Edgar Filing: ALLEGHANY CORP /DE

ALLEGHANY CORPORATION

(Registrant)

Date: May 5, 2016

/s/ John L. Sennott, Jr.

John L. Sennott, Jr.

Senior Vice President and chief financial officer

(principal financial officer)

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2016

¨	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

STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION

51-0283071

I.R.S. EMPLOYER IDENTIFICATION NO.

7 TIMES SQUARE TOWER, 17TH FLOOR, NY, NY 10036

ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE

212-752-1356

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE

NOT APPLICABLE

FORMER NAME, FORMER ADDRESS, AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT

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 x NO ¨

INDICATE BY CHECK MARK WHETHER THE REGISTRANT HAS SUBMITTED ELECTRONICALLY AND POSTED ON ITS CORPORATE WEB SITE, IF ANY, EVERY INTERACTIVE DATA FILE REQUIRED TO BE SUBMITTED AND POSTED PURSUANT TO RULE 405 OF REGULATION S-T (SECTION 232.405 OF THIS CHAPTER) DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO SUBMIT AND POST SUCH FILES). YES x NO ¨

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, A NON-ACCELERATED FILER OR A SMALLER REPORTING COMPANY. SEE THE DEFINITIONS OF “LARGE ACCELERATED FILER,” “ACCELERATED FILER,” AND “SMALLER REPORTING COMPANY” IN RULE 12b-2 OF THE EXCHANGE ACT. (CHECK ONE):


LARGE ACCELERATED FILER	x		ACCELERATED FILER	¨

NON-ACCELERATED FILER	¨	(DO NOT CHECK IF A SMALLER REPORTING COMPANY)	SMALLER REPORTING COMPANY	¨

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT). YES ¨ NO x

INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER’S CLASSES OF COMMON STOCK, AS OF THE LAST PRACTICABLE DATE.

15,438,632 SHARES, PAR VALUE $1.00 PER SHARE, AS OF MAY 1, 2016

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	21
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	56
ITEM 4.	Controls and Procedures	57

PART II

ITEM 1.	Legal Proceedings	58
ITEM 1A.	Risk Factors	58
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
ITEM 4.	Mine Safety Disclosures	58
ITEM 6.	Exhibits	59
SIGNATURES		60
EXHIBIT INDEX		61

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets


	March 31, 2016		December 31, 2015
	(unaudited)
	(in thousands, except share amounts)
Assets
Investments:
Available-for-sale securities at fair value:
Equity securities (cost: 2016 – $2,637,787; 2015 – $2,740,984)	$	2,889,055	$	3,005,908
Debt securities (amortized cost: 2016 – $13,385,266; 2015 – $13,529,923)		13,618,212		13,605,963
Short-term investments		493,614		365,810

		17,000,881		16,977,681
Commercial mortgage loans		279,906		177,947
Other invested assets		694,607		676,811

Total investments		17,975,394		17,832,439
Cash		509,743		475,267
Accrued investment income		114,681		115,313
Premium balances receivable		755,811		752,103
Reinsurance recoverables		1,203,188		1,249,948
Ceded unearned premiums		190,366		190,368
Deferred acquisition costs		449,645		419,448
Property and equipment at cost, net of accumulated depreciation and amortization		99,958		101,306
Goodwill		141,015		141,015
Intangible assets, net of amortization		209,704		212,790
Current taxes receivable		31,030		12,129
Net deferred tax assets		344,294		468,440
Other assets		1,030,514		868,513

Total assets	$	23,055,343	$	22,839,079


Liabilities, Redeemable Noncontrolling Interests and Stockholders’ Equity
Loss and loss adjustment expenses	$	10,758,730	$	10,799,242
Unearned premiums		2,170,059		2,076,061
Senior Notes		1,383,572		1,383,086
Reinsurance payable		88,164		69,297
Other liabilities		857,216		930,967

Total liabilities		15,257,741		15,258,653


Redeemable noncontrolling interests		25,866		25,719

Common stock (shares authorized: 2016 and 2015 – 22,000,000; shares issued: 2016 and 2015 – 17,459,961)		17,460		17,460
Contributed capital		3,611,715		3,611,631
Accumulated other comprehensive income		229,376		116,273
Treasury stock, at cost (2016 – 2,022,329 shares; 2015 – 1,915,884 shares)		(798,447)		(747,784)
Retained earnings		4,711,632		4,557,127

Total stockholders’ equity attributable to Alleghany stockholders		7,771,736		7,554,707

Total liabilities, redeemable noncontrolling interest and stockholders’ equity	$	23,055,343	$	22,839,079

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,
	2016		2015
	(in thousands, except per share amounts)
Revenues
Net premiums earned	$	1,221,565	$	1,017,171
Net investment income		104,863		113,382
Net realized capital gains		35,893		43,151
Other than temporary impairment losses		(20,759)		(52,281)
Other revenue		137,388		36,200

Total revenues		1,478,950		1,157,623


Costs and Expenses
Net loss and loss adjustment expenses		664,644		546,916
Commissions, brokerage and other underwriting expenses		406,733		343,609
Other operating expenses		162,164		67,405
Corporate administration		9,734		12,678
Amortization of intangible assets		3,085		(1,660)
Interest expense		20,269		23,092

Total costs and expenses		1,266,629		992,040


Earnings before income taxes		212,321		165,583
Income taxes		57,668		40,163

Net earnings		154,653		125,420
Net earnings attributable to noncontrolling interest		148		211

Net earnings attributable to Alleghany stockholders	$	154,505	$	125,209


Net earnings	$	154,653	$	125,420
Other comprehensive income:
Change in unrealized gains, net of deferred taxes of $54,981 and $33,141 for 2016 and 2015, respectively		102,107		61,548
Less: reclassification for net realized capital gains and other than temporary impairment losses, net of taxes of ($5,297) and $3,196 for 2016 and 2015, respectively		(9,837)		5,935
Change in unrealized currency translation adjustment, net of deferred taxes of $11,077 and ($5,791) for 2016 and 2015, respectively		20,571		(10,755)
Retirement plans		262		(522)

Comprehensive income		267,756		181,626
Comprehensive income attributable to noncontrolling interest		148		211

Comprehensive income attributable to Alleghany stockholders	$	267,608	$	181,415


Basic earnings per share attributable to Alleghany stockholders	$	10.00	$	7.82
Diluted earnings per share attributable to Alleghany stockholders		9.96		7.82

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(unaudited)


	Three Months Ended March 31,
	2016		2015
	(in thousands)
Cash flows from operating activities
Net earnings	$	154,653	$	125,420
Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:
Depreciation and amortization		34,905		42,083
Net realized capital (gains) losses		(35,893)		(43,151)
Other than temporary impairment losses		20,759		52,281
(Increase) decrease in reinsurance recoverables, net of reinsurance payable		65,627		215
(Increase) decrease in premium balance receivable		(3,708)		44,282
(Increase) decrease in ceded unearned premiums		2		(12,756)
(Increase) decrease in deferred acquisition costs		(30,197)		(16,662)
(Increase) decrease in unearned premiums		93,998		68,644
(Increase) decrease in loss and loss adjustment expenses		(40,512)		(182,881)
Change in unrealized foreign exchange losses (gains)		45,552		154,741
Other, net		(265,606)		(14,895)

Net adjustments		(115,073)		91,901

Net cash provided by (used in) operating activities		39,580		217,321


Cash flows from investing activities
Purchases of debt securities		(1,844,101)		(2,122,464)
Purchases of equity securities		(551,815)		(1,385,109)
Sales of debt securities		1,800,873		1,596,406
Maturities and redemptions of debt securities		237,162		353,149
Sales of equity securities		665,994		1,132,816
Net (purchase) sale in short-term investments		(142,622)		230,725
Purchases of property and equipment		(2,088)		(10,609)
Purchase of subsidiary, net of cash acquired		(1,020)		(43,900)
Other, net		(122,288)		1,232

Net cash provided by (used in) investing activities		40,095		(247,754)


Cash flows from financing activities
Treasury stock acquisitions		(53,288)		(26,632)
Other, net		5,734		7,344

Net cash provided by (used in) financing activities		(47,554)		(19,288)


Effect of exchange rate changes on cash		2,355		(18,053)

Net increase (decrease) in cash		34,476		(67,774)
Cash at beginning of period		475,267		605,259

Cash at end of period	$	509,743	$	537,485


Supplemental disclosures of cash flow information
Cash paid during period for:
Interest paid	$	16,115	$	16,406
Income taxes paid (refund received)		11,737		(1,787)

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, 2015 (the “2015 10-K”) of Alleghany Corporation (“Alleghany”).

Alleghany, a Delaware corporation, which was initially incorporated in Delaware in 1929, owns and manages certain operating subsidiaries and investments, anchored by a core position in property and casualty reinsurance and insurance. Through its wholly-owned subsidiary Alleghany Insurance Holdings LLC (“AIHL”) and its subsidiaries, Alleghany is engaged in the property and casualty insurance business. AIHL’s insurance operations are principally conducted by its subsidiaries RSUI Group, Inc. (“RSUI”), CapSpecialty, Inc. (“CapSpecialty”) and Pacific Compensation Corporation (“PacificComp”). CapSpecialty has been a subsidiary of AIHL since January 2002, RSUI has been a subsidiary of AIHL since July 2003 and PacificComp has been a subsidiary of AIHL since July 2007. AIHL Re LLC (“AIHL Re”), a captive reinsurance company which provides reinsurance to Alleghany’s insurance operating subsidiaries and affiliates, has been a wholly-owned subsidiary of Alleghany since its formation in May 2006. Alleghany’s reinsurance operations commenced on March 6, 2012 when Alleghany consummated a merger with Transatlantic Holdings, Inc. (“TransRe”), and TransRe became one of Alleghany’s wholly-owned subsidiaries. Alleghany’s public equity investments, including those held by TransRe’s and AIHL’s operating subsidiaries, are managed primarily through Alleghany’s wholly-owned subsidiary Roundwood Asset Management LLC.

Although Alleghany’s primary sources of revenues and earnings are its reinsurance and insurance operations and investments, Alleghany also manages, sources, executes and monitors certain private capital investments primarily through its wholly-owned subsidiary Alleghany Capital Corporation (“Alleghany Capital”). Alleghany Capital’s private capital investments are included in other activities for segment reporting purposes and include: (i) Stranded Oil Resources Corporation (“SORC”), an exploration and production company focused on enhanced oil recovery, headquartered in Golden, Colorado; (ii) Bourn & Koch, Inc. (“Bourn & Koch”), a manufacturer and remanufacturer/retrofitter of precision machine tools and supplier of replacement parts, headquartered in Rockford, Illinois; (iii) 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; (iv) IPS-Integrated Project Services, LLC (“IPS”), a technical service provider focused on the global pharmaceutical and biotechnology industries, headquartered in Blue Bell, Pennsylvania, acquired on October 31, 2015; (v) an approximately 40 percent equity interest in ORX Exploration, Inc. (“ORX”), a regional oil and gas exploration and production company, headquartered in New Orleans, Louisiana; and (vi) a 30 percent equity interest in Jazwares, LLC (“Jazwares”), a toy and consumer electronics company, headquartered in Sunrise, Florida. ORX and Jazwares are accounted for under the equity method of accounting. On April 15, 2016, Alleghany Capital acquired an additional 50 percent equity interest in Jazwares, bringing its equity interest in Jazwares to 80 percent, and as of that date, the results of Jazwares will be included in Alleghany’s consolidated results. In addition, Alleghany owns and manages properties in the Sacramento, California region through its wholly-owned subsidiary Alleghany Properties Holdings LLC (“Alleghany Properties”).

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 United States (“GAAP”). All significant inter-company balances and transactions have been eliminated in consolidation. The results of IPS have been included in Alleghany’s consolidated results beginning with its acquisition by Alleghany Capital on October 31, 2015.

The portion of stockholders’ equity, net earnings and accumulated other comprehensive income that is not attributable to Alleghany stockholders is presented on the Consolidated Balance Sheets and the Consolidated Statements of Earnings and Comprehensive Income as noncontrolling interest. Because all noncontrolling interests have the option to sell their interests to Alleghany in the future (generally through 2023), the portion of stockholders’ equity that is not attributable to Alleghany stockholders is presented on the Consolidated Balance Sheets as redeemable noncontrolling interest for all periods presented. During the first three months of 2016, Bourn & Koch had approximately 12 percent noncontrolling interests outstanding, Kentucky Trailer had approximately 20 percent noncontrolling interests outstanding and IPS had approximately 16 percent noncontrolling interests outstanding.

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 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 statement of earnings and comprehensive income in the period in which the change is 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 2015 10-K.

(c) Recent Accounting Standards

Recently Adopted

In February 2015, the Financial Accounting Standards Board (the “FASB”) issued guidance that amended the analysis that must be performed to determine whether an entity should consolidate certain types of legal entities. Under the new guidance, the evaluation of whether limited partnerships and similar entities are variable interest entities or voting interest entities is modified, the presumption that general partners should consolidate limited partnerships is eliminated and the process to determine the primary beneficiary of a variable interest entity is modified. This guidance is effective in the first quarter of 2016. Alleghany adopted this guidance in the first quarter of 2016 and the implementation did not have a material impact on its results of operations and financial condition.

In April 2015, the FASB issued guidance that requires debt issuance costs related to debt liabilities be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, which is consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. This guidance was effective in the first quarter of 2016. Alleghany adopted this guidance on a retrospective basis in the first quarter of 2016 and the implementation resulted in a reduction of other assets and a corresponding decrease in senior notes of approximately $7 million as of March 31, 2016 and December 31, 2015.

Future Application of Accounting Standards

In May 2014, the FASB, together with the International Accounting Standards Board, issued guidance on the recognition of revenue from contracts with customers. Under the new guidance, revenue is recognized as the transfer of goods and services to customers takes place, and in amounts that reflect the payment or payments that are expected to be received from the customers for those goods and services. The new guidance also requires new disclosures about revenue. Revenues related to insurance and reinsurance are not impacted by this guidance. In July 2015, the FASB decided to delay the effective date of the new revenue standard by a year. This guidance is now effective in the first quarter of 2018 for public entities, with early adoption permitted in 2017. Alleghany will adopt this guidance in the first quarter of 2018 and does not currently believe that the implementation will have a material impact on its results of operations and financial condition.

In May 2015, the FASB issued guidance that requires disclosures related to short-duration insurance contracts. The guidance applies to property and casualty insurance and reinsurance entities, among others, and requires the following annual disclosure related to the liability for loss and loss adjustment expenses (“LAE”): (i) net incurred and paid claims development information by accident year for up to ten years; (ii) a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for loss and LAE; (iii) incurred-but-not-reported liabilities by accident year and in total; (iv) a description of reserving methodologies (as well as any changes to those methodologies); (v) quantitative information about claim frequency by accident year; and (vi) the average annual percentage payout of incurred claims by age by accident year. In addition, the guidance requires insurance entities to disclose for annual and interim reporting periods a roll-forward of the liability for loss and LAE. This guidance is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. Alleghany will adopt this guidance as of December 31, 2016 and does not currently believe that the implementation will have an impact on its results of operations and financial condition.

In January 2016, the FASB issued guidance that changes the recognition and measurement of certain financial instruments. The new guidance requires investments in equity securities (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. For equity securities that do not have readily determinable fair values, measurement may be at cost, adjusted for any impairment and changes resulting from observable price changes for a similar investment of the same issuer. The new guidance also changes the presentation and disclosure of financial instruments by: (i) requiring that financial instrument disclosures of fair value use the exit price notion; (ii) requiring separate presentation of financial assets and financial liabilities by measurement category and form, either on the balance sheet or the accompanying notes to the financial statements; (iii) requiring separate presentation in other comprehensive income for the portion of the change in a liability’s fair value resulting from instrument-specific credit risk when an election has been made to measure the liability at fair value; and (iv) eliminating the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Except for the change in presentation for instrument-specific credit risk, the new guidance does not permit early adoption. Alleghany will adopt this guidance in the first quarter of 2018. As of January 1, 2018, unrealized gains or losses of equity securities, net of deferred taxes, will be reclassified from accumulated other comprehensive income to retained earnings. Subsequently, all changes in unrealized gains or losses of equity securities, net of deferred taxes, will be presented in the consolidated statement of earnings, rather than the consolidated statement of

comprehensive income. Alleghany does not currently believe that the implementation will have a material impact on its financial condition.

In February 2016, the FASB issued guidance on leases. Under the new guidance, a lessee is required to recognize assets and liabilities for leases with lease terms of more than one year, whereas under current guidance, a lessee is only required to recognize assets and liabilities for those leases qualifying as capital leases. The new guidance also requires new disclosures about the amount, timing and uncertainty of cash flows arising from leases. The accounting by lessors is to remain largely unchanged. This guidance is effective in the first quarter of 2019 for public entities, with early adoption permitted. Alleghany will adopt this guidance in the first quarter of 2019 and 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 carrying values and estimated fair values of Alleghany’s consolidated financial instruments as of March 31, 2016 and December 31, 2015 were as follows:


	March 31, 2016				December 31, 2015
	Carrying Value		Fair Value		Carrying Value		Fair Value
	($ in millions)
Assets
Investments (excluding equity method investments and loans)⁽¹⁾	$	17,029.3	$	17,029.3	$	17,007.6	$	17,007.6

Liabilities
Senior Notes⁽²⁾	$	1,383.6	$	1,535.4	$	1,383.1	$	1,488.7

(1)

This table includes available-for-sale (“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) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K.

(2)	See Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K 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 March 31, 2016 and December 31, 2015 were as follows:


	Level 1		Level 2		Level 3		Total
	($ in millions)
As of March 31, 2016
Equity securities:
Common stock	$	2,888.1	$	-	$	1.0	$	2,889.1
Preferred stock		-		-		-		-

Total equity securities		2,888.1		-		1.0		2,889.1


Debt securities:
U.S. Government obligations		-		1,166.2		-		1,166.2
Municipal bonds		-		4,419.9		-		4,419.9
Foreign government obligations		-		1,091.4		-		1,091.4
U.S. corporate bonds		-		1,961.4		50.0		2,011.4
Foreign corporate bonds		-		1,063.5		-		1,063.5
Mortgage and asset-backed securities:
Residential mortgage-backed securities (“RMBS”)⁽¹⁾		-		1,299.2		14.3		1,313.5
Commercial mortgage-backed securities (“CMBS”)		-		997.7		19.8		1,017.5
Other asset-backed securities⁽²⁾		-		610.4		924.4		1,534.8

Total debt securities		-		12,609.7		1,008.5		13,618.2
Short-term investments		-		493.6		-		493.6
Other invested assets⁽³⁾		-		-		28.4		28.4

Total investments (excluding equity method investments and loans)	$	2,888.1	$	13,103.3	$	1,037.9	$	17,029.3


Senior Notes	$	-	$	1,535.4	$	-	$	1,535.4


	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 and loans)	$	3,001.2	$	12,938.6	$	1,067.8	$	17,007.6


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

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

(2)	Includes $913.9 million and $946.7 million of collateralized loan obligations as of March 31, 2016 and December 31, 2015, respectively.

