Newswires
No comments
ALLEGHANY CORP /DE – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following is a discussion and analysis of our financial condition and results of operations for the twelve months endedDecember 31, 2021 , 2020 and 2019. 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.
Comment on Non-GAAP Financial Measures
Throughout this Form 10-K, our analysis of our financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with GAAP. Our results of operations have been presented in the way that we believe will be the most meaningful and useful to investors, analysts, rating agencies and others who use financial information in evaluating our performance. This presentation includes the use of underwriting profit and adjusted earnings before income taxes, which are "non-GAAP financial measures," as such term is defined in Item 10(e) of Regulation S-K promulgated by theSEC . The presentation of these financial measures is not intended to be considered in isolation or as a substitute for, or superior to, financial information prepared and presented in accordance with GAAP. These measures may also be different from non-GAAP financial measures used by other companies, limiting their usefulness for comparison purposes. A discussion of our calculation and use of these financial measures is provided below. 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) product and service revenues; (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." Adjusted earnings before income taxes is a non-GAAP financial measure for ourAlleghany Capital segment. Adjusted earnings before income taxes represents product and service revenues and net investment income less other operating expenses and interest expense, and does not include: (i) change in the fair value of equity securities; (ii) net realized capital gains; (iii) change in allowance for credit losses on available for sale securities; and (iv) amortization of intangible assets. Because adjusted earnings before income taxes excludes amortization of intangible assets, change in the fair value of equity securities, net realized capital gains and change in allowance for credit losses on available for sale securities, it provides an indication of economic performance that is not affected by levels of amortization resulting from acquisition accounting or effective tax rates. We use adjusted earnings before income taxes as a supplement to earnings before income taxes, the most comparable GAAP financial measure, to evaluate the performance of certain of our noninsurance operating subsidiaries and investments. A reconciliation of adjusted earnings before income taxes to earnings before income taxes is presented within "Consolidated Results of Operations."
Overview
The following overview does not address all of the matters covered in the other sections of Management's Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to our stockholders or the investing public. This overview should be read in conjunction with the other sections of Management's Discussion and Analysis of Financial Condition and Results of Operations.
•
Net earnings attributable to Alleghany stockholders were
2021, compared with
•
Net investment income increased by 10.1 percent in 2021 from 2020, and decreased
by 10.8 percent in 2020 from 2019.
•
Net premiums written increased by 12.7 percent in 2021 from 2020, and by 10.3
percent in 2020 from 2019.
63 --------------------------------------------------------------------------------
•
Underwriting profit was$195.3 million in 2021, compared with an underwriting loss of$128.7 million in 2020 and an underwriting profit of$33.0 million in 2019.
•
The combined ratio for our reinsurance and insurance segments was 97.2 percent
in 2021, compared with 102.1 percent in 2020 and 99.4 percent in 2019.
•
Catastrophe losses, net of reinsurance and including current accident year
losses from the Pandemic, were
million
•
Net favorable prior accident year loss reserve development was$249.7 million in 2021, which included net unfavorable prior accident year loss reserve development from the Pandemic, compared with$220.8 million in 2020 and$184.7 million in 2019.
•
Product and service revenues for
2021, compared with
•
Earnings before income taxes forAlleghany Capital were$291.7 million in 2021, compared with$146.0 million in 2020 and$111.1 million in 2019. Adjusted earnings before income taxes were$332.2 million in 2021, compared with$153.9 million in 2020 and$142.6 million in 2019. As ofDecember 31, 2021 , we had total assets of$32.3 billion and total stockholders' equity attributable to Alleghany stockholders of$9.2 billion . As ofDecember 31, 2021 , we had consolidated total investments of approximately$21.9 billion , consisting of$16.1 billion invested in debt securities,$3.7 billion invested in equity securities,$0.5 billion invested in commercial mortgage loans,$1.1 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. We began to experience a negative impact on our results of operations arising from the Pandemic in the first quarter of 2020 and that impact continued throughout 2020 and, to a lesser extent, 2021. Among other impacts on the economy, the Pandemic adversely impacted financial markets in 2020, which in turn impacted our investment portfolio. These impacts are more fully described below, as well as a recovery in the financial markets in the latter half of 2020 that continued through 2021. Since early 2020 throughDecember 31, 2021 , our reinsurance and insurance segments have incurred significant losses from the Pandemic (in total$428.9 million ), almost all of which was incurred in 2020. We incurred$13.7 million of net unfavorable prior accident year Pandemic loss reserve development in 2021, all at TransRe, compared with$415.2 million of Pandemic-related catastrophe losses in 2020, mostly at TransRe. The Pandemic losses incurred at TransRe included those from event cancellation coverage for conferences and sporting events as well as other property coverages and, to a lesser extent, the accident and health and trade credit lines of business. Our Pandemic loss estimates were based on information available at the time to us, including an analysis of reported claims, an underwriting review of in-force contracts and other factors requiring considerable judgment. Our loss estimates for Pandemic losses do not reflect judicial, legislative and regulatory risk that could expand coverage beyond the terms of our treaty and policy language, although they do reflect provisions for related legal expenses. 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. Widespread vaccine rollouts in theU.S. occurred in early 2021 and are continuing, however, new variants of the virus have emerged. Such potential adverse impacts of a prolonged Pandemic on our operations, financial position and cash flows include 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 coverages from our reinsurance and insurance subsidiaries, increased litigation and impairment of certainAlleghany Capital subsidiary goodwill and intangible assets.
Aside from the Pandemic, our reinsurance and insurance segments incurred
significant weather and other catastrophe losses. More specifically, in 2021:
•
Hurricane Ida caused widespread property damage and flooding in August and earlySeptember 2021 , primarily inLouisiana upon landfall, as well as causing subsequent damage and flooding in portions of the Northeastern and Mid-AtlanticU.S. , primarily inNew Jersey andNew York ;
•
Winter Storm Uri and other storms, collectively referred to herein as the
"
outages in
•
Severe flooding in
"European Floods," caused widespread property damage; and
•
Tornadoes which caused widespread property damage in
Midwest, or the "Midwest Tornadoes," primarily in
64 --------------------------------------------------------------------------------
In 2020:
•
Hurricane Laura caused widespread property damage and flooding in
primarily in
•
Hurricane Sally caused widespread property damage and flooding in
2020
•
Earthquakes in
In 2019:
•
Typhoon Hagibis caused widespread property damage and flooding inOctober 2019 , primarily inJapan , and affected regions which included those affected by Typhoon Faxai, which caused widespread property damage and flooding inSeptember 2019 , primarily inJapan ;
•
Civil unrest in
2019; and
•
Hurricane Dorian caused widespread property damage and flooding in August and
Our loss estimates for all of these catastrophes were based on information
available at the time, including an analysis of reported claims, an underwriting
review of in-force contracts, estimates of losses resulting from wind and other
perils, including storm surge and flooding to the extent covered by applicable
policies, and other factors requiring considerable judgment.
65
--------------------------------------------------------------------------------
The following table presents the impact of our catastrophe losses, net of
reinsurance, for 2021, 2020 and 2019:
Reinsurance Insurance
Segment Segment Total
($ in millions)
2021
Net loss and LAE:
Hurricane Ida $ 228.0 $ 40.7 $ 268.7
Winter Storms 141.7 111.1 252.8
European Floods 117.2 8.0 125.2
Midwest Tornadoes 17.0 1.5 18.5
Other 41.2 30.4 71.6
Total net loss and LAE 545.1 191.7 736.8
Net reinstatement premiums earned (1) (42.9 ) - (42.9 )
Losses before income taxes 502.2 191.7 693.9
Income taxes 105.5 40.2 145.7
Net losses attributable to Alleghany stockholders
151.5$ 548.2 2020 Net loss and LAE: Pandemic$ 391.8 $ 23.4$ 415.2 Other catastrophes: Hurricane Laura 63.6 50.6 114.2 Hurricane Sally 22.7 69.9 92.6 Puerto Rico earthquakes 19.1 - 19.1 Other 68.8 91.6 160.4 Total other catastrophes 174.2 212.1 386.3 Total net loss and LAE 566.0 235.5 801.5 Net reinstatement premiums earned (1) (26.7 ) - (26.7 ) Losses before income taxes 539.3 235.5 774.8 Income taxes 113.2 49.5 162.7
Net losses attributable to Alleghany stockholders
186.0$ 612.1 2019 Net loss and LAE: Typhoon Hagibis$ 168.2 $ 15.5$ 183.7 Typhoon Faxai 87.4 8.0 95.4 Chile civil unrest 22.3 - 22.3 Hurricane Dorian 13.2 0.4 13.6 Other 9.5 75.2 84.7 Total net loss and LAE 300.6 99.1 399.7 Net reinstatement premiums earned (1) (22.2 ) - (22.2 ) Losses before income taxes 278.4 99.1 377.5 Income taxes 58.5 20.8 79.3
Net losses attributable to Alleghany stockholders
78.3$ 298.2
(1) Represents an increase in net premiums earned.
Our catastrophe losses are more fully described on pages 78, 79, 84 and 85. In
addition to catastrophe losses in the current accident year, we report both
favorable and unfavorable prior accident year loss reserve development related
to catastrophes. See Note 6 to Notes to Consolidated Financial Statements set
forth in Part II, Item 8, "Financial Statements and Supplementary Data" of this
Form 10-K for information on our prior accident year catastrophe loss reserve
development.
66
--------------------------------------------------------------------------------
Consolidated Results of Operations
The following table presents our consolidated revenues, costs and expenses and
earnings:
Year Ended December 31,
2021 2020 2019
($ in
millions)
Revenues
Net premiums earned $ 7,097.7 $ 6,000.2 $ 5,478.1
Net investment income 540.4 490.9 550.2
Change in the fair value of equity securities 506.8 (110.5 ) 709.7
Net realized capital gains
67.4 3.1 (6.5 ) Change in allowance for credit losses on available for sale securities 2.1 (8.0 ) (19.7 ) Product and service revenues 3,789.7 2,521.1 2,328.8 Total revenues 12,004.1 8,896.8 9,040.6 Costs and Expenses Net loss and loss adjustment expenses 4,834.9 4,339.1
3,686.4
Commissions, brokerage and other underwriting expenses 2,067.5 1,789.8 1,758.7 Other operating expenses 3,479.6 2,429.3 2,263.3 Corporate administration 57.2 48.6 74.8 Amortization of intangible assets 49.9 44.2 33.8 Interest expense 102.3 88.2 100.0 Total costs and expenses 10,591.4 8,739.2 7,917.0 Earnings before income taxes 1,412.7 157.6 1,123.6 Income taxes 281.9 30.7 233.4 Net earnings 1,130.8 126.9 890.2 Net earnings attributable to noncontrolling interests 95.9 25.1
32.4
Net earnings attributable to Alleghany stockholders$ 1,034.9 $ 101.8 $ 857.8 67
--------------------------------------------------------------------------------
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
Corporate activities are not classified as a segment.
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 information on our segments and corporate activities. The tables
below present the results for our segments and for corporate activities for
2021, 2020 and 2019:
Segments
Reinsurance Insurance Alleghany Total Corporate
Year Ended
Capital Segments Activities Consolidated
($ in millions)
Gross premiums written $ 6,034.0 $ 2,542.8 $ 8,576.8 $ - $ 8,576.8 $ (38.0 ) $ 8,538.8
Net premiums written 5,387.4 1,762.0 7,149.4 - 7,149.4 - 7,149.4
Net premiums earned 5,477.1 1,620.6 7,097.7 - 7,097.7 - 7,097.7
Net loss and LAE:
Current year (excluding
catastrophe losses) 3,496.1 851.7 4,347.8 - 4,347.8 - 4,347.8
Current year catastrophe losses 545.1 191.7 736.8 - 736.8 - 736.8
Prior years (249.6 ) (0.1 ) (249.7 ) - (249.7 ) - (249.7 )
Total net loss and LAE 3,791.6 1,043.3 4,834.9 - 4,834.9 -
4,834.9
Commissions, brokerage and other underwriting expenses 1,656.7 410.8 2,067.5 - 2,067.5 - 2,067.5 Underwriting profit(1)$ 28.8 $ 166.5 195.3 - 195.3 - 195.3 Net investment income 509.0 (0.2 ) 508.8 31.6
540.4
Change in the fair value of equity securities 457.1 - 457.1 49.7
506.8
Net realized capital gains 57.6 7.6 65.2 2.2
67.4
Change in allowance for credit losses on available for sale securities 2.0 - 2.0 0.1 2.1 Product and service revenues 39.3 3,736.4 3,775.7 14.0 3,789.7 Other operating expenses 88.9 3,387.8 3,476.7 2.9 3,479.6 Corporate administration (0.1 ) - (0.1 ) 57.3 57.2 Amortization of intangible assets 1.8 48.1 49.9 - 49.9 Interest expense 26.9 16.2 43.1 59.2 102.3 Earnings (losses) before income taxes$ 1,142.8 $ 291.7$ 1,434.5 $ (21.8 ) $ 1,412.7 Loss ratio(3): Current year (excluding catastrophe losses) 63.7 % 52.6 % 61.2 % Current year catastrophe losses 10.0 % 11.8 % 10.4 % Prior years (4.5 %) (- %) (3.5 %) Total net loss and LAE 69.2 % 64.4 % 68.1 % Expense ratio(4) 30.2 % 25.4 % 29.1 % Combined ratio(5) 99.4 % 89.8 % 97.2 % Segments Reinsurance Insurance Alleghany Total Corporate
Year Ended
Capital Segments Activities Consolidated
($ in millions)
Gross premiums written $ 5,237.3 $ 2,125.7 $ 7,363.0 $ - $ 7,363.0 $ (33.6 ) $ 7,329.4
Net premiums written 4,845.0 1,499.4 6,344.4 - 6,344.4 - 6,344.4
Net premiums earned 4,644.7 1,355.5 6,000.2 - 6,000.2 - 6,000.2
Net loss and LAE:
Current year (excluding
catastrophe losses) 3,027.8 730.6 3,758.4 - 3,758.4 - 3,758.4
Current year catastrophe
losses(2) 566.0 235.5 801.5 - 801.5 - 801.5
Prior years (206.9 ) (13.9 ) (220.8 ) - (220.8 ) - (220.8 )
Total net loss and LAE 3,386.9 952.2 4,339.1 - 4,339.1 - 4,339.1
Commissions, brokerage and
other
underwriting expenses 1,425.0 364.8 1,789.8 - 1,789.8 -
1,789.8
Underwriting (loss) profit(1)$ (167.2 ) $ 38.5 (128.7 ) - (128.7 ) - (128.7 ) Net investment income 465.7 1.9 467.6 23.3 490.9 Change in the fair value of equity securities (55.8 ) - (55.8 ) (54.7 ) (110.5 ) Net realized capital gains 37.1 35.5 72.6 (69.5 )
3.1
Change in allowance for credit
losses on available for sale
securities (8.0 ) - (8.0 ) - (8.0 )
68
-------------------------------------------------------------------------------- Product and service revenues 34.9 2,477.5 2,512.4 8.7 2,521.1 Other operating expenses 103.6 2,310.0 2,413.6 15.7 2,429.3 Corporate administration (0.3 ) - (0.3 ) 48.9 48.6 Amortization of intangible assets 0.8 43.4 44.2 - 44.2 Interest expense 27.0 15.5 42.5 45.7 88.2 Earnings (losses) before income taxes$ 214.1 $ 146.0
Loss ratio(3):
Current year (excluding
catastrophe losses) 65.2 % 53.9 % 62.6 %
Current year catastrophe
losses 12.2 % 17.4 % 13.4 %
Prior years (4.5 %) (1.0 %) (3.7 %)
Total net loss and LAE 72.9 % 70.3 % 72.3 %
Expense ratio(4) 30.7 % 26.9 % 29.8 %
Combined ratio(5) 103.6 % 97.2 % 102.1 %
Segments
Reinsurance Insurance Alleghany Total Corporate
Year Ended
Capital Segments Activities Consolidated
($ in millions)
Gross premiums written $ 4,945.7 $ 1,738.4 $ 6,684.1 $ - $ 6,684.1 $ (27.7 ) $ 6,656.4
Net premiums written 4,495.0 1,256.7 5,751.7 - 5,751.7 - 5,751.7
Net premiums earned 4,327.0 1,151.1 5,478.1 - 5,478.1 - 5,478.1
Net loss and LAE:
Current year (excluding
catastrophe losses) 2,856.3 615.1 3,471.4 - 3,471.4 - 3,471.4
Current year catastrophe losses 300.6 99.1 399.7 - 399.7 - 399.7
Prior years (195.8 ) 11.1 (184.7 ) - (184.7 ) - (184.7 )
Total net loss and LAE 2,961.1 725.3 3,686.4 - 3,686.4 -
3,686.4
Commissions, brokerage and other underwriting expenses 1,406.8 351.9 1,758.7 - 1,758.7 -
1,758.7
Underwriting (loss) profit(1)$ (40.9 ) $ 73.9 33.0 - 33.0 - 33.0 Net investment income 533.2 6.3 539.5 10.7 550.2 Change in the fair value of equity securities 705.8 - 705.8 3.9
709.7
Net realized capital gains 6.0 1.0 7.0 (13.5 ) (6.5 ) Change in allowance for credit losses on available for sale securities (19.7 ) - (19.7 ) - (19.7 ) Product and service revenues 27.0 2,289.3 2,316.3 12.5 2,328.8 Other operating expenses 103.1 2,132.9 2,236.0 27.3 2,263.3 Corporate administration 4.1 - 4.1 70.7 74.8 Amortization of intangible assets 1.3 32.5 33.8 - 33.8 Interest expense 27.1 20.1 47.2 52.8 100.0 Earnings (losses) before income taxes$ 1,149.7 $ 111.1$ 1,260.8 $ (137.2 ) $ 1,123.6 Loss ratio(3): Current year (excluding catastrophe losses) 66.0 % 53.4 % 63.4 % Current year catastrophe losses 6.9 % 8.6 % 7.3 % Prior years (4.5 %) 1.0 % (3.4 %) Total net loss and LAE 68.4 % 63.0 % 67.3 % Expense ratio(4) 32.5 % 30.6 % 32.1 % Combined ratio(5) 100.9 % 93.6 % 99.4 % (1) 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, product and service revenues, other operating expenses, corporate administration, amortization of intangible assets and interest expense. Underwriting profit is a non-GAAP financial measure and does not replace earnings before income taxes determined in accordance with GAAP as a measure of profitability. See "Comment on Non-GAAP Financial Measures" herein for additional information on the presentation of our results of operations. (2) Catastrophe losses in 2020 include$391.8 million ,$23.4 million and$415.2 million of Pandemic-related losses incurred at our reinsurance segment, insurance segment and in total, respectively, as described above. (3) The loss ratio is derived by dividing the amount of net loss and LAE by net premiums earned, all as determined in accordance with GAAP. (4) The expense ratio is derived by dividing the amount of commissions, brokerage and other underwriting expenses by net premiums earned, all as determined in accordance with GAAP. (5) The combined ratio is the sum of the loss ratio and the expense ratio, all as determined in accordance with GAAP. The combined ratio represents the percentage of each premium dollar a reinsurance or an insurance company has to spend on net loss and LAE, and commissions, brokerage and other underwriting expenses. 69 --------------------------------------------------------------------------------
Comparison of 2021, 2020 and 2019
Premiums. The following table presents our consolidated premiums:
Year Ended December 31, Percent Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
($ in millions)
Premiums written:
Gross premiums written $ 8,538.8 $ 7,329.4 $ 6,656.4 16.5 % 10.1 %
Net premiums written 7,149.4 6,344.4 5,751.7 12.7 % 10.3 %
Net premiums earned 7,097.7 6,000.2 5,478.1 18.3 % 9.5 %
2021 vs 2020. The increase in gross premiums written in 2021 from 2020 is
attributable to growth at our reinsurance and insurance segments. The increase
at our reinsurance segment primarily reflects improving rates overall and growth
in various U.S. professional liability and agricultural lines of business and,
to a lesser extent, the impact of changes in foreign exchange rates, partially
offset by lower gross premiums written from a certain large whole account quota
share treaty, or the "Quota Share Treaty." Gross premiums written from the Quota
Share Treaty were $496.2 million in 2021 compared with $676.7 million in 2020,
reflecting return premiums as a result of TransRe's decision to not renew the
Quota Share Treaty as of December 31, 2021 , partially offset by a recent
business acquisition by the cedant. The increase in insurance segment gross
premiums written in 2021 from 2020 primarily reflects growth in most of RSUI's
lines of business due to increases in business opportunities, higher rates and
improved general market conditions.
