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, Hartford, 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, Saco, Maine and Berlin, Connecticut. 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. Wilbert leases office space in Overland Park, Kansas for its headquarters and owns and leases facilities at locations around the 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.
See Note 1(a) and Note 2 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for information on changes in subsidiaries for the five year period ended December 31, 2020.
Underwriting profit is a non-GAAP financial measure for our reinsurance and insurance segments. 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: (i) net investment income; (ii) change in the fair value of equity securities; (iii) net realized capital gains; (iv) change in allowance for credit losses on available for sale securities; (v) noninsurance revenue; (vi) other operating expenses; (vii) corporate administration; (viii) amortization of intangible assets; and (ix) interest expense. We use underwriting profit as a supplement to earnings before income taxes, the most comparable GAAP financial measure, to evaluate the performance of our reinsurance and insurance segments and believe that underwriting profit provides useful additional information to investors because it highlights net earnings attributable to our reinsurance and insurance segments’ underwriting performance. Earnings before income taxes may show a profit despite an underlying underwriting loss, and when underwriting losses persist over extended periods, a reinsurance or an insurance company’s ability to continue as an ongoing concern may be at risk. A reconciliation of underwriting profit to earnings before income taxes is presented within “Consolidated Results of Operations.”
Net investment income decreased by 10.8 percent in 2020 from 2019, and increased by 9.9 percent in 2019 from 2018.
Underwriting loss was $128.7 million in 2020, compared with underwriting profit of $33.0 million in 2019 and underwriting loss of $161.5 million in 2018.
The combined ratio for our reinsurance and insurance segments was 102.1 percent in 2020, compared with 99.4 percent in 2019 and 103.2 percent in 2018.
Catastrophe losses, net of reinsurance and including losses from the Pandemic, were $801.5 million in 2020, compared with $399.7 million in 2019 and $657.7 million in 2018.
Noninsurance revenue for Alleghany Capital was $2,477.5 million in 2020, compared with $2,289.3 million in 2019 and $1,574.6 million in 2018.
As of December 31, 2020, we had total assets of $28.9 billion and total stockholders’ equity attributable to Alleghany stockholders of $8.8 billion. As of December 31, 2020, we had consolidated total investments of approximately $20.2 billion, consisting of $15.6 billion invested in debt securities, $2.7 billion invested in equity securities, $0.7 billion invested in commercial mortgage loans, $0.7 billion invested in short-term investments and $0.5 billion invested in other invested assets.
The ongoing Pandemic has significantly disrupted many aspects of society as well as financial markets, and has caused widespread global economic dislocation. At the parent and subsidiary levels, we have implemented a variety of business continuation and crisis management policies and procedures to reduce the risk of infection to our employees and others.
TransRe’s Pandemic catastrophe losses were $391.8 million in 2020, which include $154.1 million of losses related to specific event cancellation treaties underwritten in the U.S., which TransRe began to exit prior to the Pandemic in February 2019. Based on current information, estimated exposed limits remaining on this portfolio, net of provisions, are approximately $53 million for 2020 events and $38 million for events scheduled throughout 2021. Events and event cancellation policies are not uniform in nature. Ultimate losses will depend on the timing of gathering restrictions being lifted, whether the event can be rescheduled and how far in advance the event is postponed or cancelled. As such, cancellation or postponement of the event does not necessarily mean a full limit will be paid. Furthermore, there could be additional incidental losses where event cancellation
policies comprise a small portion of exposure to certain multi-line treaties. Pandemic losses in 2020 include the impact of a September 15, 2020 U.K. court ruling that upheld certain U.K. policyholder business interruption claims brought against the insurance industry.
We cannot reasonably estimate the length or severity of the Pandemic, or the extent to which the related disruption may adversely impact our results of operations, financial position and cash flows. Such potential adverse impacts of a prolonged Pandemic on our operations, financial position and cash flows include further declines in our equity securities portfolio, additional credit-related realized and unrealized losses on our debt securities and commercial mortgage portfolios, additional credit losses on our reinsurance recoverables and other receivables, further losses from event cancellation and other coverages from our reinsurance and insurance subsidiaries, increased litigation and impairment of certain Alleghany Capital subsidiary goodwill and intangible assets.
Hurricane Sally caused widespread property damage and flooding in September 2020, primarily in Alabama and Florida; and
Civil unrest in Chile caused widespread property damage in the fourth quarter of 2019; and
Hurricane Dorian caused widespread property damage and flooding in August and September 2019, primarily in the Bahamas, North Carolina and South Carolina.
The following table presents the impact of our catastrophe losses, net of reinsurance, for 2020, 2019 and 2018:
The following table presents our consolidated revenues, costs and expenses and earnings:
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 2020, 2019 and 2018:
2020 vs 2019. The increase in gross premiums written in 2020 from 2019 is attributable to growth at our reinsurance segment as well as our insurance segment, primarily at RSUI. The increase at our reinsurance segment primarily reflects generally improving rates overall, growth in various traditional casualty and other professional liability lines of business in the U.S. and, to a lesser extent, the impact of changes in foreign exchange rates. The increase in gross premiums written in 2020 was partially offset by a decrease in automobile-related business in the U.S. arising from rebates at our cedants in reaction to a Pandemic-driven reduction in personal and commercial automobile usage worldwide. Gross premiums written from a certain large whole account quota share treaty, or the “Quota Share Treaty,” were $676.7 million in 2020, respectively, compared with $691.4 million in 2019, reflecting a decrease in casualty & other premiums. The increase in gross premiums written in 2020 from 2019 at RSUI 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, umbrella/excess and directors’ and officers’ liability lines of business.
2019 vs 2018. The increase in gross premiums written in 2019 from 2018 is attributable to growth at our reinsurance segment and, to a lesser extent, at RSUI and CapSpecialty. Growth at our reinsurance segment primarily reflects higher premiums written by the domestic operations, which include the impact of TransRe’s purchase on August 29, 2018 of certain renewal rights to a block of U.S. treaty reinsurance business focused on regional property and casualty, accident & health and personal auto lines of business, or the “Renewal Rights Purchase.” The increase in gross premiums written at our reinsurance segment was partially offset by lower Quota Share Treaty gross premiums written and the impact of changes in foreign currency exchange rates. Gross premiums written related to the Quota Share Treaty decreased to $691.4 million in 2019 from $737.6 million in 2018, reflecting a reduction of TransRe’s quota share participation.
A detailed comparison of premiums by segment for 2020, 2019 and 2018 is contained on pages 93, 94 and 100.
2020 vs 2019. The increase in net loss and LAE in 2020 from 2019 primarily reflects Pandemic-related catastrophe losses and, to a lesser extent, the impact of increases in net premiums, all as discussed above.
2020 vs 2019. The increase in commissions, brokerage and other underwriting expenses in 2020 from 2019 primarily reflects the impact of higher net premiums earned, as discussed above, partially offset by lower overall commission rates, lower annual incentive compensation accruals and a Pandemic-driven reduction in travel and entertainment costs.
A detailed comparison of commissions, brokerage and other underwriting expenses by segment for 2020, 2019 and 2018 is contained on pages 96 and 103.
The change in the fair value of equity securities in 2020 reflects depreciation in the value of our equity securities portfolio due primarily to the impact of the Pandemic and related economic and financial market disruptions in the spring of 2020, net of a subsequent appreciation on a smaller portfolio from the improved conditions. To a lesser extent, the change in the fair value of equity securities in 2020 reflects depreciation from our holdings in the materials sector.
Net realized capital gains in 2020 primarily reflect realized gains at Alleghany Capital and realized gains on our debt securities portfolio, partially offset by realized losses at corporate activities due primarily to impairment charges from write-downs of SORC oil field assets, prior to SORC’s December 31, 2020 sale. See Note 4(e) 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 net realized capital gains and losses.
