vs 2016. The decrease in gross and net premiums written in 2017 from 2016 was primarily attributable to a decrease at our reinsurance segment, partially offset by an increase at our insurance segment, reflecting growth at CapSpecialty and PacificComp. The decrease at our reinsurance segment was primarily related to cancellations, non-renewals and reduced participations in certain treaties, the impact of rate pressures and increased retentions by cedants, partially offset by gross and net premiums written in 2017 related to reinstatement premiums written on treaties impacted by catastrophe losses. The decrease at our reinsurance segment in gross and net premiums written also reflected lower premiums related to the Quota Share Treaty. Premiums written related to the Quota Share Treaty were $780.9 million and $854.3 million in 2017 and 2016, respectively. Premiums written related to the Quota Share Treaty in 2016 reflected elevated premiums written in the first quarter of 2016 due to differences between initial premium estimates at contract inception, which were recorded in the fourth quarter of 2015, and actual data subsequently reported. As a consequence of this change in estimate, premiums written in the fourth quarter of 2015 were understated and premiums written in the first quarter of 2016 were correspondingly increased. In general, when actual data has not been reported by ceding companies, premiums written are estimated based on historical patterns and other relevant factors. Any differences between these estimates and actual data subsequently reported are recorded in the period when actual data becomes available.
A detailed comparison of underwriting profits by segment for 2018, 2017 and 2016 is contained on pages 87 and 94.
Property. The decrease in gross premiums written in 2018 from 2017 primarily reflects a decline in property-related Quota Share Treaty premiums written, partially offset by an increase in premiums written by the Asia-Pacific operations. Gross premiums written related to the Quota Share Treaty were $280.8 million and $364.3 million in 2018 and 2017, respectively, reflecting a reduction of TransRe’s quota share participation, as well as a decline in property-related premiums written. Excluding the impact of changes in foreign currency exchange rates, gross premiums written decreased by 1.7 percent in 2018 from 2017. The slight decrease in net premiums earned in 2018 from 2017 primarily reflects higher ceded premiums earned due to an increase in retrocessional coverage. Excluding the impact of changes in foreign currency exchange rates, net premiums earned decreased by 0.5 percent in 2018 from 2017.
The decrease in gross premiums written in 2017 from 2016 primarily reflected cancellations, non-renewals and reduced participations in certain treaties, as well as the impact of rate pressures and increased retentions by cedants and a decrease in casualty-related premiums written related to the Quota Share Treaty, partially offset by reinstatement premiums written on treaties impacted by catastrophe losses. Gross premiums written related to the Quota Share Treaty were $416.6 million and $501.1 million in 2017 and 2016, respectively. Premiums written related to the Quota Share Treaty in 2016 reflected elevated premiums written in the first quarter of 2016 due to differences between initial premium estimates at contract inception, which were recorded in the fourth quarter of 2015, and actual data subsequently reported. As a consequence of this change in estimate, premiums written in the fourth quarter of 2015 were understated and premiums written in the first quarter of 2016 were correspondingly increased. In general, when actual data has not been reported by
RSUI. The increase in gross premiums written in 2018 from 2017 primarily reflects growth in most lines of business due to an increase in business opportunities and improved general market conditions, particularly in the property lines of business. Gross premiums written in 2017 approximated gross premiums written in 2016, primarily reflecting declines in the property and most casualty lines of business in the first nine months of 2017 due to an increase in competition, offset by 2017 fourth quarter growth due to an increase in business opportunities and improved general market conditions, particularly in the property lines of business.
Loss Frequency and Severity. Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described above. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs, changes in economic conditions or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations. Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to our reinsurance or insurance operating subsidiary. The length of the loss reporting lag affects their ability to accurately predict loss frequency, which are more predictable for lines with short reporting lags, as well as the amount of reserves needed for IBNR. If the actual level of loss frequency and severity is higher or lower than expected, the ultimate losses will be different than management’s estimates. A small percentage change in an estimate can result in a material effect on our reported earnings. The following table presents the impact of changes, which could be favorable or unfavorable, in frequency and severity on our loss estimates for claims occurring in 2018:
On April 13, 2015, S&P upgraded Alleghany’s issuer credit rating to BBB+ from BBB, on January 27, 2016, Moody’s upgraded Alleghany’s issuer credit ratings to Baa1 from Baa2 and on August 19, 2016, A.M. Best upgraded Alleghany’s issuer credit rating to a- from bbb+.
