Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2019

Fair Value of Financial Instruments

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, 2019 and December 31, 2018:

	March 31, 2019				December 31, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
	($ in millions)
Assets
Investments (excluding equity method investments and loans)(1)	$	17,075.7	$	17,075.7	$	16,291.3	$	16,291.3
Liabilities
Senior Notes and other debt(2)	$	1,676.4	$	1,814.1	$	1,669.0	$	1,795.5

(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 disclosed 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 2018 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, 2019 and December 31, 2018:

	Level 1		Level 2		Level 3		Total
	($ in millions)
As of March 31, 2019
Equity securities:
Common stock	$	2,515.0	$	3.5	$	-	$	2,518.5
Preferred stock		-		-		4.6		4.6
Total equity securities		2,515.0		3.5		4.6		2,523.1
Debt securities:
U.S. Government obligations		-		1,182.9		-		1,182.9
Municipal bonds		-		2,469.7		-		2,469.7
Foreign government obligations		-		779.7		-		779.7
U.S. corporate bonds		-		2,316.3		433.7		2,750.0
Foreign corporate bonds		-		1,270.3		151.4		1,421.7
Mortgage and asset-backed securities:
Residential mortgage-backed securities (“RMBS”)(1)		-		1,976.6		-		1,976.6
Commercial mortgage-backed securities (“CMBS”)		-		588.6		0.2		588.8
Other asset-backed securities(2)		-		931.3		1,179.0		2,110.3
Total debt securities		-		11,515.4		1,764.3		13,279.7
Short-term investments		-		1,272.4		-		1,272.4
Other invested assets(3)		-		-		0.5		0.5
Total investments (excluding equity method investments and loans)	$	2,515.0	$	12,791.3	$	1,769.4	$	17,075.7
Senior Notes and other debt	$	-	$	1,521.7	$	292.4	$	1,814.1

	Level 1		Level 2		Level 3		Total
	($ in millions)
As of December 31, 2018
Equity securities:
Common stock	$	3,563.9	$	3.5	$	-	$	3,567.4
Preferred stock		-		-		5.4		5.4
Total equity securities		3,563.9		3.5		5.4		3,572.8
Debt securities:
U.S. Government obligations		-		1,022.4		-		1,022.4
Municipal bonds		-		2,214.7		-		2,214.7
Foreign government obligations		-		947.9		-		947.9
U.S. corporate bonds		-		1,959.6		425.7		2,385.3
Foreign corporate bonds		-		1,226.4		126.9		1,353.3
Mortgage and asset-backed securities:
RMBS(1)		-		1,387.9		-		1,387.9
CMBS		-		533.3		-		533.3
Other asset-backed securities(2)		-		712.3		1,266.9		1,979.2
Total debt securities		-		10,004.5		1,819.5		11,824.0
Short-term investments		-		893.8		-		893.8
Other invested assets(3)		-		-		0.7		0.7
Total investments (excluding equity method investments and loans)	$	3,563.9	$	10,901.8	$	1,825.6	$	16,291.3
Senior Notes and other debt	$	-	$	1,510.5	$	285.0	$	1,795.5

(1)	Primarily includes government agency pass-through securities guaranteed by a government agency or government sponsored enterprise, among other types of RMBS.
(2)	Includes $1,166.9 million and $1,266.9 million of collateralized loan obligations as of March 31, 2019 and December 31, 2018, 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, 2019, Alleghany transferred into Level 3 $14.7 million of foreign corporate bonds, principally due to a decrease in observable inputs related to the valuation of such assets. Specifically, during the first three months of 2019, there was an increase in the weight given to non-binding broker quotes and, as a result, there was a corresponding decrease in quoted prices for similar assets in active markets.

In the three months ended March 31, 2019, Alleghany transferred out of Level 3 $1.0 million of U.S. corporate bonds, principally due to an increase in observable inputs related to the valuation of such assets. Specifically, during the first three months of 2019, there was a decrease in the weight given to non-binding broker quotes and, as a result, there was a corresponding increase in quoted prices for similar assets in active markets.

There were no other material transfers between Levels 1, 2 or 3 in the three months ended March 31, 2019.

As further described in Note 3(h), 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, as of March 15, 2018, $208.2 million of Ares common units, classified as equity securities, was transferred into Level 1, and $58.7 million of Ares limited partnership interests, classified as other invested assets, was transferred into Level 3. On September 24, 2018, AIHL’s remaining $56.9 million of Ares limited partnership interests were converted into Ares common units and, as a result, was transferred from Level 3 other invested assets into Level 1 common stocks.

In addition to the $58.7 million of Ares-related other invested assets transferred into Level 3, in the first three months of 2018, Alleghany transferred into Level 3 $4.3 million of financial instruments, principally due to a decrease in observable inputs related to the valuation of such assets, 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. 

In the three months ended March 31, 2018, Alleghany transferred out of Level 3 $1.6 million of CMBS securities, principally due to an increase in observable inputs related to the valuation of such assets. Specifically, during the first three months of 2018, there was a decrease in the weight given to non-binding broker quotes, and as a result, there was a corresponding increase in quoted prices for similar assets in active markets.

There were no other material transfers between Levels 1, 2 or 3 in the three months ended March 31, 2018.

The following tables present reconciliations of the changes in Level 3 assets during the three months ended March 31, 2019 and 2018 measured at fair value:

				Debt Securities
										Mortgage and asset-backed
Three Months Ended March 31, 2019	Preferred Stock			U.S. Corporate Bonds			Foreign Corporate Bonds			CMBS		Other Asset- backed Securities			Other Invested Assets(1)			Total
	($ in millions)
Balance as of January 1, 2019	$	5.4		$	425.7		$	126.9		$	-	$	1,266.9		$	0.7		$	1,825.6
Net realized/unrealized gains (losses) included in:
Net earnings(2)		-			(9.9	)		-			-		-			-			(9.9	)
Other comprehensive income (loss)		(0.8	)		15.7			2.6			-		15.2			(0.2	)		32.5
Purchases		-			5.8			13.8			0.2		49.6			-			69.4
Sales		-			-			(5.6	)		-		(116.9	)		-			(122.5	)
Issuances		-			-			-			-		-			-			-
Settlements		-			(2.6	)		(1.0	)		-		(35.8	)		-			(39.4	)
Transfers into Level 3		-			-			14.7			-		-			-			14.7
Transfers out of Level 3		-			(1.0	)		-			-		-			-			(1.0	)
Balance as of March 31, 2019	$	4.6		$	433.7		$	151.4		$	0.2	$	1,179.0		$	0.5		$	1,769.4

			Debt Securities
									Mortgage and asset-backed
Three Months Ended March 31, 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 (loss)		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

(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, 2019 and 2018.

Net unrealized losses related to Level 3 assets as of March 31, 2019 and December 31, 2018 were not material.

The increase in Senior Notes and other debt included in Level 3 for the first three months of 2019 primarily reflects increased borrowings at W&W|AFCO Steel to support working capital needs.

See Note 1(c) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2018 Form 10-K for Alleghany’s accounting policy on fair value.