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, 2008

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

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, 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 þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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

 

 

PART 1. FINANCIAL INFORMATION

ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
(dollars in thousands, except share and per share amounts)
(unaudited)

		2008				2007
Revenues
Net premiums earned		$	235,705			$	254,235
Net investment income			35,571				32,354
Net realized capital (losses) gains			(8,894	)			21,234
Other income			907				873
Total revenues			263,289				308,696
Costs and expenses
Loss and loss adjustment expenses			204,710				108,430
Commissions, brokerage and other underwriting expenses			70,149				66,384
Other operating expenses			2,451				16,322
Corporate administration			6,876				7,307
Interest expense			198				192
Total costs and expenses			284,384				198,635
(Losses) earnings from continuing operations, before income taxes			(21,095	)			110,061
Income taxes			(12,262	)			42,619
(Losses) earnings from continuing operations			(8,833	)			67,442
Discontinued operations
Earnings from discontinued operations			7,531				5,937
Income taxes			2,913				2,990
Earnings from discontinued operations, net			4,618				2,947
Net (losses) earnings		$	(4,215	)		$	70,389
Changes in other comprehensive income
Change in unrealized gains, net of deferred taxes		$	(169,044	)		$	34,666
Less: reclassification for gains realized in net earnings, net of taxes			5,781				(13,774	)
Other			13				58
Comprehensive income		$	(167,465	)		$	91,339
Net (losses) earnings		$	(4,215	)		$	70,389
Preferred dividends			4,305				4,307
Net (losses) earnings available to common stockholders		$	(8,520	)		$	66,082
Basic (loss) earnings per share of common stock *
Continuing operations		$	(1.58	)		$	7.59
Discontinued operations			0.56				0.35
		$	(1.02	)		$	7.94
Diluted (loss) earnings per share of common stock *
Continuing operations		$	(1.58	)		$	7.23
Discontinued operations			0.56				0.31
		$	(1.02	)		$	7.54
Dividends per share of common stock			*				*
Average number of outstanding shares of common stock **			8,313,524				8,319,905

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, 2008 AND 2007
(dollars in thousands, except share and per share amounts)
(unaudited)

		2008				2007
Revenues
Net premiums earned		$	721,424			$	721,028
Net investment income			105,611				110,978
Net realized capital gains			44,035				77,072
Other income			1,092				11,948
Total revenues			872,162				921,026
Costs and expenses
Loss and loss adjustment expenses			479,396				325,273
Commissions, brokerage and other underwriting expenses			213,100				186,503
Other operating expenses			26,484				41,751
Corporate administration			25,290				24,430
Interest expense			534				1,166
Total costs and expenses			744,804				579,123
Earnings from continuing operations, before income taxes			127,358				341,903
Income taxes			32,623				112,172
Earnings from continuing operations			94,735				229,731
Discontinued operations
Earnings from discontinued operations			29,727				16,201
Income taxes			14,977				8,659
Earnings from discontinued operations, net			14,750				7,542
Net earnings		$	109,485			$	237,273
Changes in other comprehensive income
Change in unrealized gains, net of deferred taxes		$	(145,613	)		$	92,400
Less: reclassification for gains realized in net earnings (net of taxes)			(28,623	)			(50,080	)
Other			5				173
Comprehensive income		$	(64,746	)		$	279,766
Net earnings		$	109,485			$	237,273
Preferred dividends			12,915				12,918
Net earnings available to common stockholders		$	96,570			$	224,355
Basic earnings per share of common stock *
Continuing operations		$	9.83			$	26.10
Discontinued operations			1.77				0.91
		$	11.60			$	27.01
Diluted earnings per share of common stock *
Continuing operations		$	9.83			$	24.65
Discontinued operations			1.77				0.81
		$	11.60			$	25.46
Dividends per share of common stock			*				*
Average number of outstanding shares of common stock **			8,325,837				8,306,236

See accompanying Notes to Unaudited Consolidated Financial Statements.

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

		September 30,
		2008				December 31,
		(unaudited)				2007
Assets
Investments
Available for sale securities at fair value:
Equity securities (cost: 2008 $555,274; 2007 $691,429)		$	853,197			$	1,176,412
Debt securities (amortized cost: 2008 $2,660,942; 2007 $2,541,488)			2,610,423				2,564,717
Short-term investments			502,271				316,897
			3,965,891				4,058,026
Other invested assets			263,241				193,272
Total investments			4,229,132				4,251,298
Cash			30,132				57,646
Premium balances receivable			144,113				170,080
Reinsurance recoverables			1,084,809				1,018,673
Ceded unearned premium reserves			195,444				221,203
Deferred acquisition costs			75,913				75,623
Property and equipment at cost, net of accumulated depreciation and amortization			22,050				19,735
Goodwill and other intangibles, net of amortization			201,406				207,540
Current taxes receivable			28,885				4,116
Net deferred tax assets			50,816				0
Assets of discontinued operations			940,460				812,119
Other assets			192,832				104,079
		$	7,195,992			$	6,942,112
Liabilities and Stockholders’ Equity
Losses and loss adjustment expenses		$	2,664,472			$	2,379,701
Unearned premiums			652,766				699,409
Reinsurance payable			54,598				57,380
Net deferred tax liabilities			0				71,594
Liabilities of discontinued operations			782,601				663,417
Other liabilities			352,074				286,284
Total liabilities			4,506,511				4,157,785
Preferred stock (shares authorized: 2008 and 2007 - 1,132,000; issued and outstanding 2008 - 1,131,619; 2007 - 1,131,819)			299,429				299,480
Common stock (shares authorized: 2008 and 2007 - 22,000,000; issued and outstanding 2008 - 8,349,284; 2007 - 8,322,348)			8,349				8,159
Contributed capital			752,683				689,435
Accumulated other comprehensive income			154,401				328,632
Treasury stock, at cost (2008 - 76,513 shares; 2007 - none)			(24,290	)			—
Retained earnings			1,498,909				1,458,621
Total stockholders’ equity			2,689,481				2,784,327
		$	7,195,992			$	6,942,112
Shares of Common Stock Outstanding *			8,272,771				8,322,348