The increase in net premiums earned in 2021 from 2020 reflects growth in
reinsurance and insurance segment gross premiums written in recent quarters,
partially offset by higher ceded premiums earned. TransRe's decision to not
renew the Quota Share Treaty did not impact net premiums earned in 2021 but will
in 2022.
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 the Quota Share Treaty were $676.7
million in 2020 compared with $691.4 million in 2019, reflecting a decrease in
casualty & specialty premiums. The increase in gross premiums written in 2020
from 2019 at RSUI primarily reflects growth in most lines of business due to
increases in business opportunities, higher rates and improved general market
conditions, particularly in the property, umbrella/excess and directors' and
officers' liability lines of business.
The increase in net premiums earned in 2020 from 2019 reflects growth in
reinsurance and insurance segment gross premiums written in recent quarters.
A detailed comparison of premiums by segment for 2021, 2020 and 2019 is
contained starting on pages 77 and 83.
Net loss and LAE. The following table presents our consolidated net loss and
LAE:
Year Ended December 31, Percent Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
($ in millions)
Net loss and LAE:
Current year (excluding
catastrophe losses) $ 4,347.8 $ 3,758.4 $ 3,471.4 15.7 % 8.3 %
Current year catastrophe
losses 736.8 801.5 399.7 (8.1 %) 100.5 %
Prior years (249.7 ) (220.8 ) (184.7 ) 13.1 % 19.5 %
Total net loss and LAE
11.4 % 17.7 % Loss ratio: Current year (excluding catastrophe losses) 61.2 % 62.6 % 63.4 % Current year catastrophe losses 10.4 % 13.4 % 7.3 % Prior years (3.5 %) (3.7 %) (3.4 %) Total net loss and LAE 68.1 % 72.3 % 67.3 % 2021 vs 2020. The increase in net loss and LAE in 2021 from 2020 primarily reflects the impact of increases in net premiums earned as discussed above, partially offset by a lower overall loss ratio excluding catastrophe losses, lower catastrophe losses, and higher favorable prior accident year loss reserve development.
Catastrophe losses in 2021 were
Hurricane Ida, the Winter Storms, the European Floods and the Midwest Tornadoes,
compared with
70 --------------------------------------------------------------------------------
Pandemic and
from Hurricane Laura, Hurricane Sally and
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 higher net premiums earned. Catastrophe losses in 2019 of$399.7 million include losses from Typhoon Hagibis, Typhoon Faxai, civil unrest inChile and Hurricane Dorian.
A detailed comparison of net loss and LAE by segment for 2021, 2020 and 2019 is
contained starting on pages 78 and 84.
Commissions, brokerage and other underwriting expenses. The following table
presents our consolidated commissions, brokerage and other underwriting
expenses:
Year Ended December 31, Percent Change
2021 2020 2019
2021 vs 2020 2020 vs 2019
($ in millions)
Commissions, brokerage and other
underwriting expenses $ 2,067.5 $ 1,789.8 $ 1,758.7 15.5 % 1.8 %
Expense ratio 29.1 % 29.8 % 32.1 %
2021 vs 2020. The increase in commissions, brokerage and other underwriting
expenses in 2021 from 2020 primarily reflects the impact of higher net premiums
earned, as discussed above and, to a lesser extent, higher short-term incentive
compensation accruals, partially offset by lower overall commission rates.
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 short-term 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 2021, 2020 and 2019 is contained starting on pages 80 and 86.
Underwriting profit. The following table presents our consolidated underwriting
profit (loss):
Year Ended December 31, Percent Change
2021 2020 2019
2021 vs 2020 2020 vs 2019
($ in millions)
Underwriting profit (loss)
(251.7 %) (490.0 %) Combined ratio 97.2 % 102.1 % 99.4 % 2021 vs 2020. The underwriting profit in 2021 compared with the underwriting loss in 2020 primarily reflects the impact of an increase in net premiums earned, a lower overall loss ratio excluding catastrophe losses, lower catastrophe losses, a lower expense ratio and higher favorable prior year loss reserve development, all as discussed above. 2020 vs 2019. The underwriting loss in 2020 compared to the underwriting profit in 2019 primarily reflects Pandemic-related catastrophe losses at TransRe and, to a lesser extent, RSUI, all as discussed above.
A detailed comparison of underwriting profit by segment for 2021, 2020 and 2019
is contained starting on pages 81 and 86.
Investment results. The following table presents our consolidated investment
results:
Year Ended December 31, Percent Change
2021 2020 2019
2021 vs 2020 2020 vs 2019
($ in millions)
Net investment income $ 540.4 $ 490.9 $ 550.2 10.1 % (10.8 %)
Change in the fair value of
equity securities 506.8 (110.5 ) 709.7 (558.6 %) (115.6 %)
Net realized capital gains 67.4 3.1 (6.5 ) 2,074.2 % (147.7 %)
Change in allowance for credit
losses on available for sale
securities 2.1 (8.0 ) (19.7 ) (126.3 %) (59.4 %)
2021 vs 2020. The increase in net investment income in 2021 from 2020 primarily
reflects higher dividend and partnership income, partially offset by lower
interest income. The increase in dividend income reflects an increased
allocation to higher-yielding stocks and, to a lesser extent, a large special
dividend received from a mutual fund. The increase in partnership
income reflects appreciation in a certain investment partnership, partially
offset by losses in certain partnerships with catastrophe loss exposure. The
decrease in interest income reflects the impact of low reinvestment yields on
debt securities and lower yields on short term investments and floating-rate
debt securities.
71
--------------------------------------------------------------------------------
The change in the fair value of equity securities in 2021 reflects appreciation
in the value of our equity securities portfolio, primarily from our holdings in
the healthcare, materials, financial, industrials and technology sectors. 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 2021 primarily reflect realized gains on our debt
securities portfolio and, to a lesser extent, realized gains at Alleghany
Capital . 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 from 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 changes in allowance for credit losses on available-for-sale "AFS"
securities in 2021 reflect $2.1 million of reductions of credit losses on AFS
securities, primarily from debt security sales. The change in allowance for
credit losses on 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.
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.
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. 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.
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 from corporate activities due primarily to impairment charges
from write-downs of SORC oil field assets, prior to SORC's December 31, 2020
sale.
On July 18, 2019 , AIHL purchased an exchange-traded equity derivative index put
option, or the "Put Option," for $38.4 million to hedge the downside equity
market risk on approximately $1.0 billion of our equity portfolio. The Put
Option did not qualify for hedge accounting. The Put Option expired worthless on
December 31, 2019 , and the resulting $38.4 million decline in value of the Put
Option was recorded as a reduction to net realized capital gains.
Net realized capital losses in 2019 primarily reflect the $38.4 million decline
in value of the Put Option and a $13.6 million loss from the December 2019 sale
of a privately held investment accounted for under the equity method, partially
offset by gains on the sale of debt securities.
The change in allowance for credit losses on AFS securities in 2020 reflects
$8.0 million of unrealized losses on debt securities, primarily related to the
energy sector and lower-quality corporate bonds in other sectors due to a
significant decline in their fair value relative to their amortized cost in the
spring of 2020, net of a subsequent reduction of the allowance for credit losses
on AFS securities arising from the improved bond market conditions and bond
sales later in 2020. The change in allowance for credit losses on AFS securities
in 2019 primarily reflects the determination that unrealized losses on our debt
securities were other than temporary, primarily due to the deterioration of
creditworthiness of the issuers in the domestic energy sector. In addition,
certain foreign bonds were impaired in 2019 due to a significant decline in fair
value.
A detailed comparison of investment results for 2021, 2020 and 2019 is contained
starting on pages 87, 90 and 91.
72 --------------------------------------------------------------------------------
Product and service revenues and expenses. The following table presents our
consolidated product and service revenues and expenses:
Year Ended December 31, Percent Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
($ in millions)
Product and service revenues $ 3,789.7 $ 2,521.1 $ 2,328.8 50.3 % 8.3 %
Other operating expenses 3,479.6 2,429.3 2,263.3 43.2 % 7.3 %
Corporate administration 57.2 48.6 74.8 17.7 % (35.0 %)
Amortization of intangible assets 49.9 44.2 33.8 12.9 % 30.8 %
Interest expense 102.3 88.2 100.0 16.0 % (11.8 %)
Product and service revenues and Other operating expenses. Product and service
revenues 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 $74.2 million , $79.1 million and $85.9 million in 2021,
2020 and 2019, respectively. The decrease in other operating expenses in 2021
from 2020 primarily reflects the reduction in expected payouts arising from the
departure of the former TransRe chief executive officer in the second quarter of
2021, partially offset by an increase in expected payouts due to improved
underwriting and investment results, as discussed above. 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. 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 2021 also include a
profit commissions receivable arising from a deterioration in the
creditworthiness of a certain TransRe counterparty.
Other operating expenses in 2020 also include$5.6 million of costs incurred in connection with the termination andDecember 2020 payout of the TransRe executive retirement plan. See Note 15(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. Other operating expenses in 2019 also include$5.0 million of one-time costs incurred in connection with theJuly 2019 retirement ofCapSpecialty's Chief Executive Officer and an additional$2.5 million related to the repurchase of certain restricted common stock issued toCapSpecialty management in 2014. The increase in product and service revenues and other operating expenses in 2021 from 2020 primarily reflects higher revenue atJazwares , IPS including the impact of itsOctober 14, 2021 acquisition of Linesight and W&W|AFCO Steel, as well as the impact ofPiedmont's May 10, 2021 and Wilbert'sApril 1, 2020 inclusion in our consolidated results. The increase in other operating expenses in 2021 from 2020 also reflects increases in long-term incentive compensation accruals atAlleghany Capital's corporate operations, partially offset by decreases in long-term incentive compensation accruals at our reinsurance and insurance segments, as discussed above, and the cost of Pandemic-related customer site closures and additional safety measures in 2020. The increases in product and service revenues and other operating expenses in 2020 from 2019 primarily reflect the impact of Wilbert'sApril 1, 2020 inclusion in our consolidated results, as discussed above, and higher sales atJazwares , primarily from recent acquisitions, partially offset by lower revenues and related costs atConcord , due to reduced management fee revenue from Pandemic-driven declines in hotel occupancy and Pandemic-related project delays and site closures at Kentucky Trailer, W&W|AFCO Steel and IPS. The increase in other operating expenses in 2020 also reflects the cost of Pandemic-related customer site closures and additional safety measures, partially offset by lower long-term incentive compensation accruals at theAlleghany Capital level, as well at our reinsurance and insurance segments, as discussed above. Corporate administration. The increase in corporate administration expense in 2021 from 2020 reflects higher Alleghany parent company long-term incentive compensation accruals due primarily to the impact of an appreciation of Alleghany stock price and higher consolidated net earnings attributable to Alleghany stockholders, as discussed below, partially offset by the$13.6 million pre-tax impact of the termination andDecember 2020 payout of the Alleghany parent-level executive retirement plan, or the "2020 Retirement Plan Termination Expense" (see Note 15(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). The decrease in corporate administration expense in 2020 from 2019 reflects significantly lower Alleghany parent company long-term incentive compensation accruals due primarily to the impact of depreciation of Alleghany stock price and lower consolidated net earnings attributable to Alleghany stockholders, as discussed below. The decrease was partially offset by the 2020 Retirement Plan Termination Expense. Amortization of intangible assets. The increases in amortization expense in 2021 from 2020 and in 2020 from 2019 primarily reflect the impact of recent acquisitions byAlleghany Capital and its subsidiaries, as further discussed below. 73 -------------------------------------------------------------------------------- Interest expense. The increase in interest expense in 2021 from 2020 primarily reflects our issuance of certain senior notes onAugust 13, 2021 andMay 18, 2020 . The decrease in interest expense in 2020 from 2019 primarily reflects the impact of lower overall interest rates onAlleghany Capital's floating-rate borrowings, partially offset by the impact of Wilbert'sApril 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 onJanuary 15, 2020 , partially offset by the issuance of certain other senior notes onMay 18, 2020 .
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.
A detailed comparison of product and service revenues and expenses for 2021,
2020 and 2019 is contained on pages 90 through 91.
Income taxes. The following table presents our consolidated income tax expense:
Year Ended December 31, Percent Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
($ in millions)
Income taxes $ 281.9 $ 30.7 $ 233.4 818.2 % (86.8 %)
Effective tax rate 20.0 % 19.5 % 20.8 %
2021 vs 2020. The increase in income tax expense in 2021 from 2020 primarily
reflects higher earnings before income taxes, as further discussed below, and to
a lesser extent, a higher effective tax rate. The higher effective tax rate in
2021 primarily reflects higher earnings before income taxes and the resulting
decrease 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.
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.
Net earnings. The following table presents our consolidated earnings:
Year Ended December 31 ,
Percent Change
2021 2020 2019
2021 vs 2020 2020 vs 2019
($ in millions)
Earnings before income taxes
796.4 % (86.0 %) Net earnings attributable to noncontrolling interests 95.9 25.1 32.4 281.6 % (22.5 %) Net earnings attributable to Alleghany stockholders 1,034.9 101.8 857.8 916.9 % (88.1 %) 2021 vs 2020. The increases in earnings before income taxes and net earnings attributable to Alleghany stockholders in 2021 from 2020 primarily reflect the impact of appreciation in the value of our equity securities portfolio compared with depreciation in 2020 and, to a lesser extent, an underwriting profit in 2021 compared with a Pandemic-driven underwriting loss in 2020 and significantly improved results atAlleghany Capital , all as discussed above. The increase in net earnings attributable to noncontrolling interests in 2021 from 2020 reflects significantly higher earnings atAlleghany Capital subsidiaries with noncontrolling interests and higher accretion of redeemable noncontrolling interests resulting from increased estimated future redemption values. The significantly higher earnings atAlleghany Capital in 2021 from 2020 were due to subsidiaries' higher revenues and improved margins, particularly atJazwares , W&W|AFCO Steel and IPS, reflecting higher backlogs, strong execution and the reduced impact of Pandemic-related customer site closures and additional safety measures, which negatively impacted margins in 2020. 2020 vs 2019. The decreases in earnings before income taxes and net earnings attributable to Alleghany stockholders in 2020 from 2019 primarily reflect the impact of depreciation in the value of our equity securities portfolio compared with significant appreciation in 2019 and, to a lesser extent, a Pandemic-driven underwriting loss compared with an underwriting profit in 2019, all as discussed above. 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 atAlleghany 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. 74 --------------------------------------------------------------------------------
Reinsurance Segment Underwriting Results
The reinsurance segment is composed of TransRe's property and casualty &
specialty lines of business. TransRe also writes a modest amount of property and
casualty insurance business, which is included in the reinsurance segment. For a
more detailed description of our reinsurance segment, see Part I, Item 1,
"Business-Segment Information-Reinsurance Segment" of this Form 10-K.
