UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

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

FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007

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

FOR THE TRANSITION PERIOD FROM                      TO                     

ALLEGHANY CORPORATION

EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER

STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION

I.R.S. EMPLOYER IDENTIFICATION NO.

ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE

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 þ                    NO o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A LARGE ACCELERATED FILER, AN ACCELERATED FILER, OR A NON-ACCELERATED FILER. SEE DEFINITION OF ACCELERATED FILER AND LARGE ACCELERATED FILER IN RULE 12b-2 OF THE EXCHANGE ACT.

(CHECK ONE):
LARGE ACCELERATED FILER þ                    ACCELERATED FILER o                    NON-ACCELERATED FILER o

INDICATE BY CHECK MARK WHETHER THE REGISTRANT IS A SHELL COMPANY (AS DEFINED IN RULE 12B-2 OF THE EXCHANGE ACT).

YES o                    NO þ

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

8,158,748 SHARES AS OF OCTOBER 31, 2007

 

 

PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
(dollars in thousands, except share and per share amounts)
(unaudited)

		2007				2006
Revenues
Net premiums earned		$	299,687			$	262,509
Net investment income			38,166				40,090
Net realized capital gains (losses)			21,191				(451	)
Other income			873				257
Total revenues			359,917				302,405
Costs and expenses
Loss and loss adjustment expenses			134,395				126,053
Commissions, brokerage and other underwriting expenses			79,223				64,945
Other operating expenses			17,695				12,344
Corporate administration			7,307				11,610
Interest expense			192				1,369
Total costs and expenses			238,812				216,321
Earnings before income taxes and minority interest			121,105				86,084
Income taxes			45,263				30,885
Earnings before minority interest			75,842				55,199
Minority interest, net of tax			3,866				1,802
Net earnings		$	71,976			$	53,397
Changes in other comprehensive income		$	34,666			$	427
Change in unrealized gains, net of tax
Less: reclassification for gains realized in net earnings (net of tax)			(13,774	)			293
Other			58				1,543
Comprehensive income		$	92,926			$	55,660
Net earnings		$	71,976			$	53,397
Preferred dividends			4,307				4,357
Net earnings available to common stockholders		$	67,669			$	49,040
Basic earnings per share of common stock **		$	8.30			$	6.05
Diluted earnings per share of common stock **		$	7.87			$	5.82
Dividends per share of common stock			*				*

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
(dollars in thousands, except share and per share amounts)
(unaudited)

		2007				2006
Revenues
Net premiums earned		$	852,855			$	739,803
Net investment income			127,470				101,731
Net realized capital gains			77,046				17,415
Other income			11,948				25,897
Total revenues			1,069,319				884,846
Costs and expenses
Loss and loss adjustment expenses			401,961				371,744
Commissions, brokerage and other underwriting expenses			224,096				182,519
Other operating expenses			45,938				34,864
Corporate administration			24,430				29,594
Interest expense			1,166				4,275
Total costs and expenses			697,591				622,996
Earnings before income taxes and minority interest			371,728				261,850
Income taxes			120,625				73,078
Earnings before minority interest			251,103				188,772
Minority interest, net of tax			9,769				2,969
Net earnings		$	241,334			$	185,803
Changes in other comprehensive income
Change in unrealized gains, net of tax		$	92,400			$	21,822
Less: reclassification for gains realized in net earnings (net of tax)			(50,080	)			(11,320	)
Other			173				1,862
Comprehensive income		$	283,827			$	198,167
Net earnings		$	241,334			$	185,803
Preferred dividends			12,918				4,688
Net earnings available to common stockholders		$	228,416			$	181,115
Basic earnings per share of common stock **		$	28.05			$	22.24
Diluted earnings per share of common stock **		$	26.42			$	21.78
Dividends per share of common stock			*				*

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share amounts)

		September 30,
		2007				December 31,
		(unaudited)				2006
Assets
Available for sale securities at fair value:
Equity securities (cost: 2007 $528,893; 2006 $436,203)		$	1,025,582			$	872,900
Debt securities (amortized cost: 2007 $3,134,855; 2006 $2,628,971)			3,129,464				2,622,307
Short-term investments			367,520				438,567
			4,522,566				3,933,774
Other invested assets			195,203				123,651
Total investments			4,717,769				4,057,425
Cash			33,340				68,332
Notes receivable			—				91,536
Premium balances receivable			187,708				222,958
Reinsurance recoverables			982,580				1,067,926
Ceded unearned premium reserves			267,416				324,988
Deferred acquisition costs			90,992				80,018
Property and equipment at cost, net of accumulated depreciation and amortization			21,477				18,404
Goodwill and other intangibles, net of amortization			222,868				159,772
Other assets			126,943				87,381
		$	6,651,093			$	6,178,740
Liabilities and Stockholders’ Equity
Losses and loss adjustment expenses		$	2,541,958			$	2,304,644
Unearned premiums			872,145				886,539
Reinsurance payable			91,638				114,454
Net deferred tax liabilities			54,963				62,937
Subsidiaries’ debt			—				80,000
Current taxes payable			31,313				29,499
Minority interest			89,743				77,875
Other liabilities			274,480				199,546
Total liabilities			3,956,240				3,755,494
Preferred stock (shares authorized: 2007 — 1,132,000; 2006 — 1,132,000; issued and outstanding 2007 — 1,131,830; 2006 — 1,132,000)			299,483				299,527
Common stock
Common stock (shares authorized: 2007 and 2006 — 22,000,000; issued and outstanding 2007 — 8,158,748; 2006 — 8,118,479)			8,159				7,959
Contributed capital			686,375				627,215
Accumulated other comprehensive income			318,363				275,871
Treasury stock, at cost (2007 — none; 2006 — none)			—				—
Retained earnings			1,382,473				1,212,674
Total stockholders’ equity			2,694,853				2,423,246
		$	6,651,093			$	6,178,740
Common Shares Outstanding*			8,158,748				8,118,479

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2007 AND 2006
(dollars in thousands)
(unaudited)

		2007				2006
Cash flows from operating activities
Net earnings		$	241,334			$	185,803
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization			9,071				6,370
Realized capital gains			(77,046	)			(17,415	)
(Increase) decrease in other assets			(26,308	)			(27,654	)
(Increase) decrease in reinsurance receivable, net of reinsurance payables			73,152				378,955
(Increase) decrease in premium balances receivable			40,784				25,654
(Increase) decrease in ceded unearned premium reserves			57,730				(51,529	)
(Increase) decrease in deferred acquisition costs			(10,931	)			(18,192	)
Increase (decrease) in other liabilities and current taxes			27,521				59,097
Increase (decrease) in unearned premiums			(25,862	)			123,575
Increase (decrease) in losses and loss adjustment expenses			73,701				(241,149	)
Net adjustments			141,812				237,712
Net cash provided by operating activities			383,146				423,515
Cash flows from investing activities
Purchase of investments			(1,151,479	)			(1,282,761	)
Sales of investments			748,401				252,461
Maturities of investments			218,080				220,814
Purchases of property and equipment			(3,537	)			(2,971	)
Net change in short-term investments			(47,885	)			77,205
Acquisition of insurance companies, net of cash acquired			(187,743	)			(214	)
Other, net			2,547				(157	)
Net cash used in investing activities			(421,616	)			(735,623	)
Cash flows from financing activities
Proceeds from issuance of convertible preferred stock, net of issuance costs			—				290,422
Proceeds from issuance of subsidiary common stock, net of issuance costs			—				86,288
Treasury stock acquisitions			—				(39,186	)
Principal payments on long-term debt			(80,000	)			—
Decrease (increase) in notes receivable			91,535				—
Convertible preferred stock dividends paid			(13,062	)			(4,036	)
Tax benefit on stock options exercised			1,379				970
Other, net			3,626				1,288
Net cash provided by (used in) financing activities			3,478				335,746
Net (decrease) increase in cash			(34,992	)			23,638
Cash at beginning of period			68,332				47,457
Cash at end of period		$	33,340			$	71,095
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	505			$	3,286
Income taxes		$	156,748			$	60,296

See accompanying Notes to Unaudited Consolidated Financial Statements.

Notes to Unaudited Consolidated Financial Statements
Alleghany Corporation and Subsidiaries

1. Principles of Financial Statement Presentation

This report should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2006 (the “2006 10-K”), and the Quarterly Reports on Form 10-Q for the quarter ended March 31, 2007 and the quarter and six months ended June 30, 2007, of Alleghany Corporation (“Alleghany”).

