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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


☒		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2022


☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from to

Commission File Number 1-9371

ALLEGHANY CORPORATION

(Exact Name of Registrant as Specified in its Charter)


Delaware		51-0283071
State or Other Jurisdiction of		I.R.S. Employer Identification No.
Incorporation or Organization

1411 Broadway, 34th Floor, NY, NY		10018
Address of Principal Executive Offices		Zip Code

212-752-1356

Registrant’s Telephone Number, Including Area Code

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $1.00 par value	Y	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒		Accelerated filer ☐

Non-accelerated filer ☐		Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☐ No ☐

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

13,454,888 Shares, par value $1.00 per share, as of April 28, 2022

ALLEGHANY CORPORATION

TABLE OF CONTENTS


		Page
PART I

ITEM 1.	Financial Statements	1
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	57
ITEM 4.	Controls and Procedures	59
PART II

ITEM 1.	Legal Proceedings	60
ITEM 1A.	Risk Factors	60
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
ITEM 6.	Exhibits	62
SIGNATURES		63

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets


	March 31,			December 31,
	2022			2021
	(unaudited)
	($ in thousands, except share amounts)
Assets
Investments:
Securities at fair value:
Equity securities (cost: 2022 – $2,400,563; 2021 – $2,552,722)	$	3,413,525		$	3,683,820
Debt securities (amortized cost: 2022 – $15,993,207; 2021 – $15,727,143; allowance for credit losses: 2022 – $1,084; 2021 – $502)		15,558,624			16,061,560
Short-term investments		1,305,804			1,142,258
		20,277,953			20,887,638
Commercial mortgage loans		462,556			475,860
Other invested assets		561,195			557,800
Total investments		21,301,704			21,921,298
Cash		993,056			927,966
Accrued investment income		93,895			87,610
Premium balances receivable		1,528,474			1,458,679
Reinsurance recoverables		2,164,653			2,195,975
Ceded unearned premiums		483,088			463,412
Deferred acquisition costs		636,654			586,753
Property and equipment at cost, net of accumulated depreciation and amortization		303,591			304,452
Goodwill		754,648			753,607
Intangible assets, net of amortization		909,420			924,406
Net deferred tax assets		104,966			—
Funds held under reinsurance agreements		506,005			634,182
Other assets		2,114,273			2,010,335
Total assets	$	31,894,427		$	32,268,675

Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
Loss and loss adjustment expenses	$	14,316,367		$	14,357,635
Unearned premiums		3,386,395			3,179,513
Senior notes and other debt		2,822,777			2,847,199
Reinsurance payable		360,919			322,902
Current taxes payable		63,912			34,297
Net deferred tax liabilities		—			56,958
Other liabilities		1,982,891			1,965,943
Total liabilities		22,933,261			22,764,447
Redeemable noncontrolling interests		365,793			317,346
Common stock (shares authorized: 2022 and 2021 – 22,000,000; shares issued: 2022 and 2021 – 17,459,961)		17,460			17,460
Contributed capital		3,593,370			3,608,905
Accumulated other comprehensive (loss) income		(464,460	)		141,822
Treasury stock, at cost (2022 – 4,005,073 shares; 2021 – 3,861,426 shares)		(2,029,904	)		(1,934,531	)
Retained earnings		7,478,907			7,353,226
Total stockholders’ equity attributable to Alleghany stockholders		8,595,373			9,186,882
Total liabilities, redeemable noncontrolling interests and stockholders’ equity	$	31,894,427		$	32,268,675

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Earnings and Comprehensive Income

(unaudited)


	Three Months Ended March 31,
	2022			2021
	($ in thousands, except per share amounts)
Revenues
Net premiums earned	$	1,605,458		$	1,604,763
Net investment income		113,476			153,484
Change in the fair value of equity securities		(138,777	)		112,728
Net realized capital gains		(10,003	)		12,931
Change in allowance for credit losses on available for sale securities		(582	)		1,972
Product and service revenues		1,149,162			767,835
Total revenues		2,718,734			2,653,713

Costs and Expenses
Net loss and loss adjustment expenses		941,787			1,112,070
Commissions, brokerage and other underwriting expenses		477,165			476,036
Other operating expenses		1,028,892			723,889
Corporate administration		10,723			9,558
Amortization of intangible assets		14,082			11,478
Interest expense		32,110			23,752
Total costs and expenses		2,504,759			2,356,783

