7. Investments

(a) Fair Value

The estimated carrying values and fair values of Alleghany’s consolidated financial instruments as of June 30, 2011 and December 31, 2010 were as follows (in millions):


	June 30, 2011				December 31, 2010
	Carrying Value		Fair Value		Carrying Value		Fair Value
*Assets*
Investments (excluding equity method investments)*	$	4,726.9	$	4,726.9	$	4,622.7	$	4,622.7
*Liabilities*
Senior Notes**	$	299.0	$	308.9	$	298.9	$	291.8

This table includes available-for-sale investments (securities as well as partnership investments carried at fair value that are included in other invested assets). This table excludes investments accounted for using the equity method (Homesite, ORX and other investments) and certain loans receivable that are carried at cost, all of which are included in other invested assets. The fair value of short-term investments approximates amortized cost. The fair value of all other categories of investments is discussed below.

**	See Note 7 to the Notes to the Consolidated Financial Statements set forth in Item 8 of the 2010 10-K.

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. In addition, GAAP has a three-tiered hierarchy for inputs used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are market participant assumptions based on market data obtained from sources independent of the reporting entity. Unobservable inputs are the reporting entity’s own assumptions about market participant assumptions based on the best information available under the circumstances. In assessing the appropriateness of using observable inputs in making its fair value determinations, Alleghany considers whether the market for a particular security is “active” or not based on all the relevant facts and circumstances. For example, Alleghany may consider a market to be inactive if there are relatively few recent transactions or if there is a significant decrease in market volume. Furthermore, Alleghany considers whether observable transactions are “orderly” or not. Alleghany does not consider a transaction to be orderly if there is evidence of a forced liquidation or other distressed condition, and as such, little or no weight is given to that transaction as an indicator of fair value.

The hierarchy is broken down into three levels based on the reliability of inputs as follows:

•

“Level 1” — Valuations are based on unadjusted quoted prices in active markets for identical, unrestricted assets. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these assets does not involve any meaningful degree of judgment. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing information on an ongoing basis. Alleghany’s Level 1 assets generally include publicly traded common stocks and debt securities issued directly by the U.S. Government, where Alleghany’s valuations are based on quoted market prices.

•

“Level 2” — Valuations are based on quoted market prices where such markets are not deemed to be sufficiently “active.” In such circumstances, additional valuation metrics will be used which involve direct or indirect observable market inputs. Alleghany’s Level 2 assets generally include preferred stocks and debt securities other than debt issued directly by the U.S. Government. Alleghany’s Level 2 liabilities include the Senior Notes. Substantially all of the determinations of value in this category are based on a single quote from third-party dealers and pricing services. As Alleghany generally does not make any adjustments thereto, such quote typically constitutes the sole input in its determination of the fair value of these types of securities. In developing a quote, such third-parties will use the terms of the security and market-based inputs. Terms of the security include coupon, maturity date, and any special provisions that may, for example, enable the investor, at its election, to redeem the security prior to its scheduled maturity date. Market-based inputs include the level of interest rates applicable to comparable securities in the market place and current credit rating(s) of the security. Such quotes are generally non-binding.

•

“Level 3” — Valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Valuation under Level 3 generally involves a significant degree of judgment on the part of Alleghany. Alleghany’s Level 3 assets are primarily limited to partnership investments. Net asset value quotes from the third-party general partner of the entity in which such investment is held, which will often be based on unobservable market inputs, constitute the primary input in Alleghany’s determination of the fair value of such assets.

Alleghany validates the reasonableness of its fair value determinations for Level 2 securities by testing the methodology of the relevant third-party dealer or pricing service that provides the quotes upon which the fair value determinations are made. Alleghany tests the methodology by comparing such quotes with prices from executed market trades when such trades occur. Alleghany discusses with the relevant third-party dealer or pricing service any identified material discrepancy between the quote derived from its methodology and the executed market trade in order to resolve the discrepancy. Alleghany uses the quote from the third-party dealer or pricing service unless Alleghany determines that the methodology used to produce such quote is not in compliance with GAAP. In addition to such procedures, Alleghany also compares the aggregate amount of the fair value for such Level 2 securities with the aggregate fair value provided by a third-party financial institution. Furthermore, Alleghany reviews the reasonableness of its classification of securities within the three-tiered hierarchy to ensure that the classification is consistent with GAAP.

