 

 

 

 

Total net loss and LAE

   $    459.3         $    404.6       13.5%      $    1,344.7         $    1,282.7       4.8%      $    421.4    $  459.3  (8.3%)    $  1,304.3    $  1,344.7  (3.0%) 
 

 

  

 

   

 

  

 

   

 

 

 

  

 

 

 

 

Loss ratio:

            

Current year (excluding catastrophe losses)

 67.1%    70.6%     68.7%    69.9%     72.5 67.1  70.2 68.7 

Current year catastrophe losses

 10.9%    -    %     3.6%    0.1%     -     10.9  -     3.6 

Prior years

 (6.5%)   (8.9%)    (4.0%)   (6.8%)    (6.1%)  (6.5%)   (5.3%)  (4.0%)  
 

 

  

 

   

 

  

 

   

 

 

 

  

 

 

 

 

Total net loss and LAE

 71.5%    61.7%     68.3%    63.2%     66.4 71.5  64.9 68.3 
 

 

  

 

   

 

  

 

   

 

 

 

  

 

 

 

 

Total

            

Net loss and LAE:

            

Current year (excluding catastrophe losses)

   $    593.0         $    609.6       (2.7%)     $    1,814.1         $    1,838.2       (1.3%)     $654.7    $593.0  10.4   $1,909.9    $1,814.1  5.3

Current year catastrophe losses

 576.0       21.6       2,566.7%    576.0       117.4       390.6%    195.8  576.0  (66.0%)  195.8  576.0  (66.0%) 

Prior years

 (49.8)      (69.0)      (27.8%)   (140.8)      (218.0)      (35.4%)   (41.5 (49.8 (16.7%)  (163.7 (140.8 16.3
 

 

  

 

   

 

  

 

   

 

 

 

  

 

 

 

 

Total net loss and LAE

   $    1,119.2         $    562.2       99.1%      $    2,249.3         $    1,737.6       29.4%      $809.0    $  1,119.2  (27.7%)    $1,942.0    $2,249.3  (13.7%) 
 

 

  

 

   

 

  

 

   

 

 

 

  

 

 

 

 

Loss ratio:

            

Current year (excluding catastrophe losses)

 62.3%    62.8%     63.9%    63.6%     68.1 62.3  65.8 63.9 

Current year catastrophe losses

 60.4%    2.2%     20.3%    4.1%     20.4 60.4  6.7 20.3 

Prior years

 (5.2%)   (7.1%)    (5.0%)   (7.4%)    (4.4%)  (5.2%)   (5.6%)  (5.0%)  
 

 

  

 

   

 

  

 

   

 

 

 

  

 

 

 

 

Total net loss and LAE

 117.5%    57.9%     79.2%    60.3%     84.1 117.5  66.9 79.2 
 

 

  

 

   

 

  

 

   

 

 

 

  

 

 

 

 

Property.The increasesdecreases in net loss and LAE in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect highersignificantly lower catastrophe losses, partially offset by highernon-catastrophelosses. The catastrophe losses in the third quarter and first nine months of 2018 include $87.7 million related to Typhoon Jebi, $46.2 million related to Hurricane Florence, $38.5 million related to Typhoon Trami and $23.4 million from several severe weather events in East Asia. Catastrophe losses in the third quarter and first nine months of 2017 include $160.7 million related to Hurricane Harvey in August 2017, $175.0 million related to Hurricane Irma in September 2017, $142.4 million related to Hurricane Maria in September 2017 and $27.9 million related to earthquakes in Mexico in September 2017. The catastrophe losses in the first nine months of 2016 relate to wildfire losses in Alberta, Canada, earthquake losses in Japan and earthquake losses in Ecuador, all of which occurred in the second quarter of 2016, and catastrophe losses in the third quarter of 2016 that relate primarily to typhoons and floods in China.

Net loss and LAE in the third quarter and first nine months of 20172018 and 20162017 include (favorable) unfavorable prior accident year loss reserve development as shownpresented in the table below.

 

  

Three Months Ended

September 30,

 

Nine Months Ended

September 30,

  

            Three Months Ended             

September 30,

 

            Nine Months Ended             

September 30,

 
  2017 2016 2017 2016  2018 2017 2018 2017 
  ($ in millions)  ($ in millions) 

Catastrophe events

   $        (7.8)  (1)   $        (1.2)  (2)   $        (12.2)  (1)   $(9.0)  (2)    $9.6(1)     $(7.8)(2)     $(15.6)(3)     $(12.2)(2)  
 

Non-catastrophe

   (0.3)    (9.6)  (3)   (50.4)  (4)           (70.3)  (3)  (12.4)(4)   (0.3)  (42.2)(4)   (50.4)(5)  
 

 

  

 

  

 

  

 

 
  

 

  

 

  

 

  

 

 

Total

   $(8.1)    $(10.8)    $(62.6)    $(79.3)     $      (2.8)    $      (8.1)    $      (57.8)    $      (62.6) 
  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)Reflects

Primarily reflects unfavorable prior accident year loss reserve development related to Hurricanes Maria and Irma in the 2017 accident year.

(2)

Primarily reflects favorable prior accident year loss reserve development fromrelated to several catastrophes that occurred in the 2010 through 2016 accident years.

(2)(3)Reflects

Primarily reflects favorable prior accident year loss reserve development from several catastrophes that occurredrelated to Hurricane Harvey in the 2010 through 20152017 accident years.year and catastrophes in the 2016 accident year, partially offset by unfavorable prior accident year loss reserve development related to Hurricanes Maria and Irma in the 2017 accident year.

(3)(4)Reflects

Primarily reflects favorable prior accident year loss reserve development primarily related toin the 2014 through 20152017 accident years.year.

(4)(5)Reflects

Primarily reflects favorable prior accident year loss reserve development primarily related toin the 2013 through 2016 accident years.

The favorable prior accident year loss reserve development in the third quarter and first nine months of 20172018 and 20162017 reflects favorable loss emergence compared with loss emergence patterns assumed in earlier periods. The favorable prior accident year loss reserve development in the third quarter and first nine months of 20172018 did not impact assumptions used in estimating TransRe’s loss and LAE liabilities for business earned in the first nine months of 2017.2018.

Casualty & other.The increasesdecreases in net loss and LAE in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect higheran absence of catastrophe losses and, lessfor the nine month period only, higher favorable prior accident year loss reserve development.

development, partially offset by highernon-catastrophe losses. Catastrophe losses in the third quarter and first nine months of 2017 relate primarily to the marine lines of business, and include $20.3 million related to Hurricane Harvey in August 2017, $33.3 million related to Hurricane Irma in September 2017, $13.6 million related to Hurricane Maria in September 2017 and $2.8 million related to earthquakes in Mexico in September 2017. Catastrophe losses in the third quarter and first nine months of 2016 relate to earthquake losses in Ecuador.

Net loss and LAE in the third quarter and first nine months of 20172018 and 20162017 include (favorable) unfavorable prior accident year loss reserve development as shownpresented in the table below.

 

 Three Months Ended
September 30,
 

Nine Months Ended

September 30,

  

            Three Months Ended             

September 30,

 

            Nine Months Ended             

September 30,

 
 2017 2016 2017�� 2016  2018 2017 2018 2017 
 ($ in millions)  ($ in millions) 

Malpractice Treaties(1)

  $        -         $        (2.0)     $        (2.0)    $        (10.8)     $-         $-         $(3.4)    $(2.0) 

Ogden rate impact(2)

  -         -       24.4     -        -        -        -       24.4  

Other

  (41.7) (3)   (56.2)  (4)   (100.6)  (5)   (127.9)  (4)  (38.7)(3)   (41.7)(4)   (102.5)(5)   (100.6)(6)  
 

 

  

 

  

 

  

 

 
 

 

  

 

  

 

  

 

 

Total

  $(41.7)    $        (58.2)      $(78.2)    $(138.7)     $ (38.7)    $ (41.7)    $ (105.9)    $ (78.2) 
 

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

 

(1)

Represents certain medical malpractice treaties or the “Malpractice Treaties,” pursuant to which the increased underwriting profits created by the favorable prior accident year loss reserve development are largely retained by the cedants. As a result, the favorable prior accident year loss reserve development is largely offset by an increase in profit commission expense incurred when such favorable prior accident year loss reserve development occurs.

(2)

Represents unfavorable prior accident year loss reserve development arising fromrelated to the U.K. Ministry of Justice’s decision to significantly reducesignificant reduction in the discount rate, referred to as the Ogden rate, used to calculatelump-sum bodily injury payouts in personal injury insurance claims in the U.K. AsU.K to negative 0.75 percent as of March 20, 2017 the Ogden rate changed from 2.50 percent to negative 0.75 percent.

(3)

Primarily reflects favorable prior accident year loss reserve development in the longer-tailed casualty lines of business in the 2007 and earlier accident years, partially offset by unfavorable prior accident year loss reserve development in the longer-tailed casualty lines of business in the 2014 through 2016 accident years.

(4)

Primarily reflects favorable prior accident year loss reserve development in thelonger-tailed U.S. professional liability lines of business related to older accident years and shorter-tailed casualty lines of business in the U.K. related to recent accident years.

(4)(5)Generally

Primarily reflects favorable prior accident year loss reserve development in a variety ofthe shorter-tailed casualty & other lines of business primarily related toin the 2005, 20062016 and 2008 through 20152017 accident years.years and in the longer-tailed casualty lines of business in the 2010 and earlier accident years, partially offset by unfavorable prior accident year loss reserve development in the longer-tailed casualty lines of business in the 2014 accident year.

(5)(6)

Primarily reflects favorable prior accident year loss reserve development in longer-tailed U.S. professional liability lines of business related toin the 2005 through 2014 accident years, partially offset by net unfavorable prior accident year loss reserve development in shorter-tailed casualty lines of business in the 2015 accident year in the U.S. and the U.K.

The favorable prior accident year loss reserve development in the third quarter and first nine months of 20172018 and 20162017 reflects favorable loss emergence compared with loss emergence patterns assumed in earlier periods. The favorable prior accident year loss reserve development in the third quarter and first nine months of 20172018 did not impact assumptions used in estimating TransRe’s loss and LAE liabilities for business earned in the first nine months of 2017.2018.

Reinsurance Segment: Commissions, brokerage and other underwriting expenses.The following table presents commissions, brokerage and other underwriting expenses for the reinsurance segment:

 

 

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

    Three Months Ended
September 30,
 Percent Nine Months Ended
September 30,
 Percent
 2017 2016 Percent Change 2017 2016 Percent Change      2018         2017           Change           2018         2017           Change      
 ($ in millions)  ($ in millions)

Property

            

Commissions, brokerage and other underwriting expenses

  $      105.2      $      105.4     (0.2%)    $      283.7      $      275.6     2.9%      $113.3       $105.2     7.7%      $301.2       $283.7     6.2%   

Expense ratio

 33.8%  33.5%   32.7%  32.1%   34.7%  33.8%   33.7%  32.7%  

Casualty & other

            

Commissions, brokerage and other underwriting expenses

  $203.7     $227.7     (10.5%)   $662.9     $693.6     (4.4%)     $    211.6       $    203.7     3.9%      $    663.6       $    662.9     0.1%   

Expense ratio

 31.7%  34.8%   33.7%  34.2%   33.3%  31.7%   33.0%  33.7%  

Total

            

Commissions, brokerage and other underwriting expenses

  $308.9     $333.1     (7.3%)   $946.6     $969.2     (2.3%)     $324.9       $308.9     5.2%      $964.8       $946.6     1.9%   

Expense ratio

 32.3%  34.4%   33.4%  33.6%   33.8%  32.3%   33.2%  33.4%  

Property.The increase in commissions, brokerage and other underwriting expenses in the first nine months of 2017 from the first nine months of 2016 primarily reflects the impact of higher net premiums earned and an increase in commission rates, partially offset by lower short-term incentive compensation expense accruals arising from the significant catastrophe losses that occurred in the third quarter of 2017.

Casualty & other. The decreasesincreases in commissions, brokerage and other underwriting expenses in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect higher short-term incentive compensation expense accruals arising from significantly lower catastrophe losses in the third quarter of 2018, the impact of higher net premiums earned and, for the nine month period only, higher commission rates.

Casualty & other.The increase in commissions, brokerage and other underwriting expenses in the third quarter of 2018 from the third quarter of 2017 primarily reflects higher short-term incentive compensation expense accruals arising from the significantabsence of catastrophe losses that occurred in the third quarter of 2017,2018 and, for the third quarter period only, higher commission rates, partially offset by the impact of lower net premiums earned and a decrease in profit commissions related to the Malpractice Treaties.earned.

Reinsurance Segment: Underwriting profit.The following table presents underwriting profit (loss) for the reinsurance segment:

 

  

Three Months Ended

September 30,

     

Nine Months Ended

September 30,

    
  2017  2016  Percent Change  2017  2016  Percent Change 
  ($ in millions) 

Property

      

Underwriting (loss) profit

  $    (454.3)     $        51.6      (980.4%)    $    (320.2)     $        127.4      (351.3%)  

Combined ratio

  246.1%   83.6%    136.9%   85.2%  

Casualty & other

      

Underwriting (loss) profit

  $(20.6)     $22.5      (191.6%)    $(38.9)     $54.3      (171.6%)  

Combined ratio

  103.2%   96.5%    102.0%   97.4%  

Total

      

Underwriting (loss) profit

  $(474.9)     $74.1      (740.9%)    $(359.1)     $181.7      (297.6%)  

Combined ratio

  149.8%   92.3%    112.6%   93.9%  

  Three Months Ended
September 30,
 Percent Nine Months Ended
September 30,
 Percent
      2018         2017     Change     2018         2017         Change    
  ($ in millions)

Property

      

Underwriting (loss)

   $    (174.4)      $    (454.3)     (61.6%)      $    (45.2)      $    (320.2)     (85.9%)   

Combined ratio

  153.4%   246.1%    105.0%   136.9%  

Casualty & other

      

Underwriting profit (loss)

   $2.0       $(20.6)     (109.7%)      $41.4       $(38.9)     (206.4%)   

Combined ratio

  99.7%   103.2%    97.9%   102.0%  

Total

      

Underwriting (loss)

   $    (172.4)      $(474.9)     (63.7%)      $(3.8)      $(359.1)     (98.9%)   

Combined ratio

  117.9%   149.8%    100.1%   112.6%  

Property.The decreases in underwriting lossesloss in the third quarter and first nine months of 2017, compared with underwriting profits in2018 from the corresponding 20162017 periods primarily reflect significantsignificantly lower catastrophe losses, from Hurricanes Harvey, Irma and Maria,partially offset by increases innon-catastrophe losses, all as discussed above.

Casualty & other.The underwriting lossesprofit in the third quarter and first nine months of 2017,2018 compared with the underwriting profits inloss from the corresponding 20162017 periods primarily reflect significantreflects the absence of catastrophe losses from Hurricanes Harvey, Irma and, Maria, as well as lessfor the nine month period only, higher favorable prior accident year loss reserve development, all as discussed above.

Insurance Segment Underwriting Results

The insurance segment is comprised of AIHL’s RSUI, CapSpecialty and PacificComp (prior to its sale on December 31, 2017) operating subsidiaries. RSUI also writes a modest amount of assumed reinsurance business, which is included in the insurance segment. For a more detailed description of our insurance segment, see Part I, Item 1, “Business—Segment Information—Insurance Segment” of the 20162017 Form10-K.

The underwriting results of the insurance segment are presented below.

Three Months Ended September 30, 2017

            RSUI               CapSpecialty       PacificComp     Total 
   ($ in millions) 

Gross premiums written

    $234.6          $74.3          $41.6          $350.5      

Net premiums written

   170.8         69.5         41.5         281.8      

Net premiums earned

   179.0         66.1         41.4         286.5      

Net loss and LAE:

        

Current year (excluding catastrophe losses)

   99.3         37.5         31.1         167.9      

Current year catastrophe losses

   214.7         1.8         -             216.5      

Prior years

   (8.6)        (2.3)        (0.8)        (11.7)     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net loss and LAE

   305.4         37.0         30.3         372.7      

Commissions, brokerage and other underwriting expenses

   50.3         28.4         10.6         89.3      
  

 

 

   

 

 

   

 

 

   

 

 

 

Underwriting (loss) profit(1)

    $(176.7)         $0.7          $0.5          $  (175.5)     
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss ratio(2):

        

Current year (excluding catastrophe losses)

   55.5%      56.8%      75.2%      58.6%   

Current year catastrophe losses

   119.9%      2.7%      -    %      75.6%   

Prior years

   (4.8%)     (3.5%)     (1.9%)     (4.1%)  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net loss and LAE

   170.6%      56.0%      73.3%      130.1%   

Expense ratio(3)

   28.1%      43.0%      25.5%      31.2%   
  

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio(4)

   198.7%      99.0%      98.8%      161.3%   
  

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended September 30, 2016

 RSUI  CapSpecialty  PacificComp  Total 
  

($ in millions)

 

 

Gross premiums written

   $    243.7         $    68.5         $    37.8         $350.0      

Net premiums written

  168.3        64.4        37.1        269.8      

Net premiums earned

  186.8        61.6        35.7        284.1      

Net loss and LAE:

    

Current year (excluding catastrophe losses)

  102.6        33.6        27.1        163.3      

Current year catastrophe losses

  8.7        1.8        -            10.5      

Prior years

  (16.5)       (0.9)       -            (17.4)     
 

 

 

  

 

 

  

 

 

  

 

 

 

Total net loss and LAE

  94.8        34.5        27.1        156.4      

Commissions, brokerage and other underwriting expenses

  53.9        26.4        9.6        89.9      
 

 

 

  

 

 

  

 

 

  

 

 

 

Underwriting profit (loss)(1)

   $38.1         $0.7         $(1.0)        $37.8      
 

 

 

  

 

 

  

 

 

  

 

 

 

Loss ratio(2):

    

Current year (excluding catastrophe losses)

  54.9%     54.6%     76.0%     57.5%   

Current year catastrophe losses

  4.7%     2.9%     -   %     3.7%   

Prior years

  (8.8%)    (1.5%)    -   %     (6.1%)  
 

 

 

  

 

 

  