The change in allowance for credit losses on available-for-sale, or “AFS,” securities in 2020 reflects $8.0 million of unrealized losses on debt securities, primarily related to the energy sector and lower-quality corporate bonds in other sectors due to a significant decline in their fair value relative to their amortized cost in the spring of 2020, net of a subsequent reduction of the allowance for credit losses on AFS securities arising from the improved bond market conditions and bond sales later in 2020. The change in allowance for credit losses on AFS securities in 2019 primarily reflects 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 increase in change in allowance for credit losses on AFS securities in 2019 from 2018 reflects higher impairment losses for debt securities. Change in allowance for credit losses on AFS securities in 2019 primarily reflects 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.
A detailed comparison of investment results for 2020, 2019 and 2018 is contained on page 104.
Noninsurance revenue and Other operating expenses. Noninsurance revenue and other operating expenses primarily include sales and expenses associated with our Alleghany Capital segment. Other operating expenses also include the long-term incentive compensation of our reinsurance and insurance segments, which totaled $79.1 million, $85.9 million and $49.8 million in 2020, 2019 and 2018, respectively. The decrease in long-term incentive compensation accruals at our reinsurance and insurance segments in 2020 from 2019 primarily reflects the impact on expected payouts from poor underwriting results and significant depreciation in the value of our equity portfolio compared with 2019, all as discussed above. The increase 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. 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 long-term incentive compensation plans.
Other operating expenses in 2020 also include a $6.2 million increase in estimates of expected credit losses on commercial mortgage loans, reinsurance recoverables and premium balances receivable at our reinsurance and insurance segments. This increase was based on current conditions and reasonable and supportable forecasts as of December 31, 2020, which include the impact of the Pandemic, as discussed above. See Note 1(r), 4(j) and 5(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 credit losses for these assets.
The increase in amortization expense in 2019 from 2018 primarily reflects the Concord acquisition, Kentucky Trailer’s acquisition of two manufacturers of aluminum feed transportation equipment in December 2018 and July 2019, PCT’s acquisition of a consumable cutting tool manufacturer in June 2019, Jazwares’ acquisition of WCT in October 2019 and IPS’s acquisition in May 2019.
Interest expense. The decrease in interest expense in 2020 from 2019 primarily reflects the impact of lower overall interest rates on Alleghany Capital’s floating-rate borrowings, partially offset by the impact of Wilbert’s April 1, 2020 inclusion in our consolidated results. The decrease in interest expense for 2020 also reflects the impact of the early redemption of certain senior notes on January 15, 2020, partially offset by the issuance of certain other senior notes on May 18, 2020. See Note 8(a) 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.
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 resulting from the acquisition of WCT, as well as increased borrowings at other Alleghany Capital subsidiaries to support working capital needs and fund recent acquisitions.
A detailed comparison of noninsurance revenue and expenses for 2020, 2019 and 2018 is contained on pages 105 through 107.
2020 vs 2019. The decrease in income tax expense in 2020 from 2019 primarily reflects lower earnings before income taxes, as further discussed below and, to a lesser extent, a lower effective tax rate. The lower effective tax rate in 2020 primarily reflects lower earnings before income taxes and the resulting increase from the impact of permanent tax benefits, such as tax-exempt interest income and dividends-received deductions, when expressed on an effective tax rate basis.
The Coronavirus Aid, Relief and Economic Security Act, or the “CARES Act,” was signed into law on March 27, 2020. Among other provisions, the CARES Act delayed certain employer payroll tax remittance deadlines and created or expanded certain income tax credits and loss carryback provisions. The beneficial impact of the CARES Act to us is currently not material.
2019 vs 2018. The income taxes in 2019 compared to income tax benefit in 2018 primarily reflect substantially higher earnings before income taxes. The increase in effective tax rate in 2019 compared with 2018 primarily reflects the impact of higher earnings before income taxes and, to a lesser extent, lower tax-exempt interest income arising from municipal bond securities and lower dividends-received deductions, partially offset by higher state income taxes.
The decrease in net earnings attributable to noncontrolling interests in 2020 from 2019 primarily reflects lower accretion of redeemable noncontrolling interests up to their future estimated redemption value, partially offset by the impact of higher overall earnings at Alleghany Capital subsidiaries with noncontrolling interests. See Note 1(a) 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 accretion of redeemable noncontrolling interests.
Property. The increase in gross premiums written in 2020 from 2019 primarily reflects generally improving rates and growth in non-catastrophe property lines of business and, to a lesser extent, changes in foreign currency exchange rates, partially offset by a decreased participation in a large, global treaty. Gross premiums written related to the Quota Share Treaty were $280.6 million in 2020 compared with $276.9 million in 2019. Excluding the impact of changes in foreign currency exchange rates, gross premiums written increased by 3.4 percent in 2020 from 2019.
Primarily reflects favorable prior accident year loss reserve development related to Typhoon Hagibis in the 2019 accident year and wildfires in California in the 2017 and 2018 accident years, partially offset by unfavorable prior accident year loss reserve development related to Hurricane Irma in the 2017 accident year and Typhoon Faxai in the 2019 accident year.
The favorable prior accident year loss reserve development in 2020, 2019 and 2018 reflects favorable loss emergence compared with loss emergence patterns assumed in earlier periods. The favorable prior accident year loss reserve development in 2020 did not impact assumptions used in estimating TransRe’s loss and LAE liabilities for business earned in 2020.
The increase in gross premiums written in 2019 from 2018 primarily reflects growth in the healthcare, professional liability, specialty casualty and surety lines of business due to increases in business opportunities and CapSpecialty’s expanded product offerings, and the impact of CapSpecialty’s February 2018 purchase of certain renewal rights to a small environmental liability block of business. To a lesser extent, the increase in gross premiums written in 2019 from 2018 also reflects the impact of CapSpecialty’s September 2019 purchase of certain renewal rights associated with a small lawyer’s professional liability block of business.
RSUI. The increase in net loss and LAE in 2020 from 2019 primarily reflects higher catastrophe losses and the impact of higher net premiums earned. 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 favorable prior accident year loss reserve development in 2020 reflects favorable loss emergence compared with loss emergence patterns assumed in earlier periods. The favorable prior accident year loss reserve development in 2020 did not impact the assumptions used in estimating CapSpecialty’s loss and LAE liabilities for business earned in 2020.
Insurance Segment: Commissions, brokerage and other underwriting expenses. The following table presents commissions, brokerage and other underwriting expenses for the insurance segment:
CapSpecialty. The increases in commissions, brokerage and other underwriting expenses in 2020 from 2019 primarily reflect the impact of higher net premiums earned, higher overall commission rates and investments in technology. 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.
Change in the fair value of equity securities. The change in the fair value of equity securities in 2020 reflects depreciation in the value of our equity securities portfolio due primarily to the impact of the Pandemic and related economic and financial market disruptions in the spring of 2020, net of a subsequent appreciation on a smaller portfolio from the improved conditions. The change in the fair value of equity securities in 2019 reflects appreciation in the value of our equity securities portfolio, primarily from our holdings in the technology, industrial and financial sectors. The change in the fair value of equity securities in 2018 reflects depreciation in the value of our equity securities portfolio, primarily from our holdings in the energy, consumer, communications and materials sectors, partially offset by appreciation in the value of our equity holdings in the information technology sector.
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 credit losses, credit quality and gross unrealized investment losses for debt securities as of and for the year ended December 31, 2020.