Alleghany is engaged, through Alleghany Insurance Holdings LLC (“AIHL”) and its subsidiaries RSUI Group, Inc. (“RSUI”), Capitol Transamerica Corporation (“CATA”), Employers Direct Corporation (“EDC”) and Darwin Professional Underwriters, Inc. (“Darwin”), in the property and casualty and surety insurance business. In addition, AIHL Re LLC (“AIHL Re”), a captive reinsurance subsidiary of AIHL, is available to provide reinsurance to Alleghany operating units and affiliates. Alleghany also owns and manages properties in the Sacramento, California region through its subsidiary Alleghany Properties Holdings LLC (“Alleghany Properties”) and conducts corporate investment and other activities at the parent level, including the holding of strategic equity investments. These strategic equity investments are available to support the internal growth of subsidiaries and for acquisitions of, and substantial investments in, operating companies. On December 29, 2006, Alleghany acquired approximately 32.9 percent of the outstanding shares of common stock of Homesite Group Incorporated (“Homesite”) a national, full-service, mono-line provider of homeowners insurance, for $120.0 million in cash, and this investment is reflected in Alleghany’s financial statements in other invested assets. On July 18, 2007, AIHL acquired EDC for a purchase price of approximately $198.1 million, which includes approximately $5.6 million of incurred acquisition costs. EDC is an insurance holding company based in Agoura Hills, California that, through its wholly-owned insurance subsidiary, Employers Direct Insurance Company (“EDIC”), writes workers’ compensation insurance on a direct basis in the State of California (See Note 9 to the Consolidated Financial Statements contained herein).

The information in this report is unaudited, but reflects all adjustments which, in the opinion of management, are necessary to a fair statement of results of the interim periods covered thereby. All adjustments are of a normal and recurring nature except as described herein.

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 of America (“GAAP”). All significant inter-company balances and transactions have been eliminated in consolidation.

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 at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those reported results to the extent that those estimates and assumptions prove to be inaccurate.

Certain prior year amounts have been reclassified to conform to the 2007 presentation.

In the 2007 second quarter, Alleghany determined that it had incorrectly classified operating payments made from its investing accounts as an investing cash flow activity in its consolidated statements of cash flows. These operating payment amounts should have been classified as

outflows from operating activities. As a result, for the nine-month period ended September 30, 2006, cash outflows in the amount of $34.4 million were reclassified from cash flows used in investing activities to cash flows used in operating activities. Similar corrections to cash flows will also be made in future reports for the three-month period ended March 31, 2007 and the years ended December 31, 2006 and 2005 in the amounts of $11.6 million, $0.3 million and $26.9 million, respectively. These corrections are not material to Alleghany’s consolidated financial statements.

2. Earnings Per Share of Common Stock

The following is a reconciliation of the income and share data used in the basic and diluted earnings per share computations for the three and nine months ended September 30, 2007 and 2006 (in thousands, except share amounts):

		Three months ended								Nine months ended
		September 30,								September 30,
		2007				2006				2007				2006
Net earnings		$	71,976			$	53,397			$	241,334			$	185,803
Preferred dividends			4,307				4,357				12,918				4,688
Income available to common stockholders for basic earnings per share			67,669				49,040				228,416				181,115
Preferred dividends			4,307				4,357				12,918				4,688
Effect of other dilutive securities			74				13				216				391
Income available to common stockholders for diluted earnings per share		$	72,050			$	53,410			$	241,550			$	186,194
Weighted average shares outstanding applicable to basic earnings per share			8,156,769				8,111,093				8,143,369				8,143,364
Preferred stock			978,410				1,070,435				978,410				384,563
Effect of other dilutive securities			21,606				246				21,833				19,767
Adjusted weighted average shares outstanding applicable to diluted earnings per share			9,156,785				9,181,774				9,143,612				8,547,694

Contingently issuable shares of 56,824 and 86,077 were potentially available during 2007 and 2006, 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.

Earnings per share by quarter may not equal the amount for the full year due to rounding.

3. Commitments and Contingencies

(a) Leases

Alleghany leases certain facilities, furniture and equipment under long-term lease agreements.

(b) Litigation

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.

(c) Asbestos and Environmental Exposure

The reserves for unpaid losses and loss adjustment expenses of AIHL include $23.0 million and $22.9 million of gross and net reserves, respectively, at September 30, 2007 and $23.8 and $23.7 million of gross and net reserves, respectively, at December 31, 2006 for various liability coverages related to asbestos and environmental impairment claims that arose from reinsurance assumed by a subsidiary of CATA between 1969 and 1976. This subsidiary exited this business in 1976. Although Alleghany is unable at this time to determine whether additional reserves, which could have a material impact upon the results of CATA’s operations, may be necessary in the future, Alleghany believes that CATA’s asbestos and environmental reserves are adequate at September 30, 2007. Additional information concerning CATA’s asbestos and environmental exposure can be found in Note 13 to the Consolidated Financial Statements contained in the 2006 10-K.

(d) Indemnification Obligations

On July 14, 2005, Alleghany completed the sale of its world-wide industrial minerals business, World Minerals, Inc. (“World Minerals”), to Imerys USA, Inc. (the “Purchaser”), a wholly-owned subsidiary of Imerys, S.A., pursuant to a Stock Purchase Agreement, dated as of May 19, 2005, by and among the Purchaser, Imerys, S.A. and Alleghany (the “Stock Purchase Agreement”). Pursuant to the Stock Purchase Agreement, Alleghany undertook certain indemnification obligations, including a general indemnification for breaches of representations and warranties set forth in the Stock Purchase Agreement (the “Contract Indemnification”) and a special indemnification (the “Products Liability Indemnification”) related to products liability claims arising from events that occurred during pre-closing periods, including the period of Alleghany ownership (the “Alleghany Period”).

The representations and warranties to which the Contract Indemnification applies survive for a two-year period (with the exception of certain representations and warranties such as those related to environmental, real estate and tax matters, which survive for periods longer than two years) and generally, except for tax and certain other matters, apply only to aggregate losses in excess of $2.5 million, up to a maximum of approximately $123.0 million. The Stock Purchase Agreement provides that Alleghany has no responsibility for products liability claims arising in respect of events occurring after the closing, and that any products liability claims involving both pre-closing and post-closing periods will be apportioned on an equitable basis. Additional information concerning the Contract Indemnification and Products Liability Indemnification can be found in Note 13 to the Consolidated Financial Statements contained in the 2006 10-K.

Based on Alleghany’s experience to date and other analyses, Alleghany established a $600,000 reserve in connection with the Products Liability Indemnification for the Alleghany Period. The reserve was $450,000 at September 30, 2007.

(e) Equity Holdings Concentration

At September 30, 2007, Alleghany had a concentration of market risk in its available-for-sale equity securities portfolio of common stock of Burlington Northern Santa Fe Corporation (“Burlington Northern”), a railroad holding company, amounting to $405.9 million. During the first quarter of 2007, Alleghany sold approximately 809,000 shares of Burlington Northern common stock for approximately $65.7 million of proceeds, resulting in a pre-tax gain of $55.9 million.

At September 30, 2007, Alleghany also had a concentration of market risk in its available-for-sale equity securities portfolio with respect to the common stock of certain energy sector companies amounting to $332.8 million.

4. Segment of Business

Information related to Alleghany’s reportable segment is shown in the table below. Property and casualty insurance and surety operations are conducted by AIHL through its insurance operating units RSUI, CATA, EDC, and Darwin. In addition, AIHL Re, established in June 2006, is a wholly-owned subsidiary of AIHL that is available to provide reinsurance to Alleghany operating units and affiliates.

Alleghany’s reportable segment is reported in a manner consistent with the way management evaluates the businesses. As such, insurance underwriting activities are evaluated separately from investment activities. Net realized capital gains are not considered relevant in evaluating investment performance on an annual basis. Segment accounting policies are the same as those described in Note 1 to the Consolidated Financial Statements contained in the 2006 10-K.

The primary components of “corporate activities” are Alleghany Properties, AIHL’s investment in Homesite, corporate investment and other activities at the parent level, including strategic equity investments. Such strategic equity investments are available to support the internal growth of subsidiaries and for acquisitions of, and substantial investments in, operating companies.