The estimated fair values of Alleghany’s financial instruments as of June 30, 2011 and December 31, 2010 allocated among the three levels set forth above were as follows (in millions):


	Level 1		Level 2		Level 3		Total
As of June 30, 2011
Equity securities:
Common stock(1)	$	1,642.1	$	—	$	—	$	1,642.1
Preferred stock		—		—		—		—
Debt securities:
U.S. Government obligations		271.9		30.5		—		302.4
Mortgage and asset-backed securities(2)		—		1,006.3		—		1,006.3
States, municipalities and political subdivision bonds		—		1,000.6		—		1,000.6
Foreign bonds		—		90.3		—		90.3
Corporate bonds and other		—		395.6		—		395.6

		271.9		2,523.3		—		2,795.2

Short-term investments		87.4		175.0		—		262.4
Other invested assets(3)		—		—		27.2		27.2

Investments (excluding equity method investments)	$	2,001.4	$	2,698.3	$	27.2	$	4,726.9

Senior Notes	$	—	$	308.9	$	—	$	308.9

As of December 31, 2010
Equity securities:
Common stock(1)	$	1,500.7	$	—	$	—	$	1,500.7
Preferred stock		—		—		—		—
Debt securities:
U.S. Government obligations		307.3		30.5		—		337.8
Mortgage and asset-backed securities(2)		—		866.5		—		866.5
States, municipalities and political subdivision bonds		—		1,068.5		—		1,068.5
Foreign bonds		—		114.2		—		114.2
Corporate bonds and other		—		445.4		—		445.4

		307.3		2,525.1		—		2,832.4

Short-term investments		86.4		178.4		—		264.8
Other invested assets(3)		—		—		24.8		24.8

Investments (excluding equity method investments)	$	1,894.4	$	2,703.5	$	24.8	$	4,622.7

Senior Notes	$	—	$	291.8	$	—	$	291.8

(1)	Of the $1,642.1 million of fair value as of June 30, 2011, $1,024.9 million related to certain energy sector businesses. Of the $1,500.7 million of fair value as of December 31, 2010, $1,004.8 million related to certain energy sector businesses.

(2)

Of the $1,006.3 million of fair value as of June 30, 2011, $549.9 million related to residential mortgage-backed securities (“RMBS”), $190.5 million related to commercial mortgage-backed securities (“CMBS”) and $265.9 million related to other asset-backed securities. Of the $866.5 million of fair value as of December 31, 2010, $499.9 million related to RMBS, $173.4 million related to CMBS and $193.2 million related to other asset-backed securities.

(3)	Level 3 securities consist of partnership investments. The carrying value of partnership investments of $27.2 million increased by $2.4 million from the December 31, 2010 carrying value of $24.8 million, due primarily to an increase in estimated fair value during the period.

(b)

Available-For-Sale Securities

Available-for-sale securities as of June 30, 2011 and December 31, 2010 are summarized as follows (in millions):


	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
As of June 30, 2011
Equity securities:
Common stock(1)	$	1,406.5	$	252.1	$	(16.5	)	$	1,642.1
Preferred stock		—		—		—			—
Debt securities:
U.S. Government obligations		298.4		4.4		(0.4	)		302.4
Mortgage and asset-backed securities(2)		971.4		38.8		(3.9	)		1,006.3
States, municipalities and political subdivision bonds		965.9		37.8		(3.1	)		1,000.6
Foreign bonds		88.5		2.5		(0.7	)		90.3
Corporate bonds and other		382.6		14.1		(1.1	)		395.6

		2,706.8		97.6		(9.2	)		2,795.2

Short-term investments		262.4		—		—			262.4

	$	4,375.7	$	349.7	$	(25.7	)	$	4,699.7

*Industry Segment*
AIHL insurance group	$	3,818.5	$	249.0	$	(25.7	)	$	4,041.8
Corporate activities		557.2		100.7		—			657.9

	$	4,375.7	$	349.7	$	(25.7	)	$	4,699.7


	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
As of December 31, 2010
Equity securities:
Common stock(1)	$	1,310.0	$	196.3	$	(5.6	)	$	1,500.7
Preferred stock		—		—		—			—
Debt securities:
U.S. Government obligations		334.4		4.6		(1.2	)		337.8
Mortgage and asset-backed securities(2)		841.0		31.8		(6.3	)		866.5
States, municipalities and political subdivision bonds		1,058.1		25.4		(15.0	)		1,068.5
Foreign bonds		112.7		2.4		(0.9	)		114.2
Corporate bonds and other		431.9		14.9		(1.4	)		445.4

