Premiums for 2014, 2013 and 2012 are more fully described in the following pages.
The increases in gross premiums written and net premiums earned in 2013 from 2012 primarily reflect the merger impacts discussed above, specifically related to the inclusion of operations from TransRe for the entire 2013 year, compared with the 300 day period subsequent to the TransRe Acquisition Date for 2012.
Property. The increase in commissions, brokerage and other underwriting expenses in 2014 from 2013 primarily reflects higher employee-related costs and the lack of favorable impact arising from the acquisition method of accounting, which was present in part of 2013. The increase in commissions, brokerage and other underwriting expenses in 2013 from 2012 primarily reflects the diminished favorable impact arising from the acquisition method of accounting, as described above.
Catastrophe losses, net of reinsurance, were $44.4 million in 2014, $58.8 million in 2013 and $191.7 million in 2012. Catastrophe losses in 2014 primarily reflect the impact of nationwide severe winter weather in the U.S. in January and February and hail storms in the spring, summer and fall. Catastrophe losses in 2013 include flooding in Colorado in September and severe weather in the Midwestern U.S., including tornados in Oklahoma in May. Catastrophe losses in 2012 include $155.0 million of net losses from Super Storm Sandy in October. In addition, there were $6.2 million of ceded premiums related to Super Storm Sandy.
(3) Primarily reflects favorable development in certain casualty and surety lines of business.
RSUI. The increase in RSUI’s underwriting profit in 2014 from 2013 reflects the impact of an increase in net premiums earned, partially offset by increases in net loss and LAE and commissions, brokerage and other underwriting expenses, all as discussed above. The increase in RSUI’s underwriting profit in 2013 from 2012 primarily reflects an increase in net premiums earned and a decrease in net loss and LAE, partially offset by an increase in commissions, brokerage and other underwriting expenses, all as discussed above.
Information regarding concentration of our reinsurance recoverables and the ratings profile of our reinsurers as of December 31, 2014 is as follows:
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.
Our consolidated balance sheet as of December 31, 2014 includes goodwill of $111.9 million related primarily to RSUI, CapSpecialty, Bourn & Koch and Kentucky Trailer, and intangible assets, net of amortization,
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 December 31, 2014, we held total marketable securities and cash of $1,032.0 million, compared with $840.0 million as of December 31, 2013. The increase in 2014 primarily reflects the receipt of dividends from RSUI and TransRe, partially offset by repurchases of shares of our common stock and capital contributions to subsidiaries. The $1,032.0 million is comprised of $284.2 million at the parent company, $538.1 million at AIHL and $209.7 million at the TransRe holding company. In addition, we held non-marketable investments at our unrestricted holding companies totaling $466.9 million (see “Investments in certain other invested assets” herein for additional detail). 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 December 31, 2014.
Dividends from Subsidiaries. As of December 31, 2014, approximately $6.3 billion of our total equity of $7.5 billion was unavailable for dividends or advances to us from our subsidiaries. The remaining $1.2 billion was available for dividends or advances to us from our subsidiaries, or was retained at the Alleghany parent level, and as such, was available to pay dividends to Alleghany’s stockholders as of December 31, 2014.
(1) In 2014, TRC paid dividends of $400.0 million to TransRe, of which $300.0 million was in turn paid to Alleghany. In 2013, TRC paid dividends of $200.0 million to TransRe, of which $150.0 million was in turn paid to Alleghany.
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
“Florida, Wind” has the highest modeled after-tax net catastrophe costs for both a 100 and 250 year return period. These costs would represent approximately 6 percent and 9 percent, respectively, of stockholders’ equity attributable to Alleghany as of December 31, 2014. If multiple severe catastrophe events occur in any one year, or a single catastrophe event affects more than one geographic area, the potential economic cost to us could be materially higher than any one of the amounts shown above.
results beginning April 26, 2012 and the results of Kentucky Trailer have been included in Alleghany’s consolidated results beginning August 30, 2013, the date of ACC’s initial investment in Kentucky Trailer.
Other invested assets include invested assets not identified above, primarily related to: (i) equity investments in operating companies where Alleghany has significant influence; (ii) partnership investments (including hedge funds and private equity funds); (iii) loans receivable; and (iv) non-marketable equity investments. Equity investments in operating companies where Alleghany has significant influence (an aggregate common stock position held at or above 20 percent is presumed to convey significant influence) are accounted for using the equity method. Partnership investments are accounted for as either AFS, or using the equity method where Alleghany has significant influence. Loans receivable are carried at unpaid principal balance. Non-marketable equity investments are accounted for as AFS securities.
Mortgage-backed and asset-backed securities are initially valued at the transaction price. Subsequently, Alleghany uses widely accepted valuation practices that produce a fair value measurement by comparison to transactions in similarly structured instruments, use of discounted cash flows or option adjusted spread analyses. Unobservable inputs, significant to the measurement and valuation of mortgage-backed and asset-backed securities, 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.
Alleghany incurred due diligence, legal, investment banking and other merger-related costs (“Transaction Costs”) of $33.8 million in 2012, including $18.0 million payable to Alleghany’s investment bankers, in connection with the merger. Transaction Costs are reported as a component of corporate administration expense.
Alleghany’s total purchase price for Old TransRe as of the TransRe Acquisition Date is calculated in accordance with GAAP as follows (in millions, except per share amounts):
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
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 to limited partner interests in certain Ares subsidiaries that are convertible into an aggregate 5.9 percent interest in Ares common units. At Alleghany’s discretion, half of these interests may be converted beginning at the end of a one-year waiting period, and the remaining half may be converted beginning at the end of a two-year waiting period. Until Alleghany’s limited partner interests convert into Ares common units, Alleghany classifies its investment in Ares as a component of other invested assets, and accounts for its investment using the equity method of accounting. As of December 31, 2014, AIHL’s carrying value in Ares was $231.7 million, which is net of returns of capital received from Ares.
The (favorable) unfavorable prior accident year development on loss reserves for 2014, 2013 and 2012 is summarized as follows:
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 requires that all loans be repaid in full no later than October 15, 2017. The Credit Agreement also requires Alleghany to pay a commitment fee each quarter in a range of between 0.125 and 0.30 percent per annum, based upon Alleghany’s credit rating, on the daily unused amount of the commitments. 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 its inception through December 31, 2014.
Alleghany’s reinsurance and insurance subsidiaries are subject to various regulatory restrictions that limit the maximum amount of dividends available to be paid by them without prior approval of insurance regulatory authorities. The operating subsidiaries of TransRe and RSUI have the ability to pay dividends without prior regulatory approval in 2015.
In addition, corporate activities include interest expense associated with the Alleghany Senior Notes, whereas interest expense associated with the TransRe Senior Notes is included in “Total Segments.”
Foreign gross premiums written in 2014, 2013 and from the TransRe Acquisition Date through December 31, 2012 were approximately $1.7 billion, $1.6 billion and $1.5 billion, respectively.
Alleghany has endorsement split-dollar life insurance policies for its parent-level officers that are effective during employment, as well as retirement. Premiums are paid by Alleghany, and death benefits are split between Alleghany and the beneficiaries of the officers. Death benefits for current employees that inure to the beneficiaries are generally equal to four times the annual salary at the time of an officer’s death. After retirement, death benefits that inure to the beneficiaries are generally equal to the annual salary of the officer as of the date of retirement.
In addition, Alleghany has defined benefit pension and, prior to September 30, 2013, retiree health plans for parent-level employees, and TransRe has, and Kentucky Trailer had, defined benefit pensions plans for certain of its employees, as further described below.