		Three months ended,								Nine months ended,
		September 30,								September 30,
(in millions)		2007(1)				2006				2007(1)				2006
Revenues:
AIHL insurance group:
Net premiums earned
RSUI		$	183.7			$	165.9			$	528.5			$	500.4
CATA			50.0				44.1				148.2				127.7
Darwin			45.4				35.0				131.9				94.2
EDC			20.2				—				20.2				—
AIHL Re			0.4				17.5				24.1				17.5
			299.7				262.5				852.9				739.8
Net investment income			36.8				33.9				110.1				87.4
Net realized capital gains (losses)			20.9				(0.4	)			20.9				15.0
Other income			0.1				0.2				0.4				1.6
Total insurance group			357.5				296.2				984.3				843.8
Corporate activities:
Net investment income (2)			1.4				6.2				17.4				14.3
Net realized capital gains (3)			0.2				—				56.1				2.4
Other income (4)			0.8				—				11.5				24.3
Total		$	359.9			$	302.4			$	1,069.3			$	884.8
Earnings before income taxes and minority interest:
AIHL insurance group:
Underwriting profit (5)
RSUI		$	72.3			$	46.9			$	164.0			$	149.6
CATA			5.1				6.0				19.5				15.3
Darwin			6.6				1.3				17.6				3.3
EDC			1.7				—				1.7				—
AIHL Re			0.3				17.3				24.0				17.3
			86.0				71.5				226.8				185.5
Net investment income			36.8				33.9				110.1				87.4
Net realized capital gains(losses)			20.9				(0.4	)			20.9				15.0
Other income, less other expenses			(16.8	)			(11.5	)			(43.2	)			(30.1	)
Total insurance group			126.9				93.5				314.6				257.8
Corporate activities:
Net investment income (2)			1.4				6.2				17.4				14.3
Net realized capital gains (3)			0.2				—				56.1				2.4
Other income (4)			0.8				—				11.5				24.3
Corporate administration & other expenses			8.0				12.2				26.7				32.6
Interest expense			0.2				1.4				1.2				4.3
Total		$	121.1			$	86.1			$	371.7			$	261.9

5. Income Taxes

Net earnings for the first nine months of 2006 include a tax benefit of $10.8 million resulting from the release in the first quarter of 2006 of a valuation allowance Alleghany held with respect to a portion of its deferred tax assets relating to unused foreign tax credits. The unused foreign tax credits arose from Alleghany’s ownership of World Minerals prior to its sale in July 2005. Primarily as a result of the release, Alleghany’s effective tax rate on earnings before taxes and minority interest was 27.9 percent for the first nine months of 2006, compared with 32.5 percent for the first nine months of 2007.

Alleghany’s 2004 income tax return is currently under examination by the Internal Revenue Service, Alleghany’s 2005 and 2006 income tax returns remain open to examination.

6. Reinsurance

As discussed in the 2006 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 per risk reinsurance program run on an annual basis from May 1 to the following April 30 and thus expired on April 30, 2007. RSUI, due to its reduction in exposed limits since May 1, 2006, sought a lesser amount of catastrophe reinsurance at renewal. In this regard, RSUI’s catastrophe reinsurance program for 2007-2008 covers $400.0 million of losses, before a 17.5 percent co-participation by RSUI, in excess of a $100.0 million net retention after application of the surplus share treaties, facultative reinsurance and per risk covers, compared with coverage for $675.0 million of losses, before a 5.0 percent co-participation by RSUI, in excess of a $75.0 million net retention under the expired program. RSUI’s property per risk reinsurance program for the 2007-2008 period provides RSUI with reinsurance for $90.0 million of losses in excess of $10.0 million net retention per risk after application of the surplus share treaties and facultative reinsurance, which is substantially similar to the expired program.

RSUI reinsures its other lines of business through quota share treaties. RSUI’s Professional Liability quota share reinsurance treaty, which expired on April 1, 2007, provided reinsurance for policies with limits up to $10.0 million, with RSUI ceding 25 percent of the premiums and losses for policies with limits up to $1.0 million, and 50 percent of the premiums and losses on policies with limits greater than $1.0 million up to $10.0 million. This treaty was not renewed by RSUI, as management decided to retain all of this business. RSUI’s quota share treaty for umbrella/excess renewed on June 1, 2007 and provides reinsurance for policies with limits up to $30.0 million, with RSUI ceding 35 percent of the premium and loss for policies with limits up to $15.0 million and ceding 67.5 percent of the premium and loss for policies with limits in excess of $15.0 million up to $30.0 million. RSUI’s directors and officers (“D&O”) liability line treaty renewed on July 1, 2007 and provides reinsurance for policies with limits up to $20.0 million, with RSUI ceding 35 percent of the premium and loss for all policies with limits up to $10.0 million and ceding 60 percent of the premium and loss for policies with limits in excess of $10.0 million up to $20.0 million.

AIHL Re was formed in June 2006 as a captive reinsurance subsidiary of AIHL to provide catastrophe reinsurance coverage for RSUI. AIHL Re and RSUI entered into a reinsurance agreement, effective July 1, 2006, whereby AIHL Re, in exchange for market-based premiums, took that portion of RSUI’s catastrophe reinsurance program not covered by third party reinsurers. This reinsurance coverage expired on April 30, 2007, and AIHL Re is not participating in RSUI’s catastrophe reinsurance program for the 2007-2008 period. AIHL Re and Homesite entered into a reinsurance agreement, effective April 1, 2007, whereby AIHL Re, in exchange for an annual premium that is estimated will not be in excess of $2.0 million, provides $20.0 million of excess-of-loss reinsurance coverage to Homesite under its catastrophe reinsurance program. Homesite’s wind catastrophe exposure is concentrated in the Northeast region of the United States.

As discussed in the 2006 10-K, Darwin reinsures all of its lines of business through a program consisting of a variety of excess of loss treaties. In April 2007, Darwin completed the renewal of its main reinsurance program. For Darwin’s medical lines of business, the new program provides coverage for $10.0 million of losses, before a 15 percent co-participation by Darwin, in excess of a $1.0 million net retention, with premiums no longer varying depending on profitability as under the expired program. For Darwin’s non-medical lines of business, the new program provides coverage in layers. The first layer applies to all lines, other than commercial and healthcare D&O and financial institutions and managed care E&O, and provides coverage for $1.0 million of losses, before a 25 percent Darwin co-participation, in excess of a $1.0 million retention. The next layer, for all professional and managed care lines, covers $3.0 million of losses, before a 25 percent co-participation by Darwin, in excess of a $2.0 million net retention. The third layer provides coverage for up to $10.0 million of losses, before a 15.0 percent co-participation by Darwin, in excess of $5.0 million of losses for non-publicly traded D&O liability (other than Side-A only liability) and primary insurance agents E&O liability and for $5.0 million of losses for other non-medical lines, before a 15.0 percent co-participation by Darwin, in excess of $5.0 million of losses. The last layer provides coverage for $5.0 million of losses for Darwin’s Side-A only D&O liability, before a 10 percent co-participation by Darwin, in excess of $15.0 million of losses, and for $10.0 million of losses for Managed Care E&O, before a 10 percent co-participation by Darwin, in excess of $10.0 million of losses. As with its medical reinsurance program, premiums no longer vary depending on profitability as under the expired program, but ceding commissions may vary.

7. Debt and Notes Receivable

As of December 31, 2006, Alleghany’s wholly-owned subsidiary Alleghany Funding Corporation (“Alleghany Funding”) had outstanding notes payable of $80.0 million, which were secured by a $91.5 million installment note receivable. At the time of the debt issuance, Alleghany Funding also entered into a related interest rate swap agreement with a notional amount of $86.2 million for the purpose of matching interest expense with interest income. Pursuant to the swap, Alleghany Funding paid a variable rate equal to the one-month commercial paper rate plus 0.0625 percent and received a variable rate equal to the three-month LIBOR rate plus 0.375 percent.

The notes payable, installment note receivable and swap matured on January 22, 2007, without gain or loss.

8. Recent Accounting Pronouncements

In March 2006, FASB Statement No. 155, “Accounting for Certain Hybrid Instruments, an amendment to FASB Statement No. 133 and 140” was issued. This Statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that

otherwise would require bifurcation, and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. Alleghany has adopted the provisions of this Statement as of January 1, 2007, and the implementation did not have any material impact on its results of operations and financial condition.

