2.	Fair Value of Financial Instruments

The carrying values and estimated fair values of Alleghany’s consolidated financial instruments as of June 30, 2015 and December 31, 2014 were as follows:


	June 30, 2015				December 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
	(in millions)
Assets
Investments (excluding equity method investments)⁽¹⁾	$	18,341.3	$	18,341.3	$	18,153.8	$	18,153.8

Liabilities
Senior Notes⁽²⁾	$	1,762.1	$	1,886.6	$	1,767.1	$	1,948.6

(1)

This table includes available-for-sale (“AFS”) investments (debt and equity securities as well as partnership and non-marketable equity 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. Fair value for all other categories of investments is discussed in Note 1(c) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2014 10-K.

(2)	See Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2014 10-K.

Alleghany’s financial instruments measured at fair value and the level of the fair value hierarchy of inputs used as of June 30, 2015 and December 31, 2014 were as follows:


	Level 1		Level 2		Level 3		Total
	(in millions)
As of June 30, 2015
Equity securities:
Common stock	$	3,135.2	$	8.4	$	—	$	3,143.6
Preferred stock		—		—		—		—

Total equity securities		3,135.2		8.4		—		3,143.6

Debt securities:
U.S. Government obligations		—		781.5		—		781.5
Municipal bonds		—		4,981.5		—		4,981.5
Foreign government obligations		—		900.4		—		900.4
U.S. corporate bonds		—		2,116.0		25.2		2,141.2
Foreign corporate bonds		—		1,436.1		0.7		1,436.8
Mortgage and asset-backed securities:
Residential mortgage-backed securities (“RMBS”)⁽¹⁾		—		1,588.6		16.6		1,605.2
Commercial mortgage-backed securities (“CMBS”)		—		1,147.8		21.0		1,168.8
Other asset-backed securities⁽²⁾		—		600.5		949.0		1,549.5

Total debt securities		—		13,552.4		1,012.5		14,564.9
Short-term investments		—		601.5		—		601.5
Other invested assets⁽³⁾		—		—		31.3		31.3

Total investments (excluding equity method investments)	$	3,135.2	$	14,162.3	$	1,043.8	$	18,341.3

Senior Notes	$	—	$	1,886.6	$	—	$	1,886.6


	Level 1		Level 2		Level 3		Total
	(in millions)
As of December 31, 2014
Equity securities:
Common stock	$	2,805.3	$	10.2	$	—	$	2,815.5
Preferred stock		—		—		—		—

Total equity securities		2,805.3		10.2		—		2,815.5

Debt securities:
U.S. Government obligations		—		541.1		—		541.1
Municipal bonds		—		5,197.5		—		5,197.5
Foreign government obligations		—		900.4		—		900.4
U.S. corporate bonds		—		2,118.1		36.7		2,154.8
Foreign corporate bonds		—		1,497.7		6.0		1,503.7
Mortgage and asset-backed securities:
RMBS⁽¹⁾		—		1,637.7		18.2		1,655.9
CMBS		—		1,102.0		23.3		1,125.3
Other asset-backed securities⁽²⁾		—		586.8		933.1		1,519.9

Total debt securities		—		13,581.3		1,017.3		14,598.6
Short-term investments		—		715.6		—		715.6
Other invested assets⁽³⁾		—		—		24.1		24.1

Total investments (excluding equity method investments)	$	2,805.3	$	14,307.1	$	1,041.4	$	18,153.8

Senior Notes	$	—	$	1,948.6	$	—	$	1,948.6

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

(2)	Includes $935.6 million and $900.7 million of collateralized loan obligations as of June 30, 2015 and December 31, 2014, respectively.

(3)	Includes partnership and non-marketable equity investments accounted for on an AFS basis, and excludes investments accounted for using the equity method and certain loans receivable that are carried at cost.

In the three and six months ended June 30, 2015, there were transfers of $5.8 million and $16.2 million, respectively, of debt securities out of Level 3 that were principally due to an increase in observable inputs related to the valuation of such assets. Of the $16.2 million of transfers in the first six months of 2015, $10.7 million related to U.S. corporate bonds and $5.5 million related to foreign corporate bonds.