Earnings before income taxes		213,975			296,930
Income taxes		45,082			58,867
Net earnings		168,893			238,063
Net earnings attributable to noncontrolling interest		43,212			8,022
Net earnings attributable to Alleghany stockholders	$	125,681		$	230,041

Net earnings	$	168,893		$	238,063
Other comprehensive income (loss):
Change in unrealized gains, net of deferred taxes of ($163,282) and ($57,932) in 2022 and 2021, respectively		(614,251	)		(217,935	)
Less: reclassification for net realized capital gains and change in allowance for credit losses on available for sale securities, net of taxes of $2,223 and ($3,130) for 2022 and 2021, respectively		8,362			(11,773	)
Change in unrealized currency translation adjustment, net of deferred taxes of ($139) and $654 for 2022 and 2021, respectively		(523	)		2,461
Retirement plans		130			(965	)
Comprehensive (loss) income		(437,389	)		9,851
Comprehensive income attributable to noncontrolling interests		43,212			8,022
Comprehensive (loss) income attributable to Alleghany stockholders	$	(480,601	)	$	1,829

Basic earnings per share attributable to Alleghany stockholders	$	9.29		$	16.44
Diluted earnings per share attributable to Alleghany stockholders		9.29			16.37

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(unaudited)


	Three Months Ended March 31, 2022
	Common Stock		Contributed Capital			Accumulated Other Comprehensive Income (loss)			Treasury Stock			Retained Earnings		Total Stockholders' Equity Attributable to Alleghany Shareholders			Redeemable Non- controlling Interest
	($ in thousands, except share amounts)
Balance as of December 31, 2021
(17,459,961 shares of common stock issued; 3,861,426 in treasury)	$	17,460	$	3,608,905		$	141,822		$	(1,934,531	)	$	7,353,226	$	9,186,882		$	317,346
Add (deduct):
Net earnings		—		—			—			—			125,681		125,681			43,212
Other comprehensive income (loss), net of tax:
Retirement plans		—		—			130			—			—		130			—
Change in unrealized appreciation of investments, net		—		—			(605,889	)		—			—		(605,889	)		—
Change in unrealized currency translation adjustment, net		—		—			(523	)		—			—		(523	)		—
Comprehensive (loss) income		—		—			(606,282	)		—			125,681		(480,601	)		43,212
Treasury stock repurchase		—		—			—			(95,987	)		—		(95,987	)		—
Other, net		—		(15,535	)		—			614			—		(14,921	)		5,235
Balance as of March 31, 2022
(17,459,961 shares of common stock issued; 4,005,073 in treasury)	$	17,460	$	3,593,370		$	(464,460	)	$	(2,029,904	)	$	7,478,907	$	8,595,373		$	365,793


	Three Months Ended March 31, 2021
	Common Stock		Contributed Capital		Accumulated Other Comprehensive Income (loss)			Treasury Stock			Retained Earnings		Total Stockholders' Equity Attributable to Alleghany Shareholders			Redeemable Non- controlling Interest
	($ in thousands, except share amounts)
Balance as of December 31, 2020
(17,459,961 shares of common stock issued; 3,418,781 in treasury)	$	17,460	$	3,613,454	$	452,402		$	(1,645,930	)	$	6,318,334	$	8,755,720		$	233,809
Add (deduct):
Net earnings		—		—		—			—			230,041		230,041			8,022
Other comprehensive income (loss), net of tax:
Retirement plans		—		—		(965	)		—			—		(965	)		—
Change in unrealized appreciation of investments, net		—		—		(229,708	)		—			—		(229,708	)		—
Change in unrealized currency translation adjustment, net		—		—		2,461			—			—		2,461			—
Comprehensive (loss) income		—		—		(228,212	)		—			230,041		1,829			8,022
Treasury stock repurchase		—		—		—			(63,192	)		—		(63,192	)		—
Other, net		—		310		—			1,214			—		1,524			(8,268	)
Balance as of March 31, 2021
(17,459,961 shares of common stock issued; 3,519,292 in treasury)	$	17,460	$	3,613,764	$	224,190		$	(1,707,908	)	$	6,548,375	$	8,695,881		$	233,563

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)


