4.	Investments

(a) Unrealized Gains and Losses

The amortized cost or cost and the fair value of AFS securities as of September 30, 2012 and December 31, 2011 are summarized as follows (in millions):


	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
As of September 30, 2012
Equity securities:
Common stock*	$	1,457.8	$	86.8	$	(40.0	)	$	1,504.6
Preferred stock		—		—		—			—

Total equity securities		1,457.8		86.8		(40.0	)		1,504.6

Debt securities:
U.S. Government obligations		476.0		10.3		(0.1	)		486.2
Municipal bonds		6,380.4		185.5		(2.0	)		6,563.9
Foreign government obligations		821.9		16.5		—			838.4
U.S. corporate bonds		3,445.3		71.9		(0.4	)		3,516.8
Foreign corporate bonds		2,150.7		53.4		(0.4	)		2,203.7
Mortgage and asset-backed securities:
RMBS		1,911.1		68.6		(3.8	)		1,975.9
CMBS		471.0		24.6		(1.7	)		493.9
Other asset-backed securities		252.5		5.2		—			257.7

Total debt securities		15,908.9		436.0		(8.4	)		16,336.5
Short-term investments		235.1		—		—			235.1

Total	$	17,601.8	$	522.8	$	(48.4	)	$	18,076.2

As of December 31, 2011
Equity securities:
Common stock*	$	775.8	$	121.4	$	(26.2	)	$	871.0
Preferred stock		—		—		—			—

Total equity securities		775.8		121.4		(26.2	)		871.0

Debt securities:
U.S. Government obligations		260.6		7.2		—			267.8
Municipal bonds		1,038.2		75.7		(0.3	)		1,113.6
Foreign government obligations		—		—		—			—
U.S. corporate bonds		341.8		14.4		(2.1	)		354.1
Foreign corporate bonds		81.8		2.2		(0.5	)		83.5
Mortgage and asset-backed securities:
RMBS		467.7		31.0		(1.4	)		497.3
CMBS		133.5		13.0		(1.8	)		144.7
Other asset-backed securities		215.3		3.3		(0.1	)		218.5

Total debt securities		2,538.9		146.8		(6.2	)		2,679.5
Short-term investments		1,096.5		—		—			1,096.5

Total	$	4,411.2	$	268.2	$	(32.4	)	$	4,647.0

*	Of the $1,504.6 million and $871.0 million of fair value as of September 30, 2012 and December 31, 2011, respectively, $572.8 million and $573.3 million, respectively, related to certain energy sector businesses.

(b) Contractual Maturity

The amortized cost and estimated fair value of debt securities as of September 30, 2012 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 or Cost		Fair Value
Short-term investments due in one year or less	$	235.1	$	235.1


Mortgage and asset-backed securities*		2,634.6		2,727.5
Debt securities with maturity dates:
One year or less		627.9		629.6
Over one through five years		4,945.6		5,025.7
Over five through ten years		3,991.4		4,136.0
Over ten years		3,709.4		3,817.7

Total debt securities		15,908.9		16,336.5


Equity securities		1,457.8		1,504.6

Total	$	17,601.8	$	18,076.2

*	Mortgage and asset-backed securities by their nature do not generally have single maturity dates.

(c) Net Investment Income

Net investment income for the three and nine months ended September 30, 2012 and 2011 was as follows (in millions):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Interest income	$	88.2		$	25.2		$	218.2		$	76.2
Dividend income		8.3			9.6			14.5			29.8
Investment expenses		(3.7	)		(1.5	)		(11.6	)		(4.8	)
Equity income (losses) of Homesite		(2.9	)		(9.6	)		9.5			(16.7	)
Equity (losses) of ORX		(0.9	)		(1.2	)		(4.2	)		(3.4	)
Other investment income		1.5			(0.4	)		8.2			1.1

Total	$	90.5		$	22.1		$	234.6		$	82.2

As of September 30, 2012, non-income producing invested assets were insignificant.