Capital Contributions. From time to time, we make capital contributions to our subsidiaries. In 2018, we made aggregate capital contributions of $144.1 million to Alleghany Capital to: (i) acquire approximately 85 percent of the equity in Concord for $68.6 million (excluding amounts for transaction-related expenses and estimates of future amounts payable); and (ii) to fund Alleghany Capital’s portion of the acquisition of Hirschfeld by its subsidiary W&W|AFCO Steel for $75.5 million (excluding amounts for transaction-related expenses). In addition, in 2018 we contributed $14.1 million to SORC for purposes of ongoing operations.
In 2017, we made aggregate capital contributions of $236.2 million to Alleghany Capital to: (i) acquire approximately 80 percent of the equity in W&W|AFCO Steel for $163.9 million (excluding amounts for transaction-related expenses and estimates of future
Investments in Commercial Mortgage Loans. As of December 31, 2018, the carrying value of our commercial mortgage loan portfolio was $676.5 million, representing the unpaid principal balance on the loans. As of December 31, 2018, there was no allowance for loan losses. The commercial mortgage loan portfolio consists primarily of first mortgages on commercial properties in major metropolitan areas in the U.S. The loans earn interest at fixed- and floating-rates, mature in two to ten years from loan origination and 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. The estimated fair value of the commercial mortgage loan portfolio approximated carrying value as of December 31, 2018.
$105.9 million of borrowings by W&W|AFCO Steel under its available credit facility and term loans (including borrowings incurred and assumed from its acquisition of Hirschfeld);
The portion of stockholders’ equity, net earnings and comprehensive income that is not attributable to Alleghany stockholders is presented on the Consolidated Balance Sheets, the Consolidated Statements of Earnings and Comprehensive Income and the Consolidated Statements of Changes in Stockholders’ Equity as noncontrolling interests. In addition, Alleghany accretes the redeemable noncontrolling interests up to its future estimated redemption value over the period from the date of issuance to the earliest redemption date, and such accretion is also included as noncontrolling interests. Because all noncontrolling interests have the option to sell their ownership interests to Alleghany in the future (generally through 2024), the portion of stockholders’ equity that is not attributable to Alleghany stockholders is presented on the Consolidated Balance Sheets and the Consolidated Statements of Changes in Stockholders’ Equity as redeemable noncontrolling interests for all periods presented. During 2018, the noncontrolling interests outstanding were approximately as follows: Bourn & Koch - 11 percent; Kentucky Trailer - 21 percent; IPS - 15 percent; Jazwares - 23 percent; and W&W|AFCO Steel - 20 percent. Concord had 15 percent noncontrolling interests outstanding from its October 1, 2018 acquisition date through December 31, 2018.
Level 1: Valuations are based on unadjusted quoted prices in active markets that Alleghany has the ability to access for identical, unrestricted assets and do not involve any meaningful degree of judgment. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Alleghany’s Level 1 assets include publicly traded common stocks and mutual funds (which are included on the balance sheet in equity securities) where Alleghany’s valuations are based on quoted market prices.
Level 3: Valuations are based on techniques that use significant inputs that are unobservable. The valuation of Level 3 assets requires the greatest degree of judgment. These measurements may be made under circumstances in which there is little, if any, market activity for the asset. Alleghany’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, Alleghany considers factors specific to the asset. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assets classified as Level 3 principally include other asset-backed securities (primarily, collateralized loan obligations) and, to a lesser extent, U.S. and foreign corporate bonds (including privately issued securities), partnership investments, non-marketable equity investments, RMBS, CMBS and commercial mortgage loans.
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. Noninsurance revenues and related operating expenses from manufactured products are generally recognized at the time title transfers to the customer, which typically occurs at the point of shipment or delivery to the customer, depending on the terms of the sales arrangement. For certain products, partial payment in the form of a deposit is required before the products are delivered to the customer and such deposits are recorded as a component of other liabilities. Noninsurance revenues and related operating expenses from services are generally recognized as the services are performed. Services provided pursuant to a contract are recognized either over the contract period or upon completion of the elements specified in the contract, depending on the terms of the contract.
Net unrealized losses related to Level 3 assets as of December 31, 2018 and 2017 were not material.
The increase in Senior Notes and other debt included in Level 3 for 2018 primarily reflects increased borrowings at W&W|AFCO Steel from its acquisition of Hirschfeld, increased borrowings at Kentucky Trailer from its December 28, 2018 acquisition of a controlling interest in a manufacturer of aluminum feed transportation equipment based in Cedar Rapids, Iowa, and Alleghany Capital’s acquisition of Concord.