	Three Months Ended March 31,
	2022			2021
	($ in thousands)
Cash flows from operating activities
Net earnings	$	168,893		$	238,063
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		45,109			43,554
Change in the fair value of equity securities		138,777			(112,728	)
Net realized capital (gains) losses		10,003			(12,931	)
Change in allowance for credit losses on available for sale securities		582			(1,972	)
(Increase) decrease in reinsurance recoverables, net of reinsurance payable		69,339			(6,669	)
(Increase) decrease in premium balances receivable		(69,795	)		(138,822	)
(Increase) decrease in ceded unearned premiums		(19,676	)		(34,049	)
(Increase) decrease in deferred acquisition costs		(49,901	)		(41,969	)
(Increase) decrease in funds held under reinsurance agreements		128,177			8,951
Increase (decrease) in unearned premiums		206,882			192,735
Increase (decrease) in loss and loss adjustment expenses		(41,268	)		322,420
Change in unrealized foreign currency exchange rate losses (gains)		34,879			44,344
Other, net		(111,098	)		(58,632	)
Net adjustments		342,010			204,232
Net cash provided by operating activities		510,903			442,295
Cash flows from investing activities
Purchases of debt securities		(1,527,777	)		(1,401,010	)
Purchases of equity securities		(147,826	)		(746,350	)
Sales of debt securities		778,330			1,197,630
Maturities and redemptions of debt securities		426,106			552,933
Sales of equity securities		276,605			262,690
Net (purchases) sales of short-term investments		(163,620	)		117,295
Net (purchases) sales and maturities of commercial mortgage loans		13,304			30,618
(Purchases) sales of property and equipment		(14,249	)		(12,322	)
Purchases of affiliates and subsidiaries, net of cash acquired		—			—
Other, net		56,101			101,159
Net cash (used in) provided by investing activities		(303,026	)		102,643
Cash flows from financing activities
Treasury stock acquisitions		(95,987	)		(63,192	)
Increase (decrease) in other debt		(24,820	)		(55,729	)
Other, net		(13,992	)		(8,938	)
Net cash used in financing activities		(134,799	)		(127,859	)
Effect of foreign exchange rate changes on cash		(7,988	)		(11,047	)
Net increase in cash		65,090			406,032
Cash at beginning of period		927,966			791,442
Cash at end of period	$	993,056		$	1,197,474

Supplemental disclosures of cash flow information
Cash paid during period for:
Interest paid	$	19,243		$	10,000
Income taxes paid		13,766			22,599

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

1. Summary of Significant Accounting Principles

(a) Principles of Financial Statement Presentation

This Quarterly Report on Form 10-Q (this “Form 10-Q”) should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) of Alleghany Corporation (“Alleghany”).

Alleghany, a Delaware corporation, owns and supports certain operating subsidiaries and manages investments, anchored by a core position in property and casualty reinsurance and insurance. Through its wholly-owned subsidiary Transatlantic Holdings, Inc. (“TransRe”), an Alleghany subsidiary since March 2012, Alleghany is engaged in the property and casualty reinsurance business. Through its wholly-owned subsidiary Alleghany Insurance Holdings LLC (“AIHL”), Alleghany is engaged in the property and casualty insurance business. AIHL’s insurance operations are principally conducted by its subsidiaries RSUI Group, Inc. (“RSUI”) and CapSpecialty, Inc. (“CapSpecialty”). RSUI and CapSpecialty have been subsidiaries of AIHL since July 2003 and January 2002, respectively. AIHL Re LLC (“AIHL Re”), a captive reinsurance company, which provides reinsurance to Alleghany’s current and former insurance operating subsidiaries and affiliates, has been a subsidiary of Alleghany since its formation in May 2006.

Although Alleghany’s primary sources of revenues and earnings are its reinsurance and insurance operations and investments, Alleghany also generates revenues and expenses from a diverse portfolio of non-financial businesses that are owned and supported through its wholly-owned subsidiary Alleghany Capital Corporation (“Alleghany Capital”). Alleghany Capital’s businesses include:

•

Precision Cutting Technologies, Inc. (“PCT”), a holding company headquartered in Rockford, Illinois, with four operating businesses: (i) Bourn & Koch, Inc., a provider of precision automated machine tool solutions; (ii) Diamond Technology Innovations, Inc., a manufacturer of waterjet orifices and nozzles and a provider of related services; (iii) Coastal Industrial Distributors, LLC, a provider of high-performance solid carbide end mills; and (iv) Supermill LLC, a manufacturer of high-performance solid carbide end mills;

