The principal executive offices of Alleghany, Alleghany Capital and Roundwood are located in leased office space in New York, New York. TransRe leases office space in New York, New York for its headquarters and office space for its locations around the world. RSUI leases office space in Atlanta, Georgia for its headquarters and office space in Sherman Oaks, California. CapSpecialty leases office space in Middleton, Wisconsin for its headquarters and office space in New York, New York, Glastonbury, Connecticut and other locations throughout the U.S. PCT owns its principal offices and manufacturing facilities, which are located in Rockford, Illinois and leases certain offices and manufacturing facilities, which are located in Olympia, Washington and Saco, Maine. Kentucky Trailer leases its principal offices and manufacturing facilities, which are located in Louisville, Kentucky, and has additional leased manufacturing facilities in locations throughout the U.S. and in the Netherlands. IPS leases office space in Blue Bell, Pennsylvania for its headquarters and office space in its locations around the world. Jazwares owns and leases office space in Sunrise,
Florida for its headquarters and other locations around the world. W&W|AFCO Steel owns its principal office in Oklahoma City, Oklahoma for its headquarters and owns its principal facilities, which are located throughout the U.S. Concord leases office space in Raleigh, North Carolina for its headquarters. SORC leases office space in Golden, Colorado for its headquarters and owns facilities, mineral rights and land in other locations in the Midwestern and Southeastern U.S. Alleghany Properties leases office space in Sacramento, California. Management considers its facilities suitable and adequate for the current level of operations. See Note 12(b) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for additional information on our leases.
Net investment income increased by 9.9 percent in 2019 from 2018, and increased by 11.0 percent in 2018 from 2017.
Net premiums written increased by 13.9 percent in 2019 from 2018, and increased by 1.7 percent in 2018 from 2017.
The combined ratio for our reinsurance and insurance segments was 99.4 percent in 2019, compared with 103.2 percent in 2018 and 106.4 percent in 2017.
Catastrophe losses, net of reinsurance, were $399.7 million in 2019, compared with $657.7 million in 2018 and $818.1 million in 2017.
Noninsurance revenue for Alleghany Capital was $2,289.3 million in 2019, compared with $1,574.6 million in 2018 and $896.9 million in 2017.
Earnings before income taxes for Alleghany Capital were $111.1 million in 2019, compared with $59.8 million in 2018 and $52.2 million in 2017. Adjusted earnings before income taxes were $142.6 million in 2019, compared with $83.3 million in 2018 and $50.1 million in 2017.
As of December 31, 2019, we had total assets of $26.9 billion and total stockholders’ equity attributable to Alleghany stockholders of $8.8 billion. As of December 31, 2019, we had consolidated total investments of approximately $18.9 billion, consisting of $14.2 billion invested in debt securities, $2.5 billion invested in equity securities, $0.9 billion invested in short-term investments, $0.7 billion invested in commercial mortgage loans and $0.6 billion invested in other invested assets.
Typhoon Hagibis caused widespread property damage and flooding in October 2019, primarily in Japan, and affected regions which included those affected by Typhoon Faxai, which caused widespread property damage and flooding in September 2019, primarily in Japan;
Hurricane Irma caused widespread property damage and flooding in September 2017, primarily in Florida;
Hurricane Harvey caused widespread property damage and flooding in August 2017, primarily in Texas; and
The following table presents the impact of our catastrophe losses, net of reinsurance, for 2019, 2018 and 2017:
Includes $72.1 million attributable to RSUI, primarily from severe weather and flooding in the Midwestern and Southwestern U.S., and $3.1 million attributable to CapSpecialty.
Our catastrophe losses are more fully described on pages 95, 96, 101 and 102.
See Note 13 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for additional detail on our segments and corporate activities. The tables below present the results for our segments and for corporate activities for 2019, 2018 and 2017:
The increase in net premiums earned in 2019 from 2018 reflects growth in gross premiums written in recent quarters and, to a lesser extent, decreases in ceded premiums in recent quarters at our reinsurance segment.
2019 vs 2018. The underwriting profit in 2019 compared with the underwriting loss in 2018 primarily reflects significantly lower catastrophe losses, primarily at our reinsurance segment, and the impact of an increase in net premiums earned, partially offset by lower favorable prior accident year loss reserve development, all as discussed above.
A detailed comparison of underwriting profit by segment for 2019, 2018 and 2017 is contained on pages 97 and 104.
Net realized capital losses in 2019 primarily reflect the $38.4 million decline in value of the Put Option and a $13.6 million loss from the December 2019 sale of a privately held investment accounted for under the equity method, partially offset by gains on the sale of debt securities. Net realized capital losses in 2018 primarily reflect a $35.4 million capital loss due to an impairment charge from the write-down of certain SORC assets in 2018 arising from a decline in energy prices as of December 31, 2018, as well as losses on the sale of debt securities, partially offset by a $45.7 million gain on AIHL’s conversion of its limited partnership interests in certain subsidiaries of Ares Management LLC, or “Ares,” into Ares common units in 2018. See Note 4(i) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for additional information.
The increase in OTTI losses in 2019 from 2018 reflects higher impairment losses for debt securities. OTTI losses in 2019 primarily reflect the determination that unrealized losses on our debt securities were other than temporary, primarily due to the deterioration of creditworthiness of the issuers in the domestic energy sector. In addition, certain foreign bonds were impaired in 2019 due to a significant decline in fair value.
The change in the fair value of equity securities in 2018 reflects depreciation in the value of our equity securities portfolio, as discussed above.
compensation of our reinsurance and insurance segments, which totaled $85.9 million, $49.8 million and $72.9 million in 2019, 2018 and 2017, respectively. The increases in long-term incentive compensation at our reinsurance and insurance segments in 2019 from 2018 primarily reflect a decrease in catastrophe losses at our reinsurance segment and appreciation in the value of our debt and equity securities portfolio in 2019 compared with depreciation in 2018. Other operating expenses also include $5.0 million of one-time costs incurred in connection with the July 2019 retirement of CapSpecialty’s chief executive officer and an additional $2.5 million related to the repurchase of certain restricted common stock issued to CapSpecialty management in 2014. The decrease in long-term incentive compensation at our reinsurance and insurance segments in 2018 from 2017 primarily reflects the impact of depreciation in the value of our debt and equity securities portfolio in 2018 compared with appreciation in the value of our equity and, to a lesser extent, debt securities portfolios in 2017. See Note 14 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for additional information.
On February 7, 2018, W&W|AFCO Steel acquired the outstanding equity of Hirschfeld for $109.1 million, consisting of $94.4 million in cash and $14.7 million of incremental debt. On October 1, 2018, Alleghany Capital acquired approximately 85 percent of the equity of Concord for $136.6 million, consisting of $68.6 million in cash paid upon consummation of the transaction, $38.2 million of potential contingent consideration based on future profitability and $29.8 million of incremental debt.
