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Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2020

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 September 30, 2020 and December 31, 2019:

	September 30, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
	($ in millions)
Assets
Investments (excluding equity method investments and loans)⁽¹⁾	$	18,379.7	$	18,379.7	$	17,632.3	$	17,632.3

Liabilities
Senior notes and other debt⁽²⁾	$	2,041.6	$	2,398.3	$	1,751.1	$	1,962.7

(1)

This table includes debt and equity securities, as well as partnership and non-marketable equity investments accounted for 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 accounted for 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 11 of this Form 10-Q 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 September 30, 2020 and December 31, 2019:

	Level 1		Level 2		Level 3		Total
	($ in millions)
As of September 30, 2020
Equity securities:
Common stock	$	2,154.8	$	3.5	$	—	$	2,158.3
Preferred stock		—		3.1		2.0		5.1
Total equity securities		2,154.8		6.6		2.0		2,163.4
Debt securities:
U.S. government obligations		—		1,238.4		—		1,238.4
Municipal bonds		—		2,561.1		—		2,561.1
Foreign government obligations		—		800.1		—		800.1
U.S. corporate bonds		—		3,328.3		629.7		3,958.0
Foreign corporate bonds		—		1,130.5		175.0		1,305.5
Mortgage and asset-backed securities:
Residential mortgage-backed securities (“RMBS”)⁽¹⁾		—		2,509.4		2.5		2,511.9
Commercial mortgage-backed securities (“CMBS”)		—		877.3		5.9		883.2
Other asset-backed securities⁽²⁾		—		1,544.4		777.3		2,321.7
Total debt securities		—		13,989.5		1,590.4		15,579.9
Short-term investments		—		636.1		—		636.1
Other invested assets⁽³⁾		—		—		0.3		0.3
Total investments (excluding equity method investments and loans)	$	2,154.8	$	14,632.2	$	1,592.7	$	18,379.7
Senior notes and other debt	$	—	$	1,935.8	$	462.5	$	2,398.3

	Level 1		Level 2		Level 3		Total
	($ in millions)
As of December 31, 2019
Equity securities:
Common stock	$	2,498.1	$	3.3	$	—	$	2,501.4
Preferred stock		—		2.1		2.0		4.1
Total equity securities		2,498.1		5.4		2.0		2,505.5
Debt securities:
U.S. government obligations		—		1,215.0		—		1,215.0
Municipal bonds		—		2,307.9		—		2,307.9
Foreign government obligations		—		690.7		—		690.7
U.S. corporate bonds		—		2,754.0		605.0		3,359.0
Foreign corporate bonds		—		1,208.7		168.7		1,377.4
Mortgage and asset-backed securities:
RMBS⁽¹⁾		—		1,838.5		1.9		1,840.4
CMBS		—		865.9		5.8		871.7
Other asset-backed securities⁽²⁾		—		1,692.9		856.7		2,549.6
Total debt securities		—		12,573.6		1,638.1		14,211.7
Short-term investments		—		914.8		—		914.8
Other invested assets⁽³⁾		—		—		0.3		0.3
Total investments (excluding equity method investments and loans)	$	2,498.1	$	13,493.8	$	1,640.4	$	17,632.3
Senior notes and other debt	$	—	$	1,595.6	$	367.1	$	1,962.7

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

(2)	Includes $760.5 million and $834.2 million of collateralized loan obligations as of September 30, 2020 and December 31, 2019, 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 September 30, 2020, Alleghany did not transfer out of Level 3 any financial instruments. In the nine months ended September 30, 2020, Alleghany transferred out of Level 3 $17.8 million of financial instruments, principally due to an increase in observable inputs related to the valuation of such assets. Specifically, during the first nine months of 2020, 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. Of the $17.8 million of transfers, $14.5 million related to other asset-backed securities, with the remainder related to foreign corporate bonds. There were no transfers out of Level 3 in the three months ended September 30, 2020.

In the three and nine months ended September 30, 2019, Alleghany transferred into Level 3 $5.8 million and $21.8 million, respectively, of financial instruments, principally due to a decrease in observable inputs related to the valuation of such assets. Specifically, during the first nine 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. Of the $21.8 million of transfers, $14.7 million related to foreign corporate bonds and the remainder related to other types of debt securities.