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2008 AND 2007
(dollars in thousands)
(unaudited)

		2008				2007
Cash flows from operating activities
Net earnings		$	109,485			$	237,273
Earnings from discontinued operations, net			14,750				7,542
Earnings from continuing operations		$	94,735			$	229,731
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
Depreciation and amortization			17,399				10,644
Net realized capital (gains) losses			(44,035	)			(77,072	)
(Increase) decrease in other assets			(31,276	)			(19,353	)
(Increase) decrease in reinsurance receivable, net of reinsurance payable			(68,918	)			102,407
(Increase) decrease in premium balances receivable			25,967				34,450
(Increase) decrease in ceded unearned premium reserves			25,759				65,427
(Increase) decrease in deferred acquisition costs			(290	)			(9,591	)
Increase (decrease) in other liabilities and current taxes			(44,757	)			11,623
Increase (decrease) in unearned premiums			(46,643	)			(50,305	)
Increase (decrease) in losses and loss adjustment expenses			284,771				(16,289	)
Net adjustments			117,977				51,941
Net cash provided by operating activities from continuing operations			212,712				281,672
Net cash provided by operating activities from discontinued operations			92,175				101,474
Net cash provided by operating activities			304,887				383,146
Cash flows from investing activities
Purchase of investments			(1,188,509	)			(922,497	)
Sales of investments			944,668				671,868
Maturities of investments			283,539				189,764
Purchases of property and equipment			(6,716	)			(3,069	)
Net change in short-term investments			(187,002	)			(50,251	)
Acquisition of equity method investment			(50,016	)			—
Acquisition of insurance companies, net of cash acquired			—				(187,743	)
Other, net			(1,745	)			2,547
Net cash provided by investing activities from continuing operations			(205,781	)			(299,381	)
Net cash provided by investing activities from discontinued operations			(87,935	)			(122,235	)
Net cash (used in) provided by investing activities			(293,716	)			(421,616	)
Cash flows from financing activities
Treasury stock acquisitions			(25,068	)			—
Principal payments on long-term debt			—				(80,000	)
Decrease in notes receivable			—				91,535
Convertible preferred stock dividends paid			(13,046	)			(13,062	)
Tax benefit on stock based compensation			2,330				1,063
Other, net			1,339				3,626
Net cash provided by (used in) financing activities from continuing operations			(34,445	)			3,162
Net cash provided by (used in) financing activities from discontinued operations			—				316
Net cash provided by (used in) financing activities			(34,445	)			3,478
Cash flows of discontinued operations
Operating activities			(92,175	)			(101,474	)
Investing activities			87,935				122,235
Financing activities			—				(316	)
Net cash provided by (used in) discontinued operations			(4,240	)			20,445
Net cash provided by (used in) continuing operations			(27,514	)			(14,547	)
Cash at beginning of period			57,646				41,458
Cash at end of period		$	30,132			$	26,911
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	141			$	505
Income taxes paid (refunds received)		$	110,227			$	156,748

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, 2007 (the “2007 10-K”), and the Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008, of Alleghany Corporation (“Alleghany”).

Alleghany, a Delaware corporation, is engaged in the property and casualty and surety insurance business through its wholly-owned subsidiary Alleghany Insurance Holdings LLC (“AIHL”). AIHL’s insurance business is conducted through its wholly-owned subsidiaries RSUI Group, Inc. (“RSUI”), Capitol Transamerica Corporation and Platte River Insurance Company (collectively “CATA”) and AIHL’s majority-owned subsidiary Employers Direct Corporation (“EDC”), of which AIHL owns approximately 98 percent. AIHL Re LLC (“AIHL Re”), a captive reinsurance subsidiary of AIHL, is available to provide reinsurance to Alleghany operating units and affiliates. In addition, Alleghany owns 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, and this investment is reflected in Alleghany’s financial statements in other invested assets. 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 June 27, 2008, Darwin Professional Underwriters, Inc. (“Darwin”), of which AIHL owned approximately 55 percent, entered into a merger agreement with Allied World Assurance Company Holdings, Ltd. (“Allied World”), whereby Allied World agreed to acquire all of the issued and outstanding shares of Darwin common stock for cash consideration of $32.00 per share. The transaction closed on October 20, 2008, at which time Alleghany received aggregate proceeds of approximately $300 million in cash for AIHL’s 9,371,096 shares of Darwin common stock. Alleghany estimates that it will record an after-tax gain from the transaction of approximately $94 million in the 2008 fourth quarter, including approximately $9 million of gain deferred at the time of Darwin’s initial public offering in May 2006.

