2. Fair Value of Financial Instruments

The following table presents the carrying value and estimated fair value of Alleghany’s consolidated financial instruments as of March 31, 2018 and December 31, 2017:


	March 31, 2018				December 31, 2017
	Carrying Value		Fair Value		Carrying Value		Fair Value
	($ in millions)
Assets
Investments (excluding equity method investments and loans)⁽¹⁾	$	17,284.1	$	17,284.1	$	17,406.5	$	17,406.5

Liabilities
Senior Notes and other debt⁽²⁾	$	1,540.9	$	1,677.8	$	1,484.9	$	1,614.6

(1)

This table includes 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 commercial mortgage loans that are carried at unpaid principal balance. 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 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2017 Form 10-K for additional information on the senior notes and other debt.

The following tables present Alleghany’s financial instruments measured at fair value and the level of the fair value hierarchy of inputs used as of March 31, 2018 and December 31, 2017:


	Level 1		Level 2		Level 3		Total
	($ in millions)
As of March 31, 2018
Equity securities:
Common stock	$	4,537.1	$	3.6	$	-	$	4,540.7
Preferred stock		-		-		5.2		5.2

Total equity securities		4,537.1		3.6		5.2		4,545.9


Debt securities:
U.S. Government obligations		-		1,031.7		-		1,031.7
Municipal bonds		-		3,140.6		-		3,140.6
Foreign government obligations		-		958.1		-		958.1
U.S. corporate bonds		-		1,985.5		290.2		2,275.7
Foreign corporate bonds		-		1,343.3		73.0		1,416.3
Mortgage and asset-backed securities:
Residential mortgage-backed securities (“RMBS”)⁽¹⁾		-		897.4		161.8		1,059.2
Commercial mortgage-backed securities (“CMBS”)		-		525.1		-		525.1
Other asset-backed securities⁽²⁾		-		578.2		1,081.3		1,659.5

Total debt securities		-		10,459.9		1,606.3		12,066.2
Short-term investments		-		611.7		-		611.7
Other invested assets⁽³⁾		-		-		60.3		60.3

Total investments (excluding equity method investments and loans)	$	4,537.1	$	11,075.2	$	1,671.8	$	17,284.1


Senior Notes and other debt	$	-	$	1,520.9	$	156.9	$	1,677.8


	Level 1		Level 2		Level 3		Total
	($ in millions)
As of December 31, 2017
Equity securities:
Common stock	$	4,090.7	$	3.8	$	-	$	4,094.5
Preferred stock		-		3.1		1.9		5.0

Total equity securities		4,090.7		6.9		1.9		4,099.5


Debt securities:
U.S. Government obligations		-		948.0		-		948.0
Municipal bonds		-		3,682.1		-		3,682.1
Foreign government obligations		-		1,006.6		-		1,006.6
U.S. corporate bonds		-		2,173.0		260.0		2,433.0
Foreign corporate bonds		-		1,424.6		75.2		1,499.8
Mortgage and asset-backed securities:
RMBS⁽¹⁾		-		833.8		161.8		995.6
CMBS		-		550.1		1.6		551.7
Other asset-backed securities⁽²⁾		-		503.3		1,101.3		1,604.6

Total debt securities		-		11,121.5		1,599.9		12,721.4
Short-term investments		-		578.1		-		578.1
Other invested assets⁽³⁾		-		-		7.5		7.5

Total investments (excluding equity method investments and loans)	$	4,090.7	$	11,706.5	$	1,609.3	$	17,406.5


Senior Notes and other debt	$	-	$	1,513.6	$	101.0	$	1,614.6

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

(2)	Includes $1,071.8 million and $1,101.3 million of collateralized loan obligations as of March 31, 2018 and December 31, 2017, respectively.

(3)	Includes partnership and non-marketable equity investments accounted for at fair value, and excludes investments accounted for using the equity method.

In the three months ended March 31, 2018, Alleghany transferred $1.6 million of CMBS securities out of Level 3, principally due to an increase in observable inputs related to the valuation of such assets and, specifically, an increase in broker quotes.

As further described in Note 3(g), on March 15, 2018, most of AIHL’s limited partnership interests in certain subsidiaries of Ares Management LLC (“Ares”) were converted into Ares common units. As a result of the conversion, $208.2 million of Ares common units, classified as common stock, was transferred into Level 1, and $58.7 million of Ares limited partner interests, classified as other invested assets, was transferred into Level 3 as of March 15, 2018.

