| Investments | 3. Investments
(a) Unrealized Gains and Losses
The following tables present the amortized cost or cost and the
fair value of AFS securities as of September 30, 2017 and
December 31, 2016:
Amortized Gross Gross Fair Value
($ in millions)
As of September 30, 2017
Equity securities:
Common stock $ 3,170.0 $ 662.8 $ (16.2) $ 3,816.6
Preferred stock 4.8 0.2
- 5.0
Total equity securities 3,174.8 663.0 (16.2) 3,821.6
Debt securities:
U.S. Government obligations 1,033.1 1.6 (14.0) 1,020.7
Municipal bonds 4,039.6 106.9 (14.8) 4,131.7
Foreign government obligations 1,134.6 14.0 (7.7) 1,140.9
U.S. corporate bonds 2,425.6 63.6 (8.2) 2,481.0
Foreign corporate bonds 1,270.5 27.1 (3.4) 1,294.2
Mortgage and asset-backed securities:
RMBS 953.9 7.7 (7.4) 954.2
CMBS 509.2 10.0 (2.3) 516.9
Other asset-backed securities (1) 1,661.1 13.4 (1.7) 1,672.8
Total debt securities 13,027.6 244.3 (59.5) 13,212.4
Short-term investments 547.8
-
- 547.8
Total investments $ 16,750.2 $ 907.3 $ (75.7) $ 17,581.8
Amortized Gross Gross Fair Value
($ in millions)
As of December 31, 2016
Equity securities:
Common stock $ 2,816.6 $ 332.1 $ (39.2) $ 3,109.5
Preferred stock
-
-
-
-
Total equity securities 2,816.6 332.1 (39.2) 3,109.5
Debt securities:
U.S. Government obligations 1,265.7 2.2 (24.6) 1,243.3
Municipal bonds 4,161.0 66.9 (42.1) 4,185.8
Foreign government obligations 1,030.9 20.2 (4.0) 1,047.1
U.S. corporate bonds 2,168.9 43.5 (19.3) 2,193.1
Foreign corporate bonds 1,068.3 27.3 (6.8) 1,088.8
Mortgage and asset-backed securities:
RMBS 1,005.9 7.0 (12.5) 1,000.4
CMBS 728.8 9.6 (3.6) 734.8
Other asset-backed securities (1) 1,497.6 4.0 (11.7) 1,489.9
Total debt securities 12,927.1 180.7 (124.6) 12,983.2
Short-term investments 778.4
-
- 778.4
Total investments $ 16,522.1 $ 512.8 $ (163.8) $ 16,871.1
(1) Includes $1,146.2 million and
$903.8 million of collateralized loan obligations as of
September 30, 2017 and December 31, 2016,
respectively.
(b) Contractual Maturity
The amortized cost or cost and estimated fair value of debt
securities by contractual maturity as of September 30, 2017
are presented below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment
penalties.
Amortized Fair Value
($ in millions)
As of September 30, 2017
Short-term investments due in one year or less $ 547.8 $ 547.8
Mortgage and asset-backed securities (1) 3,124.2 3,143.9
Debt securities with maturity dates:
One year or less 385.2 386.1
Over one through five years 3,089.6 3,124.6
Over five through ten years 3,359.4 3,414.9
Over ten years 3,069.2 3,142.9
Total debt securities 13,027.6 13,212.4
Equity securities 3,174.8 3,821.6
Total $ 16,750.2 $ 17,581.8
(1) Mortgage and asset-backed securities
by their nature do not generally have single maturity dates.
(c) Net Investment Income
The following table presents net investment income for the three
and nine months ended September 30, 2017 and 2016:
Three Months Ended September 30,
Nine Months Ended September 30,
2017 2016 2017 2016
($ in
millions)
Interest income $ 104.6 $ 99.0 $ 306.3 $ 299.0
Dividend income 6.7 12.2 27.9 35.5
Investment expenses (5.8) (6.2) (20.1) (19.8)
Equity in results of Pillar Investments (1) (9.4) 5.9 (2.9) 12.9
Equity in results of Ares (1) 6.9 4.6 (0.4) 5.1
Other investment results 1.7 5.1 11.1 (0.4)
Total $ 104.7 $ 120.6 $ 321.9 $ 332.3
(1) See Note 3(g) of this Form
10-Q
As of September 30, 2017, non-income
(d) Realized Gains and Losses
The proceeds from sales of AFS securities were $1.6 billion
and $0.8 billion for the three months ended September 30,
2017 and 2016, respectively, and $5.8 billion and
$5.2 billion for the nine months ended September 30, 2017
and 2016, respectively.