(d) Realized Gains and Losses

The proceeds from sales of AFS securities were $0.6 billion and $0.3 billion for the three months ended September 30, 2012 and 2011, respectively, and $1.9 billion and $0.8 billion in the nine months ended September 30, 2012 and 2011, respectively.

Realized capital gains and losses in the nine months ended September 30, 2012 and 2011 arose primarily from the sales of equity securities and include $63.1 million of capital gains from the sales of shares of common stock of Exxon Mobil Corporation in January 2012. The amount of gross realized capital gains and gross realized capital losses of AFS securities (primarily equity securities) for the three and nine months ended September 30, 2012 and 2011 were as follows (in millions):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Gross realized capital gains	$	18.2		$	24.7		$	132.1		$	73.2
Gross realized capital losses		(5.8	)		(2.0	)		(12.3	)		(9.3	)

Net realized capital gains	$	12.4		$	22.7		$	119.8		$	63.9

Gross realized loss amounts exclude OTTI losses, as discussed below.

(e) OTTI losses

Alleghany holds its equity and debt securities as AFS, 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. The analysis of any individual security’s decline in value is performed in its functional currency. If the decline 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- or amortized cost-basis down to the fair value of the investment and records an OTTI loss on its statement of earnings, regardless of whether Alleghany continues to hold the security. In addition, 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, rather than charged against earnings.

Management’s assessment of equity securities 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 credit or news event with respect to the issuer that could indicate the existence of an OTTI; and

(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).

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 it has been in an unrealized loss position for twelve months or more or if its unrealized loss position is greater than 50 percent of its cost, absent compelling evidence to the contrary.

Alleghany then evaluates those equity securities where the unrealized loss is 20 percent or more of cost as of the balance sheet date or which have been in an unrealized loss position continuously for six 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 third party 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.

Debt securities in an unrealized loss position are evaluated for OTTI if they meet any of the following criteria:

(i)

they are trading at a 20 percent discount to amortized cost for an extended period of time (nine consecutive months or longer);

(ii)

there has been a negative credit or news event with respect to the issuer that could indicate the existence of an OTTI;

(iii)

Alleghany intends to sell or it is more likely than not that Alleghany will sell the debt security before recovery of its amortized cost basis; and

(iv)

Alleghany may not realize a full recovery on its investment, regardless of the occurrence of one or more of the foregoing events.

If Alleghany intends to sell, or it is more likely than not that Alleghany will sell, a debt security before recovery of its amortized cost basis, the total amount of the unrealized loss position is recognized as an OTTI loss in earnings. To the extent that a debt security that is in an unrealized loss position is not impaired based on the preceding, Alleghany will consider a debt security to be impaired when it believes it to be probable that Alleghany 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, Alleghany develops a best estimate of the present value of expected cash flows on a security by security basis. If the results of the cash flow analysis indicate Alleghany will not recover the full amount of its amortized cost basis in the investment, Alleghany records an OTTI loss in earnings equal to the difference between the present value of expected cash flows and the amortized cost basis of the security. If applicable, the difference between the total unrealized loss position on the security and the OTTI loss recognized in earnings is the non-credit related portion and is recorded as a component of other comprehensive income.

In developing the cash flow analyses for debt securities, Alleghany considers various factors for the different categories of debt securities. For municipal bonds, Alleghany takes into account the taxing power of the issuer, source of revenue, credit risk and credit enhancements and pre-refunding. For mortgage and asset-backed securities, Alleghany discounts its 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. Alleghany’s models include assumptions about prepayment speeds, default and delinquency rates, and underlying collateral (if any), as well as credit ratings, credit enhancements and other observable market data. For corporate bonds, Alleghany reviews business prospects, credit ratings and available information from asset managers and rating agencies for individual securities.

OTTI losses for the nine months ended September 30, 2012 reflect $2.9 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. Upon the ultimate disposition of securities for which OTTI losses have been recorded, a portion of the loss may be recoverable depending on market conditions at the time of disposition. Of the $2.9 million incurred during the nine months ended September 30, 2012, $1.7 million related to equity securities (primarily in the energy sector), and $1.2 million related to debt securities. The determination that unrealized losses on such securities were other than temporary was primarily based on the duration of the decline in fair value of such security relative to their cost as of the balance sheet date.