The decrease in corporate administration expense in 2018 from 2017 primarily reflects lower Alleghany parent-company long-term incentive compensation expense, driven by the impact of depreciation in the value of our debt and equity securities portfolios in 2018 compared with appreciation in 2017 in the value of our equity and, to a lesser extent, debt securities portfolios, partially offset by the impact of lower catastrophe losses in 2018.
Interest expense. The increase in interest expense in 2019 from 2018 primarily reflects borrowings at Concord (primarily used to finance Alleghany Capital’s acquisition of Concord) and incremental debt at Jazwares from the acquisition of WCT, as well as increased borrowings at other Alleghany Capital subsidiaries to support working capital needs and fund recent acquisitions.
The increase in interest expense in 2018 from 2017 primarily reflects borrowings at W&W|AFCO Steel and, to a lesser extent, Concord, as well as the impact of higher interest rates.
Income taxes. The following table presents our consolidated income tax expense:
The Tax Act was signed into law on December 22, 2017. Among other provisions, the Tax Act reduced the corporate federal income tax rate from 35.0 percent to 21.0 percent, effective January 1, 2018, for the 2018 and subsequent tax years. As a result, the value of our deferred tax assets and liabilities as of December 31, 2017 was reduced. The net impact of this reduction to our consolidated 2017 tax expense was not material.
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.
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.
Property. The increase in gross premiums written in 2019 from 2018 primarily reflects: (i) higher premiums written by the domestic operations, which include the impact of the Renewal Rights Purchase; and (ii) higher premiums written by the Asia-Pacific and Latin America operations mainly in the property catastrophe lines of business; (iii) partially offset by the impact of changes in foreign currency exchange rates. Gross premiums written related to the Quota Share Treaty were $276.9 million and $280.8 million in 2019 and 2018, respectively, reflecting a reduction of TransRe’s quota share participation. Excluding the impact of changes in foreign currency exchange rates, gross premiums written increased by 12.0 percent in 2019 from 2018. The increase in net premiums earned in 2019 from 2018 primarily reflects the impact of higher gross premiums written, partially offset by the impact of changes in foreign currency exchange rates. Excluding the impact of changes in foreign currency exchange rates, net premiums earned increased by 10.0 percent in 2019 from 2018.
The decrease in gross premiums written in 2018 from 2017 primarily reflects a decline in property-related Quota Share Treaty premiums written, partially offset by an increase in premiums written by the Asia-Pacific operations. Gross premiums written related to the Quota Share Treaty were $280.8 million and $364.3 million in 2018 and 2017, respectively, reflecting a reduction of TransRe’s quota share participation, as well as a decline in property-related premiums written. Excluding the impact of changes in foreign currency exchange rates, gross premiums written decreased by 1.7 percent in 2018 from 2017. The slight decrease in net premiums earned in 2018 from 2017 primarily reflects higher ceded premiums earned due to an increase in retrocessional coverage. Excluding the impact of changes in foreign currency exchange rates, net premiums earned decreased by 0.5 percent in 2018 from 2017.
Net loss and LAE in 2019, 2018 and 2017 include (favorable) unfavorable prior accident year loss reserve development as presented in the table below:
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.
The favorable prior accident year loss reserve development in 2019, 2018 and 2017 reflect favorable loss emergence compared with loss emergence patterns assumed in earlier periods. The favorable prior accident year loss reserve development in 2019 did not impact assumptions used in estimating TransRe’s loss and LAE liabilities for business earned in 2019.
Casualty & other. The increase in commissions, brokerage and other underwriting expenses in 2019 from 2018 primarily reflects the impact of higher net premiums earned and, to a lesser extent, higher overhead costs, partially offset by lower overall commission rates due primarily to a change in the mix of business. The slight decrease in commissions, brokerage and other underwriting expenses in 2018 from 2017 primarily reflects lower commission rates and lower short-term incentive compensation accruals, partially offset by the impact of higher net premiums earned.
Reinsurance Segment: Underwriting profit. The following table presents our underwriting (loss) profit for the reinsurance segment:
Property. The decrease in underwriting loss in 2019 from 2018 primarily reflects lower catastrophe losses, as discussed above. The decrease in underwriting loss in 2018 from 2017 primarily reflects lower catastrophe losses, partially offset by an increase in non-catastrophe losses, all as discussed above.
The insurance segment is composed of AIHL’s operating subsidiaries RSUI, CapSpecialty and PacificComp (prior to its sale on December 31, 2017). 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 this Form 10-K.
The following tables present the underwriting results of the insurance segment:
RSUI. The increase in gross premiums written in 2019 from 2018 primarily reflects growth in most lines of business due to increases in business opportunities, higher rates and improved general market conditions, particularly in the property lines of business and, to a lesser extent, the directors’ and officers’ liability lines of business. The increase in gross premiums written in 2018 from 2017 primarily reflects growth in most lines of business due to an increase in business opportunities and improved general market conditions, particularly in the property lines of business.
The increase in gross premiums written in 2018 from 2017 primarily reflects growth in the professional liability and miscellaneous medical lines of business due to CapSpecialty’s distribution initiatives and expanded product offerings. The increase in gross premiums written in 2018 from 2017 also reflects the impact of CapSpecialty’s February 2018 purchase of certain renewal rights and growth in the surety lines of business.
RSUI. The increase in net loss and LAE in 2019 from 2018 primarily reflects lower favorable prior accident year loss reserve development and the impact of higher net premiums earned, partially offset by lower catastrophe losses. The decrease in net loss and LAE in 2018 from 2017 primarily reflects significantly lower catastrophe losses and, to a lesser extent, higher favorable prior accident year loss reserve development, partially offset by the impact of an increase in net premiums earned.
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. Catastrophe losses in 2017 include $97.6 million related to Hurricane Irma, $86.6 million related to Hurricane Harvey and $20.1 million related to Hurricane Maria, as well as losses related to flooding in California and severe weather primarily in the Southeastern and Midwestern U.S.
Primarily reflects favorable prior accident year loss reserve development in the directors’ and officers’ liability and umbrella/excess lines of business in the 2011 through 2015 accident years, partially offset by unfavorable prior accident year loss reserve development in the professional liability lines of business in the 2016 through 2018 accident years.
Primarily reflects favorable prior accident year loss reserve development related to Hurricane Irma in the 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.
The favorable prior accident year loss reserve development in 2019, 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 2019 did not impact assumptions used in estimating RSUI’s loss and LAE liabilities for business earned in 2019.
RSUI. The increase in commissions, brokerage and other underwriting expenses in 2019 from 2018 primarily reflects the impact of higher net premiums earned, partially offset by slightly lower overall commission rates due primarily to a change in the mix of business. The increase in commissions, brokerage and other underwriting expenses in 2018 from 2017 primarily reflects the impact of higher wage and healthcare costs, partially offset by lower short-term incentive compensation expense accruals and slightly lower commission expense incurred.