		2,778.1		79.1		(24.8	)		2,832.4

Short-term investments		264.8		—		—			264.8

	$	4,352.9	$	275.4	$	(30.4	)	$	4,597.9

*Industry Segment*
AIHL insurance group	$	3,760.3	$	232.7	$	(30.4	)	$	3,962.6
Corporate activities		592.6		42.7		—			635.3

	$	4,352.9	$	275.4	$	(30.4	)	$	4,597.9

(1)	Of the $1,642.1 million of fair value as of June 30, 2011, $1,024.9 million related to certain energy sector businesses. Of the $1,500.7 million of fair value as of December 31, 2010, $1,004.8 million related to certain energy sector businesses.

(2)

Of the $1,006.3 million of fair value as of June 30, 2011, $549.9 million related to RMBS, $190.5 million related to CMBS and $265.9 million related to other asset-backed securities. Of the $866.5 million of fair value as of December 31, 2010, $499.9 million related to RMBS, $173.4 million related to CMBS and $193.2 million related to other asset-backed securities.

The amortized cost and estimated fair value of debt securities as of June 30, 2011 by contractual maturity are shown below (in millions). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.


	Amortized Cost		Fair Value
Short-term investments due in one year or less	$	262.4	$	262.4

Mortgage and asset-backed securities		971.4		1,006.3

Debt securities
One year or less		241.1		244.2
Over one through five years		540.7		561.6
Over five through ten years		569.7		594.0
Over ten years		383.9		389.1

Equity securities		1,406.5		1,642.1

	$	4,375.7	$	4,699.7

The proceeds from sales of available-for-sale securities were $0.5 billion and $1.1 billion for the six months ended June 30, 2011 and 2010, respectively. The amounts of gross realized capital gains and gross realized capital losses of available-for-sale securities (primarily, equity securities) for the six months ended June 30, 2011 and June 30, 2010 were:


	Six Months Ended June 30,
	2011			2010
	(in millions)
Gross realized gains	$	48.5		$	64.1
Gross realized losses		(7.3	)		(4.3	)

Net realized gains	$	41.2		$	59.8

The gross loss amounts exclude other-than-temporary impairment losses, as discussed below. Realized gains and losses on investments are determined in accordance with the specific identification method.

(c)

Other-Than-Temporary Impairment Losses

Alleghany holds it equity and debt securities as available for sale, and as such, these securities are recorded at fair value. Alleghany continually monitors the difference between cost and the estimated fair value of its investments, which involves uncertainty as to whether declines in value are temporary in nature. If a decline in the value of a particular investment is deemed temporary, Alleghany records the decline as an unrealized loss in stockholders’ equity. If the decline is deemed to be other than temporary, Alleghany writes it down to the carrying value of the investment and records an other-than-temporary impairment loss on its statement of earnings, regardless of whether Alleghany continues to hold the applicable security. In addition, under GAAP, any portion of such decline that relates to debt securities that is believed to arise from factors other than credit is recorded as a component of other comprehensive income.

Management’s assessment of a decline in value initially involves an evaluation of all securities that are in an unrealized loss position, regardless of the duration or severity of the loss, as of the applicable balance sheet date. Such initial review consists primarily of assessing whether:

(i)

there has been a negative news event with respect to the issuer of any such security (irrespective of the duration or severity of its loss) that could indicate the existence of an other-than-temporary impairment;

(ii)

Alleghany has the ability and intent to hold an equity security for a period of time sufficient to allow for an anticipated recovery (generally considered to be less than one year from the balance sheet date); and

(iii)

it is more likely than not that Alleghany will sell a debt security before recovery of its amortized cost basis.

To the extent that an equity security in an unrealized loss position is not impaired based on the initial review described above, Alleghany then further evaluates such equity security and deems it to be other-than-temporarily impaired if its decline in fair value has existed for twelve months or more or if its decline in fair value from its cost is greater than 50 percent, absent compelling evidence to the contrary.

Alleghany then evaluates all remaining equity securities that are in an unrealized loss position the cost of which:

(i)

exceeds their fair value by 20 percent or more as of the balance sheet date; or

(ii)

has exceeded their fair value continuously for six (6) months or more preceding the balance sheet date.

