The following is a discussion and analysis of our financial condition and results of operations for the twelve months ended December 31, 2020, 2019 and 2018. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of this Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties and that are not historical facts, including statements about our beliefs and expectations. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and particularly under the headings “Risk Factors,” “Business” and “Note on Forward-Looking Statements” contained in Item 1A, Item 1, and Part I of this Form 10-K, respectively.
Alleghany’s segments are reported in a manner consistent with the way management evaluates the businesses. As such, Alleghany classifies its businesses into three reportable segments - reinsurance, insurance and Alleghany Capital. Corporate activities are not classified as a segment.
The catastrophe losses in 2020 include $415.2 million related to the Pandemic and $386.3 million related to other natural catastrophes, which included losses from Hurricane Laura, Hurricane Sally and Puerto Rico earthquakes, compared with $399.7 million of catastrophe losses in 2019, which included losses from Typhoon Hagibis, Typhoon Faxai, civil unrest in Chile and Hurricane Dorian.
2020 vs 2019. The underwriting loss in 2020 compared to the underwriting profit in 2019 primarily reflects Pandemic-related catastrophe losses at our reinsurance segment and, to a lesser extent, RSUI, all as discussed above.
2020 vs 2019. The decrease in net investment income in 2020 from 2019 primarily reflects lower interest income and, to a lesser extent, lower dividend income. Lower interest income reflects the impact of low reinvestment yields on debt securities and lower yields on short term investments and floating-rate debt securities. Lower dividend income reflects reductions in our equity security portfolio during most of 2020.
CapSpecialty. The decrease in net loss and LAE in 2020 from 2019 primarily reflects substantial unfavorable prior accident year loss reserve development in 2019, partially offset by the impact of higher net premiums earned, higher current accident year losses and $3.1 million of Pandemic-related catastrophe losses. The increase in net loss and LAE in 2019 from 2018 primarily reflects unfavorable prior accident year loss reserve development in 2019, compared with favorable prior accident year loss reserve development in 2018, the impact of higher net premiums earned and, to a lesser extent, an increase in initial loss estimates in the current accident year.
Other operating expenses in 2020, 2019 and 2018 also reflect finders’ fees, legal and accounting costs and other transaction-related expenses, primarily related to Alleghany Capital’s April 1, 2020 acquisition of an additional approximately 55 percent of Wilbert it previously did not own, Jazwares’ acquisition of Kelly Toy in April 2020 and WCT in October 2019, the acquisition by PCT of a consumable cutting tool manufacturer in June 2019, the acquisitions by Kentucky Trailer of two manufacturers of aluminum feed transportation equipment in December 2018 and July 2019, Alleghany Capital’s acquisition of Concord in 2018 and W&W|AFCO Steel’s acquisition of Hirschfeld in 2018. Finders’ fees, legal and accounting costs and other transaction-related expenses were $5.0 million, $4.1 million and $7.7 million for 2020, 2019 and 2018, respectively.
The following table presents the shares of our common stock that we repurchased in 2020, 2019 and 2018:
See Note 12(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 further information regarding variable interest entities.
None of these liabilities are guaranteed by Alleghany or Alleghany Capital. In December 2019, third-party, floating-rate term loans at Concord were repaid and replaced with approximately $33.2 million of intercompany floating-rate debt funded by the Alleghany parent company. The intercompany debt and related interest expenses are eliminated at the Alleghany consolidated level.
We set and monitor subsidiary and group-level limits to single zone exposures as well as to aggregate exposures from multiple events within any one year and at multiple points along the loss distribution curve. For example, we seek to limit the after-tax impact of all natural catastrophes occurring in any given year, net of related estimated pre-overhead underwriting profit, to 15 percent of Alleghany’s stockholders’ equity at the 250-year return period (having a likelihood of being exceeded in any single year of 0.4 percent). Our loss estimates for zonal and aggregate catastrophe exposures are updated and reviewed against
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as
Commercial mortgage loans are carried at unpaid principal balance, less an allowance for credit losses. Credit losses for commercial mortgage loans 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, and include an ongoing review of amounts outstanding, the creditworthiness of the borrower, value of the real estate collateral and other relevant factors. Amounts deemed to be uncollectible are written off against the allowance. Subsequent reversals in credit loss estimates are recognized in earnings. Interest income on loans is accrued as earned.
Commencing January 1, 2019, all leases with terms of more than one year are recorded as lease liabilities and corresponding right-of-use assets, and are recorded as a component of other liabilities and other assets, respectively.
While the reserving process is difficult for the insurance business, the inherent uncertainties of estimating loss reserves are even greater for the reinsurance business, due primarily to the longer-term nature of most of the business, the diversity of development patterns among different types of reinsurance contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing reserving practices among ceding companies, which may change without notice. TransRe writes a significant amount of non-proportional assumed casualty reinsurance as well as proportional assumed reinsurance of excess liability business. Claims from such classes can exhibit greater volatility over time than most other classes due to their low frequency, high severity nature and loss cost trends that are more difficult to predict. Net loss and LAE also include amounts for risks related to asbestos-related illness and environmental impairment.
In 2020, Alleghany transferred out of Level 3 $20.7 million of financial instruments, principally due to an increase in observable inputs related to the valuation of such assets. Specifically, during 2020, 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 $20.7 million of transfers, $14.5 million related to other asset-backed securities, with the remainder related to foreign corporate bonds. There were no transfers into of Level 3 in 2020.
Mortgage and asset-backed securities by their nature do not generally have single maturity dates.
Gross realized capital losses in 2018 include 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.
Approximately 71 percent of Alleghany’s reinsurance recoverables balance as of December 31, 2020 was due from reinsurers having an A.M. Best Company, Inc. financial strength rating of A (Excellent) or higher, with a majority of the other reinsurance recoverables being secured by funds held, trust agreements or letters of credit.
The following table presents the activity in the liability for loss and LAE in 2020, 2019 and 2018:
None of the above liabilities are guaranteed by Alleghany or Alleghany Capital. In December 2019, third-party, floating-rate term loans at Concord were repaid and replaced with approximately $33 million of intercompany floating-rate debt funded by the Alleghany parent company. The intercompany debt and related interest expenses are eliminated at the Alleghany consolidated level.
Represents the present value of lease liabilities and is reported as a component of other liabilities on Alleghany’s consolidated balance sheet.
Amounts recognized as compensation expense in the consolidated statements of earnings and comprehensive income with respect to long-term compensation awards under plans for Alleghany parent company-level employees and non-employee directors were $4.3 million, $38.7 million and $(12.0) million in 2020, 2019 and 2018, respectively. The negative expense for 2018 reflects a reversal of certain long-term incentive compensation expense accruals, driven primarily by the impacts of depreciation in the value of Alleghany’s consolidated debt and equity securities portfolio, as well as significant catastrophe losses incurred at Alleghany’s reinsurance and insurance subsidiaries in 2018. The amount of related income tax (expenses) benefit in the consolidated statements of earnings and comprehensive income with respect to these plans was $0.9 million, $8.1 million and $(2.5) million in 2020, 2019 and 2018, respectively. In 2020, 2019 and 2018, $5.0 million, $2.4 million and $4.3 million of