CapSpecialty. The increase in commissions, brokerage and other underwriting expenses in 2019 from 2018 primarily reflects the impact of higher net premiums earned, partially offset by one-time acquisition expenses incurred in 2018 from CapSpecialty’s purchase of certain renewal rights associated with a small environmental liability block of business and lower short-term incentive compensation expense accruals. The increase in commissions, brokerage and other underwriting expenses in 2018 from 2017 primarily reflects the impact of higher net premiums earned and relatively stable overhead expenses. The increase also reflects one-time acquisition expenses arising from CapSpecialty’s purchase of certain renewal rights associated with a small environmental liability block of business, as discussed above.
Insurance Segment: Underwriting profit. The following table presents our underwriting profit (loss) for the insurance segment:
RSUI. The increase in underwriting profit in 2019 from 2018 primarily reflects lower catastrophe losses and the impact of higher net premiums earned, partially offset by lower favorable prior accident year loss reserve development, all as discussed above. The underwriting profit in 2018, compared with the underwriting loss in 2017, primarily reflects significantly lower catastrophe losses and, to a lesser extent, an increase in favorable prior accident year loss reserve development, all as discussed above.
The decrease in net realized capital gains in 2018 from 2017 primarily reflects the absence of net realized capital gains from equity securities in 2018 as a result of our adoption of the new investment accounting guidance discussed above, net realized capital losses taken in 2018 from the sale of debt securities, partially offset by a gain on AIHL’s conversion of its limited partnership interests in certain subsidiaries of Ares into Ares common units, as discussed above.
Other Than Temporary Impairment Losses. OTTI losses in 2019 reflect $19.7 million of unrealized losses on debt securities, primarily in the energy sector, that were deemed to be other than temporary and, as such, were required to be charged against earnings. The determination that unrealized losses on these debt securities were other than temporary was primarily due to the deterioration of creditworthiness of the issuers. In addition, certain foreign bonds were impaired due to a significant decline in fair value.
OTTI losses in 2017 reflect $16.9 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. Of the $16.9 million of OTTI losses, $15.1 million related to equity securities, primarily in the retail sector, and $1.8 million related to debt securities. The determination that unrealized losses on equity and debt 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.
See Note 4 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for additional detail on gross unrealized investment losses for debt securities as of December 31, 2019.
For 2019, capital contributions primarily reflect funding provided by Alleghany Capital to PCT for the acquisition of a consumable cutting tool manufacturer. For 2018, capital contributions primarily reflect funding provided by Alleghany to Alleghany Capital for the acquisition of Concord and funding provided by Alleghany Capital for the acquisition of Hirschfeld by W&W|AFCO Steel. For 2017, capital contributions primarily reflect funding provided by Alleghany Capital for the acquisition of W&W|AFCO Steel and the investment in Wilbert.
Other operating expenses in 2019, 2018 and 2017 also reflect finders’ fees, legal and accounting costs and other transaction-related expenses, primarily related to Jazwares’ acquisition of WCT, the acquisition by PCT of a consumable cutting tool manufacturer in June 2019, the acquisitions by Kentucky Trailer of two manufacturers of aluminum feed transportation equipment in December 2018 and July 2019, Alleghany Capital’s acquisition of Concord in 2018, W&W|AFCO Steel’s acquisition of Hirschfeld in 2018 and Alleghany Capital’s acquisition of W&W|AFCO Steel in 2017. Finders’ fees, legal and accounting costs and other transaction-related expenses were $4.1 million, $7.7 million and $7.2 million for 2019, 2018 and 2017, respectively.
Interest expense. The increase in interest expense in 2019 from 2018 primarily reflects borrowings at Concord (primarily used to finance Alleghany Capital’s acquisition of Concord), increases in debt related to the acquisition of WCT, as well as increased borrowings at other Alleghany Capital subsidiaries to support working capital needs and fund acquisitions made during 2018 and 2019. The increase in interest expense in 2018 from 2017 primarily reflects borrowings at W&W|AFCO Steel and, to a lesser extent, Concord.
Earnings (losses) before income taxes. The increase in earnings before income taxes in 2019 from 2018 primarily reflects increased earnings in the non-industrial and industrial operations. The increase in non-industrial earnings before income taxes primarily reflects the impact of higher sales at Jazwares (due in part to its acquisition of WCT) and, to a lesser extent, the acquisition of Concord and higher sales at IPS, all as discussed above. The increase in industrial earnings before income taxes primarily reflects higher sales and higher margins at W&W|AFCO Steel and, to a lesser extent, higher sales at Kentucky Trailer, all as discussed above.
before income taxes in 2018 primarily reflects the impact of increased sales at Jazwares, partially offset by increased marketing expenditures and the impact of certain Toys “R” Us Inc. liquidation-related charges, as discussed above. To a lesser extent, the increase in non-industrial earnings before income taxes in 2018 also reflects the impact of increased sales at IPS and the acquisition of Concord, all as discussed above. The increase in the industrial earnings before income taxes primarily reflects Alleghany Capital’s earnings from its investment in Wilbert, as well as the impact of increased sales at Kentucky Trailer and PCT, all as discussed above. The increase in earnings before income taxes from the acquisitions of W&W|AFCO Steel and Hirschfeld were largely offset by an increase in amortization expense.
Net investment income. The decrease in net investment income in 2019 from 2018 primarily reflects lower dividend income resulting from a portfolio reallocation (as further described below) and, to a lesser extent, lower partnership income, partially offset by higher interest income. The increase in net investment income in 2018 from 2017 primarily reflects higher dividend income resulting from an increase in the size of the equity security portfolio held at the Alleghany parent company-level during the first three quarters of 2018.
Change in the fair value of equity securities. As discussed above, 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.
In the first quarter of 2019, a substantial portion of our investment portfolio at the Alleghany parent company-level was reallocated from equity securities to debt securities. The change in the fair value of equity securities in 2019 reflects appreciation in the value of the equity securities held at the Alleghany parent company-level, primarily from holdings in the technology sector, prior to this reallocation. The change in the fair value of equity securities in 2018 reflects depreciation of the equity securities held at the Alleghany parent company-level, primarily from holdings in the energy sector.
Noninsurance revenue. The decrease in noninsurance revenue in 2019 from 2018 primarily reflects lower property sales at Alleghany Properties. Noninsurance revenue in 2018 includes the sale in September 2018 of 68 acres of land located in Sacramento, California for approximately $20 million. The increase in noninsurance revenue in 2018 from 2017 primarily reflects increases in property sales at Alleghany Properties and, to a lesser extent, increases in oil sales at SORC.
Other operating expenses. The decrease in other operating expenses in 2019 from 2018 primarily reflects reduced costs at SORC and Alleghany Properties.