Realized capital gains and losses for the three and nine months
ended September 30, 2017 primarily reflect sales of equity
securities and certain exchange-traded funds. Realized capital
gains in the first nine months of 2017 include the sale of certain
equity securities resulting from a partial restructuring of the
equity portfolio. Realized capital gains and losses for the three
and nine months ended September 30, 2016 primarily reflect
sales of equity and debt securities. In addition, Alleghany
Capital recognized a gain of $13.2 million on April 15,
2016 in connection with the acquisition of an additional
50 percent equity ownership in Jazwares, when its pre-existing
The following table presents amounts of gross realized capital
gains and gross realized capital losses for the three and nine
months ended September 30, 2017 and 2016:
Three Months Ended
Nine Months Ended September 30,
2017 2016 2017 2016
($ in
millions)
Gross realized capital gains $ 47.0 $ 32.7 $ 189.7 $ 217.7
Gross realized capital losses
(14.1) (5.5) (87.9)
(100.6)
Net realized capital gains $ 32.9 $
27.2 $
101.8 $
117.1
Gross realized loss amounts exclude OTTI losses, as discussed
below.
(e) OTTI Losses
Alleghany holds its equity and debt securities as AFS and, as such,
these securities are recorded at fair value. Alleghany continually
monitors the difference between cost and the estimated fair value
of its equity and debt investments, which involves uncertainty as
to whether declines in value are temporary in nature. The analysis
of a security’s decline in value is performed in its
functional currency. If the decline is deemed temporary, Alleghany
records the decline as an unrealized loss in stockholders’
equity. If the decline is deemed to be other than temporary,
Alleghany writes its cost-basis or amortized cost-basis down to the
fair value of the security and records an OTTI loss on its
statement of earnings. In addition, any portion of such decline
related to a debt security that is believed to arise from factors
other than credit is recorded as a component of other comprehensive
income rather than charged against earnings.
Management’s assessment of equity securities initially
involves an evaluation of all securities that are in an unrealized
loss position, regardless of the duration or severity of the loss,
as of the applicable balance sheet date. Such initial review
consists primarily of assessing whether: (i) there has been a
negative credit or news event with respect to the issuer that could
indicate the existence of an OTTI; and (ii) Alleghany has the
ability and intent to hold an equity security for a period of time
sufficient to allow for an anticipated recovery (generally
considered to be 12 months from the balance sheet date).
To the extent that an equity security in an unrealized loss
position is not impaired based on the initial review described
above, Alleghany then further evaluates such equity security and
deems it to be other than temporarily impaired if it has been in an
unrealized loss position for 12 months or more or if its unrealized
loss position is greater than 50 percent of its cost, absent
compelling evidence to the contrary.
Alleghany then evaluates those equity securities where the
unrealized loss is at least 20 percent of cost as of the
balance sheet date or that have been in an unrealized loss position
continuously for six months or more preceding the balance sheet
date. This evaluation takes into account quantitative and
qualitative factors in determining whether such securities are
other than temporarily impaired including: (i) market
valuation metrics associated with the equity security (such as
dividend yield and price-to-earnings
Debt securities in an unrealized loss position are evaluated for
OTTI if they meet any of the following criteria: (i) they are
trading at a discount of at least 20 percent to amortized cost
for an extended period of time (nine consecutive months or more);
(ii) there has been a negative credit or news event with
respect to the issuer that could indicate the existence of an OTTI;
or (iii) Alleghany intends to sell, or it is more likely than
not that Alleghany will sell, the debt security before recovery of
its amortized cost basis.
If Alleghany intends to sell, or it is more likely than not that
Alleghany will sell, a debt security before recovery of its
amortized cost basis, the total amount of the unrealized loss
position is recognized as an OTTI loss in earnings. To the extent
that a debt security that is in an unrealized loss position is not
impaired based on the preceding, Alleghany will consider a debt
security to be impaired when it believes it to be probable that
Alleghany will not be able to collect the entire amortized cost
basis. For debt securities in an unrealized loss position as of the
end of each quarter, Alleghany develops a best estimate of the
present value of expected cash flows. If the results of the cash
flow analysis indicate that Alleghany will not recover the full
amount of its amortized cost basis in the debt security, Alleghany
records an OTTI loss in earnings equal to the difference between
the present value of expected cash flows and the amortized cost
basis of the debt security. If applicable, the difference between
the total unrealized loss position on the debt security and the
OTTI loss recognized in earnings is the non-credit
In developing the cash flow analyses for debt securities, Alleghany
considers various factors for the different categories of debt
securities. For municipal bonds, Alleghany takes into account the
taxing power of the issuer, source of revenue, credit risk and
enhancements and pre-refunding.