 

 

  

 

 

 

Total net loss and LAE

  50.8%     56.0%     76.0%     55.1%   

Expense ratio(3)

  28.9%     42.9%     26.9%     31.7%   
 

 

 

  

 

 

  

 

 

  

 

 

 

Combined ratio(4)

  79.7%     98.9%     102.9%     86.8%   
 

 

 

  

 

 

  

 

 

  

 

 

 

Nine Months Ended September 30, 2017

 RSUI  CapSpecialty  PacificComp  Total 
  

($ in millions)

 

 

Gross premiums written

   $    794.1         $    213.2         $    124.2         $  1,131.5      

Net premiums written

  558.0        198.9        122.9        879.8      

Net premiums earned

  540.3        192.2        123.5        856.0      

Net loss and LAE:

    

Current year (excluding catastrophe losses)

  279.1        104.8        93.1        477.0      

Current year catastrophe losses

  227.9        4.0        -            231.9      

Prior years

  (27.3)       (3.1)       (1.8)       (32.2)     
 

 

 

  

 

 

  

 

 

  

 

 

 

Total net loss and LAE

  479.7        105.7        91.3        676.7      

Commissions, brokerage and other underwriting expenses

  158.3        83.3        32.2        273.8      
 

 

 

  

 

 

  

 

 

  

 

 

 

Underwriting (loss) profit(1)

   $(97.7)        $3.2         $-             $(94.5)     
 

 

 

  

 

 

  

 

 

  

 

 

 

Loss ratio(2):

    

Current year (excluding catastrophe losses)

  51.7%     54.5%     75.4%     55.8%   

Current year catastrophe losses

  42.2%     2.1%     -   %     27.1%   

Prior years

  (5.1%)    (1.6%)    (1.5%)    (3.8%)  
 

 

 

  

 

 

  

 

 

  

 

 

 

Total net loss and LAE

  88.8%     55.0%     73.9%     79.1%   

Expense ratio(3)

  29.3%     43.4%     26.1%     32.0%   
 

 

 

  

 

 

  

 

 

  

 

 

 

Combined ratio(4)

  118.1%     98.4%     100.0%     111.1%   
 

 

 

  

 

 

  

 

 

  

 

 

 

Three Months Ended September 30, 2018

  RSUI CapSpecialty Total
    ($ in millions)

Gross premiums written

    $      260.8    $      83.9    $344.7 

Net premiums written

   176.0   77.9   253.9 

Net premiums earned

   190.6   73.3   263.9 
  

 

 

 

 

 

 

 

 

 

 

 

Net loss and LAE:

    

Current year (excluding catastrophe losses)

   97.9   42.3   140.2 

Current year catastrophe losses

   41.1   0.9   42.0 

Prior years

   (32.0  (1.5  (33.5
  

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

   107.0   41.7   148.7 

Commissions, brokerage and other underwriting expenses

   52.8   30.0   82.8 
  

 

 

 

 

 

 

 

 

 

 

 

Underwriting profit(1)

  

 

  $

 

30.8

 

 

   $1.6    $32.4 
  

 

 

 

 

 

 

 

 

 

 

 

Loss ratio(2):

    

Current year (excluding catastrophe losses)

   51.4  57.7  53.1

Current year catastrophe losses

   21.6  1.2  15.9

Prior years

   (16.9%)   (2.1%)   (12.7%) 
  

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

   56.1  56.8  56.3

Expense ratio(3)

   27.7  40.9  31.4
  

 

 

 

 

 

 

 

 

 

 

 

Combined ratio(4)

   83.8  97.7  87.7
  

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2017

 RSUI CapSpecialty PacificComp Total
  ($ in millions)

Gross premiums written

   $      234.6    $      74.3    $      41.6    $      350.5 

Net premiums written

  170.8   69.5   41.5   281.8 

Net premiums earned

  179.0   66.1   41.4   286.5 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and LAE:

    

Current year (excluding catastrophe losses)

  99.3   37.5   31.1   167.9 

Current year catastrophe losses

  214.7   1.8   -       216.5 

Prior years

  (8.6  (2.3  (0.8  (11.7
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

  305.4   37.0   30.3   372.7 

Commissions, brokerage and other underwriting expenses

  50.3   28.4   10.6   89.3 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting (loss) profit(1)

 

 

  $

 

(176.7

 

   $0.7    $0.5    $(175.5
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio(2):

    

Current year (excluding catastrophe losses)

  55.5  56.8  75.2  58.6

Current year catastrophe losses

  119.9  2.7  -      75.6

Prior years

  (4.8%)   (3.5%)   (1.9%)   (4.1%) 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

  170.6  56.0  73.3  130.1

Expense ratio(3)

  28.1  43.0  25.5  31.2
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined ratio(4)

  198.7  99.0  98.8  161.3
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2016

 RSUI      CapSpecialty          PacificComp                Total           
  ($ in millions) 

Gross premiums written

   $808.3         $201.5         $105.9         $1,115.7      

Net premiums written

  566.3        189.0        104.5        859.8      

Net premiums earned

  567.4        175.8        104.9        848.1      

Net loss and LAE:

    

Current year (excluding catastrophe losses)

  291.9        90.6        79.5        462.0      

Current year catastrophe losses

  37.6        5.0        -            42.6      

Prior years

  (40.5)       (3.2)       -            (43.7)     
 

 

 

  

 

 

  

 

 

  

 

 

 

Total net loss and LAE

  289.0        92.4        79.5        460.9      

Commissions, brokerage and other underwriting expenses

  161.9        78.7        28.9        269.5      
 

 

 

  

 

 

  

 

 

  

 

 

 

Underwriting profit (loss)(1)

   $    116.5         $4.7         $(3.5)        $117.7      
 

 

 

  

 

 

  

 

 

  

 

 

 

Loss ratio(2):

    

Current year (excluding catastrophe losses)

  51.4%     51.6%     75.8%     54.5%   

Current year catastrophe losses

  6.6%     2.8%     -    %     5.0%   

Prior years

  (7.1%)    (1.8%)    -    %     (5.2%)  
 

 

 

  

 

 

  

 

 

  

 

 

 

Total net loss and LAE

  50.9%     52.6%     75.8%     54.3%   

Expense ratio(3)

  28.5%     44.8%     27.6%     31.8%   
 

 

 

  

 

 

  

 

 

  

 

 

 

Combined ratio(4)

  79.4%     97.4%     103.4%     86.1%   
 

 

 

  

 

 

  

 

 

  

 

 

 

Nine Months Ended September 30, 2018

  RSUI CapSpecialty Total
      ($ in millions)  

Gross premiums written

    $      854.2    $      247.1    $      1,101.3 

Net premiums written

   579.8   229.6   809.4 

Net premiums earned

   556.2   211.0   767.2 
  

 

 

 

 

 

 

 

 

 

 

 

Net loss and LAE:

    

Current year (excluding catastrophe losses)

   295.4   117.8   413.2 

Current year catastrophe losses

   58.7   1.7   60.4 

Prior years

   (44.5  (4.6  (49.1
  

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

   309.6   114.9   424.5 

Commissions, brokerage and other underwriting expenses

   160.0   91.2   251.2 
  

 

 

 

 

 

 

 

 

 

 

 

Underwriting profit(1)

  

 

  $

 

86.6

 

 

   $4.9    $91.5 
  

 

 

 

 

 

 

 

 

 

 

 

Loss ratio(2):

    

Current year (excluding catastrophe losses)

   53.1  55.8  53.9

Current year catastrophe losses

   10.6  0.8  7.8

Prior years

   (8.0%)   (2.1%)   (6.4%) 
  

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

   55.7  54.5  55.3

Expense ratio(3)

   28.8  43.2  32.7
  

 

 

 

 

 

 

 

 

 

 

 

Combined ratio(4)

   84.5  97.7  88.0
  

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 RSUI CapSpecialty PacificComp Total
  ($ in millions)

Gross premiums written

   $      794.1    $      213.2    $      124.2    $1,131.5 

Net premiums written

  558.0   198.9   122.9   879.8 

Net premiums earned

  540.3   192.2   123.5   856.0 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss and LAE:

    

Current year (excluding catastrophe losses)

  279.1   104.8   93.1   477.0 

Current year catastrophe losses

  227.9   4.0   -       231.9 

Prior years

  (27.3  (3.1  (1.8  (32.2
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

  479.7   105.7   91.3   676.7 

Commissions, brokerage and other underwriting expenses

  158.3   83.3   32.2   273.8 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Underwriting profit (loss)(1)

 

 

  $

 

(97.7

 

   $3.2    $-        $(94.5
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss ratio(2):

    

Current year (excluding catastrophe losses)

  51.7  54.5  75.4  55.8

Current year catastrophe losses

  42.2  2.1  -      27.1

Prior years

  (5.1%)   (1.6%)   (1.5%)   (3.8%) 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net loss and LAE

  88.8  55.0  73.9  79.1

Expense ratio(3)

  29.3  43.4  26.1  32.0
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Combined ratio(4)

  118.1  98.4  100.0  111.1
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

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, othernoninsurance revenue, other operating expenses, corporate administration, amortization of intangible assets and interest expense. Underwriting profit is anon-GAAP financial measure and does not replace earnings before income taxes determined in accordance with GAAP as a measure of profitability. See “Comment onNon-GAAP Financial Measures” herein for additional detail on the presentation of our results of operations.

(2)

The loss ratio is derived by dividing the amount of net loss and LAE by net premiums earned, all as determined in accordance with GAAP.

(3)

The expense ratio is derived by dividing the amount of commissions, brokerage and other underwriting expenses by net premiums earned, all as determined in accordance with GAAP.

(4)

The combined ratio is the sum of the loss ratio and the expense ratio, all as determined in accordance with GAAP. The combined ratio represents the percentage of each premium dollar a reinsurance or an insurance company has to spend on net loss and LAE, and commissions, brokerage and other underwriting expenses.

Insurance Segment: Premiums.The following table presents premiums for the insurance segment:

 

  Three Months Ended       Nine Months Ended     
 Three Months Ended
September 30,
   Nine Months Ended
September 30,
     September 30,   Percent   September 30,   Percent 
 2017 2016 Percent Change 2017 2016 Percent Change   2018   2017         Change         2018   2017         Change       
 

 

($ in millions)

   ($ in millions) 

RSUI

                  

Premiums written:

                  

Gross premiums written

  $234.6    $243.7   (3.7%)   $794.1    $808.3   (1.8%)     $      260.8       $      234.6      11.2%       $      854.2       $      794.1      7.6%   

Net premiums written

 170.8   168.3   1.5%   558.0   566.3   (1.5%)    176.0      170.8      3.0%      579.8      558.0      3.9%   

Net premiums earned

 179.0   186.8   (4.2%)  540.3   567.4   (4.8%)    190.6      179.0      6.5%      556.2      540.3      2.9%   

CapSpecialty

                  

Premiums written:

                  

Gross premiums written

  $74.3    $68.5   8.5%    $213.2    $201.5   5.8%      $83.9       $74.3      12.9%       $247.1       $213.2      15.9%   

Net premiums written

 69.5   64.4   7.9%   198.9   189.0   5.2%     77.9      69.5      12.1%      229.6      198.9      15.4%   

Net premiums earned

 66.1   61.6   7.3%   192.2   175.8   9.3%     73.3      66.1      10.9%      211.0      192.2      9.8%   

PacificComp

                  

Premiums written:

                  

Gross premiums written

  $41.6    $37.8   10.1%    $124.2    $105.9   17.3%      $-           $41.6      (100.0%)      $-           $124.2      (100.0%)  

Net premiums written

 41.5   37.1   11.9%   122.9   104.5   17.6%     -          41.5      (100.0%)     -          122.9      (100.0%)  

Net premiums earned

 41.4   35.7   16.0%   123.5   104.9   17.7%     -          41.4      (100.0%)     -          123.5      (100.0%)  

Total

                  

Premiums written:

                  

Gross premiums written

  $      350.5    $      350.0   0.1%    $    1,131.5    $    1,115.7   1.4%      $344.7       $350.5      (1.7%)      $1,101.3       $1,131.5      (2.7%)  

Net premiums written

 281.8   269.8   4.4%   879.8   859.8   2.3%     253.9      281.8      (9.9%)     809.4      879.8      (8.0%)  

Net premiums earned

 286.5   284.1   0.8%   856.0   848.1   0.9%     263.9      286.5      (7.9%)     767.2      856.0      (10.4%)  

RSUI.The decreasesincreases in gross premiums written in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect decreasesgrowth in the property and directors’ and officers’ liabilitymost lines of business all due to an increase in competitionbusiness opportunities and a reduction in pricing, partially offset by growthimproved general market conditions, particularly in the general liabilityproperty lines of business.

The decreasesincreases in net premiums earned in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect a decrease in gross premiums written in the second and third quarters of 2017 and the fourth quarter of 2016, partially offset by a modestan increase in gross premiums written in recent quarters, partially offset by higher ceded premiums earned related to reinstatement premiums on RSUI’s per risk property reinsurance treaties and the first quarterimpact of 2017.growth in the heavily-reinsured property lines of business.

CapSpecialty.The increases in gross premiums written in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect growth in the professional liability and miscellaneous medical lines of business due to CapSpecialty’s distribution initiatives partially offset byand expanded product offerings and the impact of CapSpecialty’s February 20, 2018 purchase of certain renewal rights associated with a decrease in thesmall environmental and construction liability linesblock of business.

The increases in net premiums earned in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect an increaseincreases in gross premiums written in recent quarters.

PacificComp.The increases in gross premiums written and net premiums earned inresults shown for the third quarter and first nine months of 2017 from2018 reflect the corresponding 2016 periods primarily reflect premium growth due to PacificComp’s distribution initiatives and growth in targeted segmentssale of the workers’ compensation market in the StatePacificComp as of California.December 31, 2017.

Insurance Segment: Net loss and LAE.The following table presents net loss and LAE for the insurance segment:

 

  Three Months Ended   Nine Months Ended  
 Three Months Ended
September 30,
   Nine Months Ended
September 30,
     September 30, Percent September 30, Percent
 2017 2016 Percent Change 2017 2016 Percent Change   2018 2017 Change 2018 2017 Change
 

 

($ in millions)

   ($ in millions)

RSUI

             

Net loss and LAE:

             

Current year (excluding catastrophe losses)

  $99.3       $102.6      (3.2%)   $279.1       $291.9      (4.4%)     $97.9    $99.3  (1.4%)    $  295.4    $  279.1  5.8

Current year catastrophe losses

 214.7      8.7          2,367.8%   227.9      37.6      506.1%     41.1  214.7  (80.9%)  58.7  227.9  (74.2%) 

Prior years

 (8.6)     (16.5)     (47.9%)  (27.3)     (40.5)     (32.6%)    (32.0 (8.6 272.1 (44.5 (27.3 63.0
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Total net loss and LAE

  $      305.4       $94.8      222.2%    $479.7       $289.0      66.0%      $  107.0    $  305.4  (65.0%)    $309.6    $479.7  (35.5%) 
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Loss ratio:

             

Current year (excluding catastrophe losses)

 55.5%   54.9%    51.7%   51.4%      51.4 55.5  53.1 51.7 

Current year catastrophe losses

 119.9%   4.7%    42.2%   6.6%      21.6 119.9  10.6 42.2 

Prior years

 (4.8%)  (8.8%)   (5.1%)  (7.1%)     (16.9%)  (4.8%)   (8.0%)  (5.1%)  
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Total net loss and LAE

 170.6%   50.8%    88.8%   50.9%      56.1 170.6  55.7 88.8 
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

CapSpecialty

             

Net loss and LAE:

             

Current year (excluding catastrophe losses)

  $37.5       $33.6      11.6%    $104.8       $90.6      15.7%      $42.3    $37.5  12.8   $117.8    $104.8  12.4

Current year catastrophe losses

 1.8      1.8      -   %   4.0      5.0      (20.0%)    0.9  1.8  (50.0%)  1.7  4.0  (57.5%) 

Prior years

 (2.3)     (0.9)     155.6%   (3.1)     (3.2)     (3.1%)    (1.5 (2.3 (34.8%)  (4.6 (3.1 48.4
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Total net loss and LAE

  $37.0       $34.5      7.2%    $105.7       $92.4      14.4%      $41.7    $37.0  12.7   $114.9    $105.7  8.7
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Loss ratio:

             

Current year (excluding catastrophe losses)

 56.8%   54.6%    54.5%   51.6%      57.7 56.8  55.8 54.5 

Current year catastrophe losses

 2.7%   2.9%    2.1%   2.8%      1.2 2.7  0.8 2.1 

Prior years

 (3.5%)  (1.5%)   (1.6%)  (1.8%)     (2.1%)  (3.5%)   (2.1%)  (1.6%)  
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Total net loss and LAE

 56.0%   56.0%    55.0%   52.6%      56.8 56.0  54.5 55.0 
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

PacificComp

             

Net loss and LAE:

             

Current year (excluding catastrophe losses)

  $31.1       $27.1      14.8%    $93.1       $79.5      17.1%      $-    $31.1  (100.0%)    $-    $93.1  (100.0%) 

Current year catastrophe losses

  -          -           –    -          -          –     -   -       -   -   -       - 

Prior years

 (0.8)      -           –   (1.8)      -          –     -  (0.8 (100.0%)   -  (1.8 (100.0%) 
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Total net loss and LAE

  $30.3       $27.1      11.8%    $91.3       $79.5      14.8%      $-    $30.3  (100.0%)    $-    $91.3  (100.0%) 
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Loss ratio:

             

Current year (excluding catastrophe losses)

 75.2%   76.0%    75.4%   75.8%      -   75.2  -   75.4 

Current year catastrophe losses

 -   %   -   %    -   %   -   %      -   -      -   -     

Prior years

 (1.9%)  -   %    (1.5%)  -   %      -   (1.9%)   -   (1.5%)  
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Total net loss and LAE

 73.3%   76.0%    73.9%   75.8%      -   73.3  -   73.9 
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Total

             

Net loss and LAE:

             

Current year (excluding catastrophe losses)

  $167.9       $163.3      2.8%    $477.0       $462.0      3.2%      $140.2    $167.9  (16.5%)    $413.2    $477.0  (13.4%) 

Current year catastrophe losses

 216.5      10.5      1,961.9%   231.9      42.6      444.4%     42.0  216.5  (80.6%)  60.4  231.9  (74.0%) 

Prior years

 (11.7)     (17.4)     (32.8%)  (32.2)     (43.7)     (26.3%)    (33.5 (11.7 186.3 (49.1 (32.2 52.5
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Total net loss and LAE

  $372.7       $      156.4      138.3%    $      676.7       $      460.9      46.8%      $148.7    $372.7  (60.1%)    $424.5    $676.7  (37.3%) 
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Loss ratio:

             

Current year (excluding catastrophe losses)

 58.6%   57.5%    55.8%   54.5%      53.1 58.6  53.9 55.8 

Current year catastrophe losses

 75.6%   3.7%    27.1%   5.0%      15.9 75.6  7.8 27.1 

Prior years

 (4.1%)  (6.1%)   (3.8%)  (5.2%)     (12.7%)  (4.1%)   (6.4%)  (3.8%)  
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

Total net loss and LAE

 130.1%   55.1%    79.1%   54.3%      56.3 130.1  55.3 79.1 
 

 

  

 

   

 

  

 

    

 

 

 

  

 

 

 

 

RSUI.The increasesdecreases in net loss and LAE in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect significantly lower catastrophe losses and, to a lesser extent, higher favorable prior accident year loss reserve development. The catastrophe losses.

losses in the third quarter and first nine months of 2018 include $34.0 million related to Hurricane Florence, as well as losses related to flooding and severe weather in the Northeastern U.S. and the State of California. Catastrophe losses in the third quarter and first nine months of 2017 include $83.3 million related to Hurricane Harvey, in August 2017, $103.7 million related to Hurricane Irma in September 2017 and $14.3 million related to Hurricane Maria in September 2017.Maria. Catastrophe losses in the third quarter and first nine months of 2017 also reflect losses fromrelated to flooding in the State of California and severe weather primarily in the Southeastern and Midwestern U.S. Catastrophe losses in the third quarter of 2016 primarily reflect losses from flooding and severe weather primarily in the State of Louisiana and the Midwestern U.S. Catastrophe losses in the first nine months of 2016 also reflect losses from flooding and severe weather primarily in the State of Texas in April and May and, to a lesser extent, losses from wildfires in Alberta, Canada in May.