Interest expense. The slight variances in interest expense in 2019 from 2018 and 2017 primarily reflect changes in crediting rates on deferred compensation at the Alleghany parent-company.
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 & health; mortgage reinsurance; surety; asbestos-related illness and environmental impairment liability; and credit.
Primarily consists of the following direct lines of business: umbrella/excess; directors’ and officers’ liability; professional liability; and general liability.
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 premiums writings and risk capacity without requiring additional capital. Our reinsurance and insurance subsidiaries generally purchase reinsurance and retrocessional coverages from highly-rated, third-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.
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 and reported revenues and expenses 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.
Each of our reinsurance and insurance subsidiaries establishes reserves on its balance sheet for unpaid loss and LAE related to its property and casualty reinsurance and insurance contracts. As of any balance sheet date, there are claims that have not been reported, and some claims may not be reported for many years after the date a loss occurs. As a result of this historical pattern, the liability for unpaid loss and LAE includes significant estimates for IBNR claims. Additionally, reported claims are in various stages of the settlement process. Each claim is settled individually based upon its merits, and certain claims may take years to settle, especially if legal action is involved. As a result, the liabilities for unpaid loss and LAE include significant judgments, assumptions and estimates made by management related to the actual ultimate losses that will arise from the claims. Due to the inherent uncertainties in the process of establishing these liabilities, the actual ultimate loss from a claim is likely to differ, perhaps materially, from the liability initially recorded.
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
Our net reserves for loss and LAE of $10.3 billion as of December 31, 2019 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above. We believe the above analysis provides a reasonable benchmark for sensitivity, as we believe it is within historical variation for our reserves. Currently, none of the scenarios is believed to be more likely than the others. See Note 1(k) and Note 6 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for additional information on our loss and LAE.
We hold our debt securities as AFS and as such, these securities are recorded at fair value. We continually monitor the difference between amortized cost and the estimated fair value of our 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, we record the decline as an unrealized loss in stockholders’ equity. If the decline is deemed to be other than temporary, we write our amortized cost basis down to the fair value of the security and record an OTTI loss on our 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.
We 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. Our 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.
Goodwill and other intangible assets, net of amortization, are recorded as a consequence of business acquisitions. Goodwill represents the excess, if any, of the amount paid to acquire subsidiaries and other businesses over the fair value of their net assets as of the date of acquisition. Other intangible assets are recorded at their fair value as of the acquisition date. A significant amount of judgment is needed to determine the fair value as of the date of acquisition of other intangible assets and the net assets acquired in a business acquisition. The determination of the fair value of other intangible assets and net assets often involves the use of valuation models and other estimates, which involve many assumptions and variables and are inherently subjective. The fair value estimates may include the use of financial projections and discount rates. Other intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives. Goodwill and intangible assets that have an indefinite useful life are not subject to amortization.
We must make certain judgments in the determination of assumed reinsurance premiums written and earned. For pro rata contracts, premiums written and earned are generally based on reports received from ceding companies. For excess-of-loss contracts, premiums are generally recorded as written based on contract terms and are earned ratably over the periods the related coverages are provided. Unearned premiums and ceded unearned premiums represent the portion of gross premiums written and ceded premiums written, respectively, related to the unexpired periods of such coverages. The relationship between net premiums written and net premiums earned will, therefore, generally vary depending on the volume and inception dates of the business assumed and ceded and the mix of such business between pro rata and excess-of-loss reinsurance.
Premiums written and earned, along with related costs, for which data have not been reported by the ceding companies, are estimated based on historical patterns and other relevant factors. Such estimates of premiums earned are considered when establishing the IBNR portion of loss reserves. The differences between these estimates and actual data subsequently reported, which may be material as a result of the diversity of cedants and reporting practices and the inherent difficulty in estimating premium inflows, among other factors, are recorded in the period when actual data become available and such differences may materially affect our results of operations.
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, 2019, we held total marketable securities and cash of $1,283.3 million, compared with $1,122.3 million as of December 31, 2018. The increase in 2019 primarily reflects the receipt of dividends from TransRe and RSUI and appreciation in the value of the equity securities portfolio held at the holding company-level, partially offset by repurchases of shares of our common stock, as discussed below. The $1,283.3 million is composed of $312.6 million at the Alleghany parent company, $920.7 million at AIHL and $50.0 million at the TransRe holding company. We also hold certain non-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 December 31, 2019.
general obligations of Alleghany. Interest on the 2044 Senior Notes is payable semi-annually on March 15 and September 15 of each year. The terms of the 2044 Senior Notes permit redemption prior to their maturity. The indenture under which the 2044 Senior Notes were issued contains covenants that impose conditions on our ability to create liens on, or engage in sales of, the capital stock of AIHL, TransRe or RSUI. The 2044 Senior Notes were issued at approximately 99.3 percent of par, resulting in proceeds after underwriting discount, commissions and other expenses of $294.3 million and an effective yield of approximately 5.0 percent.
Common Stock Repurchases. In November 2015, our 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 $400.0 million. In June 2018, our Board of Directors authorized, upon the completion of the program authorized in 2015, the repurchase of additional shares of our
The following table presents the shares of our common stock that we repurchased in 2019, 2018 and 2017:
Dividends. From 1999 through 2011, we declared stock dividends in lieu of cash dividends every year. Our Board of Directors determined not to declare a dividend, cash or stock, for 2012 through 2017 and 2019. In February 2018, our 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. In February 2020, the Alleghany Board of Directors declared a special dividend of $15.00 per share for stockholders of record on March 5, 2020 payable on March 16, 2020.
“Senior Notes” refers to: (i) the Alleghany Senior Notes, consisting of the 2020 Senior Notes, the 2022 Senior Notes and the 2044 Senior Notes; and (ii) TransRe’s 8.00% senior notes due on November 30, 2039. See Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for additional information on the Senior Notes and other debt.
With respect to loss and LAE, there is typically no minimum contractual commitment associated with insurance policies and reinsurance contracts, and the timing and ultimate amount of actual claims related to these reserves is uncertain.
Investments in Certain Other Invested Assets. In December 2012, TransRe obtained an ownership interest in Pillar Capital Holdings Limited, or “Pillar Holdings,” a Bermuda-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, or 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. We have concluded that both Pillar Holdings and the Funds, 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 December 31, 2019, our carrying value in the Pillar Investments, as determined under the equity method of accounting, was $205.5 million, which is net of returns of capital received from the Pillar Investments.
$40.2 million of borrowings by IPS under its available credit facility and term loans, in part to finance an acquisition in May 2019; and
With respect to corporate activities, SORC has relied on Alleghany almost entirely to support its operations. From its formation in 2011 through December 31, 2019, we have invested $275.9 million in SORC.
Consists of $89.3 million of securities rated BB / Ba, $246.6 million of securities rated B, $24.4 million of securities rated CCC, $2.0 million of securities rated below CC and $146.3 million of not rated securities.