The following tables present the underwriting results of the reinsurance
segment:
Casualty &
Year Ended December 31, 2021 Property specialty(1) Total
($ in millions)
Gross premiums written $ 1,975.2 $ 4,058.8 $ 6,034.0
Net premiums written 1,550.4 3,837.0 5,387.4
Net premiums earned 1,708.8 3,768.3 5,477.1
Net loss and LAE:
Current year (excluding catastrophe losses) 943.7 2,552.4 3,496.1
Current year catastrophe losses 524.3 20.8 545.1
Prior years (23.8 ) (225.8 ) (249.6 )
Total net loss and LAE 1,444.2 2,347.4 3,791.6
Commissions, brokerage and other
underwriting expenses 480.1 1,176.6 1,656.7
Underwriting (loss) profit(2) $ (215.5 ) $ 244.3 $ 28.8
Loss ratio(3):
Current year (excluding catastrophe losses) 55.2 % 67.7 % 63.7 %
Current year catastrophe losses 30.7 % 0.6 % 10.0 %
Prior years (1.4 %) (6.0 %) (4.5 %)
Total net loss and LAE 84.5 % 62.3 % 69.2 %
Expense ratio(4) 28.1 % 31.2 % 30.2 %
Combined ratio(5) 112.6 % 93.5 % 99.4 %
Casualty &
Year Ended December 31, 2020 Property specialty(1) Total
($ in millions)
Gross premiums written $ 1,761.7 $ 3,475.6 $ 5,237.3
Net premiums written 1,439.6 3,405.4 4,845.0
Net premiums earned 1,379.7 3,265.0 4,644.7
Net loss and LAE:
Current year (excluding catastrophe losses) 756.8 2,271.0 3,027.8
Current year catastrophe losses 450.7 115.3 566.0
Prior years (76.9 ) (130.0 ) (206.9 )
Total net loss and LAE 1,130.6 2,256.3 3,386.9
Commissions, brokerage and other
underwriting expenses 424.2 1,000.8 1,425.0
Underwriting (loss) profit(2) $ (175.1 ) $ 7.9 $ (167.2 )
Loss ratio(3):
Current year (excluding catastrophe losses) 54.9 % 69.6 % 65.2 %
Current year catastrophe losses 32.7 % 3.5 % 12.2 %
Prior years (5.6 %) (4.0 %) (4.5 %)
Total net loss and LAE 82.0 % 69.1 % 72.9 %
Expense ratio(4) 30.7 % 30.7 % 30.7 %
Combined ratio(5) 112.7 % 99.8 % 103.6 %
75
--------------------------------------------------------------------------------
Casualty &
Year Ended December 31, 2019 Property specialty(1) Total
($ in millions)
Gross premiums written $ 1,700.3 $ 3,245.4 $ 4,945.7
Net premiums written 1,328.8 3,166.2 4,495.0
Net premiums earned 1,280.1 3,046.9 4,327.0
Net loss and LAE:
Current year (excluding catastrophe losses) 695.6 2,160.7 2,856.3
Current year catastrophe losses 293.2 7.4 300.6
Prior years (46.2 ) (149.6 ) (195.8 )
Total net loss and LAE 942.6 2,018.5 2,961.1
Commissions, brokerage and other
underwriting expenses 424.2 982.6 1,406.8
Underwriting (loss) profit(2) $ (86.7 ) $ 45.8 $ (40.9 )
Loss ratio(3):
Current year (excluding catastrophe losses) 54.3 % 70.9 % 66.0 %
Current year catastrophe losses 22.9 % 0.2 % 6.9 %
Prior years (3.6 %) (4.9 %) (4.5 %)
Total net loss and LAE 73.6 % 66.2 % 68.4 %
Expense ratio(4) 33.1 % 32.2 % 32.5 %
Combined ratio(5) 106.7 % 98.4 % 100.9 %
(1)
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.
(2)
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, product and service
revenues, other operating expenses, corporate administration, amortization of
intangible assets and interest expense. Underwriting profit is a non-GAAP
financial measure and does not replace earnings before income taxes determined
in accordance with GAAP as a measure of profitability. See "Comment on Non-GAAP
Financial Measures" herein for additional detail on the presentation of our
results of operations.
(3)
The loss ratio is derived by dividing the amount of net loss and LAE by net
premiums earned, all as determined in accordance with GAAP.
(4)
The expense ratio is derived by dividing the amount of commissions, brokerage
and other underwriting expenses by net premiums earned, all as determined in
accordance with GAAP.
(5)
The combined ratio is the sum of the loss ratio and the expense ratio, all as
determined in accordance with GAAP. The combined ratio represents the percentage
of each premium dollar a reinsurance or an insurance company has to spend on net
loss and LAE, and commissions, brokerage and other underwriting expenses.
76
--------------------------------------------------------------------------------
Reinsurance Segment: Premiums. The following table presents premiums for the
reinsurance segment:
Year Ended December 31, Percent Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
($ in millions)
Property
Premiums written:
Gross premiums written $ 1,975.2 $ 1,761.7 $ 1,700.3 12.1 % 3.6 %
Net premiums written 1,550.4 1,439.6 1,328.8 7.7 % 8.3 %
Net premiums earned 1,708.8 1,379.7 1,280.1 23.9 % 7.8 %
Casualty & specialty
Premiums written:
Gross premiums written $ 4,058.8 $ 3,475.6 $ 3,245.4 16.8 % 7.1 %
Net premiums written 3,837.0 3,405.4 3,166.2 12.7 % 7.6 %
Net premiums earned 3,768.3 3,265.0 3,046.9 15.4 % 7.2 %
Total
Premiums written:
Gross premiums written $ 6,034.0 $ 5,237.3 $ 4,945.7 15.2 % 5.9 %
Net premiums written 5,387.4 4,845.0 4,495.0 11.2 % 7.8 %
Net premiums earned 5,477.1 4,644.7 4,327.0 17.9 % 7.3 %
Property. The increase in gross premiums written in 2021 from 2020 primarily
reflects generally improving rates, growth in the agricultural lines of business
and higher reinstatement premiums and, to a lesser extent, the impact of changes
in foreign currency exchange rates, partially offset by lower gross premiums
written from the Quota Share Treaty. Gross premiums written from the Quota Share
Treaty were $171.5 million in 2021 compared with $280.6 million in 2020,
reflecting return premiums as a result of TransRe's decision to not renew the
Quota Share Treaty as of December 31, 2021 , partially offset by a recent
business acquisition by the cedant. Excluding the impact of changes in foreign
currency exchange rates, gross premiums written increased 11.2 percent in 2021
from 2020.
The increase in net premiums earned in 2021 from 2020 primarily reflects the
impact of higher gross premiums written and, to a lesser extent, the impact of
changes in foreign currency exchange rates, partially offset by higher ceded
premiums earned from expanded retrocessional coverage. TransRe's decision to not
renew the Quota Share Treaty did not impact net premiums earned in 2021 but will
in 2022. Excluding the impact of changes in foreign currency exchange rates, net
premiums earned increased by 22.8 percent in 2021 from 2020.
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.
The increase in net premiums earned in 2020 from 2019 primarily reflects the
impact of higher gross premiums written and lower ceded premiums written in
recent quarters and, to a lesser extent, the impact of changes in foreign
currency exchange rates. Excluding the impact of changes in foreign currency
exchange rates, net premiums earned increased by 7.5 percent in 2020 from 2019.
Casualty & specialty. The increase in gross premiums written in 2021 from 2020
primarily reflects improving rates overall and growth in various professional
liability lines of business in the U.S. and, to a lesser extent, the impact of
changes in foreign currency exchange rates, partially offset by lower gross
premiums written from the Quota Share Treaty. Gross premiums written from the
Quota Share Treaty were $324.7 million in 2021 compared with $396.1 million in
2020, reflecting return premiums as a result of TransRe's decision to not renew
the Quota Share Treaty as of December 31, 2021 , partially offset by a recent
business acquisition by the cedant. Excluding the impact of changes in foreign
currency exchange rates, gross premiums written increased by 16.0 percent in
2021 from 2020.
The increase in net premiums earned in 2021 from 2020 primarily reflects the
impact of higher gross premiums written in recent quarters and, to a lesser
extent, the impact of changes in foreign currency exchange rates, partially
offset by higher ceded premiums earned from expanded retrocessional coverage.
TransRe's decision to not renew the Quota Share did not impact net premiums
earned in 2021 but will in 2022. Excluding the impact of changes in foreign
currency exchange rates, net premiums earned increased by 14.6 percent in 2021
from 2020.
The increase in gross premiums written in 2020 from 2019 primarily reflects
generally improving rates overall and growth in the various traditional casualty
and other professional liability lines of business in the U.S. and, to a lesser
extent, changes in
77
--------------------------------------------------------------------------------
foreign currency exchange rates, partially offset by decreases 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 related to the Quota Share Treaty were
$396.1 million and $414.5 million in 2020 and 2019, respectively, primarily
reflecting a decrease in the automobile-related business. Excluding the impact
of changes in foreign currency exchange rates, gross premiums written increased
by 6.8 percent in 2020 from 2019.
The increase in net premiums earned in 2020 from 2019 primarily reflects the
impact of higher gross premiums written in recent quarters and, to a lesser
extent, the impact of changes in foreign currency exchange rates. Excluding the
impact of changes in foreign currency exchange rates, net premiums earned
increased by 6.8 percent in 2020 from 2019.
Reinsurance Segment: Net loss and LAE. The following table presents net loss and
LAE for the reinsurance segment:
Year Ended December 31, Percent Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
($ in millions)
Property
Net loss and LAE:
Current year (excluding
catastrophe losses) $ 943.7 $ 756.8 $ 695.6 24.7 % 8.8 %
Current year catastrophe losses 524.3 450.7 293.2
16.3 % 53.7 % Prior years (23.8 ) (76.9 ) (46.2 ) (69.1 %) 66.5 % Total net loss and LAE$ 1,444.2 $ 1,130.6 $ 942.6 27.7 % 19.9 % Loss ratio: Current year (excluding catastrophe losses) 55.2 % 54.9 % 54.3 % Current year catastrophe losses 30.7 % 32.7 % 22.9 % Prior years (1.4 %) (5.6 %) (3.6 %) Total net loss and LAE 84.5 % 82.0 % 73.6 % Casualty & specialty Net loss and LAE: Current year (excluding catastrophe losses)$ 2,552.4 $ 2,271.0 $ 2,160.7 12.4 % 5.1 % Current year catastrophe losses 20.8 115.3 7.4 (82.0 %) 1,458.1 % Prior years (225.8 ) (130.0 ) (149.6 ) 73.7 % (13.1 %) Total net loss and LAE$ 2,347.4 $ 2,256.3 $ 2,018.5 4.0 % 11.8 % Loss ratio: Current year (excluding catastrophe losses) 67.7 % 69.6 % 70.9 % Current year catastrophe losses 0.6 % 3.5 % 0.2 % Prior years (6.0 %) (4.0 %) (4.9 %) Total net loss and LAE 62.3 % 69.1 % 66.2 % Total Net loss and LAE: Current year (excluding catastrophe losses)$ 3,496.1 $ 3,027.8 $ 2,856.3 15.5 % 6.0 %
Current year catastrophe losses 545.1 566.0 300.6
(3.7 %) 88.3 % Prior years (249.6 ) (206.9 ) (195.8 ) 20.6 % 5.7 % Total net loss and LAE$ 3,791.6 $ 3,386.9 $ 2,961.1 11.9 % 14.4 % Loss ratio: Current year (excluding catastrophe losses) 63.7 % 65.2 % 66.0 % Current year catastrophe losses 10.0 % 12.2 % 6.9 % Prior years (4.5 %) (4.5 %) (4.5 %) Total net loss and LAE 69.2 % 72.9 % 68.4 % Property. The increase in net loss and LAE in 2021 from 2020 primarily reflects the impact of higher net premiums earned, higher catastrophe losses and unfavorable prior accident year loss reserve development on Pandemic losses in 2021. Catastrophe losses in 2021 include$215.0 million from Hurricane Ida,$137.7 million from the Winter Storms,$116.1 million from the European Floods,$41.0 million from severe weather inEurope andAsia and$14.5 million from the Midwest Tornadoes.
Catastrophe losses in 2020 include
catastrophe losses, as discussed above, as well as
Hurricane Laura,
related to earthquakes in
2020 also include: (i)
78 --------------------------------------------------------------------------------Asia ; (ii) a derecho inAugust 2020 , which caused widespread property and crop damage, primarily inIowa ; (iii) a hailstorm inAlberta, Canada ; (iv)Hurricane Delta ; (v) Hurricane Eta; and (vi) Hurricane Zeta. The increase in net loss and LAE in 2020 from 2019 primarily reflects significant catastrophe losses and, to a lesser extent, the impact of higher net premiums earned, partially offset by higher favorable prior accident year loss reserve development. Catastrophe losses in 2019 include$164.6 million related to Typhoon Hagibis,$86.9 million related to Typhoon Faxai,$22.3 million related to civil unrest inChile ,$10.3 million related to Hurricane Dorian and$9.1 million related to other catastrophes.
Net loss and LAE in 2021, 2020 and 2019 include (favorable) unfavorable prior
accident year loss reserve development as presented in the table below:
Year Ended December 31,
2021 2020
2019
($ in millions)
Catastrophe events (excluding Pandemic)
(6.8 ) (3) Pandemic 62.6 - - Non-catastrophe (50.9 ) (4) (33.6 ) (5) (39.4 ) (6) Total$ (23.8 ) $ (76.9 ) $ (46.2 ) (1) Primarily reflects favorable prior accident year loss reserve development related to catastrophic events in the 2018 accident year, partially offset by unfavorable prior accident year loss reserve development related to Hurricanes Laura and Sally in the 2020 accident year.
(2)
Primarily reflects favorable prior accident year loss reserve development related to Typhoon Hagibis in the 2019 accident year and wildfires inCalifornia 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. (3) Primarily reflects favorable prior accident year loss reserve development related to wildfires inCalifornia in the 2018 accident year, partially offset by unfavorable prior accident year loss reserve development related to Typhoon Jebi in the 2018 accident year and Hurricane Irma in 2017 accident year. (4) Primarily reflects favorable prior accident year loss reserve development in the 2020 accident year. (5) Primarily reflects favorable prior accident year loss reserve development in the 2017 accident year. (6) 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. The favorable prior accident year loss reserve development in 2021, 2020 and 2019 reflects favorable loss emergence compared with loss emergence patterns assumed in earlier periods. The favorable prior accident year loss reserve development in 2021 did not impact assumptions used in estimating TransRe's loss and LAE liabilities for business earned in 2021. Casualty & specialty. The increase in net loss and LAE in 2021 from 2020 primarily reflects the impact of higher net premiums earned, partially offset by significant Pandemic losses incurred in 2020 and favorable prior accident year loss reserve development on Pandemic losses in 2021. Catastrophe losses in 2021 include$13.0 million from Hurricane Ida,$4.0 million from the Winter Storms,$2.5 million from the Midwest Tornadoes,$1.1 million from the European Floods and$0.2 million from severe weather inAsia . Pandemic-related catastrophe losses total$105.4 million in 2020. Catastrophe losses in 2020 also include$3.7 million from Hurricane Laura,$1.1 million from Hurricane Sally and$5.1 million from other catastrophes. The increase in net loss and LAE in 2020 from 2019 primarily reflects higher catastrophe losses and, to a lesser extent, the impact of higher net premiums earned. Catastrophe losses in 2019 generally related to the marine and nontraditional lines of business. Catastrophe losses in 2019 include$3.6 million from Typhoon Hagibis,$2.9 million from Hurricane Dorian and$0.9 million from other catastrophes. 79 --------------------------------------------------------------------------------
Net loss and LAE in 2021, 2020 and 2019 include (favorable) unfavorable prior
accident year loss reserve development as presented in the table below:
Year Ended December 31,
2021 2020
2019
($ in millions)
Catastrophe events (excluding Pandemic) $ (0.4 ) $ (5.9 ) $ (4.4 )
Pandemic (48.9 ) - -
Other (176.5 ) (1) (124.1 ) (2) (145.2 ) (3)
Total $ (225.8 ) $ (130.0 ) $ (149.6 )
(1)
Primarily reflects favorable prior accident year loss reserve development in the
shorter-tailed lines of business in the 2020 accident year and in both the
longer- and shorter-tailed lines of business in the 2015 and earlier accident
years, partially offset by unfavorable prior accident year loss reserve
development in the longer-tailed lines of business in the 2016 to 2018 accident
years.
(2)
Primarily reflects favorable prior accident year loss reserve development in the
longer-tailed lines of business in the 2014 and earlier accident years and in
the shorter-tailed lines of business in the 2017 accident year, partially offset
by unfavorable prior accident year loss reserve development in the longer-tailed
lines of business in the 2016 to 2018 accident years.
(3)
Primarily reflects favorable prior accident year loss reserve development in the
longer-tailed casualty lines of business in the 2014 and earlier accident years
and, to a lesser extent, shorter-tailed lines of business in the 2014 and
earlier accident years, partially offset by unfavorable prior accident year loss
reserve development in the marine and aviation lines of business in the 2018
accident year.
The favorable prior accident year loss reserve development in 2021, 2020 and
2019 reflects favorable loss emergence compared with loss emergence patterns
assumed in earlier periods. The favorable prior accident year loss reserve
development in 2021 did not impact assumptions used in estimating TransRe's loss
and LAE liabilities for business earned in 2021.
Reinsurance Segment: Commissions, brokerage and other underwriting expenses. The
following table presents commissions, brokerage and other underwriting expenses
for the reinsurance segment:
Year Ended December 31, Percent Change
2021 2020 2019
2021 vs 2020 2020 vs 2019
($ in millions)
Property
Commissions, brokerage and other underwriting expenses$ 480.1 $ 424.2 $ 424.2 13.2 % (- %) Expense ratio 28.1 % 30.7 % 33.1 % Casualty & specialty Commissions, brokerage and other underwriting expenses$ 1,176.6 $ 1,000.8 $ 982.6 17.6 % 1.9 % Expense ratio 31.2 % 30.7 % 32.2 % Total Commissions, brokerage and other underwriting expenses$ 1,656.7 $ 1,425.0 $ 1,406.8
16.3 % 1.3 % Expense ratio 30.2 % 30.7 % 32.5 % Property. The increase in commissions, brokerage and other underwriting expenses in 2021 from 2020 primarily reflects the impact of higher net premiums earned, as discussed above, and higher annual incentive accruals, partially offset by lower commission rates impacted in part by higher reinstatement premiums in 2021, as discussed above. Commissions, brokerage and other underwriting expenses in 2020 approximated those from 2019, primarily reflecting lower overall commission rates, lower annual incentive compensation accruals and a Pandemic-driven reduction in travel and entertainment costs offset by the impact of higher net premiums earned, as discussed above.
Casualty & specialty. The increase in commissions, brokerage and other
underwriting expenses in 2021 from 2020 primarily reflects the impact of higher
net premiums earned, as discussed above, and higher annual incentive
compensation accruals.
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.