OTTI losses in the first nine months of 2017 reflect
$13.1 million of unrealized losses that were deemed to be
other than temporary and, as such, were required to be charged
against earnings. Of the $13.1 million of OTTI losses,
$11.8 million related to equity securities, primarily in the
retail sector, and $1.3 million related to debt securities.
The determination that unrealized losses on equity and debt
securities were other than temporary was primarily due to the
duration of the decline in the fair value of equity and debt
securities relative to their costs. Of the $13.1 million of
OTTI losses, $6.1 million was incurred in the third quarter of
2017.
OTTI losses in the first nine months of 2016 reflect
$38.2 million of unrealized losses that were deemed to be
other than temporary and, as such, were required to be charged
against earnings. Of the $38.2 million of OTTI losses,
$16.6 million related to equity securities, primarily in the
retail, financial services, technology and chemical sectors, and
$21.6 million related to debt securities, primarily in the
energy sector. The determination that unrealized losses on equity
and debt securities were other than temporary was primarily due to
the severity and duration of the decline in the fair value of
equity and debt securities relative to their costs. Of the
$38.2 million of OTTI losses, $11.7 million was incurred
in the third quarter of 2016.
Upon the ultimate disposition of the securities for which OTTI
losses have been recorded, a portion of the loss may be recoverable
depending on market conditions at the time of disposition. After
adjusting the cost basis of securities for the recognition of OTTI
losses, the remaining gross unrealized investment losses for debt
and equity securities as of September 30, 2017 were deemed to
be temporary, based on, among other factors: (i) the duration
of time and the relative magnitude to which the fair value of these
investments had been below cost were not indicative of an OTTI
loss; (ii) the absence of compelling evidence that would cause
Alleghany to call into question the financial condition or
near-term business prospects of the issuer of the security; and
(iii) Alleghany’s ability and intent to hold the
security for a period of time sufficient to allow for any
anticipated recovery.
Alleghany may ultimately record a realized loss after having
originally concluded that the decline in value was temporary. Risks
and uncertainties are inherent in the methodology.
Alleghany’s methodology for assessing other than temporary
declines in value contains inherent risks and uncertainties which
could include, but are not limited to, incorrect assumptions about
financial condition, liquidity or future prospects, inadequacy of
any underlying collateral and unfavorable changes in economic
conditions or social trends, interest rates or credit ratings.
(f) Aging of Gross Unrealized Losses
The following tables present gross unrealized losses and related
fair values for equity securities and debt securities, grouped by
duration of time in a continuous unrealized loss position, as of
September 30, 2017 and December 31, 2016:
Less Than 12 Months 12 Months or More Total
Fair Value Gross Fair Value Gross Fair Value Gross
($ in
millions)
As of September 30, 2017
Equity securities:
Common stock $ 998.5 $ 16.2 $
- $
- $ 998.5 $ 16.2
Preferred stock
-
-
-
-
-
-
Total equity securities 998.5 16.2
-
- 998.5 16.2
Debt securities:
U.S. Government obligations 626.0 5.9 242.9 8.1 868.9 14.0
Municipal bonds 404.5 2.5 358.4 12.3 762.9 14.8
Foreign government obligations 408.2 4.9 76.0 2.8 484.2 7.7
U.S. corporate bonds 399.3 5.0 206.3 3.2 605.6 8.2
Foreign corporate bonds 236.6 1.6 117.3 1.8 353.9 3.4
Mortgage and asset-backed securities:
RMBS 429.7 4.7 132.8 2.7 562.5 7.4
CMBS 24.8 0.2 41.8 2.1 66.6 2.3
Other asset-backed securities 232.5 0.7 90.8 1.0 323.3 1.7
Total debt securities 2,761.6 25.5 1,266.3 34.0 4,027.9 59.5
Total temporarily impaired securities $
3,760.1 $
41.7 $
1,266.3 $
34.0 $
5,026.4 $
75.7
Less Than 12 Months 12 Months or More Total
Fair Value Gross Fair Value Gross Fair Value Gross
($ in
millions)
As of December 31, 2016
Equity securities:
Common stock $ 619.4 $ 39.2 $
- $
- $ 619.4 $ 39.2
Preferred stock
-
-
-
-
-
-
Total equity securities 619.4 39.2
-
- 619.4 39.2