Effective duration measures a portfolio’s sensitivity to changes in interest rates. In this regard, as of both December 31, 2019 and 2018, our debt securities portfolio had an effective duration of approximately 4.2 years. As of December 31, 2019, approximately $4.1 billion, or 28.8 percent, of our debt securities portfolio represented securities with maturities of five years or less. See Note 4(b) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K 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.
The following table presents the carrying values and estimated fair values of our consolidated financial instruments as of December 31, 2019 and 2018:
See Note 3 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for additional information on our financial instruments measured at fair value and the level of the fair value hierarchy of inputs used as of December 31, 2019 and 2018.
Municipal Bonds. The following table provides the fair value of our municipal bonds as of December 31, 2019, 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.
Natural or man-made catastrophe events may expose our reinsurance and insurance subsidiaries to underwriting losses across multiple lines of business and, in any given year, could have a material adverse effect on our financial condition, results of operations, cash flows and liquidity. Further, the potential for accumulated losses from multiple events, and uncertainty as to the frequency and severity of such events, present unique challenges for managing risk. Our reinsurance and insurance subsidiaries take certain measures to mitigate the impact of catastrophe events including considering catastrophe risks in their underwriting and pricing decisions, purchasing reinsurance, monitoring and modeling accumulated exposures, and managing exposure in key geographic zones and product lines that are prone to catastrophe events.
We have audited the accompanying consolidated balance sheets of Alleghany Corporation and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of earnings and comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the financial statement schedules listed in the Index at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
At December 31, 2019, the Company’s reserves for loss and loss adjustment expenses (LAE) was $11.9 billion. As discussed in Note 1 of the financial statements, the reserves for loss and LAE represents management’s best estimate of the ultimate cost of all reported and unreported losses incurred through the balance sheet date. Reserves for loss and LAE include but are not limited to estimates for incurred but not reported (IBNR) claims based on past experience, modified for current trends, and industry data. The estimation of reserves for IBNR claims is inherently difficult and subjective, and is sensitive to significant assumptions, including the selection of actuarial methods, expected loss ratios, and reported and paid loss emergence patterns, which are affected by actuarial judgment.
Auditing the valuation of the reserve for IBNR claims was complex and required the involvement of our actuarial specialists due to the high degree of judgment in the actuarial methods and assumptions, including expected loss ratios and reported and paid loss emergence patterns, used in the valuation process. These methods and assumptions have a significant effect on the valuation of reserves for IBNR claims.
Alleghany Corporation (“Alleghany”), a Delaware corporation, owns and supports certain operating subsidiaries and manages investments, anchored by a core position in property and casualty reinsurance and insurance. Through its subsidiary Transatlantic Holdings, Inc. (“TransRe”), an Alleghany subsidiary since March 2012, Alleghany is engaged in the property and casualty reinsurance business. Through its wholly-owned subsidiary Alleghany Insurance Holdings LLC (“AIHL”), 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”). RSUI and CapSpecialty have been subsidiaries of AIHL since July 2003 and January 2002, respectively. 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 subsidiary of AIHL since its formation in May 2006.
Prior to December 31, 2017, AIHL’s insurance operations also included Pacific Compensation Corporation (“PacificComp”). On December 31, 2017, AIHL sold PacificComp to CopperPoint Mutual Insurance Company (“CopperPoint”) for total cash consideration of approximately $158 million, 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 provides adverse development reinsurance coverage on PacificComp’s pre-acquisition claims, subject to certain terms and conditions. AIHL Re’s obligations, 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.
Although Alleghany’s primary sources of revenues and earnings are its reinsurance and insurance operations and investments, Alleghany also generates revenues and expenses from a diverse portfolio of middle-market businesses that are owned and managed through its wholly-owned subsidiary Alleghany Capital Corporation (“Alleghany Capital”). Alleghany Capital’s businesses include:
Jazwares, LLC (together with its affiliates, “Jazwares”), a global toy, entertainment and musical instrument company, headquartered in Sunrise, Florida;
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. On December 31, 2019, Alleghany Capital exercised its call right to acquire a majority of the remaining outstanding equity interests in Wilbert. The purchase of such additional equity interest is subject to the satisfaction of certain closing conditions and is expected to close later in 2020.
In addition, Alleghany owns certain other holding-company investments. Alleghany’s wholly-owned subsidiary, Stranded Oil Resources Corporation (“SORC”) is an exploration and production company focused on enhanced oil recovery, headquartered in Golden, 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.
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 and reported revenues and expenses 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.
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 its fair value determinations, Alleghany considers whether the market for a particular security is “active” or “inactive” 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, Alleghany considers whether observable transactions are “orderly” or not. Alleghany does 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.
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 and market-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 commercial mortgage-backed securities (“CMBS”) and other asset- backed securities, as well as a small portion of residential mortgage-backed securities (“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. Alleghany’s Level 2 liabilities consist of the Senior Notes, as defined in Note 1(n).
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. Alleghany’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, Alleghany considers 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 other asset-backed securities (primarily, collateralized loan obligations) and, to a lesser extent, U.S. and foreign corporate bonds (including privately issued securities), CMBS and commercial mortgage loans.
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.
Ceded premiums written are recorded in accordance with the applicable terms of the various reinsurance contracts and ceded premiums earned are charged against revenue over the period of the various reinsurance contracts. This also generally applies to reinstatement premiums paid to a reinsurer, which arise when contractually-specified ceded loss triggers have been breached. Ceded commissions reduce commissions, brokerage and other underwriting expenses and ceded losses incurred reduce net loss and LAE incurred over the applicable periods of the various reinsurance contracts with third-party reinsurers. If premiums or commissions are subject to adjustment (for example, retrospectively-rated or experience-rated), the estimated ultimate premium or commission is recognized over the period of the contract.
Acquisition costs related to unearned premiums that vary with, and are directly related to, the production of such premiums are deferred. Furthermore, such deferred costs: (i) represent only incremental, direct costs associated with the successful acquisition of a new or renewal insurance or reinsurance contract; (ii) are essential to the contract transaction; (iii) would not have been incurred had the contract transaction not occurred; and (iv) are related directly to the acquisition activities involving underwriting, policy issuance and processing. Acquisition costs principally relate to commissions. To a lesser extent, acquisition costs can include premium taxes and certain qualifying underwriting expenses. For insurance policies written, acquisition costs are generally incurred directly and include commissions, premium taxes and certain qualifying underwriting expenses. For reinsurance contracts written, acquisition costs are generally incurred through brokerage commissions and indirectly through ceding commissions, which are deferred. Deferred acquisition costs are amortized to expense as the related premiums are earned, generally over a period of one year. Deferred
The reserves for loss and LAE include but are not limited to: (i) reports and individual case estimates received from ceding companies with respect to assumed reinsurance business; (ii) the accumulation of individual estimates for claims reported with respect to direct insurance business; (iii) estimates for IBNR claims based on past experience, modified for current trends and industry data; and (iv) estimates of expenses for investigating and settling claims based on past experience. The methods used to determine such estimates and to establish the resulting reserves are continually reviewed and updated. Any adjustments are reflected in current income. Net loss and LAE consist of the estimated ultimate cost of settling claims incurred within the reporting period (net of related reinsurance recoverable), including IBNR claims, plus changes in estimates of prior period losses.