80
--------------------------------------------------------------------------------
Reinsurance Segment: Underwriting profit. The following table presents our
underwriting profit (loss) for the reinsurance segment:
Year Ended December 31 ,
Percent Change
2021 2020 2019 2021
vs 2020 2020 vs 2019
($ in millions)
Property
Underwriting (loss)$ (215.5 ) $ (175.1 ) $ (86.7 ) 23.1 % 102.0 % Combined ratio 112.6 % 112.7 % 106.7 % Casualty & specialty Underwriting profit$ 244.3 $ 7.9 $ 45.8 2,992.4 % (82.8 %) Combined ratio 93.5 % 99.8 % 98.4 % Total
Underwriting profit (loss)
(117.2 %) 308.8 % Combined ratio 99.4 % 103.6 % 100.9 % Property. The increase in underwriting loss in 2021 from 2020, primarily reflects higher catastrophe losses and, to a lesser extent, unfavorable prior accident year loss reserve development related to the Pandemic in 2021, all as discussed above.
The increase in underwriting loss in 2020 from 2019 primarily reflects
significantly higher catastrophe losses, which include losses related to the
Pandemic, as discussed above.
Casualty & specialty. The increase in underwriting profit in 2021 from 2020 primarily reflects casualty-related Pandemic catastrophe losses in 2020 and favorable prior accident year loss reserve development on Pandemic losses in 2021 and, to a lesser extent, the impact of higher net premiums earned, all as discussed above.
The decrease in underwriting profit in 2020 from 2019 primarily reflects
casualty-related Pandemic catastrophe losses, as discussed above.
Insurance Segment Underwriting Results
The insurance segment is composed of AIHL's RSUI andCapSpecialty operating subsidiaries. RSUI also writes a modest amount of assumed reinsurance business, which is included in the insurance segment. For a more detailed description of our insurance segment, see Part I, Item 1, "Business-Segment Information-Insurance Segment" of this Form 10-K. The following tables present the underwriting results of the insurance segment: Year Ended December 31, 2021 RSUI CapSpecialty Total ($ in millions) Gross premiums written$ 2,067.6 $ 475.2 $ 2,542.8 Net premiums written 1,354.7 407.3 1,762.0 Net premiums earned 1,230.7 389.9 1,620.6 Net loss and LAE: Current year (excluding catastrophe losses) 622.1 229.6 851.7 Current year catastrophe losses 189.5 2.2 191.7 Prior years (6.1 ) 6.0 (0.1 ) Total net loss and LAE 805.5 237.8 1,043.3 Commissions, brokerage and other underwriting expenses 261.1 149.7 410.8 Underwriting profit(1)$ 164.1 $ 2.4$ 166.5 Loss ratio(2): Current year (excluding catastrophe losses) 50.6 % 58.9 % 52.6 % Current year catastrophe losses 15.4 % 0.6 % 11.8 % Prior years (0.5 %) 1.5 % (- %) Total net loss and LAE 65.5 % 61.0 % 64.4 % Expense ratio(3) 21.2 % 38.4 % 25.4 % Combined ratio(4) 86.7 % 99.4 % 89.8 % 81
--------------------------------------------------------------------------------
Year Ended December 31, 2020 RSUI CapSpecialty Total
($ in millions)
Gross premiums written $ 1,714.4 $ 411.3 $ 2,125.7
Net premiums written 1,124.8 374.6 1,499.4
Net premiums earned 1,008.8 346.7 1,355.5
Net loss and LAE:
Current year (excluding catastrophe losses) 520.8 209.8
730.6
Current year catastrophe losses 230.4 5.1 235.5 Prior years (12.8 ) (1.1 ) (13.9 ) Total net loss and LAE 738.4 213.8 952.2 Commissions, brokerage and other underwriting expenses 226.1 138.7 364.8 Underwriting profit (loss)(1)$ 44.3 $ (5.8 ) $ 38.5 Loss ratio(2): Current year (excluding catastrophe losses) 51.7 % 60.5 % 53.9 % Current year catastrophe losses 22.8 % 1.5 % 17.4 % Prior years (1.3 %) (0.3 %) (1.0 %) Total net loss and LAE 73.2 % 61.7 % 70.3 % Expense ratio(3) 22.4 % 40.0 % 26.9 % Combined ratio(4) 95.6 % 101.7 % 97.2 % Year Ended December 31, 2019 RSUI CapSpecialty Total ($ in millions) Gross premiums written$ 1,366.6 $ 371.8 $ 1,738.4 Net premiums written 912.0 344.7 1,256.7 Net premiums earned 824.2 326.9 1,151.1 Net loss and LAE: Current year (excluding catastrophe losses) 425.2 189.9 615.1 Current year catastrophe losses 96.0 3.1 99.1 Prior years (17.5 ) 28.6 11.1 Total net loss and LAE 503.7 221.6 725.3 Commissions, brokerage and other underwriting expenses 219.2 132.7 351.9 Underwriting profit (loss)(1)$ 101.3 $ (27.4 ) $ 73.9 Loss ratio(2): Current year (excluding catastrophe losses) 51.6 % 58.2 % 53.4 % Current year catastrophe losses 11.6 % 0.9 % 8.6 % Prior years (2.1 %) 8.7 % 1.0 % Total net loss and LAE 61.1 % 67.8 % 63.0 % Expense ratio(3) 26.6 % 40.6 % 30.6 % Combined ratio(4) 87.7 % 108.4 % 93.6 % (1) 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, product and service revenues, other operating expenses, corporate administration, amortization of intangible assets and interest expense. Underwriting profit is a non-GAAP financial measure and does not replace earnings before income taxes determined in accordance with GAAP as a measure of profitability. See "Comment on Non-GAAP Financial Measures" herein for additional information on the presentation of our results of operations. (2) The loss ratio is derived by dividing the amount of net loss and LAE by net premiums earned, all as determined in accordance with GAAP. (3) The expense ratio is derived by dividing the amount of commissions, brokerage and other underwriting expenses by net premiums earned, all as determined in accordance with GAAP. (4) The combined ratio is the sum of the loss ratio and the expense ratio, all as determined in accordance with GAAP. The combined ratio represents the percentage of each premium dollar a reinsurance or an insurance company has to spend on net loss and LAE, and commissions, brokerage and other underwriting expenses. 82 -------------------------------------------------------------------------------- Insurance Segment: Premiums. The following table presents premiums for the insurance segment: Year Ended December 31, Percent Change 2021 2020 2019 2021 vs 2020 2020 vs 2019 ($ in millions) RSUI Premiums written: Gross premiums written$ 2,067.6 $ 1,714.4 $ 1,366.6 20.6 % 25.5 % Net premiums written 1,354.7 1,124.8 912.0 20.4 % 23.3 % Net premiums earned 1,230.7 1,008.8 824.2 22.0 % 22.4 % CapSpecialty Premiums written: Gross premiums written$ 475.2 $ 411.3 $ 371.8 15.5 % 10.6 % Net premiums written 407.3 374.6 344.7 8.7 % 8.7 % Net premiums earned 389.9 346.7 326.9 12.5 % 6.1 % Total Premiums written: Gross premiums written$ 2,542.8 $ 2,125.7 $ 1,738.4 19.6 % 22.3 % Net premiums written 1,762.0 1,499.4 1,256.7 17.5 % 19.3 % Net premiums earned 1,620.6 1,355.5 1,151.1 19.6 % 17.8 % RSUI. The increase in gross premiums written in 2021 from 2020 primarily reflects growth in most lines of business due to increases in business opportunities, higher rates and improved general market conditions, particularly in the directors' and officers' liability, property, professional liability and umbrella/excess lines of business.
The increase in gross premiums written in 2020 from 2019 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, directors' and officers' liability and umbrella/excess lines of
business.
The increases in net premiums earned in 2021 from 2020 and in 2020 from 2019 primarily reflect increases in gross premiums written in recent quarters, partially offset by higher ceded premiums earned related to the growth in the heavily-reinsured property lines of business.CapSpecialty . The increase in gross premiums written in 2021 from 2020 primarily reflects growth in the professional liability and other specialty casualty lines of business and, to a lesser extent, growth in the surety lines of business, partially offset by a curtailment of certain unprofitable broker relationships and declines in property and healthcare lines of business. Growth in the professional liability and other specialty casualty lines of business reflects increases in business opportunities and higher rates.
The increase in net premiums earned in 2021 from 2020 primarily reflects
increases in gross premiums written in recent quarters, partially offset by
higher ceded premiums earned from higher reinsurance costs.
The increase in gross premiums written in 2020 from 2019 primarily reflects growth in the professional liability and healthcare lines of business due to increases in business opportunities and higher rates,CapSpecialty's expanded product offerings and the impact ofCapSpecialty's purchases of certain renewal rights inSeptember 2019 andMay 2020 , partially offset by a curtailment of certain unprofitable broker relationships.
The increase in net premiums earned in 2020 from 2019 primarily reflects
increases in gross premiums written in recent quarters.
83 --------------------------------------------------------------------------------
Insurance Segment: Net loss and LAE. The following table presents net loss and
LAE for the insurance segment:
Year Ended December 31 ,
Percent Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
($ in millions)
RSUI
Net loss and LAE:
Current year (excluding
catastrophe losses) $ 622.1 $ 520.8 $ 425.2 19.5 % 22.5 %
Current year catastrophe
losses 189.5 230.4 96.0 (17.8 %) 140.0 %
Prior years (6.1 ) (12.8 ) (17.5 ) (52.3 %) (26.9 %)
Total net loss and LAE
9.1 % 46.6 % Loss ratio: Current year (excluding catastrophe losses) 50.6 % 51.7 % 51.6 % Current year catastrophe losses 15.4 % 22.8 % 11.6 % Prior years (0.5 %) (1.3 %) (2.1 %) Total net loss and LAE 65.5 % 73.2 % 61.1 % CapSpecialty Net loss and LAE: Current year (excluding catastrophe losses)$ 229.6 $ 209.8 $ 189.9 9.4 % 10.5 % Current year catastrophe losses 2.2 5.1 3.1 (56.9 %) 64.5 % Prior years 6.0 (1.1 ) 28.6 (645.5 %) (103.8 %)
Total net loss and LAE
11.2 % (3.5 %) Loss ratio: Current year (excluding catastrophe losses) 58.9 % 60.5 % 58.2 % Current year catastrophe losses 0.6 % 1.5 % 0.9 % Prior years 1.5 % (0.3 %) 8.7 % Total net loss and LAE 61.0 % 61.7 % 67.8 % Total Net loss and LAE: Current year (excluding catastrophe losses)$ 851.7 $ 730.6 $ 615.1 16.6 % 18.8 % Current year catastrophe losses 191.7 235.5 99.1 (18.6 %) 137.6 % Prior years (0.1 ) (13.9 ) 11.1 (99.3 %) (225.2 %)
Total net loss and LAE
9.6 % 31.3 % Loss ratio: Current year (excluding catastrophe losses) 52.6 % 53.9 % 53.4 % Current year catastrophe losses 11.8 % 17.4 % 8.6 % Prior years (- %) (1.0 %) 1.0 % Total net loss and LAE 64.4 % 70.3 % 63.0 % RSUI. The increase in net loss and LAE in 2021 from 2020 primarily reflects the impact of higher net premiums earned and, to a lesser extent, lower favorable prior accident year loss reserve development, partially offset by lower catastrophe losses and a lower overall current year loss ratio excluding catastrophe losses. Catastrophe losses in 2021 include$110.0 million from the Winter Storms,$40.7 million from Hurricane Ida,$8.0 million from the European Floods and$1.3 million from the Midwest Tornadoes. The remaining catastrophe losses in 2021 relate to severe weather and flooding in the MidwesternU.S. in the spring and summer of 2021 and, to a lesser extent, wildfires inCalifornia . Catastrophe losses in 2020 include$69.9 million from Hurricane Sally,$50.6 million from Hurricane Laura and$20.3 million of Pandemic losses, which primarily relate to business interruption and related estimated legal expenses. Catastrophe losses in 2020 also include losses from severe weather and flooding in theSoutheastern U.S. in the spring of 2020, which included a tornado inTennessee , as well as Hurricane Zeta andHurricane Delta inOctober 2020 .
The increase in net loss and LAE in 2020 from 2019 primarily reflects higher
catastrophe losses and the impact of higher net premiums earned.
84 --------------------------------------------------------------------------------
Catastrophe losses in 2019 primarily consist of severe weather and flooding in
the Midwestern and
Net loss and LAE in 2021, 2020 and 2019 include unfavorable (favorable) prior
accident year loss reserve development as presented in the table below:
Year Ended December 31,
2021 2020 2019
($ in millions)
Casualty $ 5.0 (1) $ 1.8 (2) $ (16.3 ) (3)
Property and other (11.1 ) (4) (14.6 ) (5) (1.2 ) (6)
Total $ (6.1 ) $ (12.8 ) $ (17.5 )
(1)
Primarily reflects unfavorable prior accident year loss reserve development in
in the directors' and officers' liability lines of business in the 2012 through
2014 accident years and, to a lesser extent, the general liability and binding
authority lines of business in earlier accident years, partially offset by
favorable prior accident year loss reserve development in the umbrella/excess
lines of business in the 2005 through 2015 accident years.
(2)
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. (3) Primarily reflects favorable prior accident year loss reserve development in the directors' and officers' liability and umbrella/excess lines of business in the 2011 through 2015 accident years, partially offset by unfavorable prior accident year loss reserve development in the professional liability lines of business in the 2016 through 2018 accident years. (4) Primarily reflects favorable prior accident year loss reserve development related to losses not classified as catastrophes in recent accident years and, to a lesser extent, catastrophes in the 2017, 2018 and 2019 accident years, partially offset by unfavorable prior accident year loss reserve development related to catastrophes in the 2020 accident year. (5) Primarily reflects favorable prior accident year loss reserve development related to Superstorm Sandy in the 2012 accident year, Hurricanes Florence and Michael in the 2018 accident year and Hurricanes Harvey and Maria in the 2017 accident year, partially offset by unfavorable prior accident year loss reserve development related to assumed property reinsurance lines of business from both catastrophe and non-catastrophe losses in the 2018 accident year. The favorable prior accident year loss reserve development in 2021, 2020 and 2019 reflects favorable loss emergence compared with loss emergence patterns assumed in earlier periods. The favorable prior accident year loss reserve development in 2021 did not impact assumptions used in estimating RSUI's loss and LAE liabilities for business earned in 2021.CapSpecialty . The increase in net loss and LAE in 2021 from 2020 primarily reflects the impact of higher net premiums earned and unfavorable prior accident year loss reserve development in 2021 compared with favorable prior accident year loss reserve development in 2020, partially offset by a lower current year loss ratio excluding catastrophe losses and$3.1 million of Pandemic-related catastrophe losses incurred in 2020. 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 in 2020, higher current accident year losses and$3.1 million of Pandemic-related catastrophe losses.
Net loss and LAE in 2021, 2020 and 2019 include (favorable) unfavorable prior
accident year loss reserve development as presented in the table below:
Year Ended December 31,
2021 2020 2019
($ in millions)
Ongoing lines of business $ 6.1 (1) $ (2.0 ) (2) $ 26.1 (3)
Terminated Program(4) (0.1 ) 0.9 3.0
Asbestos-related illness and environmental
impairment liability - - (0.5 )
Total $ 6.0 $ (1.1 ) $ 28.6
(1)
Primarily reflects unfavorable prior accident year loss reserve development in
the healthcare, construction liability and other casualty lines of business in
the 2015 through 2017 accident years.
(2)
Primarily reflects favorable prior accident year development related to the surety lines of business from recent accident years. (3) 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. (4) Represents certain specialty lines of business written through a program administrator in connection with a terminated program in the 2010 and 2009 accident years and reflects favorable loss emergence compared with loss emergence patterns assumed in earlier periods for such business. The unfavorable prior accident year loss reserve development in 2021 reflects unfavorable loss emergence compared with loss emergence patterns assumed in earlier periods. The unfavorable prior accident year loss reserve development in 2021 did not impact the assumptions used in estimatingCapSpecialty's loss and LAE liabilities for business earned in 2021. 85 -------------------------------------------------------------------------------- Insurance Segment: Commissions, brokerage and other underwriting expenses. The following table presents commissions, brokerage and other underwriting expenses for the insurance segment: Year Ended December 31, Percent Change 2021 2020 2019
2021 vs 2020 2020 vs 2019
($ in millions)
RSUI
Commissions, brokerage and other underwriting expenses$ 261.1 $ 226.1 $ 219.2 15.5 % 3.1 % Expense ratio 21.2 % 22.4 % 26.6 % CapSpecialty Commissions, brokerage and other underwriting expenses$ 149.7 $ 138.7 $ 132.7 7.9 % 4.5 % Expense ratio 38.4 % 40.0 % 40.6 % Total Commissions, brokerage and other underwriting expenses$ 410.8 $ 364.8 $ 351.9 12.6 % 3.7 % Expense ratio 25.4 % 26.9 % 30.6 % RSUI. The increase in commissions, brokerage and other underwriting expenses in 2021 from 2020 primarily reflects the impact of higher net premiums earned, as discussed above and, to a lesser extent, higher short-term incentive compensation expense accruals, partially offset by lower overall commission rates.
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 and a
Pandemic-driven reduction in travel and entertainment costs.
CapSpecialty . The increase in commissions, brokerage and other underwriting expenses in 2021 from 2020 primarily reflects the impact of higher net premiums earned, as discussed above and, to a lesser extent, investments in technology and higher short-term incentive compensation expense accruals, partially offset by lower overall commission rates. The increase 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.
Insurance Segment: Underwriting profit. The following table presents our
underwriting profit (loss) for the insurance segment:
Year Ended December 31, Percent Change
2021 2020 2019 2021 vs 2020 2020 vs 2019
($ in millions)
RSUI
Underwriting profit $ 164.1 $ 44.3 $ 101.3
270.4 % (56.3 %) Combined ratio 86.7 % 95.6 % 87.7 %CapSpecialty
Underwriting profit (loss)
(141.4 %) (78.8 %) Combined ratio 99.4 % 101.7 % 108.4 % Total Underwriting profit$ 166.5 $ 38.5 $ 73.9 332.5 % (47.9 %) Combined ratio 89.8 % 97.2 % 93.6 % RSUI. The increase in underwriting profit in 2021 from 2020 primarily reflects the impact of higher net premiums earned, lower catastrophe losses, a lower expense ratio and a lower overall current year loss ratio excluding catastrophe losses, partially offset by lower favorable prior accident year loss reserve development, all as discussed above.