Net loss and LAE in the third quarter and first nine months of 20172018 and 20162017 include (favorable) unfavorable prior accident year loss reserve development as shownpresented in the table below.

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
  2017  2016  2017  2016 
  

 

($ in millions)

 

Casualty

  $(6.9) (1)    $(11.9) (2)   $(28.5) (1)    $(32.1) (2) 

Property and other

  (1.7) (3)    (4.6) (4)   1.2  (5)   (8.4) (4) 
 

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $        (8.6)    $        (16.5)    $        (27.3)     $      (40.5)  
 

 

 

  

 

 

  

 

 

  

 

 

 

   Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
   2018  2017  2018  2017 
   ($ in millions) 

Casualty

    $    (4.3)(1)     $    (6.9)(2)     $    (16.8)(1)     $    (28.5)(2)  
     

Property and other

   (27.7)(3)    (1.7)(4)    (27.7)(3)    1.2(5)  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total

    $      (32.0)    $      (8.6)    $      (44.5)    $      (27.3) 
  

 

 

  

 

 

  

 

 

  

 

 

 

 

(1)

Primarily reflects favorable prior accident year loss reserve development in the umbrella/excess lines of business related toin the 2005 through 20112012 accident years, partially offset by unfavorable prior accident year loss reserve development in the directors’ and officers’ liability lines of business in the 2009, 2012 and 2016 accident years.

(2)

Primarily reflects favorable prior accident year loss reserve development in the umbrella/excess general liability and professional liability lines of business related toin the 20062005 through 20122011 accident years.

(3)Primarily reflects favorable unallocated LAE development.
(4)

Primarily reflects favorable prior accident year loss reserve development related to Hurricane Irma in thenon-catastrophe property lines of business 2017 accident year and, to a lesser extent, Hurricane Matthew in the 2016 accident year, as well as various other losses not classified as catastrophes in recent accident years.

(4)

Primarily reflects favorable unallocated LAE development.

(5)

Primarily reflects unfavorable prior accident year property loss reserve development in the binding authority lines of business primarily related toin the 2015 and 2016 accident years, partially offset by favorable catastrophe prior accident year catastrophe loss reserve development related toin the 2016 accident year.

The favorable prior accident year loss reserve development in the third quarter and first nine months of 20172018 and 20162017 reflects favorable loss emergence compared with loss emergence patterns assumed in earlier periods. The favorable prior accident year loss reserve development in the third quarter and first nine months of 20172018 did not impact assumptions used in estimating RSUI’s loss and LAE liabilities for business earned in the first nine months of 2017.2018.

CapSpecialty.The increases in net loss and LAE in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect the impact of higher net premiums earned and higher property2018 accident year losses due primarily to an increase in net premiums earned for certain lines of business with a higher loss ratio, partially offset by lower catastrophe losses. The increase in net loss and LAE in the third quarter of 2017 from the third quarter of 2016 was partially offset by more2018 also reflects a decrease in favorable prior accident year loss reserve development. Catastrophe lossesThe increase in net loss and LAE in the third quarter and first nine months of 2018 was partially offset by an increase in favorable prior accident year loss reserve development.

Net loss and LAE in the first nine months of 2018 includes favorable prior accident year loss reserve development primarily in the surety lines of business primarily in the 2016 and 2017 include $0.3 million related to Hurricane Harveyaccident years. The favorable prior accident year loss reserve development in August 2017.

the first nine months of 2018 and 2017 reflects favorable loss emergence compared with loss emergence patterns assumed in earlier periods. The favorable prior accident year loss reserve development in the first nine months of 2018 did not impact assumptions used in estimating CapSpecialty’s loss and LAE liabilities for business earned in the first nine months of 2018. Net loss and LAE in the third quarter and first nine months of 2017 include favorable prior accident year loss reserve development primarily in the casualty lines of business primarily related toin the 2010, 2014, 2015 and 2016 accident years. The favorable prior accident year loss reserve development in the first nine months of 2017 reflects net favorable loss emergence compared with loss emergence patterns assumed in earlier periods. Net loss and LAE in the third quarter of 2016 includes favorable prior accident year loss reserve development primarily in the surety lines of business related to the 2015 accident year. Net loss and LAE in the first nine months of 2016 includes favorable prior accident year loss reserve development primarily related to CapSpecialty’s legacy asbestos-related illness and environmental impairment liabilities and the surety lines of business.

PacificComp.The increases in net loss and LAE in the third quarter and first nine months of 2017 from the corresponding 2016 periods primarily reflect the impact of higher net premiums earned, partially offset by favorable prior accident year loss reserve development in the corresponding 2017 periods.

The favorable prior accident year loss reserve development in the third quarter and first nine months of 2017 relates primarily to the 2013 and prior accident years, and reflects favorable loss emergence compared with loss emergence patterns assumed in earlier periods.

Insurance Segment: Commissions, brokerage and other underwriting expenses.The following table presents commissions, brokerage and other underwriting expenses for the insurance segment:

 

                                                
 

Three Months Ended

 

   Nine Months Ended  
 Three Months Ended
September 30,
   Nine Months Ended
September 30,
    

September 30,

 

 Percent September 30, Percent
 2017 2016 Percent Change 2017 2016 Percent Change  2018 2017       Change         2018 2017 Change
 ($ in millions)  ($ in millions)

RSUI

            

Commissions, brokerage and other underwriting expenses

  $50.3       $53.9      (6.7%)   $158.3       $161.9      (2.2%)    $        52.8    $        50.3   5.0   $        160.0    $        158.3   1.1

Expense ratio

     28.1%       28.9%        29.3%       28.5%     27.7  28.1   28.8  29.3 

CapSpecialty

            

Commissions, brokerage and other underwriting expenses

  $28.4       $26.4      7.6%    $83.3       $78.7      5.8%     $        30.0    $        28.4   5.6   $        91.2    $        83.3   9.5

Expense ratio

 43.0%   42.9%    43.4%   44.8%     40.9  43.0   43.2  43.4 

PacificComp

            

Commissions, brokerage and other underwriting expenses

  $10.6       $9.6      10.4%    $32.2       $28.9      11.4%     $    $        10.6   (100.0%)    $    $        32.2   (100.0%) 

Expense ratio

 25.5%   26.9%    26.1%   27.6%       25.5     26.1 

Total

            

Commissions, brokerage and other underwriting expenses

  $89.3       $89.9      (0.7%)   $273.8       $269.5      1.6%     $        82.8    $        89.3   (7.3%)    $        251.2    $        273.8   (8.3%) 

Expense ratio

 31.2%   31.7%    32.0%   31.8%     31.4  31.2   32.7  32.0 

RSUI.The decreasesincreases in commissions, brokerage and other underwriting expenses in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect the impact of lowerhigher net premiums earned and the impact of losses arising from Hurricanes Harvey, Irma and Maria onhigher short-term incentive compensation expense accruals.accruals arising from significantly lower catastrophe losses in the third quarter of 2018, partially offset by slightly lower commission expense incurred.

CapSpecialty.The increases in commissions, brokerage and other underwriting expenses in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect the impact of higher net premiums earned and relatively stable overhead expenses.

PacificComp.The increases in commissions, brokerage and otheralso reflectone-time acquisition expenses arising from CapSpecialty’s February 20, 2018 purchase of certain renewal rights associated with a small environmental block of business.

Insurance Segment: Underwriting profit.The following table presents underwriting expensesprofit (loss) for the insurance segment:

  Three Months Ended   Nine Months Ended  
  September 30, Percent September 30, Percent
  2018 2017 Change 2018 2017 Change
      ($ in millions)    

RSUI

      

Underwriting profit (loss)

   $    30.8    $(176.7  (117.4%)    $    86.6    $(97.7  (188.6%) 

Combined ratio

  83.8  198.7   84.5  118.1 

CapSpecialty

      

Underwriting profit

   $    1.6    $0.7   128.6   $    4.9    $3.2   53.1

Combined ratio

  97.7  99.0   97.7      98.4 

PacificComp

      

Underwriting profit

   $-        $0.5   (100.0%)    $-        $-       -     

Combined ratio

  -      98.8   -      100.0 

Total

      

Underwriting profit (loss)

   $    32.4    $  (175.5  (118.5%)    $    91.5    $(94.5  (196.8%) 

Combined ratio

  87.7  161.3   88.0  111.1 

RSUI.The underwriting profit in the third quarter and first nine months of 2018, compared with the underwriting loss in the corresponding 2017 periods, primarily reflects significantly lower catastrophe losses and, to a lesser extent, increases in favorable prior accident year loss reserve development, all as discussed above.

CapSpecialty.The increase in underwriting profit in the third quarter of 2018 from the corresponding 2016 periodsthird quarter of 2017 primarily reflectreflects the impact of higher net premiums earned, and relatively stable overhead expenses.

Insurance Segment: Underwriting profit. The following table presents underwriting profit for the insurance segment:

   Three Months Ended
September 30,
       Nine Months Ended
September 30,
     
   2017   2016   Percent Change   2017   2016   Percent Change 
   ($ in millions) 

RSUI

            

Underwriting (loss) profit

   $      (176.7)      $        38.1       (563.8%)    $        (97.7)      $        116.5       (183.9%)  

Combined ratio

   198.7%    79.7%      118.1%    79.4%   

CapSpecialty

            

Underwriting profit

   $           0.7        $          0.7       -    %     $           3.2       $            4.7       (31.9%)  

Combined ratio

   99.0%    98.9%      98.4%    97.4%   

PacificComp

            

Underwriting profit (loss)

   $           0.5        $        (1.0)      (150.0%)    $             -        $           (3.5)      (100.0%)  

Combined ratio

   98.8%    102.9%      100.0%    103.4%   

Total

            

Underwriting (loss) profit

   $     (175.5)      $        37.8       (564.3%)    $      (94.5)      $         117.7       (180.3%)  

Combined ratio

   161.3%    86.8%      111.1%    86.1%   

RSUI. The underwriting lossespartially offset by a decrease in the third quarter and first nine months of 2017, compared with underwriting profits in the corresponding 2016 periods primarily reflect the impact of significant catastrophe losses from Hurricanes Harvey, Irma and Maria,favorable prior accident year loss reserve development, all as discussed above.

CapSpecialty.The decreaseincrease in underwriting profit in the first nine months of 20172018 from the first nine months of 20162017 primarily reflects the impact of higher property losses, as discussed above.

PacificComp.The underwriting profitan increase in the third quarter of 2017 compared with the underwriting loss in the third quarter of 2016, and the decrease in underwriting loss in the first nine months of 2017 from the first nine months of 2016, primarily reflect favorable prior accident year loss reserve development and the impact of growinghigher net premiums earned, all as discussed above.

Investment Results for the Reinsurance and Insurance Segments

The following table presents the investment results for our reinsurance and insurance segments:

 

 Three Months Ended   Nine Months Ended  
  Three Months Ended
September 30,
   Nine Months Ended
September 30,
    September 30, Percent September 30, Percent
  2017 2016 Percent Change 2017 2016 Percent Change  2018 2017 Change 2018 2017 Change
  ($ in millions)  ($ in millions)

Net investment income

   $        101.4   $        118.7   (14.6%)  $        311.7   $        326.4   (4.5%)    $    122.5      $    101.4  20.8   $    362.0    $    311.7   16.1

Change in the fair value of equity securities

 373.9   -      -    506.7   -       -   

Net realized capital gains

   21.5   27.1   (20.7%)  90.8   107.6   (15.6%)  16.2  21.5  (24.7%)  66.8  90.8   (26.4%) 

Other than temporary impairment losses

   (6.1)  (11.7)  (47.9%)  (13.1)  (38.2)  (65.7%)   -      (6.1 (100.0%)  (0.5 (13.1)  (96.2%) 

Net Investment Income.investment income.The decreasesincreases in net investment income in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily relatereflect increases in partnership income, increases in dividend income resulting from an increase in the size of the equity securities portfolio and, to a lesser extent, higher interest income. The increase in interest income primarily reflects higher yields onshort-term investments and floating-rate debt securities, partially offset by the impact of the sale of PacificComp.

Partnership income in the first nine months of 2018 includes a $12.9 million increase in the carrying value of AIHL’s limited partnership interests in certain subsidiaries of Ares as of March 15, 2018. See Note 3(h) to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form 10-Q for additional information.

Partnership income in the third quarter and first nine months of 2017 includes losses incurred on our equity interests in the Pillar InvestmentsHoldings and related funds arising from significant catastrophe losses incurred in August and September 2017 and, for2017. Partnership income in the first nine months of 2017 only,also includes a $12.6 million charge on our equity investment in Ares. The charge on our equity investment in Ares, reflectsreflecting our share of aone-time payment recorded by Ares related to an acquisition by its affiliated entity. In connection with this acquisition, Ares agreed to make certain transaction support payments to the sellers of the acquired entity. Ares expects

Change in the fair value of equity securities.In the first quarter of 2018, we adopted new investment accounting guidance which required changes in the fair value of equity securities, except those accounted for under the equity method, to receive future management fees derivedbe recognized in net earnings. In earlier periods, equity securities were considered to be AFS and were included in the analysis of OTTI. See Note 1(c) to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form 10-Q for additional information regarding our adoption of this new guidance.

The changes in the fair value of equity securities in the third quarter and first nine months of 2018 reflect appreciation in the value of our equity securities portfolio, primarily from our holdings in the assets under managementtechnology and industrial sectors. To a lesser extent, the changes in the fair value of equity securities in the acquired entity.third quarter and first nine months of 2018 also reflect appreciation in the value of our equity holdings in the healthcare and consumer discretionary sectors, respectively.

Net Realized Capital Gains.realized capital gains.The decreases in net realized capital gains in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect lowera lack of net realized capital gains for thefrom equity and bond portfolio, partially offset by gains on the sale of certain exchange-traded fundssecurities in the third quarter2018 periods as a result of 2017. In addition,our adoption of the new investment accounting guidance discussed above. The decrease for the first nine months of 2016 reflected2018 was partially offset by aone-time $13.2 $45.7 million realized gain recorded on April 15, 2016 by Alleghany Capital, as more fully describedAIHL’s conversion of its limited partnership interests in the following pages.certain subsidiaries of Ares into Ares common units. See Note 3(h) to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form 10-Q for additional information on AIHL’s conversion.

Other Than Temporary Impairment Losses.than temporary impairment losses.OTTI losses in the first nine months of 2018 reflect $0.5 million of unrealized losses on debt securities that were deemed to be other than temporary and, as such, were required to be charged against earnings.

OTTI losses in the first nine months of 2017 reflect $13.1 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. Of the $13.1 million of OTTI losses, $11.8 million related to equity securities, primarily in the retail sector, and $1.3 million related to debt securities. The determination that unrealized losses on equity and debtthe securities were other than temporary was primarily due to the duration of the decline in the fair value of equity and debt securities relative to their costs. Of the $13.1 million of OTTI losses, $6.1 million was incurred in the third quarter of 2017.

OTTI losses in the first nine months of 2016 reflect $38.2 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. Of the $38.2 million of OTTI losses, $16.6 million related to equity securities, primarily in the retail, financial services, technology and chemical sectors, and $21.6 million related to debt securities, primarily in the energy sector. The determination that unrealized losses on equity and debt securities were other than temporary was primarily due to the severity and duration of the decline in the fair value of equity and debt securities relative to their costs. Of the $38.2 million of OTTI losses, $11.7 million was incurred in the third quarter of 2016.

Upon the ultimate disposition of the securities for which OTTI losses have been recorded, a portion of the loss may be recoverable depending on market conditions at the time of disposition. After adjusting the cost basis of securities for the recognition of OTTI losses, the remaining gross unrealized investment losses for debt and equity securities as of September 30, 20172018 were deemed to be temporary, based on, among other factors: (i) the duration of time and the relative magnitude to which the fair values of these securities had been below cost were not indicative of an OTTI loss; (ii) the absence of compelling evidence that would cause us to call into question the financial condition or near-term business prospects of the issuers of the securities; and (iii) our ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery.