In July 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” was issued. This Interpretation clarifies the accounting for income taxes recognized in an entity’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. Alleghany has adopted the provisions of this Interpretation as of January 1, 2007. The implementation did not have any impact on Alleghany’s results of operations and financial condition, and Alleghany did not have any unrecognized tax benefits as of January 1, 2007, or September 30, 2007.

The Securities and Exchange Commission released Staff Accounting Bulletin No. 108 (“SAB 108”), in September 2006. SAB 108 provides guidance on how the effects of the carryover or reversal of prior year financial statement misstatements should be considered in quantifying a current period misstatement. In addition, upon adoption, SAB 108 permits an entity to adjust for the cumulative effect of immaterial errors relating to prior years in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of retained earnings. SAB 108 also requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. Alleghany has adopted the provisions of SAB 108 as of January 1, 2007, and the implementation did not have any material impact on its results of operations and financial condition.

In September 2006, FASB Statement No. 157, “Fair Value Measurements,” was issued. This Statement provides guidance for using fair value to measure assets and liabilities. The Statement does not expand the use of fair value in any new circumstances. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Alleghany does not believe that this Statement will have a material impact on its results of operations and financial condition.

At the September 2006 meeting, the Emerging Issues Task Force reached a consensus with respect to Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The Issue addresses split-dollar life insurance, which is defined as an arrangement in which the employer and an employee share the cash surrender value and/or death benefits of the insurance policy. Additional information regarding this Issue can be found in Note 1.p. to the Consolidated Financial Statements contained in the 2006 10-K. Alleghany will adopt this Issue in the first quarter of 2008, and does not anticipate that it will have any material impact on its results of operations and financial condition.

In February 2007, FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115,” was issued. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value, at specified election dates, with unrealized gains and losses reported in

earnings at each subsequent reporting date. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements.” Alleghany does not anticipate that this Statement will have any material impact on its results of operations and financial condition.

9. Acquisition

On July 18, 2007 (the “Acquisition Date”), AIHL completed its acquisition of EDC for a purchase price of approximately $198.1 million, including approximately $5.6 million of incurred acquisition costs. After giving effect to the transaction, AIHL owns approximately 98.5% of the common stock of EDC with EDC senior management owning the remainder. EDC is included as an insurance operating unit within AIHL for segment reporting purposes.

The acquisition has been accounted for by the purchase method of accounting in accordance with Statement of Financial Accounting Standard No. 141, “Business Combinations” (“SFAS 141”), and therefore, the assets acquired and liabilities assumed have been recorded at their estimated fair values at the Acquisition Date. Any excess of the purchase price over the estimated fair values of the assets acquired, including identifiable intangible assets, and liabilities assumed is recorded as goodwill. Although Alleghany has not finalized the allocation of the purchase price at this time, it currently estimates goodwill, which is not deductible for tax purposes, of approximately $51.7 million and other intangible assets of approximately $17.6 million. Acquired identifiable intangible assets include trade names and licenses, which were determined to have indefinite useful lives, as well as renewal rights, distribution rights and database development, which are being amortized over the estimated useful lives of ten years, ten years, and twenty years, respectively. The net impact of amortization expenses and purchase accounting on Alleghany’s net income is not material. The estimated fair value of assets acquired, including identifiable intangible assets, and liabilities assumed at the Acquisition Date is as follows (in millions):

Available-for-sale securities		$	285.4
Goodwill			51.7
Other intangible assets			17.6
All other assets			44.6
Total assets assumed		$	399.3
Liabilities assumed (primarily losses and loss adjustment expenses)		$	201.2
Net assets acquired		$	198.1

Available-for-sale securities consist of high-quality fixed-income securities and money market funds, over half of which are currently on deposit with the California Department of Insurance to comply with insurance regulations. The unaudited condensed consolidated statement of earnings for the nine months ended September 30, 2007 and 2006 on an as-reported and pro forma basis, assuming the acquisition of EDC as of January 1, 2006, is as follows (in millions, except per share data):

		As Reported								Pro Forma
		2007				2006				2007				2006
Total Revenues		$	1,069.3			$	884.8			$	1,152.7			$	991.8
Net earnings			241.3				185.8				263.3				210.6
Basic earnings per share		$	28.05			$	22.24			$	30.75			$	25.29
Diluted earnings per share		$	26.42			$	21.78			$	28.80			$	24.64

These pro forma statements have been prepared for comparative purposes only and are not intended to be indicative of what Alleghany’s results would have been had the acquisition occurred at the beginning of 2006, or future results.

Substantially all of EDIC’s equity was unavailable for dividends or advances to Alleghany without prior approval of the California Department of Insurance.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

          References to the “Company,” “Alleghany,” “we,” “us,” and “our” in Items 2, 3 and 4 of Part I, as well as in Part II, of this Form 10-Q refer to Alleghany Corporation and its consolidated subsidiaries unless the context otherwise requires. “AIHL” refers to our insurance holding company subsidiary Alleghany Insurance Holdings LLC. “RSUI” refers to our subsidiary RSUI Group, Inc. and its subsidiaries. “AIHL Re” refers to our subsidiary AIHL Re LLC. “CATA” refers to our subsidiary Capitol Transamerica Corporation and its subsidiaries and also includes the results and operations of Platte River Insurance Company unless the context otherwise requires. “EDC” refers to our subsidiary Employers Direct Corporation and its subsidiaries. “Darwin” refers to our majority-owned subsidiary Darwin Professional Underwriters, Inc. and its subsidiaries. Unless the context otherwise requires, references to AIHL include the operations of RSUI, CATA, EDC, Darwin and AIHL Re. “Alleghany Properties” refers to our subsidiary Alleghany Properties Holdings LLC and its subsidiaries.

Cautionary Statement Regarding Forward-Looking Information

          “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,” “continue” 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, risks relating to our insurance operating units such as

	•		significant weather-related or other natural or human-made catastrophes and disasters;
	•		the cyclical nature of the property and casualty industry;
	•		the long-tail and potentially volatile nature of certain casualty lines of business written by our insurance operating units;
	•		the cost and availability of reinsurance;
	•		exposure to terrorist acts;
	•		the willingness and ability of our insurance operating units’ reinsurers to pay reinsurance recoverables owed to our insurance operating units;
	•		changes in the ratings assigned to our insurance operating units;
	•		claims development and the process of estimating reserves;
	•		legal and regulatory changes;
	•		the uncertain nature of damage theories and loss amounts;
	•		increases in the levels of risk retention by our insurance operating units; and
	•		adverse loss development for events insured by our insurance operating units in either the current year or in prior years.

          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 market prices of our significant equity investments; 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.

Business Overview

          We are engaged, through AIHL and its subsidiaries, in the property and casualty and surety insurance business. In addition, AIHL Re, a captive reinsurance subsidiary of AIHL, is available to provide reinsurance to Alleghany operating units and affiliates. We also own and manage properties in the Sacramento, California region through our subsidiary Alleghany Properties and conduct corporate investment and other activities at the parent level, including the holding of strategic equity investments. These strategic equity investments are available to support the internal growth of subsidiaries and for acquisitions of, and substantial investments in, operating companies. On December 29, 2006, we acquired approximately 32.9 percent of the outstanding shares of common stock of Homesite Group Incorporated, or “Homesite,” a national, full-service, mono-line provider of homeowners insurance, for $120.0 million in cash, and this investment is reflected in our financial statements in other invested assets. On July 18, 2007, AIHL completed its acquisition of EDC for a purchase price of approximately $198.1 million, which includes approximately $5.6 million of incurred acquisition costs. EDC is an insurance holding company based in Agoura Hills, California that, through its wholly-owned insurance subsidiary, Employers Direct Insurance Company, writes workers’ compensation insurance on a direct basis in the State of California.

          The following discussion and analysis presents a review of our results for the three and nine months ended September 30, 2007 and 2006. You should read this review in conjunction with the consolidated financial statements and other data presented in this Form 10-Q as well as “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and “Risk Factors” contained in our Report on Form 10-K for the year ended December 31, 2006, or the “2006 10-K,” and our Report on Form 10-Q for the quarter ended March 31, 2007 and our Report on Form 10-Q for the quarter and six months ended June 30, 2007. Our results for the first nine months of 2007 are not indicative of operating results in future periods.