The decrease in underwriting profit in 2020 from 2019 primarily reflects higher
catastrophe losses, as discussed above.
86 --------------------------------------------------------------------------------
loss in 2020 primarily reflects a lower overall current year loss ratio
excluding catastrophe losses, a lower expense ratio and
Pandemic-related catastrophe losses incurred in 2020, partially offset by
unfavorable prior accident year loss reserve development in 2021, all as
discussed above.
The decrease in underwriting loss in 2020 from 2019 primarily reflects substantial unfavorable prior accident year loss reserve development in 2019, partially offset by higher current accident year losses, Pandemic-related losses and higher commissions, brokerage and other underwriting expenses, all as discussed above.
Investment Results for the Reinsurance and Insurance Segments
The following table presents the investment results for our reinsurance and
insurance segments:
Year Ended December 31, Percent Change
2021 2020 2019
2021 vs 2020 2020 vs 2019
($ in millions)
Net investment income $ 509.0 $ 465.7 $ 533.2 9.3 % (12.7 %)
Change in the fair value of
equity securities 457.1 (55.8 ) 705.8 (919.2 %) (107.9 %)
Net realized capital gains 57.6 37.1 6.0 55.3 % 518.3 %
Change in allowance for credit
losses on available for sale
securities 2.0 (8.0 ) (19.7 ) (125.0 %) (59.4 %)
Net Investment Income. The increase in net investment income in 2021 from 2020
primarily reflects higher dividend and partnership income, partially offset by
lower interest income. The increase in dividend income reflects an increased
allocation to higher-yielding stocks and, to a lesser extent, a large special
dividend received from a mutual fund. The increase in partnership income
reflects appreciation in certain investment partnerships partially offset by
lower income from certain partnerships with catastrophe exposure. The decrease
in interest income reflects the impact of low reinvestment yields on debt
securities and lower yields on short term investments and floating-rate debt
securities.
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.
Change in the fair value of equity securities. The change in the fair value of
equity securities in 2021 reflects appreciation in the value of our equity
securities portfolio, primarily from our holdings in the healthcare, materials,
financial, industrials and technology sectors.
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.
Net Realized Capital Gains. The increase in net realized gains in 2021 from 2020
primarily reflects higher realized gains from the sale of our debt securities.
The increase in net realized gains in 2020 from 2019 primarily reflects higher
realized gains from the sale of our debt securities and the
decline in value of the Put Option in 2019.
Change in allowance for credit losses on available for sale securities. The changes in allowance for credit losses on AFS securities in 2021 reflect$2.0 million of reductions of credit losses on AFS securities, primarily from debt security sales. The change in allowance for credit losses on 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 reflects$19.7 million of unrealized losses on debt securities, primarily in the energy sector, primarily due to the deterioration of creditworthiness of the issuers. In addition, certain foreign bonds were impaired due to a significant decline in fair value. See Note 4 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K for additional information on credit losses, credit quality and gross unrealized investment losses for debt securities as of and for the year endedDecember 31, 2021 . 87 --------------------------------------------------------------------------------
Alleghany Capital Segment Results
TheAlleghany Capital segment consists of: (i) industrial operations conducted through PCT, Kentucky Trailer, W&W|AFCO Steel, Wilbert beginningApril 1, 2020 andPiedmont beginningMay 10, 2021 ; (ii) consumer & services operations (formerly non-industrial operations) conducted through IPS,Jazwares andConcord and (iii) corporate operations at theAlleghany Capital level, which include certain hotel development projects. OnMay 10, 2021 ,Piedmont , a newly-formed subsidiary ofAlleghany Capital , acquired WPS. WPS is a provider of injection molded and thermoformed parts and multi-component assemblies for original equipment manufacturer customers in a range of end-markets, headquartered inBelmont, North Carolina . OnApril 1, 2020 ,Alleghany Capital acquired an additional approximately 55 percent of Wilbert it previously did not own, bringing its equity interest in Wilbert to approximately 100 percent, and as of that date, the results of Wilbert were included in our consolidated results. Prior toApril 1, 2020 , Wilbert was accounted for under the equity method of accounting and was included in other assets. The following tables present the results of theAlleghany Capital segment for 2021, 2020 and 2019: Consumer & Year Ended December 31, 2021 Industrial services Corp. & other Total ($ in millions) Product and service revenues(1)$ 1,662.3 $ 2,074.1 $ -$ 3,736.4 Net investment income - (0.3 ) 0.1 (0.2 ) Net realized capital gains (0.3 ) 4.8 3.1 7.6 Total revenues$ 1,662.0 $ 2,078.6 $ 3.2$ 3,743.8 Other operating expenses(1) 1,527.0 1,841.8 19.0 3,387.8 Amortization of intangible assets 18.0 30.1 - 48.1 Interest expense 8.3 7.7 0.2 16.2
Earnings (losses) before income taxes
Earnings (losses) before income taxes
Less: net realized capital gains
0.3 (4.8 ) (3.1 ) (7.6 ) Add: amortization of intangible assets 18.0 30.1 - 48.1 Adjusted earnings (losses) before income taxes(2)$ 127.0 $ 224.3 $ (19.1 )$ 332.2 Consumer & Year Ended December 31, 2020 Industrial services Corp. & other Total ($ in millions) Product and service revenues(1)$ 1,220.9 $ 1,256.5 $ 0.1$ 2,477.5 Net investment income 1.9 - - 1.9 Net realized capital gains 4.3 (0.1 ) 31.3 35.5 Total revenues$ 1,227.1 $ 1,256.4 $ 31.4$ 2,514.9 Other operating expenses(1) 1,145.7 1,151.7 12.6 2,310.0 Amortization of intangible assets 15.4 28.0 - 43.4 Interest expense 8.7 7.2 (0.4 ) 15.5 Earnings before income taxes$ 57.3 $ 69.5 $ 19.2$ 146.0 Earnings before income taxes$ 57.3 $ 69.5 $ 19.2$ 146.0 Less: net realized capital gains (4.3 ) 0.1 (31.3 ) (35.5 ) Add: amortization of intangible assets 15.4 28.0 - 43.4 Adjusted earnings (losses) before income taxes(2)$ 68.4 $ 97.6 $ (12.1 )$ 153.9 88
--------------------------------------------------------------------------------
Consumer &
Year Ended December 31, 2019 Industrial services Corp. & other Total
($ in millions)
Product and service revenues(1) $ 1,105.6 $ 1,183.7 $ - $ 2,289.3
Net investment income 6.1 (0.2 ) 0.4 6.3
Net realized capital gains 1.3 (0.3 ) - 1.0
Total revenues $ 1,113.0 $ 1,183.2 $ 0.4 $ 2,296.6
Other operating expenses(1) 1,038.0 1,076.4 18.5 2,132.9
Amortization of intangible assets 12.5 20.0 - 32.5
Interest expense 11.6 8.1 0.4 20.1
Earnings (losses) before income taxes
Earnings (losses) before income taxes
Less: net realized capital gains
(1.3 ) 0.3 - (1.0 ) Add: amortization of intangible assets 12.5 20.0 - 32.5 Adjusted earnings (losses) before income taxes(2)$ 62.1 $ 99.0 $ (18.5 )$ 142.6 (1) For industrial and consumer & services operations: (i) product and service revenues consists of the sale of manufactured goods and services; and (ii) other operating expenses consist of the cost of goods and services sold and selling, general and administrative expenses. Other operating expenses also include finders' fees, legal and accounting costs and other transaction-related expenses of$6.1 million ,$5.0 million and$4.1 million for 2021, 2020 and 2019, respectively. (2) Adjusted earnings before income taxes is a non-GAAP financial measure and does not replace earnings before income taxes determined in accordance with GAAP as a measure of profitability. See "Comment on Non-GAAP Financial Measures" herein for additional information on the presentation of our results of operations. Adjusted earnings before income taxes represents product and service revenues and net investment income less other operating expenses and interest expense and does not include: (i) amortization of intangible assets; (ii) change in the fair value of equity securities; (iii) net realized capital gains; (iv) change in allowance for credit losses on available for sale securities; and (v) income taxes. The changes inAlleghany Capital's equity for 2021, 2020 and 2019 are presented in the table below: Consumer & Industrial services Corp. & other Total(1) ($ in millions) Equity as of December 31, 2018$ 462.5 $ 443.3 $ (44.2 )$ 861.6 Earnings (losses) before income taxes 50.9 78.7 (18.5 ) 111.1 Income taxes(1) (2.8 ) (4.0 ) (18.0 ) (24.8 ) Accretion of redeemable noncontrolling interests(2) - (8.8 ) - (8.8 ) Portion of net earnings attributable to noncontrolling interests(2) (7.7 ) (15.9 ) - (23.6 ) Capital contributions (returns of capital) and other(3) 20.4 (82.7 ) 47.7 (14.6 ) Equity as of December 31, 2019 523.3 410.6 (33.0 ) 900.9 Earnings before income taxes 57.3 69.5 19.2 146.0 Income taxes(1) (7.2 ) (3.3 ) (12.1 ) (22.6 ) Accretion of redeemable noncontrolling interests(2) - (2.2 ) - (2.2 ) Portion of net earnings attributable to noncontrolling interests(2) (5.9 ) (17.0 ) - (22.9 ) Capital contributions (returns of capital) and other(3) 62.0 25.1 22.8 109.9 Equity as of December 31, 2020 629.5 482.7 (3.1 ) 1,109.1 Earnings (losses) before income taxes 108.7 199.0 (16.0 ) 291.7 Income taxes(1) (3.5 ) (6.7 ) (39.1 ) (49.3 ) Accretion of redeemable noncontrolling interests(2) - (23.5 ) - (23.5 ) Portion of net earnings attributable to noncontrolling interests(2) (17.4 ) (55.0 ) - (72.4 ) Capital contributions (returns of capital) and other(3) 26.1 (25.4 ) 81.6 82.3 Equity as of December 31, 2021$ 743.4 $ 571.1 $ 23.4$ 1,337.9 (1) Federal income taxes for mostAlleghany Capital subsidiaries are incurred at theAlleghany Capital corporate level. Estimated federal income tax (expense) benefit incurred at theAlleghany Capital corporate level attributable to industrial and consumer & services operations for 2021 was($20.9) million and($41.8) million , respectively, for 2020 was($11.4) million and($14.6) million , respectively, and for 2019 was($10.5) million and($16.5) million , respectively.
(2)
As ofDecember 31, 2021 , the noncontrolling interests outstanding were approximately as follows: Kentucky Trailer - 22 percent; W&W|AFCO Steel - 20 percent; IPS - 18 percent;Jazwares - 24 percent; andConcord - 15 percent. 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. (3) For 2021, capital contributions primarily reflect funding provided by: (i)Alleghany Capital toPiedmont for itsMay 10, 2021 acquisition of WPS; and (ii)Alleghany Capital to IPS for itsOctober 14, 2021 acquisition of Linesight. For 2020, capital contributions primarily reflect funding provided byAlleghany Capital to PCT for its acquisition of a manufacturer of high-performance carbide end mills inMarch 2020 ; (ii)Alleghany Capital toJazwares for its acquisition ofKelly Toy that closed onApril 1, 2020 ; and (iii) Alleghany toAlleghany Capital for its purchase of an additional approximately 55 89 --------------------------------------------------------------------------------
percent of Wilbert it previously did not own that closed on
2019, capital contributions primarily reflect funding provided by
Capital
Product and service revenues. The increase in product and service revenues in 2021 from 2020 reflects higher revenue from consumer & services and industrial subsidiaries. The increase in consumer & services product and service revenues primarily reflects higher revenues atJazwares , IPS and, to a lesser extent,Concord . Higher revenue atJazwares is due to strong customer demand across its portfolio of licenses and brands, including those from itsApril 1, 2020 acquisition ofKelly Toy . Higher revenue at IPS reflects the realization of a much higher backlog and higher employee utilization in 2021, the impact of itsOctober 14, 2021 acquisition of Linesight, and fewer Pandemic-related project delays. Higher revenue atConcord reflects higher management fee revenue due to significantly improved occupancy compared to 2020, which was negatively impacted by the Pandemic, as well as more hotels under management. The increase in industrial product and service revenues primarily reflects higher revenue at W&W|AFCO Steel and, to a lesser extent, the impact ofPiedmont's acquisition of WPS onMay 10, 2021 and the impact of Wilbert'sApril 1, 2020 inclusion in our consolidated results. The higher revenue at W&W|AFCO Steel reflects the realization of a strong backlog with higher man-hours worked, the timing of revenue recognition on certain large construction projects and the reduced impact of Pandemic-related site closures and safety measures.
The increase in product and service revenues in 2020 from 2019 reflects higher
industrial and consumer & services operations revenues.
The increase in industrial product and service revenues in 2020 primarily reflects the impact of Wilbert'sApril 1, 2020 inclusion in our consolidated results, as well as Wilbert's revenue growth, partially offset by Pandemic-related project delays and customer site closures at W&W|AFCO Steel during 2020 and slower orders for industrial capital equipment and services at Kentucky Trailer. The increase in consumer & services product and service revenues reflects higher sales atJazwares , partially offset by lower product and service revenues atConcord , due to reduced management fee revenue from Pandemic-driven declines in hotel occupancy, and IPS, due to Pandemic-related project delays and customer site closures. The increase inJazwares primarily reflects the impact of acquisitions ofKelly Toy inApril 2020 and WCT inOctober 2019 , partially offset by the acquisition of a major new video game license in the fourth quarter of 2018, which positively impacted sales in 2019 and Pandemic-related temporary shelter in place orders, disruptions to shipping schedules and store closures in 2020. Net investment income. The decreases in net investment income in 2021 from 2020 and in 2020 from 2019 primarily reflect a cessation of equity income from Wilbert upon Wilbert'sApril 1, 2020 inclusion in our consolidated results, as discussed above. Net realized capital gains. Net realized capital gains in 2021 include a$3.1 million gain on the remeasurement of fair value of certain outstanding contingent consideration liabilities in connection withAlleghany Capital's 2018 acquisition ofConcord and gains from certain foreign currency exchange rate impacts and sales of certain property and equipment. Net realized capital gains in 2020 include: (i)$15.0 million on a partial settlement and remeasurement of fair value of certain outstanding contingent consideration liabilities in connection with its 2018 acquisition ofConcord ; (ii) a$16.3 million gain onApril 1, 2020 in connection withAlleghany 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 its estimated fair value; and (iii) a$5.0 million 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 inJune 2019 . Other operating expenses. The increase in other operating expenses in 2021 from 2020 primarily reflects an increase in costs related to higher revenues in consumer & services and industrial operations, as discussed above and, to a lesser extent, higher supply chain costs atJazwares , partially offset by lower costs of Pandemic-related safety measures. In addition, the increase in other operating expenses in 2021 reflects an increase in long-term incentive compensation accruals inAlleghany Capital's corporate operations. The increase in other operating expenses in 2020 from 2019 primarily reflects an increase in costs related to higher revenues in industrial and consumer & services operations, as described above, and the cost of Pandemic-related safety measures undertaken in 2020. To a lesser extent, the increase in other operating expenses in 2020 reflected an increase in finders' fees, legal and accounting costs and other transaction-related expenses, partially offset by lower incentive compensation accruals inAlleghany Capital's corporate operations. Other operating expenses in 2021, 2020 and 2019 also reflect finders' fees, legal and accounting costs and other transaction-related expenses, primarily related toPiedmont's May 10, 2021 acquisition of WPS, IPS'sOctober 14, 2021 acquisition of Linesight,Alleghany Capital's April 1, 2020 acquisition of an additional approximately 55 percent of Wilbert it 90 -------------------------------------------------------------------------------- previously did not own,Jazwares' acquisition ofKelly Toy inApril 2020 and WCT inOctober 2019 , the acquisition by PCT of a consumable cutting tool manufacturer inJune 2019 , and the acquisition by Kentucky Trailer of a manufacturers of aluminum feed transportation equipment inJuly 2019 . Finders' fees, legal and accounting costs and other transaction-related expenses were$6.1 million ,$5.0 million and$4.1 million for 2021, 2020 and 2019, respectively. Amortization of intangible assets. The increase in amortization expense in 2021 from 2020 primarily reflects theMay 10, 2021 Piedmont acquisition of WPS, theOctober 14, 2021 IPS acquisition of Linesight, theApril 1, 2020 Jazwares acquisition ofKelly Toy and Wilbert'sApril 1, 2020 inclusion in our consolidated results, as discussed above. The increase in amortization expense in 2020 from 2019 primarily reflects recent acquisitions byJazwares and PCT, as well as the impact of Wilbert'sApril 1, 2020 inclusion in our consolidated results, as discussed above. Interest expense. The increase in interest expense in 2021 from 2020 primarily reflects the impact of debt used inPiedmont's May 10, 2021 acquisition of WPS and IPS'sOctober 14, 2021 acquisition of Linesight, as well as increased debt to support growth atJazwares . 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'sApril 1, 2020 inclusion in our consolidated results, as discussed above, andJazwares acquisition ofKelly Toy . Earnings (losses) before income taxes. The increase in earnings before income taxes in 2021 from 2020 primarily reflects higher consumer & services and industrial earnings, partially offset by lower realized capital gains, as discussed above. The increase in consumer & services earnings before income taxes in 2021 primarily reflect an increase in sales and margins atJazwares , and to a lesser extent, increases in revenue and margins at IPS andConcord , all as discussed above. Higher industrial earnings before income taxes in 2021 primarily reflects increases in revenue and margins at W&W|AFCO Steel, as discussed above. The increase in earnings before income taxes in 2020 from 2019 primarily reflects net realized capital gains and lower incentive compensation accruals inAlleghany Capital's corporate operations and, to a lesser extent, an increase in industrial earnings before income taxes, partially offset by a decrease in consumer & services earnings before income taxes. Higher industrial earnings before income taxes in 2020 primarily reflects the impact of Wilbert'sApril 1, 2020 inclusion in our consolidated results and revenue growth, as discussed above and, to a lesser extent, higher margins at W&W|AFCO Steel, partially offset by the impact of lower sales and margins at Kentucky Trailer. The decrease in consumer & services earnings before income taxes reflects the Pandemic-related impact on revenue and margins atConcord , partially offset by the impact of higher sales atJazwares , all as discussed above.