Alleghany has classified the operations of Darwin as “discontinued operations” in its consolidated financial statements for all periods presented. Refer to Note 8 for historical financial information of these discontinued operations.

On July 18, 2008, Alleghany, through its subsidiary Alleghany Capital Corporation, acquired approximately 40.45% of the voting interests of ORX Exploration, Inc. (“ORX”), a regional oil and gas exploration and production company, through a purchase of participating preferred stock for cash consideration of $50.0 million. This investment is reflected in Alleghany’s financial statements in other invested assets. Alleghany’s interest in ORX is included in corporate activities for segment reporting purposes and is accounted for under the equity-method of accounting.

The financial statements contained in this Report on Form 10-Q are unaudited, but reflect 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 2008 presentation.

During the third quarter of 2008, Alleghany identified an error in the amount of $15.0 million with respect to additional deferred tax liability that relates to prior periods. The $15.0 million specifically relates to the capital gains taxes incurred by Alleghany at the closing date of the Darwin merger agreement. GAAP requires that capital gains taxes be accrued for over time as income is reported, prior to the date of Darwin’s disposition back to the date of Darwin’s initial public offering in May 2006. As a result, for the nine-month period ended September 30, 2008, earnings from discontinued operations (as well as net earnings) were reduced by $5.5 million related to the portion of the $15.0 million that is attributable to the first half of 2008. Similarly, for the three- and nine-month periods ended September 30, 2007, earnings from discontinued operations and net earnings were reduced by $1.5 million and $4.0 million, respectively. Similar corrections to earnings from discontinued operations and net earnings will be made in future reports for the three-month period ended March 31, 2008, for the six-month period ended June 30, 2008, and the years ended December 31, 2007 and 2006 in the amounts of $2.9 million, $5.5 million, $6.2 million, $3.3 million, respectively. These corrections are not material to Alleghany’s consolidated financial statements.

2. Recent Accounting Pronouncements

(a) Recently Adopted

In September 2006, FASB Statement No. 157, “Fair Value Measurements” (“SFAS 157”), was issued. SFAS 157 provides guidance for using fair value to measure assets and liabilities. SFAS 157 does not expand the use of fair value to any new circumstances. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Alleghany has adopted the provisions of SFAS 157 as of January 1, 2008, and the implementation did not have a material impact on its results of operations and financial condition. See Note 7.

In October 2008, Financial Accounting Standards Board Staff Position No. 157-3 (“FSP FAS157-3”) was issued. FSP FAS157-3 clarifies the application of SFAS 157 in an inactive market. If a market becomes inactive, then the fair value determination for securities in that market may be based on inputs that are unobservable in the market, rather than being based on either unadjusted quoted prices or observable market inputs. FSP FAS157-3 is effective upon issuance, including

periods for which financial statements have not been issued. Alleghany has adopted the provisions of FSP FAS157-3 as of September 30, 2008, and the implementation did not have a material impact on its results of operations and financial condition. See Note 7.

(b) Future Application of Accounting Standards

In December 2007, FASB Statements No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”), and No. 160, “Noncontrolling Interests in Consolidated Financial Statements” (“SFAS 160”), were issued. SFAS 141R replaces FASB Statement No. 141, “Business Combinations.” SFAS 141R requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose additional information regarding the nature and financial effect of the business combination. SFAS 160 requires all entities to report noncontrolling (minority) interests in subsidiaries in the same way—as equity in the consolidated financial statements. SFAS 160 also requires disclosure, on the face of the consolidated statement of income, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. Alleghany will adopt SFAS 141R and SFAS 160 for all business combinations initiated after December 31, 2008.

3. 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, 2008 and 2007 (in millions, except share amounts):

		Three months ended September 30,								Nine months ended September 30,
		2008				2007				2008				2007
(Losses) earnings from continuing operations		$	(8.8	)		$	67.5			$	94.7			$	229.7
Earnings from discontinued operations			4.6				2.9				14.8				7.5
Net (losses) earnings		$	(4.2	)		$	70.4			$	109.5			$	237.2
Preferred dividends			4.3				4.3				12.9				12.9
(Losses) income available to common stockholders for basic earnings per share			(8.5	)			66.1			$	96.6				224.3
Preferred dividends			4.3				4.3				12.9				12.9
Effect of other dilutive securities			—				0.1				—				0.2
(Losses) income available to common stockholders for diluted earnings per share		$	(4.2	)		$	70.5			$	109.5			$	237.4
Weighted average shares outstanding applicable to basic earnings per share			8,313,524				8,319,905				8,325,837				8,306,236
Preferred stock			—				997,978				—				997,978
Effect of other dilutive securities			—				22,037				—				22,270
Adjusted weighted average shares outstanding applicable to diluted earnings per share			8,313,524				9,399,920				8,325,837				9,326,484

Contingently issuable shares of 1,057,625 and 57,960 were potentially available during 2008 and 2007, 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.

4. 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

AIHL’s reserve for unpaid losses and loss adjustment expenses includes $20.5 million of gross reserves and $20.3 million of net reserves at September 30, 2008 and $22.9 million of gross reserves and $22.7 million of net reserves at December 31, 2007, 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. Alleghany believes that CATA’s asbestos and environmental reserves are adequate at September 30, 2008. Additional information concerning CATA’s asbestos and environmental exposure can be found in Note 13 to the Notes to the Consolidated Financial Statements set forth in Item 8 of the 2007
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”).