In the three and nine months ended September 30, 2019, Alleghany transferred out of Level 3 $1.5 million and $16.4 million, respectively, of financial instruments, principally due to an increase in observable inputs related to the valuation of such assets. Specifically, during the first nine 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. Of the $16.4 million of transfers, $12.1 million related to other asset-backed securities, with the remainder related to other types of debt securities.

The following tables present reconciliations of the changes in Level 3 assets during the nine months ended September 30, 2020 and 2019 measured at fair value:

			Debt Securities
									Mortgage and asset-backed
Nine Months Ended September 30, 2020	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, 2020	$	2.0	$	605.0		$	168.7		$	1.9		$	5.8	$	856.7		$	0.3	$	1,640.4
Net realized/unrealized gains (losses) included in:
Net earnings (losses)⁽²⁾		—		(3.8	)		0.1			—			—		(9.5	)		—		(13.2	)
Other comprehensive income (loss)		—		19.2			5.1			(0.1	)		0.1		(8.2	)		—		16.1
Purchases		—		26.0			15.6			0.9			—		63.3			—		105.8
Sales		—		(2.0	)		(0.8	)		—			—		(54.7	)		—		(57.5	)
Issuances		—		—			—			—			—		—			—		—
Settlements		—		(14.7	)		(10.4	)		(0.2	)		—		(55.8	)		—		(81.1	)
Transfers into Level 3		—		—			—			—			—		—			—		—
Transfers out of Level 3		—		—			(3.3	)		—			—		(14.5	)		—		(17.8	)
Balance as of September 30, 2020	$	2.0	$	629.7		$	175.0		$	2.5		$	5.9	$	777.3		$	0.3	$	1,592.7

				Debt Securities
										Mortgage and asset-backed
Nine Months Ended September 30, 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 (losses)⁽²⁾		(1.6	)		(9.9	)		(0.2	)		—		(1.1	)		(0.1	)		(12.9	)
Other comprehensive income (loss)		—			40.0			3.5			—		16.7			(0.4	)		59.8
Purchases		0.3			123.2			27.3			1.7		68.3			0.1			220.9
Sales		—			—			(5.6	)		—		(378.8	)		—			(384.4	)
Issuances		—			—			—			—		—			—			—
Settlements		—			(6.3	)		(8.9	)		—		(99.8	)		—			(115.0	)
Transfers into Level 3		—			1.3			14.7			—		5.8			—			21.8
Transfers out of Level 3		—			(2.7	)		(1.6	)		—		(12.1	)		—			(16.4	)
Balance as of September 30, 2019	$	4.1		$	571.3		$	156.1		$	1.7	$	865.9		$	0.3		$	1,599.4

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

(2)	There were no credit losses recorded in net earnings related to Level 3 assets still held as of September 30, 2020 and 2019.

With respect to changes in Level 3 liabilities during the first nine months of 2020, the increase in senior notes and other debt reflects the impact of Wilbert’s April 1, 2020 inclusion in Alleghany’s consolidated results, as discussed above and, to a lesser extent, increased borrowings at other Alleghany Capital subsidiaries due to greater working capital needs.

Although Alleghany is responsible for the determination of the fair value of Alleghany’s financial assets and the supporting methodologies and assumptions, it employs third-party valuation service providers to gather, analyze and interpret market information and derive fair values based upon relevant methodologies and assumptions for individual instruments. When those providers are unable to obtain sufficient market observable information upon which to estimate the fair value for a particular security, fair value is determined either by requesting a quote, which is generally non-binding, from brokers who are knowledgeable about these securities or by employing widely accepted valuation models. As of September 30, 2020 and December 31, 2019, the fair value for the vast majority of debt securities included in Level 3 was provided by such third-party valuation service providers, and as such, valuation details on these securities are generally not available to Alleghany.

Alleghany employs specific control processes to determine the reasonableness of the fair values of its financial assets and liabilities. Alleghany’s processes are designed to ensure that the values received or internally estimated are accurately recorded and that the data inputs and the valuation techniques used are appropriate, consistently applied and that the assumptions are reasonable and consistent with the objective of determining fair value. Alleghany assesses the reasonableness of individual security values received from valuation service providers through various analytical techniques. In addition, Alleghany validates the reasonableness of fair values by comparing information obtained from Alleghany’s valuation service providers to other third-party valuation sources for selected securities. Alleghany also validates prices obtained from brokers for selected securities through reviews by those who have relevant expertise and who are independent of those charged with executing investing transactions. See Note 1(c) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2019 Form 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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