Corporate Activities Results
The primary components of corporate activities areAlleghany Properties , activities at the Alleghany parent company and, prior to itsDecember 31, 2020 sale, SORC. The following table presents the results for corporate activities: Year Ended December 31, 2021 2020 2019 ($ in millions) Net premiums earned $ - $ - $ - Net investment income 31.6 23.3 10.7
Change in the fair value of equity securities 49.7 (54.7 )
3.9
Net realized capital gains 2.2 (69.5 ) (13.5 ) Change in allowance for credit losses on available for sale securities 0.1 - - Product and service revenues 14.0 8.7
12.5
Total revenues 97.6 (92.2 )
13.6
Net loss and loss adjustment expenses - - - Commissions, brokerage and other underwriting expenses - - - Other operating expenses 2.9 15.7 27.3 Corporate administration 57.3 48.9 70.7 Amortization of intangible assets - - - Interest expense 59.2 45.7 52.8 (Losses) before income taxes$ (21.8 ) $ (202.5 ) $ (137.2 ) Net investment income. The increase in net investment income in 2021 from 2020 primarily reflects higher dividend income due to an increased allocation to higher-yielding stocks and, to a lesser extent, higher partnership income due to appreciation in a certain partnership that has exposure to cryptocurrencies.
The increase in net investment income in 2020 from 2019 primarily reflects
higher partnership income.
91 -------------------------------------------------------------------------------- Change in the fair value of equity securities. The change in the fair value of equity securities in 2021 reflects appreciation in the value of our equity securities held at the Alleghany parent company-level, primarily from our holdings in the materials, healthcare, financial, industrials and technology sectors. The change in the fair value of equity securities in 2020 reflects depreciation in the value of equity securities held 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.
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.
Net realized capital gains. Modest net realized capital gains in 2021 primarily
reflect the sale of debt securities.
The net realized capital losses in 2020 primarily reflect$76.0 million from the write-down of SORC oil field assets. In the first half of 2020, SORC's oil field assets were written down to estimated fair value, which primarily reflected a significant decline in oil prices, less costs to sell. In the second half of 2020, SORC's oil field assets were sold at values that approximated their reduced carrying values. SORC was sold onDecember 31, 2020 . 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 ofJanuary 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 theDecember 2019 sale of a privately held investment accounted for under the equity method. Product and service revenues. The increase in product and service revenues in 2021 from 2020 primarily reflects property sales atAlleghany Properties of approximately$13.9 million , partially offset by the absence of energy sales arising from the sale of SORC as ofDecember 31, 2020 .
The decrease in product and service revenues in 2020 from 2019 primarily
reflects lower energy sales at SORC, due to a significant decline in oil prices
and the impact of the sale of SORC's oil field assets in the second half of
2020, partially offset by higher property sales at
Other operating expenses. The decrease in other operating expenses in 2021 from 2020 primarily reflects the absence of operating costs arising from the sale of SORC as ofDecember 31, 2020 . The decrease in other operating expenses in 2020 from 2019 primarily reflects reduced costs at SORC, which were due primarily to the impact of the sale of SORC's oil field assets in the second half of 2020. Corporate administration. The increase in corporate administration expense in 2021 from 2020 reflects higher Alleghany parent company long-term incentive compensation accruals arising primarily from appreciation in Alleghany's stock price, compared with significant, Pandemic-driven depreciation of Alleghany's stock price in 2020, and higher consolidated net earnings attributable to Alleghany stockholders, as discussed above, partially offset by the 2020 Retirement Plan Termination Expense. The decrease in corporate administration expense in 2020 from 2019 reflects significantly lower Alleghany parent company long-term incentive compensation accruals due primarily to the impact of depreciation of Alleghany's stock price and lower consolidated net earnings attributable to Alleghany stockholders, as discussed above. The decrease was partially offset by the 2020 Retirement Plan Termination Expense. Interest expense. The increase in interest expense in 2021 from 2020 primarily reflects the issuance of certain senior notes onAugust 13, 2021 andMay 18, 2020 . The decrease in interest expense in 2020 from 2019 primarily reflects the impact of the early redemption of certain senior notes onJanuary 15, 2020 , partially offset by the issuance of certain other senior notes onMay 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 information. Losses before income taxes. The decrease in losses before income taxes in 2021 from 2020 primarily reflects appreciation in the value of our equity securities held at the Alleghany parent company-level compared with depreciation in 2020, and the impairment charges from the write-downs of SORC oil field assets in 2020, all as discussed above. The increase in losses before income taxes in 2020 reflects the impairment charges from the write-downs of SORC oil field assets and the depreciation in the fair value of equity securities held at the Alleghany parent company-level, partially offset by the impact of lower corporate administration expense and higher net investment income, all as discussed above. 92 --------------------------------------------------------------------------------
Reserve Review Process
Our reinsurance and insurance subsidiaries analyze, at least quarterly,
liabilities for unpaid loss and LAE established in prior years and adjust their
expected ultimate cost, where necessary, to reflect favorable or unfavorable
development in loss experience and new information, including, for certain
catastrophe 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. The following table presents the
reserves established in connection with the loss and LAE of our reinsurance and
insurance segments on a gross and net basis by line of business. These reserve
amounts represent the accumulation of estimates of ultimate loss (including for
IBNR) and LAE.
As of December 31, 2021 As of December 31, 2020 As of December 31, 2019
Gross Reinsurance Gross Reinsurance Gross Reinsurance
Loss Recoverables Net Loss Loss
Recoverables Net Loss Loss Recoverables Net Loss
and LAE on Unpaid and LAE and LAE on Unpaid and LAE and LAE on Unpaid and LAE
Reserves Losses Reserves Reserves Losses Reserves Reserves Losses Reserves
($ in millions)
Reinsurance Segment
Property$ 2,599.4 $ (641.1 ) $ 1,958.3 $ 2,086.0 $ (480.0 ) $ 1,606.0 $ 1,965.5 $ (604.3 ) $ 1,361.2 Casualty & specialty(1) 8,148.8 (406.0 ) 7,742.8 7,728.0 (350.7 ) 7,377.3 7,358.3 (303.2 ) 7,055.1 10,748.2 (1,047.1 ) 9,701.1 9,814.0 (830.7 ) 8,983.3 9,323.8 (907.5 ) 8,416.3 Insurance Segment Property 574.6 (201.4 ) 373.2 585.6 (222.1 ) 363.5 409.0 (142.2 ) 266.8 Casualty(2) 2,924.3 (766.2 ) 2,158.1 2,441.4 (640.1 ) 1,801.3 2,075.3 (537.3 ) 1,538.0 Workers' Compensation 1.8 - 1.8 2.3 - 2.3 2.3 - 2.3 All other(3) 185.3 (88.0 ) 97.3 197.6 (81.1 ) 116.5 183.7 (62.6 ) 121.1 3,686.0 (1,055.6 ) 2,630.4 3,226.9 (943.3 ) 2,283.6 2,670.3 (742.1 ) 1,928.2 Eliminations (76.6 ) 76.6 - (70.3 ) 70.3 - (65.7 ) 65.7 - Total$ 14,357.6 $ (2,026.1 ) $ 12,331.5 $
12,970.6
(1)
Primarily consists of the following reinsurance lines of business: directors' and officers' liability; errors and omissions liability; general liability; medical malpractice; ocean marine and aviation; auto liability; accident & health; mortgage reinsurance; surety; asbestos-related illness and environmental impairment liability; and credit. (2) Primarily consists of the following direct lines of business: umbrella/excess; directors' and officers' liability; professional liability; and general liability. (3) 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 betweenDecember 31, 2021 andDecember 31, 2020 . Gross and net loss and LAE reserves as ofDecember 31, 2021 increased fromDecember 31, 2020 , primarily reflecting the impact of growing net premiums earned and catastrophe losses incurred in 2021, partially offset by payments on catastrophe losses incurred in prior years and favorable prior accident year loss reserve development, all as discussed above. The 2021 catastrophe losses, net of reinsurance, include$268.7 million related to Hurricane Ida,$252.8 million related to the Winter Storms,$125.2 million related to the European Floods and$18.5 million related to the Midwest Tornadoes. Changes in Gross and Net Loss and LAE Reserves betweenDecember 31, 2020 andDecember 31, 2019 . Gross and net loss and LAE reserves as ofDecember 31, 2020 increased fromDecember 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 inPuerto Rico . Reinsurance Recoverables Our reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite in order to reduce the effect of individual or aggregate exposure to losses, manage capacity, protect capital resources, reduce volatility in specific lines of business, improve risk-adjusted portfolio returns and enable them to increase gross premiums writings and risk capacity without requiring additional capital. Our reinsurance and insurance subsidiaries generally purchase reinsurance and retrocessional coverages from highly-rated third-party reinsurers or on a collateralized basis. If the assuming reinsurers are unable or unwilling to meet the obligations assumed under the applicable reinsurance agreements, our reinsurance and insurance subsidiaries would remain liable for such reinsurance portion not paid by these reinsurers. As such, funds, trust agreements and letters of credit are held to collateralize a portion of our reinsurance and insurance subsidiaries' reinsurance recoverables, and our reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite or assume with multiple reinsurance programs. As ofDecember 31, 2021 , our reinsurance and insurance subsidiaries had total reinsurance recoverables of$2,196.0 million , consisting of$2,026.1 million of ceded outstanding loss and LAE and$173.1 million of recoverables on paid losses, less$3.2 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 93 -------------------------------------------------------------------------------- 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.
Critical Accounting Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that directly affect our reported financial condition and operating performance. More specifically, these estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying value of assets and liabilities and reported revenues and expenses that are not readily apparent from other sources. Actual results may differ materially from reported results to the extent that estimates and assumptions prove to be inaccurate. 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.
Unpaid Loss and LAE
Overview. The estimation of the liability for unpaid loss and LAE is inherently
difficult and subjective, especially in view of changing legal and economic
environments that impact the development of loss reserves, and therefore,
quantitative techniques frequently have to be supplemented by subjective
considerations and managerial judgment. In addition, trends that have affected
development of liabilities in the past may not necessarily occur or affect
liability development to the same degree in the future.
Each of our reinsurance and insurance subsidiaries establishes reserves on its
balance sheet for unpaid loss and LAE related to its property and casualty
reinsurance and insurance contracts. As of any balance sheet date, there are
claims that have not been reported, and some claims may not be reported for many
years after the date a loss occurs. As a result of this historical pattern, the
liability for unpaid loss and LAE includes significant estimates for IBNR
claims. Additionally, reported claims are in various stages of the settlement
process. Each claim is settled individually based upon its merits, and certain
claims may take years to settle, especially if legal action is involved. As a
result, the liabilities for unpaid loss and LAE include significant judgments,
assumptions and estimates made by management related to the actual ultimate
losses that will arise from the claims. Due to the inherent uncertainties in the
process of establishing these liabilities, the actual ultimate loss from a claim
is likely to differ, perhaps materially, from the liability initially recorded.
As noted above, as of any balance sheet date, not all claims that have occurred
have been reported to us, and if reported may not have been settled. The time
period between the occurrence of a loss and the time it is settled is referred
to as the "claim tail." In general, actuarial judgments for shorter-tailed lines
of business normally have much less of an effect on the determination of the
loss reserve amount than when those same judgments are made regarding
longer-tailed lines of business. Reported losses for the shorter-tailed classes,
such as property classes, generally reach the ultimate level of incurred losses
in a relatively short period of time. Rather than having to rely on actuarial
assumptions for many accident years, these assumptions are generally only
relevant for the more recent accident years. Therefore, these assumptions tend
to be less critical and the reserves calculated pursuant to these assumptions
are subject to less variability for the shorter-tailed lines of business.
For short-tail lines, loss reserves primarily consist of reserves for reported
claims. The process of recording quarterly and annual liabilities for unpaid
loss and LAE for short-tail lines is primarily focused on maintaining an
appropriate reserve level for reported claims and IBNR. Specifically, we assess
the reserve adequacy of IBNR in light of such factors as the current levels of
reserves for reported claims and expectations with respect to reporting lags,
catastrophe events, historical data, legal developments and economic conditions,
including the effects of inflation.
Standard actuarial methodologies employed to estimate ultimate losses
incorporate the inherent lag from the time claims occur to when they are
reported to an insurer and, if applicable, to when an insurer reports the claims
to a reinsurer. Certain actuarial methodologies may be more appropriate than
others in instances where this lag may not be consistent from period to period.
Consequently, additional actuarial judgment is employed in the selection of
methodologies to best incorporate the potential impact of this situation.
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
94
--------------------------------------------------------------------------------
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
number of factors, including the line and volume of the business involved. For
these reasons, our insurance operating subsidiaries will generally use actuarial
projections in setting reserves for all casualty lines of business.
While the reserving process is difficult for insurance business, the inherent
uncertainties of estimating loss reserves are even greater for reinsurance
business, due primarily to the longer-tailed nature of most of the reinsurance
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 can be subject to change without notice. TransRe writes
a significant amount of non-proportional assumed casualty reinsurance as well as
proportional assumed reinsurance of excess liability business for classes such
as medical malpractice, directors' and officers' liability, errors and omissions
liability and general liability. 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.
The estimation of unpaid loss and LAE for our reinsurance operations is
principally based on reports and individual case estimates received from ceding
companies. Data received from cedants is audited periodically by TransRe's
claims and underwriting personnel, to help ensure that reported data is
supported by proper documentation and conforms to contract terms, and is
analyzed, as appropriate, by its underwriting and actuarial personnel. Such
analysis often includes a detailed review of reported data to assess the
underwriting results of assumed reinsurance and to explain any significant
departures from expected performance. Over time, reported loss information is
ultimately corroborated when the underlying claims are paid.
In addition, the estimation of unpaid loss and LAE, including IBNR, for our
reinsurance operations also takes into account assumptions with respect to many
factors that will affect ultimate loss costs but are not yet known. The process
by which actual carried reserves are determined considers not only actuarial
estimates but a myriad of other factors. Such factors, both internal and
external, which contribute to the variability and unpredictability of loss
costs, include trends related to jury awards, social trends, medical inflation,
worldwide economic conditions, tort reforms, judicial interpretations of
coverages, the regulatory environment, underlying policy pricing, terms and
conditions and claims handling, among others. In addition, information gathered
through underwriting and claims audits is also considered. We assess the
reasonableness of our unpaid loss and LAE for our reinsurance operations using
various actuarial methodologies, principally the paid development method, the
reported loss development method and the Bornhuetter-Ferguson method as
described below.
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.
We believe that the reserves for unpaid loss and LAE established by our
reinsurance and insurance subsidiaries are adequate as of December 31, 2021 ;
however, additional reserves, which could have a material impact upon our
financial condition, results of operations and cash flows, may be necessary in
the future.
Methodologies and Assumptions. Our reinsurance and insurance subsidiaries use a
variety of techniques that employ significant judgments and assumptions to
establish the liabilities for unpaid loss and LAE recorded at the balance sheet
date. These techniques include detailed statistical analyses of past claims
reporting, settlement activity, claims frequency, internal loss experience,
changes in pricing or coverages and severity data when sufficient information
exists to lend statistical credibility to the analyses. More subjective
techniques are used when statistical data is insufficient or unavailable. These
liabilities also reflect implicit or explicit assumptions regarding the
potential effects of future inflation, court resolutions and judicial
interpretations, reinsurance coverage, legislative changes and recent trends in
such factors, as well as a number of actuarial assumptions that vary across our
reinsurance and insurance subsidiaries and across lines of business. This data
is analyzed by line of business, coverage, accident year or underwriting year
and reinsurance contract type, as appropriate.
Our loss reserve review processes use actuarial methods that vary by operating
subsidiary and line of business and produce point estimates for each class of
business. The actuarial methods used include the following methods:
•
Reported Loss Development Method: a reported loss development pattern is calculated based on historical loss development data, and this pattern is then used to project the latest evaluation of cumulative reported losses for each accident year or underwriting year, as appropriate, to ultimate levels;
•
Paid Development Method: a paid loss development pattern is calculated based on historical paid loss development data, and this pattern is then used to project the latest evaluation of cumulative paid losses for each accident year or underwriting year, as appropriate, to ultimate levels;
•
Expected Loss Ratio Method: expected loss ratios are applied to premiums earned,
based on historical company experience, or historical insurance industry results
when company experience is deemed not to be sufficient; and
95
--------------------------------------------------------------------------------
•
Bornhuetter-Ferguson Method: the results from the Expected Loss Ratio Method are essentially blended with either the Reported Loss Development Method or the Paid Development Method.
The primary actuarial assumptions used by our reinsurance and insurance
subsidiaries include the following:
•
Expected loss ratios represent management's expectation of losses, in relation to earned premium, at the time business is written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in the type of risks underwritten. For certain longer-tailed reinsurance lines of business that are typically lower frequency, high severity classes, expected loss ratios are often used for the last several accident years or underwriting years, as appropriate.
•
Rate of loss cost inflation (or deflation) represents management's expectation of the inflation associated with the costs we may incur in the future to settle claims. Expected loss cost inflation is particularly important for longer-tailed classes.
•
Reported and paid loss emergence patterns represent management's expectation of
how losses will be reported and ultimately paid in the future based on the
historical emergence patterns of reported and paid losses and are derived from
past experience of our subsidiaries, modified for current trends. These
emergence patterns are used to project current reported or paid loss amounts to
their ultimate settlement value.
In the absence of sufficiently credible internally-derived historical
information, each of the above actuarial assumptions may also incorporate data
from the insurance or reinsurance industries as a whole, or peer companies
writing substantially similar coverages. Data from external sources may be used
to set expectations, as well as assumptions regarding loss frequency or severity
relative to an exposure unit or claim, among other actuarial parameters.
Assumptions regarding the application or composition of peer group or industry
reserving parameters require substantial judgment.
Loss Frequency and Severity. Loss frequency and severity are measures of loss
activity that are considered in determining the key assumptions described above.