Substantially all of the representations and warranties to which the Contract Indemnification applies survived until July 14, 2007, with the exception of certain representations and warranties such as those related to environmental, real estate and tax matters, which survive for longer periods 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 Notes to the Consolidated Financial Statements set forth in Item 8 of the 2007 10-K.

Based on Alleghany’s experience to date and other analyses, Alleghany established a $600 thousand reserve in connection with the Products Liability Indemnification for the Alleghany Period. Such reserve was $390 thousand at September 30, 2008.

(e) Equity Holdings Concentration

At September 30, 2008, 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 $307.8 million. During the first quarter of 2008, Alleghany sold approximately 1.0 million shares of Burlington Northern common stock, resulting in a pre-tax gain of $78.1 million. During the third quarter of 2008, Alleghany sold approximately 0.2 million shares of Burlington Northern common stock, resulting in a pre-tax gain of $14.3 million. In addition, subsequent to September 30, 2008, Alleghany sold approximately 0.9 million shares of Burlington Northern common stock, resulting in a pre-tax gain of $59.9 million, which will be recognized in the 2008 fourth quarter.

At September 30, 2008, 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 businesses amounting to $323.7 million.

5. Segment of Business

Information related to Alleghany’s reportable segment is shown in the table below. Property and casualty and surety insurance operations are conducted by AIHL through its insurance operating units RSUI, CATA and EDC. Alleghany has classified the operations of Darwin as “discontinued operations” in its consolidated financial statements for all periods presented. See Notes 1 and 8. In addition, AIHL Re is a wholly-owned subsidiary of AIHL that is available to provide reinsurance to Alleghany’s insurance 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 or losses 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 Notes to the Consolidated Financial Statements set forth in Item 8 of the 2007 10-K.

The primary components of “corporate activities” are Alleghany Properties, Alleghany’s investments in Homesite and ORX, and 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 September 30,								Nine months ended September 30,
(in millions)		2008				2007(1)				2008				2007(1)
Revenues:
AIHL insurance group:
Net premiums earned
RSUI		$	169.9			$	183.7			$	521.9			$	528.5
CATA			47.1				50.0				142.0				148.2
EDC			18.7				20.2				57.3				20.2
AIHL Re			—				0.4				0.2				24.1
			235.7				254.3				721.4				721.0
Net investment income			30.9				31.0				93.1				93.6
Net realized capital (losses) gains			(26.0	)(2)			21.0				(52.2	)(2)			21.0
Other income			0.2				—				0.4				0.4
Total insurance group			240.8				306.3				762.7				836.0
Corporate activities:
Net investment income(3)			4.7				1.4				12.5				17.4
Net realized capital gains(4)			17.1				0.2				96.2				56.1
Other income			0.7				0.8				0.8				11.5
Total		$	263.3			$	308.7			$	872.2			$	921.0
Earnings from continuing operations, before income taxes:
AIHL insurance group:
Underwriting (loss) profit (5)
RSUI		$	(37.4	)(6)		$	72.3			$	55.9			$	164.0
CATA			5.2				5.1				12.8				19.5
EDC			(6.9	)			1.7				(39.9	)(7)			1.7
AIHL Re			—				0.3				0.1				24.0
			(39.1	)			79.4				28.9				209.2
Net investment income			30.9				31.0				93.1				93.6
Net realized capital (losses) gains			(26.0	)(2)			21.0				(52.2	)(2)			21.0
Other income, less other expenses			(1.9	)			(15.6	)			(24.3	)			(39.0	)
Total insurance group			(36.1	)			115.8				45.5				284.8
Corporate activities:
Net investment income (3)			4.7				1.4				12.5				17.4
Net realized capital gains(4)			17.1				0.2				96.2				56.1
Other income			0.7				0.8				0.8				11.5
Corporate administration and other expenses			7.3				7.9				27.1				26.7
Interest expense			0.2				0.2				0.5				1.2
Total		$	(21.1	)		$	110.1			$	127.4			$	341.9

(1)		Includes the results of EDC, net of purchase accounting adjustments, commencing July 18, 2007.
(2)		Primarily reflects impairment charges for unrealized losses related to AIHL’s investment portfolio that were deemed to be other than temporary. See Note 7 to the Notes to the Unaudited Consolidated Financial Statements contained herein.
(3)		Includes ($0.7) million and ($1.3) million of Alleghany’s equity in earnings of Homesite, net of purchase accounting adjustments, for the three months ended September 30, 2008 and 2007, respectively. The comparable figures for the nine months ended September 30, 2008 and 2007 are $0.3 million and $4.9 million, respectively. See Note 16 to the Notes to the Consolidated Financial Statements set forth in Item 8 of the 2007 10-K.
(4)		Primarily reflects net realized capital gains from the sale of shares of Burlington Northern common stock.
(5)		Represents net premiums earned less loss and loss adjustment expenses and underwriting expenses, all as determined in accordance with GAAP, and does not include net investment income and other income or net realized capital gains. Underwriting expenses represent commission and brokerage expenses and that portion of salaries, administration and other operating expenses attributable to underwriting activities, whereas the remainder constitutes “other expenses.”

(6)		Loss and loss adjustment expenses for the first nine months of 2008 reflect $121.3 million of catastrophe losses, which relate primarily to the 2008 third quarter (specifically arising from Hurricanes Gustav, Ike and Dolly).
(7)		Reflects a significant increase in loss and loss adjustment expense reserves in the 2008 second quarter.