The increase in noninsurance revenue in 2019 from 2018 reflects increases in non-industrial and industrial operations. The increase in non-industrial noninsurance revenue reflects higher sales at IPS and Jazwares, as well as the acquisition of Concord. The higher sales at IPS are due to organic growth and the impact of an acquisition in May 2019. Higher sales at Jazwares are due primarily to the impact of a major new video game license in the fourth quarter of 2018 and the acquisition of WCT on October 1, 2019. The increase in industrial noninsurance revenue primarily reflects organic sales growth at W&W|AFCO Steel and its acquisition of Hirschfeld on February 7, 2018 and, to a lesser extent, the impact of Kentucky Trailer’s acquisition of two manufacturers of aluminum feed transportation equipment in December 2018 and July 2019.
Net investment income. The decrease in net investment income in 2020 from 2019 primarily reflect a cessation of equity income from Wilbert upon Wilbert’s April 1, 2020 inclusion in our consolidated results, as discussed above. The increase in net investment income in 2019 from 2018 primarily reflects Alleghany Capital’s earnings from its investment in Wilbert, due to higher earnings at Wilbert.
The increase in other operating expenses in 2019 from 2018 primarily reflects increases in non-industrial and industrial operations. The increase in non-industrial other operating expenses primarily reflects higher costs related to higher sales at IPS and Jazwares, as well as the impact of the acquisitions of Concord and WCT, partially offset by the impact of certain Toys “R” Us Inc. liquidation-related charges in early 2018. The increase in industrial other operating expenses primarily reflects higher costs related to higher sales at W&W|AFCO Steel, including the impact of W&W|AFCO Steel’s acquisition of Hirschfeld in 2018, and, to a lesser extent, Kentucky Trailer due to higher sales, partially offset by the impact of certain facility consolidation activities at Kentucky Trailer in 2018. The increase in other operating expenses in 2019 from 2018 also relates, to a lesser extent, to higher employee costs, including incentive compensation, in Alleghany Capital’s corporate operations.
Amortization of intangible assets. The increase in amortization expense in 2020 from 2019 primarily reflects recent acquisitions by Jazwares and PCT, as well as the impact of Wilbert’s April 1, 2020 inclusion in our consolidated results, as discussed above. The increase in amortization expense in 2019 from 2018 primarily reflects the Concord acquisition, Kentucky Trailer’s acquisition of two manufacturers of aluminum feed transportation equipment in December 2018 and July 2019, PCT’s acquisition of a consumable cutting tool manufacturer in June 2019, Jazwares’ acquisition of WCT in October 2019 and IPS’s acquisition in May 2019.
Interest expense. The decrease in interest expense in 2020 from 2019 primarily reflects the impact of lower overall interest rates on floating-rate borrowings, partially offset by the impact of Wilbert’s April 1, 2020 inclusion in our consolidated results, as discussed above, and Jazwares acquisition of Kelly Toy. 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 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.
Change in the fair value of equity securities. The change in the fair value of equity securities in 2020 reflects depreciation in the value of equity securities at the Alleghany parent company-level, primarily in the materials sector, and a significant depreciation due primarily to the impact of the Pandemic, as discussed above. 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.
The net realized capital losses in 2020 also include a $7.1 million realized loss as a result of an early redemption of certain senior notes as of January 15, 2020. See Note 8(a) 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 this early redemption. Net realized capital losses in 2019 primarily reflects a $13.6 million loss from the December 2019 sale of a privately held investment accounted for under the equity method. 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 arising from a decline in energy prices as of December 31, 2018.
The increase in corporate administration expense in 2019 from 2018 reflects higher Alleghany parent company long-term incentive compensation accruals due primarily to the impact of appreciation in the value of our consolidated debt and equity securities portfolios in 2019, compared with depreciation in 2018 and Alleghany stock price appreciation.
Primarily consists of commercial multi-peril and surety lines of business, as well as loss and LAE reserves for terminated lines of business and loss reserves acquired in connection with prior acquisitions for which the sellers provided loss reserve guarantees.
Changes in Gross and Net Loss and LAE Reserves between December 31, 2020 and December 31, 2019. Gross and net loss and LAE reserves as of December 31, 2020 increased from December 31, 2019, primarily reflecting the impact of growing net premiums earned and catastrophe losses incurred in 2020, partially offset by payments on catastrophe losses incurred primarily in 2017, 2018 and 2019 and favorable prior accident year loss reserve development, all as discussed above. The 2020 catastrophe losses, net of reinsurance, include $415.2 million related to the Pandemic, $114.2 million related to Hurricane Laura and $92.6 million related to Hurricane Sally and $19.1 million related to earthquakes in Puerto Rico.
As of December 31, 2020, our reinsurance and insurance subsidiaries had total reinsurance recoverables of $1,781.1 million, consisting of $1,703.7 million of ceded outstanding loss and LAE and $85.3 million of recoverables on paid losses, less $7.9 million of an allowance for credit losses. See Part I, Item 1, “Business - Reinsurance Protection” of this Form 10-K for additional information on the reinsurance purchased by our reinsurance and insurance subsidiaries and Note 5 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: (i) the reinsurance purchased by our reinsurance and insurance subsidiaries; (ii) the allowance for credit losses; (iii) the concentration of our reinsurance recoverables; and (iv) the ratings profile of our reinsurers.
We believe our most critical accounting estimates are those with respect to the liability for unpaid loss and LAE reserves, fair value measurements of certain financial assets, change in allowance for credit losses on available for sale securities, goodwill and other intangible assets and reinsurance premium revenues, as they require management’s most significant exercise of judgment on both a quantitative and qualitative basis. The accounting estimates that result require the use of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our financial condition, results of operations and cash flows would be affected, possibly materially.
Our insurance operating subsidiaries provide coverage on both a claims-made and occurrence basis. Claims-made policies generally require that claims occur and be reported during the coverage period of the policy. Occurrence policies allow claims which occur during a policy’s coverage period to be reported after the coverage period, and as a result, these claims can have a very long claim tail, occasionally extending for decades. Casualty claims can have a very long claim tail, in certain situations extending for many years. In addition, casualty claims are more susceptible to litigation and the legal environment and can be significantly affected by changing contract interpretations, all of which contribute to extending the claim tail. For long-tail casualty lines of business, estimating the ultimate liabilities for unpaid loss and LAE is a more complex process and depends on a
In conformity with GAAP, our reinsurance and insurance subsidiaries are not permitted to establish reserves for catastrophe losses that have not occurred. Therefore, losses related to a significant catastrophe, or accumulation of catastrophes, in any reporting period could have a material adverse effect on our results of operations and financial condition during that period.
Prior Year Development. Our reinsurance and insurance subsidiaries continually evaluate the potential for changes, both favorable and unfavorable, in their estimates of loss and LAE liabilities and use the results of these evaluations to adjust both recorded liabilities and underwriting criteria. With respect to liabilities for unpaid loss and LAE established in prior years, these liabilities are periodically analyzed and their expected ultimate cost adjusted, where necessary, to reflect favorable or unfavorable development in loss experience and new information, including, for certain catastrophic events, revised industry estimates of the magnitude of a catastrophe. Adjustments to previously recorded liabilities for unpaid loss and LAE, both favorable and unfavorable, are reflected in our financial results in the periods in which these adjustments are made and are referred to as prior accident year loss reserve development. We adjusted our prior year loss and LAE reserve estimates during 2020, 2019 and 2018 based on current information that differed from previous assumptions made at the time such loss and LAE reserves were previously estimated. See Note 6(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 a table presenting the favorable and unfavorable prior accident year loss reserve development for 2020, 2019 and 2018.
