Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2012

Fair Value of Financial Instruments

3. Fair Value of Financial Instruments

The carrying values and estimated fair values of Alleghany’s consolidated financial instruments as of June 30, 2012 and December 31, 2011 were as follows (in millions):

	June 30, 2012				December 31, 2011
	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Investments (excluding equity method investments)(1)	$	17,704.6	$	17,704.6	$	4,670.6	$	4,670.6
Liabilities
Senior Notes(2)	$	1,819.8	$	1,878.3	$	299.0	$	314.8

(1) This table includes AFS investments (debt and equity 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 (including Homesite, ORX and other equity method 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.

(2) See Note 8.

Alleghany’s financial instruments measured at fair value and the level of the fair value hierarchy of inputs used as of June 30, 2012 and December 31, 2011 were as follows (in millions):

	Level 1		Level 2		Level 3		Total
As of June 30, 2012
Equity securities:
Common stock(1)	$	1,047.1	$	—	$	—	$	1,047.1
Preferred stock		—		—		—		—
Total equity securities		1,047.1		—		—		1,047.1
Debt securities:
U.S. Government obligations		—		528.6		—		528.6
Municipal bonds		—		6,602.3		—		6,602.3
Foreign government obligations		—		824.2		—		824.2
U.S. corporate bonds		—		3,034.6		6.3		3,040.9
Foreign corporate bonds		—		1,944.9		—		1,944.9
Mortgage and asset-backed securities:
RMBS(2)		—		1,927.8		50.9		1,978.7
CMBS		—		393.5		34.3		427.8
Other asset-backed securities		—		242.8		6.6		249.4
Total debt securities		—		15,498.7		98.1		15,596.8
Short-term investments		—		1,023.1		—		1,023.1
Other invested assets (excluding equity method investments)(3)		—		—		37.6		37.6
Total investments (excluding equity method investments)	$	1,047.1	$	16,521.8	$	135.7	$	17,704.6
Senior Notes	$	—	$	1,878.3	$	—	$	1,878.3

	Level 1		Level 2		Level 3		Total
As of December 31, 2011
Equity securities:
Common stock(1)	$	871.0	$	—	$	—	$	871.0
Preferred stock		—		—		—		—
Total equity securities		871.0		—		—		871.0
Debt securities:
U.S. Government obligations		267.8		—		—		267.8
Municipal bonds		—		1,113.6		—		1,113.6
Foreign government obligations		—		—		—		—
U.S. corporate bonds		—		354.1		—		354.1
Foreign corporate bonds		—		83.5		—		83.5
Mortgage and asset-backed securities:
RMBS(2)		—		497.3		—		497.3
CMBS		—		144.7		—		144.7
Other asset-backed securities		—		218.5		—		218.5
Total debt securities		267.8		2,411.7		—		2,679.5
Short-term investments		54.3		1,042.2		—		1,096.5
Other invested assets (excluding equity method investments)(3)		—		—		23.6		23.6
Total investments (excluding equity method investments)	$	1,193.1	$	3,453.9	$	23.6	$	4,670.6
Senior Notes	$	—	$	314.8	$	—	$	314.8

(1) Of the $1,047.1 million and $871.0 million of fair value as of June 30, 2012 and December 31, 2011, respectively, $461.8 million and $573.3 million, respectively, related to certain energy sector businesses.

(2) Includes government agency pass-through securities guaranteed by a government agency or government sponsored enterprise, among other types of RMBS.

(3) Includes partnership investments accounted for on an AFS basis.

In the three months ended June 30, 2012 there were no transfers in or out of Level 1, Level 2 or Level 3. In the six months ended June 30, 2012, transfers in or out of Level 1, Level 2 or Level 3 consisted of a $267.8 million transfer of U.S. Government obligations out of Level 1 and into Level 2, reflecting a change in Alleghany’s classification practice for U.S. Government obligations, effective January 1, 2012, based on a review of trading activity. In the three and six months ended June 30, 2011, there were no transfers in or out of Level 1, Level 2 or Level 3.

The following tables present reconciliations of the changes during the six months ended June 30, 2012 in Level 3 assets measured at fair value (in millions):

	Debt Securities
						Mortgage and asset-backed
Six Months Ended June 30, 2012	Foreign Government Obligations		U.S. Corporate Bonds			RMBS			CMBS			Other Asset- backed Securities		Other  Invested Assets(1)			Total
Balance January 1, 2012	$	—	$	—		$	—		$	—		$	—	$	23.6		$	23.6
Net realized/unrealized gains (losses) included in:
Net earnings(2)		—		—			2.1			0.7			0.1		(0.2	)		2.7
Other comprehensive income		—		—			(2.6	)		(1.8	)		—		0.5			(3.9	)
Purchases(3)		—		6.5			55.1			37.2			6.5		16.7			122.0
Sales		—		(0.2	)		—			—			—		(3.0	)		(3.2	)
Issuances		—		—			—			—			—		—			—
Settlements		—		—			(3.7	)		(1.8	)		—		—			(5.5	)
Transfers into Level 3		—		—			—			—			—		—			—
Transfers out of Level 3		—		—			—			—			—		—			—
Balance June 30, 2012	$	—	$	6.3		$	50.9		$	34.3		$	6.6	$	37.6		$	135.7

(1) Includes partnership investments accounted for on an AFS basis.

(2) There were no OTTI losses recorded in net earnings related to level 3 instruments still held as of June 30, 2012.

(3) Principally consists of Level 3 assets acquired as part of the merger.

Net unrealized losses related to Level 3 investments as of June 30, 2012 and December 31, 2011 were not material.

See Note 1(c) for Alleghany’s accounting policy on fair value.