(3)	Includes partnership and non-marketable equity investments accounted for on an AFS basis, and excludes investments accounted for using the equity method.

In the three months ended March 31, 2016, there were no material transfers of securities out of Level 3.

In the three months ended March 31, 2016, there were transfers of $2.7 million of securities into Level 3 principally due to a decrease in observable inputs related to the valuation of such assets. Of the $2.7 million of transfers, $1.7 million related to U.S. corporate bonds and $1.0 million related to common stock. There were no other material transfers between Levels 1, 2 or 3 in the three months ended March 31, 2016.

In the three months ended March 31, 2015, there were transfers of $10.4 million of debt securities out of Level 3 that were principally due to an increase in observable inputs related to the valuation of such assets. Of the $10.4 million, $6.8 million related to U.S. corporate bonds and $3.6 million related to foreign corporate bonds.

In the three months ended March 31, 2015, there were no transfers of securities into Level 3. There were no other significant transfers between Levels 1, 2 or 3 in the three months ended March 31, 2015.

The following tables present reconciliations of the changes during the three months ended March 31, 2016 and 2015 in Level 3 assets measured at fair value:


			Debt Securities
					Mortgage and asset-backed
Three Months Ended March 31, 2016	Common Stock		U.S. Corporate Bonds		RMBS		CMBS		Other Asset- backed Securities		Other Invested Assets⁽¹⁾		Total
	($ in millions)
Balance as of January 1, 2016	$	-	$	49.8	$	14.9	$	20.2	$	953.0	$	29.9	$	1,067.8
Net realized/unrealized gains (losses) included in:
Net earnings⁽²⁾		-		0.1		0.1		(0.1)		1.0		1.5		2.6
Other comprehensive income		-		0.2		(0.2)		(0.1)		(14.3)		(1.3)		(15.7)
Purchases		-		0.3		-		-		10.3		-		10.6
Sales		-		(1.2)		-		-		(25.3)		(1.5)		(28.0)
Issuances		-		-		-		-		-		-		-
Settlements		-		(0.9)		(0.5)		(0.2)		(0.3)		-		(1.9)
Transfers into Level 3		1.0		1.7		-		-		-		-		2.7
Transfers out of Level 3		-		-		-		-		-		(0.2)		(0.2)

Balance as of March 31, 2016	$	1.0	$	50.0	$	14.3	$	19.8	$	924.4	$	28.4	$	1,037.9


	Debt Securities
					Mortgage and asset-backed
Three Months Ended March 31, 2015	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⁾		0.1		-		0.1		(0.1)		0.6		-		0.7
Other comprehensive income		0.4		-		-		(0.4)		7.8		0.3		8.1
Purchases		6.7		-		-		0.9		35.0		-		42.6
Sales		(0.5)		(0.2)		-		-		(53.1)		-		(53.8)
Issuances		-		-		-		-		-		-		-
Settlements		(4.0)		-		(0.7)		(0.5)		(0.5)		-		(5.7)
Transfers into Level 3		-		-		-		-		-		-		-
Transfers out of Level 3		(6.8)		(3.6)		-		-		-		-		(10.4)

Balance as of March 31, 2015	$	32.6	$	2.2	$	17.6	$	23.2	$	922.9	$	24.4	$	1,022.9

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

(2)	There were no other than temporary impairment (“OTTI”) losses recorded in net earnings related to Level 3 investments still held as of March 31, 2016 and 2015.

Net unrealized losses related to Level 3 investments as of March 31, 2016 and December 31, 2015 were not material.

See Note 1(c) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K for Alleghany’s accounting policy on fair value.

3. Investments

(a) Unrealized Gains and Losses

The amortized cost or cost and the fair value of AFS securities as of March 31, 2016 and December 31, 2015 are summarized as follows:


	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	($ in millions)
As of March 31, 2016
Equity securities:
Common stock	$	2,637.8	$	307.7	$	(56.4)	$	2,889.1
Preferred stock		-		-		-		-

Total equity securities		2,637.8		307.7		(56.4)		2,889.1


Debt securities:
U.S. Government obligations		1,147.7		19.2		(0.7)		1,166.2
Municipal bonds		4,268.9		159.4		(8.4)		4,419.9
Foreign government obligations		1,061.7		29.9		(0.2)		1,091.4
U.S. corporate bonds		1,979.7		50.2		(18.5)		2,011.4
Foreign corporate bonds		1,035.2		32.0		(3.7)		1,063.5
Mortgage and asset-backed securities:
RMBS		1,296.7		18.8		(2.0)		1,313.5
CMBS		1,009.7		16.0		(8.2)		1,017.5
Other asset-backed securities⁽¹⁾		1,585.7		1.5		(52.4)		1,534.8

Total debt securities		13,385.3		327.0		(94.1)		13,618.2
Short-term investments		493.6		-		-		493.6

Total	$	16,516.7	$	634.7	$	(150.5)	$	17,000.9


	Amortized Cost or Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	($ in millions)
As of December 31, 2015
Equity securities:
Common stock	$	2,741.0	$	351.9	$	(87.0)	$	3,005.9
Preferred stock		-		-		-		-

Total equity securities		2,741.0		351.9		(87.0)		3,005.9


Debt securities:
U.S. Government obligations		1,086.8		1.9		(14.0)		1,074.7
Municipal bonds		4,213.6		134.8		(8.8)		4,339.6
Foreign government obligations		924.1		18.6		(1.3)		941.4
U.S. corporate bonds		2,201.3		23.4		(48.0)		2,176.7
Foreign corporate bonds		1,219.0		24.0		(12.7)		1,230.3
Mortgage and asset-backed securities:
RMBS		1,255.1		10.7		(12.4)		1,253.4
CMBS		1,024.8		8.2		(9.6)		1,023.4
Other asset-backed securities⁽¹⁾		1,605.2		0.3		(39.0)		1,566.5

Total debt securities		13,529.9		221.9		(145.8)		13,606.0
Short-term investments		365.8		-		-		365.8

Total	$	16,636.7	$	573.8	$	(232.8)	$	16,977.7

(1)	Includes $913.9 million and $946.7 million of collateralized loan obligations as of March 31, 2016 and December 31, 2015, respectively.

(b) Contractual Maturity

The amortized cost and estimated fair value of debt securities by contractual maturity as of March 31, 2016 are shown 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 Cost or Cost		Fair Value
	($ in millions)
Short-term investments due in one year or less	$	493.6	$	493.6


Mortgage and asset-backed securities⁽¹⁾		3,892.1		3,865.8
Debt securities with maturity dates:
One year or less		416.2		418.1
Over one through five years		2,851.5		2,895.3
Over five through ten years		3,079.9		3,176.6
Over ten years		3,145.6		3,262.4

Total debt securities		13,385.3		13,618.2


Equity securities		2,637.8		2,889.1

Total	$	16,516.7	$	17,000.9

(1)	Mortgage and asset-backed securities by their nature do not generally have single maturity dates.

(c) Net Investment Income

Net investment income for the three months ended March 31, 2016 and 2015 were as follows:


	Three Months Ended March 31,
	2016		2015
	($ in millions)
Interest income	$	101.2	$	94.7
Dividend income		12.1		14.5
Investment expenses		(6.9)		(7.3)
Equity in results of Pillar Investments⁽¹⁾		3.1		6.6
Equity in results of Ares⁽¹⁾		0.4		2.3
Equity in results of ORX		-		(1.0)
Other investment results		(5.0)		3.6

Total	$	104.9	$	113.4

(1)	See Note 3(g) for discussion of the Pillar Investments and the investment in Ares as defined therein.

As of March 31, 2016, non-income producing invested assets were insignificant.

(d) Realized Gains and Losses

The proceeds from sales of AFS securities were $2.5 billion and $2.7 billion for the three months ended March 31, 2016 and 2015, respectively.

Realized capital gains and losses for the three months ended March 31, 2016 and 2015 primarily reflect sales of equity and debt securities. Gross realized capital gains and gross realized capital losses for the three months ended March 31, 2016 and 2015 were as follows:


	Three Months Ended March 31,
	2016		2015
	($ in millions)
Gross realized capital gains	$	82.4	$	114.4
Gross realized capital losses		(46.5)		(71.3)

Net realized capital gains	$	35.9	$	43.1

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 any individual security’s decline in value is performed in its functional currency. If the decline of a particular security 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 debt securities 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 one year 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 which 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 ratio); (ii) current views on the equity security, as expressed by either Alleghany’s internal stock analysts and/or by third-party stock analysts or rating agencies; and (iii) credit or news events associated with a specific issuer, such as negative news releases and rating agency downgrades with respect to the issuer of the equity security.

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 longer); (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 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 related portion and is recorded as a component of other comprehensive income.

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 credit enhancements and pre-refunding. For mortgage and asset-backed securities, Alleghany discounts its best estimate of future cash flows at an effective rate equal to the original effective yield of the security or, in the case of floating rate securities, at the current coupon. Alleghany’s models include assumptions about prepayment speeds, default and delinquency rates and underlying collateral (if any), as well as credit ratings, credit enhancements and other observable market data. For corporate bonds, Alleghany reviews business prospects, credit ratings and available information from asset managers and rating agencies for individual securities.

OTTI losses in the first quarter of 2016 reflect $20.8 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. 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. Of the $20.8 million of OTTI losses, $5.3 million related to equity securities, primarily in the financial services, technology and chemical sectors, and $15.5 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.

OTTI losses in the first quarter of 2015 reflect $52.3 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. All of the OTTI losses incurred in the first quarter of 2015 related to equity securities, primarily in the energy and gaming sectors. The determination that unrealized losses on such securities were other than temporary was primarily based on the duration of the decline in the fair value of equity securities relative to their costs.

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 March 31, 2016 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 (for example, no equity security was in a continuous unrealized loss position for 12 months or more as of March 31, 2016); (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

As of March 31, 2016 and December 31, 2015, gross unrealized losses and related fair values for equity securities and debt securities, grouped by duration of time in a continuous unrealized loss position, were as follows:


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	($ in millions)
As of March 31, 2016
Equity securities:
Common stock	$	1,030.5	$	56.4	$	-	$	-	$	1,030.5	$	56.4
Preferred stock		-		-		-		-		-		-

Total equity securities		1,030.5		56.4		-		-		1,030.5		56.4


Debt securities:
U.S. Government obligations		110.0		0.7		4.3		-		114.3		0.7
Municipal bonds		203.0		1.0		155.4		7.4		358.4		8.4
Foreign government obligations		152.9		0.2		2.6		-		155.5		0.2
U.S. corporate bonds		300.6		15.0		157.3		3.5		457.9		18.5
Foreign corporate bonds		122.2		1.4		72.7		2.3		194.9		3.7
Mortgage and asset-backed securities:
RMBS		7.9		0.1		334.1		1.9		342.0		2.0
CMBS		372.8		6.5		35.1		1.7		407.9		8.2
Other asset-backed securities		950.8		35.7		275.3		16.7		1,226.1		52.4

Total debt securities		2,220.2		60.6		1,036.8		33.5		3,257.0		94.1

Total temporarily impaired securities	$	3,250.7	$	117.0	$	1,036.8	$	33.5	$	4,287.5	$	150.5


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	($ in millions)
As of December 31, 2015
Equity securities:
Common stock	$	1,355.6	$	87.0	$	-	$	-	$	1,355.6	$	87.0
Preferred stock		-		-		-		-		-		-

Total equity securities		1,355.6		87.0		-		-		1,355.6		87.0


Debt securities:
U.S. Government obligations		818.4		13.9		7.9		0.1		826.3		14.0
Municipal bonds		276.2		2.4		108.3		6.4		384.5		8.8
Foreign government obligations		208.5		1.3		-		-		208.5		1.3
U.S. corporate bonds		1,149.8		39.0		70.0		9.0		1,219.8		48.0
Foreign corporate bonds		479.9		10.8		12.5		1.9		492.4		12.7
Mortgage and asset-backed securities:
RMBS		511.1		6.5		250.6		5.9		761.7		12.4
CMBS		593.1		9.4		15.1		0.2		608.2		9.6
Other asset-backed securities		1,164.8		27.2		265.0		11.8		1,429.8		39.0

Total debt securities		5,201.8		110.5		729.4		35.3		5,931.2		145.8

Total temporarily impaired securities	$	6,557.4	$	197.5	$	729.4	$	35.3	$	7,286.8	$	232.8

As of March 31, 2016, Alleghany held a total of 587 debt securities and equity securities that were in an unrealized loss position, of which 155 securities, all debt securities, were in an unrealized loss position continuously for 12 months or more. The

unrealized losses associated with the 155 debt securities consisted primarily of losses related to other asset-backed securities, municipal bonds and U.S. corporate bonds.

As of March 31, 2016, the vast majority of Alleghany’s debt securities were rated investment grade, with approximately 4.2 percent of debt securities having issuer credit ratings that were below investment grade or not rated, compared with 3.6 percent as of December 31, 2015.

(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 March 31, 2016, Alleghany’s carrying value in the Pillar Investments, as determined under the equity method of accounting, was $225.4 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. As of March 31, 2016, at Alleghany’s discretion, half of these interests may be converted at any time, and the remaining half may be converted starting in May 2016. 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 March 31, 2016, AIHL’s carrying value in Ares was $222.5 million, which is net of returns of capital received from Ares.

(h) Investments in Commercial Mortgage Loans

As of March 31, 2016, the carrying value of the commercial loan portfolio was $279.9 million, representing the unpaid principal balance on the loans. As of March 31, 2016, there was no allowance for loan losses. The commercial 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 2-10 years and the principal lent was no more than approximately two-thirds of each property’s appraised value at the time the loan was made.

4. Reinsurance Ceded

(a) Overview

Alleghany’s reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite in order to reduce the effect of individual or aggregate exposure to losses, manage capacity, protect capital resources, reduce volatility in specific lines of business, improve risk-adjusted portfolio returns and enable them to increase gross premium writings and risk capacity without requiring additional capital. Alleghany’s reinsurance and insurance subsidiaries purchase reinsurance and retrocessional coverages from highly-rated third-party reinsurers. If the assuming reinsurers are unable or unwilling to meet the obligations assumed under the applicable reinsurance agreements, Alleghany’s reinsurance and insurance subsidiaries would remain liable for such reinsurance portion not paid by these reinsurers. As such, funds, trust agreements and letters of credit are held to collateralize a portion of Alleghany’s reinsurance and insurance subsidiaries’ reinsurance recoverables, and Alleghany’s reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite or assume with multiple reinsurance programs.

(b) Significant Reinsurance Contracts

As discussed in Note 5(d) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K, RSUI reinsures its property lines of business through a program consisting of surplus share treaties, facultative placements, per risk and catastrophe excess of loss treaties. RSUI’s catastrophe reinsurance program (which covers catastrophe risks including, among others, windstorms and earthquakes) and property per risk reinsurance program run on an annual basis from May 1 to the following April 30 and portions expired on April 30, 2016.

RSUI’s catastrophe reinsurance program covers catastrophe risks including, among others, windstorms and earthquakes. Portions of the catastrophe reinsurance program include multi-year terms, some of which were entered into in 2014. As of May 1, 2016, the catastrophe reinsurance program consisted of three layers, with portions of the first two layers placed on May 1, 2015 and May 1, 2016 and the third layer placed on May 1, 2014 and May 1, 2016. The portions of the program expiring on April 30, 2016 were renewed on May 1, 2016. The catastrophe reinsurance program provides coverage for $600.0 million of losses in excess of a $200.0 million net retention after application of surplus share treaties and facultative reinsurance. The first layer provides coverage for $300.0 million of losses, subject to a 5.0 percent co-participation by RSUI in excess of $200.0 million, the second layer provides coverage for $100.0 million of losses in excess of $500.0 million, with no co-participation by RSUI, and the third layer provides coverage for $200.0 million of losses in excess of $600.0 million, with no co-participation by RSUI. The first and second layers of coverage include expiration terms as follows: 34.0 percent of coverage limits expired on April 30, 2016 and was renewed May 1, 2016 with expiration on April 30, 2019; 33.0 percent of coverage limits will expire on April 30, 2017; and 33.0 percent of coverage limits will expire on April 30, 2018. The third layer of coverage was originally placed with expiration on April 30, 2017. However, effective May 1, 2016 approximately 40 percent of the third layer of coverage was cancelled and replaced with the same coverage for a three year period expiring on April 30, 2019. The remaining coverage will expire on April 30, 2017.

In addition, RSUI’s property per risk reinsurance program runs on an annual basis from May 1 to the following April 30 and thus expired on April 30, 2016. On May 1, 2016, the property per risk program was renewed and will expire on April 30, 2017. For the 2016 to 2017 period, RSUI’s property per risk reinsurance program provides coverage for $90.0 million of losses, subject to a 10.0 percent co-participation by RSUI, in excess of a $10.0 million net retention per risk after application of surplus share treaties and facultative reinsurance.

5. Income Taxes

The effective tax rate on earnings before income taxes for the first three months of 2016 was 27.2 percent, compared with 24.3 percent for the first three months of 2015. The increase in the effective tax rate in the first quarter of 2016 from the first quarter of 2015 primarily reflects higher taxable income, primarily from higher underwriting profits, and lower tax-exempt interest income arising from municipal bond securities.

Alleghany believes that, as of March 31, 2016, it had no material uncertain tax positions. Interest and penalties relating to unrecognized tax expenses (benefits) are recognized in income tax expense, when applicable. There were no material liabilities for interest or penalties accrued as of March 31, 2016.

6. Stockholders’ Equity

(a) Common Stock Repurchases

In July 2014, the Alleghany Board of Directors authorized the repurchase of additional shares of common stock, par value $1.00 per share, of Alleghany (“Common Stock”), at such times and at prices as management determines to be advisable, up to an aggregate of $350.0 million (the “2014 Repurchase Program”). In November 2015, the Alleghany Board of Directors authorized, upon the completion of the 2014 Repurchase Program, the repurchase of additional shares of Common Stock, at such times and at prices as management determines to be advisable, up to an aggregate of $400.0 million (the “2015 Repurchase Program”). In the first quarter of 2016, Alleghany completed the 2014 Repurchase Program and subsequent repurchases have been made pursuant to the 2015 Repurchase Program.

