3.	Investments

(a) Unrealized Gains and Losses

The amortized cost or cost and the fair value of AFS securities as of June 30, 2015 and December 31, 2014 are summarized as follows:


	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in millions)
As of June 30, 2015
Equity securities:
Common stock	$	2,701.3	$	482.2	$	(39.9	)	$	3,143.6
Preferred stock		—		—		—			—

Total equity securities		2,701.3		482.2		(39.9	)		3,143.6

Debt securities:
U.S. Government obligations		790.7		2.4		(11.6	)		781.5
Municipal bonds		4,913.5		96.1		(28.1	)		4,981.5
Foreign government obligations		885.1		17.3		(2.0	)		900.4
U.S. corporate bonds		2,139.1		28.6		(26.5	)		2,141.2
Foreign corporate bonds		1,417.2		30.4		(10.8	)		1,436.8
Mortgage and asset-backed securities:
RMBS		1,611.0		13.5		(19.3	)		1,605.2
CMBS		1,159.1		15.0		(5.3	)		1,168.8
Other asset-backed securities⁽¹⁾		1,549.6		5.1		(5.2	)		1,549.5

Total debt securities		14,465.3		208.4		(108.8	)		14,564.9
Short-term investments		601.5		—		—			601.5

Total	$	17,768.1	$	690.6	$	(148.7	)	$	18,310.0



	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(in millions)
As of December 31, 2014
Equity securities:
Common stock	$	2,366.0	$	530.3	$	(80.8	)	$	2,815.5
Preferred stock		—		—		—			—

Total equity securities		2,366.0		530.3		(80.8	)		2,815.5

Debt securities:
U.S. Government obligations		541.2		3.4		(3.5	)		541.1
Municipal bonds		5,067.3		139.3		(9.1	)		5,197.5
Foreign government obligations		876.7		23.7		—			900.4
U.S. corporate bonds		2,136.5		39.5		(21.2	)		2,154.8
Foreign corporate bonds		1,460.5		47.7		(4.5	)		1,503.7
Mortgage and asset-backed securities:
RMBS		1,646.9		20.7		(11.7	)		1,655.9
CMBS		1,104.2		22.5		(1.4	)		1,125.3
Other asset-backed securities⁽¹⁾		1,531.2		2.2		(13.5	)		1,519.9

Total debt securities		14,364.5		299.0		(64.9	)		14,598.6
Short-term investments		715.6		—		—			715.6

Total	$	17,446.1	$	829.3	$	(145.7	)	$	18,129.7

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

(b) Contractual Maturity

The amortized cost and estimated fair value of debt securities as of June 30, 2015 by contractual maturity are shown below. 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
	(in millions)
Short-term investments due in one year or less	$	601.5	$	601.5

Mortgage and asset-backed securities⁽¹⁾		4,319.7		4,323.5
Debt securities with maturity dates:
One year or less		553.2		556.6
Over one through five years		3,131.3		3,160.3
Over five through ten years		2,975.6		3,002.1
Over ten years		3,485.5		3,522.4

Total debt securities		14,465.3		14,564.9

Equity securities		2,701.3		3,143.6

Total	$	17,768.1	$	18,310.0

(1)	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 six months ended June 30, 2015 and 2014 were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in millions)
Interest income	$	92.5		$	97.4		$	187.2		$	192.7
Dividend income		11.9			19.8			26.4			33.3
Investment expenses		(6.1	)		(7.4	)		(13.3	)		(14.4	)
Equity in results of Pillar Investments⁽¹⁾		1.0			3.6			7.6			7.5
Equity in results of Ares⁽¹⁾		3.3			3.0			5.6			3.1
Equity in results of ORX		(3.7	)		(1.1	)		(4.7	)		(0.7	)
Other investment results		4.2			(1.2	)		7.7			3.2

Total	$	103.1		$	114.1		$	216.5		$	224.7

(1)	See Note 3(g) for discussion of the Pillar Investments as defined therein and the investment in Ares.

As of June 30, 2015, non-income producing invested assets were insignificant.