OTTI losses for the nine months ended September 30, 2011 reflect $2.8 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. Of the $2.8 million incurred during the nine months ended September 30, 2011, $2.6 million related to equity security holdings (primarily in the materials sector), and $0.2 million related to debt securities. Of the $2.8 million of impairment losses, all was incurred in the third quarter of 2011. 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.

After adjusting the cost basis of securities for the recognition of OTTI losses, the remaining gross unrealized investment losses for debt and equity securities as of September 30, 2012 were deemed to be temporary, based on, among other things:

(i)

the duration of time and the relative magnitude to which fair values of these investments has been below cost was not indicative of an OTTI loss (for example, no equity security was in a continuous unrealized loss position for twelve months or more as of September 30, 2012);

(ii)

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

(iii)

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

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.

(f) Aging of Gross Unrealized Losses

As of September 30, 2012 and December 31, 2011, gross unrealized investment losses and related fair values for debt securities and equity securities, grouped by length of time in a continuous unrealized loss position, were as follows (in millions):


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
As of September 30, 2012
Debt securities:
U.S. Government obligations	$	23.6	$	0.1	$	—	$	—	$	23.6	$	0.1
Municipal bonds		375.2		1.7		5.4		0.3		380.6		2.0
Foreign government obligations		40.5		—		—		—		40.5		—
U.S. corporate bonds		112.5		0.4		—		—		112.5		0.4
Foreign corporate bonds		68.7		0.4		—		—		68.7		0.4
Mortgage and asset-backed securities:
RMBS		78.9		3.8		1.2		—		80.1		3.8
CMBS		23.7		0.2		8.4		1.5		32.1		1.7
Other asset-backed securities		3.5		—		0.3		—		3.8		—

Total debt securities		726.6		6.6		15.3		1.8		741.9		8.4

Equity securities:
Common stock		632.6		40.0		—		—		632.6		40.0
Preferred stock		—		—		—		—		—		—

Total equity securities		632.6		40.0		—		—		632.6		40.0

Total temporarily impaired securities	$	1,359.2	$	46.6	$	15.3	$	1.8	$	1,374.5	$	48.4

As of December 31, 2011
Debt securities:
U.S. Government obligations	$	—	$	—	$	—	$	—	$	—	$	—
Municipal bonds		—		—		6.8		0.3		6.8		0.3
Foreign government obligations		—		—		—		—		—		—
U.S. corporate bonds		47.4		1.8		5.1		0.3		52.5		2.1
Foreign corporate bonds		7.6		0.3		6.1		0.2		13.7		0.5
Mortgage and asset-backed securities:
RMBS		4.2		0.1		18.7		1.3		22.9		1.4
CMBS		7.8		0.3		8.5		1.5		16.3		1.8
Other asset-backed securities		21.4		0.1		0.5		—		21.9		0.1

Total debt securities		88.4		2.6		45.7		3.6		134.1		6.2

Equity securities:
Common stock		275.5		26.2		—		—		275.5		26.2
Preferred stock		—		—		—		—		—		—

Total equity securities		275.5		26.2		—		—		275.5		26.2

Total temporarily impaired securities	$	363.9	$	28.8	$	45.7	$	3.6	$	409.6	$	32.4

As of September 30, 2012, Alleghany held a total of 204 debt and equity securities that were in an unrealized loss position, of which 9 securities, all debt securities, were in an unrealized loss position continuously for 12 months or more. Unrealized losses associated with debt securities consisted primarily of RMBS, municipal bonds and CMBS.

As of September 30, 2012, substantially all of Alleghany’s debt securities were rated investment grade, with approximately 1.4 percent of debt securities having issuer credit ratings that were below investment grade or not rated.

(g) Statutory Deposits

Investments with fair values of $973.6 million as of September 30, 2012, the substantial majority of which were debt and equity securities, were deposited with governmental authorities as required by law.