Pursuant to the 2014 Repurchase Program and the 2015 Repurchase Program, as applicable, Alleghany repurchased shares of Common Stock in the three months ended March 31, 2016 and 2015 as follows:


	Three Months Ended March 31,
	2016		2015

Shares repurchased		113,100		58,950
Cost of shares repurchased (in millions)	$	53.3	$	26.6
Average price per share repurchased	$	471.15	$	451.77

(b) Accumulated Other Comprehensive Income

The following table presents a reconciliation of the changes during the three months ended March 31, 2016 and 2015 in accumulated other comprehensive income attributable to Alleghany stockholders:


	Unrealized Appreciation of Investments		Unrealized Currency Translation Adjustment		Retirement Plans		Total
	($ in millions)

Balance as of January 1, 2016	$	231.9	$	(104.0)	$	(11.6)	$	116.3
Other comprehensive income, net of tax:
Other comprehensive income before reclassifications		102.1		20.6		0.2		122.9
Reclassifications from accumulated other comprehensive income		(9.8)		-		-		(9.8)

Total		92.3		20.6		0.2		113.1

Balance as of March 31, 2016	$	324.2	$	(83.4)	$	(11.4)	$	229.4


	Unrealized Appreciation of Investments		Unrealized Currency Translation Adjustment		Retirement Plans		Total
	($ in millions)

Balance as of January 1, 2015	$	455.4	$	(89.2)	$	(12.6)	$	353.6
Other comprehensive income, net of tax:
Other comprehensive income (loss) before reclassifications		61.6		(10.8)		(0.5)		50.3
Reclassifications from accumulated other comprehensive income		5.9		-		-		5.9

Total		67.5		(10.8)		(0.5)		56.2

Balance as of March 31, 2015	$	522.9	$	(100.0)	$	(13.1)	$	409.8

Reclassifications out of accumulated other comprehensive income attributable to Alleghany stockholders during the three months ended March 31, 2016 and 2015 were as follows:


		Three Months Ended March 31,
Accumulated Other Comprehensive Income Component	Line in Consolidated Statement of Earnings	2016		2015
		($ in millions)
Unrealized appreciation of investments:	Net realized capital gains	$	(35.9)	$	(43.1)
	Other than temporary impairment losses		20.8		52.3
	Income taxes		5.3		(3.3)

Total reclassifications:	Net earnings	$	(9.8)	$	5.9

7. Earnings Per Share of Common Stock

The following is a reconciliation of the earnings and share data used in the basic and diluted earnings per share computations for the three months ended March 31, 2016 and 2015:


	Three Months Ended March 31,
	2016		2015
	($ in millions, except share amounts)
Net earnings available to Alleghany stockholders	$	154.5	$	125.2
Effect of dilutive securities		(0.4)		-

Income available to common stockholders for diluted earnings per share	$	154.1	$	125.2


Weighted average common shares outstanding applicable to basic earnings per share		15,452,191		16,014,223
Effect of dilutive securities		12,298		-

Adjusted weighted average common shares outstanding applicable to diluted earnings per share		15,464,489		16,014,223

57,123 and 75,420 contingently issuable shares were potentially available during the first three months of 2016 and 2015, respectively, but were not included in the computations of diluted earnings per share because the impact was anti-dilutive to the earnings per share calculation.

8. Commitments and Contingencies

(a) Legal Proceedings

Certain of Alleghany’s subsidiaries are parties to pending litigation and claims in connection with the ordinary course of their businesses. Each such subsidiary makes provisions for estimated losses to be incurred in such litigation and claims, including legal costs. In the opinion of management, such provisions are adequate.

(b) Indemnification Obligations

On July 14, 2005, Alleghany completed the sale of its world-wide industrial minerals business. Pursuant to the terms of the sale, Alleghany undertook certain indemnification obligations, including a general indemnification for breaches of representations and warranties, and a special indemnification related to products liability claims arising from events that occurred during pre-closing periods, including the period of Alleghany ownership, that will expire on July 31, 2016. Additional information about these indemnification obligations can be found in Note 12(b) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K.

(c) Leases

Alleghany and its subsidiaries lease certain facilities, furniture and equipment under long-term lease agreements. Additional information about leases can be found in Note 12(c) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K.

(d) Energy Holdings

As of March 31, 2016, Alleghany had holdings in energy sector businesses of $658.8 million, comprised of $278.6 million of debt securities, $169.3 million of equity securities and $210.9 million of Alleghany’s equity attributable to SORC.

9. Segments of Business

(a) Overview

Alleghany’s segments are reported in a manner consistent with the way management evaluates the businesses. As such, Alleghany classifies its business into two reportable segments – reinsurance and insurance. Other activities include Alleghany Capital and corporate activities. In addition, reinsurance and insurance underwriting activities are evaluated separately from investment and other activities. Net realized capital gains and OTTI losses are not considered relevant in evaluating investment performance on an annual basis. Segment accounting policies are described in Note 1 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K.

The reinsurance segment consists of property and casualty reinsurance operations conducted by TransRe’s reinsurance operating subsidiaries and is further reported by major product lines – property and casualty & other. TransRe provides property and

casualty reinsurance to insurers and reinsurers through brokers and on a direct basis to ceding companies. TransRe also writes a modest amount of insurance business, which is included in the reinsurance segment. Over one-third of the premiums earned by TransRe’s operations are generated by offices located in Canada, Europe, Asia, Australia, Africa and those serving Latin America and the Caribbean. Although the majority of the premiums earned by these offices typically relate to the regions where they are located, a significant portion may be derived from other regions of the world, including the U.S. In addition, although a significant portion of the assets and liabilities of these foreign offices generally relate to the countries where ceding companies and reinsurers are located, most investments are located in the country of domicile of these offices.

The insurance segment consists of property and casualty insurance operations conducted in the U.S. by AIHL through its insurance operating subsidiaries RSUI, CapSpecialty and PacificComp. RSUI also writes a modest amount of assumed reinsurance business, which is included in the insurance segment.

The components of other activities are Alleghany Capital and corporate activities. Alleghany Capital consists of manufacturing and service operations, oil and gas operations and corporate operations and investments at the Alleghany Capital parent level. Manufacturing and service operations are conducted through Bourn & Koch, Kentucky Trailer, IPS, beginning October 31, 2015, and Alleghany Capital’s investment in Jazwares. Oil and gas operations are conducted through SORC and Alleghany Capital’s investment in ORX. Jazwares and ORX are accounted for under the equity method of accounting.

The primary components of corporate activities are Alleghany Properties and other activities at the parent level.

In addition, corporate activities include interest expense associated with senior notes issued by Alleghany, whereas interest expense associated with senior notes issued by TransRe is included in “Total Segments.” Information related to Alleghany’s and TransRe’s senior notes can be found in Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K.

(b) Results

Segment results for Alleghany’s two reportable segments and for other activities for the three months ended March 31, 2016 and 2015 are shown in the tables below:


	Reinsurance Segment						Insurance Segment										Other Activities
Three Months Ended March 31, 2016	Property		Casualty & other⁽¹⁾		Total		RSUI		Cap Specialty		Pacific Comp		Total		Total Segments		Alleghany Capital		Corporate Activities⁽²⁾		Consolidated
	($ in millions)
Gross premiums written	$	383.2	$	759.2	$	1,142.4	$	256.9	$	62.9	$	34.1	$	353.9	$	1,496.3	$	-	$	(6.7)	$	1,489.6
Net premiums written		309.5		746.4		1,055.9		173.6		58.9		33.8		266.3		1,322.2		-		-		1,322.2
Net premiums earned		253.1		685.9		939.0		192.3		55.4		34.8		282.5		1,221.5		-		-		1,221.5
Net loss and LAE		96.1		430.0		526.1		85.1		26.9		26.5		138.5		664.6		-		-		664.6
Commissions, brokerage and other underwriting expenses		77.9		239.5		317.4		53.2		26.4		9.7		89.3		406.7		-		-		406.7

Underwriting profit (loss)⁽³⁾	$	79.1	$	16.4	$	95.5	$	54.0	$	2.1	$	(1.4)	$	54.7		150.2		-		-		150.2

Net investment income																102.8		(0.1)		2.2		104.9
Net realized capital gains																39.4		(0.1)		(3.4)		35.9
Other than temporary impairment losses																(20.8)		-		-		(20.8)
Other revenue																0.2		136.9		0.3		137.4
Other operating expenses																22.0		139.5		0.7		162.2
Corporate administration																0.2		-		9.5		9.7
Amortization of intangible assets																(1.0)		4.1		-		3.1
Interest expense																6.9		0.3		13.1		20.3

Earnings (losses) before income taxes															$	243.7	$	(7.2)	$	(24.2)	$	212.3


	Reinsurance Segment						Insurance Segment										Other Activities
Three Months Ended March 31, 2015	Property		Casualty & other⁽¹⁾		Total		RSUI		Cap Specialty		Pacific Comp		Total		Total Segments		Alleghany Capital		Corporate Activities⁽²⁾		Consolidated
	($ in millions)
Gross premiums written	$	271.6	$	630.6	$	902.2	$	288.2	$	54.5	$	21.5	$	364.2	$	1,266.4	$	-	$	(7.5)	$	1,258.9
Net premiums written		210.1		618.7		828.8		190.5		50.6		21.2		262.3		1,091.1		-		-		1,091.1
Net premiums earned		215.6		531.3		746.9		203.1		47.6		19.6		270.3		1,017.2		-		-		1,017.2
Net loss and LAE		63.2		343.2		406.4		100.8		24.4		15.3		140.5		546.9		-		-		546.9
Commissions, brokerage and other underwriting expenses		66.9		189.8		256.7		55.3		22.8		8.8		86.9		343.6		-		-		343.6

Underwriting profit (loss)⁽³⁾	$	85.5	$	(1.7)	$	83.8	$	47.0	$	0.4	$	(4.5)	$	42.9		126.7		-		-		126.7

Net investment income																110.8		1.0		1.6		113.4
Net realized capital gains																48.8		(0.1)		(5.6)		43.1
Other than temporary impairment losses																(52.3)		-		-		(52.3)
Other revenue																1.4		34.6		0.2		36.2
Other operating expenses																26.6		40.2		0.6		67.4
Corporate administration																0.3		-		12.4		12.7
Amortization of intangible assets																(1.8)		0.1		-		(1.7)
Interest expense																9.7		0.4		13.0		23.1

Earnings (losses) before income taxes															$	200.6	$	(5.2)	$	(29.8)	$	165.6

(1)	Primarily consists of the following assumed reinsurance lines of business: directors’ and officers’ liability; errors and omissions liability; general liability; medical malpractice; ocean marine and aviation; auto liability; accident and health; surety; and credit.

(2)	Includes elimination of minor reinsurance activity between segments.

(3)

Underwriting profit represents net premiums earned less net loss and LAE and commissions, brokerage and other underwriting expenses, all as determined in accordance with GAAP, and does not include net investment income, net realized capital gains, OTTI losses, other revenue, other operating expenses, corporate administration, amortization of intangible assets or interest expense. Underwriting profit does not replace earnings before income taxes determined in accordance with GAAP as a measure of profitability. Rather, Alleghany believes that underwriting profit enhances the understanding of its segments’ operating results by highlighting net earnings attributable to their underwriting performance. Earnings before income taxes (a GAAP measure) may show a profit despite an underlying underwriting loss. Where underwriting losses persist over extended periods, a reinsurance or an insurance company’s ability to continue as an ongoing concern may be at risk. Therefore, Alleghany views underwriting profit as an important measure in the overall evaluation of performance.

(c) Identifiable assets and equity

As of March 31, 2016, the identifiable assets of the reinsurance segment, insurance segment and other activities were $15.8 billion, $6.4 billion and $0.9 billion, respectively, of which cash and invested assets represented $13.3 billion, $4.8 billion and $0.4 billion, respectively. As of March 31, 2016, Alleghany’s equity attributable to the reinsurance segment, insurance segment and other activities was $5.3 billion, $2.7 billion and ($0.2) billion, respectively.

Included in other activities is debt associated with Alleghany Capital’s operating subsidiaries. This includes $40.4 million of borrowings by Kentucky Trailer as of March 31, 2016 related primarily to a mortgage loan, borrowings to finance small acquisitions and borrowings under its available credit facility. None of these liabilities are guaranteed by Alleghany or Alleghany Capital, and they are classified as a component of other liabilities on Alleghany’s consolidated balance sheets.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following is a discussion and analysis of our financial condition and results of operations for the three months ended March 31, 2016 and 2015. This discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this
Form 10-Q and our audited consolidated financial statements and Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the Annual Report on Form 10-K for the year ended December 31, 2015, or the “2015 10-K.”

References in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, or this “Form 10-Q,” to the “Company,” “Alleghany,” “we,” “us,” and “our” refer to Alleghany Corporation and its consolidated subsidiaries unless the context otherwise requires. In addition, unless the context otherwise requires, references to

•

“TransRe” are to our wholly-owned reinsurance holding company subsidiary Transatlantic Holdings, Inc. and its subsidiaries,

•

“AIHL” are to our wholly-owned insurance holding company subsidiary Alleghany Insurance Holdings LLC,

•

“RSUI” are to our wholly-owned subsidiary RSUI Group, Inc. and its subsidiaries,

•

“CapSpecialty” are to our wholly-owned subsidiary CapSpecialty, Inc. and its subsidiaries,

•

“PacificComp” are to our wholly-owned subsidiary Pacific Compensation Corporation and its subsidiaries,

•

“AIHL Re” are to our wholly-owned subsidiary AIHL Re LLC,

•

“Roundwood” are to our wholly-owned subsidiary Roundwood Asset Management LLC,

•

“Alleghany Capital” are to our wholly-owned subsidiary Alleghany Capital Corporation and its subsidiaries,

•

“SORC” are to our wholly-owned subsidiary Stranded Oil Resources Corporation and its subsidiaries,

•

“Bourn & Koch” are to our majority-owned subsidiary Bourn & Koch, Inc.,

•

“Kentucky Trailer” are to our majority-owned subsidiary R.C. Tway Company, LLC,

•

“IPS” are to our majority-owned subsidiary IPS-Integrated Project Services, LLC and its subsidiaries, and

•

“Alleghany Properties” are to our wholly-owned subsidiary Alleghany Properties Holdings LLC and its subsidiaries.

Note on Forward-Looking Statements

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Quantitative and Qualitative Disclosures About Market Risk” contain disclosures which are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements include all statements that do not relate solely to historical or current facts, and can be identified by the use of words such as “may,” “will,” “expect,” “project,” “estimate,” “anticipate,” “plan,” “believe,” “potential,” “should” or the negative versions of those words or other comparable words. These forward-looking statements are based upon our current plans or expectations and are subject to a number of uncertainties and risks that could significantly affect current plans, anticipated actions and our future financial condition and results. These statements are not guarantees of future performance, and we have no specific intention to update these statements. The uncertainties and risks include, but are not limited to:

•

significant weather-related or other natural or man-made catastrophes and disasters;

•

the cyclical nature of the property and casualty reinsurance and insurance industries;

•

changes in market prices of our significant equity investments and changes in value of our debt securities portfolio;

•

adverse loss development for events insured by our reinsurance and insurance subsidiaries in either the current year or prior years;

•

the long-tail and potentially volatile nature of certain casualty lines of business written by our reinsurance and insurance subsidiaries;

•

the cost and availability of reinsurance;

•

the reliance by our reinsurance operating subsidiaries on a limited number of brokers;

•

increases in the levels of risk retention by our reinsurance and insurance subsidiaries;

•

exposure to terrorist acts and acts of war;

•

the willingness and ability of our reinsurance and insurance subsidiaries’ reinsurers to pay reinsurance recoverables owed to our reinsurance and insurance subsidiaries;

•

changes in the ratings assigned to our reinsurance and insurance subsidiaries;

•

claims development and the process of estimating reserves;

•

legal, political, judicial and regulatory changes, including the federal financial regulatory reform of the insurance industry by the Dodd-Frank Wall Street Reform and Consumer Protection Act;

•

the uncertain nature of damage theories and loss amounts;

•

the loss of key personnel of our reinsurance or insurance operating subsidiaries;

•

fluctuation in foreign currency exchange rates;

•

the failure to comply with the restrictive covenants contained in the agreements governing our indebtedness;

•

the ability to make payments on, or repay or refinance, our debt;

•

risks inherent in international operations; and

•

difficult and volatile conditions in the global market.

Additional risks and uncertainties include general economic and political conditions, including the effects of a prolonged U.S. or global economic downturn or recession; changes in costs; variations in political, economic or other factors; risks relating to conducting operations in a competitive environment; effects of acquisition and disposition activities, inflation rates, or recessionary or expansive trends; changes in interest rates; extended labor disruptions, civil unrest, or other external factors over which we have no control; and changes in our plans, strategies, objectives, expectations, or intentions, which may happen at any time at our discretion. As a consequence, current plans, anticipated actions, and future financial condition and results may differ from those expressed in any forward-looking statements made by us or on our behalf. See Part I, Item 1A, “Risk Factors” of the 2015 10-K.

Comment on Non-GAAP Financial Measures

Throughout this Form 10-Q, our analysis of our financial condition and results of operations is based on our consolidated financial statements which have been prepared in accordance with accounting principles generally accepted in the United States of America, or “GAAP.” Our results of operations have been presented in the way that we believe will be the most meaningful and useful to investors, analysts, rating agencies and others who use financial information in evaluating our performance. This presentation includes the use of underwriting profit and earnings before interest, income taxes, depreciation and amortization expense, and further adjusted to exclude investment gains or losses, or “Adjusted EBITDA,” which are “non-GAAP financial measures,” as such term is defined in Item 10(e) of Regulation S-K promulgated by the Securities and Exchange Commission, or the “SEC.”