(d) Realized Gains and Losses

The proceeds from sales of AFS securities were $2.5 billion and $1.7 billion for the three months ended June 30, 2015 and 2014, respectively, and $5.3 billion and $3.7 billion for the six months ended June 30, 2015 and 2014, respectively.

Realized capital gains and losses for the three and six months ended June 30, 2015 and 2014 primarily reflect sales of equity securities. Realized capital gains from equity securities for the three months ended June 30, 2015 include the sales of certain equity securities as a result of a modification of Alleghany’s equity investment strategy, as well as the sales of certain equity securities which had their cost basis reduced in earlier periods for the recognition of OTTI losses. Realized capital gains in the second quarter of 2014 include a realized capital gain of $34.0 million from the sales of long-dated U.S. Treasury Strip debt securities in April 2014. The amounts of gross realized capital gains and gross realized capital losses for the three and six months ended June 30, 2015 and 2014 were as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	2015			2014			2015			2014
	(in millions)
Gross realized capital gains	$	101.7		$	46.2		$	216.1		$	153.9
Gross realized capital losses		(15.5	)		(4.7	)		(86.8	)		(15.5	)

Net realized capital gains	$	86.2		$	41.5		$	129.3		$	138.4

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-basis or amortized cost-basis down to the fair value of the investment and records an OTTI loss on its statement of earnings. In addition, any portion of such decline related 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 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 12 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 (such as 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) credit or news events associated with a specific issuer, 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; or (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.

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. If the results of the cash flow analysis indicate Alleghany will not recover the full amount of its amortized cost basis in the debt security, 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 debt security. If applicable, the difference between the total unrealized loss position on the debt 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 in the first six months of 2015 reflect $59.6 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 the 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 $59.6 million of OTTI losses, $58.8 million related to equity securities, primarily in the energy, gaming and mining sectors, and $0.8 million related to debt securities, primarily in the energy sector. The determination that unrealized losses on equity and debt securities were other than temporary was primarily based on the duration of the decline in the fair value of equity securities relative to their costs. Of the $59.6 million of OTTI losses, $7.3 million was incurred in the second quarter of 2015.

OTTI losses for the first six months of 2014 reflect $6.2 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. Of the $6.2 million of OTTI losses, $5.3 million related to equity securities and $0.9 million related to debt securities. The determination that unrealized losses on equity and debt securities were other than temporary was primarily based on the fact that Alleghany lacked the intent to hold the securities for a period of time sufficient to allow for an anticipated recovery. Of the $6.2 million of OTTI losses, $0.9 million was incurred in the second quarter of 2014.

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 June 30, 2015 were deemed to be temporary, based on, among other factors: (i) the duration of time and the relative magnitude to which the fair value of these investments had been below cost were not indicative of an OTTI loss (for example, no equity security was in a continuous unrealized loss position for 12 months or more as of June 30, 2015); (ii) the absence of compelling evidence that would cause Alleghany to call into question the financial condition or near-term business 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 June 30, 2015 and December 31, 2014, gross unrealized losses and related fair values for equity securities and debt securities, grouped by duration of time in a continuous unrealized loss position, were as follows:


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in millions)
As of June 30, 2015
Equity securities:
Common stock	$	705.4	$	39.9	$	—	$	—	$	705.4	$	39.9
Preferred stock		—		—		—		—		—		—

Total equity securities		705.4		39.9		—		—		705.4		39.9

Debt securities:
U.S. Government obligations		366.3		11.5		8.2		0.1		374.5		11.6
Municipal bonds		1,317.1		22.9		97.7		5.2		1,414.8		28.1
Foreign government obligations		218.2		2.0		—		—		218.2		2.0
U.S. corporate bonds		842.4		19.5		87.5		7.0		929.9		26.5
Foreign corporate bonds		397.2		10.4		11.4		0.4		408.6		10.8
Mortgage and asset-backed securities:
RMBS		609.4		8.5		388.8		10.8		998.2		19.3
CMBS		321.7		4.9		36.7		0.4		358.4		5.3
Other asset-backed securities		640.5		3.1		198.5		2.1		839.0		5.2