Critical Accounting Estimates

          The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, or “GAAP,” requires us to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period covered by the financial statements. Critical accounting estimates are defined as those estimates that are important to the presentation of our financial condition and results of operations and require us to exercise significant judgment.

          We review our critical accounting estimates and assumptions quarterly. These reviews include evaluating the adequacy of reserves for unpaid losses and loss adjustment expenses and the reinsurance allowance for doubtful accounts, analyzing the recoverability of deferred tax

assets, assessing goodwill for impairment and evaluating the investment portfolio for other-than-temporary declines in estimated fair value. Actual results may differ from the estimates used in preparing the consolidated financial statements.

          Readers are encouraged to review our 2006 10-K for a more complete description of our critical accounting estimates.

Consolidated Results of Operations

          The following table summarizes our consolidated revenues, costs and expenses and earnings for the three and nine months ended September 30, 2007 and 2006.

		Three months ended								Nine months ended
		September 30,								September 30,
(in thousands)		2007(1)				2006				2007(1)				2006
Revenues
Net premiums earned		$	299.7			$	262.5			$	852.9			$	739.8
Net investment income			38.2				40.1				127.5				101.7
Net realized capital gains (losses)			21.2				(0.5	)			77.0				17.4
Other income			0.8				0.3				11.9				25.9
Total revenues		$	359.9			$	302.4			$	1,069.3			$	884.8
Costs and expenses
Loss and loss adjustment expenses		$	134.4			$	126.1			$	402.0			$	371.7
Commissions, brokerage and other underwriting expenses			79.3				64.9				224.1				182.5
Other operating expenses			17.6				12.3				45.9				34.8
Corporate administration			7.3				11.6				24.4				29.6
Interest expense			0.2				1.4				1.2				4.3
Total costs and expenses			238.8				216.3				697.6				622.9
Earnings before taxes and minority interest			121.1				86.1				371.7				261.9
Income taxes			45.3				30.9				120.6				73.1
Earnings before minority interest			75.8				55.2				251.1				188.8
Minority interest, net of tax			3.8				1.8				9.8				3.0
Net earnings		$	72.0			$	53.4			$	241.3			$	185.8
Revenues:
AIHL		$	357.5			$	296.2			$	984.3			$	843.8
Corporate activities (2)			2.4				6.2				85.0				41.0
Earnings (loss) before income taxes and minority interest:
AIHL		$	126.9			$	93.5			$	314.6			$	257.8
Corporate activities (2)			(5.8	)			(7.4	)			57.1				4.1

          Our earnings before income taxes and minority interest in the third quarter and first nine months of 2007 increased from the corresponding 2006 periods, reflecting increases in net premiums earned and substantially higher net realized capital gains, partially offset by an increase in loss and loss adjustment expenses and commissions, brokerage and other underwriting expenses. The increase in net premiums earned primarily reflects growth at each of RSUI, CATA and Darwin, and, with respect to the 2007 third quarter, inclusion of the results of EDC. The increase in net realized capital gains in the first nine months of 2007 primarily reflects the sale in

the 2007 first quarter of approximately 809,000 shares of common stock of Burlington Northern Santa Fe Corporation, or “Burlington Northern,” for a net realized capital gain of $55.9 million. The increase in net realized capital gains in the 2007 third quarter primarily reflects the sale during the period of common stock holdings in the energy and mining sectors. The increase in loss and loss adjustment expenses primarily reflects the growth in net premiums earned at CATA and Darwin, partially offset by continued favorable current accident year loss experience at RSUI. The increase in commissions, brokerage and other underwriting expenses primarily reflects the increase in net premiums earned at RSUI, CATA and Darwin, and with respect to the 2007 third quarter, inclusion of the results of EDC.

          The decrease in other income for the first nine months of 2007 reflects gains on sales of real property by Alleghany Properties of $11.6 million during the first nine months of 2007, compared with gains of $24.3 million in the corresponding 2006 period. The slight decrease in net investment income for the 2007 third quarter from the corresponding 2006 period primarily reflects losses in our Homesite and partnership investments, partially offset by strong underwriting cash flow and the net positive effect of the acquisition of EDC.

          The effective tax rate on net earnings before income taxes and minority interest was 32.5 percent for the first nine months of 2007, compared with 27.9 percent for the corresponding 2006 period. The effective tax rate in the first nine months of 2006 includes a tax benefit of $10.8 million resulting from the first quarter of 2006 release of a valuation allowance we held with respect to a portion of our deferred tax assets related to unused foreign tax credits. The unused foreign tax credits arose from our ownership of World Minerals, Inc. prior to its sale in July 2005. Net earnings for the first nine months of 2006 include this $10.8 million tax benefit.

     AIHL Operating Unit Pre-Tax Results

(in millions, except ratios)		RSUI				AIHL Re				CATA				EDC (1)				Darwin				AIHL
Three months ended September 30, 2007
Gross premiums written		$	285.2			$	0.4			$	51.7			$	21.8			$	69.3			$	428.4
Net premiums written			178.6				0.4				49.7				18.8				50.6				298.1
Net premiums earned (2)		$	183.7			$	0.4			$	50.0			$	20.2			$	45.4			$	299.7
Loss and loss adjustment expenses			70.4				—				24.3				13.7				26.0				134.4
Underwriting expenses (3)			41.0				0.1				20.6				4.8				12.8				79.3
Underwriting profit (4)		$	72.3			$	0.3			$	5.1			$	1.7			$	6.6				86.0
Net investment income (2)																							36.8
Net realized capital gains (2)																							20.9
Other income (2)																							0.1
Other expenses (3)																							(16.9	)
Earnings before taxes and minority interest																						$	126.9
Loss ratio (5)			38.3	%			0.0	%			48.6	%			67.8	%			57.1	%			44.8	%
Expense ratio (6)			22.3	%			7.8	%			41.2	%			23.7	%			28.3	%			26.4	%
Combined ratio (7)			60.6	%			7.8	%			89.8	%			91.5	%			85.4	%			71.2	%
Three months ended September 30, 2006
Gross premiums written		$	331.2				—			$	47.2				—			$	65.4			$	443.8
Cessions to AIHL Re			(58.0	)			58.0				—				—				—				—
Gross premiums written after AIHL Re			273.2				58.0				47.2				—				65.4				443.8
Net premiums written			112.1				58.0				45.2				—				41.9				257.2
Net premiums earned (2)		$	165.9			$	17.5			$	44.1				—			$	35.0			$	262.5
Loss and loss adjustment expenses			81.7				—				20.2				—				24.2				126.1
Underwriting expenses (3)			37.3				0.2				17.9				—				9.5				64.9
Underwriting profit (4)		$	46.9			$	17.3			$	6.0				—			$	1.3				71.5
Net investment income (2)																							33.9
Net realized capital losses (2)																							(0.4	)
Other income (2)																							0.2
Other expenses (3)																							(11.7	)
Earnings before taxes and minority interest																						$	93.5
Loss ratio (5)			49.2	%			—				45.7	%			—				69.2	%			48.0	%
Expense ratio (6)			22.5	%			1.2	%			40.6	%			—				27.1	%			24.7	%
Combined ratio (7)			71.7	%			1.2	%			86.3	%			—				96.3	%			72.7	%