Debt securities:
U.S. Government obligations 975.0 24.6
-
- 975.0 24.6
Municipal bonds 1,464.5 39.7 41.6 2.4 1,506.1 42.1
Foreign government obligations 238.3 4.0
-
- 238.3 4.0
U.S. corporate bonds 727.9 18.1 52.6 1.2 780.5 19.3
Foreign corporate bonds 331.0 6.6 4.1 0.2 335.1 6.8
Mortgage and asset-backed securities:
RMBS 652.0 11.4 43.4 1.1 695.4 12.5
CMBS 148.9 1.4 117.7 2.2 266.6 3.6
Other asset-backed securities 334.7 1.6 550.4 10.1 885.1 11.7
Total debt securities 4,872.3 107.4 809.8 17.2 5,682.1 124.6
Total temporarily impaired securities $ 5,491.7 $ 146.6 $ 809.8 $ 17.2 $ 6,301.5 $ 163.8
As of September 30, 2017, Alleghany held a total of 1,111 debt
and equity securities that were in an unrealized loss position, of
which 363, all debt securities, were in an unrealized loss position
continuously for 12 months or more. The unrealized losses
associated with these debt securities consisted primarily of losses
related primarily to municipal bonds and U.S. Government
obligations.
As of September 30, 2017, the vast majority of
Alleghany’s debt securities were rated investment grade, with
7.3 percent of debt securities having issuer credit ratings
that were below investment grade or not rated, compared with
5.1 percent as of December 31, 2016.
(g) Investments in Certain Other Invested Assets
In December 2012, TransRe obtained an ownership interest in Pillar
Capital Holdings Limited (“Pillar Holdings”), a
Bermuda-based insurance asset manager focused on collateralized
reinsurance and catastrophe insurance-linked securities.
Additionally, TransRe invested $175.0 million and AIHL
invested $25.0 million in limited partnership funds managed by
Pillar Holdings (the “Funds”). The objective of the
Funds is to create portfolios with attractive risk-reward
characteristics and low correlation with other asset classes, using
the extensive reinsurance and capital market experience of the
principals of Pillar Holdings. Alleghany has concluded that both
Pillar Holdings and the Funds (collectively, the “Pillar
Investments”) represent variable interest entities and that
Alleghany is not the primary beneficiary, as it does not have the
ability to direct the activities that most significantly impact
each entity’s economic performance. Therefore, the Pillar
Investments are not consolidated and are accounted for under the
equity method of accounting. Alleghany’s potential maximum
loss in the Pillar Investments is limited to its cumulative net
investment. As of September 30, 2017, Alleghany’s
carrying value in the Pillar Investments, as determined under the
equity method of accounting, was $216.7 million, which is net
of returns of capital received from the Pillar Investments.
In July 2013, AIHL invested $250.0 million in Ares Management
LLC (“Ares”), an asset manager, in exchange for a
6.25 percent equity stake in Ares, with an agreement to engage
Ares to manage up to $1.0 billion in certain investment
strategies. In May 2014, Ares completed an initial public offering
of its common units. Upon completion of the initial public
offering, Alleghany’s equity investment in Ares converted to
limited partner interests in certain Ares subsidiaries that are
convertible into an aggregate 5.9 percent interest in Ares
common units. These interests may be converted at any time at
Alleghany’s discretion. Until Alleghany determines to
convert its limited partner interests into Ares common units,
Alleghany classifies its investment in Ares as a component of other
invested assets and accounts for its investment using the equity
method of accounting. As of September 30, 2017, AIHL’s
carrying value in Ares was $213.9 million, which is net of
returns of capital received from Ares.
(h) Investments in Commercial Mortgage Loans
As of September 30, 2017, the carrying value of
Alleghany’s commercial mortgage loan portfolio was
$649.7 million, representing the unpaid principal balance on
the loans. As of September 30, 2017, there was no allowance
for loan losses. The commercial mortgage loan portfolio consists
primarily of first mortgages on commercial properties in major
metropolitan areas in the U.S. The loans earn interest at
fixed- and floating-rates, mature in two to ten years from loan
origination and the principal amounts of the loans were no more
than approximately two-thirds |
