3. Fair Value of Financial Instruments

The carrying values and estimated fair values of Alleghany’s consolidated financial instruments as of December 31, 2015 and 2014 were as follows:


	December 31, 2015				December 31, 2014
	Carrying Value		Fair Value		Carrying Value		Fair Value
	($ in millions)
Assets
Investments (excluding equity method investments)⁽¹⁾		$ 17,007.6		$ 17,007.6		$ 18,153.8		$ 18,153.8

Liabilities
Senior Notes⁽²⁾		$ 1,390.3		$ 1,488.7		$ 1,767.1		$ 1,948.6

(1)

This table includes AFS investments (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 in Note 1(c).

(2)	See Note 8 for additional information on the Senior Notes.

Alleghany’s financial instruments measured at fair value and the level of the fair value hierarchy of inputs used as of December 31, 2015 and 2014 were as follows:


	Level 1		Level 2		Level 3		Total
	($ in millions)
As of December 31, 2015
Equity securities:
Common stock		$ 3,001.2		$ 4.7		$ -		$ 3,005.9
Preferred stock		-		-		-		-

Total equity securities		3,001.2		4.7		-		3,005.9

Debt securities:
U.S. Government obligations		-		1,074.7		-		1,074.7
Municipal bonds		-		4,339.6		-		4,339.6
Foreign government obligations		-		941.4		-		941.4
U.S. corporate bonds		-		2,126.9		49.8		2,176.7
Foreign corporate bonds		-		1,230.3		-		1,230.3
Mortgage and asset-backed securities:
RMBS⁽¹⁾		-		1,238.5		14.9		1,253.4
CMBS		-		1,003.2		20.2		1,023.4
Other asset-backed securities⁽²⁾		-		613.5		953.0		1,566.5

Total debt securities		-		12,568.1		1,037.9		13,606.0
Short-term investments		-		365.8		-		365.8
Other invested assets⁽³⁾		-		-		29.9		29.9

Total investments (excluding equity method investments)		$ 3,001.2		$ 12,938.6		$ 1,067.8		$ 17,007.6


Senior Notes		$ -		$ 1,488.7		$ -		$ 1,488.7

As of December 31, 2014
Equity securities:
Common stock		$ 2,805.3		$ 10.2		$ -		$ 2,815.5
Preferred stock		-		-		-		-

Total equity securities		2,805.3		10.2		-		2,815.5

Debt securities:
U.S. Government obligations		-		541.1		-		541.1
Municipal bonds		-		5,197.5		-		5,197.5
Foreign government obligations		-		900.4		-		900.4
U.S. corporate bonds		-		2,118.1		36.7		2,154.8
Foreign corporate bonds		-		1,497.7		6.0		1,503.7
Mortgage and asset-backed securities:
RMBS⁽¹⁾		-		1,637.7		18.2		1,655.9
CMBS		-		1,102.0		23.3		1,125.3
Other asset-backed securities⁽²⁾		-		586.8		933.1		1,519.9

Total debt securities		-		13,581.3		1,017.3		14,598.6
Short-term investments		-		715.6		-		715.6
Other invested assets⁽³⁾		-		-		24.1		24.1

Total investments (excluding equity method investments)		$ 2,805.3		$14,307.1		$1,041.4		$ 18,153.8


Senior Notes		$ -		$ 1,948.6		$ -		$ 1,948.6

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

(2)	Includes $946.7 million and $900.7 million of collateralized loan obligations as of December 31, 2015 and 2014, respectively.

(3)	Includes partnership and non-marketable equity investments accounted for on an AFS basis, and excludes investments accounted for using the equity method and commercial mortgage loans that are carried at unpaid principal balance.

In 2015, there were transfers of $22.9 million of securities out of Level 3 that were principally due to an increase in observable inputs related to the valuation of such assets. Of the $22.9 million of transfers, $15.9 million related to U.S. corporate bonds, $5.5 million related to foreign corporate bonds and $1.5 million related to other invested assets.