6. Reinsurance

As discussed in the 2007 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. RSUI has placed all of its catastrophe reinsurance program for the 2008-2009 period. Under the 2008-2009 program, RSUI’s catastrophe reinsurance program provides coverage in two layers for $400.0 million of losses in excess of a $100.0 million net retention after application of the surplus share treaties, facultative reinsurance and per risk covers. The first layer provides coverage for $100.0 million of losses, before a 33.15 percent co-participation by RSUI, in excess of the $100.0 million net retention, and the second layer provides coverage for $300.0 million of losses, before a 5 percent co-participation by RSUI, in excess of $200.0 million. In addition, RSUI’s property per risk reinsurance program for the 2008-2009 period provides RSUI with coverage 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.

RSUI reinsures its other lines of business through quota share treaties, except for professional liability and binding authority lines where RSUI retains all of such business. RSUI’s quota share reinsurance treaty for umbrella/excess renewed on June 1, 2008 and provides coverage 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 quota share reinsurance treaty renewed on July 1, 2008 and provides coverage 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.

7. Investments

(a) Fair Value

The estimated carrying values and fair values of Alleghany’s financial instruments as of September 30, 2008 and December 31, 2007 are as follows (in millions):

		September 30, 2008								December 31, 2007
		Carrying				Fair				Carrying				Fair
		Amount				Value				Amount				Value
Assets
Investments (excluding equity-method investments)*		$	3,996.9			$	3,996.9			$	4,069.3			$	4,069.3

included in other invested assets. The fair value of short-term investments approximates amortized cost. The fair value of all other categories of investments is discussed below.

As previously noted, SFAS 157 was issued in September 2006 and adopted by Alleghany as of January 1, 2008. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are not adjusted for transaction costs. In addition, SFAS 157 establishes a three-tiered hierarchy for inputs 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 inputs that market participants would use in pricing a financial instrument. Unobservable inputs are inputs that reflect management’s belief about the assumptions market participants would use in pricing a financial instrument based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the reliability of inputs as follows:

	•		“Level 1” — Management’s valuations are based on unadjusted quoted prices in active markets for identical, unrestricted assets. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these assets does 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. For Alleghany, assets utilizing Level 1 inputs generally include common stocks and U.S. Government debt securities, where management’s valuations are based on quoted market prices.
	•		“Level 2” — Management’s valuations are based on quoted market prices where such markets are not deemed to be sufficiently “active.” In such circumstances, additional valuation metrics will be used which involve direct or indirect observable market inputs. For Alleghany, assets utilizing Level 2 inputs generally include debt securities other than debt issued by the U.S. Government and preferred stocks. Third-party dealer quotes typically constitute a significant input in management’s determination of the fair value of these types of fixed income securities. In developing such quotes, dealers will use 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 his election, to redeem the security prior to its scheduled maturity date. Market-based inputs include the level of interest rates applicable to comparable securities in the market place and current credit rating(s) of the security.
	•		“Level 3” — Management’s valuations are based on inputs that are unobservable and significant to the overall fair value measurement. Valuation under Level 3 generally involves a significant degree of judgment on the part of management. For Alleghany, assets utilizing Level 3 inputs are primarily limited to partnership investments. Quotes from the third-party general partner of the entity in which such investment was held, which will often be based on unobservable market inputs, constitute the primary input in management’s determination of the fair value.

The estimated fair values of Alleghany’s invested assets by balance sheet caption and level as of September 30, 2008 are as follows (in millions):

		Level 1				Level 2				Level 3				Total
Assets
Equity securities		$	835.4			$	17.8			$	—			$	853.2
Debt securities			262.8				2,344.4				3.2				2,610.4
Short-term investments			290.0				212.3				—				502.3
Other invested assets*			—				—				31.0				31.0
Investments (excluding equity-method investments)		$	1,388.2			$	2,574.5			$	34.2			$	3,996.9

(b) Other Than Temporary Declines

Net realized capital gains of $44.0 million for the first nine months of 2008 include $114.2 million of impairment charges related to unrealized losses that were deemed to be other than temporary and, as such, are required to be charged against earnings. Of the $114.2 million of impairment charges ($51.8 million of which was incurred in the 2008 third quarter), $42.9 million related to energy sector (including refinery) equity holdings, $31.4 million related to financial sector equity holdings and $2.1 million related to fixed income security holdings. The determination that unrealized losses on such securities were other than temporary was primarily based on the severity of the declines in fair value of such securities relative to cost as of the balance sheet date. As of September 30, 2008 and December 31, 2007, no equity security was in a continuous unrealized loss position for twelve months or more.