See Note 3 to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of thisForm 10-Q for additional detail on gross unrealized investment losses for debt and equity securities as of September 30, 2017.2018.

Alleghany Capital Segment Results

The Alleghany Capital segment consists of: (i) manufacturing and serviceindustrial operations conducted through Bourn & Koch, Kentucky Trailer, IPS, Jazwares, 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 Funeral Services, Inc., or “Wilbert,” beginning August 1, 2017;2017 (the date on which Alleghany Capital acquired its equity interest therein); (ii) oil and gasnon-industrial operations conducted through SORC;IPS and Jazwares; and (iii) corporate operations and investments at the Alleghany Capital level.

On August 1, 2017, Alleghany CapitalFebruary 7, 2018, W&W|AFCO Steel acquired the outstanding equity of Hirschfeld, a 45 percent equity interest in Wilbert, a providerfabricator of productssteel bridges and servicesstructural steel for the funeralstadiums, airports and cemetery industriesother large commercial and precast concrete markets, headquartered in Overland Park, Kansas, for $72.3 million.industrial projects. Wilbert is accounted for under the equity method of accounting and is included in other invested assets.

On April 28, 2017, Alleghany Capital acquired approximately 80 percent of the equity in W&W|AFCO Steel, a structural steel fabricator and erector headquartered in Oklahoma City, Oklahoma, 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 July 2014, Alleghany Capital acquired a 30 percent equity interest in Jazwares. 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 our consolidated results. Prior to April 15, 2016, Jazwares was accounted for under the equity method of accounting.

The results of the Alleghany Capital segment for the third quarter and first nine months of 20172018 and 20162017 are presented below.

 

   Three Months Ended September 30, 
   2017   2016 
   Mfg. &
Svcs.
   Oil & Gas   Corp. &
other
   Total   Mfg. &
Svcs.
   Oil & Gas   Corp. &
other
   Total 
   ($ in millions) 

Net investment income

    $0.9       $-           $0.7       $1.6       $-           $-           $-           $-       

Net realized capital gains

   0.7      -          -          0.7      0.1      -          -          0.1   

Other than temporary impairment losses

   -          -          -          -          -          -          -          -       

Other revenue

     288.8          2.4      0.5        291.7        216.7      2.4          (0.5)     218.6   

Other operating expenses

   259.6      9.1      0.4      269.1      192.9      9.3      1.4        203.6   

Corporate administration

   -          -          -          -          -          -          -          -       

Amortization of intangible assets

   6.0      -          -          6.0      6.7      -          -          6.7   

Interest expense

   1.2      -          -          1.2      0.5      -          0.1      0.6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

    $23.6       $(6.7)      $0.8       $17.7       $16.7       $    (6.9)      $(2.0)      $7.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(1)

    $34.3       $(3.8)      $0.8       $31.3       $25.6       $(3.4)      $(1.9)      $20.3   

Less: depreciation expense

   (3.2)     (2.9)     -          (6.1)     (1.8)     (3.5)     -          (5.3)  

Less: amortization of intangible assets

   (6.0)     -          -          (6.0)     (6.7)     -          -          (6.7)  

Less: interest expense

   (1.2)     -          -          (1.2)     (0.5)     -          (0.1)     (0.6)  

Add: net realized capital gains

   0.7      -          -          0.7      0.1      -          -          0.1   

Adjustments to equity in earnings of Wilbert

   (1.0)     -          -          (1.0)     -          -          -          -       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

    $23.6       $(6.7)      $    0.8       $17.7       $16.7       $(6.9)      $(2.0)      $7.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Nine Months Ended September 30, 
   2017   2016 
   Mfg. &
Svcs.
   Oil & Gas   Corp. &
other
   Total   Mfg. &
Svcs.
   Oil & Gas   Corp. &
other
   Total 
   ($ in millions) 

Net investment income

    $1.1       $-           $  1.0       $2.1       $0.2       $-           $(0.2)      $-       

Net realized capital gains

   0.9      -          -          0.9      (0.2)     -          13.2      13.0   

Other than temporary impairment losses

   -          -          -          -          -          -          -          -       

Other revenue

     626.3            7.5      0.5        634.3        511.0      6.8      (0.5)     517.3   

Other operating expenses

   579.4      27.2      11.6      618.2      474.6          27.6          5.8        508.0   

Corporate administration

   -          -          -          -          -          -          -          -       

Amortization of intangible assets

   15.4      -          -          15.4      16.9      -          -          16.9   

Interest expense

   2.9      -          0.1      3.0      1.1      -          0.1      1.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

    $30.6       $(19.7)      $(10.2)      $0.7       $18.4       $(20.8)      $6.6       $4.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(1)

    $56.8       $(10.9)      $(10.1)      $35.8       $41.5       $(10.1)      $(6.5)      $24.9   

Less: depreciation expense

   (7.8)     (8.8)     -          (16.6)     (4.9)     (10.7)     -          (15.6)  

Less: amortization of intangible assets

   (15.4)     -          -          (15.4)     (16.9)     -          -          (16.9)  

Less: interest expense

   (2.9)     -          (0.1)     (3.0)     (1.1)     -          (0.1)     (1.2)  

Add: net realized capital gains

   0.9      -          -          0.9      (0.2)     -          13.2      13.0   

Adjustments to equity in earnings of Wilbert

   (1.0)     -          -          (1.0)     -          -          -          -       
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (losses) before income taxes

    $30.6       $(19.7)      $  (10.2)      $0.7       $18.4       $(20.8)      $6.6       $4.2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   Three Months Ended September 30,
   2018 2017
     Industrial   Non-
  industrial  
   Corp. &  
other
 Total   Industrial   Non-
  industrial  
   Corp. &  
other
 Total
   ($ in millions)

Noninsurance revenue(1)

   $  224.2   $  183.7   $(0.4  $  407.5   $  137.9   $  150.9   $0.5   $  289.3 

Net investment income

   0.7   -      -      0.7   0.8   0.1   0.7   1.6 

Net realized capital gains

   0.1   (0.1  -      -      0.5   0.2   -      0.7 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

   $225.0   $183.6   $(0.4  $408.2   $139.2   $151.2   $1.2   $291.6 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating expenses(1)

   217.1   161.7        3.7   382.5   130.8   128.7   0.5   260.0 

Amortization of intangible assets

   2.4   3.4   -      5.8   1.9   4.1   -      6.0 

Interest expenses

   2.0   0.6   -      2.6   0.8   0.4   -      1.2 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

   $3.5   $17.9   $(4.1  $17.3   $5.7   $18.0   $       0.7   $24.4 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings (losses) before income taxes(2)

   $5.8   $21.4   $(4.1  $23.1   $7.1   $21.9   $0.7   $29.7 

Add: net realized capital gains

   0.1   (0.1  -      -      0.5   0.2   -      0.7 

Less: amortization of intangible assets

   (2.4  (3.4  -      (5.8  (1.9  (4.1  -      (6.0
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

   $3.5   $17.9   $(4.1  $17.3   $5.7   $18.0   $0.7   $24.4 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Nine Months Ended September 30,
   2018 2017
   Industrial Non-
industrial
 Corp. &
other
 Total Industrial Non-
industrial
 Corp. &
other
 Total
   ($ in millions)

Noninsurance revenue(1)

   $591.6   $387.9   $(0.3  $979.2   $254.2   $372.1   $0.5   $626.8 

Net investment income

   3.6   0.1   -      3.7   0.8   0.2   1.1   2.1 

Net realized capital gains

   0.7   (0.1  -      0.6   0.6   0.3   -      0.9 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

   $595.9   $387.9   $(0.3  $983.5   $255.6   $372.6   $1.6   $629.8 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating expenses(1)

   570.2   358.1   8.7   937.0   241.2   338.2   11.6   591.0 

Amortization of intangible assets

   6.7   10.3   -      17.0   2.9   12.5   -      15.4 

Interest expenses

   4.5   1.6   -      6.1   1.9   1.0   0.1   3.0 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

   $14.5   $17.9   $(9.0  $23.4   $9.6   $20.9   $(10.1  $20.4 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating earnings (losses) before income taxes(2)

   $20.5   $28.3   $(9.0  $39.8   $11.9   $33.1   $(10.1  $34.9 

Add: net realized capital gains

   0.7   (0.1  -      0.6   0.6   0.3   -      0.9 

Less: amortization of intangible assets

   (6.7  (10.3  -      (17.0  (2.9  (12.5  -      (15.4
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (losses) before income taxes

   $14.5   $17.9   $(9.0  $23.4   $9.6   $20.9   $(10.1  $20.4 
  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Adjusted EBITDA

For industrial and non-industrial operations: (i) noninsurance revenue consists of the sale of manufactured goods and services; and (ii) other operating expenses consist of the cost of goods and services sold and selling, general and administrative expenses. Other operating expenses also includes finders’ fees, legal and accounting costs and othertransaction-related expenses of $0.3 million and $0.8 million for the third quarter of 2018 and 2017, respectively, and $3.2 million and $6.8 million for the first nine months of 2018 and 2017, respectively.

(2)

Operating earnings before income taxes is anon-GAAP financial measure and does not replace earnings before income taxes determined in accordance with GAAP as a measure of profitability. See “Comment onNon-GAAP Financial Measures” herein for additional detail on the presentation of our results of operations. Adjusted EBITDA represents otherOperating earnings before income taxes represent noninsurance revenue less certain otherall operating expenses and does not include: (i) depreciation expense (a component of other operating expenses); (ii) amortization of intangible assets; (ii) change in the fair value of equity securities; (iii) interest expense; (iv) net realized capital gains; (v)(iv) OTTI impairment losses; and (vi)(v) income taxes.

The following table presents the changes in Alleghany Capital’s equity for the three and nine months ended September 30, 2017:2018 and 2017 are presented below.

 

 Three Months Ended September 30,
 2018 2017
      Three Months Ended September 30, 2017           Nine Months Ended September 30, 2017     
  Mfg. &
Svcs.
   Oil &
Gas
   Corp. &
other
   Total   Mfg. &
Svcs.
   Oil &
Gas
   Corp. &
other
   Total  Industrial Non-
industrial
 Corp. &
other
 Total Industrial Non-
industrial
 Corp. &
other
 Total
  ($ in millions)  ($ in millions)

Equity, beginning of period

    $607.5       $146.0       $(5.2)      $748.3       $453.4       $149.2       $(12.1)      $590.5     $439.2   $312.1   $25.9   $777.2   $284.0   $323.5   $(5.2  $602.3 

Earnings (losses) before income taxes

   23.6      (6.7)     0.8      17.7      30.6      (19.7)     (10.2)     0.7    3.5  17.9  (4.1 17.3  5.7  18.0  0.7  24.4 

Income taxes(1)

   (0.7)     2.6      (5.2)     (3.3)       (0.9)     7.2      (3.6)     2.7    (0.2 (0.7 (2.2 (3.1 (0.6 (0.1 (5.2 (5.9

Net earnings attributable to noncontrolling interest

   (4.2)     -          -          (4.2)     (5.2)     -          -          (5.2)  

Capital contributions (returns of capital) and other(2)

   67.0      7.3      0.5      74.8      215.3      12.5      16.8      244.6   

Net earnings attributable to noncontrolling interests(2)

 (0.5 (4.1  -     (4.6 (0.7 (3.5  -     (4.2

Capital contributions (returns of capital) and other(3)

 5.9  (4.1 67.2  69.0  70.5  (3.7    0.7  67.5 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity, end of period

    $693.2       $149.2       $(9.1)      $833.3       $693.2       $149.2       $(9.1)      $833.3     $447.9   $321.1   $  86.8   $855.8   $358.9   $334.2   $(9.0  $684.1 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Nine Months Ended September 30,
 2018 2017
 Industrial Non-
industrial
 Corp. &
other
 Total Industrial Non-
industrial
 Corp. &
other
 Total
 ($ in millions)

Equity, beginning of period

  $363.6   $331.3   $11.2   $706.1   $122.7   $330.7   $(12.1  $441.3 

Earnings (losses) before income taxes

 14.5  17.9  (9.0 23.4  9.6  20.9  (10.1 20.4 

Income taxes(1)

 (0.8 (1.4 (2.4 (4.6 (0.8 (0.1 (3.6 (4.5

Net earnings attributable to noncontrolling interests(2)

 (1.8 (5.7  -     (7.5 (1.3 (3.9  -     (5.2

Capital contributions (returns of capital) and other(3)

 72.4  (21.0 87.0  138.4  228.7  (13.4 16.8  232.1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity, end of period

  $447.9   $321.1   $86.8   $855.8   $358.9   $334.2   $(9.0  $684.1 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Income

Federal income taxes for certainmost Alleghany Capital subsidiaries are incurred at the Alleghany Capital corporate level.

(2)For Estimated federal income tax (expense) benefit incurred at the Alleghany Capital corporate level attributable to industrial andnon-industrial operations for the third quarter of 2018 were ($0.7) million and ($3.8) million, respectively, for the third quarter of 2017 primarily reflectswere ($1.9) million and ($6.3) million, respectively, for the investment in Wilbert,first nine months of 2018 were ($2.8) million and ($3.8) million, respectively, and for the first nine months of 2017 alsowere ($3.3) million and ($7.3) million, respectively.

(2)

During the first nine months of 2018, the noncontrolling interests outstanding were approximately as follows: Bourn & Koch - 11 percent; Kentucky Trailer - 21 percent; W&W|AFCO Steel - 20 percent; IPS - 15 percent; and Jazwares - 23 percent.

(3)

For the third quarter and first nine months of 2018, primarily reflects funding provided by Alleghany to Alleghany Capital for an acquisition in October 2018 and, for the first nine months only, reflects funding provided by Alleghany Capital for the acquisition of Hirschfeld by W&W|AFCO Steel. For the third quarter and first nine months of 2017, primarily reflects funding provided by Alleghany Capital for the investment in Wilbert in August 2017 and, for the nine month period only, the acquisition of W&W|AFCO Steel.

Noninsurance revenue.The increases in noninsurance revenue in the third quarter and first nine months of 2018 from the corresponding 2017 periods primarily reflect increases in industrial operations, due primarily to the acquisition of Hirschfeld and, for the first nine months of 2018, the acquisition of W&W|AFCO Steel. To a lesser extent, the increases in the third quarter and first nine months of 2018 also reflect higher sales at Kentucky Trailer. With respect tonon-industrial operations, the increase in noninsurance revenue in the third quarter of 2018 from the third quarter of 2017 primarily reflects higher sales at IPS and the increase in noninsurance revenue in the first nine months of 2018 from the first nine months of 2017 primarily reflects higher sales at Jazwares.

Net investment income.The increases in net investment income in the third quarter andfirst nine months of 2018 from the first nine months of 2017 from the corresponding 2016 periods primarily reflect Alleghany Capital’s earnings from its investment in Wilbert.

Net realized capital gains.Net realized capital gains in the first nine months of 20162018 and 2017 primarily reflect a gaingains from the sale of $13.2 million recognized by Alleghany Capital on April 15, 2016 in connection with the acquisition of an additional 50 percent equity ownership in Jazwares, when itspre-existing 30 percent equity ownership was remeasured at estimated fair value, or the “Jazwares Remeasurement Gain.”certain investments and equipment, as well as certain foreign currency exchange rate impacts.

Other revenue and Other operating expenses.The increases in other revenue and other operating expenses in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect significant increases in industrial operations, due primarily to the acquisition of Hirschfeld and, for the first nine months of 2018, the acquisition of W&W|AFCO Steel. The increasesTo a lesser extent, the increase in other operating expenses in the first nine months of 2017 from the first nine months of 2016 also reflect finders fees, legal and accounting costs and other transaction-related expenses at the Alleghany Capital level.

Amortization of intangible assets.The decreases in amortization expenses in the third quarter and first nine months of 2018 also reflects higher costs related to higher sales and facility consolidation activities at Kentucky Trailer, as well as higher costs fornon-industrial operations. The increase innon-industrial operations’ other operating expenses in the third quarter of 2018 primarily reflects higher costs at IPS related to higher sales. The increase innon-industrial operations’ other operating expenses in the first nine months of 2018 primarily reflects higher costs at Jazwares related to higher sales, increased marketing expenditures and the impact of certain Toys “R” Us Inc. liquidation-related charges. The increase in other operating expenses in the third quarter of 2018 also reflects an increase in long-term incentive compensation expense accruals at Alleghany Capital.

Other operating expenses in the first nine months of 2018 and 2017 from the corresponding 2016 periodsalso reflect significant finders’ fees, legal and accounting costs and other transaction-related expenses, primarily reflect decreasesrelated to W&W|AFCO Steel’s acquisition of Hirschfeld and Alleghany Capital’s acquisition of W&W|AFCO Steel.

Amortization of intangible assets.The increase in amortization expense at IPS, as certainin the first nine months of IPS’s intangible assets were fully amortized as2018 from the first nine months of December 31, 2016, partially offset by2017 primarily reflects the amortizationacquisition of net intangible assets related toHirschfeld and, for the first nine months of 2018, the acquisition of W&W|AFCO Steel.

Interest expense.The increases in interest expense in the third quarter and first nine months of 20172018 from the corresponding 20162017 periods primarily reflect new or increased borrowings at Bourn & Koch and Jazwares and borrowings at W&W|AFCO Steel.Steel and Hirschfeld.

Earnings (losses) before income taxes.The increasedecrease in earnings before income taxes in the third quarter of 20172018 from the third quarter of 20162017 primarily reflects a loss for corporate & other compared with earnings in the third quarter of 2017 and, to a lesser extent, a decrease in the industrial operations’ earnings before income taxes. The loss for corporate & other primarily reflects an increase in long-term incentive compensation expense accruals at Alleghany Capital. The decrease in the industrial operations’ earnings before income taxes primarily reflects higher margins of the manufacturinginterest expense and service operations,amortization expenses at W&W|AFCO Steel and expenses related to facility consolidation activities at Kentucky Trailer, all as discussed above, as well as the inclusiontiming of certain large projects at W&W|AFCO Steel and our investment in Wilbert, as discussed above. Steel.