In addition to the above, in the three months ended March 31, 2018, Alleghany transferred $4.3 million of financial instruments into Level 3, principally due to a decrease in observable inputs related to the valuation of such assets and, specifically, a decrease in broker quotes. Of the $4.3 million of transfers, $3.1 million related to preferred stock and $1.2 million related to U.S. corporate bonds. There were no other material transfers between Levels 1, 2 or 3 in the three months ended March 31, 2018.

In the three months ended March 31, 2017, Alleghany transferred $4.1 million of financial instruments out of Level 3, principally due to an increase in observable inputs related to the valuation of such assets and, specifically, an increase in broker quotes. Of the $4.1 million of transfers, $2.3 million related to common stock and $1.8 million related to U.S. corporate bonds.

In the three months ended March 31, 2017, Alleghany transferred $2.6 million of financial instruments into Level 3, principally due to a decrease in observable inputs related to the valuation of such assets and, specifically, a decrease in broker quotes. Of the $2.6 million of transfers, $1.9 million related to U.S. corporate bonds, $0.4 million related to common stock and $0.3 million related to foreign corporate bonds. There were no other material transfers between Levels 1, 2 or 3 in the three months ended March 31, 2017.

The following tables present reconciliations of the changes during the three months ended March 31, 2018 and 2017 in Level 3 assets measured at fair value:


			Debt Securities
							Mortgage and asset-backed
Three Months Ended March, 2018	Preferred Stock		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, 2018	$	1.9	$	260.0	$	75.2	$	161.8	$	1.6	$	1,101.3	$	7.5	$	1,609.3
Net realized/unrealized gains (losses) included in:
Net earnings⁽²⁾		-		-		-		-		-		0.4		1.2		1.6
Other comprehensive income		0.2		(5.4)		(1.3)		-		-		(3.3)		(1.6)		(11.4)
Purchases		-		36.2		-		-		-		128.2		-		164.4
Sales		-		(1.8)		(0.9)		-		-		(145.3)		(5.5)		(153.5)
Issuances		-		-		-		-		-		-		-		-
Settlements		-		-		-		-		-		-		-		-
Transfers into Level 3		3.1		1.2		-		-		-		-		58.7		63.0
Transfers out of Level 3		-		-		-		-		(1.6)		-		-		(1.6)

Balance as of March 31, 2018	$	5.2	$	290.2	$	73.0	$	161.8	$	-	$	1,081.3	$	60.3	$	1,671.8


	Equity Securities				Debt Securities
									Mortgage and asset-backed
Three Months Ended March, 2017	Common Stock		Preferred Stock		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, 2017	$	4.3	$	-	$	72.9	$	0.4	$	5.9	$	4.3	$	903.8	$	28.1	$	1,019.7
Net realized/unrealized gains (losses) included in:
Net earnings⁽²⁾		-		-		(0.1)		-		0.1		-		1.5		2.4		3.9
Other comprehensive income		0.2		-		0.2		-		-		-		11.6		(1.8)		10.2
Purchases		-		2.4		43.8		3.1		-		-		380.6		-		429.9
Sales		(1.8)		-		(2.0)		-		-		-		(16.0)		(2.4)		(22.2)
Issuances		-		-		-		-		-		-		-		-		-
Settlements		-		-		(3.2)		-		(0.4)		(0.2)		(82.2)		-		(86.0)
Transfers into Level 3		0.4		-		1.9		0.3		-		-		-		-		2.6
Transfers out of Level 3		(2.3)		-		(1.8)		-		-		-		-		-		(4.1)

Balance as of March 31, 2017	$	0.8	$	2.4	$	111.7	$	3.8	$	5.6	$	4.1	$	1,199.3	$	26.3	$	1,354.0

(1)	Includes partnership and non-marketable equity investments accounted for at fair value.

(2)	There were no other than temporary impairment (“OTTI”) losses recorded in net earnings related to Level 3 assets still held as of March 31, 2018 and 2017.

Net unrealized losses related to Level 3 assets as of March 31, 2018 and December 31, 2017 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 2017 Form 10-K for Alleghany’s accounting policy on fair value.