After adjusting the cost basis of equity securities for the recognition of unrealized losses through impairment charges, the following is information regarding unrealized gain (loss), before tax, on Alleghany’s equity securities:

(in millions)		At September 30, 2008				At December 31, 2007
Gross unrealized gain		$	367.1			$	513.7
Gross unrealized (loss)			(69.2	)			(28.7	)
Net unrealized gain		$	297.9			$	485.0

8. Discontinued Operations

Alleghany has classified the operations of Darwin as “discontinued operations” in its consolidated financial statements for all periods presented. Historical balance sheet information related to these discontinued operations, as included in Alleghany’s consolidated financial statements, is set forth in the following table (in millions):

		September 30, 2008				December 31, 2007
Assets
Available for sale securities at fair value		$	610.4			$	449.4
Short term investments			12.0				107.6
Cash			11.7				7.5
Reinsurance recoverables			154.0				136.4
Ceded unearned premium reserves			41.8				43.2
Other			110.6				68.0
		$	940.5			$	812.1
Liabilities
Losses and loss adjustment expenses			445.0				387.9
Unearned premiums			143.8				141.1
Debt			5.0				5.0
Other			68.8				23.9
Minority interest (carried at the AIHL level)			120.0				105.4
			782.6				663.3
Alleghany Equity
Alleghany’s investment in Darwin			157.9				148.8
		$	940.5			$	812.1

Alleghany’s investment in Darwin excludes the portion of Darwin’s stockholders’ equity that is attributable to common stockholders other than Alleghany.

Historical information related to the results of operations of the discontinued operations, as included in Alleghany’s consolidated financial statements, is set forth in the following table (in millions):

		Nine months ended
		September 30, 2008				September 30, 2007
Revenues
Net premiums earned		$	161.4			$	131.8
Net investment income			18.3				16.5
Net realized capital (losses)			(3.3	)			—
Other income			3.9				—
		$	180.3				148.3
Costs and expenses
Losses and loss adjustment expenses			64.2				76.7
Commission, brokerage and other underwriting expenses			54.5				37.6
Other operating expenses			22.2				4.2
			140.9				118.5
Earnings before income taxes and minority interest			39.4				29.8
Income taxes			16.3				8.5
Earnings before minority interest			23.1				21.3
Minority interest (carried at the AIHL-level)			8.3				13.8
Net earnings		$	14.8			$	7.5

Net earnings during the 2008 period include a $32.5 million release of prior accident year loss reserves ($21.1 million after tax and before minority interest), reflecting favorable loss emergence.

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. Unless the context otherwise requires, references to AIHL include the operations of RSUI, CATA, EDC 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;
	•		changes in market prices of our significant equity investments and changes in value of our fixed income portfolio;
	•		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 prior year.

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.

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 Report on Form 10-K for the year ended December 31, 2007, or the “2007 10-K,” for a more complete description of our critical accounting estimates.

Overview

          We are engaged, through AIHL and its subsidiaries, primarily 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 our insurance 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. In addition, Alleghany owns 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, and, through its Alleghany Capital Corporation subsidiary, 40.45% of the voting interests of ORX Exploration, Inc., or “ORX,” a regional oil and gas exploration and production company. Our primary sources of revenues and earnings are our insurance operations and investments.

          The profitability of our insurance operating units, and as a result, our profitability, is primarily impacted by the adequacy of premium rates, level of catastrophe losses, investment returns, intensity of competition and the cost of reinsurance. The ultimate adequacy of premium rates is not known with certainty at the time property casualty insurance policies are issued because premiums are determined before claims are reported. The adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors,

including natural disasters, regulatory measures and court decisions that define and expand the extent of coverage and the effects of economic inflation on the amount of compensation due for injuries or losses.

          Catastrophe losses, or the absence thereof, can have a significant impact on our results. RSUI’s pre-tax catastrophe losses, net of reinsurance, were $121.3 million for the first nine months of 2008, primarily reflecting 2008 third quarter hurricane net catastrophe losses of $99.0 million for Hurricanes Ike, Gustav and Dolly, compared with $32.0 million for the first nine months of 2007, a period in which there were no material hurricane losses. The incidence and severity of catastrophes in any short period of time are inherently unpredictable. Catastrophes can cause losses in a variety of our property lines of business, and most of our past catastrophe-related losses have resulted from severe hurricanes.

          Our profitability is also affected by net realized capital gains and investment income. Our invested assets, which are derived primarily from our own capital and cash flow from our insurance operating units, are invested principally in fixed income securities, although we also invest in equity securities. The return on fixed income securities is primarily impacted by the general level of interest rates and the credit quality and duration of the securities. Net realized capital gains include gains or losses realized upon sale of invested assets, as well as impairment charges related to unrealized losses that were deemed to be other than temporary and, as such, are required to be charged against earnings as realized losses regardless of whether we continue to hold the applicable security. In the first nine months of 2008, our net realized capital gains of $44.0 million included $114.2 million of impairment charges. Of the $114.2 million of impairment charges ($51.8 million of which was incurred in the 2008 third quarter), $42.9 million related to energy sector (including refinery) equity holdings, $31.4 million related to financial sector equity holdings and $2.1 million related to fixed income security holdings. The deterioration of U.S. equity market conditions continued during October 2008, and if such conditions persist or deteriorate further, we may be required to record additional impairment charges at 2008 year-end, which could have a material and adverse impact on our results of operations.

          The profitability of our insurance operating units is also impacted by price competition. Historically, the financial performance of the property and casualty insurance industry has tended to fluctuate in cyclical periods of price competition and excess underwriting capacity, known as a soft market, followed by periods of high premium rates and shortages of underwriting capacity. Although an individual insurance company’s financial performance is dependent on its own specific business characteristics, the profitability of most property and casualty insurance companies tends to follow this cyclical market pattern. As discussed in more detail below, our insurance operating units began to experience increased price competition in certain of their lines of business in 2006. The competitive environment continued and increased during 2007 and the first nine months of 2008, resulting in a decrease in pricing over that time.