Underwriting profit is a “non-GAAP financial measure” for our reinsurance and insurance segments. Underwriting profit represents net premiums earned less net loss and loss adjustment expenses, or “LAE,” and commissions, brokerage and other underwriting expenses, all as determined in accordance with GAAP and does not include net investment income, net realized capital gains, other than temporary impairment, or “OTTI,” losses, other revenue, other operating expenses, corporate administration, amortization of intangible assets or interest expense. We consistently use underwriting profit as a supplement to earnings before income taxes, the most comparable GAAP financial measure, to evaluate the performance of our segments and believe that underwriting profit provides useful additional information to investors because it highlights net earnings attributable to a segment’s underwriting performance. Earnings before income taxes may show a profit despite an underlying underwriting loss, and when underwriting losses persist over extended periods, a reinsurance or an insurance company’s ability to continue as an ongoing concern may be at risk. However, underwriting profit is not meant to be considered in isolation or as a substitute for earnings before income taxes or any other measures of operating performance prepared in accordance with GAAP. A reconciliation of underwriting profit to earnings before income taxes is presented within “Consolidated Results of Operations.”

Adjusted EBITDA is a “non-GAAP financial measure” for our non-insurance operating subsidiaries and investments held by our Alleghany Capital subsidiary. Adjusted EBITDA represents other revenue less certain other expenses, and does not include: (i) depreciation expense (a component of other operating expenses); (ii) amortization of intangible assets; (iii) interest expense; (iv) net realized capital gains; (v) OTTI losses; and (vi) income taxes. Because Adjusted EBITDA excludes interest, income taxes, depreciation and amortization, it provides an indication of economic performance that is not affected by levels of debt, interest rates, effective tax rates or levels of depreciation and amortization resulting from purchase accounting. We use Adjusted EBITDA as a supplement to earnings before income taxes, the most comparable GAAP financial measure, to evaluate the performance of certain of our non-insurance operating subsidiaries and investments. A reconciliation of Adjusted EBITDA to earnings before income taxes is presented within “Consolidated Results of Operations.”

Overview

The following overview does not address all of the matters covered in the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations or contain all of the information that may be important to our stockholders or the investing public. This overview should be read in conjunction with the other sections of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

•

Net earnings attributable to Alleghany stockholders were $154.5 million in the first quarter of 2016, compared with $125.2 million in the first quarter of 2015.

•

Earnings before income taxes were $212.3 million in the first quarter of 2016, compared with $165.6 million in the first quarter of 2015.

•

Net investment income decreased by 7.5 percent in the first quarter of 2016 from the first quarter of 2015.

•

Net premiums written increased by 21.2 percent in the first quarter of 2016 from the first quarter of 2015.

•

Underwriting profit was $150.2 million in the first quarter of 2016, compared with $126.7 million in the first quarter of 2015.

•

The combined ratio for our reinsurance and insurance segments was 87.7 percent in the first quarter of 2016, compared with 87.6 percent in the first quarter of 2015.

•

Catastrophe losses, net of reinsurance, were $2.6 million in the first quarter of 2016, compared with $1.8 million in the first quarter of 2015.

•

Net favorable prior accident year development on loss reserves was $85.3 million in the first quarter of 2016, compared with $40.6 million in the first quarter of 2015.

As of March 31, 2016, we had total assets of $23.1 billion and total stockholders’ equity attributable to Alleghany stockholders of $7.8 billion. As of March 31, 2016, we had consolidated total investments of approximately $18.0 billion, of which $13.6 billion was invested in debt securities, $2.9 billion was invested in equity securities, $0.5 billion was invested in short-term investments, $0.3 billion was invested in commercial mortgage loans and $0.7 billion was invested in other invested assets.

Consolidated Results of Operations

The following table summarizes our consolidated revenues, costs and expenses and earnings.


	Three Months Ended March 31,
	2016		2015
	($ in millions)
Revenues
Net premiums earned	$	1,221.5	$	1,017.2
Net investment income		104.9		113.4
Net realized capital gains		35.9		43.1
Other than temporary impairment losses		(20.8)		(52.3)
Other revenue		137.4		36.2

Total revenues		1,478.9		1,157.6


Costs and Expenses
Net loss and loss adjustment expenses		664.6		546.9
Commissions, brokerage and other underwriting expenses		406.7		343.6
Other operating expenses		162.2		67.4
Corporate administration		9.7		12.7
Amortization of intangible assets		3.1		(1.7)
Interest expense		20.3		23.1

Total costs and expenses		1,266.6		992.0


Earnings before income taxes		212.3		165.6
Income taxes		57.7		40.2

Net earnings		154.6		125.4
Net earnings attributable to noncontrolling interest		0.1		0.2

Net earnings attributable to Alleghany stockholders	$	154.5	$	125.2

Alleghany’s segments are reported in a manner consistent with the way management evaluates the businesses. As such, Alleghany classifies its businesses into two reportable segments – reinsurance and insurance. Other activities include Alleghany Capital and corporate activities. See Note 9 to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form 10-Q for additional detail on our segments and other activities. The results for our segments and for other activities for the three months ended March 31, 2016 and 2015 are shown in the tables below:


	Segments						Other Activities
Three Months Ended March 31, 2016	Reinsurance Segment		Insurance Segment		Total Segments		Alleghany Capital		Corporate Activities⁽¹⁾		Consolidated
	($ in millions, except ratios)
Gross premiums written	$	1,142.4	$	353.9	$	1,496.3	$	-	$	(6.7)	$	1,489.6
Net premiums written		1,055.9		266.3		1,322.2		-		-		1,322.2

Net premiums earned		939.0		282.5		1,221.5		-		-		1,221.5

Net loss and LAE:
Current year (excluding catastrophe losses)		597.1		150.2		747.3		-		-		747.3
Current year catastrophe losses		-		2.6		2.6		-		-		2.6
Prior years		(71.0)		(14.3)		(85.3)		-		-		(85.3)

Total net loss and LAE		526.1		138.5		664.6		-		-		664.6
Commissions, brokerage and other underwriting expenses		317.4		89.3		406.7		-		-		406.7

Underwriting profit⁽²⁾	$	95.5	$	54.7		150.2		-		-		150.2

Net investment income						102.8		(0.1)		2.2		104.9
Net realized capital gains						39.4		(0.1)		(3.4)		35.9
Other than temporary impairment losses						(20.8)		-		-		(20.8)
Other revenue						0.2		136.9		0.3		137.4
Other operating expenses						22.0		139.5		0.7		162.2
Corporate administration						0.2		-		9.5		9.7
Amortization of intangible assets						(1.0)		4.1		-		3.1
Interest expenses						6.9		0.3		13.1		20.3

Earnings (losses) before income taxes					$	243.7	$	(7.2)	$	(24.2)	$	212.3


Loss ratio⁽³⁾:
Current year (excluding catastrophe losses)		63.6%		53.2%		61.2%
Current year catastrophe losses		- %		0.9%		0.2%
Prior years		(7.6%)		(5.1%)		(7.0%)

Total net loss and LAE		56.0%		49.0%		54.4%
Expense ratio⁽⁴⁾		33.8%		31.6%		33.3%

Combined ratio⁽⁵⁾		89.8%		80.6%		87.7%


	Segments						Other Activities
Three Months Ended March 31, 2015	Reinsurance Segment		Insurance Segment		Total Segments		Alleghany Capital		Corporate Activities⁽¹⁾		Consolidated
	($ in millions, except ratios)
Gross premiums written	$	902.2	$	364.2	$	1,266.4	$	-	$	(7.5)	$	1,258.9
Net premiums written		828.8		262.3		1,091.1		-		-		1,091.1

Net premiums earned		746.9		270.3		1,017.2		-		-		1,017.2

Net loss and LAE:
Current year (excluding catastrophe losses)		444.8		140.9		585.7		-		-		585.7
Current year catastrophe losses		-		1.8		1.8		-		-		1.8
Prior years		(38.4)		(2.2)		(40.6)		-		-		(40.6)

Total net loss and LAE		406.4		140.5		546.9		-		-		546.9
Commissions, brokerage and other underwriting expenses		256.7		86.9		343.6		-		-		343.6

Underwriting profit⁽²⁾	$	83.8	$	42.9		126.7		-		-		126.7

Net investment income						110.8		1.0		1.6		113.4
Net realized capital gains						48.8		(0.1)		(5.6)		43.1
Other than temporary impairment losses						(52.3)		-		-		(52.3)
Other revenue						1.4		34.6		0.2		36.2
Other operating expenses						26.6		40.2		0.6		67.4
Corporate administration						0.3		-		12.4		12.7
Amortization of intangible assets						(1.8)		0.1		-		(1.7)
Interest expenses						9.7		0.4		13.0		23.1

Earnings (losses) before income taxes					$	200.6	$	(5.2)	$	(29.8)	$	165.6


Loss ratio⁽³⁾:
Current year (excluding catastrophe losses)		59.5%		52.1%		57.6%
Current year catastrophe losses		- %		0.7%		0.2%
Prior years		(5.1%)		(0.8%)		(4.0%)

Total net loss and LAE		54.4%		52.0%		53.8%
Expense ratio⁽⁴⁾		34.4%		32.2%		33.8%

Combined ratio⁽⁵⁾		88.8%		84.2%		87.6%

(1)	Includes elimination of minor reinsurance activity between segments.

(2)

(3)	The loss ratio is derived by dividing the amount of net loss and LAE by net premiums earned, all as determined in accordance with GAAP.

(4)	The expense ratio is derived by dividing the amount of commissions, brokerage and other underwriting expenses by net premiums earned, all as determined in accordance with GAAP.

(5)

The combined ratio is the sum of the loss ratio and the expense ratio, all as determined in accordance with GAAP. The combined ratio represents the percentage of each premium dollar a reinsurance or an insurance company has to spend on net loss and LAE, and commissions, brokerage and other underwriting expenses.

Comparison of Three Months Ended March 31, 2016 and 2015

Premiums. The following table summarizes our consolidated premiums.


	Three Months Ended March 31,				Percent Change
	2016		2015		Percent Change
	($ in millions)
Premiums written:
Gross premiums written	$	1,489.6	$	1,258.9		18.3%
Net premiums written		1,322.2		1,091.1		21.2%

Net premiums earned		1,221.5		1,017.2		20.1%

The increase in gross premiums written in the first quarter of 2016 from the first quarter of 2015 reflects an increase at our reinsurance segment, partially offset by a decrease at our insurance segment. The increase in net premiums written in the first quarter of 2016 from the first quarter of 2015 primarily reflects an increase at our reinsurance segment. The increases in gross premiums written and net premiums written at our reinsurance segment primarily reflect $244.8 million of premiums related to a large whole account quota share treaty entered into in the fourth quarter of 2015, partially offset by the impact of changes in foreign exchange rates. The increase in net premiums written was also partially offset by higher ceded premiums written due to an increase in retrocessional coverage purchased by TransRe. The decrease in gross premiums written at our insurance segment reflects lower premiums at RSUI, partially offset by continued growth in premiums at PacificComp and CapSpecialty.

The increase in net premiums earned in the first quarter of 2016 from the first quarter of 2015 primarily reflects an increase at our reinsurance segment for the reasons discussed above.

Premiums for the first quarter of 2016 and 2015 are more fully described in the following pages.

Net loss and LAE. The following table summarizes our consolidated net loss and LAE.


	Three Months Ended March 31,				Percent Change
	2016		2015		Percent Change
	($ in millions, except ratios)
Net loss and LAE:
Current year (excluding catastrophe losses)	$	747.3	$	585.7		27.6%
Current year catastrophe losses		2.6		1.8		44.4%
Prior years		(85.3)		(40.6)		110.1%

Total net loss and LAE	$	664.6	$	546.9		21.5%


Loss ratio:
Current year (excluding catastrophe losses)		61.2%		57.6%
Current year catastrophe losses		0.2%		0.2%
Prior years		(7.0%)		(4.0%)

Total net loss and LAE		54.4%		53.8%

The increase in net loss and LAE in the first quarter of 2016 from the first quarter of 2015 primarily reflects an increase at our reinsurance segment. The increase at our reinsurance segment primarily reflects higher net premiums earned, as discussed above, and higher non-catastrophe property losses in the current accident year in connection with a large whole account quota share treaty entered into in the fourth quarter of 2015, partially offset by an increase in favorable prior accident year development on loss reserves.

Net loss and LAE for the first quarter of 2016 and 2015 are more fully described in the following pages.

Commissions, brokerage and other underwriting expenses. The following table summarizes our consolidated commissions, brokerage and other underwriting expenses.


	Three Months Ended March 31,				Percent Change
	2016		2015		Percent Change
	($ in millions, except ratios)
Commissions, brokerage and other underwriting expenses	$	406.7	$	343.6		18.4%

Expense ratio		33.3%		33.8%

The increase in commissions, brokerage and other underwriting expenses in the first quarter of 2016 from the first quarter of 2015 primarily reflects an increase at our reinsurance segment. The increase at our reinsurance segment primarily reflects higher net premiums earned, as discussed above, partially offset by relatively stable employee-related costs.

Commissions, brokerage and other underwriting expenses for the first quarter of 2016 and 2015 are more fully described in the following pages.

Underwriting profit. The following table summarizes our consolidated underwriting profit.


	Three Months Ended March 31,				Percent Change
	2016		2015		Percent Change
	($ in millions, except ratios)
Underwriting profit	$	150.2	$	126.7		18.5%

Combined ratio		87.7%		87.6%

The increase in underwriting profit in the first quarter of 2016 from the first quarter of 2015 reflects increases at our reinsurance segment and our insurance segment. The increases at our reinsurance and insurance segments primarily reflect more favorable prior year loss reserve development.

Underwriting profits for the first quarter of 2016 and 2015 are more fully described in the following pages.

Investment results. The following table summarizes our consolidated investment results.


	Three Months Ended March 31,				Percent Change
	2016		2015		Percent Change
	($ in millions)
Net investment income	$	104.9	$	113.4		(7.5%)
Net realized capital gains		35.9		43.1		(16.7%)
Other than temporary impairment losses		(20.8)		(52.3)		(60.2%)

The decrease in net investment income in the first quarter of 2016 from the first quarter of 2015 primarily reflects lower earnings from partnership investments and equity-method investments included in other invested assets, partially offset by higher interest income from funds withheld by cedants.

The decrease in net realized capital gains in the first quarter of 2016 from the first quarter of 2015 primarily reflects lower gains from the sales of equity securities.

The decrease in other than temporary impairment losses in the first quarter of 2016 from the first quarter of 2015 reflects a significant decrease in losses on equity securities, partially offset by losses on debt securities in the first quarter of 2016.

Investment results for the first quarter of 2016 and 2015 are more fully described in the following pages.

Other revenue and expenses. The following table summarizes our consolidated other revenue and expenses.


	Three Months Ended March 31,				Percent Change
	2016		2015		Percent Change
	($ in millions)
Other revenue	$	137.4	$	36.2		279.6%

Other operating expenses		162.2		67.4		140.7%
Corporate administration		9.7		12.7		(23.6%)
Amortization of intangible assets		3.1		(1.7)		(282.4%)
Interest expense		20.3		23.1		(12.1%)

Other revenue and Other operating expenses. Other revenue and other operating expenses primarily include revenues and expenses associated with our Alleghany Capital subsidiary. Other operating expenses also include the long-term incentive compensation of our reinsurance segment and insurance segment, which totaled $21.4 million and $25.7 million in the first quarter of 2016 and 2015, respectively.

The increases in other revenue and other operating expenses in the first quarter of 2016 from the first quarter of 2015 primarily reflect the acquisition of IPS on October 31, 2015 and, to a lesser extent, growth at Kentucky Trailer.

Corporate administration. The decrease in corporate administration expense in the first quarter of 2016 from the first quarter of 2015 primarily reflects a decrease in aggregate annual incentive accruals and lower long-term incentive compensation expenses.

Amortization of intangible assets. Amortization expense in the first quarter of 2016 reflects the amortization of net intangible assets, including intangible assets related to the acquisition of IPS. Negative amortization expense in the first quarter of 2015 reflects the amortization of intangible liabilities acquired in the merger with TransRe in 2012, partially offset by the amortization of intangible assets.

Interest expense. The decrease in interest expense in the first quarter of 2016 from the first quarter of 2015 primarily reflects lower interest expense at TransRe resulting from the maturity and repayment of senior notes on December 14, 2015. See Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K for further information on the senior notes.

Income taxes. The following table summarizes our consolidated income tax expense.


	Three Months Ended March 31,				Percent Change
	2016		2015		Percent Change
	($ in millions, except ratios)
Income taxes	$	57.7	$	40.2		43.5%

Effective tax rate		27.2%		24.3%

The increase in income taxes in the first quarter of 2016 from the first quarter of 2015 primarily reflects an increase in earnings before income taxes. The increase in the effective tax rate in the first quarter of 2016 from the first quarter of 2015 primarily reflects higher taxable income, primarily from higher underwriting profits, and lower tax-exempt interest income arising from municipal bond securities.

Earnings. The following table summarizes our earnings.


	Three Months Ended March 31,				Percent Change
	2016		2015		Percent Change
	($ in millions)
Earnings before income taxes	$	212.3	$	165.5		28.3%
Net earnings attributable to Alleghany stockholders		154.5		125.2		23.4%

The increases in earnings before income taxes and net earnings attributable to Alleghany stockholders in the first quarter of 2016 from the first quarter of 2015 primarily reflects higher underwriting profits and lower OTTI losses, all as discussed above.

Reinsurance Segment Underwriting Results

The reinsurance segment is comprised of TransRe’s property and casualty & other lines of business. TransRe also writes a modest amount of property and casualty insurance business, which is included in the reinsurance segment. For a more detailed description of our reinsurance segment, see Part I, Item 1, “Business—Segment Information—Reinsurance Segment” of the 2015 10-K.

The underwriting results of the reinsurance segment are presented below.