Reinsurance. Our reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite in order to reduce the effect of individual or aggregate exposure to losses, manage capacity, protect capital resources, reduce volatility in specific lines of business, improve risk-adjusted portfolio returns and enable them to increase gross premium writings and risk capacity without requiring additional capital. Our reinsurance and insurance subsidiaries 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. Recoverables recorded with respect to claims ceded to reinsurers under reinsurance contracts are predicated in large part on the estimates for unpaid losses and, therefore, are also subject to a significant degree of uncertainty. In addition to the factors cited above, reinsurance recoverables may prove uncollectible if a reinsurer is unable or unwilling to perform under a contract. Reinsurance purchased by our reinsurance and insurance subsidiaries does not relieve them of their obligations to their own policyholders or cedants. Additional information regarding the use of, and risks related to the use of reinsurance by our reinsurance and insurance subsidiaries can be found on pages 49, 50, 65 and 66 of this Form 10-K. Also see Note 1(f) and Note 5 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 reinsurance recoverables.
Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between willing, able and knowledgeable market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. In addition, a three-tiered hierarchy for inputs is used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are market participant assumptions based on market data obtained from sources independent of the reporting entity. Unobservable inputs are the reporting entity’s own assumptions about market participant assumptions based on the best information available under the circumstances. In assessing the appropriateness of using observable inputs in making our fair value determinations, we consider whether the market for a particular security is “active” or “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, we consider whether observable transactions are “orderly” or not. We do not consider a transaction to be orderly if there is evidence of a forced liquidation or other distressed condition; as such, little or no weight is given to that transaction as an indicator of fair value.
however, the market approach, where feasible, is used to corroborate the fair values determined by the income approach. The market approach primarily relies on the securities’ relationships to quoted transaction prices for similarly structured instruments. To the extent that transaction prices for similarly structured instruments are not available for a particular security, other market approaches are used to corroborate the fair values determined by the income approach, including option adjusted spread analyses.
Change in Allowance for Credit Losses on Available for Sale Securities
The determination of the allowance for credit losses on AFS securities requires the judgment of management and consideration of the fundamental condition of the issuer, its near-term business prospects and all the relevant facts and circumstances.
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
Goodwill and other intangible assets deemed to have an indefinite useful life are tested annually in the fourth quarter of every year for impairment. Goodwill and other intangible assets are also tested whenever events and changes in circumstances suggest that the carrying amount may not be recoverable. A significant amount of judgment is required in performing goodwill and other intangible asset impairment tests. These tests may include estimating the fair value of our subsidiaries, which include Alleghany Capital’s operating subsidiaries, and other intangible assets. The fair value estimates may include the use of financial projections and discount rates. If it is determined that an asset has been impaired, the asset is written down by the amount of the impairment, with a corresponding charge to net earnings. Subsequent reversal of any impairment charge is not permitted.
With respect to goodwill, a qualitative assessment is first made to determine whether it is necessary to perform quantitative testing. This initial assessment includes, among other factors, consideration of: (i) past, current and projected future earnings and equity; (ii) recent trends and market conditions; and (iii) valuation metrics involving similar companies that are publicly-traded and acquisitions of similar companies, if available. If this initial qualitative assessment indicates that the fair value of an operating subsidiary of ours may be less than its carrying amount, a second step is taken, involving a comparison between the estimated fair values of our operating subsidiary with its respective carrying amount including goodwill. Under GAAP, fair value refers to the amount for which the entire operating subsidiary may be bought or sold. The methods for estimating the fair value of an operating subsidiary values include asset and liability fair values and other valuation techniques, such as discounted cash flows and multiples of earnings or revenues. All of these methods involve significant estimates and assumptions. If the carrying value exceeds estimated fair value an impairment charge is recognized for the amount by which the carrying amount of the operating subsidiary exceeds its estimated fair value. Any resulting impairment loss recognized cannot exceed the total amount of goodwill associated with the operating subsidiary.
Our consolidated balance sheet as of December 31, 2020 includes goodwill of $614.2 million related primarily to Jazwares, Wilbert, Concord, Kentucky Trailer, PCT, W&W|AFCO Steel and IPS, and intangible assets, net of amortization, of $787.5 million related primarily to Jazwares, W&W|AFCO Steel, Wilbert, TransRe, Concord, IPS, PCT and Kentucky Trailer. See Note 1(i) and Note 2 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 goodwill and other intangible assets.
On September 20, 2010, we completed a public offering of $300.0 million aggregate principal amount of our 5.625% senior notes due on September 15, 2020, or the “2020 Senior Notes.” The terms of the 2020 Senior Notes permitted redemption prior to their maturity. The 2020 Senior Notes were issued at approximately 99.6 percent of par, resulting in proceeds after underwriting discount, commissions and other expenses of $298.9 million and an effective yield of approximately 5.67 percent.
On January 15, 2020, we redeemed the 2020 Senior Notes for $312.7 million, consisting of the $300.0 million aggregate principal amount redeemed, $7.1 million of redemption premium and $5.6 million of accrued and unpaid interest on the principal amount being redeemed to the date of redemption. As a result of this early redemption of the 2020 Senior Notes, we recorded a realized loss, before tax, of $7.1 million in 2020.
Credit Agreement. On July 31, 2017, we entered into a five-year credit agreement, or the “Credit Agreement,” with certain lenders party thereto, which provides for an unsecured revolving credit facility in an aggregate principal amount of up to $300.0 million. The credit facility is scheduled to expire on July 31, 2022, unless earlier terminated. Borrowings under the Credit Agreement will be available for working capital and general corporate purposes, including permitted acquisitions and repurchases
If an event of default occurs, then, to the extent permitted in the Credit Agreement, the lenders may direct the administrative agent to, or the administrative agent may, with the consent of lenders holding more than 50% of the aggregate outstanding principal amount of the loans, as applicable, terminate the commitments, accelerate the repayment of any outstanding loans and exercise all rights and remedies available to such lenders under the Credit Agreement and applicable law. In the case of an event of default that exists due to the occurrence of certain involuntary or voluntary bankruptcy, insolvency or reorganization events of Alleghany, the commitments will automatically terminate and the repayment of any outstanding loans shall be automatically accelerated.
Dividends from Subsidiaries. See Note 10(c) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K for information on dividend restrictions and dividends received from our subsidiaries.
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. On March 16, 2020, we paid dividends to stockholders totaling $215.0 million.
Capital Contributions. From time to time, we make capital contributions to our subsidiaries. In 2020, we made aggregate capital contributions of $126.1 million to Alleghany Capital to: (i) fund a portion of PCT’s acquisition of a manufacturer of high-performance carbide end mills in March 2020 for $20.1 million; (ii) fund a portion of Jazwares’s acquisition of Kelly Toy that closed on April 1, 2020 for $59.7 million; and (iii) fund a portion of its purchase of an additional approximately 55 percent of Wilbert it previously did not own that closed on April 1, 2020 for $46.3 million. In addition, in 2020, we contributed $3.1 million to SORC for purposes of its operations prior to its December 31, 2020 sale.
Contractual Obligations. We have certain obligations to make future payments under contracts and credit-related financial instruments and commitments. The following table presents certain long-term aggregate contractual obligations and credit-related financial commitments as of December 31, 2020:
Investments in Certain Variable Interest Entities. 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 and, to a lesser extent, AIHL invested in limited partnership funds managed by Pillar Holdings, or the “Funds.” 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. 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 on the Pillar Investments as of December 31, 2020.
Investments in Commercial Mortgage Loans. As of December 31, 2020 and 2019, the carrying value of our commercial mortgage loan portfolio was $670.2 million and $686.2 million, respectively, representing the unpaid principal balance on the loans, less allowance for credit losses. See Note 4(j) 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 ratings of our commercial mortgage portfolio as of December 31, 2020.
resources and unused credit facilities to provide for the currently foreseeable needs of their businesses. Our subsidiaries had no material commitments for capital expenditures as of December 31, 2020.