The decreaseincrease in earnings before income taxes in the first nine months of 20172018 from the first nine months of 20162017 primarily reflects the $13.2 million Jazwares Remeasurement Gainincreased earnings in the 2016 period,industrial operations, partially offset by higher margins oflower earnings in the manufacturing and service operations,non-industrial operations. The increase in the industrial operations’ earnings before income taxes primarily reflects Alleghany Capital’s earnings from its investment in Wilbert, as well as the inclusionimpact of increased sales at Kentucky Trailer, all as discussed above. The increase in earnings before income taxes from the acquisitions of W&W|AFCO Steel and our investmentHirschfeld was offset by an increase in Wilbert, allamortization expense. The decrease innon-industrial operating earnings before income taxes in the first nine months of 2018 primarily reflects higher expenses at Jazwares, as discussed above.

Corporate Activities Results

The primary components of corporate activities are Alleghany Properties, SORC and activities at the Alleghany parent company. The following table presents the results for corporate activities:

 

 

Three Months Ended

September 30,

 Nine Months Ended
September 30,
   

Three Months Ended

September 30,

   

Nine Months Ended

September 30,

 
 2017 2016 2017 2016   2018   2017   2018   2017 
 ($ in millions)   ($ in millions) 

Net premiums earned

   $-          $-          $-          $-          $          -        $          -        $          -        $          -      

Net investment income

 1.7    1.9    8.1    5.9      4.1      1.7      12.0      8.1   

Change in the fair value of equity securities

   (3.7)     -         6.1      -      

Net realized capital gains

         10.7     -                10.1        (3.5)     -         10.7      (0.2)     10.1   

Other than temporary impairment losses

  -         -         -         -          -         -         -         -      

Other revenue

 (0.1)   6.1    5.6    6.7   

Noninsurance revenue

   24.6      2.3      36.8      13.1   
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total revenues

 12.3    8.0    23.8    9.1      25.0      14.7      54.7      31.3   
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Net loss and loss adjustment expenses

  -         -         -         -          -         -         -         -      

Commissions, brokerage and other underwriting expenses

  -         -         -         -          -         -         -         -      

Other operating expenses

 0.5    1.2    2.6    2.4      9.2      9.6      25.9      29.8   

Corporate administration

 (3.2)           10.4            26.4            33.0      17.8      (3.2)     39.2      26.4   

Amortization of intangible assets

  -         -         -         -          -         -        -         -      

Interest expense

 13.0    13.3    39.5    39.6      12.9      13.0      39.4      39.5   
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Earnings (losses) before income taxes

   $2.0      $(16.9)     $(44.7)     $(65.9)     $(14.9)     $(4.7)     $(49.8)     $(64.4)  
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Net investment income.The increaseincreases in net investment income in the third quarter and first nine months of 20172018 from the corresponding 2017 periods primarily reflect higher dividend income resulting from an increase in the size of the equity security portfolio held at the Alleghany parentcompany-level.

Change in the fair value of equity securities.In the first quarter of 2018, we adopted new investment accounting guidance which required changes in the fair value of equity securities, except those accounted for under the equity method, to be recognized in net earnings. See Note 1(c) to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form 10-Q for additional information regarding our adoption of this new guidance.

The changes in the fair value of equity securities in the third quarter and first nine months of 2016 primarily reflects higher income from new investments2018 reflect depreciation and appreciation, respectively, in other invested assets resulting from the purchasevalue of certainnon-marketablethe equity investmentssecurities held at the Alleghany parent company.company-level, primarily from holdings in the energy sector.

Net realized capital gains.The net realized capital gains in the third quarter and first nine months of 2017 primarily reflect gains on the sale of certain exchange-traded funds. The net realized capital losses in the first nine months of 2016 primarily reflect the sale at a loss of equity securities in the health care sector in the first quarter of 2016.

OtherNoninsurance revenue.The decreaseincreases in othernoninsurance revenue in the third quarter and first nine months of 2018 from the corresponding 2017 periods primarily reflect increases in property sales at Alleghany Properties and, to a lesser extent, increases in oil sales at SORC. Noninsurance revenue includes the sale in September 2018 of 68 acres of land located in Sacramento, California for approximately $20 million.

Other operating expenses.The decreases in other operating expenses in the third quarter and first nine months of 2018 from the corresponding 2017 periods primarily reflect the impact of the sale of a SORC legacy oil field in December 2017.

Corporate administration.The corporate administration expense in the third quarter of 2016 reflects a gain on the sale of a retail shopping center by Alleghany Properties in July 2016. The decrease in other revenue in the first nine months of 2017 from the first nine months of 2016 reflects lower real estate sales activity at Alleghany Properties.

Corporate administration. The2018, compared with negative corporate administration expense in the third quarter of 2017, compared with corporate administration expense in the third quarter of 2016, and the decreaseincrease in corporate administration expense in the first nine months of 20172018 from the first nine months of 2016,2017, primarily reflect increases in Alleghany’s long-term incentive compensation accruals. Such increases in accruals primarily reflect the impact of significantly lower catastrophe losses arising from Hurricanes Harvey, Irma and Mariaincreases in the price per share of our common stock during the 2018 periods, partially offset by the impact of declines in unrealized appreciation on long-term incentive compensation expense accruals at Alleghany.our debt securities portfolio in the third quarter and first nine months of 2018.

Earnings (losses)(Losses) before income taxes.The earnings before income taxesincrease in the third quarter of 2017 compared with the net losses before income taxes in the third quarter of 2016,2018 from the third quarter of 2017 primarily reflects the corporate administration expense in the third quarter of 2018, compared with negative corporate administration expense in the third quarter of 2017 and, to a lesser extent, gains on the sale of certain exchange-traded funds in the third quarter of 2017, partially offset by an increase in sales at Alleghany Properties, all as discussed above. The decrease in losses before income taxes in the first nine months of 20172018 from the first nine months of 2016,2017 primarily reflect the impact of losses arising from Hurricanes Harvey, Irma and Maria on long-term incentive compensationreflects an increase in sales at Alleghany Properties, partially offset by an increase in corporate administration expense, accruals and net realized capital gains in the third quarter and first nine months of 2017,all as explaineddiscussed above.

Reserve Review Process

Our reinsurance and insurance subsidiaries analyze, at least quarterly, liabilities for unpaid loss and LAE established in prior years and adjust their expected ultimate cost, where necessary, to reflect favorable or unfavorable development in loss experience and new information, including, for certain catastrophe events, revised industry estimates of the magnitude of a catastrophe. Adjustments to previously recorded liabilities for unpaid loss and LAE, both favorable and unfavorable, are reflected in our financial results in the periods in which these adjustments are made and are referred to as prior accident year loss reserve development. The following table presents the reserves established in connection with the loss and LAE of our reinsurance and insurance segments on a gross and net basis by line of business. These reserve amounts represent the accumulation of estimates of ultimate loss (including for losses that have been incurred but not yet reported or “IBNR”) and LAE.

  As of September 30, 2017  As of December 31, 2016 
  Gross Loss
and LAE
Reserves
  Reinsurance
Recoverables
on Unpaid
Losses
  Net Loss and
LAE Reserves
  Gross Loss
and LAE
Reserves
  Reinsurance
Recoverables
on Unpaid
Losses
  Net Loss and
LAE Reserves
 
  ($ in millions) 

Reinsurance Segment

      

Property

   $1,891.3      $(523.9)     $1,367.4      $952.7      $(106.7)     $846.0   

Casualty & other(1)

  7,524.7     (259.9)    7,264.8     7,324.4     (226.0)    7,098.4   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  9,416.0     (783.8)    8,632.2     8,277.1     (332.7)    7,944.4   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Insurance Segment

      

Property

  581.6     (231.1)    350.5     362.2     (186.8)    175.4   

Casualty(2)

      2,076.1           (672.7)        1,403.4         2,083.1           (696.0)        1,387.1   

Workers’ Compensation

  274.2     (1.1)    273.1     241.2     (1.8)    239.4   

All other(3)

  181.4     (77.6)    103.8     192.1     (87.4)    104.7   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  3,113.3     (982.5)    2,130.8     2,878.6     (972.0)    1,906.6   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Eliminations

  (72.9)    72.9     -       (68.5)    68.5     -     
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

   $12,456.4      $(1,693.4)     $10,763.0      $11,087.2      $(1,236.2)     $9,851.0   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 
  As of September 30, 2018 As of December 31, 2017
  Gross Loss
and LAE
Reserves
 Reinsurance
Recoverables
on Unpaid
Losses
 Net Loss and
LAE
Reserves
 Gross Loss
and LAE
Reserves
 Reinsurance
Recoverables
on Unpaid
Losses
 Net Loss and
LAE
Reserves
  ($ in millions)

Reinsurance Segment

      

Property

   $1,832.7    $(598.9   $1,233.8    $1,758.0    $(493.7   $1,264.3 

Casualty & other(1)

  7,309.4   (247.9  7,061.5   7,370.0   (251.0  7,119.0 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  9,142.1   (846.8  8,295.3   9,128.0   (744.7  8,383.3 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Insurance Segment

      

Property

  448.5   (173.0  275.5   545.9   (225.9  320.0 

Casualty(2)

  2,154.5   (691.5  1,463.0   2,078.6   (671.8  1,406.8 

Workers’ Compensation

  3.1   -      3.1   1.5   -      1.5 

All other(3)

  173.6   (72.4  101.2   185.1   (75.5  109.6 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  2,779.7   (936.9  1,842.8   2,811.1   (973.2  1,837.9 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Eliminations

  (66.9  66.9   -      (67.8  67.8   -    
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

        Total

   $  11,854.9    $  (1,716.8   $  10,138.1    $  11,871.3    $  (1,650.1   $  10,221.2 
 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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; surety;asbestos-related illness and environmental impairment liability; and credit.

(2)

Primarily consists of the following direct lines of business: umbrella/excess; directors’ and officers’ liability; professional liability; and general liability.

(3)

Primarily consists of commercialmulti-peril and surety lines of business, as well as loss and LAE reserves for terminated lines of business and loss reserves acquired in connection with prior acquisitions for which the sellers provided loss reserve guarantees.

Changes in Gross and Net Loss and LAE Reserves between September 30, 20172018 and December 31, 20162017. Gross and net loss and LAE reserves and reinsurance recoverables as of September 30, 2017 increased2018 decreased from December 31, 2016,2017, primarily reflecting significantpayments on catastrophe losses. Catastrophelosses incurred in 2017 and favorable prior accident year loss reserve development, partially offset by catastrophe losses in September 2018. Such 2018 catastrophe losses, net of reinsurance, in the third quarter and first nine months of 2017 included $264.6include $87.7 million related to Typhoon Jebi, $80.2 million related to Hurricane Harvey in August 2017, $312.0Florence and $38.5 million related to Hurricane Irma in September 2017, and $170.3 million related to Hurricane Maria in September 2017, all as discussed above.Typhoon Trami.

Reinsurance Recoverables

Our reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite in order to reduce the effect of individual or aggregate exposure to losses, manage capacity, protect capital resources, reduce volatility in specific lines of business, improve risk-adjusted portfolio returns and enable them to increase gross premium writings and risk capacity without requiring additional capital. Our reinsurance and insurance subsidiaries purchase reinsurance and retrocessional coverages from highly-ratedthird-party reinsurers. If the assuming reinsurers are unable or unwilling to meet the obligations assumed under the applicable reinsurance agreements, our reinsurance and insurance subsidiaries would remain liable for such reinsurance portion not paid by these reinsurers. As such, funds, trust agreements and letters of credit are held to collateralize a portion of our reinsurance and insurance subsidiaries’ reinsurance recoverables, and our reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite or assume with multiple reinsurance programs.

As of September 30, 2017,2018, our reinsurance and insurance subsidiaries had total reinsurance recoverables of $1,738.4$1,768.8 million, consisting of $1,693.4$1,716.8 million of ceded outstanding loss and LAE and $45.0$52.0 million of recoverables on paid losses. See Part I, Item 1,

“Business— “Business — Reinsurance Protection” of the 20162017 Form10-K for additional information on the reinsurance purchased by our reinsurance and insurance subsidiaries.

The following table presents information regarding concentration of our reinsurance recoverables and the ratings profile of our reinsurers as of September 30, 2017:2018:

 

                                                         

Reinsurer(1)

 Rating(2)  Amount      Percentage     
     ($ in millions)    

 

Swiss Reinsurance Company

  A+ (Superior)   $159.5    9.2%   

Syndicates at Lloyd’s of London

  A (Excellent)   135.8    7.8%   

PartnerRe Ltd

  A (Excellent)   122.5    7.0%   

Fairfax Financial Holdings Ltd(3)

  A (Excellent)   102.0    5.9%   

RenaissanceRe Holdings Ltd

  A+ (Superior)   99.1    5.7%   

Chubb Corporation

  A++ (Superior)   89.4    5.1%   

W.R. Berkley Corporation

  A+ (Superior)   88.3    5.1%   

Liberty Mutual

  A (Excellent)   72.6    4.2%   

Kane SAC Ltd(4)

  not rated   70.4    4.0%   

Hannover Ruck SE

  A+ (Superior)   53.5    3.1%   

All other reinsurers

   745.3    42.9%   
  

 

 

  

 

 

 

Total reinsurance recoverables(5)

   $1,738.4    100.0%   
  

 

 

  

 

 

 

Secured reinsurance recoverables(4)

   $477.7    27.5%   
  

 

 

  

 

 

 

Reinsurer(1)

 

                Rating(2)                

  Amount     Percentage   
     ($ in millions)     

Syndicates at Lloyd’s of London

 A (Excellent)       $126.7      7.2%   

PartnerRe Ltd

 A (Excellent)      112.2      6.3%   

Swiss Reinsurance Company

 A+ (Superior)      107.7      6.1%   

Fairfax Financial Holdings Ltd

 A (Excellent)      96.0      5.4%   

RenaissanceRe Holdings Ltd

 A+ (Superior)      89.9      5.1%   

W.R. Berkley Corporation

 A+ (Superior)      87.7      5.0%   

Chubb Corporation

 A++ (Superior)      79.6      4.5%   

Kane SAC Ltd, Rondout Segregated Account(3)

 not rated      75.5      4.3%   

Liberty Mutual

 A (Excellent)      67.7      3.8%   

Kane SAC Ltd, Bowery Segregated Account(3)

 not rated      52.1      2.9%   

All other reinsurers

    873.7      49.4%   
   

 

 

   

 

 

 

Total reinsurance recoverables(4)

     $    1,768.8      100.0%   
   

 

 

   

 

 

 

Secured reinsurance recoverables(3)

     $    613.3      34.7%   
   

 

 

   

 

 

 

 

(1)

Reinsurance recoverables reflect amounts due from one or more reinsurance subsidiaries of the listed company.

(2)

Represents the A.M. Best Company, Inc. financial strength rating for the applicable reinsurance subsidiary or subsidiaries from which the reinsurance recoverable is due.

(3)In July 2017, Fairfax Financial Holdings Ltd acquired Allied World Assurance Company Holdings, AG.
(4)

Represents reinsurance recoverables secured by funds held, trust agreements or letters of credit.

(5)(4)

Approximately 8073 percent of our reinsurance recoverables balance as of September 30, 20172018 was due from reinsurers having an A.M. Best Company, Inc. financial strength rating of A (Excellent) or higher.

We had no allowance for uncollectible reinsurance as of September 30, 2017.2018.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that directly affect our reported financial condition and operating performance. More specifically, these estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from reported results to the extent that estimates and assumptions prove to be inaccurate.

We believe our most critical accounting estimates are those with respect to the liability for unpaid loss and LAE reserves, fair value measurements of certain financial assets, OTTI losses on investments, goodwill and other intangible assets and reinsurance premium revenues, as they require management’s most significant exercise of judgment on both a quantitative and qualitative basis. The accounting estimates that result require the use of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our financial condition, results of operations and cash flows would be affected, possibly materially.

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” of the 20162017 Form10-K for a more complete description of our critical accounting estimates.

Financial Condition

Parent Level

General.In general, we follow a policy of maintaining a relatively liquid financial condition at our unrestricted holding companies. This policy has permitted us to expand our operations through internal growth at our subsidiaries and through acquisitions

of, or substantial investments in, operating companies. As of September 30, 2017,2018, we held total marketable securities and cash of $1,110.3$1,421.1 million, compared with $1,047.4$1,383.4 million as of December 31, 2016.2017. The increase in the nine months ended September 30, 20172018 primarily reflects the receipt of dividends from TransRe and RSUI and appreciation in the value of the equity securities held at the holding company-level, partially offset by a special dividend and repurchases of shares of our common stock, each as discussed below, as well as contributions to Alleghany Capital to fund the acquisition of approximately 80 percent of the equity inHirschfeld by its subsidiary W&W|AFCO Steel and the 45 percent equity interest in Wilbert, as well as the purchase of certainnon-marketable equity investments at the Alleghany parent company.Steel. The $1,110.3$1,421.1 million is comprised of $549.4$405.8 million at the Alleghany parent

company, $533.2$959.2 million at AIHL and $27.7$56.1 million at the TransRe holding company. We also hold certainnon-marketable investments at our unrestricted holding companies. We believe that we have and will have adequate internally generated funds, cash resources and unused credit facilities to provide for the currently foreseeable needs of our business, and we had no material commitments for capital expenditures as of September 30, 2017.2018.

Stockholders’ equity attributable to Alleghany stockholders was approximately $8.2$8.6 billion as of September 30, 2017,2018, compared with approximately $7.9$8.5 billion as of December 31, 2016.2017. The increase in stockholders’ equity in the first nine months of 20172018 primarily reflects an increasenet earnings, partially offset by a decline in unrealized appreciation on our equity and,debt securities portfolio due to a lesser extent, bond portfolios, partially offset by net losses attributable to Alleghany stockholdersan increase in interest rates in the first nine months of 2017. Net losses attributable to Alleghany stockholders in the first nine months2018, as well as a special dividend and repurchases of 2017 primarily reflect significant catastrophe losses from Hurricanes Harvey, Irma and Maria at our reinsurance and insurance segments,common stock, all as discussed above.below. As of September 30, 2017,2018, we had 15,403,75814,918,380 shares of our common stock outstanding, compared with 15,410,16415,390,500 shares of our common stock outstanding as of December 31, 2016.2017.