(in millions, except ratios)		RSUI				AIHL Re				CATA				EDC (1)				Darwin				AIHL
Nine months ended September 30, 2007
Gross premiums written		$	945.1			$	0.7			$	162.8			$	21.8			$	209.5			$	1,339.9
Net premiums written			559.0				1.8				156.6				18.8				148.6				884.8
Net premiums earned (2)		$	528.5			$	24.1			$	148.2			$	20.2			$	131.9			$	852.9
Loss and loss adjustment expenses			244.2				—				67.4				13.7				76.7				402.0
Underwriting expenses (3)			120.3				0.1				61.3				4.8				37.6				224.1
Underwriting profit (4)		$	164.0			$	24.0			$	19.5			$	1.7			$	17.6				226.8
Net investment income (2)																							110.1
Net realized capital losses (2)																							20.9
Other income (2)																							0.4
Other expenses (3)																							(43.6	)
Earnings before taxes and minority interest																						$	314.6
Loss ratio (5)			46.2	%			—				45.5	%			67.8	%			58.2	%			47.1	%
Expense ratio (6)			22.8	%			0.5	%			41.3	%			23.7	%			28.5	%			26.3	%
Combined ratio (7)			69.0	%			0.5	%			86.8	%			91.5	%			86.7	%			73.4	%
Nine months ended September 30, 2006
Gross premiums written		$	1,034.2				—			$	141.1				—			$	183.4			$	1,358.7
Cessions to AIHL Re			(58.0	)			58.0				—				—				—				—
Gross premiums written after AIHL Re			976.2				58.0				141.1				—				183.4				1,358.7
Net premiums written			503.9				58.0				134.8				—				115.1				811.8
Net premiums earned (2)		$	500.4			$	17.5			$	127.7				—			$	94.2			$	739.8
Loss and loss adjustment expenses			248.5				—				58.1				—				65.2				371.8
Underwriting expenses (3)			102.3				0.2				54.3				—				25.7				182.5
Underwriting profit (4)		$	149.6			$	17.3			$	15.3				—			$	3.3				185.5
Net investment income (2)																							87.4
Net realized capital gains (2)																							15.0
Other income (2)																							1.6
Other expenses (3)																							(31.7	)
Earnings before taxes and minority interest																						$	257.8
Loss ratio (5)			49.7	%			—				45.4	%			—				69.2	%			50.2	%
Expense ratio (6)			20.4	%			1.2	%			42.6	%			—				27.3	%			24.7	%
Combined ratio (7)			70.1	%			1.2	%			88.0	%			—				96.5	%			74.9	%

          Discussion of individual AIHL operating unit results follows, and AIHL investment results are discussed below under “Investments.”

RSUI

          The decrease in gross premiums written in the third quarter and first nine months of 2007 from the corresponding 2006 periods primarily reflects continuing and increasing pricing competition in RSUI’s general liability, umbrella and property lines of business. RSUI’s net premiums earned in the third quarter and first nine months of 2007 increased from the corresponding 2006 periods. The increase in property premiums earned is due primarily to reduced reinsurance limits being purchased and reduced rates paid for catastrophe and per risk coverage renewed at May 1, 2007. The increase in casualty premiums earned primarily reflects the growth of RSUI’s binding authority line of business which writes small, specialized coverages pursuant to underwriting authority arrangements with managing general agents.

          The decrease in loss and loss adjustment expenses in the 2007 third quarter from the corresponding 2006 period primarily reflects continued favorable current accident year loss experience for property and to a lesser extent, D&O lines of business and a release of $9.0 million of prior year reserves for the professional liability and D&O lines of business. The decrease in reserves for professional liability and D&O liability reflects favorable loss emergence in the 2003 and 2004 accident years following a recently completed reserve study.

          The decrease in loss and loss adjustment expenses in the first nine months of 2007 from the corresponding 2006 period primarily reflects continued favorable current accident year loss experience for property and to a lesser extent D&O lines of business, partially offset by a prior year net reserve adjustment of $8.8 million. The net reserve adjustment reflected an increase in estimated losses and LAE related to Hurricane Katrina in the amount of $30.9 million after reinsurance ($40.0 million before reinsurance), partially offset by an aggregate release of $22.1 million of prior year reserves for the professional liability and D&O liability lines of business. The increase in Hurricane Katrina reserves reflects the results of a review, completed during the 2007 second quarter, of Katrina loss and LAE reserves in light of the current uncertain legal environment. RSUI reviews its reserves quarterly. In the second quarter of 2007, settlements of pending claims were larger than expected, which contributed to RSUI’s decision to increase reserves for its remaining pending Hurricane Katrina claims. Future legal developments, to the extent adverse to the insurance industry, may result in additional adverse development in RSUI’s Hurricane Katrina loss and LAE reserves.

          The increase in underwriting expenses in the third quarter and first nine months of 2007 from the corresponding 2006 periods reflects higher salary and benefit expenses and lower ceding commissions earned by RSUI on its property surplus share reinsurance arrangements, which caused net commission expenses incurred to increase. RSUI’s underwriting profit for the third quarter and first nine months of 2007 increased from the corresponding 2006 periods, primarily reflecting an increase in net premiums earned and lower than expected current accident year property losses, partially offset by higher underwriting expenses and the net reserve adjustment of $8.8 million, as discussed above. Rates at RSUI in the first nine months of 2007 as compared with the first nine months of 2006 reflect overall industry trends of downward pricing as a result of increased competition, with decreased rates in all of RSUI’s lines of business, particularly with respect to the general liability and umbrella lines of business.

          As discussed in the 2006 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 per risk reinsurance program run on

an annual basis from May 1 to the following April 30 and thus expired on April 30, 2007. RSUI, due to its reduction in exposed limits since May 1, 2006, sought a lesser amount of catastrophe reinsurance at renewal. In this regard, RSUI’s catastrophe reinsurance program for 2007-2008 covers $400.0 million of losses, before a 17.5 percent co-participation by RSUI, in excess of a $100.0 million net retention after application of the surplus share treaties, facultative reinsurance and per risk covers, compared with coverage for $675.0 million of losses, before a 5.0 percent co-participation by RSUI, in excess of a $75.0 million net retention under the expired program. In addition, RSUI’s property per risk reinsurance program for the 2007-2008 period provides RSUI with reinsurance for $90.0 million of losses in excess of $10.0 million net retention per risk after application of the surplus share treaties and facultative reinsurance, which is substantially similar to the expired program.

          RSUI reinsures its other lines of business through quota share treaties. RSUI’s Professional Liability quota share reinsurance treaty, which expired on April 1, 2007, provided reinsurance for policies with limits up to $10.0 million, with RSUI ceding 25 percent of the premiums and losses for policies with limits up to $1.0 million, and 50 percent of the premiums and losses on policies with limits greater than $1.0 million up to $10.0 million. This treaty was not renewed by RSUI, as management decided to retain all of this business. RSUI’s quota share treaty for umbrella/excess renewed on June 1, 2007 and provides reinsurance for policies with limits up to $30.0 million, with RSUI ceding 35 percent of the premium and loss for policies with limits up to $15.0 million and ceding 67.5 percent of the premium and loss for policies with limits in excess of $15.0 million up to $30.0 million. RSUI’s D&O liability line treaty renewed on July 1, 2007 and provides reinsurance for policies with limits up to $20.0 million, with RSUI ceding 35 percent of the premium and loss for all policies with limits up to $10.0 million and ceding 60 percent of the premium and loss for policies with limits in excess of $10.0 million up to $20.0 million.

AIHL Re

          AIHL Re was formed in June 2006 as a captive reinsurance subsidiary of AIHL to provide catastrophe reinsurance coverage for RSUI. AIHL Re and RSUI entered into a reinsurance agreement, effective July 1, 2006, whereby AIHL Re, in exchange for market-based premiums, took that portion of RSUI’s catastrophe reinsurance program not covered by third party reinsurers. This reinsurance coverage expired on April 30, 2007 and AIHL Re is not participating in RSUI’s catastrophe reinsurance program for the 2007-2008 period. The cumulative premiums ceded from RSUI to AIHL Re under this agreement for the coverage period was $59.1 million, which reflects a $1.1 million premium adjustment recorded during the second quarter of 2007.

          AIHL Re’s underwriting profit in the first nine months of 2007 reflects the absence of catastrophe losses during the period. In connection with the expiration of the reinsurance agreement, the trust funds established to secure AIHL Re’s obligations to make payments to RSUI under such reinsurance agreement were dissolved and the $208.0 million in such funds was disbursed to AIHL.

          AIHL Re and Homesite entered into a reinsurance agreement, effective April 1, 2007, whereby AIHL Re, in exchange for annual premium that is estimated will not be in excess of $2.0 million, provides $20.0 million of excess-of-loss reinsurance coverage to Homesite under its catastrophe reinsurance program. Homesite’s catastrophe exposure is concentrated in the Northeast region of the United States. To secure AIHL Re’s obligations to make payments to

Homesite under the April 1, 2007 agreement, a deposit of $20.0 million will be made into a trust fund being established for the benefit of Homesite.

CATA

          CATA’s net premiums earned in the third quarter and first nine months of 2007 increased from the corresponding 2006 periods, reflecting growth in gross and net premiums written in CATA’s property and casualty (including in excess and surplus markets) lines of business. The increase in loss and loss adjustment expenses in the third quarter and first nine months of 2007 from the corresponding 2006 periods reflects growth in net premiums earned, partially offset by reductions of reserves for prior accident years. Underwriting expenses for the third quarter and first nine months of 2007 increased from the corresponding 2006 periods, primarily reflecting higher commissions and other acquisition-related expenses as a consequence of increased premium volumes.

