Hurricane Florence caused widespread property damage and flooding in September 2018, primarily in North Carolina.
The increase in net premiums earned in 2020 from 2019 reflects growth in reinsurance and insurance segment gross premiums written in recent quarters.
Amortization of intangible assets. The increase in amortization expense in 2020 from 2019 primarily reflects recent acquisitions by Jazwares and PCT, as well as the impact of Wilbert’s April 1, 2020 inclusion in our consolidated results.
The increase in net premiums earned in 2020 from 2019 primarily reflects the impact of higher gross premiums written and lower ceded premiums written in recent quarters and, to a lesser extent, the impact of changes in foreign currency exchange rates. Excluding the impact of changes in foreign currency exchange rates, net premiums earned increased by 7.5 percent in 2020 from 2019.
Reinsurance Segment: Net loss and LAE. The following table presents net loss and LAE for the reinsurance segment:
Property. Commissions, brokerage and other underwriting expenses in 2020 approximated those from 2019, primarily reflecting lower overall commission rates, lower annual incentive compensation accruals and a Pandemic-driven reduction in travel and entertainment costs offset by the impact of higher net premiums earned, as discussed above. The increase in commissions, brokerage and other underwriting expenses in 2019 from 2018 primarily reflects the impact of higher net premiums earned, higher overall commission rates due primarily to a change in the mix of business and higher overhead expenses.
Insurance Segment: Net loss and LAE. The following table presents net loss and LAE for the insurance segment:
Catastrophe losses in 2020 include $69.9 million from Hurricane Sally, $50.6 million from Hurricane Laura and $20.3 million of Pandemic losses, which primarily relate to business interruption and related estimated legal expenses. Catastrophe losses in 2020 also include losses from severe weather and flooding in the Southeastern U.S. in the spring of 2020, which included a tornado in Tennessee, as well as Hurricane Zeta and Hurricane Delta in October 2020. Catastrophe losses in 2019 primarily consist of severe weather and flooding in the Midwestern and Southwestern U.S. and, to a lesser extent, typhoons in Japan. Catastrophe losses in 2018 include $55.1 million related to Hurricane Michael, $33.8 million from Hurricane Florence and $17.4 million related to wildfires in California, as well as losses related to flooding and severe weather in the Northeastern U.S. and California and typhoons in Japan.
Net Investment Income. The decrease in net investment income in 2020 from 2019 primarily reflects lower interest income and, to a lesser extent, lower dividend income. Lower interest income reflects the impact of low reinvestment yields on debt securities and lower yields on short term investments and floating-rate debt securities. Lower dividend income reflects reductions in our equity security portfolio during most of 2020.
number of factors, including the line and volume of the business involved. For these reasons, our insurance operating subsidiaries will generally use actuarial projections in setting reserves for all casualty lines of business.
Loss Frequency and Severity. Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described above. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs, changes in economic conditions or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations. Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to our reinsurance or insurance operating subsidiaries. The length of the loss reporting lag affects their ability to accurately predict loss frequency, which are more predictable for lines with short reporting lags, as well as the amount of reserves needed for IBNR. If the actual level of loss frequency and severity is higher or lower than expected, the ultimate losses will be different than management’s estimates. A small percentage change in an estimate can result in a material effect on our reported earnings. The following table presents the impact of changes, which could be favorable or unfavorable, in frequency and severity on our loss estimates for claims occurring in 2020:
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;
In developing the cash flow analyses for debt securities, we consider various factors for the different categories of debt securities. For municipal bonds, we take into account the taxing power of the issuer, source of revenue, credit risk and enhancements and pre-refunding. For mortgage and asset-backed securities, we discount our 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. Our 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, we review business prospects, credit ratings and available information from asset managers and rating agencies for individual securities.
$32.1 million of term loans at PCT primarily related to borrowings to finance the acquisition of a waterjet orifice and nozzle manufacturer in 2016 and the acquisition of a consumable cutting tool manufacturer in June 2019.
As a result, there can be no assurance that we will not experience after-tax net catastrophe costs from individual and / or multiple events that will exceed these estimates by a material amount. There also can be no assurance that we will not experience catastrophe events more frequently than the modeled probabilities would suggest.
We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls that address the risks of material misstatement relating to the valuation of the Company’s reserve for IBNR claims. For example, we tested controls over the selection of actuarial methods and significant actuarial assumptions.
On April 1, 2020, Alleghany Capital acquired an additional approximately 55 percent of Wilbert it previously did not own, bringing its equity interest in Wilbert to approximately 100 percent, and as of that date, the results of Wilbert were included in Alleghany’s consolidated results. Prior to April 1, 2020, Wilbert was accounted for under the equity method of accounting and was included in other invested assets.
Alleghany files a consolidated federal income tax return with its subsidiaries. Alleghany’s consolidated federal income tax return includes as part of its taxable income all items of income of non-U.S. subsidiaries that are subject to current U.S. income tax, currently pursuant to provisions of the Internal Revenue Code. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be
Certain prior year amounts have been reclassified to conform to the 2020 presentation of the financial statements.
The following tables present Alleghany’s financial instruments at fair value and the level of the fair value hierarchy of inputs used as of December 31, 2020 and 2019:
The following tables present reconciliations of the changes during 2020 and 2019 in Level 3 assets measured at fair value:
In connection with the December 31, 2017 sale of Pacific Compensation Corporation (“PacificComp”) by AIHL, AIHL Re provides adverse development reinsurance coverage to the acquirer on PacificComp’s pre-acquisition claims, subject to certain terms and conditions. AIHL Re’s obligation, which are guaranteed by Alleghany, are subject to an aggregate limit of $150.0 million and a final commutation and settlement as of December 31, 2024.
$98.3 million of borrowings by W&W|AFCO Steel under its available credit facilities and term loans, including borrowings incurred and assumed from its acquisition of Hirschfeld;