Sale of Subsidiary. On September 12, 2017, AIHL signed a definitive agreement to sell PacificComp to CopperPoint Mutual Insurance Company (“CopperPoint”) for total cash consideration of approximately $150$158 million. The transaction closed on December 31, 2017, at which time: (i) approximately $442 million of PacificComp assets, consisting primarily of debt securities, and approximately $316 million of PacificComp liabilities, consisting primarily of loss and LAE reserves, were transferred; and (ii) AIHL recorded an after-tax gain of approximately $16 million, which included a tax benefit. In connection with the transaction, AIHL Re will continue to provide adverse development reinsurance coverage on PacificComp’spre-acquisition claims, subject to certain terms and conditions. The transaction,AIHL Re’s obligations, which isare guaranteed by Alleghany, are subject to customary regulatory reviewto: (i) an aggregate limit of $150.0 million; and approvals, is expected to close on(ii) a final commutation and settlement as of December 31, 2017. Upon closing, we expect to record an estimatedafter-tax gain of approximately $25 million, which amount includes a tax benefit. As of September 30, 2017, PacificComp’s total assets were $440.6 million, consisting primarily of debt securities, and PacificComp’s total liabilities were $313.7 million, consisting primarily of loss and LAE reserves.2024.

Debt.On September 9, 2014, we completed a public offering of $300.0 million aggregate principal amount of our 4.90% senior notes due on September 15, 2044. On June 26, 2012, we completed a public offering of $400.0 million aggregate principal amount of our 4.95% senior notes due on June 27, 2022. On September 20, 2010, we completed a public offering of $300.0 million aggregate principal amount of our 5.625% senior notes due on September 15, 2020. See Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 20162017 Form10-K for additional information on the senior notes.

Credit Agreement.On July 31, 2017, we entered into a five-year credit agreement, or the “Credit Agreement,” with certain lenders party thereto, which provides for an unsecured revolving credit facility in an aggregate principal amount of up to $300.0 million. The credit facility is scheduled to expire on July 31, 2022, unless earlier terminated. Borrowings under the Credit Agreement will be available for working capital and general corporate purposes, including permitted acquisitions and repurchases of Common Stock. Borrowings under the Credit Agreement bear a floating rate of interest based in part on our credit rating, among other factors. The Credit Agreement contains representations, warranties and covenants customary for bank loan facilities of this nature.

There were no borrowings under the Credit Agreement from July 31, 2017inception through September 30, 2017.2018.

The Credit Agreement replaced our previous four-year credit agreement, or the “Prior Credit Agreement,” which provided for an unsecured revolving credit facility in an aggregate principal amount of up to $200.0 million. The Prior Credit Agreement was terminated on July 31, 2017 in advance of its scheduled October 15, 2017 expiration date. There were no borrowings under the Prior Credit Agreement in the seven months ended July 31, 2017.

Common Stock Repurchases.In July 2014, ourNovember 2015, the Alleghany Board of Directors authorized the repurchase of shares of our common stock at such times and at prices as management determines to be advisable, up to an aggregate of $350.0 million, or the “2014 Repurchase Program.” In November 2015, our Board of Directors authorized the repurchase, upon the completion of the 2014 Repurchase Program, of additional shares of our common stock at such times and at prices as management determines to be advisable, up to an aggregate of $400.0 million, or the “2015 Repurchase Program.” In June 2018, the first quarterAlleghany Board of 2016, we completedDirectors authorized, upon the 2014 Repurchase Program and subsequent repurchases have been made pursuant tocompletion of the 2015 Repurchase Program.Program, the repurchase of additional shares of our common stock, at such times and at prices as management determines to be advisable, up to an aggregate of $400.0 million. As of September 30, 2017,2018, we had $370.7$481.1 million remaining under ourboth share repurchase authorization.authorization programs.

The following table presents the shares of our common stock that we repurchased in the three and nine months ended September 30, 20172018 and 20162017 pursuant to the 2014 Repurchase Program and the 2015 Repurchase Program, as applicable:Program:

 

                                                                
  Three Months Ended
September 30,
   Nine Months Ended
September 30,
   Three Months Ended
September 30,
  Nine Months Ended
September 30,
  2017   2016   2017   2016   

2018

  

2017

  

2018

  

2017

Shares repurchased

   15,916    4,621    15,916    117,721   76,299    15,916    479,922    15,916  

Cost of shares repurchased (in millions)

  $8.5   $2.4   $8.5   $55.7     $        46.0      $        8.5      $      282.1      $          8.5  

Average price per share repurchased

  $537.14   $517.40   $537.14   $472.97     $    602.24      $  537.14      $    587.70      $    537.14  

Special Dividend.In February 2018, the Alleghany Board of Directors declared a special dividend of $10.00 per share for stockholders of record on March 5, 2018. On March 15, 2018, we paid dividends to stockholders totaling $154.0 million.

Investments in Certain Other Invested Assets.In December 2012, TransRe obtained an ownership interest in Pillar Capital Holdings, Limited, or “Pillar Holdings,” aBermuda-based insurance asset manager focused on collateralized reinsurance and catastropheinsurance-linked securities. Additionally,

TransRe invested $175.0 million and AIHL invested $25.0 million in limited partnership funds managed by Pillar Holdings, or the “Funds.” The objective of the Funds is to create portfolios with attractive risk-rewardrisk- reward characteristics and low correlation with other asset classes, using the extensive reinsurance and capital market experience of the principals of Pillar Holdings. We have concluded that both Pillar Holdings and the PillarFunds, or collectively, the “Pillar Investments, represent variable interest entities and that we are not the primary beneficiary, as we do not have the ability to direct the activities that most significantly impact each entity’s economic performance. Therefore, the Pillar Investments are not consolidated and are accounted for under the equity method of accounting. Our potential maximum loss in the Pillar Investments is limited to our cumulative net investment. As of September 30, 2017,2018, our carrying value in the Pillar Investments, as determined under the equity method of accounting, was $216.7$201.3 million, which is net of returns of capital received from the Pillar Investments.

In July 2013, AIHL invested $250.0 million in Ares, an asset manager, in exchange for a 6.25 percent equity stake in Ares, with an agreement to engage Ares to manage up to $1.0 billion in certain investment strategies. In May 2014, Ares completed an initial public offering of its common units. Upon completion of the initial public offering, Alleghany’s equity investment in Ares converted tointo limited partnerpartnership interests in certain Ares subsidiaries that arewere convertible into an aggregate 5.9 percent interest in Ares common units. TheseOn March 15, 2018, most of AIHL’s limited partnership interests may bewere converted at any time at our discretion. Until we determineinto Ares common units. As a result of the conversion and with respect to convert ourthe limited partnerpartnership interests that were converted into Ares common units, we classify our investmentAIHL: (i) reclassified its converted interests from other invested assets to equity securities; (ii) increased its carrying value to $208.2 million to reflect the fair value of Ares common units; and (iii) recorded the $45.7 million increase in carrying value as a realized capital gain as of March 15, 2018. As a result of the conversion and with respect to the unconverted limited partnership interests, AIHL: (i) changed its accounting from the equity method to fair value; (ii) increased its carrying value to $58.7 million to reflect the fair value of Ares limited partnership interests; and (iii) recorded the $12.9 million increase in carrying value as a component of net investment income as of March 15, 2018. On September 24, 2018, AIHL’s remaining Ares limited partnership interests were converted into Ares common units and, as a result, AIHL reclassified the remaining $56.9 million of its converted interests from other invested assets and we account for our investment using theto equity method of accounting. As of September 30, 2017, AIHL’s carrying value in Ares was $213.9 million, which is net of returns of capital received from Ares.securities.

Investments in Commercial Mortgage Loans.As of September 30, 2017,2018, the carrying value of our commercial mortgage loan portfolio was $649.7$695.9 million, representing the unpaid principal balance on the loans. As of September 30, 2017,2018, there was no allowance for loan losses. The commercial mortgage loan portfolio consists primarily of first mortgages on commercial properties in major metropolitan areas in the U.S. The loans earn interest at fixed- and floating-rates, mature in two to ten years from loan origination and the principal amounts of the loans were no more than approximatelytwo-thirds of the property’s appraised value at the time the loans were made.

Energy Holdings.As of September 30, 2017,2018, we had holdings in energy sector businesses of $519.3$896.8 million, comprised of $319.4$294.0 million of debt securities, $50.7$483.5 million of equity securities and $149.2$119.3 million of Alleghany’s equity attributable to SORC.

Subsidiaries

Financial strength is also a high priority of our subsidiaries, whose assets stand behind their financial commitments to their customers and vendors. We believe that our subsidiaries have and will have adequate internally generated funds, cash resources and unused credit facilities to provide for the currently foreseeable needs of their businesses. Our subsidiaries had no material commitments for capital expenditures as of September 30, 2017.2018.

The obligations and cash outflow of our reinsurance and insurance subsidiaries include claim settlements, commission expenses, administrative expenses, purchases of investments, and interest and principal payments on TransRe’s 8.00% senior notes due on November 30, 2039. In addition to premium collections, cash inflow is obtained from interest and dividend income, and maturities and sales of investments.investments and reinsurance recoveries. Because cash inflow from premiums is received in advance of cash outflow required to settle claims, our reinsurance and insurance operating units accumulate funds which they invest pending the need for liquidity. As the cash needs of a reinsurance or an insurance company can be unpredictable due to the uncertainty of the claims settlement process, the portfolios of our reinsurance and insurance subsidiaries consist primarily of debt securities and short-term investments to ensure the availability of funds and maintain a sufficient amount of liquid securities.

Included in Alleghany Capital is debt associated with its operating subsidiaries, which totaled $197.7 million as of September 30, 2018. The $197.7 million includes $102.3 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), $43.0 million of borrowings by Jazwares under its available credit facility, $21.5 million of term loans at Kentucky Trailer primarily related to borrowings to finance small acquisitions and borrowings under its available credit facility, $16.5 million of borrowings by IPS under its available credit facility, and $14.4 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.

With respect to ournon-insurance operating subsidiaries,corporate activities, SORC has relied on Alleghany almost entirely to support its operations. From its formation in 2011 through September 30, 2017,2018, we have invested $281.8$293.8 million in SORC.

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.

Consolidated Investment Holdings

Investment Strategy and Holdings.Our investment strategy seeks to preserve principal and maintain liquidity while trying to maximize ourrisk-adjusted,after-tax rate of return. Our investment decisions are guided mainly by the nature and timing of expected liability payouts, management’s forecast of cash flows and the possibility of unexpected cash demands, for example, to satisfy claims due to catastrophe losses. Our consolidated investment portfolio currently consists mainly of highly rated and liquid debt and equity securities listed on national securities exchanges. The overall credit quality of the debt securities portfolio is measured using the lowest rating of Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. or Fitch Ratings, Inc. In this regard, the overallweighted-average credit quality rating of our debt securities portfolio as of September 30, 20172018 and December 31, 20162017 wasAA-. Although manya portion of our debt securities, which consist predominantly of municipal bonds, are insured bythird-party financial guaranty insurance companies, the impact of such insurance was not significant to the debt securities credit quality rating as of September 30, 2017.2018. The following table presents the ratings of our debt securities portfolio as of September 30, 2017:2018:

 

  Ratings as of September 30, 2017  Ratings as of September 30, 2018
  AAA / Aaa   AA / Aa   A   BBB / Baa   Below
BBB / Baa or
Not-Rated(1)
   Total    AAA / Aaa     AA / Aa         A         BBB / Baa   Below
  BBB / Baa or  
Not Rated(1)
 Total
  ($ in millions)  ($ in millions)

U.S. Government obligations

   $-             $1,020.7         $-             $-             $-             $1,020.7         $-       $1,028.6    $-       $-       $-       $1,028.6 

Municipal bonds

   549.3         2,574.2         835.6         124.8         47.8         4,131.7       253.0  1,693.4  542.6  114.4  0.9  2,604.3 

Foreign government obligations

   572.6         338.0         210.7         19.6         -             1,140.9       458.6  259.4  174.9  9.1   -     902.0 

U.S. corporate bonds

   4.7         91.0         628.3         995.6         761.4         2,481.0       12.5  99.0  856.4  1,038.4  437.4  2,443.7 

Foreign corporate bonds

   202.9         149.9         543.1         285.5         112.8         1,294.2       319.3  154.2  556.4  330.7  58.2  1,418.8 

Mortgage and asset-backed securities:

                  

Residential mortgage-backed securities (“RMBS”)

   15.3         923.6         0.1         7.2         8.0         954.2       15.1  1,045.1   -     48.5  6.9  1,115.6 

Commercial mortgage-backed securities (“CMBS”)

   172.4         270.3         66.5         1.4         6.3         516.9       155.1  308.2  59.6  1.0   -     523.9 

Other asset-backed securities

   712.7         234.4         356.8         339.9         29.0         1,672.8       833.9  422.3  352.0  417.6  8.5  2,034.3 
  

 

   

 

   

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

 

 

 

 

Total debt securities

   $  2,229.9         $  5,602.1         $  2,641.1         $  1,774.0         $  965.3         $  13,212.4         $    2,047.5    $    5,010.2    $    2,541.9    $    1,959.7    $    511.9    $  12,071.2 
  

 

   

 

   

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

 

 

 

 

Percentage of debt securities

   16.9%      42.4%      20.0%      13.4%      7.3%      100.0%    17.0 41.5 21.1 16.2 4.2 100.0
  

 

   

 

   

 

   

 

   

 

   

 

  

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Consists of $223.0$157.2 million of securities rated BB / Ba, $286.8$209.8 million of securities rated B, $51.5$44.8 million of securities rated CCC, $3.2$0.4 million of securities rated CC, $3.7$4.3 million of securities rated below CC and $397.1$95.4 million ofnot-rated securities.

Our debt securities portfolio has been designed to enable management to react to investment opportunities created by changing interest rates, prepayments, tax and credit considerations or other factors, or to circumstances that could result in a mismatch between the desired duration of debt securities and the duration of liabilities and, as such, is classified asavailable-for-sale, or “AFS.” AFS.

Effective duration measures a portfolio’s sensitivity to changes in interest rates. In this regard, as of September 30, 2018 and December 31, 2017, our debt securities portfolio had an effective duration of approximately 4.54.3 years approximately the same duration as of December 31, 2016.and 4.4 years, respectively. As of September 30, 2017,2018, approximately $3.5$3.2 billion, or 26.627 percent, of our debt securities portfolio represented securities with maturities of five years or less. See Note 3(b) to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form10-Q for additional detail on the contractual maturities of our consolidated debt securities portfolio. We may increase the proportion of our debt securities portfolio held in securities with maturities of more than five years should the yields of these securities provide, in our judgment, sufficient compensation for their increased risk. We do not believe that this strategy would reduce our ability to meet ongoing claim payments or to respond to significant catastrophe losses.

In the event paid losses accelerate beyond the ability of our reinsurance and insurance subsidiaries to fund these paid losses from current cash balances, current operating cash flow, dividend and interest receipts and security maturities, we would need to liquidate a portion of our investment portfolio, make capital contributions to our reinsurance and insurance subsidiaries, and/or arrange for financing. Strains on liquidity could result from: (i) the occurrence of several significant catastrophe events in a relatively short period of time; (ii) the sale of investments into a depressed marketplace to fund these paid losses; (iii) the uncollectibility of reinsurance recoverables on these paid losses; (iv) the significant decrease in the value of collateral supporting reinsurance recoverables; or (v) a significant reduction in our net premium collections.

We may, from time to time, make significant investments in the common stock of a public company, subject to limitations imposed by applicable regulations.

On a consolidated basis, our invested assets increased to approximately $19.0 billion as of September 30, 20172018 from approximately $18.1$18.8 billion as of December 31, 2016,2017, primarily reflecting appreciation in the impactfair value of an increaseequity securities, partially offset by a decline in unrealized appreciation on our equitydebt securities portfolio and,due to a lesser extent, our bond portfolio, partially offset byan increase in interest rates in the first nine months of 2018,

contributions to Alleghany Capital to fund the acquisition of approximately 80 percent of the equity inHirschfeld by its subsidiary, W&W|AFCO Steel.Steel, and repurchases of shares of our common stock, all as discussed above. The special dividend was funded by the proceeds from the sale of PacificComp at December 31, 2017.

Fair Value.The following table presents the carrying valuevalues and estimated fair valuevalues of our consolidated financial instruments as of September 30, 20172018 and December 31, 2016:2017:

 

  September 30, 2017   December 31, 2016   September 30, 2018   December 31, 2017 
  Carrying Value   Fair Value   Carrying Value   Fair Value     Carrying Value       Fair Value       Carrying Value       Fair Value   
  ($ in millions)   ($ in millions) 

Assets

           ��    

Investments (excluding equity method investments and loans)(1)

   $    17,590.2      $    17,590.2      $    16,899.2      $    16,899.2       $17,791.3     $    17,791.3     $17,406.5     $    17,406.5 

Liabilities

                

Senior Notes and other debt(2)

   $      1,486.4      $      1,655.5      $      1,476.5      $      1,584.3       $1,581.7     $1,701.8     $1,484.9     $1,614.6 

 

(1)

This table includes AFS investments (debtdebt and equity securities, as well as partnership andnon-marketable equity investments carried at fair value that are included in other invested assets).assets. This table excludes investments accounted for using the equity method and commercial mortgage loans that are carried at unpaid principal balance. The fair value of short-term investments approximates amortized cost. The fair value of all other categories of investments is discussed below.

(2)

See Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 20162017 Form10-K for additional information on the senior notes.notes and other debt.

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between willing, able and knowledgeable market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. In addition, a three-tiered hierarchy for inputs is used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are market participant assumptions based on market data obtained from sources independent of the reporting entity. Unobservable inputs are the reporting entity’s own assumptions about market participant assumptions based on the best information available under the circumstances. In assessing the appropriateness of using observable inputs in making our fair value determinations, we consider whether the market for a particular security is “active” or not based on all the relevant facts and circumstances. A market may be considered to be inactive if there are relatively few recent transactions or if there is a significant decrease in market volume. Furthermore, we consider whether observable transactions are “orderly” or not. We do not consider a transaction to be orderly if there is evidence of a forced liquidation or other distressed condition; as such, little or no weight is given to that transaction as an indicator of fair value.

