Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2013

2.	Fair Value of Financial Instruments

The carrying values and estimated fair values of Alleghany’s consolidated financial instruments as of June 30, 2013 and December 31, 2012 were as follows:


	June 30, 2013				December 31, 2012
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in millions)
*Assets*
Investments (excluding equity method investments)⁽¹⁾	$	17,794.8	$	17,794.8	$	17,831.8	$	17,831.8

*Liabilities*
Senior Notes⁽²⁾	$	1,803.0	$	1,911.5	$	1,811.5	$	1,946.7

(1)

This table includes available-for-sale (“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 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 presented below.

(2)	See Note 8 to the Notes to Consolidated Financial Statements set forth in Part II, Item 8 of the 2012 10-K for additional information.

Alleghany’s financial instruments measured at fair value and the level of the fair value hierarchy of inputs used as of June 30, 2013 and December 31, 2012 were as follows:


	Level 1		Level 2		Level 3		Total
	(in millions)
As of June 30, 2013
Equity securities:
Common stock⁽¹⁾	$	1,827.5	$	—	$	—	$	1,827.5
Preferred stock		—		—		—		—

Total equity securities		1,827.5		—		—		1,827.5

Debt securities:
U.S. Government obligations		—		441.9		—		441.9
Municipal bonds		—		6,364.2		—		6,364.2
Foreign government obligations		—		836.6		—		836.6
U.S. corporate bonds		—		2,685.5		5.6		2,691.1
Foreign corporate bonds		—		1,886.2		—		1,886.2
Mortgage and asset-backed securities:
Residential mortgage-backed securities (“RMBS”)⁽²⁾		—		1,378.0		80.7		1,458.7
Commercial mortgage-backed securities (“CMBS”)		—		751.9		77.9		829.8
Other asset-backed securities		—		434.0		1.6		435.6

Total debt securities		—		14,778.3		165.8		14,944.1
Short-term investments		—		884.4		—		884.4
Other invested assets (excluding equity method investments)⁽³⁾		—		—		138.8		138.8

Total investments (excluding equity method investments)	$	1,827.5	$	15,662.7	$	304.6	$	17,794.8


Senior Notes	$	—	$	1,911.5	$	—	$	1,911.5


	Level 1		Level 2		Level 3		Total
	(in millions)
As of December 31, 2012
Equity securities:
Common stock⁽¹⁾	$	1,424.0	$	—	$	—	$	1,424.0
Preferred stock		—		—		—		—

Total equity securities		1,424.0		—		—		1,424.0

Debt securities:
U.S. Government obligations		—		522.9		—		522.9
Municipal bonds		—		6,304.1		—		6,304.1
Foreign government obligations		—		816.0		—		816.0
U.S. corporate bonds		—		3,485.3		30.4		3,515.7
Foreign corporate bonds		—		2,198.5		—		2,198.5
Mortgage and asset-backed securities:
RMBS⁽²⁾		—		1,602.9		59.6		1,662.5
CMBS		—		434.0		76.1		510.1
Other asset-backed securities		—		463.8		5.9		469.7

Total debt securities		—		15,827.5		172.0		15,999.5
Short-term investments		—		366.0		—		366.0
Other invested assets (excluding equity method investments)⁽³⁾		—		—		42.3		42.3

Total investments (excluding equity method investments)	$	1,424.0	$	16,193.5	$	214.3	$	17,831.8


Senior Notes	$	—	$	1,946.7	$	—	$	1,946.7

(1)	Of the $1,827.5 million and $1,424.0 million of fair value as of June 30, 2013 and December 31, 2012, respectively, $568.0 million and $542.2 million, respectively, related to certain energy sector businesses.

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

(3)	Includes partnership and non-marketable equity investments accounted for on an AFS basis.

In the three and six months ended June 30, 2013, there was a transfer of $21.7 million, consisting primarily of RMBS securities, from Level 2 to Level 3 that was principally due to a decrease in observable inputs related to the valuation of such securities. There were no other transfers between Levels 1, 2 or 3 for the three and six months ended June 30, 2013.

The following table presents a reconciliation of the changes during the six months ended June 30, 2013 in Level 3 assets measured at fair value:


	Debt Securities
				Mortgage and asset-backed
Six Months Ended June 30, 2013	U.S. Corporate Bonds			RMBS			CMBS			Other Asset- backed Securities			Other Invested Assets⁽¹⁾			Total
		(in millions)
Balance as of January 1, 2013	$	30.4		$	59.6		$	76.1		$	5.9		$	42.3		$	214.3
Net realized/unrealized gains (losses) included in:

Net earnings⁽²⁾		0.3			0.3			0.1			0.2			—			0.9
Other comprehensive income		(0.6	)		4.0			(1.7	)		(0.5	)		2.2			3.4
Purchases		—			—			9.8			—			100.0			109.8
Sales		(23.8	)		—			(0.7	)		—			—			(24.5	)
Issuances		—			—			—			—			—			—
Settlements		(0.7	)		(4.5	)		(5.8	)		(4.3	)		(5.7	)		(21.0	)
Transfers into Level 3⁽³⁾		—			21.3			0.1			0.3			—			21.7
Transfers out of Level 3		—			—			—			—			—			—

Balance as of June 30, 2013	$	5.6		$	80.7		$	77.9		$	1.6		$	138.8		$	304.6

(1)	Includes partnership and non-marketable equity investments accounted for on an AFS basis.

(2)	There were no other than temporary impairment (“OTTI”) losses recorded in net earnings related to Level 3 instruments still held as of June 30, 2013.

(3)	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 June 30, 2013 and December 31, 2012 were not material.

See Note 1(c) to the Notes to Consolidated Financial Statements set forth in Part II, Item 8 of the 2012 10-K for Alleghany’s accounting policy on fair value.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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