Loss frequency is a measure of the number of claims per unit of insured
exposure, and loss severity is a measure of the average size of claims. Factors
affecting loss frequency include the effectiveness of loss controls and safety
programs, changes in economic conditions or weather patterns. Factors affecting
loss severity include changes in policy limits, retentions, rate of inflation
and judicial interpretations. Another factor affecting estimates of loss
frequency and severity is the loss reporting lag, which is the period of time
between the occurrence of a loss and the date the loss is reported to our
reinsurance or insurance operating subsidiaries. The length of the loss
reporting lag affects their ability to accurately predict loss frequency, which
are more predictable for lines with short reporting lags, as well as the amount
of reserves needed for IBNR. If the actual level of loss frequency and severity
is higher or lower than expected, the ultimate losses will be different than
management's estimates. A small percentage change in an estimate can result in a
material effect on our reported earnings. The following table presents the
impact of changes, which could be favorable or unfavorable, in frequency and
severity on our loss estimates for claims occurring in 2021:
Frequency
Severity 1.0% 5.0% 10.0%
($ in millions)
1% $ 102.2 $ 307.6 $ 564.4
5% 307.6 521.2 788.1
10% 564.4 788.1 1,067.8
Our net reserves for loss and LAE of $12.3 billion as of December 31, 2021
relate to multiple accident years. Therefore, the impact of changes in frequency
or severity for more than one accident year could be higher or lower than the
amounts reflected above. We believe the above analysis provides a reasonable
benchmark for sensitivity, as we believe it is within historical variation for
our reserves. Currently, none of the scenarios is believed to be more likely
than the others. See Note 1(k) and Note 6 to Notes to Consolidated Financial
Statements set forth in Part II, Item 8, "Financial Statements and Supplementary
Data" of this Form 10-K for additional information on our loss and LAE.
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 2021, 2020 and 2019 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
96
--------------------------------------------------------------------------------
Statements and Supplementary Data" of this Form 10-K for a table presenting the
favorable and unfavorable prior accident year loss reserve development for 2021,
2020 and 2019.
Asbestos-Related Illness and Environmental Impairment Reserves. Loss and LAE
include amounts for risks related to asbestos-related illness and environmental
impairment. The reserves carried for such claims, including the IBNR portion,
are based upon known facts and current law at the respective balance sheet
dates. However, significant uncertainty exists in determining the amount of
ultimate liability for asbestos-related illness and environmental impairment
losses. This uncertainty is due to, among other reasons, inconsistent and
changing court resolutions and judicial interpretations with respect to
underlying policy intent and coverage and uncertainties as to the allocation of
responsibility for resultant damages, among other reasons. Further, possible
future changes in statutes, laws, regulations, theories of liability and other
factors could have a material effect on these liabilities and, accordingly,
future earnings. Although we are unable at this time to determine whether
additional reserves, which could have a material adverse effect upon our results
of operations, may be necessary in the future, we believe that our
asbestos-related illness and environmental impairment reserves are adequate as
of December 31, 2021 . See Note 12(c) to Notes to Consolidated Financial
Statements set forth in Part II, Item 8, "Financial Statements and Supplementary
Data" and pages 46 and 47 of this Form 10-K for additional information on loss
and LAE reserves related to asbestos-related illness and environmental
impairment.
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 33 through 35 and 51 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 Measurement of Certain Financial Assets
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. The three-tiered hierarchy used in management's determination of fair value is broken down into three levels based on the reliability and observability of inputs. Assets classified as Level 3 principally include certain other asset-backed securities (primarily, collateralized loan obligations) and, to a lesser extent,U.S. and foreign corporate bonds (including privately issued securities) and commercial mortgage loans. 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. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, we consider factors specific to the asset. Mortgage-backed and asset-backed securities are initially valued at the transaction price. Subsequently, we use widely accepted valuation practices that produce a fair value measurement. The vast majority of fair values are determined using an income approach. The income approach primarily involves developing a discounted cash flow model using the future projected cash flows of the underlying collateral, as well as other inputs described below. A few Level 3 valuations are based entirely on non-binding broker quotes. These securities consist primarily of mortgage-backed and asset-backed securities where reliable pool and loan level collateral information cannot be reasonably obtained, and as such, an income approach is not feasible. 97 -------------------------------------------------------------------------------- Since Level 3 valuations are based on techniques that use significant inputs that are unobservable with little or no market activity, the fair values under the market approach for Level 3 securities are less credible than under the income approach; 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. Unobservable inputs, significant to the measurement and valuation of mortgage-backed and asset-backed securities, are generally used in the income approach, and include assumptions about prepayment speed and collateral performance, including default, delinquency and loss severity rates. Significant changes to any one of these inputs, or combination of inputs, could significantly change the fair value measurement for these securities. The impact of prepayment speeds on fair value is dependent on a number of variables including whether the securities were purchased at a premium or discount. A decrease in interest rates generally increases the assumed rate of prepayments, and an increase in interest rates generally decreases the assumed speed of prepayments. Increased prepayments increase the yield on securities purchased at a discount and reduce the yield on securities purchased at a premium. In a decreasing prepayment environment, yields on securities purchased at a discount are reduced but are increased for securities purchased at a premium. Changes in default assumptions on underlying collateral are generally accompanied by directionally similar changes in other collateral performance factors, but generally result in a directionally opposite change in prepayment assumptions. Securities that are less liquid are more difficult to value and trade. During periods of market disruption, including periods of significantly rising or high interest rates, rapidly widening credit spreads or illiquidity, it may be difficult to value certain of the securities in our investment portfolio if trading becomes less frequent or market data becomes less observable. Certain asset classes in active markets with significant observable data may become illiquid due to changes in the financial environment. In such cases, valuing these securities may require more subjectivity and judgment. In addition, prices provided by third-party pricing services and broker quotes can vary widely even for the same security. As such, valuations may include inputs and assumptions that are less observable or require greater estimation as well as valuation methods which are more sophisticated, thereby resulting in values which may be greater or less than the value at which the investments may be ultimately sold. Further, rapidly changing or strained credit and equity market conditions could materially impact the value of securities as reported within our consolidated financial statements and the period-to-period changes in value could vary significantly. Decreases in value may have a material adverse effect on our results of operations or financial condition. For example, in early 2020, as the Pandemic disrupted global economic activity and caused financial markets to drop sharply, the fair value of our Level 3 debt securities depreciated by$110.5 million in the first three months of 2020. See Notes 1(b), 1(c), 3 and 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 information on our investments and fair value.
Change in Allowance for Credit Losses on Available for
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.
We hold our debt securities as AFS and as such, these securities are recorded at
fair value. 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. A portion of such 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.
We continually monitor the difference between amortized cost and the estimated
fair value of our debt investments. The analysis of a security's decline in
value is performed in its functional currency. Debt securities in an unrealized
loss position are evaluated for credit losses if they meet any of the following
criteria: (i) they are trading at a discount of at least 20 percent to amortized
cost and have a credit rating below investment grade or are not rated; (ii)
there has been a negative credit or news event with respect to the issuer that
could indicate the existence of a credit loss; or (iii) we intend to sell, or it
is more likely than not that we will sell, the debt security before recovery of
its amortized cost basis.
If we intend to sell, or it is more likely than not that we will sell, a debt
security before recovery of its amortized cost basis, the total amount of the
unrealized loss position is recognized as a credit loss in earnings. To the
extent that a debt security that is in an unrealized loss position is not
impaired based on the preceding, we will consider a debt security to be impaired
when we believe it to be probable that we will not be able to collect the entire
amortized cost basis. For debt securities in an unrealized loss position as of
the end of each quarter, we develop a best estimate of the present value of
expected cash flows. If the results of the cash flow analysis indicate that we
will not recover the full amount of its amortized cost basis in the debt
security, we record a credit loss in earnings equal to the difference between
the present value of expected cash flows and the amortized cost basis of the
debt security. If applicable, the difference between the total unrealized loss
position on the debt security and the total loss recognized in earnings is the
non-credit related portion, which is recorded as a component of other
comprehensive income.
98
--------------------------------------------------------------------------------
In developing the cash flow analyses for debt securities, we consider various
factors for the different categories of debt securities. For municipal bonds, we
take into account the taxing power of the issuer, source of revenue, credit risk
and enhancements and pre-refunding. For mortgage and asset-backed securities, we
discount our best estimate of future cash flows at an effective rate equal to
the original effective yield of the security or, in the case of floating rate
securities, at the current coupon. Our models include assumptions about
prepayment speeds, default and delinquency rates, underlying collateral (if
any), credit ratings, credit enhancements and other observable market data. For
corporate bonds, we review business prospects, credit ratings and available
information from asset managers and rating agencies for individual securities.
The occurrence of a major economic downturn, acts of corporate malfeasance,
widening risk spreads or other events could adversely affect the issuers of our
debt securities. In addition, with economic uncertainty, the credit quality of
issuers could be adversely affected. These events could cause us to
significantly increase the allowance for credit losses on AFS securities. For
example, in early 2020, as the Pandemic disrupted global economic activity and
caused financial markets to drop sharply, our allowance for credit losses
increased by $31.4 million in the first three months of 2020.
See Note 1(b) and 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 information on our investments and the allowance for
credit losses on AFS securities.
Goodwill and other intangible assets, net of amortization, are recorded as a consequence of business acquisitions.Goodwill represents the excess, if any, of the amount paid to acquire subsidiaries and other businesses over the fair value of their net assets as of the date of acquisition. Other intangible assets are recorded at their fair value as of the acquisition date. A significant amount of judgment is needed to determine the fair value as of the date of acquisition of other intangible assets and the net assets acquired in a business acquisition. The determination of the fair value of other intangible assets and net assets often involves the use of valuation models and other estimates, which involve many assumptions and variables and are inherently subjective. The fair value estimates may include the use of financial projections and discount rates. Other intangible assets that are not deemed to have an indefinite useful life are amortized over their estimated useful lives.Goodwill and intangible assets that have an indefinite useful life are not subject to amortization.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 includeAlleghany 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 goodwill and intangible assets relate primarily toAlleghany Capital subsidiaries. Specifically, our consolidated balance sheet as ofDecember 31, 2021 includes goodwill of$753.6 million related primarily toJazwares , Wilbert,Concord , Kentucky Trailer, PCT, W&W|AFCO Steel and IPS, and intangible assets, net of amortization, of$924.4 million related primarily toJazwares , W&W|AFCO Steel, Wilbert, TransRe,Concord , IPS,Piedmont , PCT and Kentucky Trailer. The estimated fair value of these subsidiaries are primarily impacted by the performance of its business. Such performance may be adversely impacted by prolonged market declines, among other things. If any of our businesses do not perform well, we may be required to recognize an impairment of goodwill or other intangible assets. Such write-downs could have a material adverse effect on our results of operations or financial position. 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. 99 --------------------------------------------------------------------------------
Reinsurance Premium Revenues
We must make certain judgments in the determination of assumed reinsurance premiums written and earned. For pro rata contracts, premiums written and earned are generally based on reports received from ceding companies. For excess-of-loss contracts, premiums are generally recorded as written based on contract terms and are earned ratably over the periods the related coverages are provided. Unearned premiums and ceded unearned premiums represent the portion of gross premiums written and ceded premiums written, respectively, related to the unexpired periods of such coverages. The relationship between net premiums written and net premiums earned will, therefore, generally vary depending on the volume and inception dates of the business assumed and ceded and the mix of such business between pro rata and excess-of-loss reinsurance. Premiums written and earned, along with related costs, for which data have not been reported by the ceding companies, are estimated based on historical patterns and other relevant factors. Such estimates of premiums earned are considered when establishing the IBNR portion of loss reserves. The differences between these estimates and actual data subsequently reported, which may be material as a result of the diversity of cedants and reporting practices and the inherent difficulty in estimating premium inflows, among other factors, are recorded in the period when actual data become available and such differences may materially affect our results of operations.
Other Accounting Estimates
In addition to the policies described above which contain critical accounting estimates, our other accounting policies are described in Note 1 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K. The accounting policies described in Note 1 require us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities that do not meet the level of materiality required for a determination that the accounting policy includes critical accounting estimates. On an ongoing basis, we evaluate our estimates, including those related to the value of deferred acquisition costs, incentive compensation, income taxes, pension benefits and contingencies and litigation. Our estimates are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions. Financial Condition
General. In general, we follow a policy of maintaining a relatively liquid financial position at our unrestricted holding companies. This policy has permitted us to expand our operations through internal growth at our subsidiaries and through acquisitions of, or substantial investments in, operating companies. As ofDecember 31, 2021 , we held total marketable securities and cash of$1,687.2 million , compared with$1,123.7 million as ofDecember 31, 2020 . The increase in marketable securities and cash in 2021 primarily reflects the net proceeds from the issuance of certain senior notes onAugust 13, 2021 , as discussed below, receipt of dividends by TransRe and RSUI and appreciation in the value of the holding company-level equity securities portfolios, partially offset by contributions toAlleghany Capital to fund the acquisition of WPS and contributions to IPS to fund the acquisition of Linesight, as discussed above, repurchases of shares of our common stock, as discussed below, and additional investments in certain partnerships at the Alleghany parent company-level. The$1,687.2 million is composed of$1,216.0 million at the Alleghany parent company,$393.8 million at AIHL and$77.4 million at the TransRe holding company. We also hold certain non-marketable investments at our unrestricted holding companies. We believe that we have and will have adequate internally generated funds, cash resources and unused credit facilities to provide for the currently foreseeable needs of our business, and we had no material commitments for capital expenditures as ofDecember 31, 2021 . Stockholders' equity attributable to Alleghany stockholders was approximately$9.2 billion as ofDecember 31, 2021 compared with approximately$8.8 billion as ofDecember 31, 2020 , primary reflecting net earnings attributable to Alleghany stockholders, partially offset by depreciation in the value of our debt securities portfolio and repurchases of our common stock, all as discussed below. As ofDecember 31, 2021 , we had 13,598,535 shares of our common stock outstanding, compared with 14,041,180 shares of our common stock outstanding as ofDecember 31, 2020 . Debt. OnAugust 13, 2021 , we completed a public offering of$500.0 million aggregate principal amount of our 3.250% 2051 Senior Notes due onAugust 15, 2051 , or the "2051 Senior Notes." The 2051 Senior Notes are unsecured and unsubordinated general obligations of Alleghany. Interest on the 2051 Senior Notes is payable semi-annually in arrears onFebruary 15 andAugust 15 of each year, commencingFebruary 15, 2022 . The terms of the 2051 Senior Notes permit redemption prior to maturity. The indenture under which the 2051 Senior Notes were issued contains covenants that impose conditions on our ability to create liens on the capital stock of AIHL, TransRe or RSUI. The 2051 Senior Notes were issued at approximately 98.6 percent of par, resulting in proceeds after underwriting discount, commissions and other expenses of$487.5 million , and an effective yield of approximately 3.32 percent. Approximately$5.7 million of underwriting discount, commissions and other expenses were recorded as deferred charges, which are amortized over the life of the 2051 Senior Notes. We intend to use the net 100 --------------------------------------------------------------------------------
proceeds of this offering for general corporate purposes, which may include the
repayment at maturity of our 2022 Senior Notes (defined below).
OnMay 18, 2020 , we completed a public offering of$500.0 million aggregate principal of our 3.625% senior notes due onMay 15, 2030 , or 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 onMay 15 andNovember 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 our 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. OnSeptember 9, 2014 , we completed a public offering of$300.0 million aggregate principal amount of our 4.90% senior notes due onSeptember 15, 2044 , or the "2044 Senior Notes." The 2044 Senior Notes are unsecured and unsubordinated general obligations of Alleghany. Interest on the 2044 Senior Notes is payable semi-annually onMarch 15 andSeptember 15 of each year. The terms of the 2044 Senior Notes permit redemption prior to their maturity. The indenture under which the 2044 Senior Notes were issued contains covenants that impose conditions on our ability to create liens on, or engage in sales of, the capital stock of AIHL, TransRe or RSUI. The 2044 Senior Notes were issued at approximately 99.3 percent of par, resulting in proceeds after underwriting discount, commissions and other expenses of$294.3 million and an effective yield of approximately 5.0 percent. OnJune 26, 2012 , we completed a public offering of$400.0 million aggregate principal amount of our 4.95% senior notes due onJune 27, 2022 , or the "2022 Senior Notes." The 2022 Senior Notes are unsecured and unsubordinated general obligations of Alleghany. Interest on the 2022 Senior Notes is payable semi-annually onJune 27 andDecember 27 of each year. The terms of the 2022 Senior Notes permit redemption prior to their maturity. The indenture under which the 2022 Senior Notes were issued contains covenants that impose conditions on our ability to create liens on, or engage in sales of, the capital stock of AIHL, TransRe or RSUI. The 2022 Senior Notes were issued at approximately 99.9 percent of par, resulting in proceeds after underwriting discount, commissions and other expenses of$396.0 million and an effective yield of approximately 5.05 percent.
On
aggregate principal amount of our 5.625% senior notes due on
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
yield of approximately 5.67 percent.