Included in Alleghany Capital is debt associated with its operating subsidiaries, which totaled $556.9 million as of December 31, 2020, which is generally used to support working capital needs and to help finance acquisitions. The $556.9 million included:
$253.1 million of borrowings by Jazwares under its available credit facilities to support its seasonal peak working capital requirements and borrowings incurred and assumed from its acquisition of WCT in October 2019 and its acquisition of Kelly Toy in April 2020;
$72.8 million of borrowings by Wilbert under its available credit facility and term loans;
$64.1 million of term loans at Kentucky Trailer primarily related to borrowings to finance small acquisitions, including its acquisitions of controlling interests in certain manufacturers of aluminum feed transportation equipment in December 2018 and July 2019, and borrowings under its available credit facilities;
Investment Strategy and Holdings. Our investment strategy seeks to avoid permanent loss of capital and maintain appropriate levels of liquidity while maximizing long-term, risk-adjusted, after-tax returns. Our investment decisions are guided mainly by the nature and timing of expected liability payouts, management’s forecast of cash flows and the possibility of unexpected cash demands, such as to satisfy claims due to catastrophe losses. Our consolidated investment portfolio consists mainly of highly rated and liquid debt and equity securities listed on national securities exchanges. The overall credit quality of the debt securities portfolio is measured using the lowest rating of three large, reputable rating agencies. In this regard, the overall weighted-average credit quality rating of our debt securities portfolio as of December 31, 2020 and 2019 was AA-. Although a portion of our debt securities, which consist predominantly of municipal bonds, are insured by third-party financial guaranty insurance companies, the impact of such insurance was not significant to the debt securities credit quality rating as of December 31, 2020. See Note 4(f) 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 ratings of our debt securities portfolio as of December 31, 2020.
generally falls as time passes, all else being equal. Furthermore, a portfolio’s duration can also be impacted by adjustments made to the composition of the portfolio as well as changes in the level of market yields. As yields rise (fall), duration generally decreases (increases). As of December 31, 2020 and 2019, our debt securities portfolio had an effective duration of approximately 4.3 years and 4.2 years, respectively. The increase in duration during the 2020 primarily reflects the significant decline in risk-free interest rates, which was partially offset by the passage of time. As of December 31, 2020, approximately $4.2 billion, or 27 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.
On a consolidated basis, as of December 31, 2020 our invested assets increased to approximately $20.2 billion from approximately $18.9 billion as of December 31, 2019, primarily reflecting appreciation in the value of our debt securities portfolio and net proceeds from the issuance of our 2030 Senior Notes, partially offset by the early redemption of our 2020 Senior Notes, the special dividend payment, repurchases of shares of our common stock and depreciation in the value of our equity securities portfolio, all as discussed above. The appreciation in the value of our debt securities portfolio reflects a decrease in risk-free interest rates in 2020.
The following table presents the carrying values and estimated fair values of our consolidated financial instruments as of December 31, 2020 and 2019:
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.
For a discussion of recently adopted accounting standards and future application of accounting standards, see Note 1(r) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K.
We have audited the accompanying consolidated balance sheets of Alleghany Corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 23, 2021 expressed an unqualified opinion thereon.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
At December 31, 2020, the Company’s reserves for loss and loss adjustment expenses (LAE) was $13.0 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.
To test the estimate of the reserve for IBNR claims, our audit procedures included, among others, evaluating, with the assistance of actuarial specialists, the Company’s selection and weighting of actuarial methods compared to methods used in prior periods and in the industry for the specific types of insurance. To evaluate the significant assumptions, including expected loss ratios and loss emergence patterns, we compared the assumptions to factors historically used and current industry benchmarks. We compared the Company’s recorded reserve amount to a range of estimates which our actuarial specialist developed based on independently selected methods and assumptions. We also performed a review of the development of prior years’ reserve estimates.
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 wholly-owned 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 Alleghany since its formation in May 2006.
Precision Cutting Technologies, Inc. (“PCT”), a holding company headquartered in Rockford, Illinois, with four operating businesses: (i) Bourn & Koch, Inc., a provider of precision automated machine tool solutions; (ii) Diamond Technology Innovations, Inc., a manufacturer of waterjet orifices and nozzles and a provider of related services; (iii) Coastal Industrial Distributors, LLC, a provider of high-performance solid carbide end mills; and (iv) as of March 2020, Supermill LLC, a manufacturer of high-performance carbide end mills;
IPS-Integrated Project Services, LLC (“IPS”), a design, engineering, procurement, construction management and validation service provider focused on the global pharmaceutical and biotechnology industries, headquartered in Blue Bell, Pennsylvania;
The results of Concord have been included in Alleghany’s consolidated results beginning with its acquisition by Alleghany Capital on October 1, 2018.
AFS securities are recorded at fair value. Unrealized gains and losses during the year, net of the related tax effect, for AFS securities are excluded from earnings and reflected in comprehensive income, and the cumulative effect is reported as a separate component of stockholders’ equity until realized. Credit losses for AFS securities are recorded through an allowance for credit losses. Changes in the allowance for credit losses are recorded for (or as a reversal of) credit losses on AFS securities. Credit losses on an AFS security cannot exceed the amount by which the fair value of the security is less than its amortized cost. Any portion of a decline in fair value 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.
Net investment income consists primarily of: (i) interest income from debt securities, short-term investments, commercial mortgage loans, funds withheld by cedants and cash, including any premium amortization or discount accretion; (ii) dividend
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).
through reviews by those who have relevant expertise and who are independent of those charged with executing investing transactions.
Premium balances receivable are reported net of an allowance for credit losses. Estimates of expected credit losses are based on historical experience, current conditions and reasonable and supportable forecasts, and include an ongoing review of amounts outstanding, length of collection periods, the creditworthiness of the insured and other relevant factors. Amounts deemed to be uncollectible are written off against the allowance. Subsequent reversals are recognized in earnings.
Reinsurance is used to mitigate the exposure to losses, manage capacity and protect capital resources. Reinsuring loss exposures does not relieve a ceding entity from its obligations to policyholders and cedants. Reinsurance recoverables (including amounts related to incurred but not reported (“IBNR”) claims) and ceded unearned premiums are reported as assets. To minimize exposure to losses related to a reinsurer’s inability to pay, the financial condition of such reinsurer is evaluated initially upon placement of the reinsurance and periodically thereafter. In addition to considering the financial condition of a reinsurer, the collectability of the reinsurance recoverables is evaluated based upon a number of other factors. Such factors include the amounts outstanding, length of collection periods, disputes, any collateral or letters of credit held and other relevant factors. Credit losses for reinsurance recoverables are recorded through an allowance for credit losses. Estimates of expected credit losses are based on historical experience, current conditions and reasonable and supportable forecasts. Amounts deemed to be uncollectible are written off against the allowance. Subsequent reversals in credit loss estimates are recognized in earnings.
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 loss adjustment expenses (“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.
Anticipated net loss and LAE and estimated remaining costs of servicing the contracts are considered when evaluating recoverability of deferred acquisition costs.
With respect to goodwill, a qualitative assessment is first made to determine whether it is necessary to perform quantitative testing. This initial assessment includes, among other factors, consideration of: (i) past, current and projected future earnings and equity; (ii) recent trends and market conditions; and (iii) valuation metrics involving similar companies that are publicly-traded and acquisitions of similar companies, if available. If this initial qualitative assessment indicates that the fair value of an operating subsidiary may be less than its carrying amount, a second step is taken, involving a comparison between the estimated fair value of the operating subsidiary with its respective carrying amount including goodwill. Under GAAP, fair value refers to the amount for which the entire operating subsidiary may be bought or sold. The methods for estimating the fair value of an operating subsidiary values include asset and liability fair values and other valuation techniques, such as discounted cash flows and multiples of earnings or revenues. All of these methods involve significant estimates and assumptions. If the carrying value exceeds estimated fair value, an impairment charge is recognized for the amount by which the carrying amount of the operating subsidiary exceeds its estimated fair value. Any resulting impairment loss recognized cannot exceed the total amount of goodwill associated with the operating subsidiary.