In 2015, there were transfers of $19.9 million of securities into Level 3 that were principally due to a decrease in observable inputs related to the valuation of such assets. Of the $19.9 million of transfers, $14.2 million related to U.S. corporate bonds, $5.0 million related to other invested assets and $0.7 million related to foreign corporate bonds. There were no other transfers between Levels 1, 2 or 3 in 2015.

In 2014, there were transfers of $253.8 million of invested assets out of Level 3. Of the $253.8 million, $232.9 million related to a conversion of an equity interest held by AIHL in the second quarter of 2014. As further described in Note 4(h), AIHL’s investment in Ares Management LLC (“Ares”) converted to limited partner interests in certain Ares subsidiaries during the second quarter of 2014, at which time the investment ceased to qualify as a financial instrument measured at fair value. No gain or loss was recognized upon the conversion. The remaining transfers of $20.9 million of invested assets out of Level 3 were principally due to an increase in observable inputs related to the valuation of such assets.

In 2014, there were transfers of $58.4 million of debt securities into Level 3 that were principally due to a decrease in observable inputs related to the valuation of such securities. Of the $58.4 million, $29.1 million related to other asset-backed securities (specifically, collateralized loan obligations), $23.2 million related to U.S. corporate bonds and $6.1 million related to foreign corporate bonds. There were no other transfers between Levels 1, 2 or 3 in 2014.

The following tables present reconciliations of the changes during 2015 and 2014 in Level 3 assets measured at fair value:


	Debt Securities
							Mortgage and asset-backed
	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, 2015		$ 36.7			$ 6.0			$ 18.2			$ 23.3			$ 933.1			$ 24.1			$ 1,041.4
Net realized/unrealized gains (losses)included in:
Net earnings⁽²⁾		(0.6	)		-			0.6			(0.4	)		2.7			1.0			3.3
Other comprehensive income		(1.3	)		0.8			(1.1	)		(1.0	)		(25.9	)		0.2			(28.3	)
Purchases		35.5			-			-			-			233.3			1.8			270.6
Sales		(1.9	)		(2.0	)		-			-			(182.3	)		(0.7	)		(186.9	)
Issuances		-			-			-			-			-			-			-
Settlements		(16.9	)		-			(2.8	)		(1.7	)		(7.9	)		-			(29.3	)
Transfers into Level 3		14.2			0.7			-			-			-			5.0			19.9
Transfers out of Level 3		(15.9	)		(5.5	)		-			-			-			(1.5	)		(22.9	)

Balance as of December 31, 2015		$ 49.8			$ -			$ 14.9			$ 20.2			$ 953.0			$ 29.9			$ 1,067.8


	Debt Securities
							Mortgage and asset-backed
	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, 2014		$ 27.5			$ 1.0			$ 78.8			$ 60.8			$ 258.4			$ 282.0			$ 708.5
Net realized/unrealized gains (losses)included in:
Net earnings⁽²⁾		(0.9	)		-			20.8			(0.4	)		0.4			0.3			20.2
Other comprehensive income		-			(0.1	)		(13.3	)		(1.2	)		(12.4	)		1.3			(25.7	)
Purchases		22.5			2.7			-			14.4			749.7			4.5			793.8
Sales		(12.9	)		(1.2	)		(58.2	)		(8.3	)		(79.3	)		(4.9	)		(164.8	)
Issuances		-			-			-			-			-			-			-
Settlements		(8.0	)		(1.5	)		(9.9	)		(42.0	)		(12.8	)		(21.0	)		(95.2	)
Transfers into Level 3		23.2			6.1			-			-			29.1			-			58.4
Transfers out of Level 3		(14.7	)		(1.0	)		-			-			-			(238.1	)		(253.8	)

Balance as of December 31, 2014		$ 36.7			$ 6.0			$ 18.2			$ 23.3			$ 933.1			$ 24.1			$ 1,041.4

(1)	Includes partnership and non-marketable equity investments accounted for on an AFS basis.

(2)	There were no OTTI losses recorded in net earnings related to Level 3 instruments still held as of December 31, 2015 and 2014.

Net unrealized losses related to Level 3 investments as of December 31, 2015 and 2014 were not material.

See Note 1(c) for Alleghany’s accounting policy on fair value.