          As part of their overall risk and capacity management strategy, our insurance operating units purchase reinsurance for certain amounts of risk underwritten by them, especially catastrophe risks. The reinsurance programs purchased by our insurance operating units are generally subject to annual renewal. Market conditions beyond their control determine the availability and cost of the reinsurance protection they purchase, which may affect the level of business written and thus their profitability.

          The following discussion and analysis presents a review of our results for the three and nine months ended September 30, 2008 and 2007. 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 2007 10-K and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008, respectively. Our results for the first nine months of 2008 are not indicative of operating results in future periods.

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, 2008 and 2007.

		Three months ended September 30,								Nine months ended September 30,
(in millions)		2008				2007				2008				2007
Revenues
Net premiums earned		$	235.7			$	254.3			$	721.4			$	721.0
Net investment income			35.6				32.4				105.6				111.0
Net realized capital (losses) gains			(8.9	)			21.2				44.0				77.1
Other income			0.9				0.8				1.2				11.9
Total revenues		$	263.3			$	308.7			$	872.2			$	921.0
Costs and expenses
Loss and loss adjustment expenses		$	204.6			$	108.4			$	479.4			$	325.3
Commissions, brokerage and other underwriting expenses			70.2				66.5				213.1				186.5
Other operating expenses			2.5				16.2				26.5				41.7
Corporate administration			6.9				7.3				25.3				24.4
Interest expense			0.2				0.2				0.5				1.2
Total costs and expenses			284.4				198.6				744.8				579.1
(Losses) earnings from continuing operations, before income taxes			(21.1	)			110.1				127.4				341.9
Income taxes			(12.3	)			42.6				32.7				112.2
(Losses) earnings from continuing operations			(8.8	)			67.5				94.7				229.7
Discontinued operations*
Operations			7.5				5.9				29.8				16.2
Income taxes			2.9				3.0				15.0				8.7
Earnings from discontinued operations, net of tax			4.6				2.9				14.8				7.5
Net (losses) earnings		$	(4.2	)		$	70.4			$	109.5			$	237.2
Revenues:
AIHL		$	240.8			$	306.3			$	762.7			$	836.0
Corporate activities**			22.5				2.4				109.5				85.0
(Losses) earnings from continuing operations, before income taxes:
AIHL		$	(36.1	)		$	115.8			$	45.5			$	284.8
Corporate activities**			15.0				(5.7	)			81.9				57.1

          2008 Third Quarter Results

          We reported a net loss from continuing operations before income taxes in the 2008 third quarter, compared with strong earnings from continuing operations before income taxes in the corresponding 2007 period, primarily reflecting an increase in loss and loss adjustment expenses, a decrease in net premiums earned and net realized capital losses of $8.9 million, partially offset by a decrease in other operating expenses. The increase in loss and loss adjustment expenses primarily reflects approximately $99.0 million of net catastrophe losses at RSUI related to 2008 third quarter hurricanes Ike, Gustav and Dolly, compared with minimal catastrophe losses at RSUI in the 2007 third quarter. Additional information regarding these losses and other items can be found in the discussion of AIHL’s operating unit results from continuing operations on pages 25 and 26 herein. Net realized capital losses in the 2008 third quarter reflect significant impairment charges related to unrealized losses that were deemed to be other than temporary and, as such, are required to be charged against earnings as realized losses regardless of whether we continue to hold the applicable security or not, partially offset by sales by parent of common stock of Burlington Northern Santa Fe Corporation, or “Burlington Northern.” Additional information regarding our investments can be found on pages 30 and 31 herein. The decrease in net premiums earned primarily reflects lower net premium writings by all three of AIHL’s insurance operating units resulting from increased price competition during the 2008 third quarter compared with the 2007 third quarter. The decrease in other operating expenses reflects reduced incentive compensation accruals due to lower underwriting and investment results in the 2008 third quarter.

          2008 Year to Date Results

          Our earnings from continuing operations before income taxes in the first nine months of 2008 decreased from the corresponding 2007 period, primarily reflecting increases in loss and loss adjustment expenses and commissions, brokerage and other underwriting expenses, as well as a decrease in net realized capital gains, other income and net investment income, partially offset by a decrease in other operating expenses. The increase in loss and loss adjustment expenses and commissions, brokerage and other underwriting expenses primarily reflects the inclusion of EDC’s results in the first nine months of 2008, which include a $24.7 million reserve increase for current and prior accident years in the 2008 second quarter. In addition, RSUI’s results in the first nine months of 2008 include net catastrophe losses of $121.3 million, partially offset by an aggregate $32.4 million of prior accident year loss reserve releases in the second and third quarters of 2008. Additional information regarding these reserving actions and other items can be found in the discussion of AIHL’s operating unit results from continuing operations on pages 25 through 27 herein.

          The decrease in net realized capital gains relates principally to significant impairment charges in 2008 related to unrealized losses that were deemed to be other than temporary and, as such, are required to be charged against earnings as realized losses regardless of whether we continue to hold the applicable security, partially offset by sales by parent of common stock of Burlington Northern. Additional information regarding our investments can be found in on pages 30 and 31 herein.