          CATA’s underwriting profit for the first nine months of 2007 increased from the corresponding 2006 period, primarily reflecting favorable loss emergence principally in its liability and commercial surety lines of business. Such favorable loss emergence resulted in a release in the third quarter and first nine months of 2007 of $4.6 million and $14.0 million, respectively, of prior year reserves, compared with a release of prior year reserves in the third quarter and first nine months of 2006 of $4.8 million and $11.1 million, respectively. In addition, an increase in net premiums earned in its property and casualty lines of business was partially offset by higher than expected property loss frequency and severity in the first nine months of 2007.

          CATA experienced increased competition and decreased rates in its property and casualty and commercial surety lines of business during the first nine months of 2007, compared with the corresponding 2006 period.

EDC

          AIHL include the results of EDC, net of purchase accounting adjustments, commencing July 18, 2007. (See Note 9 to the Consolidated Financial Statements contained herein).

Darwin

          The increase in gross premiums written at Darwin in the third quarter and first nine months of 2007 from the corresponding 2006 periods reflects growth in Darwin’s E&O and medical malpractice lines of business. The increase in net premiums earned in the third quarter and first nine months of 2007 from the corresponding 2006 periods primarily reflects the increase in gross premiums written, an increase in retentions under Darwin’s reinsurance programs, and a reduction of ceded premiums, connected to a loss reserve release for prior accident years.

          The increase in loss and loss adjustment expenses and underwriting expenses in the third quarter and first nine months of 2007 compared with the corresponding 2006 periods primarily reflects an increase in premium volume, partially offset by a reduction of reserves for prior accident years.

          Darwin’s underwriting profit for the first nine months of 2007 increased from the corresponding 2006 period, primarily reflecting an increase in net premiums earned and releases

of prior year loss reserves and corresponding adjustments in ceded reinsurance premiums totaling $12.6 million, compared with $1.3 million in the comparable 2006 period, partially offset by increases in loss and loss adjustment expenses and underwriting expenses related to the growth of Darwin’s business. The $12.6 million adjustment in the first nine months of 2007 includes $3.8 million of loss reserve releases and a corresponding $0.8 million reduction in ceded reinsurance premiums made in the 2007 third quarter, due to continued favorable loss development. The remainder of the $12.6 million relates to loss reserve releases and corresponding adjustments in ceded reinsurance premiums made in the first half of 2007, reflecting a change in reserving methodology to give greater weight to historical claims experience.

          Darwin experienced increased competition and decreased rates across all of its lines of business during the first nine months of 2007, compared with the corresponding 2006 period.

          Darwin reinsures all of its lines of business through a program consisting of a variety of excess of loss treaties. In April 2007, Darwin completed the renewal of its main reinsurance program. For Darwin’s medical lines of business, the new program provides coverage for $10.0 million of losses, before a 15 percent co-participation by Darwin, in excess of a $1.0 million net retention, with premiums no longer varying depending on profitability as under the expired program. For Darwin’s non-medical lines of business, the new program provides coverage in layers. The first layer applies to all lines, other than commercial and healthcare D&O and financial institutions and managed care E&O, and provides coverage for $1.0 million of losses, before a 25 percent Darwin co-participation, in excess of a $1.0 million retention. The next layer, for all professional and managed care lines, covers $3.0 million of losses, before a 25 percent co-participation by Darwin, in excess of a $2.0 million net retention. The third layer provides coverage for up to $10.0 million of losses, before a 15.0 percent co-participation by Darwin, in excess of $5.0 million of losses for non-publicly traded D&O liability (other than Side-A only liability) and primary insurance agents E&O liability and for $5.0 million of losses for other non-medical lines, before a 15.0 percent co-participation by Darwin, in excess of $5.0 million of losses. The last layer provides coverage for $5.0 million of losses for Darwin’s Side-A only D&O liability, before a 10 percent co-participation by Darwin, in excess of $15.0 million of losses, and for $10.0 million of losses for Managed Care E&O, before a 10 percent co-participation by Darwin, in excess of $10.0 million of losses. As with its medical reinsurance program, premiums no longer vary depending on profitability as under the expired program, but ceding commissions may vary.

Reserve Review Process

          AIHL’s insurance operating units periodically analyze liabilities for unpaid losses and loss adjustment expenses, or “LAE,” established in prior years and adjust their expected ultimate cost, where necessary, to reflect positive or negative development in loss experience and new information, including, for certain catastrophic events, revised industry estimates of the magnitude of a catastrophe. Adjustments to previously recorded liabilities for unpaid losses and LAE, both positive and negative, are reflected in our financial results in the periods in which these adjustments are made and are referred to as prior year reserve development. The following table presents the reserves established in connection with the losses and LAE of AIHL’s insurance operating units on a gross and net basis by line of business. These reserve amounts represent the accumulation of estimates of ultimate losses (including for claims incurred but not yet reported) and LAE.

																		Workers’
(in millions)		Property				Casualty(1)				CMP(2)				Surety				Comp(3)				All Other(4)				Total
At September 30, 2007
Gross loss and LAE reserves		$	377.4			$	1,809.2			$	85.0			$	20.2			$	179.0			$	71.1			$	2,541.9
Reinsurance recoverables on unpaid losses			(164.5	)			(709.6	)			(0.8	)			(0.2	)			(11.6	)			(46.6	)			(933.3	)
Net loss and LAE reserves		$	212.9			$	1,099.6			$	84.2			$	20.0			$	167.4			$	24.5			$	1,608.6
At December 31, 2006
Gross loss and LAE reserves		$	598.3			$	1,503.5			$	86.2			$	18.4			$	11.5			$	86.7			$	2,304.6
Reinsurance recoverables on unpaid losses			(348.4	)			(608.7	)			(1.1	)			(0.2	)			—				(51.4	)			(1,009.8	)
Net loss and LAE reserves		$	249.9			$	894.8			$	85.1			$	18.2			$	11.5			$	35.3			$	1,294.8

Changes in Loss and LAE Reserves between September 30, 2007 and December 31, 2006

          Gross Reserves. The increase in gross loss and LAE reserves at September 30, 2007 from December 31, 2006 primarily reflects increases in workers’ compensation and casualty gross loss and LAE reserves, partially offset by a net reduction in RSUI’s property gross loss and LAE reserves. The increase in workers’ compensation gross loss and LAE reserves is due to the acquisition of EDC. The increase in casualty gross loss and LAE reserves primarily reflects anticipated loss reserves on current accident year gross premiums earned and limited gross paid loss activity for the current and prior casualty accident years at RSUI and Darwin, partially offset by releases of prior year reserves. The decrease in property gross loss and LAE reserves is mainly due to gross loss payments on 2004 and 2005 hurricane related losses, principally Hurricane Katrina.

          Net Reserves. The increase in net loss and LAE reserves at September 30, 2007 from December 31, 2006 primarily reflects increases in workers’ compensation and casualty net loss and LAE reserves. The increase in workers’ compensation gross loss and LAE reserves is due to the acquisition of EDC. The increase in casualty gross loss and LAE reserves is due to RSUI and Darwin, and primarily reflects anticipated loss reserves on current accident year gross premiums earned and limited gross paid loss activity for the current and prior casualty accident years, and lower reinsurance utilization, partially offset by releases of prior year reserves. Slightly lower loss and LAE property reserves is mainly due to loss payments on 2004 and 2005 hurricane related losses, principally Hurricane Katrina, partially offset by an increase in estimated losses, net of reinsurance recoverables on unpaid losses, related to Hurricane Katrina.

Reinsurance Recoverables

          At September 30, 2007, AIHL had total reinsurance recoverables of $982.6 million, consisting of $933.3 million of ceded outstanding losses and LAE and $49.3 million of recoverables on paid losses. Approximately 90.5 percent of AIHL’s reinsurance recoverables balance at September 30, 2007 was due from reinsurers having an A.M. Best financial strength rating of A (Excellent) or higher.