•

R.C. Tway Company, LLC (“Kentucky Trailer”), a manufacturer of custom trailers and truck bodies for the moving and storage industry and other markets, headquartered in Louisville, Kentucky;

•

IPS-Integrated Project Services, LLC (“IPS”), a global provider of design, engineering and related services to the biopharmaceutical and life sciences markets, and cost and project management services for clients in the data center, technology and other sectors, headquartered in Blue Bell, Pennsylvania;

•

Jazwares, LLC (together with its affiliates, “Jazwares”), a global toy company, headquartered in Sunrise, Florida;

•

WWSC Holdings, LLC (“W&W|AFCO Steel”), a structural steel fabricator and erector, headquartered in Oklahoma City, Oklahoma;

•

CHECO Holdings, LLC (“Concord”), a hotel management and development company, headquartered in Raleigh, North Carolina;

•

Wilbert Funeral Services, Inc. (“Wilbert”), a provider of products and services for the funeral and cemetery industries and precast concrete markets, headquartered in Overland Park, Kansas; and

•

Piedmont Manufacturing Group, LLC (“Piedmont”), a provider of injection molded and thermoformed parts and multi-component assemblies for original equipment manufacturer customers in a range of end-markets, headquartered in Belmont, North Carolina.

The results of Piedmont have been included in Alleghany’s consolidated results from its formation and subsequent acquisition of Wilbert, Inc., doing business as Wilbert Plastic Services (“WPS”) on May 10, 2021.

In addition, Alleghany owns certain other holding-company investments. Alleghany’s wholly-owned subsidiary Alleghany Properties Holdings LLC (“Alleghany Properties”) owns and manages certain properties in the Sacramento, California region. Alleghany’s public equity investments are managed primarily through Alleghany’s wholly-owned subsidiary Roundwood Asset Management LLC.

On March 20, 2022, Alleghany entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Berkshire Hathaway Inc., a Delaware corporation (“Berkshire”) and O&M Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Berkshire (“Merger Sub”). Pursuant to the Merger Agreement and subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will be merged with and into Alleghany, with Alleghany continuing as the surviving corporation and a wholly-owned subsidiary of Berkshire (“Merger”). As a result of the Merger, each issued and outstanding share of Alleghany's common stock, par value $1.00 per share (the “Common Stock”) (other than shares (a) held in the treasury of Alleghany or owned by Berkshire or any direct or indirect wholly-owned subsidiary of Berkshire or (b) held by a stockholder who has demanded and perfected such holder's demand for appraisal rights in accordance with Delaware law) will be cancelled and extinguished and converted into the right to receive $848.02 in cash, without interest, representing a total equity value of approximately $11.6 billion. The closing of the Merger is subject to certain conditions, including (i) the approval and adoption of the Merger Agreement by the holders of at least 75% of the voting power of the outstanding shares of Common Stock, (ii) the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and applicable foreign antitrust laws, (iii) the receipt of authorizations required to be obtained from applicable insurance regulators and (iv) other customary closing conditions. The Merger Agreement generally requires Alleghany to operate its business in the ordinary course pending consummation of the proposed Merger and restricts Alleghany, without Berkshire’s consent, from taking certain specified actions until the Merger is completed. For a description of the treatment of equity awards under the Merger Agreement, see Alleghany’s definitive proxy statement filed with the SEC on April 29, 2022.

Unless the context otherwise requires, references to “Alleghany” include Alleghany together with its subsidiaries.

The accompanying consolidated financial statements include the results of Alleghany and its wholly-owned and majority-owned subsidiaries and have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). All material inter-company balances and transactions have been eliminated in consolidation.

The portion of stockholders’ equity, net earnings and comprehensive income that is not attributable to Alleghany stockholders is presented on the consolidated balance sheets, the consolidated statements of earnings and comprehensive income and the consolidated statements of changes in stockholders’ equity as noncontrolling interests. Because all noncontrolling interests have the option to sell their ownership interests to Alleghany in the future (generally through 2028), the portion of stockholders’ equity that is not attributable to Alleghany stockholders is presented on the consolidated balance sheets and the consolidated statements of changes in stockholders’ equity as redeemable noncontrolling interests for all periods presented. In addition, Alleghany accretes the redeemable noncontrolling interests up to their future estimated redemption value over the period from the date of issuance to the earliest redemption date. The redemption value of the equity interests is generally based on the subsidiary’s earnings in specified periods preceding the applicable redemption date, calculated based on either a specified formula or an independent fair market valuation. Accretion related to redemption values based on a specified formula are recorded as a component of net earnings attributable to noncontrolling interests, whereas accretion related to redemption values based on an independent fair market valuation are recorded as a component of contributed capital. Accretion may increase or decrease each period, however, the redeemable noncontrolling interest balance may not go below the initial balance established at the acquisition date. The following table presents the components of net earnings attributable to noncontrolling interests for the three months ended March 31, 2022 and 2021:


	Three Months Ended March 31,
	2022		2021
	($ in millions)
Accretion of redeemable noncontrolling interests	$	18.8	$	0.6
Portion of net earnings attributable to noncontrolling interests		24.4		7.5
Total	$	43.2	$	8.1

In addition, accretion reduced contributed capital by $16.5 million and $0.0 million for the three months ended March 31, 2022 and 2021, respectively. Such accretion may be adjusted later in 2022 as certain significant noncontrolling interest holders have the right to put their respective equity interests to Alleghany Capital. The difference between any actual payouts that may be negotiated and agreed, as compared to the carrying value of such noncontrolling interests, will be recorded as accretion and charged to contributed capital.

As of March 31, 2022, the noncontrolling interests outstanding were approximately as follows: Kentucky Trailer - 22 percent; IPS - 18 percent; Jazwares - 24 percent; W&W|AFCO Steel - 20 percent; and Concord - 15 percent.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Alleghany relies on historical experience and on various other assumptions that it believes to be reasonable under the circumstances to make judgments about the carrying value of assets and liabilities and reported revenues and expenses that are not readily apparent from other sources. Actual results may differ materially from those reported results to the extent that those estimates and assumptions prove to be inaccurate. Changes in estimates are reflected in the consolidated statements of earnings and comprehensive income in the period in which the changes are made.

(b) Other Significant Accounting Principles

Alleghany’s significant accounting principles can be found in Note 1 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2021 Form 10-K.

Recently Adopted

In August 2020, the Financial Accounting Standards Board (the “FASB”) issued guidance that simplifies the accounting and disclosure requirements for certain financial instruments with characteristics of liabilities and equity, such as convertible debt and convertible preferred stock. This guidance also modifies the accounting for certain contracts involving an entity’s own stock. This guidance was effective in the first quarter of 2022 for public companies, with early adoption permitted. Alleghany adopted this guidance in the first quarter of 2022 and the adoption did not have a material impact on its results of operations and financial condition.

In May 2021, the FASB issued guidance on how issuers should account for modifications or exchanges of freestanding equity-classified written call options that remain classified as equity after the modification or exchange. Under this guidance, the issuer will determine the accounting for the modification or exchange based on the economic substance of the modification or exchange (i.e. to issue equity, to issue or modify debt, or other reasons). This guidance was effective in the first quarter of 2022 for all entities, with early adoption permitted when applied as of the beginning of the fiscal year. Alleghany adopted this guidance in the first quarter of 2022 and the adoption did not have a material impact on its results of operations and financial condition.

Future Application of Accounting Standards

In October 2021, the FASB issued guidance related to contract assets and liabilities recorded in a business combination. A contract asset is recorded when the amount of goods or services transferred to a customer exceed the amount received or receivable from the customer, and a contract liability is recorded when the amount received or receivable from a customer exceeds the amount of goods or services transferred to the customer. The guidance requires that the acquirer of a business determine and record a customer contract asset or liability it would have recorded if the acquirer had entered into the original contract with the customer at the same date and at the same terms as the acquiree using preexisting revenue recognition guidance. Under current guidance, contract assets and liabilities are recorded at acquisition date fair value. As a result of this guidance, the acquisition date recognition and measurement of customer contract assets and liabilities will likely be similar to the acquiree carrying values, and post-acquisition revenue recognition will likely be similar to what the acquiree would have recorded. This guidance is effective for public companies for business acquisitions completed on or after January 1, 2023, with early adoption permitted subject to certain conditions and requirements. Alleghany will adopt this guidance for business acquisitions completed on or after January 1, 2023 and does not currently believe that the implementation will have a material impact on its results of operations and financial condition.