Three Months Ended March 31, 2016	Property		Casualty & other⁽¹⁾		Total
	($ in millions, except ratios)
Gross premiums written	$	383.2	$	759.2	$	1,142.4
Net premiums written		309.5		746.4		1,055.9

Net premiums earned		253.1		685.9		939.0
Net loss and LAE:
Current year (excluding catastrophe losses)		129.3		467.8		597.1
Current year catastrophe losses		-		-		-
Prior years		(33.2)		(37.8)		(71.0)

Total net loss and LAE		96.1		430.0		526.1
Commissions, brokerage and other underwriting expenses		77.9		239.5		317.4

Underwriting profit⁽²⁾	$	79.1	$	16.4	$	95.5


Loss ratio⁽³⁾:
Current year (excluding catastrophe losses)		51.1%		68.2%		63.6%
Current year catastrophe losses		- %		- %		- %
Prior years		(13.1%)		(5.5%)		(7.6%)

Total net loss and LAE		38.0%		62.7%		56.0%
Expense ratio⁽⁴⁾		30.8%		34.9%		33.8%

Combined ratio⁽⁵⁾		68.8%		97.6%		89.8%


Three Months Ended March 31, 2015	Property		Casualty & other⁽¹⁾		Total
	($ in millions, except ratios)
Gross premiums written	$	271.6	$	630.6	$	902.2
Net premiums written		210.1		618.7		828.8

Net premiums earned		215.6		531.3		746.9
Net loss and LAE:
Current year (excluding catastrophe losses)		75.2		369.6		444.8
Current year catastrophe losses		-		-		-
Prior years		(12.0)		(26.4)		(38.4)

Total net loss and LAE		63.2		343.2		406.4
Commissions, brokerage and other underwriting expenses		66.9		189.8		256.7

Underwriting profit (loss)⁽²⁾	$	85.5	$	(1.7)	$	83.8


Loss ratio⁽³⁾:
Current year (excluding catastrophe losses)		34.9%		69.6%		59.5%
Current year catastrophe losses		- %		- %		- %
Prior years		(5.6%)		(5.0%)		(5.1%)

Total net loss and LAE		29.3%		64.6%		54.4%
Expense ratio⁽⁴⁾		31.0%		35.7%		34.4%

Combined ratio⁽⁵⁾		60.3%		100.3%		88.8%

(1)	Primarily consists of the following assumed reinsurance lines of business: directors’ and officers’ liability; errors and omissions liability; general liability; medical malpractice; ocean marine and aviation; auto liability; accident and health; surety; and credit.

(2)

Underwriting profit (loss) represents net premiums earned less net loss and LAE and commissions, brokerage and other underwriting expenses, all as determined in accordance with GAAP, and does not include net investment income, net realized capital gains, OTTI losses, other revenue, other operating expenses, corporate administration, amortization of intangible assets or interest expense. Underwriting profit is a non-GAAP financial measure and does not replace earnings before income taxes determined in accordance with GAAP as a measure of profitability. See “Comment on Non-GAAP Financial Measures” herein for additional detail on the presentation of our results of operations.

(3)	The loss ratio is derived by dividing the amount of net loss and LAE by net premiums earned, all as determined in accordance with GAAP.

(4)	The expense ratio is derived by dividing the amount of commissions, brokerage and other underwriting expenses by net premiums earned, all as determined in accordance with GAAP.

(5)

Reinsurance Segment: Premiums. The following table summarizes premiums for the reinsurance segment.


	Three Months Ended March 31,				Percent Change
	2016		2015		Percent Change
	($ in millions)
Property
Premiums written:
Gross premiums written	$	383.2	$	271.6		41.1%
Net premiums written		309.5		210.1		47.3%

Net premiums earned		253.1		215.6		17.4%

Casualty & other
Premiums written:
Gross premiums written	$	759.2	$	630.6		20.4%
Net premiums written		746.4		618.7		20.6%

Net premiums earned		685.9		531.3		29.1%

Total
Premiums written:
Gross premiums written	$	1,142.4	$	902.2		26.6%
Net premiums written		1,055.9		828.8		27.4%

Net premiums earned		939.0		746.9		25.7%

Property. The increase in gross premiums written in the first quarter of 2016 from the first quarter of 2015 primarily reflects $110.5 million of property-related premiums in connection with a large whole account quota share treaty entered into in the fourth quarter of 2015, partially offset by the impact of changes in foreign exchange rates. Excluding the impact of changes in foreign exchange rates, gross premiums written increased 43.0 percent in the first quarter of 2016 from the first quarter of 2015.

The increase in net premiums earned in the first quarter of 2016 from the first quarter of 2015 primarily reflects an increase in gross premiums written in recent quarters, partially offset by higher ceded premiums earned due to an increase in retrocessional coverage purchased in 2016 and the impact of changes in foreign exchange rates. Excluding the impact of changes in foreign exchange rates, net premiums earned increased 18.3 percent in the first quarter of 2016 from the first quarter of 2015.

Casualty & other. The increase in gross premiums written in the first quarter of 2016 from the first quarter of 2015 primarily reflects $134.3 million of casualty-related premiums in connection with a large whole account quota share treaty entered into in the fourth quarter of 2015, partially offset by the impact of changes in foreign exchange rates. Excluding the impact of changes in foreign exchange rates, gross premiums written increased 21.8 percent in the first quarter of 2016 from the first quarter of 2015.

The increase in net premiums earned in the first quarter of 2016 from the first quarter of 2015 primarily reflects an increase in gross premiums written in recent quarters, partially offset by the impact of changes in foreign exchange rates. Excluding the impact of changes in foreign exchange rates, net premiums earned increased 30.6 percent in the first quarter of 2016 from the first quarter of 2015.

Reinsurance Segment: Net loss and LAE. The following table summarizes net loss and LAE for the reinsurance segment.


	Three Months Ended March 31,				Percent
	2016		2015		Change
	($ in millions, except ratios)
Property
Net loss and LAE:
Current year (excluding catastrophe losses)	$	129.3	$	75.2		71.9%
Current year catastrophe losses		-		-		-
Prior years		(33.2)		(12.0)		176.7%

Total net loss and LAE	$	96.1	$	63.2		52.1%


Loss ratio:
Current year (excluding catastrophe losses)		51.1%		34.9%
Current year catastrophe losses		- %		- %
Prior years		(13.1%)		(5.6%)

Total net loss and LAE		38.0%		29.3%


Casualty & other
Net loss and LAE:
Current year (excluding catastrophe losses)	$	467.8	$	369.6		26.6%
Current year catastrophe losses		-		-		-
Prior years		(37.8)		(26.4)		43.2%

Total net loss and LAE	$	430.0	$	343.2		25.3%


Loss ratio:
Current year (excluding catastrophe losses)		68.2%		69.6%
Current year catastrophe losses		- %		- %
Prior years		(5.5%)		(5.0%)

Total net loss and LAE		62.7%		64.6%


Total
Net loss and LAE:
Current year (excluding catastrophe losses)	$	597.1	$	444.8		34.2%
Current year catastrophe losses		-		-		-
Prior years		(71.0)		(38.4)		84.9%

Total net loss and LAE	$	526.1	$	406.4		29.5%


Loss ratio:
Current year (excluding catastrophe losses)		63.6%		59.5%
Current year catastrophe losses		- %		- %
Prior years		(7.6%)		(5.1%)

Total net loss and LAE		56.0%		54.4%

Property. The increase in net loss and LAE in the first quarter of 2016 from the first quarter of 2015 primarily reflects the impact of higher net premiums earned and higher non-catastrophe property losses in the current accident year in connection with a large whole account quota share treaty entered into in the fourth quarter of 2015, partially offset by more favorable prior accident year development on loss reserves. There were no catastrophe losses in the first quarter of 2016 or 2015.

Net loss and LAE in the first quarter of 2016 and 2015 include (favorable) unfavorable prior accident year development on loss reserves as shown in the table below.


	Three Months Ended March 31,
	2016			2015
	($ in millions)
Catastrophe events	$	(1.0)	⁽¹⁾	$	2.9	⁽²⁾
Non-catastrophe		(32.2)	⁽³⁾		(14.9)	⁽⁴⁾

Total	$	(33.2)		$	(12.0)

(1)	Reflects favorable prior accident year development from several catastrophes that occurred in the 2010 through 2015 accident years.

(2)	Primarily reflects unfavorable prior accident year development from the New Zealand earthquake in 2010, partially offset by favorable prior accident year development from several catastrophes that occurred in the 2011 through 2013 accident years.

(3)	Reflects favorable prior accident year development primarily related to the 2014 and 2015 accident years.

(4)	Reflects favorable prior accident year development primarily related to the 2012 and 2014 accident years.

The favorable prior accident year development on loss reserves in the first quarter of 2016 and 2015 reflects favorable loss emergence compared with loss emergence patterns assumed in earlier periods. The favorable prior accident year development on loss reserves in the first quarter of 2016 did not impact assumptions used in estimating TransRe’s loss and LAE liabilities for business earned in the first quarter of 2016.

Casualty & other. The increase in net loss and LAE in the first quarter of 2016 from the first quarter of 2015 primarily reflects the impact of higher net premiums earned, partially offset by the impact of a lower casualty loss ratio in the current accident year and more favorable prior accident year development on loss reserves.

Net loss and LAE in the first quarter of 2016 and 2015 include (favorable) unfavorable prior accident year development on loss reserves as shown in the table below.


	Three Months Ended March 31,
	2016			2015
	($ in millions)
The Malpractice Treaties⁽¹⁾	$	(6.9)		$	(5.4)
Other		(30.9)	⁽²⁾		(21.0)	⁽³⁾

Total	$	(37.8)		$	(26.4)

(1)

Represents certain medical malpractice treaties pursuant to which the increased underwriting profits created by the favorable prior accident year development on loss reserves are largely retained by the cedants, or the “Malpractice Treaties.” As a result, the favorable prior accident year development is largely offset by an increase in profit commission expense incurred when such favorable prior accident year development occurs.

(2)	Generally reflects favorable development in a variety of casualty & other lines of business primarily from the 2009, 2014 and 2015 accident years, partially offset by unfavorable development from the 2013 accident year.

(3)	Generally reflects favorable development in a variety of casualty & other lines of business primarily from the 2009 through 2014 accident years, partially offset by unfavorable development from the 2002 and prior accident years.

Reinsurance Segment: Commissions, brokerage and other underwriting expenses. The following table summarizes commissions, brokerage and other underwriting expenses for the reinsurance segment.


	Three Months Ended March 31,				Percent
	2016		2015		Change
	($ in millions, except ratios)
Property
Commissions, brokerage and other underwriting expenses	$	77.9	$	66.9		16.4%

Expense ratio		30.8%		31.0%

Casualty & other
Commissions, brokerage and other underwriting expenses	$	239.5	$	189.8		26.2%

Expense ratio		34.9%		35.7%

Total
Commissions, brokerage and other underwriting expenses	$	317.4	$	256.7		23.6%

Expense ratio		33.8%		34.4%

Property. The increase in commissions, brokerage and other underwriting expenses in the first quarter of 2016 from the first quarter of 2015 primarily reflects the impact of higher net premiums earned, partially offset by relatively stable employee-related costs.

Casualty & other. The increase in commissions, brokerage and other underwriting expenses in the first quarter of 2016 from the first quarter of 2015 primarily reflects the impact of higher net premiums earned, partially offset by relatively stable employee-related costs.

Reinsurance Segment: Underwriting profit. The following table summarizes our underwriting profit for the reinsurance segment.


	Three Months Ended March 31,				Percent
	2016		2015		Change
	($ in millions, except ratios)
Property
Underwriting profit	$	79.1	$	85.5		(7.5%)

Combined ratio		68.8%		60.3%

Casualty & other
Underwriting profit (loss)	$	16.4	$	(1.7)		(1,065%)

Combined ratio		97.6%		100.3%

Total
Underwriting profit	$	95.5	$	83.8		14.0%

Combined ratio		89.8%		88.8%

Property. The decrease in underwriting profit in the first quarter of 2016 from the first quarter of 2015 primarily reflects higher non-catastrophe property losses in the current accident year, partially offset by more favorable prior accident year development on loss reserves and the impact of higher net premiums earned.

Casualty & other. The underwriting profit in the first quarter of 2016 compared to the underwriting loss in the first quarter of 2015 primarily reflects the impact of higher net premiums earned and more favorable prior accident year development on loss reserves.

Insurance Segment Underwriting Results

The insurance segment is comprised of AIHL’s RSUI, CapSpecialty and PacificComp operating subsidiaries. RSUI also writes a modest amount of assumed reinsurance business, which is included in the insurance segment. For a more detailed description of our insurance segment, see Part I, Item 1, “Business—Segment Information—Insurance Segment” of the 2015 10-K.

The underwriting results of the insurance segment are presented below.


Three Months Ended March 31, 2016	RSUI		CapSpecialty		PacificComp		Total
	($ in millions, except ratios)
Gross premiums written	$	256.9	$	62.9	$	34.1	$	353.9
Net premiums written		173.6		58.9		33.8		266.3

Net premiums earned		192.3		55.4		34.8		282.5
Net loss and LAE:
Current year (excluding catastrophe losses)		96.2		27.5		26.5		150.2
Current year catastrophe losses		1.7		0.9		-		2.6
Prior years		(12.8)		(1.5)		-		(14.3)

Total net loss and LAE		85.1		26.9		26.5		138.5

Commissions, brokerage and other underwriting expenses		53.2		26.4		9.7		89.3

Underwriting profit (loss)⁽¹⁾	$	54.0	$	2.1	$	(1.4)	$	54.7


Loss ratio⁽²⁾:
Current year (excluding catastrophe losses)		50.1%		49.7%		76.1%		53.2%
Current year catastrophe losses		0.9%		1.6%		- %		0.9%
Prior years		(6.7%)		(2.7%)		- %		(5.1%)

Total net loss and LAE		44.3%		48.6%		76.1%		49.0%
Expense ratio⁽³⁾		27.7%		47.6%		27.9%		31.6%

Combined ratio⁽⁴⁾		72.0%		96.2%		104.0%		80.6%


Three Months Ended March 31, 2015	RSUI		CapSpecialty		PacificComp		Total
	($ in millions, except ratios)
Gross premiums written	$	288.2	$	54.5	$	21.5	$	364.2
Net premiums written		190.5		50.6		21.2		262.3

Net premiums earned		203.1		47.6		19.6		270.3
Net loss and LAE:
Current year (excluding catastrophe losses)		102.4		23.2		15.3		140.9
Current year catastrophe losses		1.0		0.8		-		1.8
Prior years		(2.6)		0.4		-		(2.2)

Total net loss and LAE		100.8		24.4		15.3		140.5

Commissions, brokerage and other underwriting expenses		55.3		22.8		8.8		86.9

Underwriting profit (loss)⁽¹⁾	$	47.0	$	0.4	$	(4.5)	$	42.9


Loss ratio⁽²⁾:
Current year (excluding catastrophe losses)		50.4%		48.8%		78.3%		52.1%
Current year catastrophe losses		0.5%		1.7%		- %		0.7%
Prior years		(1.3%)		0.8%		- %		(0.8%)

Total net loss and LAE		49.6%		51.3%		78.3%		52.0%
Expense ratio⁽³⁾		27.2%		47.8%		45.3%		32.2%

Combined ratio⁽⁴⁾		76.8%		99.1%		123.6%		84.2%

(1)

(2)	The loss ratio is derived by dividing the amount of net loss and LAE by net premiums earned, all as determined in accordance with GAAP.

(3)	The expense ratio is derived by dividing the amount of commissions, brokerage and other underwriting expenses by net premiums earned, all as determined in accordance with GAAP.

(4)

Insurance Segment: Premiums. The following table summarizes premiums for the insurance segment.


	Three Months Ended March 31,						Percent Change
	2016			2015			Percent Change
	($ in millions)
RSUI
Premiums written:
Gross premiums written		$	256.9		$	288.2		(10.9%)
Net premiums written			173.6			190.5		(8.9%)

Net premiums earned			192.3			203.1		(5.3%)

CapSpecialty
Premiums written:
Gross premiums written		$	62.9		$	54.5		15.4%
Net premiums written			58.9			50.6		16.4%

Net premiums earned			55.4			47.6		16.4%

PacificComp
Premiums written:
Gross premiums written		$	34.1		$	21.5		58.6%
Net premiums written			33.8			21.2		59.4%

Net premiums earned			34.8			19.6		77.6%

Total
Premiums written:
Gross premiums written		$	353.9		$	364.2		(2.8%)
Net premiums written			266.3			262.3		1.5%

Net premiums earned			282.5			270.3		4.5%

RSUI. The decrease in gross premiums written in the first quarter of 2016 from the first quarter of 2015 primarily reflects declines in the property line of business and, to a lesser extent, declines in RSUI’s other lines of business, all due to an increase in competition and a reduction in pricing. The decrease in net premiums earned in the first quarter of 2016 from the first quarter of 2015 primarily reflects a decrease in gross premiums written in recent quarters, partially offset by a decrease in ceded premiums earned due to the reduction in property premiums.

CapSpecialty. The increase in gross premiums written in the first quarter of 2016 from the first quarter of 2015 primarily reflects strong growth in the professional lines of business and, to a lesser extent, an increase in the surety lines of business. The increase in net premiums earned in the first quarter of 2016 from the first quarter of 2015 primarily reflects an increase in gross premiums written in recent quarters.

PacificComp. The increase in gross premiums written and net premiums earned in the first quarter of 2016 from the first quarter of 2015 primarily reflects premium growth due to PacificComp’s distribution initiatives and growth in desirable segments of the California workers’ compensation market.

Insurance Segment: Net loss and LAE. The following table summarizes net loss and LAE for the insurance segment.


	Three Months Ended March 31,				Percent Change
	2016		2015		Percent Change
	($ in millions, except ratios)

RSUI
Net loss and LAE:
Current year (excluding catastrophe losses)	$	96.2	$	102.4		(6.1%)
Current year catastrophe losses		1.7		1.0		70.0%
Prior years		(12.8)		(2.6)		392.3%

Total net loss and LAE	$	85.1	$	100.8		(15.6%)


Loss ratio:
Current year (excluding catastrophe losses)		50.1%		50.4%
Current year catastrophe losses		0.9%		0.5%
Prior years		(6.7%)		(1.3%)

Total net loss and LAE		44.3%		49.6%


CapSpecialty
Net loss and LAE:
Current year (excluding catastrophe losses)	$	27.5	$	23.2		18.5%
Current year catastrophe losses		0.9		0.8		12.5%
Prior years		(1.5)		0.4		(475.0%)

Total net loss and LAE	$	26.9	$	24.4		10.2%


Loss ratio:
Current year (excluding catastrophe losses)		49.7%		48.8%
Current year catastrophe losses		1.6%		1.7%
Prior years		(2.7%)		0.8%

Total net loss and LAE		48.6%		51.3%


PacificComp
Net loss and LAE:
Current year (excluding catastrophe losses)	$	26.5	$	15.3		73.2%
Current year catastrophe losses		-		-		-
Prior years		-		-		-

Total net loss and LAE	$	26.5	$	15.3		73.2%


Loss ratio:
Current year (excluding catastrophe losses)		76.1%		78.3%
Current year catastrophe losses		- %		- %
Prior years		- %		- %

Total net loss and LAE		76.1%		78.3%


Total
Net loss and LAE:
Current year (excluding catastrophe losses)	$	150.2	$	140.9		6.6%
Current year catastrophe losses		2.6		1.8		44.4%
Prior years		(14.3)		(2.2)		550.0%

Total net loss and LAE	$	138.5	$	140.5		(1.4%)


Loss ratio:
Current year (excluding catastrophe losses)		53.2%		52.1%
Current year catastrophe losses		0.9%		0.7%
Prior years		(5.1%)		(0.8%)

Total net loss and LAE		49.0%		52.0%

RSUI. The decrease in net loss and LAE in the first quarter of 2016 from the first quarter of 2015 primarily reflects more favorable prior accident year development on loss reserves and the impact of lower net premiums earned.