OnJanuary 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. OnJuly 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 onJuly 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 of common stock. Borrowings under the Credit Agreement bear a floating rate of interest based in part on our credit rating, among other factors. The Credit Agreement contains representations, warranties and covenants customary for bank loan facilities of this nature. There were no borrowings under the Credit Agreement from inception throughDecember 31, 2021 . The Credit Agreement contains representations, warranties and covenants customary for bank loan facilities of this nature and substantially similar to the Prior Credit Agreement. In this regard, the Credit Agreement requires Alleghany to, among other things, (x) maintain consolidated net worth of not less than the sum of (i)$5.3 billion plus (ii) 50% of the cumulative consolidated net income earned in each fiscal quarter thereafter (if positive) commencing with the fiscal quarter endingJune 30, 2017 and (y) maintain a ratio of consolidated total indebtedness to consolidated capital as of the end of each fiscal quarter of not greater than 0.35 to 1.0. Additionally, the Credit Agreement contains various negative covenants with which Alleghany must comply, including, but not limited to, limitations respecting: the creation of liens on any property or asset; the incurrence of indebtedness; mergers, consolidations, liquidations and dissolutions; change of business; sales of assets; transactions with affiliates; and other provisions customary in similar types of agreements. 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 101 --------------------------------------------------------------------------------
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. Common Stock Repurchases. InJune 2018 , our Board of Directors authorized, upon the completion of the program authorized in 2015, the repurchase of additional shares of our common stock at such times and at prices as management determines to be advisable, up to an aggregate of$400.0 million . InSeptember 2019 , our Board of Directors authorized, upon the completion of the program authorized in 2018, the repurchase of additional shares of our common stock at such times and at prices as management determines to be advisable, up to an aggregate of$500.0 million . As ofDecember 31, 2021 , we had$141.9 million remaining in the aggregate under our share repurchase authorizations. The following table presents the shares of our common stock that we repurchased in 2021, 2020 and 2019: Year Ended December 31, 2021 2020 2019 Shares repurchased 446,596 333,393 215,091
Cost of shares repurchased (in millions)
Average price per share repurchased
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, 2019 and 2021. InFebruary 2018 , our Board of Directors declared a special dividend of$10.00 per share for stockholders of record onMarch 5, 2018 . OnMarch 15, 2018 , we paid dividends to stockholders totaling$154.0 million . InFebruary 2020 , the Alleghany Board of Directors declared a special dividend of$15.00 per share for stockholders of record onMarch 5, 2020 . OnMarch 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 2021, we made aggregate capital contributions of$203.2 million toAlleghany Capital to: (i) fund a portion ofPiedmont's acquisition of WPS that closed onMay 10, 2021 for$60.4 million ; (ii) fund a portion of IPS's acquisition of Linesight that closed onOctober 14, 2021 for$97.4 million ; (iii) fund a portion of Wilbert's acquisition in the fourth quarter of 2021 for$35.0 million ; (iv) fund Kentucky Trailer operating activities in the fourth quarter of 2021 for$5.6 million ; and (v) fund investment in certain hotel development projects for$4.8 million in 2021. In 2020, we made aggregate capital contributions of$126.1 million toAlleghany Capital to: (i) fund a portion of PCT's acquisition of a manufacturer of high-performance carbide end mills inMarch 2020 for$20.1 million ; (ii) fund a portion ofJazwares's acquisition ofKelly Toy that closed onApril 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 onApril 1, 2020 for$46.3 million . In addition, in 2020, we contributed$3.1 million to SORC for purposes of its operations prior to itsDecember 31, 2020 sale. In 2019, we made aggregate capital contributions of$50.2 million toAlleghany Capital to: (i) fund a portion of PCT's acquisition of a consumable cutting tool manufacturer inJune 2019 for$29.4 million ; (ii) fund a portion ofKentucky Trailer's acquisition of a manufacturer of aluminum feed transportation equipment inJuly 2019 for$12.2 million ; and (iii) purchase all PCT noncontrolling interests effectiveApril 1, 2019 for$8.6 million . In addition, in 2019, we contributed$8.3 million to SORC for purposes of ongoing operations. 102 -------------------------------------------------------------------------------- Contractual Obligations. We have certain obligations to make future payments under contracts and credit-related financial instruments and commitments. The following table presents certain long-term aggregate contractual obligations and credit-related financial commitments as ofDecember 31, 2021 : More than More than 1 Year but 3 Years but Within Within More than Contractual Obligations Total Within 1 Year 3 Years 5 Years 5 Years ($ in millions) Loss and LAE$ 14,357.6 $ 4,548.6 $ 4,538.7 $ 2,129.7 $ 3,140.6 Senior notes(1) and other debt and related interest 4,282.8 519.5 319.0 696.0 2,748.3 Operating lease obligations(2) 379.4 51.1 95.6 72.9 159.8 Investments(3) 33.2 7.6 13.9 11.7 - Other long-term liabilities(4) 465.5 211.1 148.6 33.5 72.3 Total$ 19,518.5 $ 5,337.9 $ 5,115.8 $ 2,943.8 $ 6,121.0 (1) "Senior Notes" refers to: (i) the Alleghany Senior Notes, consisting of the 2051 Senior Notes, the 2030 Senior Notes, the 2044 Senior Notes and the 2022 Senior Notes; and (ii) TransRe's 8.00% senior notes due onNovember 30, 2039 . See Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K for additional information on the Senior Notes and other debt. (2) Includes approximately$30 million of future lease payments arising from certain leases that are yet to commence. See Note 12 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 lease liabilities. (3) Primarily reflects capital commitments to investment partnerships. (4) Primarily reflects obligations related to employee long-term compensation plans and retirement benefit plans. See Notes 14 and 15 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 compensation and retirement benefit plans, respectively. Our reinsurance and insurance subsidiaries have obligations to make certain payments for loss and LAE pursuant to insurance policies and reinsurance contracts they issue. These future payments are reflected as reserves on our consolidated financial statements. With respect to loss and LAE, there is typically no minimum contractual commitment associated with insurance policies and reinsurance contracts, and the timing and ultimate amount of actual claims related to these reserves is uncertain. Investments in Certain Variable Interest Entities. InDecember 2012 , TransRe obtained an ownership interest inPillar Capital Holdings Limited , or "Pillar Holdings ," aBermuda -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 byPillar Holdings , or the "Funds." We have concluded that bothPillar 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 ofDecember 31, 2021 . 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 additional information regarding variable interest entities. Investments in Commercial Mortgage Loans. As ofDecember 31, 2021 and 2020, the carrying value of our commercial mortgage loan portfolio was$475.9 million and$670.2 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 information on the ratings of our commercial mortgage portfolio as ofDecember 31, 2021 .
Subsidiaries
Financial strength is also a high priority of our subsidiaries, whose assets stand behind their financial commitments to their customers and vendors. We believe that our subsidiaries have and will have adequate internally generated funds, cash 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 ofDecember 31, 2021 . The obligations and cash outflow of our reinsurance and insurance subsidiaries include claim settlements, commission expenses, administrative expenses, purchases of investments and interest and principal payments on TransRe's 8.00% senior notes due onNovember 30, 2039 . In addition to premium collections, cash inflow is obtained from interest and dividend income, maturities and sales of investments and reinsurance recoveries. Because cash inflow from premiums is received in advance of cash outflow required to settle claims, our reinsurance and insurance operating units accumulate funds which they invest pending the need for liquidity. As the cash needs of a reinsurance or an insurance company can be unpredictable due to the uncertainty of the claims settlement process, the portfolios of our reinsurance and insurance subsidiaries consist primarily of debt securities and short-term investments to ensure the availability of funds and maintain a sufficient amount of liquid securities. 103 --------------------------------------------------------------------------------
Included in
subsidiaries, which totaled
generally used to support working capital needs and to help finance
acquisitions. The
•
$349.2 million of borrowings byJazwares under its available credit facilities to support its seasonal peak working capital requirements and borrowings incurred and assumed from its acquisition of WCT in 2019 and its acquisition ofKelly Toy in 2020;
•
$162.9 million of borrowings by IPS under its available credit facility and term loans, including approximately$125 million ofU.S. dollar-equivalent Euro based borrowings incurred from its acquisition of Linesight in 2021;
•
facilities;
•
term loans;
•
$55.3 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 2018 and 2019, and borrowings under its available credit facilities;
•
finance the acquisition of WPS in 2021; and
•
$24.4 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 2019. None of these liabilities are guaranteed by Alleghany orAlleghany Capital . InDecember 2019 , third-party, floating-rate term loans atConcord 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.Hotel Development Commitments . Commencing in 2020,Alleghany Capital invested in certain hotel development projects. As ofDecember 31, 2021 ,Alleghany Capital has invested$5.4 million in these hotel development projects. The projects are conducted through certain limited liability entities, which are variable interest entities, to which we are not the primary beneficiary. As ofDecember 31, 2021 , we guaranteed up to$5.3 million of debt of these entities to certain third party lenders for which we receive a fee.
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 ofDecember 31, 2021 and 2020 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 ofDecember 31, 2021 . 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 information on the ratings of our debt securities portfolio as ofDecember 31, 2021 . Our debt securities portfolio has been designed to enable management to react to investment opportunities created by changing interest rates, prepayments, tax and credit considerations or other factors, or to circumstances that could result in a mismatch between the desired duration of debt securities and the duration of liabilities, and, as such, is classified as AFS. Effective duration measures a portfolio's fair value sensitivity to changes in interest rates. Shorter lengths of time to maturity are generally associated with shorter duration and less sensitivity to changes in market yields. As such, duration 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 ofDecember 31, 2021 and 2020, our debt securities portfolio had an effective duration of approximately 4.5 years and 4.3 years, respectively. We may increase our effective duration by increasing the proportion of our debt securities portfolio held in securities with longer-dated maturities (for example, 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. See Note 4(b) to Notes 104 -------------------------------------------------------------------------------- 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 contractual maturities of our consolidated debt securities portfolio. In the event paid losses accelerate beyond the ability of our reinsurance and insurance subsidiaries to fund these paid losses from current cash balances, current operating cash flow, dividend and interest receipts and security maturities, we would need to liquidate a portion of our investment portfolio, make capital contributions to our reinsurance and insurance subsidiaries, and/or arrange for financing. Strains on liquidity could result from: (i) the occurrence of several significant catastrophe events in a relatively short period of time; (ii) the sale of investments into a depressed marketplace to fund these paid losses; (iii) the uncollectibility of reinsurance recoverables on these paid losses; (iv) the significant decrease in the value of collateral supporting reinsurance recoverables; or (v) a significant reduction in our net premium collections.
We may, from time to time, make significant investments in the common stock of a
public company, subject to limitations imposed by applicable regulations.
On a consolidated basis, as ofDecember 31, 2021 our invested assets increased to approximately$21.9 billion from approximately$20.2 billion as ofDecember 31, 2020 , primarily reflecting net proceeds from the issuance of our 2051 Senior Notes, appreciation in the value of our equity securities portfolio, as discussed above, and cash flows from operating activities, partially offset by depreciation in the value of our debt securities portfolio, repurchases of shares of our common stock and contributions toAlleghany Capital to fundPiedmont's acquisition of WPS and IPS's acquisition of Linesight, all as discussed above. The depreciation in the value of our debt securities portfolio reflects an increase in risk-free interest rates in 2021. Fair Value. 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. See Note 1 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 accounting policy on fair value.
The following table presents the carrying values and estimated fair values of
our consolidated financial instruments as of
December 31, 2021 December 31, 2020
Carrying Value Fair Value Carrying Value Fair Value
($ in millions)
Assets
Investments (excluding equity method investments and loans)(1)$ 20,887.7 $ 20,887.7
Liabilities
Senior Notes and other debt(2)$ 2,847.2 $ 3,157.9 $ 2,135.9 $ 2,468.7 (1) This table includes debt and equity securities, as well as partnership and non-marketable equity investments accounted for at fair value that are included in other invested assets. This table excludes investments accounted for using the equity method and commercial mortgage loans that are accounted for at unpaid principal balance. The fair value of short-term investments approximates amortized cost. (2) 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. See Note 3 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, "Financial Statements and Supplementary Data" of this Form 10-K for additional information on our financial instruments measured at fair value and the level of the fair value hierarchy of inputs used as ofDecember 31, 2021 and 2020. 105 -------------------------------------------------------------------------------- Municipal Bonds. The following table provides the fair value of our municipal bonds as ofDecember 31, 2021 , categorized by state and revenue source. Special revenue bonds are debt securities for which the payment of principal and interest is available solely from the cash flows of the related projects. As issuers of revenue bonds do not have the ability to draw from tax revenues or levy taxes to fund obligations, revenue bonds may carry a greater risk of default than general obligation bonds. Special Revenue Total Total Lease Special All Other Special General Total State Education Hospital Housing Revenue Tax Transit Utilities Sources Revenue Obligation Fair Value ($ in millions) New York$ 1.3 $ -$ 3.1 $ 1.8 $ 122.0 $ 64.0 $ 48.6 $ 7.0 $ 247.8 $ 11.8 $ 259.6 Texas 13.2 - 0.1 4.1 - 29.8 88.0 9.0 144.2 78.5 222.7 California 4.4 22.5 2.2 5.3 - 8.7 49.9 9.7 102.7 76.7 179.4 Massachusetts 16.1 5.7 11.7 - 42.2 1.3 20.6 0.3 97.9 39.2 137.1 Pennsylvania 6.2 0.9 11.1 - - 34.6 8.4 31.4 92.6 39.1 131.7 Ohio 34.1 1.2 2.8 1.2 2.2 8.9 20.3 9.2 79.9 30.2 110.1 Washington - - 1.4 - - 6.7 34.0 2.2 44.3 53.3 97.6 Florida - 0.3 2.5 - 19.1 44.1 8.5 9.5 84.0 11.1 95.1 Michigan 4.1 12.6 2.0 10.3 12.7 - - 4.8 46.5 21.4 67.9 Colorado 15.1 - - 11.0 - 2.6 7.0 - 35.7 28.5 64.2 All other states 73.5 60.3 32.9 31.6 78.9 67.3 163.2 115.3 623.0 203.7 826.7 Total$ 168.0 $ 103.5 $ 69.8 $
65.3
Total advanced refunded / escrowed maturity funds
343.8 Total municipal bonds$ 2,535.9 Catastrophe Exposure Natural or man-made catastrophe events may expose our reinsurance and insurance subsidiaries to underwriting losses across multiple lines of business and, in any given year, could have a material adverse effect on our financial condition, results of operations, cash flows and liquidity. Further, the potential for accumulated losses from multiple events, and uncertainty as to the frequency and severity of such events, present unique challenges for managing risk. Our reinsurance and insurance subsidiaries take certain measures to mitigate the impact of catastrophe events including considering catastrophe risks in their underwriting and pricing decisions, purchasing reinsurance, monitoring and modeling accumulated exposures, and managing exposure in key geographic zones and product lines that are prone to catastrophe events. We 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 tolerances as part of our risk oversight processes on a quarterly basis. Risk tolerances are subject to change based on our view of the risk-return characteristics of business being underwritten. We assess the probability of occurrence and severity of catastrophe events through the use of industry recognized models and other techniques. Where appropriate, we supplement these models with our own assessment of exposures which, in our view, may not be appropriately captured by these models. There is no single standard methodology or set of industry standard assumptions to project possible losses related to catastrophe exposures and the form and quality of the data obtained, including data obtained from insureds and ceding companies, and used in these models are not uniformly compatible with the data requirements of all models. Therefore, the use of different methodologies and assumptions could materially change the projected losses. Finally, these modeled losses may not be comparable with estimates made by other companies. Although the analytical tools used to estimate catastrophe exposure are useful in both pricing and monitoring catastrophe risk, the estimates derived by use of these techniques are inherently uncertain and do not reflect our maximum exposures to these events and it is highly likely that our losses will vary, perhaps materially, from these estimates. Potential catastrophe losses are typically expressed in terms of the probable maximum loss, or "PML." PMLs may be expressed as Occurrence Exceedance Probability, or "OEP," which reflect losses that may occur in any single event due to the defined peril in the indicated region, or as Aggregate Exceedance Probability, or "AEP," which reflect losses from multiple events that may occur in any given year. The following is an overview of such modeled OEP PMLs from property, engineering, marine and energy exposures and the associated natural perils that we deem most significant based upon contracts in force atJanuary 1, 2022 for TransRe andDecember 1, 2021 for RSUI. In addition to the single zone PMLs, we provide a "U.S. wind" PML in our disclosures which reflects our occurrence PML for the entireU.S. Modeled results also reflect losses arising from certain of our invested assets that have specific catastrophe exposures. The estimated amounts of these modeled losses are presented for both a 100-year return period (having a likelihood of being exceeded in any single year of 1.0 percent) and a 250-year return period (having a likelihood of being exceeded in any single year of 0.4 percent). These modeled losses are presented in two ways: (i) gross catastrophe losses; and (ii) after-tax net catastrophe costs (that is, gross losses, net of reinsurance, net reinstatement premiums and taxes). The reduction for reinsurance assumes that all reinsurers fulfill their obligations in accordance with contract 106 --------------------------------------------------------------------------------
terms. Given the uncertainty of the frequency, severity and location of
catastrophe events, we may experience losses significantly larger than the
estimated PMLs in any given year.
[[Image Removed: img67088784_7.jpg]][[Image Removed: img67088784_8.jpg]]
"Florida , Wind" and "Northeast U.S. , Wind" have the highest modeled after-tax net catastrophe costs for a 100 and 250-year return period single zone occurrence, respectively. These costs would represent approximately 5 percent and 7 percent, respectively, of stockholders' equity attributable to Alleghany as ofDecember 31, 2021 , compared with approximately 5 percent and 6 percent, respectively, for the highest modeled after-tax net catastrophe costs for a 100 and 250-year return period single zone occurrence as ofDecember 31, 2020 . There is much uncertainty and imprecision in the compilation of these estimates. Moreover, the makeup of our in-force business is constantly changing as new business is added and existing contracts terminate or expire, including contracts for reinsurance coverage purchased by us. In addition, there could be possible scenarios that are not captured in our analysis. Additionally, other risks, such as an outbreak of a pandemic disease, a major terrorist event, the bankruptcy of a major company or a marine and/or aviation disaster, could also have a material adverse effect on our business and operating results. As a result, there can be no assurance that we will not experience after-tax net catastrophe costs from individual and / or multiple events that will exceed these estimates by a material amount. There also can be no assurance that we will not experience catastrophe events more frequently than the modeled probabilities would suggest.
Recent Accounting Standards
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.
107
--------------------------------------------------------------------------------
AFLAC INC – 10-K – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
Research Reports on Crop Insurance from University of Bucharest Provide New Insights (Application of asset tokenization, smart contracts and decentralized finance in agriculture): Agriculture – Crop Insurance
Advisor News
- Panel: Is the American retirement system ‘broken’?
- Goldman Sachs, others weigh in on what’s ahead for the market in 2025
- How is consumers’ investing confidence impacting the need for advisors?
- Can a balance of withdrawals and annuities outshine the 4% rule?
- Economy ‘in a sweet spot’ but some concerns ahead
More Advisor NewsAnnuity News
Health/Employee Benefits News
- Opinion: Colorado must be a trailblazer on youth mental health services and solve the commercial insurance problem
- Why filling job openings will be crucial for Connecticut's economy in 2025
- The illusive sunny side
- How one doctor tried to take the profit motive out of health insurance
- Opinion: Scores of Alaskans face another eye-watering spike in their health care costs next year
More Health/Employee Benefits NewsLife Insurance News