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Fair Value of Financial Instruments
9 Months Ended
Sep. 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 September 30, 2012 and December 31, 2011 were as follows (in millions):

 

     September 30, 2012      December 31, 2011  
     Carrying
Value
     Fair Value      Carrying
Value
     Fair Value  

Assets

           

Investments (excluding equity method investments)(1)

   $ 18,116.0       $ 18,116.0       $ 4,670.6       $ 4,670.6   

Liabilities

           

Senior Notes(2)

   $ 1,815.7       $ 1,974.2       $ 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 for additional information on the Senior Notes.

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

 

     Level 1      Level 2      Level 3      Total  

As of September 30, 2012

           

Equity securities:

           

Common stock(1)

   $ 1,504.6       $ —         $ —         $ 1,504.6   

Preferred stock

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,504.6         —           —           1,504.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Debt securities:

           

U.S. Government obligations

     —           486.2         —           486.2   

Municipal bonds

     —           6,563.9         —           6,563.9   

Foreign government obligations

     —           838.4         —           838.4   

U.S. corporate bonds

     —           3,485.5         31.3         3,516.8   

Foreign corporate bonds

     —           2,203.7         —           2,203.7   

Mortgage and asset-backed securities:

           

RMBS(2)

     —           1,918.1         57.8         1,975.9   

CMBS

     —           416.3         77.6         493.9   

Other asset-backed securities

     —           250.9         6.8         257.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     —           16,163.0         173.5         16,336.5   

Short-term investments

     —           235.1         —           235.1   

Other invested assets (excluding equity method investments)(3)

     —           —           39.8         39.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments (excluding equity method investments)

   $ 1,504.6       $ 16,398.1       $ 213.3       $ 18,116.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Senior Notes

   $ —         $ 1,974.2       $ —         $ 1,974.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 $1,504.6 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.
(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 September 30, 2012, there was a transfer of $41.9 million of CMBS-related securities from Level 2 to Level 3 that was principally due to a decrease in observable inputs related to the valuation of such securities. In addition, in the nine months ended September 30, 2012, there was a transfer of $267.8 million of U.S. Government obligation-related securities from Level 1 to Level 2, reflecting a change in Alleghany’s classification practice for such securities, effective January 1, 2012, based on a review of trading activity. There were no other transfers among Levels 1, 2 or 3.

 

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

 

     Debt Securities               
                  Mortgage and asset-backed               

Nine Months Ended September 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)

     —           —          3.7        1.0        0.1         (0.2     4.6   

Other comprehensive income

     —           0.5        5.1        —          0.2         2.2        8.0   

Purchases(3)

     —           31.5        55.1        37.2        6.5         16.7        147.0   

Sales

     —           —          —          —          —           (2.5     (2.5

Issuances

     —           —          —          —          —           —          —     

Settlements

     —           (0.7     (6.1     (2.5     —           —          (9.3

Transfers into Level 3(4)

     —           —          —          41.9        —           —          41.9   

Transfers out of Level 3

     —           —          —          —          —           —          —     
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance September 30, 2012

   $ —         $ 31.3      $ 57.8      $ 77.6      $ 6.8       $ 39.8      $ 213.3   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(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 September 30, 2012.
(3) Principally consists of Level 3 assets acquired as part of the merger.
(4) Principally due to a decrease in observable inputs related to the valuation of such securities.

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

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