Net loss and LAE in the first quarter of 2016 and 2015 include (favorable) unfavorable prior accident year development on loss reserves as shown in the table below.


	Three Months Ended March 31,
	2016			2015
	($ in millions)
Casualty	$	(9.8)	⁽¹⁾	$	(1.1)	⁽²⁾
Property and other		(3.0)	⁽³⁾		(1.5)	⁽⁴⁾

Total	$	(12.8)		$	(2.6)

(1)	Primarily reflects favorable prior accident year development on loss reserves in the general liability, umbrella/excess and professional liability lines of business related to the 2006 through 2012 accident years.

(2)

Primarily reflects favorable prior accident year development on loss reserves in the umbrella/excess, general liability and professional liability lines of business related to the 2006 through 2011 accident years, partially offset by unfavorable development in the directors’ and officers’ liability line of business related to the 2011 through 2013 accident years.

(3)	Primarily reflects favorable prior accident year development on loss reserves in non-catastrophe property lines of business in recent accident years.

(4)

Primarily reflects favorable development in the professional liability, umbrella/excess and general liability lines of business related to the 2005 through 2010 accident years, partially offset by unfavorable development in the directors’ and officers’ liability line of business in the 2011 accident year.

The favorable prior accident year development on loss reserves in the first quarter of 2016 and 2015 reflects favorable loss emergence compared with loss emergence patterns assumed in earlier periods. The favorable prior accident year development on loss reserves in the first quarter of 2016 did not impact assumptions used in estimating RSUI’s loss and LAE liabilities for business earned in the first quarter of 2016.

CapSpecialty. The increase in net loss and LAE in the first quarter of 2016 from the first quarter of 2015 primarily reflects the impact of higher net premiums earned, partially offset by favorable prior accident year development on loss reserves in the first quarter of 2016, compared with unfavorable prior accident year development on loss reserves in the first quarter of 2015.

Net loss and LAE in the first quarter of 2016 include favorable prior accident year development on loss reserves primarily related to CapSpecialty’s legacy asbestos-related illness and environmental impairment liabilities. The favorable prior accident year development on loss reserves in the first quarter of 2016 reflects net favorable loss emergence compared with loss emergence patterns assumed in earlier periods. Net loss and LAE in the first quarter of 2015 include unfavorable prior accident year development on loss reserves primarily from the casualty line of business.

PacificComp. The increase in net loss and LAE in the first quarter of 2016 from the first quarter of 2015 primarily reflects the impact of higher net premiums earned.

Insurance Segment: Commissions, brokerage and other underwriting expenses. The following table summarizes commissions, brokerage and other underwriting expenses for the insurance segment.


	Three Months Ended March 31,						Percent Change
	2016			2015			Percent Change
	($ in millions, except ratios)
RSUI
Commissions, brokerage and other underwriting expenses		$	53.2		$	55.3		(3.8%)

Expense ratio			27.7%			27.2%

CapSpecialty
Commissions, brokerage and other underwriting expenses		$	26.4		$	22.8		15.8%

Expense ratio			47.6%			47.8%

PacificComp
Commissions, brokerage and other underwriting expenses		$	9.7		$	8.8		10.2%

Expense ratio			27.9%			45.3%

Total
Commissions, brokerage and other underwriting expenses		$	89.3		$	86.9		2.8%

Expense ratio			31.6%			32.2%

RSUI. The decrease in commissions, brokerage and other underwriting expenses in the first quarter of 2016 from the first quarter of 2015 primarily reflects the impact of lower net premiums earned.

CapSpecialty. The increase in commissions, brokerage and other underwriting expenses in the first quarter of 2016 from the first quarter of 2015 primarily reflects the impact of growth in net premiums earned.

PacificComp. The increase in commissions, brokerage and other underwriting expenses in the first quarter of 2016 from the first quarter of 2015 primarily reflects the impact of growth in net premiums earned, partially offset by the commencement of deferring certain acquisition costs for new business in the first quarter of 2016.

Insurance Segment: Underwriting profit. The following table summarizes our underwriting profit for the insurance segment.


	Three Months Ended March 31,								Percent Change
	2016				2015				Percent Change
	($ in millions, except ratios)
RSUI
Underwriting profit		$	54.0			$	47.0			14.9	%

Combined ratio			72.0	%			76.8	%

CapSpecialty
Underwriting profit		$	2.1			$	0.4			425.0	%

Combined ratio			96.2	%			99.1	%

PacificComp
Underwriting (loss)		$	(1.4	)		$	(4.5	)		(68.9	%)

Combined ratio			104.0	%			123.6	%

Total
Underwriting profit		$	54.7			$	42.9			27.5	%

Combined ratio			80.6	%			84.2	%

RSUI. The increase in underwriting profit in the first quarter of 2016 from the first quarter of 2015 primarily reflects an increase in favorable prior accident year development on loss reserves, partially offset by the impact of lower net premiums earned, all as discussed above.

CapSpecialty. The increase in underwriting profit in the first quarter of 2016 from the first quarter of 2015 primarily reflects favorable prior accident year development on loss reserves in the first quarter of 2016, compared with unfavorable prior accident year development on loss reserves in the first quarter of 2015, all as discussed above.

PacificComp. PacificComp reported underwriting losses in the first quarter 2016 and 2015, primarily as a result of its ongoing expenses relative to comparatively low premiums earned. The decrease in underwriting losses in the first quarter of 2016 from the first quarter of 2015 primarily reflects the beneficial impact of growing net premiums earned, as discussed above.

Total Reinsurance and Insurance Segments’ Investment Results

The following table summarizes the investment results for our reinsurance and insurance segments.


	Three Months Ended March 31,								Percent Change
	2016				2015				Percent Change
	($ in millions)
Net investment income		$	102.8			$	110.8			(7.2	%)
Net realized capital gains			39.4				48.8			(19.3	%)
Other than temporary impairment losses			(20.8	)			(52.3	)		(60.2	%)

Net Investment Income. The decrease in net investment income in the first quarter of 2016 from the first quarter of 2015 primarily reflects lower earnings from partnership investments and equity-method investments included in other invested assets, partially offset by higher interest income from funds withheld by cedants.

Net Realized Capital Gains. The decrease in net realized capital gains in the first quarter of 2016 from the first quarter of 2015 primarily reflects lower gains from the sales of equity securities.

Other Than Temporary Impairment Losses. OTTI losses in the first quarter of 2016 reflect $20.8 million of unrealized losses that were deemed to be other than temporary and, as such, were required to be charged against earnings. 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. Of the $20.8 million of OTTI losses, $5.3 million related to equity securities, primarily in the financial services, technology and chemical sectors, and $15.5 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.

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 March 31, 2016 were deemed to be temporary, based on, among other factors: (i) the duration of time and the relative magnitude to which the fair values of these securities had been below cost were not indicative of an OTTI loss (for example, no equity security was in a continuous unrealized loss position for 12 months or more as of March 31, 2016); (ii) the absence of compelling evidence that would cause us to call into question the financial condition or near-term business prospects of the issuers of the securities; and (iii) our ability and intent to hold the securities for a period of time sufficient to allow for any anticipated recovery.

See Note 3 to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form 10-Q for additional detail on gross unrealized investment losses for debt and equity securities as of March 31, 2016.

Alleghany Capital Results

Alleghany Capital consists of: (i) manufacturing and service operations conducted through Bourn & Koch, Kentucky Trailer, IPS, beginning October 31, 2015, and Alleghany Capital’s investment in Jazwares, LLC (“Jazwares”); (ii) oil and gas operations conducted through SORC and Alleghany Capital’s investment in ORX Exploration, Inc. (“ORX”); and (iii) corporate operations and investments at the Alleghany Capital parent level. ORX and Jazwares are accounted for under the equity method of accounting. On April 15, 2016, Alleghany Capital acquired an additional 50 percent equity interest in Jazwares, bringing its equity interest in Jazwares to 80 percent, and as of that date, the results of Jazwares will be included in our consolidated results.

The results of Alleghany Capital are presented below.


	Three Months Ended March 31,
	2016												2015
	Mfg. & Svcs.			Oil & Gas			Corp. & other			Total			Mfg. & Svcs.			Oil & Gas			Corp. & other			Total
	($ in millions)
Net investment income		$	-		$	-		$	(0.1)		$	(0.1)		$	1.8		$	(0.9)		$	0.1		$	1.0
Net realized capital gains (losses)			(0.1)			-			-			(0.1)			(0.1)			-			-			(0.1)
Other than temporary impairment losses			-			-			-			-			-			-			-			-
Other revenue			135.1			1.8			-			136.9			33.3			1.3			-			34.6
Other operating expenses			129.1			9.3			1.1			139.5			31.2			7.3			1.7			40.2
Corporate administration			-			-			-			-			-			-			-			-
Amortization of intangible assets			4.1			-			-			4.1			0.1			-			-			0.1
Interest expense			0.3			-			-			0.3			0.3			0.1			-			0.4

Earnings (losses) before income taxes		$	1.5		$	(7.5)		$	(1.2)		$	(7.2)		$	3.4		$	(7.0)		$	(1.6)		$	(5.2)


Adjusted EBITDA⁽¹⁾		$	7.0		$	(3.9)		$	(1.2)		$	1.9		$	4.7		$	(5.2)		$	(1.6)		$	(2.1)
Add: depreciation expense			(1.3)			(3.6)			-			(4.9)			(1.0)			(1.4)			-			(2.4)
Add: amortization of intangible assets			(4.1)			-			-			(4.1)			(0.1)			-			-			(0.1)
Add: interest expense			(0.3)			-			-			(0.3)			(0.3)			(0.1)			-			(0.4)
Add: net realized capital gains (losses)			0.1			-			-			0.1			0.1			-			-			0.1
Adjustments to equity in earnings of Jazwares and ORX			0.1			-			-			0.1			-			(0.3)			-			(0.3)

Earnings (losses) before income taxes		$	1.5		$	(7.5)		$	(1.2)		$	(7.2)		$	3.4		$	(7.0)		$	(1.6)		$	(5.2)

(1)

Adjusted EBITDA is a “non-GAAP financial measure” for our non-insurance operating subsidiaries and investments held by Alleghany Capital. Adjusted EBITDA represents other revenue less certain other expenses, and does not include: (i) depreciation expense; (ii) amortization of intangible assets; (iii) interest expense; (iv) net realized capital gains; (v) OTTI impairment; and (vi) income taxes. See “Comment on Non-GAAP Financial Measures” herein for additional detail on the presentation of our results of operations.

The changes in Alleghany Capital’s equity for the three months ended March 31, 2016 are summarized as follows:


	Three Months Ended March 31, 2016
	Mfg. & Svcs.		Oil & Gas		Corp. & other		Total
	($ in millions)
Equity, beginning of period	$	275.8	$	206.0	$	16.4	$	498.2
Earnings (losses) before income taxes		1.5		(7.5)		(1.2)		(7.2)
Income taxes⁽¹⁾		(0.6)		2.6		0.3		2.3
Capital contributions (dividends or returns of capital)		-		9.8		2.8		12.6

Equity, end of period	$	276.7	$	210.9	$	18.3	$	505.9

(1)	Income taxes for certain Alleghany Capital subsidiaries are incurred at the Alleghany Capital corporate level.

Net investment income. The decrease in net investment income in the first quarter of 2016 from the first quarter of 2015 primarily reflects lower earnings from Jazwares, partially offset by the absence of losses from ORX in the first quarter of 2016.

Other revenue and Other operating expenses. The increases in other revenue and other operating expenses in the first quarter of 2016 from the first quarter of 2015 primarily reflects the acquisition of IPS on October 31, 2015 and, to a lesser extent, growth at Kentucky Trailer. The increase in other operating expenses also reflects higher expenses at SORC.

Amortization of intangible assets. The increase in amortization of intangible assets in the first quarter of 2016 primarily reflects the amortization of intangible assets from the acquisition of IPS.

Losses before income taxes. The increase in losses before income taxes in the first quarter of 2016 from the first quarter of 2015 primarily reflects an increase in amortization of intangible assets, a decrease in net investment income and higher losses at SORC, partially offset by earnings associated with IPS and higher earnings at Kentucky Trailer.

Corporate Activities Results

The primary components of corporate activities are Alleghany Properties and other activities at the parent level. The following table summarizes the results for corporate activities.


	Three Months Ended March 31,
	2016		2015
	($ in millions)
Net premiums earned	$	-	$	-
Net investment income		2.2		1.6
Net realized capital gains		(3.4)		(5.6)
Other than temporary impairment losses		-		-
Other revenue		0.3		0.2

Total revenues		(0.9)		(3.8)


Net loss and loss adjustment expenses		-		-
Commissions, brokerage and other underwriting expenses		-		-
Other operating expenses		0.7		0.6
Corporate administration		9.5		12.4
Amortization of intangible assets		-		-
Interest expense		13.1		13.0

Losses before income taxes	$	(24.2)	$	(29.8)

Net realized capital gains. Net realized capital losses in the first quarter of 2016 primarily reflect the sale at a loss of equity securities in the health care sector. Net realized capital losses in the first quarter of 2015 primarily reflect the sale at a loss of equity securities in the energy sector.

Corporate administration. The decrease in corporate administration expense in the first quarter of 2016 from the first quarter of 2015 primarily reflects a decrease in aggregate annual incentive accruals and lower long-term incentive compensation expenses.

Losses before income taxes. The decrease in losses before income taxes in the first quarter of 2016 from the first quarter of 2015 primarily reflects lower net realized capital losses and lower corporate administration expense, as explained above.

Reserve Review Process

Our reinsurance and insurance subsidiaries analyze, at least quarterly, liabilities for unpaid loss and LAE established in prior years and adjust their expected ultimate cost, where necessary, to reflect favorable or unfavorable development in loss experience and new information, including, for certain catastrophe events, revised industry estimates of the magnitude of a catastrophe. Adjustments to previously recorded liabilities for unpaid loss and LAE, both favorable and unfavorable, are reflected in our financial results in the periods in which these adjustments are made and are referred to as prior accident year loss reserve development. The following table presents the reserves established in connection with the loss and LAE of our reinsurance and insurance subsidiaries on a gross and net basis by line of business. These reserve amounts represent the accumulation of estimates of ultimate loss (including for incurred but not reported) and LAE.


	As of March 31, 2016						As of December 31, 2015
	Gross Loss and LAE Reserves		Reinsurance Recoverables on Unpaid Losses		Net Loss and LAE Reserves		Gross Loss and LAE Reserves		Reinsurance Recoverables on Unpaid Losses		Net Loss and LAE Reserves
	($ in millions)
Reinsurance Segment:
Property	$	855.2	$	(98.2)	$	757.0	$	884.7	$	(131.9)	$	752.8
Casualty & other⁽¹⁾		7,290.3		(193.7)		7,096.6		7,283.5		(200.2)		7,083.3

		8,145.5		(291.9)		7,853.6		8,168.2		(332.1)		7,836.1


Insurance Segment:
Property		260.3		(110.9)		149.4		285.9		(118.7)		167.2
Casualty⁽²⁾		2,015.1		(689.2)		1,325.9		2,033.0		(698.9)		1,334.1
Workers’ compensation		210.3		(2.9)		207.4		190.1		(2.9)		187.2
All other⁽³⁾		197.9		(87.6)		110.3		192.9		(87.6)		105.3

		2,683.6		(890.6)		1,793.0		2,701.9		(908.1)		1,793.8

Eliminations		(70.4)		70.4		-		(70.9)		70.9		-

Total	$	10,758.7	$	(1,112.1)	$	9,646.6	$	10,799.2	$	(1,169.3)	$	9,629.9

(1)

Primarily consists of the following reinsurance lines of business: directors’ and officers’ liability; errors and omissions liability; general liability; medical malpractice; ocean marine and aviation; auto liability; accident and health; surety; asbestos-related illness and environmental impairment liability; and credit.

(2)	Primarily consists of the following direct lines of business: umbrella/excess; directors’ and officers’ liability; professional liability; and general liability.

(3)	Primarily consists of commercial multi-peril and surety lines of business, as well as loss and LAE reserves for terminated lines of business and loss reserves acquired in connection with prior acquisitions for which the sellers provided loss reserve guarantees.

Changes in Gross and Net Loss and LAE Reserves between March 31, 2016 and December 31, 2015. Gross and net loss and LAE reserves as of March 31, 2016 approximated gross and net loss and LAE reserves from December 31, 2015, primarily reflecting the impact of favorable prior accident year loss reserve development being offset by the impact of higher net premiums earned, as discussed above.

Reinsurance Recoverables

Our reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite in order to reduce the effect of individual or aggregate exposure to losses, manage capacity, protect capital resources, reduce volatility in specific lines of business, improve risk-adjusted portfolio returns and enable them to increase gross premium writings and risk capacity without requiring additional capital. Our reinsurance and insurance subsidiaries purchase reinsurance and retrocessional coverages from highly-rated third-party reinsurers. If the assuming reinsurers are unable or unwilling to meet the obligations assumed under the applicable reinsurance agreements, our reinsurance and insurance subsidiaries would remain liable for such reinsurance portion not paid by these reinsurers. As such, funds, trust agreements and letters of credit are held to collateralize a portion of our reinsurance and insurance subsidiaries’ reinsurance recoverables, and our reinsurance and insurance subsidiaries reinsure portions of the risks they underwrite or assume with multiple reinsurance programs.

As of March 31, 2016, our reinsurance and insurance subsidiaries had total reinsurance recoverables of $1,203.2 million, consisting of $1,112.1 million of ceded outstanding loss and LAE and $91.1 million of recoverables on paid losses. See Part I, Item 1, “Business — Reinsurance Protection” of the 2015 Form 10-K for additional information on the reinsurance purchased by our reinsurance and insurance subsidiaries.