This evaluation takes into account quantitative and qualitative factors in determining whether such securities are other-than-temporarily impaired including:

•

market valuation metrics associated with the equity security (e.g., dividend yield and price-to-earnings ratio);

•

current views on the equity security, as expressed by either Alleghany’s internal stock analysts and/or by independent stock analysts or rating agencies; and

•

discrete credit or news events associated with a specific company, such as negative news releases and rating agency downgrades with respect to the issuer of the investment.

To the extent that a debt security that is in an unrealized loss position is not impaired based on the initial review described above, Alleghany will consider a debt security to be impaired when it believes it to be probable that Alleghany will not be able to collect all amounts due under the security’s contractual terms.

Alleghany may ultimately record a realized loss after having originally concluded that the decline in value was temporary. Risks and uncertainties are inherent in the methodology Alleghany uses to assess other-than-temporary declines in value. Risks and uncertainties could include, but are not limited to, incorrect assumptions about financial condition, liquidity or future prospects, inadequacy of any underlying collateral, and unfavorable changes in economic or social conditions, interest rates or credit ratings.

There were no other-than-temporary impairment losses for the six months ended June 30, 2011. Other-than-temporary impairment losses for the six months ended June 30, 2010 reflect $6.8 million of unrealized losses that were deemed to be other-than-temporary and, as such, were required to be charged against earnings. Of the $6.8 million, $6.5 million of other-than-temporary impairment losses related to equity holdings (primarily in the energy sector), and $0.3 million related to debt security holdings (all of which were deemed to be credit-related). The determination that unrealized losses on such securities were other-than-temporary was primarily based on the severity and duration of the declines in fair value of such securities relative to their cost as of the balance sheet date.

After adjusting the cost basis of securities for the recognition of other-than-temporary impairment losses, the gross unrealized investment losses for debt and equity securities as of June 30, 2011 were deemed to be temporary, based on, among other things:

•

the duration of time and the relative magnitude to which fair values of these investments have been below cost was not indicative of an other-than-temporary impairment loss (for example, no equity security was in a continuous unrealized loss position for twelve months or more as of June 30, 2011);

•

the absence of compelling evidence that would cause Alleghany to call into question the financial condition or near-term prospects of the issuer of the investment; and

•

Alleghany’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery.

Such gross unrealized investment losses and related fair values for debt securities and equity securities as of June 30, 2011 and December 31, 2010, were as follows (in millions):


	2011				2010
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
Debt securities:
U.S. Government obligations
Less than 12 months	$	34.7	$	0.4	$	49.7	$	1.2
More than 12 months		—		—		—		—
Mortgage and asset-backed securities
Less than 12 months		102.6		0.9		170.8		2.8
More than 12 months		32.4		3.0		39.5		3.5
States, municipalities and political subdivision bonds
Less than 12 months		197.2		2.6		349.1		14.4
More than 12 months		6.7		0.5		7.7		0.6
Foreign bonds
Less than 12 months		15.7		0.7		45.2		0.9
More than 12 months		—		—		—		—
Corporate bonds and other
Less than 12 months		56.5		1.1		63.1		1.4
More than 12 months		—		—		—		—

Total debt securities
Less than 12 months		406.7		5.7		677.9		20.7
More than 12 months		39.1		3.5		47.2		4.1

Equity securities — Common Stock
Less than 12 months		287.9		16.5		139.5		5.6
More than 12 months		—		—		—		—

Equity securities — Preferred Stock
Less than 12 months		—		—		—		—
More than 12 months		—		—		—		—

Total temporarily impaired securities
Less than 12 months		694.6		22.2		817.4		26.3
More than 12 months		39.1		3.5		47.2		4.1

Total	$	733.7	$	25.7	$	864.6	$	30.4

As of June 30, 2011, Alleghany held a total of 147 debt and equity securities that were in an unrealized loss position, of which 15 securities, all debt securities, were in an unrealized loss position continuously for 12 months or more. Of the debt securities that were in an unrealized loss position, all were mortgage and asset-backed securities, and states, municipalities and political subdivision bonds. As of June 30, 2011, substantially all of Alleghany’s debt securities were rated investment grade. As of June 30, 2011, non-income producing invested assets were insignificant.