Noninsurance revenues and related operating expenses from manufactured products are generally recognized at the time title transfers to the customer, which typically occurs at the point of shipment or delivery to the customer, depending on the terms of the sales arrangement. For certain products, partial payment in the form of a deposit is required before the products are delivered to the customer and such deposits are recorded as a component of other liabilities.
Noninsurance revenues and related operating expenses from services are generally recognized as the services are performed. Services provided pursuant to a contract are recognized either over the contract period or upon completion of the elements specified in the contract, depending on the terms of the contract. For certain customer contracts in the technical service and hotel management businesses, construction-related costs and recurring hotel operating expenses are incurred and recognized as other operating expenses, but are passed through to the customer and correspondingly recognized as noninsurance revenues.
Certain prior year amounts have been reclassified to conform to the 2019 presentation of the financial statements.
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 improves the alignment between hedge accounting and a company’s risk management activities. This guidance became effective in the first quarter of 2019 for public entities, with early adoption permitted. Alleghany adopted this guidance in the first quarter of 2019 and the implementation did not have a material impact on its results of operations and financial condition.
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, 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 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 became 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 adopted this guidance in the first quarter of 2018. As of January 1, 2018, approximately $736 million of net unrealized gains of equity securities, net of deferred taxes, were reclassified from accumulated other comprehensive income to retained earnings. Subsequently, all changes in unrealized gains or losses of equity securities, net of deferred taxes, were presented in the Consolidated Statements of Earnings rather than the Consolidated Statements of Comprehensive Income, 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 have a material
impact on Alleghany’s financial condition. See Note 4 for further information on Alleghany’s equity securities, and Note 10(b) for further information on accumulated other comprehensive income.
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 became 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.
The acquisition-date consideration transferred and purchase price allocation to the acquired assets and assumed liabilities of WCT 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 further adjustment. Once completed, any adjustment resulting from the valuations may impact the individual amounts recorded for acquired assets and assumed liabilities, as well as the residual goodwill. The acquisition accounting for WCT is expected to be finalized later in 2020.
On April 28, 2017, Alleghany Capital acquired approximately 80 percent of the equity in W&W|AFCO Steel for $164.5 million, consisting of $163.9 million in cash paid on May 1, 2017 and $0.6 million of estimated purchase price adjustments. In connection with the acquisition, Alleghany recorded $41.1 million, $25.3 million and $70.0 million of goodwill, indefinite-lived intangible assets and finite-lived intangible assets, respectively. Indefinite-lived intangible assets relate to trade name and finite-lived intangible assets relate to customer relationships.
In addition to W&W|AFCO Steel’s acquisition of Hirschfeld and Jazwares’ acquisition of WCT, several other subsidiaries of Alleghany Capital have made other acquisitions, including:
Represents goodwill and other intangible assets related to the acquisition of: (i) Jazwares on April 15, 2016 and its subsequent acquisitions; (ii) W&W|AFCO Steel on April 28, 2017 and its subsequent acquisition; (iii) Concord on October 1, 2018; (iv) PCT on April 26, 2012 and its subsequent acquisitions; (v) IPS on October 31, 2015 and its subsequent acquisition; and (vi) Kentucky Trailer on August 30, 2013 and its subsequent acquisitions. Balances as of December 31, 2019 also reflect the finalization of provisional estimates that existed as of December 31, 2018.
and leases - 10 years. The economic useful life of license agreements is 8 years and of customer relationships is between 5 and 10 years.
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 December 31, 2019 and 2018:
In 2019, Alleghany transferred out of Level 3 $25.4 million of financial instruments, principally due to an increase in observable inputs related to the valuation of such assets. Specifically, during 2019, there was a decrease in the weight given to non-binding broker quotes and, as a result, there was a corresponding increase in quoted prices for similar assets in active markets. Of the $25.4 million of transfers, $18.9 million related to other asset-backed securities, with the remainder related to other types of debt securities.
As further described in Note 4(i), 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 partnership interests, classified as other invested assets, was transferred into Level 3. On September 24, 2018, AIHL’s remaining $56.9 million of Ares limited partnership interests was converted into Ares common units and, as a result, was transferred out of Level 3 and into Level 1.
In addition to the $58.7 million of Ares-related other invested assets transferred into Level 3, in 2018, Alleghany transferred into Level 3 $6.3 million of financial instruments, principally due to a decrease in observable inputs related to the valuation of such assets and, specifically, a decrease in non-binding broker quotes. Of the $6.3 million of transfers, $4.3 million related to preferred stock, $1.9 million related to corporate bonds and $0.1 million related to other invested assets.
There were no other material transfers between Levels 1, 2 or 3 in 2018.
The following tables present the amortized cost or cost and the fair value of AFS securities as of December 31, 2019 and 2018:
The following table presents the amortized cost or cost and estimated fair value of debt securities by contractual maturity as of December 31, 2019. 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.
The following table presents net investment income for 2019, 2018 and 2017:
See Note 4(i) for discussion of the Pillar Investments, as defined therein, and limited partnership interests in certain subsidiaries of Ares.
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(r) for additional information regarding Alleghany’s adoption of this new guidance.
The following table presents increases (decreases) in the fair value of equity securities for 2019 and 2018:
Net realized capital losses in 2019 primarily reflect the $38.4 million decline in value of the Put Option and a $13.6 million loss from the December 2019 sale of a privately held investment accounted for under the equity method, partially offset by net realized capital gains from the sale of debt securities.
Net realized capital losses in 2018 primarily reflect a $35.4 million capital loss due to an impairment charge from the write-down of certain SORC assets in 2018 arising from a decline in energy prices as of December 31, 2018, as well as losses on the sale of debt securities, partially offset by a $45.7 million gain on AIHL’s conversion of its limited partnership interests in certain subsidiaries of Ares into Ares common units in 2018. See Note 4(i) for additional information on this conversion.
The following table presents the amounts of gross realized capital gains and gross realized capital losses for 2019, 2018 and 2017:
Alleghany holds its 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 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 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.
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 the non-credit related portion, which is recorded as a component of other comprehensive income.
OTTI losses in 2018 reflect $1.3 million of unrealized losses on debt securities, primarily in the energy and industrial sectors, that were deemed to be other than temporary and, as such, were required to be charged against earnings. The determination that unrealized losses on debt securities were other than temporary was primarily due to the deterioration of creditworthiness of the issuer.