Information regarding concentration of our reinsurance recoverables and the ratings profile of our reinsurers as of March 31, 2016 is as follows:


Reinsurer⁽¹⁾	Rating⁽²⁾	Amount		Percentage
		($ in millions)
Swiss Reinsurance Company	A+ (Superior)	$	132.4		11.0%
PartnerRe Ltd	A (Excellent)		110.5		9.2%
Chubb Corporation	A++ (Superior)		101.8		8.5%
RenaissanceRe Holdings Ltd	A+ (Superior)		89.8		7.5%
W.R. Berkley Corporation	A+ (Superior)		89.7		7.5%
Syndicates at Lloyd’s of London	A (Excellent)		84.6		7.0%
Allianz SE	A+ (Superior)		82.2		6.8%
Fairfax Financial Holdings Ltd	A (Excellent)		51.8		4.3%
Allied World Assurance Company Holdings, AG	A (Excellent)		50.3		4.2%
Hannover Ruck SE	A+ (Superior)		37.8		3.1%
All other reinsurers			372.3		30.9%


Total reinsurance recoverables⁽³⁾		$	1,203.2		100.0%


Secured reinsurance recoverables⁽⁴⁾		$	185.3		15.4%

(1)	Reinsurance recoverables reflect amounts due from one or more reinsurance subsidiaries of the listed company.

(2)	Represents the A.M. Best Company, Inc., or “A.M. Best,” financial strength rating for the applicable reinsurance subsidiary or subsidiaries from which the reinsurance recoverable is due.

(3)	Approximately 95 percent of our reinsurance recoverables balance as of March 31, 2016 was due from reinsurers having an A.M. Best financial strength rating of A (Excellent) or higher.

(4)	Represents reinsurance recoverables secured by funds held, trust agreements and letters of credit.

We had no allowance for uncollectible reinsurance as of March 31, 2016.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions about future events that directly affect our reported financial condition and operating performance. More specifically, 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. We rely on historical experience and on various other assumptions that we believe to be reasonable under the circumstances to make judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from reported results to the extent that estimates and assumptions prove to be inaccurate.

We believe our most critical accounting estimates are those with respect to the liability for unpaid loss and LAE reserves, fair value measurements of certain financial assets, OTTI losses on investments, goodwill and other intangible assets and reinsurance premium revenues, as they require management’s most significant exercise of judgment on both a quantitative and qualitative basis. The accounting estimates that result require the use of assumptions about certain matters that are highly uncertain at the time of estimation. To the extent actual experience differs from the assumptions used, our financial condition, results of operations and cash flows would be affected, possibly materially.

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates” of the 2015 10-K for a more complete description of our critical accounting estimates.

Financial Condition

Parent Level

General. In general, we follow a policy of maintaining a relatively liquid financial condition at our unrestricted holding companies. This policy has permitted us to expand our operations through internal growth at our subsidiaries and through acquisitions of, or substantial investments in, operating companies. As of March 31, 2016, we held total marketable securities and cash of $766.8 million, compared with $821.3 million as of December 31, 2015. The decrease in the three months ended March 31, 2016 primarily reflects repurchases of shares of our common stock, our investment in certain private equity investments and capital contributions to SORC, partially offset by the receipt of dividends from TransRe and RSUI. The $766.8 million is comprised of $275.2 million at the

Alleghany parent company, $384.8 million at AIHL and $106.8 million at the TransRe holding company. We also hold certain non-marketable investments at our unrestricted holding companies. We believe that we have and will have adequate internally generated funds, cash resources and unused credit facilities to provide for the currently foreseeable needs of our business, and we had no material commitments for capital expenditures as of March 31, 2016.

Stockholders’ equity attributable to Alleghany stockholders was approximately $7.8 billion as of March 31, 2016, compared with approximately $7.6 billion as of December 31, 2015. The increase in stockholders’ equity in the first three months of 2016 primarily reflects net earnings and an increase in unrealized appreciation on our debt securities portfolio, partially offset by repurchases of our common stock. The increase in unrealized appreciation on our debt securities portfolio is due to a decrease in longer-term interest rates that occurred in the first three months of 2016. As of March 31, 2016, we had 15,437,632 shares of our common stock outstanding, compared with 15,544,077 shares of our common stock outstanding as of December 31, 2015.

Debt. On September 9, 2014, we completed a public offering of $300.0 million aggregate principal amount of our 4.90% senior notes due on September 15, 2044. On June 26, 2012, we completed a public offering of $400.0 million aggregate principal amount of our 4.95% senior notes due on June 27, 2022. On September 20, 2010, we completed a public offering of $300.0 million aggregate principal amount of our 5.625% senior notes due on September 15, 2020.

On October 15, 2014, TransRe redeemed $300.0 million aggregate principal amount of its 5.75% senior notes due on December 14, 2015, or the “2015 Senior Notes.” On December 14, 2015, the remaining $367.0 million outstanding aggregate principal amount of TransRe’s 2015 Senior Notes matured and was repaid. See Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K for additional information on the senior notes.

Credit Agreement. As discussed in Note 7 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K, on October 15, 2013, we entered into a four-year credit agreement, or the “Credit Agreement,” which provides for an unsecured credit facility in an aggregate principal amount of up to $200.0 million. There were no borrowings under the Credit Agreement in the three months ended March 31, 2016 and there were no outstanding borrowings under the Credit Agreement as of March 31, 2016.

Common Stock Repurchases. In July 2014, our Board of Directors authorized the repurchase of additional shares of common stock at such times and at prices as management determines to be advisable, up to an aggregate of $350.0 million, or the “2014 Repurchase Program.” In November 2015, our Board of Directors authorized, upon the completion of the 2014 Repurchase Program, the repurchase of additional shares of common stock, at such times and at prices as management determines to be advisable, up to an aggregate of $400.0 million, or the “2015 Repurchase Program.” In the first quarter of 2016, we completed the 2014 Repurchase Program and subsequent repurchases have been made pursuant to the 2015 Repurchase Program.

Pursuant to the 2014 Repurchase Program and the 2015 Repurchase Program, as applicable, we repurchased shares of our common stock in the three months ended March 31, 2016 and 2015 as follows:


	Three Months Ended March 31,
	2016			2015

Shares repurchased			113,100			58,950
Costs of shares repurchased (in millions)		$	53.3		$	26.6
Average price per share repurchased		$	471.15		$	451.77

Investments in Certain Other Invested Assets. In December 2012, TransRe obtained an ownership interest in Pillar Capital Holdings Limited, or “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, or 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. We have concluded that both Pillar Holdings and the Funds, which we collectively refer to as the “Pillar Investments,” represent variable interest entities and that we are not the primary beneficiary, as we do 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. Our potential maximum loss in the Pillar Investments is limited to our cumulative net investment. As of March 31, 2016, our carrying value in the Pillar Investments, as determined under the equity method of accounting, was $225.4 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, or “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. As of March 31, 2016, at our discretion, half of these interests may be converted at any time, and the remaining half may be converted starting in May 2016. Until we determine to convert our limited partner interests into Ares common units, we classify our investment in Ares as a component of other invested assets, and we account for our investment using the equity method of accounting. As of March 31, 2016, AIHL’s carrying value in Ares was $222.5 million, which is net of returns of capital received from Ares.

Investments in Commercial Mortgage Loans. As of March 31, 2016, the carrying value of the commercial loan portfolio was $279.9 million, representing the unpaid principal balance on the loans. As of March 31, 2016, there was no allowance for loan losses. The commercial 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 2-10 years and the principal lent was no more than approximately two-thirds of each property’s appraised value at the time the loan was made.

Energy Holdings. As of March 31, 2016, we had holdings in energy sector businesses of $658.8 million, comprised of $278.6 million of debt securities, $169.3 million of equity securities and $210.9 million of our equity attributable to SORC.

Subsidiaries

Financial strength is also a high priority of our subsidiaries, whose assets stand behind their financial commitments to their customers and vendors. We believe that our subsidiaries have and will have adequate internally generated funds, cash resources and unused credit facilities to provide for the currently foreseeable needs of their businesses. Our subsidiaries had no material commitments for capital expenditures as of March 31, 2016.

The obligations and cash outflow of our reinsurance and insurance subsidiaries include claim settlements, commission expenses, administrative expenses, purchases of investments, and interest and principal payments on TransRe’s 8.00% senior notes due on November 30, 2039. In addition to premium collections, cash inflow is obtained from interest and dividend income and maturities and sales of investments. Because cash inflow from premiums is received in advance of cash outflow required to settle claims, our reinsurance and insurance operating units accumulate funds which they invest pending the need for liquidity. As the cash needs of a reinsurance or an insurance company can be unpredictable due to the uncertainty of the claims settlement process, the portfolios of our reinsurance and insurance subsidiaries consist primarily of debt securities and short-term investments to ensure the availability of funds and maintain a sufficient amount of liquid securities.

With respect to our non-insurance operating subsidiaries, SORC has almost entirely depended on Alleghany to support its growth. From formation in 2011 through March 31, 2016, we have invested $253.8 million in SORC.

Consolidated Investment Holdings

Investment Strategy and Holdings. Our investment strategy seeks to preserve principal and maintain liquidity while trying to maximize our risk-adjusted, after-tax rate of return. Our investment decisions are guided mainly by the nature and timing of expected liability payouts, management’s forecast of cash flows and the possibility of unexpected cash demands, for example, to satisfy claims due to catastrophe losses. Our consolidated investment portfolio currently consists mainly of highly rated and liquid debt and equity securities listed on national securities exchanges. The overall debt securities portfolio credit quality is measured using the lowest rating of Standard & Poor’s Ratings Services, Moody’s Investors Service, Inc. or Fitch Ratings, Inc. In this regard, the overall weighted-average credit quality rating of our debt securities portfolio as of March 31, 2016 and December 31, 2015 was AA-. Although many of our debt securities, which consist predominantly of municipal bonds, are insured by third-party financial guaranty insurance companies, the impact of such insurance was not significant to the debt securities credit quality rating as of March 31, 2016. As of March 31, 2016, the ratings of our debt securities portfolio were as follows:


	Ratings as of March 31, 2016
	AAA / Aaa		AA / Aa		A		BBB / Baa		Below BBB / Baa or Not-Rated⁽¹⁾		Total
	($ in millions)
U.S. Government obligations	$	-	$	1,166.2	$	-	$	-	$	-	$	1,166.2
Municipal bonds		716.1		2,847.7		823.5		30.9		1.7		4,419.9
Foreign government obligations		581.8		309.4		193.2		6.9		0.1		1,091.4
U.S. corporate bonds		20.5		107.0		600.4		816.9		466.6		2,011.4
Foreign corporate bonds		99.8		153.9		490.6		248.7		70.5		1,063.5
Mortgage and asset-backed securities:
Residential mortgage-backed securities (“RMBS”)		30.6		1,263.8		0.1		1.1		17.9		1,313.5
Commercial mortgage-backed securities (“CMBS”)		305.8		468.5		147.0		93.3		2.9		1,017.5
Other asset-backed securities		810.5		159.1		302.9		256.3		6.0		1,534.8

Total debt securities	$	2,565.1	$	6,475.6	$	2,557.7	$	1,454.1	$	565.7	$	13,618.2


Percentage of debt securities		18.8%		47.5%		18.8%		10.7%		4.2%		100.0%

(1)	Consists of $209.9 million of securities rated BB / Ba, $273.9 million of securities rated B, $26.3 million of securities rated CCC, $9.5 million of securities rated CC, $4.8 million of securities rated below CC and $41.3 million of not-rated securities.

Our debt securities portfolio has been designed to enable management to react to investment opportunities created by changing interest rates, prepayments, tax and credit considerations or other factors, or to circumstances that could result in a mismatch between the desired duration of debt securities and the duration of liabilities, and, as such, is classified as available-for-sale, or “AFS.”

Effective duration measures a portfolio’s sensitivity to changes in interest rates. In this regard, as of March 31, 2016, our debt securities portfolio had an effective duration of approximately 4.6 years, compared with 4.6 years as of December 31, 2015. As of March 31, 2016, approximately $3.3 billion, or 24.3 percent, of our debt securities portfolio represented securities with maturities of five years or less. See Note 3(b) to Notes to Unaudited Consolidated Financial Statements set forth in Part I, Item 1, “Financial Statements” of this Form 10-Q for additional detail on the contractual maturities of our consolidated debt securities portfolio. We may modestly increase the proportion of our debt securities portfolio held in securities with maturities of more than five years should the yields of these securities provide, in our judgment, sufficient compensation for their increased risk. We do not believe that this strategy would reduce our ability to meet ongoing claim payments or to respond to significant catastrophe losses.

In the event paid losses accelerate beyond the ability of our reinsurance and insurance subsidiaries to fund these paid losses from current cash balances, current operating cash flow, dividend and interest receipts and security maturities, we would need to liquidate a portion of our investment portfolio, make capital contributions to our reinsurance and insurance subsidiaries, and/or arrange for financing. Strains on liquidity could result from: (i) the occurrence of several significant catastrophe events in a relatively short period of time; (ii) the sale of investments into a depressed marketplace to fund these paid losses; (iii) the uncollectibility of reinsurance recoverables on these paid losses; (iv) the significant decrease in the value of collateral supporting reinsurance recoverables; or (v) a significant reduction in our net premium collections.

We may, from time to time, make significant investments in the common stock of a public company, subject to limitations imposed by applicable regulations.

On a consolidated basis, our invested assets increased to approximately $18.0 billion as of March 31, 2016 from approximately $17.8 billion as of December 31, 2015, primarily reflecting cash flows from operating activities and the impact of an increase in unrealized appreciation on our debt securities portfolio, partially offset by the impact of repurchases of our common stock. The increase in unrealized appreciation on our debt securities portfolio is due to an increase in longer-term interest rates that occurred in the first three months of 2016.

Fair Value. The carrying values and estimated fair values of our consolidated financial instruments as of March 31, 2016 and December 31, 2015 were as follows:


	March 31, 2016						December 31, 2015
	Carrying Value			Fair Value			Carrying Value			Fair Value
	($ in millions)
Assets
Investments (excluding equity method investments and loans)⁽¹⁾		$	17,029.3		$	17,029.3		$	17,007.6		$	17,007.6

Liabilities
Senior Notes⁽²⁾		$	1,383.6		$	1,535.4		$	1,383.1		$	1,488.7

(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 below.

(2)	See Note 8 to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K for additional information on the senior notes.

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between willing, able and knowledgeable market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. In addition, a three-tiered hierarchy for inputs is used in management’s determination of fair value of financial instruments that emphasizes the use of observable inputs over the use of unobservable inputs by requiring that the observable inputs be used when available. Observable inputs are market participant assumptions based on market data obtained from sources independent of the reporting entity. Unobservable inputs are the reporting entity’s own assumptions about market participant assumptions based on the best information available under the circumstances. In assessing the appropriateness of using observable inputs in making our fair value determinations, we consider whether the market for a particular security is “active” or not based on all the relevant facts and circumstances. A market may be considered to be inactive if there are relatively few recent transactions or if there is a significant decrease in market volume. Furthermore, we consider whether observable transactions are “orderly” or not. We do not consider a transaction to be orderly if there is evidence of a forced liquidation or other distressed condition, and as such, little or no weight is given to that transaction as an indicator of fair value.

Although we are responsible for the determination of the fair value of our financial assets and the supporting methodologies and assumptions, we employ 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 internal valuation models.

Valuation service providers typically obtain data about market transactions and other key valuation model inputs from multiple sources and, through the use of widely accepted internal valuation models, provide a single fair value measurement for individual securities for which a fair value has been requested under the terms of service agreements. The inputs used by the valuation service providers include, but are not limited to, market prices from recently completed transactions and transactions of comparable securities, interest rate yield curves, credit spreads, currency rates and other market observable information, as applicable. The valuation models take into account, among other things, market observable information as of the measurement date as well as the specific attributes of the security being valued including its term, interest rate, credit rating, industry sector and, when applicable, collateral quality and other issue or issuer specific information. When market transactions or other market observable data is limited, the extent to which judgment is applied in determining fair value is greatly increased.

The three-tiered hierarchy used in management’s determination of fair value is broken down into three levels based on the reliability of inputs as follows:

•

Level 1: Valuations are based on unadjusted quoted prices in active markets that we have the ability to access for identical, unrestricted assets and do not involve any meaningful degree of judgment. An active market is defined as a market where transactions for the financial instrument occur with sufficient frequency and volume to provide pricing

information on an ongoing basis. Our Level 1 assets include publicly traded common stocks and mutual funds (which are included on the balance sheet in equity securities) where our valuations are based on quoted market prices.

•

Level 2: Valuations are based on direct and indirect observable inputs other than quoted market prices included in Level 1. Level 2 inputs include quoted prices for similar assets in active markets and inputs other than quoted prices that are observable for the asset, such as the terms of the security and market-based inputs. Terms of the security include coupon, maturity date and any special provisions that may, for example, enable the investor, at its election, to redeem the security prior to its scheduled maturity date (such provisions may apply to all debt securities except U.S. Government obligations). Market-based inputs include interest rates and yield curves that are observable at commonly quoted intervals and current credit rating(s) of the security. Market-based inputs may also include credit spreads of all debt securities except U.S. Government obligations, and currency rates for certain foreign government obligations and foreign corporate bonds denominated in foreign currencies. Fair values are determined using a market approach that relies on the securities’ relationships to quoted prices for similar assets in active markets, as well as the other inputs described above. In determining the fair values for the vast majority of CMBS and other asset-backed securities, as well as a small portion of RMBS, an income approach is used to corroborate and further support the fair values determined by the market approach. The income approach primarily involves developing a discounted cash flow model using the future projected cash flows of the underlying collateral, and the terms of the security. Level 2 assets generally include short-term investments and most debt securities. Our Level 2 liabilities consist of the Senior Notes.

•

Level 3: Valuations are based on techniques that use significant inputs that are unobservable. The valuation of Level 3 assets requires the greatest degree of judgment. These measurements may be made under circumstances in which there is little, if any, market activity for the asset. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, we consider factors specific to the asset. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement is classified is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assets classified as Level 3 principally include certain RMBS, CMBS, other asset-backed securities (primarily, collateralized loan obligations), U.S. corporate bonds, partnership investments and non-marketable equity investments.

Mortgage-backed and asset-backed securities are initially valued at the transaction price. Subsequently, we use widely accepted valuation practices that produce a fair value measurement. The vast majority of fair values are determined using an income approach. The income approach primarily involves developing a discounted cash flow model using the future projected cash flows of the underlying collateral, as well as other inputs described below. A few Level 3 valuations are based entirely on non-binding broker quotes. These securities consist primarily of mortgage-backed and asset-backed securities where reliable pool and loan level collateral information cannot be reasonably obtained, and as such, an income approach is not feasible.