In the three and six months ended June 30, 2015, there were $9.6 million transfers of securities into Level 3, principally due to a decrease in observable inputs related to the valuation of such assets. Of the $9.6 million of transfers, $5.0 million related to other invested assets, $3.9 million related to U.S. corporate bonds and $0.7 million related to foreign corporate bonds.

In the six months ended June 30, 2014, there were transfers of $238.1 million of other invested assets out of Level 3. Of the $238.1 million, $232.9 million related to the conversion of an equity interest held by AIHL in the second quarter of 2014. As further described in Note 3(g), AIHL’s investment in Ares Management L.P. (“Ares”) converted to limited partner interests in certain Ares subsidiaries during the second quarter of 2014, at which time the investment ceased to qualify as a financial instrument measured at fair value. No gain or loss was recognized upon the conversion.

In the six months ended June 30, 2014, there were transfers of $38.1 million of primarily other asset-backed securities (specifically, collateralized loan obligations) into Level 3 that were principally due to a decrease in observable inputs related to the valuation of such securities during the first quarter of 2014. There were no other significant transfers between Levels 1, 2 or 3 in the three and six months ended June 30, 2014.

The following tables present reconciliations of the changes in Level 3 assets measured at fair value during the six months ended June 30, 2015 and 2014:


	Debt Securities
							Mortgage and asset-backed
	U.S. Corporate Bonds			Foreign Corporate Bonds			RMBS			CMBS			Other Asset- backed Securities			Other Invested Assets⁽¹⁾			Total
	(in millions)
Balance as of January 1, 2015	$	36.7		$	6.0		$	18.2		$	23.3		$	933.1		$	24.1		$	1,041.4
Net realized/unrealized gains (losses) included in:
Net earnings⁽²⁾		0.3			—			0.3			(0.2	)		1.4			0.2			2.0
Other comprehensive income		(0.6	)		0.8			(0.5	)		(1.1	)		8.1			0.6			7.3
Purchases		8.8			—			—			—			132.5			1.6			142.9
Sales		(0.5	)		(1.3	)		—			—			(119.8	)		(0.2	)		(121.8	)
Issuances		—			—			—			—			—			—			—
Settlements		(12.7	)		—			(1.4	)		(1.0	)		(6.3	)		—			(21.4	)
Transfers into Level 3		3.9			0.7			—			—			—			5.0			9.6
Transfers out of Level 3		(10.7	)		(5.5	)		—			—			—			—			(16.2	)

Balance as of June 30, 2015	$	25.2		$	0.7		$	16.6		$	21.0		$	949.0		$	31.3		$	1,043.8



	Debt Securities
							Mortgage and asset-backed
	U.S. Corporate Bonds			Foreign Corporate Bonds			RMBS			CMBS			Other Asset- backed Securities			Other Invested Assets⁽¹⁾			Total
	(in millions)
Balance as of January 1, 2014	$	27.5		$	1.0		$	78.8		$	60.8		$	258.4		$	282.0		$	708.5
Net realized/unrealized gains (losses) included in:
Net earnings⁽²⁾		(0.1	)		—			2.2			(0.2	)		(0.3	)		(0.1	)		1.5
Other comprehensive income		0.1			—			0.8			0.1			(0.4	)		1.2			1.8
Purchases		12.0			1.9			—			14.0			581.2			—			609.1
Sales		(7.7	)		(1.1	)		—			(1.0	)		(52.7	)		—			(62.5	)
Issuances		—			—			—			—			—			—			—
Settlements		(4.6	)		—			(6.2	)		(26.7	)		(7.7	)		(20.9	)		(66.1	)
Transfers into Level 3		9.0			—			—			—			29.1			—			38.1
Transfers out of Level 3		—			—			—			—			—			(238.1	)		(238.1	)

Balance as of June 30, 2014	$	36.2		$	1.8		$	75.6		$	47.0		$	807.6		$	24.1		$	992.3

(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 investments still held as of June 30, 2015 and 2014.

Net unrealized losses related to Level 3 investments as of June 30, 2015 and December 31, 2014 were not material.

See Note 1(c) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2014 10-K for Alleghany’s accounting policy on fair value.