Although we are responsible for the determination of the fair value of our financial assets and the supporting methodologies and assumptions, we employthird-party valuation service providers to gather, analyze and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. When those providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting a quote, which is generallynon-binding, from brokers who are knowledgeable about these securities or by employing widely accepted internal valuation models.

Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted internal valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested under the terms of service agreements. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates and other market observable information, as applicable. The valuation models take into account, among other things, market observable information as of the measurement date as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector and, when applicable, collateral quality and other issue or issuer specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased.

The three-tiered hierarchy used in management’s determination of fair value is broken down into three levels based on the reliability of inputs as follows:

 

Level 1: Valuations are based on unadjusted quoted prices in active markets that we have the ability to access for identical, unrestricted assets and do not involve any meaningful degree of judgment. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Our Level 1 assets include publicly traded common stocks and mutual funds (which are included on the balance sheet in equity securities) where our valuations are based on quoted market prices.

Level 2: Valuations are based on direct and indirect observable inputs other than quoted market prices included in Level 1. Level 2 inputs include quoted prices for similar assets in active markets and inputs other than quoted prices that are observable for the asset, such as the terms of the security andmarket-based inputs. Terms of the security include coupon, maturity date and any special provisions that may, for example, enable the investor, at its election, to redeem the security prior to its scheduled maturity date (such provisions may apply to all debt securities except U.S. Government obligations). Market-based inputs include interest rates and yield curves that are observable at commonly quoted intervals and current credit rating(s) of the security. Market-based inputs may also include credit spreads of all debt securities except U.S. Government obligations, and currency rates for certain foreign government obligations and foreign corporate bonds denominated in foreign currencies. Fair values are determined using a market approach that relies on the securities’ relationships to quoted prices for similar assets in active markets, as well as the other inputs described above. In determining the fair values for the vast majority of CMBS and otherasset-backed securities, as well as a small portion of RMBS, an income approach is used to corroborate and further support the fair values determined by the market approach. The income approach primarily involves developing a discounted cash flow model using the future projected cash flows of the underlying collateral, and the terms of the security. Level 2 assets generally include short-term investments and most debt securities. Our Level 2 liabilities consist of the senior notes.

 

Level 3: Valuations are based on techniques that use significant inputs that are unobservable. The valuation of Level 3 assets requires the greatest degree of judgment. These measurements may be made under circumstances in which there is little, if any, market activity for the asset. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, we consider factors specific to the asset. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assets classified as Level 3 principally include certain RMBS, CMBS, other asset-backed securities (primarily, collateralized loan obligations), U.S. and foreign corporate bonds (including privately issued securities), partnership investments andnon-marketable equity investments.

Mortgage-backed and asset-backed securities are initially valued at the transaction price. Subsequently, we use widely accepted valuation practices that produce a fair value measurement. The vast majority of fair values are determined using an income approach. The income approach primarily involves developing a discounted cash flow model using the future projected cash flows of the underlying collateral, as well as other inputs described below. A few Level 3 valuations are based entirely onnon-binding broker quotes. These securities consist primarily ofmortgage-backed andasset-backed securities where reliable pool and loan level collateral information cannot be reasonably obtained, and as such, an income approach is not feasible.

Since Level 3 valuations are based on techniques that use significant inputs that are unobservable with little or no market activity, the fair values under the market approach for Level 3 securities are less credible than under the income approach; however, the market approach, where feasible, is used to corroborate the fair values determined by the income approach. The market approach primarily relies on the securities’ relationships to quoted transaction prices for similarly structured instruments. To the extent that transaction prices for similarly structured instruments are not available for a particular security, other market approaches are used to corroborate the fair values determined by the income approach, including option adjusted spread analyses.

Unobservable inputs, significant to the measurement and valuation ofmortgage-backed andasset-backed securities, are generally used in the income approach, and include assumptions about prepayment speed and collateral performance, including default, delinquency and loss severity rates. Significant changes to any one of these inputs, or combination of inputs, could significantly change the fair value measurement for these securities.

The impact of prepayment speeds on fair value is dependent on a number of variables including whether the securities were purchased at a premium or discount. A decrease in interest rates generally increases the assumed rate of prepayments, and an increase in interest rates generally decreases the assumed speed of prepayments. Increased prepayments increase the yield on securities purchased at a discount and reduce the yield on securities purchased at a premium. In a decreasing prepayment environment, yields on securities purchased at a discount are reduced but are increased for securities purchased at a premium. Changes in default assumptions on underlying collateral are generally accompanied by directionally similar changes in other collateral performance factors, but generally result in a directionally opposite change in prepayment assumptions.

Our Level 3 liabilities consist of the debt of Alleghany Capital’s operating subsidiaries.

We employ specific control processes to determine the reasonableness of the fair values of our financial assets and liabilities. Our processes are designed to ensure that the values received or internally estimated are accurately recorded and that the data inputs and the valuation techniques used are appropriate, consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value. We assess the reasonableness of individual security values received from valuation service providers through various analytical techniques. In addition, we validate the reasonableness of fair values by comparing information obtained from our valuation service providers to other third-party valuation sources for selected securities. We also validate prices obtained from brokers for selected securities through reviews by those who have relevant expertise and who are independent of those charged with executing investing transactions.

In addition to such procedures, we review the reasonableness of our classification of securities within thethree-tiered hierarchy to ensure that the classification is consistent with GAAP.

The following tables present the estimated fair values of our financial instruments measured at fair value and the level of the fair value hierarchy of inputs used as of September 30, 20172018 and December 31, 2016:2017:

 

 Level 1 Level 2 Level 3 Total   Level 1   Level 2   Level 3   Total 
 ($ in millions)   ($ in millions) 

As of September 30, 2017

    

As of September 30, 2018

        

Equity securities:

            

Common stock

 $     3,815.2    $             0.5    $              0.9    $      3,816.6       $5,016.7      $3.5      $-          $5,020.2  

Preferred stock

  -         -        5.0    5.0      -         -         8.4     8.4  
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total equity securities

 3,815.2    0.5    5.9    3,821.6      5,016.7     3.5     8.4     5,028.6  
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Debt securities:

            

U.S. Government obligations

  -        1,020.7     -        1,020.7      -         1,028.6     -         1,028.6  

Municipal bonds

  -        4,131.7     -        4,131.7      -         2,604.3     -         2,604.3  

Foreign government obligations

  -        1,136.2    4.7    1,140.9      -         902.0     -         902.0  

U.S. corporate bonds

  -        2,202.2    278.8    2,481.0      -         2,040.7     403.0     2,443.7  

Foreign corporate bonds

  -        1,254.3    39.9    1,294.2      -         1,310.4     108.4     1,418.8  

Mortgage and asset-backed securities:

            

RMBS(1)

  -        948.8    5.4    954.2      -         1,115.6     -         1,115.6  

CMBS

  -        505.5    11.4    516.9      -         523.9     -         523.9  

Other asset-backed securities(2)

  -        490.3    1,182.5    1,672.8      -         654.4     1,379.9     2,034.3  
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total debt securities

  -        11,689.7    1,522.7    13,212.4      -         10,179.9     1,891.3     12,071.2  
  

 

   

 

   

 

   

 

 

Short-term investments

  -        547.8     -        547.8      -         690.6     -         690.6  

Other invested assets(3)

  -         -        8.4    8.4      -         -         0.9     0.9  
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Total investments (excluding equity method investments and loans)

 $     3,815.2    $    12,238.0    $      1,537.0    $    17,590.2       $    5,016.7      $  10,874.0      $  1,900.6      $  17,791.3  
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

Senior Notes and other debt

 $            -        $      1,553.0    $         102.5    $      1,655.5       $-          $1,504.1      $197.7      $1,701.8  
 

 

  

 

  

 

  

 

   

 

   

 

   

 

   

 

 

      Level 1          Level 2          Level 3          Total     
     ($ in millions)    

As of December 31, 2016

    

Equity securities:

    

Common stock

   $    3,105.2      $-          $4.3      $3,109.5   

Preferred stock

  -         -         -         -       
 

 

 

  

 

 

  

 

 

  

 

 

 

Total equity securities

  3,105.2     -         4.3     3,109.5   
 

 

 

  

 

 

  

 

 

  

 

 

 

Debt securities:

    

U.S. Government obligations

  -         1,243.3     -         1,243.3   

Municipal bonds

  -         4,185.8     -         4,185.8   

Foreign government obligations

  -         1,047.1     -         1,047.1   

U.S. corporate bonds

  -         2,120.2     72.9     2,193.1   

Foreign corporate bonds

  -         1,088.4     0.4     1,088.8   

Mortgage and asset-backed securities:

    

RMBS(1)

  -         994.5     5.9     1,000.4   

CMBS

  -         730.5     4.3     734.8   

Other asset-backed securities(2)

  -         586.1     903.8     1,489.9   
 

 

 

  

 

 

  

 

 

  

 

 

 

Total debt securities

  -         11,995.9     987.3     12,983.2   

Short-term investments

  -         778.4     -         778.4   

Other invested assets(3)

  -         -         28.1     28.1   
 

 

 

  

 

 

  

 

 

  

 

 

 

Total investments (excluding equity method investments and loans)

   $3,105.2      $12,774.3      $    1,019.7      $16,899.2   
 

 

 

  

 

 

  

 

 

  

 

 

 

Senior Notes and other debt

   $    -          $    1,491.5      $    92.8      $    1,584.3   
 

 

 

  

 

 

  

 

 

  

 

 

 

       Level 1       Level 2   Level 3   Total 
   ($ in millions) 

As of December 31, 2017

        

Equity securities:

        

Common stock

    $    4,090.7      $3.8      $-          $4,094.5  

Preferred stock

   -         3.1     1.9     5.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

   4,090.7     6.9     1.9     4,099.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Debt securities:

        

U.S. Government obligations

   -         948.0     -         948.0  

Municipal bonds

   -         3,682.1     -         3,682.1  

Foreign government obligations

   -         1,006.6     -         1,006.6  

U.S. corporate bonds

   -         2,173.0     260.0     2,433.0  

Foreign corporate bonds

   -         1,424.6     75.2     1,499.8  

Mortgage and asset-backed securities:

        

RMBS(1)

   -         833.8     161.8     995.6  

CMBS

   -         550.1     1.6     551.7  

Other asset-backed securities(2)

   -         503.3     1,101.3     1,604.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total debt securities

   -         11,121.5     1,599.9     12,721.4  
  

 

 

   

 

 

   

 

 

   

 

 

 

Short-term investments

   -         578.1     -         578.1  

Other invested assets(3)

   -         -         7.5     7.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total investments (excluding equity method investments and loans)

    $4,090.7      $  11,706.5      $    1,609.3      $  17,406.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Senior Notes and other debt

    $-          $1,513.6      $101.0      $1,614.6  
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Primarily includes government agency pass-through securities guaranteed by a government agency or government sponsored enterprise, among other types of RMBS.

(2)

Includes $1,146.2$1,368.9 million and $903.8$1,101.3 million of collateralized loan obligations as of September 30, 20172018 and December 31, 2016,2017, respectively.

(3)

Includes partnership andnon-marketable equity investments accounted for on an AFS basis,at fair value, and excludes investments accounted for using the equity method.

Municipal Bonds.The following table provides the fair value of our municipal bonds as of September 30, 2017,2018, categorized by state and revenue source. Special revenue bonds are debt securities for which the payment of principal and interest is available solely from the cash flows of the related projects. As issuers of revenue bonds do not have the ability to draw from tax revenues or levy taxes to fund obligations, revenue bonds may carry a greater risk of default than general obligation bonds.

 

  Special Revenue       

State

 Education  Hospital  Housing  Lease
Revenue
  Special Tax  Transit  Utilities  All Other
Sources
  Total Special
Revenue
  Total
General
Obligation
  Total Fair
Value
 
                 ($ in millions)                

New York

  $18.6    $-        $-        $-        $100.0    $163.3    $83.7    $49.5    $415.1    $15.4    $430.5  

California

  9.8    46.7    -        9.4    1.3    27.4    113.5    7.5    215.6    99.7    315.3  

Texas

  13.0    -        0.2    -        26.4    96.5    75.3    2.4    213.8    81.9    295.7  

Massachusetts

  28.9    24.9    -        -        29.6    40.3    32.3    0.2    156.2    115.9    272.1  

Washington

  1.2    -        -        -        13.6    21.1    56.6    2.3    94.8    69.1    163.9  

Ohio

  46.3    1.5    0.2    1.5    2.1    -         49.2    2.2    103.0    59.5    162.5  

Colorado

  25.1    14.0    -        13.4    8.4    32.1    6.9    2.3    102.2    22.8    125.0  

North Carolina

  11.4    26.2    1.8    0.3    -         0.5    6.8    9.5    56.5    52.6    109.1  

Florida

  9.4    0.3    -        -        14.2    32.6    14.7    10.1    81.3    27.6    108.9  

Pennsylvania

  2.5    0.6    10.4    -        -         41.7    2.2    6.3    63.7    44.9    108.6  

All other states

  215.6    115.4    26.9    75.3    152.6    191.3    221.2    107.9    1,106.2    323.4    1,429.6  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $    381.8    $    229.6    $    39.5    $    99.9    $    348.2    $    646.8    $    662.4    $    200.2    $    2,608.4    $    912.8    3,521.2  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total advance refunded / escrowed maturity bonds

 

  610.5  
 

 

 

 

Total municipal bonds

 

  $    4,131.7  
 

 

 

 

  Special Revenue       

State

 Education  Hospital  Housing  Lease
Revenue
  Special Tax  Transit  Utilities  All Other
Sources
  Total
Special
Revenue
  Total
General
Obligation
  Total Fair
Value
 
  ($ in millions) 

New York

   $9.7      $-          $-          $-          $102.8      $76.0      $32.0      $7.3      $227.8      $9.2      $237.0   

Texas

  24.9     -         0.2     -         7.9     42.2     72.5     2.3     150.0     65.1     215.1   

California

  8.4     43.4     -         2.5     1.3     27.6     69.2     -         152.4     58.5     210.9   

Massachusetts

  18.6     5.4     6.7     -         29.8     29.7     25.8     0.3     116.3     72.6     188.9   

Washington

  -         -         1.7     -         8.9     10.9     30.3     2.2     54.0     49.1     103.1   

Pennsylvania

  2.4     1.4     10.2     -         -         33.3     1.1     14.4     62.8     36.2     99.0   

Ohio

  42.8     0.6     0.1     -         2.0     -         23.8     3.0     72.3     17.9     90.2   

Florida

  -        0.3     3.6     -         11.0     30.4     14.5     10.6     70.4     10.8     81.2   

Colorado

  23.0     14.8     -         9.9     2.4     6.5     6.1     -         62.7     16.9     79.6   

New Jersey

  27.9     -         -         -         -         16.4     -         32.3     76.6     -         76.6   

All other states

  109.8     90.3     28.4     51.7     112.5     65.2     119.4     133.3     710.6     174.4     885.0   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

   $      267.5      $      156.2      $      50.9      $      64.1      $      278.6      $      338.2      $      394.7      $      205.7      $      1,755.9      $      510.7     2,266.6   
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

Total advanced refunded / escrowed maturity funds

 

  337.7   
 

 

 

 

Total municipal bonds

 

   $    2,604.3   
 

 

 

 

Recent Accounting Standards

Recently Adopted

In May 2015,February 2018, the Financial Accounting Standards Board, or the “FASB,” issued guidance on certain tax effects caused by the Tax Act, which was signed into law on December 22, 2017. The Tax Act, among other things, reduced the U.S. corporate federal income tax rate from 35.0 percent to 21.0 percent, effective January 1, 2018 for the 2018 tax year. Under such circumstances, GAAP requires that requires disclosures relatedthe value of deferred

tax assets and liabilities be reduced through tax expense. The new guidance provides an option to short-duration insurance contracts. The guidance appliesreclassify any stranded tax amounts that remain in accumulated other comprehensive income to property and casualty insurance and reinsurance entities, among others, and requiresretained earnings, either retrospectively or at the following annual disclosure related to the liability for loss and LAE: (i) net incurred and paid claims development information by accident year for up to ten years; (ii) a reconciliation of incurred and paid claims development information to the aggregate carrying amountbeginning of the liability for loss and LAE; (iii) liabilities for IBNR by accident year andperiod in total; (iv) a description of reserving methodologies (as well as any changes to those methodologies); (v) quantitative information about claim frequency by accident year; and (vi)which the average annual percentage payout of incurred claims by age and accident year. In addition, the guidance also requires insurance entities to disclose for annual and interim reporting periods a roll-forward of the liability for loss and LAE.adoption is elected. This guidance wasbecame effective in the first quarter of 2018 for annual periods beginning after December 15, 2015 and interim periods within annual periods beginning after December 15, 2016,public entities, with early adoption permitted.permitted in 2017. We adopted this new guidance in the first quarter of 2018 and have elected to reclassify stranded tax amounts that remain in accumulated other comprehensive income, in the amount of approximately $135 million, to retained earnings as of December 31, 2016 and the implementation did not have an impact on our results of operations and financial condition.January 1, 2018. See Note 57(b) to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form10-Q for further information on accumulated other comprehensive income, and see Note 1(k) and Note 69 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 20162017 Form 10-K for additional information on the Tax Act and its impact on Alleghany.

In March 2017, the FASB issued guidance that reduces the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The guidance applies specifically to noncontingent call features that are callable at a predetermined and fixed price and date. The accounting for purchased callable debt securities held at a discount is not affected. This guidance is effective in the first quarter of 2019 for public entities with early adoption permitted. We adopted this guidance in the fourth quarter of 2017 and recorded a cumulative effect reduction of approximately $13 million directly to opening 2017 retained earnings and an offsetting increase in opening 2017 accumulated other comprehensive income. The implementation did not have a material impact on our results of operations and financial condition. See Note 7(b) to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form10-K10-Q for the new disclosures.

Future Application of Accounting Standardsfurther information on accumulated other comprehensive income.