Total debt securities		4,712.8		82.8		828.8		26.0		5,541.6		108.8

Total temporarily impaired securities	$	5,418.2	$	122.7	$	828.8	$	26.0	$	6,247.0	$	148.7


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(in millions)
As of December 31, 2014
Equity securities:
Common stock	$	514.4	$	80.8	$	—	$	—	$	514.4	$	80.8
Preferred stock		—		—		—		—		—		—

Total equity securities		514.4		80.8		—		—		514.4		80.8

Debt securities:
U.S. Government obligations		270.5		3.1		16.3		0.4		286.8		3.5
Municipal bonds		105.2		0.8		372.0		8.3		477.2		9.1
Foreign government obligations		6.1		—		5.7		—		11.8		—
U.S. corporate bonds		574.7		17.2		150.7		4.0		725.4		21.2
Foreign corporate bonds		133.4		4.1		26.2		0.4		159.6		4.5
Mortgage and asset-backed securities:
RMBS		187.9		0.5		586.4		11.2		774.3		11.7
CMBS		176.5		0.7		60.9		0.7		237.4		1.4
Other asset-backed securities		1,041.1		12.7		175.3		0.8		1,216.4		13.5

Total debt securities		2,495.4		39.1		1,393.5		25.8		3,888.9		64.9

Total temporarily impaired securities	$	3,009.8	$	119.9	$	1,393.5	$	25.8	$	4,403.3	$	145.7

As of June 30, 2015, Alleghany held a total of 1,044 debt securities and equity securities that were in an unrealized loss position, of which 100 securities, all debt securities, were in an unrealized loss position continuously for 12 months or more. The unrealized losses associated with the 100 debt securities consisted primarily of losses related to RMBS, U.S. corporate bonds and municipal bonds.

As of June 30, 2015, the vast majority of Alleghany’s debt securities were rated investment grade, with approximately 3.6 percent of debt securities having issuer credit ratings that were below investment grade or not rated.

(g) Investments in Certain Other Invested Assets

In December 2012, TransRe obtained an ownership interest in Pillar Capital Holdings Limited (“Pillar Holdings”), a Bermuda-based insurance asset manager focused on collateralized reinsurance and catastrophe insurance-linked securities. Additionally, TransRe invested $175.0 million and AIHL invested $25.0 million in limited partnership funds managed by Pillar Holdings (the “Funds”). The objective of the Funds is to create portfolios with attractive risk-reward characteristics and low correlation with other asset classes, using the extensive reinsurance and capital market experience of the principals of Pillar Holdings. Alleghany has concluded that both Pillar Holdings and the Funds (collectively, the “Pillar Investments”) represent variable interest entities and that Alleghany is not the primary beneficiary, as it does not have the ability to direct the activities that most significantly impact each entity’s economic performance. Therefore, the Pillar Investments are not consolidated and are accounted for under the equity method of accounting. Alleghany’s potential maximum loss in the Pillar Investments is limited to its cumulative net investment. As of June 30, 2015, Alleghany’s carrying value in the Pillar Investments, as determined under the equity method of accounting, was $243.3 million, which is reported in other invested assets on Alleghany’s consolidated balance sheets.

In July 2013, AIHL invested $250.0 million in Ares, an asset manager, in exchange for a 6.25 percent equity stake in Ares, with an agreement to engage Ares to manage up to $1.0 billion in certain investment strategies. In May 2014, Ares completed an initial public offering of its common units. Upon completion of the initial public offering, Alleghany’s equity investment in Ares converted to limited partner interests in certain Ares subsidiaries that are convertible into an aggregate 5.9 percent interest in Ares common units. As of June 30, 2015, at Alleghany’s discretion, half of these interests may be converted at any time, and the remaining half may be converted in May 2016. Until Alleghany determines to convert its limited partner interests into Ares common units, Alleghany classifies its investment in Ares as a component of other invested assets, and accounts for its investment using the equity method of accounting. As of June 30, 2015, AIHL’s carrying value in Ares was $229.9 million, which is net of returns of capital received from Ares.