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 securities as of December 31, 2019 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.
The following tables present gross unrealized losses and related fair values for Alleghany’s AFS securities, grouped by duration of time in a continuous unrealized loss position, as of December 31, 2019 and 2018:
As of December 31, 2019, Alleghany held a total of 860 debt securities that were in an unrealized loss position, of which 280 securities were in an unrealized loss position continuously for 12 months or more. The unrealized losses associated with these debt securities consisted of losses related primarily to other asset-backed securities, U.S. corporate bonds, U.S. Government obligations and RMBS.
Investments with fair values of approximately $2.3 billion as of December 31, 2019, the substantial majority of which were debt securities and equity securities, were deposited with governmental authorities as required by law.
In December 2012, TransRe obtained an ownership interest in Pillar Capital Holdings Limited (“Pillar Holdings”), a Bermuda- 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 December 31, 2019, Alleghany’s carrying value in the Pillar Investments, as determined under the equity method of accounting, was $205.5 million, which is net of returns of capital received from the Pillar Investments.
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 generally purchase reinsurance and retrocessional coverages from highly-rated, third-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.
The following table presents information regarding concentration of Alleghany’s reinsurance recoverables and the ratings profile of its reinsurers as of December 31, 2019:
Reinsured loss and LAE ceded included in Alleghany’s consolidated statements of earnings were $407.7 million, $628.2 million and $777.4 million for 2019, 2018 and 2017, respectively.
RSUI reinsures its property lines of business through a program consisting of surplus share treaties, facultative placements, and per risk and catastrophe excess-of-loss treaties. RSUI’s catastrophe reinsurance program and property per risk reinsurance program each run on an annual basis from May 1 to the following April 30 and portions expired on April 30, 2019. Both programs were renewed on May 1, 2019 with substantially similar terms as the expired programs.
AIHL Re and CapSpecialty entered into an intercompany reinsurance contract, effective July 1, 2015, pursuant to which AIHL Re provides CapSpecialty with coverage primarily for adverse development on certain net loss and allocated LAE in excess of its carried reserves at June 30, 2015. AIHL Re’s commitments are intended to cover the statutory collateral requirements at CapSpecialty, if and when necessary, and AIHL Re’s obligations are subject to an aggregate limit of $50.0 million. In connection with such intercompany reinsurance agreement, Alleghany and AIHL Re entered into a contract whereby Alleghany will guarantee the recoverable balances owed to CapSpecialty from AIHL Re up to $50.0 million. The above agreements had no impact on Alleghany’s consolidated results of operations and financial condition.
Includes paid loss and LAE, net of reinsurance, related to commutations.
Primarily reflects favorable prior accident year loss reserve development related to Hurricane Harvey in the 2017 accident 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.
Reflects favorable prior accident year loss reserve development primarily in the 2011 through 2016 accident years.
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.
Primarily reflects favorable prior accident year loss reserve development in the umbrella/excess lines of business in the 2005 through 2011 accident years.
Primarily reflects favorable prior accident year catastrophe loss reserve development in the 2016 accident year, partially offset by unfavorable prior accident year property loss reserve development in the binding authority lines of business primarily in the 2015 and 2016 accident years.
Primarily reflects unfavorable prior accident year loss reserves development related to the professional liability and other casualty lines of business in the 2015 through 2018 accident years.
Primarily reflects favorable prior accident year loss reserve development in the 2013 and prior accident years.
The following is information about incurred and paid loss and LAE development, net of reinsurance. The information for 2010 through 2018 is unaudited and is provided as supplementary information. Information is also included for the portion of unpaid loss and LAE, net of reinsurance recoverables, that relate to IBNR and, for the insurance segment, the cumulative number of reported insurance claims. For the reinsurance segment, reported insurance claim information is generally not received from the cedants, and such information is therefore impracticable to disclose.
There were no borrowings under the Credit Agreement in 2019, 2018 and 2017 and there were no outstanding borrowings under the Credit Agreement as of December 31, 2019. There were no borrowings under the Prior Credit Agreement in 2017.
$57.3 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;
$40.2 million of borrowings by IPS under its available credit facility and term loans, in part to finance a small acquisition in May 2019; and
None of the above liabilities are guaranteed by Alleghany or Alleghany Capital. In December 2019, third-party, floating-rate term loans at Concord were repaid and replaced with $33.3 million of intercompany floating-rate debt funded by the Alleghany parent company. The intercompany debt and related interest expenses are eliminated at the Alleghany consolidated level.
The following table presents income tax expense (benefit) for 2019, 2018 and 2017:
Earnings (losses) before income taxes from domestic operations were $952.4 million, ($46.4) million and ($132.7) million in 2019, 2018 and 2017, respectively. Earnings before income taxes from foreign operations were $171.2 million, $86.0 million and $169.4 million in 2019, 2018 and 2017, respectively. Foreign tax expense was primarily attributable to the U.K., Canada, Switzerland and France.
Other deferred tax assets include significant amounts of foreign tax credit carry forwards, which begin to expire in 2028. A valuation allowance is provided against deferred tax assets when, in the opinion of management, it is more likely than not that a portion of the deferred tax asset will not be realized. As of December 31, 2019 and 2018, Alleghany recognized $22.8 million and
$23.5 million, respectively, of deferred tax assets for certain state net operating and capital loss carryovers, and a valuation allowance of $22.8 million and $23.5 million, respectively, has been established against these deferred tax assets as Alleghany does not currently anticipate it will generate sufficient income in these states to absorb such loss carryovers.
Alleghany’s income tax return is currently under examination by the Internal Revenue Service for the 2015, 2016 and 2017 tax years. The following table presents the tax years of Alleghany and TransRe tax returns that remain subject to examination by major tax jurisdictions as of December 31, 2019.
Alleghany believes that, as of December 31, 2019, it had no material uncertain tax positions. Interest and penalties related 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 December 31, 2019.
In November 2015, the 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 program authorized in 2015, 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. In September 2019, the Alleghany Board of Directors authorized, upon the completion of the program authorized in 2018, 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 $500.0 million. As of December 31, 2019, Alleghany had $627.1 million remaining in the aggregate under its share repurchase authorizations.
The following table presents the shares of Common Stock that Alleghany repurchased in 2019, 2018 and 2017:
The following table presents reclassifications out of accumulated other comprehensive income attributable to Alleghany stockholders during 2019 and 2018:
As of December 31, 2019, approximately $6.9 billion of Alleghany’s total equity of $8.8 billion was unavailable for dividends or advances to Alleghany from its subsidiaries. The remaining $1.9 billion was available for dividends or advances to Alleghany from its subsidiaries, or was retained at the Alleghany parent company-level and, as such, was available to pay dividends to Alleghany’s stockholders as of December 31, 2019.