In March 2022, the FASB issued guidance on credit losses. Under this guidance, all loan and receivable modifications, including modifications made for borrowers experiencing financial difficulty, shall be accounted for using the current expected credit loss model (the “Model”). This guidance applies to entities that have previously adopted the Model. Entities that have not yet adopted the Model will continue to use pre-existing accounting rules. This guidance also expands disclosure requirements for modifications made for borrowers experiencing financial difficulty. This guidance is effective in the first quarter of 2023 for public companies, with early adoption permitted. Alleghany previously adopted the Model in the first quarter of 2020 and will adopt this guidance in the first quarter of 2023. Alleghany does not currently believe that the implementation will have a material impact on its results of operations and financial condition.

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, 2022 and December 31, 2021:


	March 31, 2022				December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
	($ in millions)
Assets
Investments (excluding equity method investments and loans)(1)	$	20,277.9	$	20,277.9	$	20,887.7	$	20,887.7

Liabilities
Senior notes and other debt(2)	$	2,822.8	$	2,950.2	$	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 March 31, 2022 and December 31, 2021:


	Level 1		Level 2		Level 3		Total
	($ in millions)
As of March 31, 2022
Equity securities:
Common stock	$	3,406.5	$	2.4	$	—	$	3,408.9
Preferred stock		—		3.3		1.3		4.6
Total equity securities		3,406.5		5.7		1.3		3,413.5
Debt securities:
U.S. Government obligations		—		1,593.0		—		1,593.0
Municipal bonds		—		2,641.9		—		2,641.9
Foreign government obligations		—		818.0		—		818.0
U.S. corporate bonds		—		2,676.8		674.0		3,350.8
Foreign corporate bonds		—		997.0		189.4		1,186.4
Mortgage and asset-backed securities:
Residential mortgage-backed securities (“RMBS”)(1)		—		1,830.1		1.8		1,831.9
Commercial mortgage-backed securities (“CMBS”)		—		1,044.4		4.3		1,048.7
Other asset-backed securities(2)		—		1,759.1		1,328.8		3,087.9
Total debt securities		—		13,360.3		2,198.3		15,558.6
Short-term investments		—		1,305.8		—		1,305.8
Total investments (excluding equity method investments and loans)	$	3,406.5	$	14,671.8	$	2,199.6	$	20,277.9
Senior notes and other debt	$	—	$	2,194.2	$	756.0	$	2,950.2


	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 $1,281.5 million and $1,320.4 million of collateralized loan obligations as of March 31, 2022 and December 31, 2021, respectively.

In the three months ended March 31, 2022, Alleghany did not transfer any financial instruments into Level 3.

In the three months ended March 31, 2022, Alleghany transferred out of Level 3 $18.3 million of financial instruments, principally due to an increase in observable inputs related to the valuation of such assets. Specifically, during the first three months of 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. All of the $18.3 million of transfers related to other asset-backed securities.

In the three months ended March 31, 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 three 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.

In the three months ended March 31, 2021, Alleghany transferred out of Level 3 $10.9 million of financial instruments, principally due to an increase in observable inputs related to the valuation of such assets. Specifically, during the first three 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 $10.9 million of transfers, $5.8 million related to CMBS and $5.1 million related to other asset-backed securities.

The following tables present reconciliations of the changes during the three months ended March 31, 2022 and 2021 in Level 3 assets measured at fair value:


			Debt Securities
									Mortgage and asset-backed
Three Months Ended March 31, 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
Other comprehensive (loss)		—		(35.5	)		(10.0	)		—			—		(12.2	)		—		(57.7	)
Purchases		—		43.3			24.3			—			4.3		62.5			—		134.4
Sales		—		—			—			—			—		(28.3	)		—		(28.3	)
Issuances		—		—			—			—			—		—			—		—
Settlements		—		(4.3	)		(2.1	)		(0.1	)		—		(23.2	)		—		(29.7	)
Transfers into Level 3		—		—			—			—			—		—			—		—
Transfers out of Level 3		—		—			—			—			—		(18.3	)		—		(18.3	)
Balance as of March 31, 2022	$	1.3	$	674.0		$	189.4		$	1.8		$	4.3	$	1,328.8		$	—	$	2,199.6


			Debt Securities
									Mortgage and asset-backed
Three Months Ended March 31, 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		0.1		0.4
Other comprehensive income (loss)		—		(17.1	)		(3.9	)		—		—		6.7

ALLEGHANY CORP /DE 10-Q