Corporate Activities Results from Operations

          Corporate activities recorded a pre-tax loss of $5.8 million on revenues of $2.4 million for the 2007 third quarter, compared with a pre-tax loss of $7.4 million on revenues of $6.2 million in the corresponding period of 2006, and pre-tax earnings of $57.1 million on revenues of $85.0 million for first nine months of 2007, compared with pre-tax earnings of $4.1 million on revenues of $41.0 million in the corresponding period of 2006. The 2007 third quarter results primarily reflect a decrease in corporate administration expenses due to lower executive compensation expense compared with the corresponding 2006 period, partially offset by a decrease in net investment income, primarily reflecting losses in our Homesite and partnership investments. The results for the first nine months of 2007 primarily reflect net realized capital gains at the parent level of $55.9 million resulting from the sale of approximately 809,000 shares of Burlington Northern common stock during the first quarter of 2007. In addition, the results for the first nine months of 2007 also reflect a sale by Alleghany Properties of real property which generated a net pre-tax gain of $7.2 million, compared with a net pre-tax gain of $23.1 million generated by a sale of real property by Alleghany Properties during the corresponding 2006 period.

          For the third quarter and first nine months of 2007, net investment income includes ($1.3) million and $4.9 million of Alleghany’s equity in earnings of Homesite, net of purchase accounting adjustments.

Investments

          On a consolidated basis, Alleghany’s invested asset portfolio was approximately $4.7 billion as of September 30, 2007, an increase of 16.3 percent from approximately $4.1 billion at December 31, 2006. Of the $0.6 billion increase, approximately $0.1 billion is due to the addition of EDC’s invested asset portfolio, consisting entirely of fixed income securities, less the acquisition price (See Note 9 to the Consolidated Financial Statements contained herein). The credit quality of EDC’s fixed income portfolio is comparable to that of AIHL’s.

          At September 30, 2007, the average duration of Alleghany’s debt securities portfolio was 4.08 years, compared with 4.21 years at December 31, 2006.

          The invested asset portfolio generated net investment income of $127.5 million for the first nine months of 2007, of which $110.1 million was generated by AIHL and $17.4 million was generated by corporate activities. These amounts were $101.7 million, $87.4 million, and $14.3 million, respectively, for the comparable 2006 period. The increase in AIHL’s net investment income in the first nine months of 2007 was due principally to strong underwriting cash flow and the net positive effect from the acquisition of EDC. The increase in net investment income for corporate activities in the first nine months of 2007 is due principally to the reinvestment of proceeds from our mandatory convertible preferred stock offering (after capitalization of AIHL Re), which occurred during the 2006 second quarter.

          The sales within our invested asset portfolio generated net realized capital gains of $77.0 million for the first nine months of 2007, reflecting net realized capital gains of $56.1 million generated by corporate activities and $20.9 million generated by AIHL. These amounts were $17.4 million, $2.4 million, and $15.0 million, respectively, for the comparable 2006 period. As noted above, the net realized capital gains for corporate activities in the first nine months of 2007 were due principally to the sale of Burlington Northern common stock in the first quarter of 2007. As of September 30, 2007, we held approximately 5.0 million shares of Burlington Northern common stock with an aggregate market value at that date of approximately $405.9 million. The aggregate cost of such shares is approximately $60.4 million, or $12.07 per share. In the first nine months of 2007, AIHL recorded $7.7 million of unrealized capital losses in its investment portfolio that were deemed to be other than temporary. Of the $7.7 million of unrealized capital losses, $6.6 million related to its mortgage- and asset-backed bond portfolio that were deemed to be other than temporary during the first quarter of 2007, and $1.1 million related to its equity portfolio that were deemed to be other than temporary during the third quarter of 2007. The $7.7 million of unrealized capital losses was more than offset by $28.6 million of net realized capital gains on the sale of securities by AIHL, due principally to the sale of common stock holdings in the energy and mining sectors in the 2007 third quarter. The net realized capital gains generated by AIHL in the first nine months of 2006 were due principally to the sale of a large common stock holding in the energy sector in May 2006.

Financial Condition

          Stockholders’ equity increased to $2,694.9 million as of September 30, 2007, compared with $2,423.2 million as of December 31, 2006, representing an increase of 11.2 percent, due primarily to net earnings in the first nine months of 2007.

          As of December 31, 2006, our wholly-owned subsidiary Alleghany Funding Corporation, or “Alleghany Funding,” had outstanding notes payable of $80.0 million, which were secured by a $91.5 million installment note receivable. At the time of the debt issuance, Alleghany Funding also entered into a related interest rate swap agreement with a notional amount of $86.2 million for the purpose of matching interest expense with interest income. Pursuant to the swap, Alleghany Funding paid a variable rate equal to the one-month commercial paper rate plus 0.0625 percent and received a variable rate equal to the three-month LIBOR rate plus 0.375 percent. The notes payable, installment note receivable and swap matured on January 22, 2007, without gain or loss.

          We and our subsidiaries have adequate internally generated funds and unused credit facilities to provide for the currently foreseeable needs of our and their businesses, respectively.

          In August 2007, we made a capital contribution of $50.0 million to EDC, which EDC contributed to EDIC. As of September 30, 2007, substantially all of EDIC’s equity of $248.5 million was unavailable for dividends or advances to us without prior approval of the California Department of Insurance.

Recent Accounting Pronouncements

          In March 2006, FASB Statement No. 155, “Accounting for Certain Hybrid Instruments, an amendment to FASB Statement No. 133 and 140” was issued. This Statement permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. This Statement is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We have adopted the provisions of this Statement as of January 1, 2007, and the implementation did not have any material impact on our results of operations and financial condition.

          In July 2006, FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes,” was issued. This Interpretation clarifies the accounting for income taxes recognized in an entity’s financial statements in accordance with FASB Statement 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The implementation did not have any impact on our results of operations and financial condition, and we did not have any unrecognized tax benefits as of January 1, 2007 or September 30, 2007.

          The Securities and Exchange Commission released Staff Accounting Bulletin No. 108 (“SAB 108”), in September 2006. SAB 108 provides guidance on how the effects of the carryover or reversal of prior year financial statement misstatements should be considered in quantifying a current period misstatement. In addition, upon adoption, SAB 108 permits an entity to adjust for the cumulative effect of immaterial errors relating to prior years in the carrying amount of assets and liabilities as of the beginning of the current fiscal year, with an offsetting adjustment to the opening balance of retained earnings. SAB 108 also requires the adjustment of any prior quarterly financial statements within the fiscal year of adoption for the effects of such errors on the quarters when the information is next presented. We have adopted the provisions of SAB 108 as of January 1, 2007, and the implementation did not have any material impact on our results of operations and financial condition.

          In September 2006, FASB Statement No. 157, “Fair Value Measurements,” was issued. This Statement provides guidance for using fair value to measure assets and liabilities. The Statement does not expand the use of fair value in any new circumstances. The Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not believe that this Statement will have a material impact on our results of operations and financial condition.

          At the September 2006 meeting, the Emerging Issues Task Force reached a consensus with respect to Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” The Issue addresses split-dollar life insurance, which is defined as an arrangement in which the employer and an employee share the cash surrender value and/or death benefits of the insurance policy. Additional information regarding this Issue can be found in Note 1.p. to the Consolidated Financial Statements contained in the 2006 10-K. We will adopt this Issue in the first quarter of 2008, and do not anticipate that it will have any material impact on our results of operations and financial condition.

          In February 2007, FASB Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities—Including an amendment of FASB Statement No. 115,” was issued. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value, at specified election dates, with unrealized gains and losses reported in earnings at each subsequent reporting date. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of FASB Statement No. 157, “Fair Value Measurements.” We do not anticipate that this Statement will have any 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, such as interest rates, foreign currency exchange rates and commodity prices. The primary market risk related to our non-trading financial instruments is the risk of loss associated with adverse changes in interest rates. We currently do not use derivatives to manage market and interest rate risks.

          The table below presents a sensitivity analysis of our consolidated debt securities as of September 30, 2007. 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. In this sensitivity analysis model, we use fair values to measure its potential change, and 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 September 30, 2007 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.

At September 30, 2007 ( in millions)

Interest rate shifts		-300				-200				-100				0				100				200				300
Debt securities, fair value		$	3,518.2			$	3,386.1			$	3,257.8			$	3,129.5			$	3,000.6			$	2,873.2			$	2,749.9
Estimated change in fair value		$	388.7			$	256.6			$	128.3				—				($128.9	)			($256.3	)			($379.6	)