Since Level 3 valuations are based on techniques that use significant inputs that are unobservable with little or no market activity, the fair values under the market approach for Level 3 securities are less credible than under the income approach, however, the market approach, where feasible, is used to corroborate the fair values determined by the income approach. The market approach primarily relies on the securities’ relationships to quoted transaction prices for similarly structured instruments. To the extent that transaction prices for similarly structured instruments are not available for a particular security, other market approaches are used to corroborate the fair values determined by the income approach, including option adjusted spread analyses.

Unobservable inputs, significant to the measurement and valuation of mortgage-backed and asset-backed securities, are generally used in the income approach, and include assumptions about prepayment speed and collateral performance, including default, delinquency and loss severity rates. Significant changes to any one of these inputs, or combination of inputs, could significantly change the fair value measurement for these securities.

The impact of prepayment speeds on fair value is dependent on a number of variables including whether the securities were purchased at a premium or discount. A decrease in interest rates generally increases the assumed rate of prepayments, and an increase in interest rates generally decreases the assumed speed of prepayments. Increased prepayments increase the yield on securities purchased at a discount, and reduce the yield on securities purchased at a premium. In a decreasing prepayment environment, yields on securities purchased at a discount are reduced but are increased for securities purchased at a premium. Changes in default assumptions on underlying collateral are generally accompanied by directionally similar changes in other collateral performance factors, but generally result in a directionally opposite change in prepayment assumptions.

We employ specific control processes to determine the reasonableness of the fair values of our financial assets and liabilities. Our 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. We assess the reasonableness of individual security values received from valuation service providers through various analytical techniques. In addition, we validate the reasonableness of fair values by comparing information obtained from our valuation service providers to other third-party valuation sources for selected securities. We also validate 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.

In addition to such procedures, we review the reasonableness of our classification of securities within the three-tiered hierarchy to ensure that the classification is consistent with GAAP.

The estimated fair values of our financial instruments measured at fair value and the level of the fair value hierarchy of inputs used as of March 31, 2016 and December 31, 2015 were as follows:


	Level 1		Level 2		Level 3		Total
	($ in millions)
As of March 31, 2016
Equity securities:
Common stock	$	2,888.1	$	-	$	1.0	$	2,889.1
Preferred stock		-		-		-		-

Total equity securities		2,888.1		-		1.0		2,889.1


Debt securities:
U.S. Government obligations		-		1,166.2		-		1,166.2
Municipal bonds		-		4,419.9		-		4,419.9
Foreign government obligations		-		1,091.4		-		1,091.4
U.S. corporate bonds		-		1,961.4		50.0		2,011.4
Foreign corporate bonds		-		1,063.5		-		1,063.5
Mortgage and asset-backed securities:
RMBS⁽¹⁾		-		1,299.2		14.3		1,313.5
CMBS		-		997.7		19.8		1,017.5
Other asset-backed securities⁽²⁾		-		610.4		924.4		1,534.8

Total debt securities		-		12,609.7		1,008.5		13,618.2
Short-term investments		-		493.6		-		493.6
Other invested assets⁽³⁾		-		-		28.4		28.4

Total investments (excluding equity method investments and loans)	$	2,888.1	$	13,103.3	$	1,037.9	$	17,029.3


Senior Notes	$	-	$	1,535.4	$	-	$	1,535.4


	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 and loans)	$	3,001.2	$	12,938.6	$	1,067.8	$	17,007.6


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

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

(2)	Includes $913.9 million and $946.7 million of collateralized loan obligations as of March 31, 2016 and December 31, 2015, respectively.

(3)	Includes partnership and non-marketable equity investments accounted for on an AFS basis, and excludes investments accounted for using the equity method.

Municipal Bonds. The following table provides the fair value of our municipal bonds as of March 31, 2016, categorized by state and revenue source. Special revenue bonds are debt securities for which the payment of principal and interest is available solely from the cash flows of the related projects. As issuers of revenue bonds do not have the ability to draw from tax revenues or levy taxes to fund obligations, revenue bonds may carry a greater risk of default than general obligation bonds.


	Special Revenue
State	Education		Hospital		Housing		Lease Revenue		Special Tax		Transit		Utilities		All Other Sources		Total Special Revenue		Total General Obligation		Total Fair Value
	($ in millions)
New York	$	19.6	$	-	$	0.5	$	-	$	103.3	$	170.2	$	90.3	$	69.0	$	452.9	$	19.9	$	472.8
Texas		38.8		-		-		-		24.1		77.9		55.3		-		196.1		159.1		355.2
California		9.6		43.2		-		14.6		1.4		28.6		90.0		0.8		188.2		102.6		290.8
Massachusetts		11.3		20.3		3.3		-		36.0		42.4		41.9		0.7		155.9		109.9		265.8
Ohio		45.9		5.2		0.2		1.6		-		1.7		84.5		2.3		141.4		64.9		206.3
North Carolina		20.0		26.7		4.2		-		-		0.6		19.0		15.2		85.7		98.8		184.5
Washington		1.1		-		-		-		7.9		5.8		77.4		4.7		96.9		56.0		152.9
Arizona		4.0		28.6		-		-		14.6		0.6		66.2		33.8		147.8		-		147.8
District of Columbia		-		-		-		-		75.0		41.3		7.8		-		124.1		9.8		133.9
Illinois		15.1		38.1		1.4		-		9.8		26.8		-		-		91.2		28.5		119.7
All other states		198.9		79.4		59.4		76.2		117.2		236.0		185.4		77.5		1,030.0		458.8		1,488.8

Total	$	364.3	$	241.5	$	69.0	$	92.4	$	389.3	$	631.9	$	717.8	$	204.0	$	2,710.2	$	1,108.3		3,818.5

Total advance refunded / escrowed maturity bonds																						601.4

Total municipal bonds																					$	4,419.9

Recent Accounting Standards

Recently Adopted

In February 2015, the Financial Accounting Standards Board, or the “FASB,” issued guidance that amended the analysis that must be performed to determine whether an entity should consolidate certain types of legal entities. Under the new guidance, the evaluation of whether limited partnerships and similar entities are variable interest entities or voting interest entities is modified, the presumption that general partners should consolidate limited partnerships is eliminated and the process to determine the primary beneficiary of a variable interest entity is modified. This guidance is effective in the first quarter of 2016. We adopted this guidance in the first quarter of 2016 and the implementation did not have a material impact on our results of operations and financial condition.

In April 2015, the FASB issued guidance that requires debt issuance costs related to debt liabilities be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, which is consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected. This guidance was effective in the first quarter of 2016. We adopted this guidance on a retrospective basis in the first quarter of 2016 and the implementation resulted in a reduction of other assets and a corresponding decrease in senior notes of approximately $7 million as of March 31, 2016 and December 31, 2015.

Future Application of Accounting Standards

In May 2014, the FASB, together with the International Accounting Standards Board, issued guidance on the recognition of revenue from contracts with customers. Under the new guidance, revenue is recognized as the transfer of goods and services to customers takes place, and in amounts that reflect the payment or payments that are expected to be received from the customers for those goods and services. The new guidance also requires new disclosures about revenue. Revenues related to insurance and reinsurance are not impacted by this guidance. In July 2015, the FASB decided to delay the effective date of the new revenue standard by a year. This guidance is now effective in the first quarter of 2018 for public entities, with early adoption permitted in 2017. We will adopt this guidance in the first quarter of 2018 and do not currently believe that the implementation will have a material impact on our results of operations and financial condition.

In May 2015, the FASB issued guidance that requires disclosures related to short-duration insurance contracts. The guidance applies to property and casualty insurance and reinsurance entities, among others, and requires the following annual disclosure related to the liability for loss and LAE: (i) net incurred and paid claims development information by accident year for up to ten years; (ii) a reconciliation of incurred and paid claims development information to the aggregate carrying amount of the liability for loss and LAE; (iii) incurred-but-not-reported liabilities by accident year and in total; (iv) a description of reserving methodologies (as well as any changes to those methodologies); (v) quantitative information about claim frequency by accident year; and (vi) the average annual percentage payout of incurred claims by age by accident year. In addition, the guidance requires insurance entities to disclose for annual and interim reporting periods a roll-forward of the liability for loss and LAE. This guidance is effective for annual periods beginning after December 15, 2015, and interim periods within annual periods beginning after December 15, 2016, with early adoption permitted. We will adopt this guidance as of December 31, 2016 and do not currently believe that the implementation will have an impact on our results of operations and financial condition.

In January 2016, the FASB issued guidance that changes the recognition and measurement of certain financial instruments. The new guidance requires investments in equity securities (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. For equity securities that do not have readily determinable fair values, measurement may be at cost, adjusted for any impairment and changes resulting from observable price changes for a similar investment of the same issuer. The new guidance also changes the presentation and disclosure of financial instruments by: (i) requiring that financial instrument disclosures of fair value use the exit price notion; (ii) requiring separate presentation of financial assets and financial liabilities by measurement category and form, either on the balance sheet or the accompanying notes to the financial statements; (iii) requiring separate presentation in other comprehensive income for the portion of the change in a liability’s fair value resulting from instrument-specific credit risk when an election has been made to measure the liability at fair value; and (iv) eliminating the requirement to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost on the balance sheet. The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Except for the change in presentation for instrument-specific credit risk, the new guidance does not permit early adoption. We will adopt this guidance in the first quarter of 2018. As of January 1, 2018, unrealized gains or losses of equity securities, net of deferred taxes, will be reclassified from accumulated other comprehensive income to retained earnings. Subsequently, all changes in unrealized gains or losses of equity securities, net of deferred taxes, will be presented in the consolidated statement of earnings, rather than the consolidated statement of comprehensive income. We do not currently believe that the implementation will have a material impact on our financial condition.

effective in the first quarter of 2019 for public entities, with early adoption permitted. We will adopt this guidance in the first quarter of 2019 and do not currently believe that the implementation will have a material impact on our results of operations and financial condition.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Market risk is the risk of loss from adverse changes in market prices and rates. The primary market risk related to our debt securities is the risk of loss associated with adverse changes in interest rates. We also invest in equity securities which are subject to fluctuations in market value. We hold our equity securities and debt securities as AFS. Any changes in the fair value in these securities, net of tax, would be recorded as a component of other comprehensive income. However, if a decline in fair value relative to cost is believed to be other than temporary, a loss is generally recorded on our statement of earnings. In addition, significant portions of our assets (principally investments) and liabilities (principally loss and LAE reserves and unearned premiums) are exposed to changes in foreign currency exchange rates. The net change in the carrying value of assets and liabilities denominated in foreign currencies is generally recorded as a component of other comprehensive income.

The sensitivity analyses presented below provide only a limited, point-in-time view of the market risk of our financial instruments. The actual impact of changes in market interest rates, equity market prices and foreign currency exchange rates may differ significantly from those shown in these sensitivity analyses. The sensitivity analyses are further limited because they do not consider any actions we could take in response to actual and/or anticipated changes in equity market prices, market interest rates, or foreign currency exchange rates. In addition, these sensitivity analyses do not provide weight to risks relating to market issues such as liquidity and the credit worthiness of investments.

Interest Rate Risk

The primary market risk for our and our subsidiaries’ debt securities is interest rate risk at the time of refinancing. We monitor the interest rate environment to evaluate reinvestment and refinancing opportunities. We generally do not use derivatives to manage market and interest rate risks. The table below presents sensitivity analyses as of March 31, 2016 of our (i) consolidated debt securities and (ii) Senior Notes, which are sensitive to changes in interest rates. Sensitivity analysis is defined as the measurement of potential change in future earnings, fair values or cash flows of market sensitive instruments resulting from one or more selected hypothetical changes in interest rates over a selected time period. In the sensitivity analysis model below, we use a +/- 300 basis point range of change in interest rates to measure the hypothetical change in fair value of the financial instruments included in the analysis. The change in fair value is determined by calculating hypothetical March 31, 2016 ending prices based on yields adjusted to reflect a +/- 300 basis point range of change in interest rates, comparing these hypothetical ending prices to actual ending prices, and multiplying the difference by the par outstanding. The selected hypothetical changes in interest rates do not reflect what could be the potential best or worst case scenarios.


	-300			-200			-100			0			100				200				300
	($ in millions)
Assets:
Debt securities, fair value		$	14,792.1		$	14,581.0		$	14,209.2		$	13,618.2		$	13,002.7			$	12,417.1			$	11,868.3
Estimated change in fair value			1,173.9			962.8			591.0			-			(615.5	)			(1,201.1	)			(1,749.9	)

Liabilities:
Senior Notes, fair value		$	2,061.5		$	1,855.3		$	1,682.0		$	1,535.4		$	1,410.0			$	1,302.2			$	1,208.7
Estimated change in fair value			526.1			319.9			146.6			-			(125.4	)			(233.2	)			(326.7	)

Equity Risk

Our equity securities are subject to fluctuations in market value. The table below summarizes our equity market price risk and reflects the effect of a hypothetical increase or decrease in market prices as of March 31, 2016 on the estimated fair value of our consolidated equity securities portfolio. The selected hypothetical price changes do not reflect what could be the potential best or worst case scenarios.


As of March 31, 2016
($ in millions)
Estimated Fair Value	Hypothetical Price Change	Estimated Fair Value After Hypothetical Change in Price	Hypothetical Percentage Increase (Decrease) in Stockholders’ Equity
$ 2,889.1	20% Increase	$ 3,466.9	4.8%
	20% Decrease	$ 2,311.3	(4.8%)

In addition to debt and equity securities, we invest in several partnerships which are subject to fluctuations in market value. Our partnership investments are included in other invested assets and are accounted for as AFS or using the equity method, and had a carrying value of $333.2 million as of March 31, 2016.

Foreign Currency Exchange Rate Risk

Foreign currency exchange rate risk is the potential change in value arising from changes in foreign currency exchange rates. Our reinsurance operations located in foreign countries maintain some or all of their capital in their local currency and conduct business in their local currency, as well as the currencies of the other countries in which they operate. As of March 31, 2016, the largest foreign currency exposures for these foreign operations were the Canadian Dollar, the Euro, the Japanese Yen and the Australian Dollar. The table below summarizes our foreign currency exchange rate risk and shows the effect of a hypothetical increase or decrease in foreign currency exchange rates against the U.S. dollar as of March 31, 2016 on the estimated net carrying value of our foreign currency denominated assets, net of our foreign currency denominated liabilities. The selected hypothetical changes do not reflect what could be the potential best or worst case scenarios.


As of March 31, 2016
($ in millions)
Estimated Fair Value	Hypothetical Price Change	Estimated Fair Value After Hypothetical Change in Price	Hypothetical Percentage Increase (Decrease) in Stockholders’ Equity
$ 364.0 ⁽¹⁾	20% Increase	$ 436.8	0.6%
	20% Decrease	$ 291.2	(0.6%)

(1)	Denotes a net asset position as of March 31, 2016.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures

We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer, or “CEO,” and our chief financial officer, or “CFO,” of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q pursuant to Rule 13a-15(e) or 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, or the “Exchange Act.” Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of that date to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is (i) recorded, processed, summarized, and timely reported as specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow for timely decisions regarding required disclosure. Our disclosure controls and procedures were designed to provide such assurance; however, we note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Control Over Financial Reporting

No changes occurred during the quarter ended March 31, 2016 in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings.

Certain of our subsidiaries are parties to pending litigation and claims in connection with the ordinary course of their businesses. Each such subsidiary makes provisions for estimated losses to be incurred in such litigation and claims, including legal costs. We believe such provisions are adequate and do not believe that any pending litigation will have a material adverse effect on our consolidated results of operations, financial position or cash flows. See Note 12(a) to Notes to Consolidated Financial Statements set forth in Part II, Item 8, “Financial Statements and Supplementary Data” of the 2015 10-K.

Item 1A. Risk Factors.

There are no material changes from the risk factors set forth in Part I, Item 1A, “Risk Factors” of the 2015 10-K. Please refer to that section for disclosures regarding what we believe are the more significant risks and uncertainties related to our businesses.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(c) Issuer Purchases of Equity Securities.

The following table summarizes our common stock repurchases for the quarter ended March 31, 2016:


	Total Number of Shares Repurchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs⁽¹⁾		Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs⁽¹⁾ (in millions)
January 1 to January 31		100,430	$	470.02		100,430	$	400.3
February 1 to February 29		-		-		-		400.3
March 1 to March 31		12,670		480.16		12,670		394.2

Total		113,100		471.15		113,100

(1)

In July 2014, our Board of Directors authorized pursuant to the 2014 Repurchase Program the repurchase of shares of common stock, at such times and at prices as management determines to be advisable, up to an aggregate of $350.0 million. In November 2015, our Board of Directors authorized pursuant to the 2015 Repurchase Program, upon the completion of the 2014 Repurchase Program, the repurchase of additional shares of common stock, at such times and at prices as management determines to be advisable, up to an aggregate of $400.0 million. In the first quarter of 2016, Alleghany completed the 2014 Repurchase Program and subsequent repurchases have been made pursuant to the 2015 Repurchase Program.

Item 4. Mine Safety Disclosures.

The information concerning mine safety violations or other regulatory matters required by SEC regulations is included in Exhibit 95 to this Form 10-Q.

Item 6. Exhibits.


Exhibit Number		Description

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) of the Exchange Act.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) of the Exchange Act.

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit shall not be deemed “filed” as a part of this Form 10-Q.

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit shall not be deemed “filed” as a part of this Form 10-Q.

95		Mine Safety Disclosure required under Regulation 104 of Item S-K.

101		Interactive Data Files formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015; (ii) Consolidated Statements of Earnings and Comprehensive Income for the three months ended March 31, 2016 and 2015; (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015; and (iv) Notes to Unaudited Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

EXHIBIT INDEX


Exhibit Number		Description

31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) of the Exchange Act.

31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15(d)-14(a) of the Exchange Act.

32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit shall not be deemed “filed” as a part of this Form 10-Q.

32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. This exhibit shall not be deemed “filed” as a part of this Form 10-Q.

95		Mine Safety Disclosure required under Regulation 104 of Item S-K.

101		Interactive Data Files formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015; (ii) Consolidated Statements of Earnings and Comprehensive Income for the three months ended March 31, 2016 and 2015; (iii) Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015; and (iv) Notes to Unaudited Consolidated Financial Statements.