In May 2014, the FASB, together with the International Accounting Standards Board, issued guidance on the recognition of revenue from contracts with customers. Under this guidance, revenue is recognized as the transfer of goods and services to customers takes place and in amounts that reflect the payment or payments that are expected to be received from the customers for those goods and services. This guidance also requires new disclosures about revenue. Revenues related to insurance and reinsurance contracts and revenues from investments are not impacted by this guidance, whereas noninsurance revenues arising from the sale of manufactured goods and services is generally included within the scope of this guidance. This guidance, isand all related amendments, became effective in the first quarter of 2018 for public entities, with early adoption permitted in 2017. We will adoptadopted this guidance in the first quarter of 2018 using the modified retrospective transition approach and do not currently believe that the implementation willdid not have a material impact on our results of operations and financial condition. See Note 10 to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form 10-Q for further information on Alleghany’s noninsurance revenues.

In January 2016, the FASB issued guidance that changes the recognition and measurement of certain financial instruments. This guidance requires investments in equity securities (except those accounted for under the equity method of accounting)accounting, but including partnership investments not accounted for under the equity method) to be measured at fair value with changes in fair value recognized in net income.earnings. For equity securities that do not have readily determinable fair values, measurement may be at cost, adjusted for any impairment and changes resulting from observable price changes for a similar investment of the same issuer. This guidance also changes the presentation and disclosure of financial instruments by: (i) requiring that financial instrument disclosures of fair value use the exit price notion; (ii) requiring separate presentation of financial assets and financial liabilities by measurement category and form, either on the balance sheet or the accompanying notes to the financial statements; (iii) requiring separate presentation in other comprehensive income for the portion of the change in a liability’s fair value resulting from instrument-specific credit risk when an election has been made to measure the liability at fair value; and (iv) eliminating the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. This guidance is effective for fiscal years beginning after December 15, 2017 for public entities, including interim periods within those fiscal years. Except for the change in presentation for instrument-specific credit risk, this guidance does not permit early adoption. We will adoptadopted this guidance in the first quarter of 2018. As of January 1, 2018, approximately $736 million of net unrealized gains or losses of equity securities, net of deferred taxes, will bewere reclassified from accumulated other comprehensive income to retained earnings. Subsequently, all changes in unrealized gains or losses of equity securities, net of deferred taxes, will bewere presented in the Consolidated Statements of Earnings rather than the Consolidated Statements of Comprehensive Income. We doIncome, under the caption “change in the fair value of equity securities.” Results arising from partnership investments, whether accounted for under the equity method or at fair value, continue to be reported as a component of net investment income. The implementation did not currently believe that the implementation will have a material impact on our financial condition. See Note 3(a)3 to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form 10-Q for further information on Alleghany’s equity securities, and Note 7(b) to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form10-Q for further information on our unrealized gains and lossesaccumulated other comprehensive income.

Future Application of equity securities.Accounting Standards

In February 2016, the FASB issued guidance on leases. Under this guidance, a lessee is required to recognize lease liabilities and correspondingright-of-use assets for leases with terms of more than one year, whereas under current guidance, a lessee is only required to recognize assets and liabilities for those leases qualifying as capital leases. This guidance also requires new disclosures about the amount, timing and uncertainty of cash flows arising from leases. The accounting by lessors is to remain largely unchanged. This guidance is effective in the first

quarter of 2019 for public entities, with early adoption permitted. A modified retrospective transition approach is required for all leases in existence as of, or entered into after, the beginning of the earliest comparative period presented in the financial statements. We will adopt this guidance in the first quarter of 2019 and do not currently believe that the implementation will have a material impact on our results of operations and financial condition. See Note 12(b) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 20162017 Form10-K for further information on ourAlleghany’s leases.

In June 2016, the FASB issued guidance on credit losses. Under this guidance, a company is required to measure all expected credit losses on loans, reinsurance recoverables and other financial assets accounted for at cost or amortized cost, as applicable.

Estimates of expected credit losses are to be based on historical experience, current conditions and reasonable and supportable forecasts. Credit losses for securities accounted for on an AFS basis are to be measured in a manner similar to GAAP as currently applied and cannot exceed the amount by which the fair value is less than the amortized cost. Credit losses for all financial assets are to be recorded through an allowance for credit losses. Subsequent reversals in credit loss estimates are permitted and are to be recognized in earnings. This guidance also requires new disclosures about the significant estimates and judgments used in estimating credit losses, as well as the credit quality of financial assets. This guidance is effective in the first quarter of 2020 for public entities, with early adoption permitted. We will adopt this guidance in the first quarter of 2020 and do not currently believe that the implementation will have a material impact on our results of operations and financial condition.

In January 2017, the FASB issued guidance that simplifies the subsequent measurement of goodwill. Under this guidance, if an initial qualitative assessment indicates that the fair value of an operating subsidiary may be less than its carrying amount, an impairment charge is recognized for the amount by which the carrying amount of the operating subsidiary exceeds its estimated fair value. Any resulting impairment loss recognized cannot exceed the total amount of goodwill associated with the operating subsidiary. This guidance is effective in the first quarter of 2020 for public entities, with early adoption permitted. We will adopt this guidance in the first quarter of 2020 and do not currently believe that the implementation will have a material impact on our results of operations and financial condition.

In March See Note 2 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2017 the FASB issued guidance that reduces the amortization periodForm 10-K for the premium on certain purchased callable debt securities to the earliest call date. The guidance applies specifically to noncontingent call features that are callable at a predetermined and fixed price and date. The accounting for purchased callable debt securities held at a discount is not affected. This guidance is effective in the first quarter of 2019 for public entities, with early adoption permitted. We will adopt this guidance in the fourth quarter of 2017, and we will record a cumulative effect reduction directly to opening 2017 retained earnings and an offsetting increase in opening 2017 accumulated other comprehensive income at that time. We do not currently believe that the implementation will have a material impactfurther information on our results of operations and financial condition.goodwill.

In August 2017, the FASB issued guidance that simplifies the requirements to achieve hedge accounting, better reflects the economic results of hedging in the financial statements and better alignsimproves the alignment between hedge accounting withand a company’s risk management activities. This guidance is effective in the first quarter of 2019 for public entities, with early adoption permitted. We will adopt this guidance in the first quarter of 2019 and do not currently believe that the implementation will have a material impact on our results of operations and financial condition.

In August 2018, the FASB issued guidance that changes the financial statement disclosure requirements for measuring fair value. With respect to financial instruments classified as “Level 3” in the fair value disclosure hierarchy, the guidance requires certain additional disclosures for public entities related to amounts included in other comprehensive income and significant unobservable inputs used in the valuation, while removing disclosure requirements related to an entity’s overall valuation processes. The guidance also removes certain disclosure requirements related to transfers between financial instruments classified as “Level 1” and “Level 2” and provides clarification on certain other existing disclosure requirements. This guidance is effective for interim and annual periods beginning after December 15, 2019, with early adoption permitted with respect to any eliminated or modified disclosures. We will adopt this guidance in the first quarter of 2020 and we do not currently believe that the implementation will have a material impact on our results of operations and financial condition.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the risk of loss from adverse changes in market prices and rates. The primary market risk related to our debt securities is the risk of loss associated with adverse changes in interest rates. We also invest in equity securities which are subject to fluctuations in market value. We hold our equity securities and debt securities as AFS. Any changes in the fair value in these securities, net of tax, would be recorded as a component of other comprehensive income. However, if a decline in fair value relative to cost is believed to be other than temporary, a loss is generally recorded on our statement of earnings. We also invest in equity securities which are subject to fluctuations in market value. In addition, significant portions of our assets (principally investments) and liabilities (principally loss and LAE reserves and unearned premiums) are exposed to changes in foreign currency exchange rates. The net change in the carrying value of assets and liabilities denominated in foreign currencies is generally recorded as a component of other comprehensive income.

The sensitivity analyses presented below provide only a limited,point-in-time view of the market risk of our financial instruments. The actual impact of changes in market interest rates, equity market prices and foreign currency exchange rates may differ significantly from those shown in these sensitivity analyses. The sensitivity analyses are further limited because they do not consider any actions we could take in response to actual and/or anticipated changes in equity market prices, market interest rates or foreign currency exchange rates. In addition, these sensitivity analyses do not provide weight to risks relating to market issues such as liquidity and the credit worthiness of investments.

Interest Rate Risk

The primary market risk for our debt securities is interest rate risk at the time of refinancing. We monitor the interest rate environment to evaluate reinvestment and refinancing opportunities. We generally do not use derivatives to manage market and interest rate risks. The table below presents a sensitivity analysesanalysis as of September 30, 20172018 of our (i) consolidated debt securities and (ii) senior notes and other debt, which are sensitive to changes in interest rates. Sensitivity analysis is defined as the measurement of potential change in future earnings, fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates over a selected time period. In the sensitivity analysis model below, we use a +/- 300 basis point range of change in interest rates to measure the hypothetical change in fair value of the financial instruments included in the analysis. The change in fair value is determined by calculating hypothetical September 30, 20172018 ending prices based on yields adjusted to reflect a +/- 300 basis point range of change in interest rates, comparing these hypothetical ending prices to actual ending prices, and multiplying the difference by the par outstanding. The selected hypothetical changes in interest rates do not reflect what could be the potential best or worst case scenarios.

     -300         -200         -100         0         100         200         300     
 ($ in millions)   -300   -200   -100   0   100   200   300 
              ($ in millions)             

Assets:

                     

Debt securities, fair value

 $  14,546.9  $  14,286.6  $  13,808.3  $  13,212.4  $  12,632.4  $  12,078.8  $  11,556.9   $  13,589.8   $13,119.0   $12,593.9    $ 12,071.2   $11,560.6    $11,075.3    $    10,620.2  

Estimated change in fair value

 1,334.5  1,074.2  595.9   -     (580.0 (1,133.6 (1,655.5   1,518.6    1,047.8    522.7    -        (510.6)    (995.9)    (1,451.0) 

Liabilities:

                     

Senior Notes and other debt, fair value

 $2,129.5  $1,959.9  $1,795.2  $1,655.5  $1,536.8  $1,434.6  $1,346.2   $2,148.6   $1,974.2   $1,826.7    $  1,701.8   $1,594.8    $1,502.8    $1,423.4  

Estimated change in fair value

 474.0  304.4  139.7   -     (118.7 (220.9 (309.3   446.8    272.4    124.9    -        (107.0)    (199.0)    (278.4) 

Equity Risk

Our equity securities are subject to fluctuations in market value. The table below presents our equity market price risk and reflects the effect of a hypothetical increase or decrease in market prices as of September 30, 20172018 on the estimated fair value of our consolidated equity portfolio. The selected hypothetical price changes do not reflect what could be the potential best or worst case scenarios.

 

As of September 30, 2017

($ in millions)

Estimated  

            Fair Value               

 

        Hypothetical        

        Price Change         

 

Estimated Fair Value

After Hypothetical

  Change in Price  

 

Hypothetical

Percentage Increase

(Decrease) in

  Stockholders’ Equity  

  $          3,821.6

 20% Increase $            4,585.9   6.1%
 20% Decrease $            3,057.3   (6.1%)
As of September 30, 2018 
($ in millions) 
Estimated
    Fair Value    
         Hypothetical Price        
Change
   Estimated Fair Value  
After Hypothetical
Change in Price
  Hypothetical
Percantage Increase
(Decrease) in
    Stockholders’ Equity    
 
  $      5,028.6   20% Increase       $                  6,034.3      9.2%    
 20% Decrease  4,022.9      (9.2%)   

In addition to debt and equity securities, we invest in several partnerships which are subject to fluctuations in market value. Our partnership investments are included in other invested assets and are accounted for as AFSat fair value or using the equity method, and had a carrying value of $338.0$370.1 million as of September 30, 2017.2018.

Foreign Currency Exchange Rate Risk

Foreign currency exchange rate risk is the potential change in value arising from changes in foreign currency exchange rates. Our reinsurance operations located in foreign countries maintain some or all of their capital in their local currency and conduct business in their local currency, as well as the currencies of the other countries in which they operate. To mitigate this risk, we maintain investments denominated in certain foreign currencies in which the claims payments will be made, and we have recently initiated a hedging program that is designed to reduce this risk for a portion of our exposure to certain currencies.made. As of September 30, 2017,2018, the largest foreign currency exposures for these foreign operations were the Euro the Canadian Dollar, the Japanese Yen and the AustralianCanadian Dollar. The table below presents our foreign currency exchange rate risk and shows the effect of a hypothetical increase or decrease in foreign currency exchange rates against the U.S. Dollar as of September 30, 20172018 on the estimated net carrying value of our foreign currency denominated assets, net of our foreign currency denominated liabilities. The selected hypothetical changes do not reflect what could be the potential best or worst case scenarios.

 

As of September 30, 2017

($ in millions)

Estimated  

          Fair Value           

 

        Hypothetical        

        Price Change         

 

Estimated Fair Value

After Hypothetical

  Change in Price  

 

Hypothetical

Percentage Increase

(Decrease) in

  Stockholders’ Equity  

  $          223.7(1)

 20% Increase $            268.4 0.4%
 20% Decrease $            179.0 (0.4%)
As of September 30, 2018 
($ in millions) 
Estimated
    Fair Value    
 

        Hypothetical Price        
Change

   Estimated Fair Value  
After Hypothetical
Change in Price
 Hypothetical
Percantage Increase
(Decrease) in
    Stockholders’ Equity    
 
  $      48.1(1) 20% Increase     $                      57.7     0.1%    
 20% Decrease  38.5     (0.1%)   

 

(1)

Denotes a net asset position as of September 30, 2017.2018.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer, or “CEO,” and our chief financial officer, or “CFO,” of the effectiveness of the design and operation of our

disclosure controls and procedures as of the end of the period covered by this Form10-Q pursuant to Rule13a-15(e) or15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, or the “Exchange Act.” Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of that date to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized, and timely reported as specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow for timely decisions regarding required disclosure. Our disclosure controls and procedures were designed to provide such assurance; however, we note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Control Over Financial Reporting

No changes occurred during the quarter ended September 30, 20172018 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.

Certain of our subsidiaries are parties to pending litigation and claims in connection with the ordinary course of their businesses. Each such subsidiary makes provisions for estimated losses to be incurred in such litigation and claims, including legal costs. We believe such provisions are adequate and do not believe that any pending litigation will have a material adverse effect on our consolidated results of operations, financial position or cash flows. See Note 12(a) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 20162017 Form10-K.

Item 1A. Risk Factors.

There are no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors” of the 20162017 Form10-K. Please refer to that section for disclosures regarding what we believe are the more significant risks and uncertainties related to our businesses.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(c) Issuer Purchases of Equity Securities.

The following table presents our common stock repurchases for the quarter ended September 30, 2017:2018:

 

  Total Number of
Shares
Repurchased
   Average Price
Paid per Share
   Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs(1)
   Approximate
Dollar Value of
Shares That May
Yet be Purchased
Under the Plans
or Programs(1)
(in millions)
    Total Number of  
Shares
Repurchased
 Average Price
    Paid per Share    
 Total Number of
Shares Purchased
as Part of
Publicly
 Announced Plans  
or Programs(1)
 Approximate
Dollar Value of
Shares That May
Yet be Purchased
Under the Plans
or Programs(1)
(in millions)

July 1 to July 31

   -         $-            -         $379.2    60,390    $        592.35  60,390    $          491.3 

August 1 to August 31

   -          -            -          379.2    2,137  631.32  2,137  490.0 

September 1 to September 30

   15,916      537.14      15,916      370.7    13,772  641.09  13,772  481.1 
  

 

     

 

    

 

  

 

 

Total

   15,916      537.14      15,916      76,299  602.24  76,299  
  

 

     

 

    

 

  

 

 

 

(1)

In November 2015, ourthe Alleghany Board of Directors authorized the repurchase of shares of common stock, at such times and at prices as management determines to be advisable, up to an aggregate of $400.0 million. In June 2018, the Alleghany Board of Directors authorized, upon the completion of the previously announced program, the repurchase of additional shares of common stock, at such times and at prices as management determines to be advisable, up to an aggregate of $400.0 million.

Item 4. Mine Safety Disclosures.

The information concerning mine safety violations or other regulatory matters required by SEC regulations is included in Exhibit 95 to this Form10-Q.

Item 6. Exhibits.

 

Exhibit


        Number

  

Description

  10.1(a)31.1  

  Credit Agreement, dated as of July  31, 2017, among Alleghany Corporation, the Lenders which are signatories thereto and U.S. Bank National Association, as administrative agent for the Lenders, filed as Exhibit 10.1(a) to Alleghany’s Current Report on Form8-K filed on August 1, 2017, is incorporated herein by reference.

  10.1(b)

List of Contents of Exhibits and Schedules to the Credit Agreement, filed as Exhibit 10.1(b) to Alleghany’s Current Report on Form8-K filed on August 1, 2017, is incorporated herein by reference. Alleghany agrees to furnish supplementally a copy of any omitted exhibit or schedule to the Securities and Exchange Commission upon request.

  31.1

Certification of the Chief Executive Officer of the Company pursuant to Rule13a-14(a) or Rule15(d)-14(a) of the Exchange Act.

31.2

  

Certification of the Chief Financial Officer of the Company pursuant to Rule13a-14(a) or Rule15(d)-14(a) of the Exchange Act.

32.1

  

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit shall not be deemed “filed” as a part of this Form10-Q.

32.2

  

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section  1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit shall not be deemed “filed” as a part of this Form10-Q.

  95101  

  Mine Safety Disclosure required under Item 104 of RegulationS-K.

  101

Interactive Data Files formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 20172018 and December 31, 2016;2017; (ii) Consolidated Statements of Earnings and Comprehensive Income for the three and nine months ended September 30, 20172018 and 2016;2017; (iii) Consolidated Statements of Cash Flows for the nine months ended September 30, 20172018 and 2016;2017; and (iv) Notes to Unaudited Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  

ALLEGHANY CORPORATION

(Registrant)

Date: November 2, 20171, 2018  By: 

/s/ John L. Sennott, Jr.

   

John L. Sennott, Jr.

Senior Vice President and chief financial officer

(principal financial officer)

 

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