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Current tax liabilities or assets are recognized for the estimated taxes payable or refundable on tax returns for the current year.
Debt consists of senior notes issued by Alleghany (the “Alleghany Senior Notes”), senior notes issued by TransRe (the “TransRe Senior Notes,” and together with the Alleghany Senior Notes, the “Senior Notes”) and other debt. Other debt consists primarily of borrowings at Alleghany Capital’s subsidiaries, and is generally used to fund acquisitions and support working capital needs. The Senior Notes and other debt are carried at unpaid principal balance, including any unamortized premium or discount and any unamortized debt issuance costs.
Noninsurance revenues relate primarily to manufactured products and services sold by Alleghany Capital’s subsidiaries. Manufactured products primarily include fabricated steel, toys, trailers, machine tools and funeral products. Services primarily include facility design, construction management, technical services and hotel management and development. Noninsurance revenues and related operating expenses arising from the sale of manufactured goods and services are generally recognized as the transfer of goods and services to customers takes place. Payment terms for products and services vary by the type of product or service offered. Noninsurance revenues reflect the payment or payments that are expected to be received from the customers for those goods and services. Other operating expenses consist of the cost of goods and services sold and selling, general and administrative expenses. Other operating expenses also include: (i) advertising and marketing costs; and (ii) finders’ fees, legal and accounting costs and other transaction-related expenses, all of which are recognized as incurred.
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. For certain manufactured products,
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. Service revenues related to uncompleted facility construction projects are further recognized as the work progresses, which involve estimates of costs needed to complete the facilities, among other things. The cumulative impact of revisions in total cost estimates are reflected in the period in which these changes become known, including, to the extent required, the increase or reversal of profit recognized in prior periods. External factors, such as weather, changes in customer requirements and other factors outside of Alleghany’s control, may affect the progress and estimated cost of a project’s completion and, therefore, the timing and amount of recognition of revenues and income. Provisions for estimated losses on uncompleted contracts, if any, are made in the period in which such losses are determined.
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 March 2020, the FASB issued guidance to expedite and simplify the accounting associated with the anticipated migration away from the widely-used London Inter-bank Offered Rate and other similar rates as benchmark interest rates after 2021. Under pre-existing GAAP, such modifications made to: (i) loans and certain other contracts would require re-assessments of the accounting for those contacts, such as whether they were extinguished and remeasured from an accounting perspective; and (ii) derivative contracts may cause a change in accounting, such as a possible dedesignation of hedge accounting. This new guidance largely eliminates these requirements as a result of this migration to one or more new benchmark rates and is generally applicable for contract modifications made prior to December 31, 2022. Alleghany adopted this guidance in March 2020 and the implementation did not have an impact on its results of operations and financial condition.
In August 2020, the FASB issued guidance that simplifies the accounting and disclosure requirements for certain financial instruments with characteristics of liabilities and equity, such as convertible debt and convertible preferred stock. This guidance also modifies the accounting for certain contracts involving an entity’s own stock. This guidance is effective in the first quarter of 2022 for public companies, with early adoption permitted. Alleghany will adopt this guidance in the first quarter of 2022 and does not currently believe that the implementation will have a material impact on its results of operations and financial condition.
The following table presents a rollforward of Alleghany’s goodwill and intangible assets by segment during 2020 and 2019:
See description below for a summary of recent material acquisitions impacting goodwill and intangible assets.
See table below for additional information regarding amortization and useful lives by major class of intangible asset.
On April 1, 2020, Alleghany Capital acquired an additional approximately 55 percent of Wilbert it previously did not own, bringing its equity interest in Wilbert to approximately 100 percent, for $121.3 million, consisting of $46.3 million in cash and $75.0 million of incremental debt. In connection with the acquisition, Alleghany recorded $62.9 million of goodwill, $21.5 million of finite-lived customer relationship intangible assets, $14.9 million of finite-lived license agreements intangible assets and $26.2 million of indefinite-lived trade name intangible assets. In connection with the acquisition accounting, Alleghany Capital recorded a $16.3 million gain on the remeasurement of its pre-existing approximately 45 percent equity ownership to estimated fair value (the “Wilbert Remeasurement Gain”). See Note 4(e) for information on the Wilbert Remeasurement Gain.
Acquisitions made by Kentucky Trailer in 2014, 2015, 2018 and 2019, including two acquisitions of controlling interests in manufacturers of aluminum feed transportation equipment. Specifically, Kentucky Trailer acquired a company based in Cedar Rapids, Iowa in December 2018 and a company based in Birmingham, Alabama in July 2019;
Acquisitions made by Jazwares in April 2020 of a controlling interest in a plush toy manufacturer based in Los Angeles, California (“Kelly Toy”), as well as other, smaller acquisitions in 2016 and 2018;
Acquisitions made by PCT of a manufacturer of waterjet orifices and nozzles and a provider of related services in October 2016, a provider of high-performance solid carbide end mills in June 2019 and a manufacturer of high-performance carbide end mills in March 2020; and
Goodwill and intangible assets have been reduced by amounts written-down in prior periods, as applicable.
In most instances, trade names and state and foreign insurance licenses generally have an indefinite useful life. The economic useful lives of significant intangible assets are as follows: agency relationships - 15 years; brokerage and reinsurance relationships - 15 years; renewal rights - between 3 and 14 years; loss and LAE reserves - 15 years; leases - 10 years; license agreements - 8 years; and of customer relationships - between 5 and 10 years.
Includes partnership investments accounted for at fair value and excludes investments accounted for using the equity method.
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. In 2019, Alleghany transferred into Level 3 $21.8 million of financial instruments, principally due to a decrease in observable inputs related to the valuation of such assets. Specifically, during 2019, there was an increase in the weight given to non-binding broker quotes and, as a result, there was a corresponding decrease in quoted prices for similar assets in active markets. Of the $21.8 million of transfers, $14.7 million related to foreign corporate bonds, with the remainder related to other types of debt securities.
There were no credit losses recorded in net earnings related to Level 3 instruments still held as of December 31, 2020 and 2019.
With respect to changes in Level 3 liabilities during 2020, the increase in senior notes and other debt reflects the impact of Wilbert’s April 1, 2020 inclusion in Alleghany’s consolidated results, as discussed above and, to a lesser extent, increased borrowings at other Alleghany Capital subsidiaries due to greater working capital needs.
Although Alleghany is responsible for the determination of the fair value of Alleghany’s financial assets and the supporting methodologies and assumptions, it employs third-party valuation service providers to gather, analyze and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. When those providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting a quote, which is generally non-binding, from brokers who are knowledgeable about these securities or by employing widely accepted valuation models. As of December 31, 2020 and December 31, 2019, the fair value for the vast majority of debt securities included in Level 3 was provided by such third-party valuation service providers, and as such, valuation details on these securities are generally not available to Alleghany.
The following tables present the amortized cost and the fair value of AFS securities as of December 31, 2020 and 2019:
The following table presents net investment income for 2020, 2019 and 2018:
As of December 31, 2020, non-income producing invested assets were immaterial.
The proceeds from sales of equity securities were $1.7 billion in 2020, $2.3 billion in 2019 and $1.6 billion in 2018.
