Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2022

Fair Value Disclosures [Abstract]

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 June 30, 2022 and December 31, 2021:

	June 30, 2022				December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
	($ in millions)
Assets
Investments (excluding equity method investments and loans)(1)	$	19,145.1	$	19,145.1	$	20,887.7	$	20,887.7
Liabilities
Senior notes and other debt(2)	$	2,339.6	$	2,267.8	$	2,847.2	$	3,157.9

(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.

(2)See Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2021 Form 10-K for additional information on the senior notes and other debt.

The following tables present Alleghany’s financial instruments at fair value and the level of the fair value hierarchy of inputs used as of June 30, 2022 and December 31, 2021:

	Level 1		Level 2		Level 3		Total
	($ in millions)
As of June 30, 2022
Equity securities:
Common stock	$	2,863.0	$	2.4	$	—	$	2,865.4
Preferred stock		—		2.7		1.3		4.0
Total equity securities		2,863.0		5.1		1.3		2,869.4
Debt securities:
U.S. Government obligations		—		1,538.5		—		1,538.5
Municipal bonds		—		2,626.8		—		2,626.8
Foreign government obligations		—		744.2		—		744.2
U.S. corporate bonds		—		2,538.3		618.9		3,157.2
Foreign corporate bonds		—		900.6		184.5		1,085.1
Mortgage and asset-backed securities:
Residential mortgage-backed securities (“RMBS”)(1)		—		1,667.2		1.5		1,668.7
Commercial mortgage-backed securities (“CMBS”)		—		925.7		—		925.7
Other asset-backed securities(2)		—		1,656.0		1,249.1		2,905.1
Total debt securities		—		12,597.3		2,054.0		14,651.3
Short-term investments		—		1,624.4		—		1,624.4
Total investments (excluding equity method investments and loans)	$	2,863.0	$	14,226.8	$	2,055.3	$	19,145.1
Senior notes and other debt	$	—	$	1,595.2	$	672.6	$	2,267.8

	Level 1		Level 2		Level 3		Total
	($ in millions)
As of December 31, 2021
Equity securities:
Common stock	$	3,677.1	$	2.1	$	—	$	3,679.2
Preferred stock		—		3.3		1.3		4.6
Total equity securities		3,677.1		5.4		1.3		3,683.8
Debt securities:
U.S. Government obligations		—		2,050.7		—		2,050.7
Municipal bonds		—		2,535.9		—		2,535.9
Foreign government obligations		—		854.9		—		854.9
U.S. corporate bonds		—		2,807.0		670.3		3,477.3
Foreign corporate bonds		—		1,049.7		177.2		1,226.9
Mortgage and asset-backed securities:
RMBS(1)		—		2,007.1		1.9		2,009.0
CMBS		—		905.9		—		905.9
Other asset-backed securities(2)		—		1,652.7		1,348.3		3,001.0
Total debt securities		—		13,863.9		2,197.7		16,061.6
Short-term investments		—		1,142.3		—		1,142.3
Total investments (excluding equity method investments and loans)	$	3,677.1	$	15,011.6	$	2,199.0	$	20,887.7
Senior notes and other debt	$	—	$	2,377.4	$	780.5	$	3,157.9

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

(2)Includes $1,229.6 million and $1,320.4 million of collateralized loan obligations as of June 30, 2022 and December 31, 2021, respectively.

In the three and six months ended June 30, 2022, Alleghany did not transfer any financial instruments into Level 3.

In the three and six months ended June 30, 2022, Alleghany transferred out of Level 3 $35.4 million and $53.7 million, respectively, of financial instruments, principally due to an increase in observable inputs related to the valuation of such assets. Specifically, during the three and six months ended June 30, 2022, 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 $53.7 million of transfers, $45.1 related to other asset-backed securities, $4.3 million related to CMBS, $3.1 million related to foreign corporate bonds, and $1.2 million related to U.S. corporate bonds.

In the six months ended June 30, 2021, Alleghany transferred into Level 3 $5.8 million of financial instruments, principally due to a decrease in observable inputs related to the valuation of such assets. Specifically, during the first six months of 2021, 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. All of the $5.8 million of transfers related to other asset-backed securities. There were no transfers into Level 3 in the three months ended June 30, 2021.

In the three and six months ended June 30, 2021, Alleghany transferred out of Level 3 $24.5 million and $35.4 million respectively, of financial instruments, principally due to an increase in observable inputs related to the valuation of such assets. Specifically, during the first six months of 2021, 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 $35.4 million of transfers, $29.0 million related other asset-backed securities and $5.8 million related to CMBS.

The following tables present reconciliations of the changes during the six months ended June 30, 2022 and 2021 in Level 3 assets measured at fair value:

			Debt Securities
									Mortgage and asset-backed
Six Months Ended June 30, 2022	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, 2022	$	1.3	$	670.3		$	177.2		$	1.9		$	—		$	1,348.3		$	—	$	2,199.0
Net realized/unrealized gains (losses) included in:
Net earnings(2)		—		(0.2	)		(0.2	)		—			—			(0.1	)		—		(0.5	)
Other comprehensive (loss)		—		(60.8	)		(17.2	)		(0.2	)		—			(48.8	)		—		(127.0	)
Purchases		—		59.7			30.3			—			4.3			67.5			—		161.8
Sales		—		(0.6	)		(0.3	)		—			—			(42.4	)		—		(43.3	)
Issuances		—		—			—			—			—			—			—		—
Settlements		—		(48.3	)		(2.2	)		(0.2	)		—			(30.3	)		—		(81.0	)
Transfers into Level 3		—		—			—			—			—			—			—		—
Transfers out of Level 3		—		(1.2	)		(3.1	)		—			(4.3	)		(45.1	)		—		(53.7	)
Balance as of June 30, 2022	$	1.3	$	618.9		$	184.5		$	1.5		$	—		$	1,249.1		$	—	$	2,055.3

			Debt Securities
									Mortgage and asset-backed
Six Months Ended June 30, 2021	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, 2021	$	1.3	$	631.6		$	189.5		$	2.5		$	5.8		$	902.7		$	0.3		$	1,733.7
Net realized/unrealized gains (losses) included in:
Net earnings(2)		—		0.2			(0.1	)		—			—			0.3			0.1			0.5
Other comprehensive income (loss)		—		(11.4	)		(3.0	)		—			—			9.4			—			(5.0	)
Purchases		—		46.4			2.0			—			—			693.5			—			741.9
Sales		—		—			—			—			—			(0.1	)		(0.4	)		(0.5	)
Issuances		—		—			—			—			—			—			—			—
Settlements		—		(44.6	)		(2.4	)		(0.3	)		—			(188.1	)		—			(235.4	)
Transfers into Level 3		—		—			—			—			—			5.8			—			5.8
Transfers out of Level 3		—		(0.6	)		—			—			(5.8	)		(29.0	)		—			(35.4	)
Balance as of June 30, 2021	$	1.3	$	621.6		$	186.0		$	2.2		$	—		$	1,394.5		$	—		$	2,205.6

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

(2)There were minimal or no credit losses recorded in net earnings related to Level 3 instruments still held as of June 30, 2022 and 2021.

With respect to changes in Level 3 liabilities during the six months ended June 30, 2022, the decrease in senior notes and other debt reflects decreased borrowings at Alleghany Capital subsidiaries due to a reduction in 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 June 30, 2022 and December 31, 2021, 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 2021 Form 10-K for Alleghany’s accounting policy on fair value.