          The decrease in other income for the first nine months of 2008 from the corresponding 2007 period primarily reflects a pre-tax gain of approximately $7.2 million realized in the 2007 first quarter on sales of real property by Alleghany Properties, compared with immaterial sales activity during the first nine months of 2008. The decrease in net investment income for the first nine months of 2008 from the corresponding 2007 period was principally due to lower average

investment yields on our fixed income portfolio during the first nine months of 2008. The decrease in other operating expenses reflects reduced incentive compensation accruals due to lower underwriting and investment results in the 2008 period.

          The effective tax rate on earnings from continuing operations before income taxes was 25.6 percent for the first nine months of 2008, compared with 32.8 percent for the corresponding 2007 period. The lower effective tax rate primarily reflects the impact of significant catastrophe losses incurred in the 2008 period, compared with immaterial catastrophe losses in the corresponding 2007 period.

AIHL Operating Unit Pre-Tax Results from Continuing Operations

(in millions, except ratios)		RSUI				AIHL Re				CATA				EDC (1)				AIHL
Three months ended September 30, 2008
Gross premiums written		$	243.8				0.2			$	52.4			$	17.7			$	314.1
Net premiums written			160.4				—				45.0				15.9				221.3
Net premiums earned (2)		$	169.9				—			$	47.1			$	18.7			$	235.7
Loss and loss adjustment expenses			162.8				—				22.7				19.1				204.6
Commission, brokerage and other underwriting expenses (3)			44.5				—				19.2				6.5				70.2
Underwriting (loss) profit (4)		$	(37.4	)			—			$	5.2			$	(6.9	)		$	(39.1	)
Net investment income (2)																			30.9
Net realized capital losses (2)																			(26.0	)
Other income (2)																			0.2
Other expenses (3)																			(2.1	)
Losses from continuing operations before income taxes																		$	(36.1	)
Loss ratio (5)			95.8	%			—				48.3	%			102.2	%			86.9	%
Expense ratio (6)			26.2	%			—				40.8	%			34.6	%			29.8	%
Combined ratio (7)			122.0	%			—				89.1	%			136.8	%			116.7	%
Three months ended September 30, 2007
Gross premiums written		$	285.2			$	0.4			$	59.3			$	21.8			$	366.7
Net premiums written			178.6				0.4				49.7				18.8				247.5
Net premiums earned (2)		$	183.7			$	0.4			$	50.0			$	20.2			$	254.3
Loss and loss adjustment expenses			70.4				—				24.3				13.7				108.4
Commission, brokerage and other underwriting expenses (3)			41.0				0.1				20.6				4.8				66.5
Underwriting profit (4)		$	72.3			$	0.3			$	5.1			$	1.7			$	79.4
Net investment income (2)																			31.0
Net realized capital gains (2)																			21.0
Other income (2)																			—
Other expenses (3)																			(15.6	)
Earnings from continuing operations before income taxes																		$	115.8
Loss ratio (5)			38.3	%			—				48.6	%			67.8	%			42.7	%
Expense ratio (6)			22.3	%			7.8	%			41.2	%			23.7	%			26.1	%
Combined ratio (7)			60.6	%			7.8	%			89.8	%			91.5	%			68.8	%

AIHL Operating Unit Pre-Tax Results from Continuing Operations

(in millions, except ratios)		RSUI				AIHL Re				CATA				EDC (1)				AIHL
Nine months ended September 30, 2008
Gross premiums written		$	813.3			$	0.4			$	164.5			$	60.7			$	1,038.9
Net premiums written			504.9				0.2				140.2				55.9				701.2
Net premiums earned (2)		$	521.9			$	0.2			$	142.0			$	57.3			$	721.4
Loss and loss adjustment expenses			333.4				—				70.2				75.8				479.4
Commission, brokerage and other underwriting expenses (3)			132.6				0.1				59.0				21.4				213.1
Underwriting profit (loss) (4)		$	55.9			$	0.1			$	12.8			$	(39.9	)		$	28.9
Net investment income (2)																			93.1
Net realized capital losses (2)																			(52.2	)
Other income (2)																			0.4
Other expenses (3)																			(24.7	)
Earnings from continuing operations before income taxes																		$	45.5
Loss ratio (5)			63.9	%			—				49.4	%			132.2	%			66.5	%
Expense ratio (6)			25.4	%			37.6	%			41.6	%			37.4	%			29.5	%
Combined ratio (7)			89.3	%			37.6	%			91.0	%			169.6	%			96.0	%
Nine months ended September 30, 2007
Gross premiums written		$	945.1			$	0.7			$	194.5			$	21.8			$	1,162.1
Net premiums written			559.0				1.8				156.6				18.8				736.2
Net premiums earned (2)		$	528.5			$	24.1			$	148.2			$	20.2			$	721.0
Loss and loss adjustment expenses			244.2				—				67.4				13.7				325.3
Commission, brokerage and other underwriting expenses (3)			120.3				0.1				61.3				4.8				186.5
Underwriting profit (4)		$	164.0			$	24.0			$	19.5			$	1.7			$	209.2
Net investment income (2)																			93.6
Net realized capital gains (2)																			21.0
Other income (2)																			0.4
Other expenses (3)																			(39.4	)
Earnings from continuing operations before income taxes																		$	284.8
Loss ratio (5)			46.2	%			—				45.5	%			67.8	%			45.1	%
Expense ratio (6)			22.8	%			0.5	%			41.3	%			23.7	%			25.9	%
Combined ratio (7)			69.0	%			0.5	%			86.8	%			91.5	%			71.0	%