The following table presents changes in the fair value of equity securities for 2020, 2019 and 2018:
Gross realized capital gains in 2020 include (i) a $15.0 million realized gain on a partial settlement and remeasurement of fair value of certain outstanding contingent consideration liabilities by Alleghany Capital in connection with its 2018 acquisition of Concord (the “Concord Settlement Gain”); (ii) a gain of $16.3 million on April 1, 2020 in connection with Alleghany Capital’s acquisition of an additional approximately 55 percent of Wilbert that it did not previously own, and the remeasurement of its pre-existing approximately 45 percent equity ownership to estimated fair value (the “Wilbert Remeasurement Gain”); and (iii) a $5.0 million realized gain from a reduction of certain contingent consideration liabilities at the PCT-level in connection with its acquisition of a provider of high-performance solid carbide end mills in June 2019.
Gross realized capital gains in 2018 include a $45.7 million gain on AIHL’s conversion of its limited partnership interests in certain subsidiaries of Ares Management LLC (“Ares”) into Ares common units in 2018.
Gross realized loss amounts exclude change in allowance for credit losses on AFS securities, as discussed below.
In developing the cash flow analyses for debt securities, Alleghany considers various factors for the different categories of debt securities. For municipal bonds, Alleghany takes into account the taxing power of the issuer, source of revenue, credit risk and enhancements and pre-refunding. For mortgage and asset-backed securities, Alleghany discounts its best estimate of future cash flows at an effective rate equal to the original effective yield of the security or, in the case of floating rate securities, at the current coupon. Alleghany’s models include assumptions about prepayment speeds, default and delinquency rates, underlying collateral (if any), credit ratings, credit enhancements and other observable market data. For corporate bonds, Alleghany reviews business prospects, credit ratings and available information from asset managers and rating agencies for individual securities.
Change in allowance for credit losses on AFS securities in 2018 reflects $1.3 million of unrealized losses on debt securities, primarily in the energy and industrial sectors, related to the deterioration of creditworthiness of the issuers.
Alleghany’s methodology for assessing credit losses 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.
Alleghany’s consolidated investment portfolio consists mainly of highly rated and liquid debt and equity securities listed on national securities exchanges. The overall credit quality of the debt securities portfolio is measured using the lowest rating of three large, reputable rating agencies. In this regard, the overall weighted-average credit quality rating of Alleghany’s debt securities portfolio as of December 31, 2020 and 2019, was AA-. Although a portion of Alleghany’s debt securities, which consist predominantly of municipal bonds, is insured by third-party financial guaranty insurance companies, the impact of such insurance was not significant to the debt securities’ credit quality rating as of December 31, 2020.
The following table presents the ratings of Alleghany’s debt securities as of December 31, 2020:
Investments with fair values of approximately $2.4 billion as of December 31, 2020, 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 and, to a lesser extent, AIHL invested 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, 2020 and 2019, Alleghany’s carrying value in the Pillar Investments, as determined under the equity method of accounting, was $173.3 million and $205.5 million, respectively, which is reported as a component of other invested assets and is net of returns of capital received from the Pillar Investments.
The principal amounts of the loans were no more than approximately two-thirds of the property’s appraised value at the time the loans were made and the estimated fair value of underlying collateral was approximately double that of the commercial mortgage loan portfolio carrying value as of December 31, 2020. Fair value estimates of underlying collateral are updated on a rolling basis at least annually, with a portion of the portfolio updated each quarter. As of December 31, 2020, there was no loan in default or in arrears.
Amounts recoverable from reinsurers are recognized in a manner consistent with the loss and LAE liabilities associated with the reinsurance placement and presented on the balance sheet as reinsurance recoverables, and are recorded after an allowance for credit losses. Such balances as of December 31, 2020 and 2019 are presented in the table below:
The following table presents information regarding concentration of Alleghany’s reinsurance recoverables and the ratings profile of its reinsurers as of December 31, 2020:
Reinsurance recoverables reflect amounts due from one or more reinsurance subsidiaries of the listed company.
Reinsured loss and LAE ceded included in Alleghany’s consolidated statements of earnings were $562.7 million, $407.7 million and $628.2 million for 2020, 2019 and 2018, respectively.
The following table presents property and casualty premiums written and earned for 2020, 2019 and 2018:
TransRe enters into various retrocession arrangements, including property catastrophe retrocession contracts, to manage the effects of individual or aggregate exposure to losses, reduce volatility in specific lines of business, improve risk-adjusted portfolio returns, strengthen its market position and enhance capital efficiency. These include excess-of-loss and quota share treaties in both traditional rated and collateralized form as well as catastrophe bonds. TransRe’s retrocession protections generally have a one-year term and renewal dates occur throughout the year, with the majority renewing at January 1. The catastrophe bonds, however, have a four-year term, with maturities in 2022 and 2023.
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, 2020. Both programs were renewed on May 1, 2020 with substantially similar terms as the expired programs.
The following table presents the (favorable) unfavorable prior accident year loss reserve development for 2020, 2019 and 2018:
Primarily reflects favorable prior accident year loss reserve development in the 2017 accident year.
Primarily reflects favorable prior accident year loss reserve development in the 2016 and 2017 accident years, partially offset by unfavorable prior accident year loss reserve development in the 2018 accident year.
Primarily reflects favorable prior accident year loss reserve development in the 2015 and 2016 accident years, partially offset by unfavorable prior accident year loss reserve development in the 2017 accident year.
Primarily reflects unfavorable prior accident year loss reserve development in the professional liability lines of business in the 2017 through 2019 accident years, partially offset by 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.
Primarily reflects unfavorable prior accident loss reserve development related to the professional liability and other casualty lines of business in the 2015 through 2018 accident years.
Represents the following reinsurance lines of business: directors’ and officers’ liability; errors and omissions liability; general liability; and medical malpractice.
Primarily represents the following reinsurance lines of business: ocean marine and aviation; auto liability; accident & health; mortgage reinsurance; surety; and credit.
The vast majority of the CapSpecialty’s loss and LAE reserves relate to its casualty lines of business.
The following table presents supplemental information about average historical loss and LAE duration, net of reinsurance, as of December 31, 2020.
On May 18, 2020, Alleghany completed a public offering of $500.0 million aggregate principal amount of its 3.625% senior notes due on May 15, 2030 (the “2030 Senior Notes”). The 2030 Senior Notes are unsecured and unsubordinated general obligations of Alleghany. Interest on the 2030 Senior Notes is payable semi-annually in arrears on May 15 and November 15 of each year. The terms of the 2030 Senior Notes permit redemption prior to maturity. The indenture under which the 2030 Senior Notes were issued contains covenants that impose conditions on Alleghany’s ability to create liens on the capital stock of AIHL, TransRe or RSUI. The 2030 Senior Notes were issued at approximately 99.9 percent of par, resulting in proceeds after underwriting discount, commissions and other expenses of $494.8 million, and an effective yield of approximately 3.64 percent. Approximately $4.6 million of underwriting discount, commissions and other expenses were recorded as deferred charges, which are amortized over the life of the 2030 Senior Notes.
On January 15, 2020, Alleghany redeemed all of its outstanding 2020 Senior Notes for $312.7 million, consisting of the $300.0 million aggregate principal amount redeemed, $7.1 million of redemption premium and $5.6 million of accrued and unpaid interest on the principal amount being redeemed to the date of redemption. As a result of this early extinguishment of debt, Alleghany recorded a realized loss, before tax, of $7.1 million in 2020.
