Investments

12 Months Ended

Dec. 31, 2011

Investments

3. Investments

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

	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
2011
Consolidated
Equity securities:
Common stock(1)	$	775.8	$	121.4	$	(26.2	)	$	871.0
Preferred stock		—		—		—			—
Debt securities:
U.S. Government obligations		260.6		7.2		—			267.8
Mortgage and asset-backed securities(2)		816.5		47.3		(3.3	)		860.5
States, municipalities and political subdivision bonds		1,038.2		75.7		(0.3	)		1,113.6
Foreign bonds		81.8		2.2		(0.5	)		83.5
Corporate bonds and other		341.8		14.4		(2.1	)		354.1
		2,538.9		146.8		(6.2	)		2,679.5
Short-term investments		1,096.5		—		—			1,096.5
	$	4,411.2	$	268.2	$	(32.4	)	$	4,647.0
Industry Segment
AIHL insurance group	$	3,918.8	$	228.7	$	(32.4	)	$	4,115.1
Corporate activities		492.4		39.5		—			531.9
	$	4,411.2	$	268.2	$	(32.4	)	$	4,647.0
	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
2010
Consolidated
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 $871.0 million of fair value as of December 31, 2011, $573.3 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 $860.5 million of fair value as of December 31, 2011, $497.3 million related to residential mortgage-backed securities, or “RMBS,” $144.7 million related to commercial mortgage-backed securities, or “CMBS” and $218.5 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 December 31, 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	$	1,096.5	$	1,096.5
Mortgage and asset-backed securities		816.5		860.5
Debt securities
One year or less		91.9		93.2
Over one through five years		591.9		612.9
Over five through ten years		624.2		674.9
Over ten years		414.4		438.0
Equity securities		775.8		871.0
	$	4,411.2	$	4,647.0

The proceeds from sales of available-for-sale securities were $1.9 billion, $1.5 billion and $1.7 billion, in 2011, 2010 and 2009, respectively. The amount of gross realized capital gains and gross realized capital losses of available-for-sale securities (primarily equity securities) for 2011, 2010 and 2009 were (in millions):

	2011			2010			2009
Gross realized gains	$	161.1		$	105.0		$	338.5
Gross realized losses		(34.0	)		(7.6	)		(5.8	)
Net realized gains	$	127.1		$	97.4		$	332.7

The gross loss amounts exclude other-than-temporary impairment losses, as discussed below, and impairment losses incurred in 2009 relating to intangibles assets (See Note 4(a)). Realized gains and losses on investments are determined in accordance with the specific identification method. Gross gains relate primarily to the sales of equity securities.

Alleghany holds its 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 its cost-basis down to the fair 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 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 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:

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

(ii) 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

(iii) 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, and absent an intent to sell, 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 conditions or social trends, interest rates or credit ratings.

Other-than-temporary impairment losses reflect impairment charges related to unrealized losses that were deemed to be other than temporary and, as such, are required to be charged against earnings. Other-than-temporary impairment losses for 2011 reflect $3.6 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. Of the $3.6 million, $3.1 million related to equity security holdings (primarily in the materials and financial services sectors), and $0.5 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 of the declines in fair value of such securities relative to their cost as of the balance sheet date.

Of the $12.3 million of other-than-temporary impairment losses in 2010, $11.1 million related to equity security holdings (primarily in the energy sector) and $1.2 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.

Of the $85.9 million of other-than-temporary impairment losses in 2009, $57.6 million related to equity security holdings in the energy sector, $16.5 million related to equity security holdings in various other sectors and $11.8 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 in 2009 was primarily based on the severity of the declines in fair value of such securities relative to cost as of the balance sheet date. Such severe declines were primarily related to a significant deterioration of U.S. equity market conditions during the latter part of 2008 and the first quarter of 2009, which abated somewhat in the remainder of 2009.

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 December 31, 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 has 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 December 31, 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 value for debt securities and equity securities as of December 31, 2011, as well as for 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	$	—	$	—	$	49.7	$	1.2
More than 12 months		—		—		—		—
Mortgage and asset-backed securities
Less than 12 months		33.4		0.5		170.8		2.8
More than 12 months		27.7		2.8		39.5		3.5
States, municipalities and political subdivision bonds
Less than 12 months		—		—		349.1		14.4
More than 12 months		6.8		0.3		7.7		0.6
Foreign bonds
Less than 12 months		7.6		0.3		45.2		0.9
More than 12 months		6.1		0.2		—		—
Corporate bonds and other
Less than 12 months		47.4		1.8		63.1		1.4
More than 12 months		5.1		0.3		—		—
Total debt securities
Less than 12 months		88.4		2.6		677.9		20.7
More than 12 months		45.7		3.6		47.2		4.1
Equity securities — Common Stock
Less than 12 months		275.5		26.2		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		363.9		28.8		817.4		26.3
More than 12 months		45.7		3.6		47.2		4.1
Total	$	409.6	$	32.4	$	864.6	$	30.4

As of December 31, 2011, Alleghany held a total of 56 debt and equity securities that were in an unrealized loss position, of which 13 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, to a lesser extent, states, municipalities and political subdivision bonds, foreign bonds and corporate bonds and other. As of December 31, 2011, substantially all of Alleghany’s debt securities were rated investment grade.

As of December 31, 2011, non-income producing invested assets were insignificant.

As of December 31, 2011 and 2010, investments carried at fair value totaling $272.8 million and $322.1 million, respectively, were on deposit with various states or governmental agencies to comply with applicable state insurance regulations. Both amounts include $40.0 million that was contributed by AIHL to PCC on September 27, 2010, and these funds were used to increase PCC’s workers’ compensation deposit.

Net investment income was as follows (in millions):

	2011			2010			2009
Interest income	$	100.0		$	108.6		$	113.7
Dividend income		37.8			23.2			15.2
Investment expenses		(6.8	)		(5.5	)		(7.2	)
Equity in losses of Homesite		(20.2	)		(3.2	)		(1.1	)
Equity in losses of ORX		(1.6	)		(2.0	)		(21.9	)
Other investment (loss) income		(0.3	)		3.9			3.2
	$	108.9		$	125.0		$	101.9

Homesite losses in 2011 primarily reflect the impact of increased homeowners insurance claims from severe weather, particularly tornados, in the southeastern and midwestern U.S. in April and May 2011, as well as from Hurricane Irene, which affected the east coast of the U.S. in August 2011. Homesite losses in 2011 also reflect a tax valuation adjustment. Homesite losses in 2010 and 2009 primarily reflect the impact of increased homeowners insurance claims from severe weather and ongoing purchase accounting adjustments.

The $21.9 million of losses in 2009 for ORX were due primarily to asset impairment charges incurred as of December 31, 2008, but finalized in the 2009 third quarter, arising from relatively low energy prices as of December 31, 2008.