In 2019, 2018 and 2017, TRC paid cash dividends of $220.0 million, $280.0 million and $270.0 million, respectively, to the TransRe holding company. In addition, TRC transferred its ownership interest in CapSpecialty to the TransRe holding company, and consequently, the TransRe holding company recorded a dividend from TRC in the amount of $101.0 million.
As of December 31, 2019, a maximum amount of $41.5 million was available for dividends by TRC without prior approval of the applicable regulatory authorities. Aside from Alleghany’s reinsurance and insurance subsidiaries, dividends are regularly paid to Alleghany from the subsidiaries of Alleghany Capital, where there are generally no regulatory restrictions on dividends being paid from retained earnings.
The statutory net income of Alleghany’s reinsurance and insurance subsidiaries was $690.9 million and $263.6 million for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2019 and 2018, the combined statutory capital and surplus of Alleghany’s reinsurance and insurance subsidiaries was $7.0 billion and $6.5 billion, respectively. As of December 31, 2019, the amount of statutory capital and surplus necessary to satisfy regulatory requirements was not significant in relation to the actual statutory capital and surplus of Alleghany’s reinsurance and insurance companies in the U.S.
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, Alleghany paid dividends to stockholders totaling $154.0 million. In February 2020, the Alleghany Board of Directors declared a special dividend of $15.00 per share for stockholders of record on March 5, 2020 payable on March 16, 2020.
The following table presents a reconciliation of the earnings and share data used in the basic and diluted earnings per share computations for 2019, 2018 and 2017:
(4) Reported as a component of other assets on Alleghany’s consolidated balance sheet.
The reinsurance segment consists of property and casualty reinsurance operations conducted by TransRe’s reinsurance operating subsidiaries and is further reported through two major product lines - property and casualty & other. TransRe provides property and casualty reinsurance to insurers and other reinsurers through brokers and on a direct basis to ceding companies. TransRe writes a modest amount of property and casualty insurance business, which is included in the reinsurance segment. A significant portion of the premiums earned by TransRe’s operations are generated by offices located in Canada, Europe, Asia, Australia, Africa and those serving Latin America and the Caribbean. Although the majority of the premiums earned by these offices typically relate to the regions where they are located, a significant portion may be derived from other regions of the world, including the U.S. In addition, although a significant portion of the assets and liabilities of these foreign offices generally relate to the countries where the ceding companies and reinsurers are located, most investments are located in the country of domicile of these offices.
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.
Excludes certain minor, legacy investments that were previously reflected in Alleghany Capital in 2018 and prior periods, to align with management’s view of reportable segments.
Includes elimination of minor reinsurance activity between segments. Also, includes certain minor, legacy investments that were previously reflected in Alleghany Capital in 2018 and prior periods.
Includes amortization associated with deferred acquisition costs of $1,392.8 million, $1,271.4 million and $1,261.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Underwriting profit represents net premiums earned less net loss and LAE and commissions, brokerage and other underwriting expenses, all as determined in accordance with GAAP, and does not include net investment income, change in the fair value of equity securities, net realized capital gains, OTTI losses, noninsurance revenue, other operating expenses, corporate administration, amortization of intangible assets or interest expense. Underwriting profit does not replace earnings before income taxes determined in accordance with GAAP as a measure of profitability. Rather, Alleghany believes that underwriting profit enhances the understanding of its reinsurance and insurance segments’ operating results by highlighting net earnings attributable to their underwriting performance. Earnings before income taxes (a GAAP measure) may show a profit despite an underlying underwriting loss. Where underwriting losses persist over extended periods, a reinsurance or an insurance company’s ability to continue as an ongoing concern may be at risk. Therefore, Alleghany views underwriting profit as an important measure in the overall evaluation of performance.
As of December 31, 2019, Alleghany had long-term compensation plans for parent company-level employees and directors. Alleghany parent company-level long-term compensation awards to current employees do not include stock options but consist only of restricted stock awards, including restricted stock units and performance share awards of Common Stock. Alleghany parent company-level, long-term compensation awards to non-employee directors consist of annual grants of restricted shares and restricted stock units of Common Stock.
Amounts recognized as compensation expense in the consolidated statements of earnings and comprehensive income with respect to long-term compensation awards under plans for Alleghany parent company-level employees and non-employee directors
Awards under Alleghany’s long-term compensation plans may include, but are not limited to, cash and/or shares of Common Stock, rights to receive cash and/or shares of Common Stock and options to purchase shares of Common Stock, including options intended to qualify as incentive stock options under the Internal Revenue Code, and options not intended to so qualify.
The BVU Plan was initiated on July 1, 2019. Under the BVU Plan, BVUs are issued. The BVUs may only be settled in cash. The fair value of each BVU is calculated as the stockholder’s equity of RSUI, adjusted for certain capital transactions, divided by the
In addition, Alleghany and TransRe have defined benefit pensions plans for certain of their employees, as further described below. These employee retirement plans are not material to Alleghany’s results of operations, financial condition or cash flows for the three years ended December 31, 2019. Alleghany recognizes on its balance sheet an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, with changes in funded status reported in other comprehensive income, net of tax.
In December 2019, the Alleghany Board of Directors authorized the termination of the executive retirement plans at both the Alleghany Parent company-level and at TransRe, effective December 24, 2019. The final payments will be made in December 2020 to Alleghany Parent company-level and TransRe retirement plan participants, at which time the remaining other comprehensive loss balances will be reclassified to corporate administration expense and commissions, brokerage and other underwriting expenses, respectively. Alleghany estimates that approximately $57 million of total payments will be made to all executive retirement participants in 2020 and that approximately $21 million of other comprehensive losses attributable to retirement plans, before tax, as of December 31, 2019 will be reclassified to expenses in 2020. Due in large part to this authorization for termination of these plans, other comprehensive losses attributable to retirement plans, before tax, were $15.4 million in 2019.
Alleghany has an unfunded, noncontributory defined benefit pension plan for Alleghany parent company-level executives, which was frozen as of December 31, 2013 and terminated in December 2019, and a funded, noncontributory defined benefit pension plan for Alleghany parent company-level employees. The projected benefit obligations of the defined benefit pension plans as of December 31, 2019 and 2018 was $44.1 million and $32.3 million, respectively, and the related fair value of plan assets was $3.5 million and $3.3 million, respectively.
W&W|AFCO Steel had a funded noncontributory defined benefit plan for certain of its employees. Benefits under W&W|AFCO Steel’s defined benefit plans were frozen as of April 1, 2003. During 2018, W&W|AFCO Steel initiated a plan termination, whereby the obligations related to plan participants currently receiving benefits were annuitized through the purchase of annuity contracts from a third-party life insurance company. During 2019, the termination plan was completed. As of December 31, 2018 the projected benefit obligation was $10.0 million and the related fair value of plan assets was $11.7 million.
We have audited Alleghany Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Alleghany Corporation and subsidiaries (the “Company”) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on the COSO criteria.