In July 2013, AIHL invested $250.0 million in Ares, an asset manager, in exchange for a 6.25 percent equity stake in Ares, with an agreement to engage Ares to manage up to $1.0 billion in certain investment strategies. In May 2014, Ares completed an initial public offering of its common units. Upon completion of the initial public offering, Alleghany’s equity investment in Ares converted into limited partnership interests in certain Ares subsidiaries that were convertible into Ares common units. On March 15, 2018, most of AIHL’s limited partnership interests were converted into Ares common units. As a result of the conversion and with respect to the limited partnership interests that were converted into Ares common units, AIHL: (i) reclassified its converted interests from other invested assets to equity securities; (ii) increased its carrying value to $208.2 million to reflect the fair value of Ares common units; and (iii) recorded the $45.7 million increase in carrying value as a realized capital gain as of March 15, 2018. As a result of the conversion and with respect to the unconverted limited partnership interests, AIHL: (i) changed its accounting method from the equity method to fair value; (ii) increased its carrying value to $58.7 million to reflect the fair value of Ares limited partnership interests; and (iii) recorded the $12.9 million increase in carrying value as a component of net investment income as of March 15, 2018. On September 24, 2018, AIHL’s remaining Ares limited partnership interests were converted into Ares common units and, as a result, AIHL reclassified the remaining $56.9 million of its converted interests from other invested assets to equity securities.
Gross loss and LAE reserves and reinsurance recoverables as of December 31, 2017 increased from December 31, 2016, primarily reflecting significant catastrophe losses, partially offset by the sale of PacificComp. Catastrophe losses in 2017, net of reinsurance, included $252.1 million related to Hurricane Irma, $217.7 million related to Hurricane Harvey and $216.8 million related to Hurricane Maria.
(21) Primarily reflects favorable prior accident year loss reserve development in the 2013 and prior accident years.
(22) Primarily reflects favorable prior accident year loss reserve development in the 2012 and prior accident years.
The Credit Agreement replaced Alleghany’s previous four-year credit agreement (the “Prior Credit Agreement”), which provided for an unsecured revolving credit facility in an aggregate principal amount of up to $200.0 million. The Prior Credit Agreement was terminated on July 31, 2017 in advance of its scheduled October 15, 2017 expiration date.
The Tax Act was signed into law on December 22, 2017. Among other provisions, the Tax Act reduced the corporate federal income tax rate from 35.0 percent to 21.0 percent, effective January 1, 2018, for the 2018 tax year. As a result, the value of Alleghany’s deferred tax assets and liabilities as of December 31, 2017 was reduced. Alleghany has reflected the impact of the Tax Act in its financial statements. The net impact of this reduction to Alleghany’s consolidated 2017 tax expense was not material.
(2) In 2018, 2017 and 2016, TRC paid dividends of $280.0 million, $270.0 million and $350.0 million, respectively, to the TransRe holding company.
(2) For 2018, 2017 and 2016, approximately 63 percent, 66 percent and 74 percent, respectively, of noninsurance revenues were recognized as services transferred to customers over time, with the remainder recognized as goods transferred at a point in time. See Note 1(r) for additional information on Alleghany’s adoption of new revenue recognition accounting guidance effective in the first quarter of 2018.
The following types of awards were outstanding as of December 31, 2018:
RSUI has a Restricted Stock Unit Plan (the “RSUI Plan”) for the purpose of providing equity-like incentives to key employees of RSUI. Under the RSUI Plan, restricted stock units (“units”) are issued. Additional units, defined as the “Deferred Equity Pool,” were issued in 2018, 2017 and 2016 and may be created in the future if certain financial performance measures are met. Units may only be settled in cash. The fair value of each unit is calculated as the stockholder’s equity of RSUI, adjusted for certain capital transactions and accumulated compensation expense recognized under the RSUI Plan, divided by the sum of RSUI common stock outstanding and the original units available under the RSUI Plan. The units vest on the fourth anniversary of the date of grant and contain certain restrictions, related to, among other things, forfeiture in the event of termination of employment and transferability. In 2018, 2017 and 2016, RSUI recorded $11.7 million, $26.3 million and $25.4 million, respectively, in compensation expense related to the RSUI Plan. During the same periods, a deferred tax benefit of $2.4 million, $5.5 million and $8.9 million, respectively, related to the compensation expense were recorded.