The debt associated with Alleghany Capital’s operating subsidiaries totaled $556.9 million and $367.1 million as of December 31, 2020 and 2019, respectively, and is generally used to support working capital needs and to help finance acquisitions. As of December 31, 2020, the $556.9 million includes:
$64.1 million of term loans at Kentucky Trailer primarily related to borrowings to finance small acquisitions, including its acquisitions of a controlling interest in two manufacturers of aluminum feed transportation equipment in December 2018 and July 2019, and borrowings under its available credit facilities;
$32.1 million of term loans at PCT primarily related to borrowings to finance the acquisition of a waterjet orifice and nozzle manufacturer in 2016 and the acquisition of a consumable cutting tool manufacturer in June 2019;
The following table presents income tax expense (benefit) for 2020, 2019 and 2018:
The following table presents the difference between the federal income tax rate and the effective income tax rate:
The effective tax rate in 2020 primarily reflects modest pre-tax income and the resulting increase of the impact from permanent tax benefits, such as tax-exempt interest income and dividends-received deductions, when expressed on an effective tax rate basis. The higher effective tax rate in 2019 primarily reflects significant pre-tax earnings and the resulting decrease from the impact of these permanent tax benefits when expressed on an effective tax rate basis.
The following table presents the tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities as of December 31, 2020 and 2019:
management, it is more likely than not that a portion of the deferred tax asset will not be realized. As of December 31, 2020 and 2019, Alleghany recognized $12.5 million and $22.8 million, respectively, of deferred tax assets for certain state net operating and capital loss carryovers, and a valuation allowance of $12.5 million and $22.8 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, 2020.
Alleghany believes that, as of December 31, 2020, 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, 2020.
The following table presents unrealized appreciation of investment reclassifications out of accumulated other comprehensive income attributable to Alleghany stockholders during 2020 and 2019:
As of December 31, 2020, approximately $7.2 billion of Alleghany’s total equity of $8.8 billion was unavailable for dividends or advances to Alleghany from its subsidiaries. The remaining $1.6 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, 2020.
In the U.S., Alleghany’s reinsurance and insurance subsidiaries are subject to insurance laws and regulations that restrict the amount and timing of dividends they may pay without the prior approval of regulatory authorities. Under the insurance holding company laws and regulations, Alleghany’s reinsurance and insurance subsidiaries may not pay an “extraordinary”
Includes $101.0 million representing the July 1, 2019 carrying value of TransRe’s ownership interest in CapSpecialty, which was transferred to Alleghany.
In 2020, 2019 and 2018, TRC paid cash dividends of $245.0 million, $220.0 million and $280.0 million, respectively, to the TransRe holding company. In addition, in 2019, 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, 2020, a maximum amount of $72.8 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.
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. On March 16, 2020 Alleghany paid dividends to stockholders totaling $215.0 million.
The following table presents a reconciliation of the earnings and share data used in the basic and diluted earnings per share computations for 2020, 2019 and 2018:
Alleghany and its subsidiaries lease certain facilities, land, furniture and equipment under long-term, non-cancellable lease agreements that expire at various dates through 2040. Most of Alleghany’s leases relate to office facilities. Alleghany’s lease agreements do not contain any material restrictive covenants and substantially all are considered to be operating leases.
As of December 31, 2020, the weighted average lease term was approximately 13 years.
Loss and LAE include amounts for risks related to asbestos-related illness and environmental impairment. The following table presents such gross and net reserves as of December 31, 2020 and 2019:
Corporate activities are not classified as a segment. The primary components of corporate activities are Alleghany Properties, activities at the Alleghany parent company and, prior to its December 31, 2020 sale, SORC. Corporate activities also include the elimination of minor activity between segments.
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; and credit.
Underwriting profit represents net premiums earned less net loss and LAE and commissions, brokerage and other underwriting expenses, all as determined in accordance with GAAP, and does not include net investment income, change in the fair value of equity securities, net realized capital gains, change in allowance for credit losses on available for sale securities, noninsurance revenue, other operating expenses, corporate administration, amortization of intangible assets or interest expense. Underwriting profit does not replace earnings before income taxes determined in accordance with GAAP as a measure of profitability. Rather, Alleghany believes that underwriting profit enhances the understanding of its reinsurance and insurance segments’ operating results by highlighting net earnings attributable to their underwriting performance. Earnings before income taxes (a GAAP measure) may show a profit despite an underlying underwriting loss. Where underwriting losses persist over extended periods, a reinsurance or an insurance company’s ability to continue as an ongoing concern may be at risk. Therefore, Alleghany views underwriting profit as an important measure in the overall evaluation of performance.
Foreign gross premiums written in 2020, 2019 and 2018 were approximately $1.7 billion, $1.7 billion and $1.6 billion, respectively.
Foreign net premiums earned in 2020, 2019 and 2018 were approximately $1.6 billion, $1.5 billion and $1.4 billion, respectively. The foreign country in which Alleghany generates the largest amount of premium revenues is the U.K. Net premiums earned by operations in the U.K. in 2020, 2019 and 2018 were $699.6 million, $615.6 million and $583.8 million, respectively.
The following table presents identifiable assets, the portion of identifiable assets related to cash and invested assets, and equity attributable to Alleghany, for Alleghany’s reportable segments and for corporate activities as of December 31, 2020:
For 2020, 2019 and 2018, the vast majority of industrial noninsurance revenues were recognized as goods and services transferred to customers over time.
Significant portions of the reinsurance segment’s gross premiums written are produced by a limited number of brokers. Gross premiums written produced by the reinsurance segment’s three largest brokers were approximately 27 percent, 19 percent and 14 percent in 2020, 26 percent, 17 percent and 16 percent in 2019 and 26 percent, 18 percent, and 15 percent in 2018.
As of December 31, 2020, 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.
The annual grant to each non-employee director consists of either restricted shares or restricted stock units of Common Stock, at the director’s election. Awards granted to non-employee directors were not material to Alleghany’s results of operations, financial condition or cash flows for the three years ended December 31, 2020.
The following types of awards were outstanding as of December 31, 2020:
RSUI has a Restricted Stock Unit Plan (the “RSU Plan”) and a Book Value Unit Plan (the “BVU Plan”) (collectively the “RSUI Plans”) for the purpose of providing equity-like incentives to key employees of RSUI.
Alleghany and certain of its subsidiaries provide a variety of retirement benefits. Alleghany provides supplemental retirement benefits through deferred compensation programs and profit sharing plans for certain of its Alleghany parent company-level officers and employees. In addition, Alleghany’s subsidiaries sponsor both qualified, defined contribution retirement plans for substantially all employees, including executives, and non-qualified plans only for executives, some of which provide for voluntary salary reduction contributions by employees and matching contributions by each respective subsidiary, subject to specified limitations.
Alleghany has endorsement split-dollar life insurance policies for its Alleghany parent company-level officers that are effective during employment, as well as retirement. Premiums are paid by Alleghany and death benefits are split between Alleghany and the beneficiaries of the officers. Death benefits for current employees that inure to the beneficiaries are generally equal to four times the annual salary at the time of an officer’s death. After retirement, death benefits that inure to the beneficiaries are generally equal to the annual salary of the officer as of the date of retirement.
In addition, Alleghany 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, 2020. 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.
TransRe had an unfunded, noncontributory defined benefit plan for executives and has a funded noncontributory defined benefit plan for certain of its employees in the U.S. Benefits under TransRe’s defined benefit plans were frozen as of December 31, 2009 and the unfunded, noncontributory defined benefit plan for executives was terminated in December 2019. As of December 31, 2020 and 2019, the projected benefit obligations of defined benefit pension plans were $72.2 million and $79.0 million, respectively, and the related fair value of plan assets was $63.7 million and $56.9 million, respectively.
Earnings per share by quarter may not equal the amount for the full year due to the timing of repurchases of Common Stock, as well as rounding.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Alleghany Corporation and subsidiaries as of December 31, 2020 and 2019, and 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, 2020 and the related notes and the financial statement schedules listed in the Index at Item 15(a)(2) and our report dated February 23, 2021 expressed an unqualified opinion thereon.