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 JUNE 30, 2009

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 HAS SUBMITTED ELECTRONICALLY AND POSTED ON ITS CORPORATE WEB SITE, IF ANY, EVERY INTERACTIVE DATA FILE REQUIRED TO BE SUBMITTED AND POSTED PURSUANT TO RULE 405 OF REGULATION S-T (SECTION 232.405 OF THIS CHAPTER) DURING THE PRECEDING 12 MONTHS (OR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO SUBMIT AND POST SUCH FILES).

YES o       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):

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.

9,013,587 SHARES AS OF AUGUST 5, 2009

 

 

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED
JUNE 30, 2009 AND 2008
(dollars in thousands, except share and per share amounts)
(unaudited)

		2009				2008
Revenues
Net premiums earned		$	204,530			$	240,238
Net investment income			24,524				34,768
Net realized capital gains			79,492				25,281
Other than temporary impairment losses			(9,675	)			(47,064	)
Other income			571				122
Total revenues			299,442				253,345
Costs and expenses
Loss and loss adjustment expenses			143,917				139,455
Commissions, brokerage and other underwriting expenses			70,272				72,542
Other operating expenses			12,185				12,302
Corporate administration			7,230				8,466
Interest expense			169				179
Total costs and expenses			233,773				232,944
Earnings from continuing operations, before income taxes			65,669				20,401
Income taxes			19,668				7,380
Earnings from continuing operations			46,001				13,021
Discontinued operations
Earnings from discontinued operations			0				10,662
Income taxes			0				5,843
Earnings from discontinued operations, net			0				4,819
Net earnings		$	46,001			$	17,840
Changes in other comprehensive income
Change in unrealized gains, net of deferred taxes		$	84,111			$	22,370
Less: reclassification for gains realized in net earnings (net of taxes)			(53,169	)			14,159
Other			45				(3	)
Comprehensive income		$	76,988			$	54,366
Net earnings		$	46,001			$	17,840
Preferred dividends			2,250				4,305
Net earnings available to common stockholders		$	43,751			$	13,535
Basic earnings per share of common stock *
Continuing operations		$	5.11			$	1.02
Discontinued operations			0.00				0.57
		$	5.11			$	1.59
Diluted earnings per share of common stock *
Continuing operations		$	5.00			$	1.02
Discontinued operations			0.00				0.57
		$	5.00			$	1.59
Dividends per share of common stock			*				*
Average number of outstanding shares of common stock **			8,556,911				8,507,719

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
(dollars in thousands, except share and per share amounts)
(unaudited)

		2009				2008
Revenues
Net premiums earned		$	422,574			$	485,719
Net investment income			51,593				70,040
Net realized capital gains			139,974				115,064
Other than temporary impairment losses			(75,801	)			(62,135	)
Other income			1,020				185
Total revenues			539,360				608,873
Costs and expenses
Loss and loss adjustment expenses			256,754				274,686
Commissions, brokerage and other underwriting expenses			137,722				142,951
Other operating expenses			21,398				24,033
Corporate administration			7,138				18,414
Interest expense			332				336
Total costs and expenses			423,344				460,420
Earnings from continuing operations, before income taxes			116,016				148,453
Income taxes			25,441				44,885
Earnings from continuing operations			90,575				103,568
Discontinued operations
Earnings from discontinued operations			0				22,196
Income taxes			0				12,064
Earnings from discontinued operations, net			0				10,132
Net earnings		$	90,575			$	113,700
Changes in other comprehensive income
Change in unrealized gains, net of deferred taxes		$	43,394			$	23,431
Less: reclassification for gains realized in net earnings (net of taxes)			(49,500	)			(34,404	)
Other			(11	)			(8	)
Comprehensive income		$	84,458			$	102,719
Net earnings		$	90,575			$	113,700
Preferred dividends			6,158				8,610
Net earnings available to common stockholders		$	84,417			$	105,090
Basic earnings per share of common stock *
Continuing operations		$	9.92			$	11.17
Discontinued operations			0.00				1.19
		$	9.92			$	12.36
Diluted earnings per share of common stock *
Continuing operations		$	9.55			$	10.87
Discontinued operations			0.00				1.06
		$	9.55			$	11.93
Dividends per share of common stock			*				*
Average number of outstanding shares of common stock **			8,506,208				8,502,135

See accompanying Notes to Unaudited Consolidated Financial Statements.

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

		June 30, 2009				December 31,
		(unaudited)				2008
Assets
Investments
Available for sale securities at fair value:
Equity securities (cost: 2009 $500,210; 2008 $463,207)		$	611,814			$	629,518
Debt securities (amortized cost: 2009 $2,965,783; 2008 $2,781,829)			2,987,702				2,760,019
Short-term investments			341,989				636,197
			3,941,505				4,025,734
Other invested assets			243,286				250,407
Total investments			4,184,791				4,276,141
Cash			74,941				18,125
Premium balances receivable			210,737				154,022
Reinsurance recoverables			1,016,532				1,056,438
Ceded unearned premium reserves			198,593				185,402
Deferred acquisition costs			74,265				71,753
Property and equipment at cost, net of accumulated depreciation and amortization			21,101				23,310
Goodwill and other intangibles, net of amortization			138,200				151,223
Current taxes receivable			4,171				14,338
Net deferred tax assets			143,645				130,293
Other assets			108,159				100,783
		$	6,175,135			$	6,181,828
Liabilities and Stockholders’ Equity
Losses and loss adjustment expenses		$	2,584,975			$	2,578,590
Unearned premiums			672,688				614,067
Reinsurance payable			80,778				53,541
Other liabilities			269,441				288,941
Total liabilities			3,607,882				3,535,139
Preferred stock (shares authorized: 2009 and 2008 — 1,132,000; issued and outstanding 2009 — none; 2008 — 1,131,819)			0				299,429
Common stock (shares authorized: 2009 and 2008 — 22,000,000; issued and outstanding 2009 — 9,118,367; 2008 — 8,516,270)			9,118				8,349
Contributed capital			924,432				742,863
Accumulated other comprehensive income			81,133				87,249
Treasury stock, at cost (2009 — 104,780 shares; 2008 — 76,513)			(26,466	)			(24,290	)
Retained earnings			1,579,036				1,533,089
Total stockholders’ equity			2,567,253				2,646,689
		$	6,175,135			$	6,181,828
Shares of Common Stock Outstanding *			9,013,587				8,438,226

See accompanying Notes to Unaudited Consolidated Financial Statements.

ALLEGHANY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND 2008
(dollars in thousands)
(unaudited)

		2009				2008
Cash flows from operating activities
Net earnings		$	90,575			$	113,700
Earnings from discontinued operations, net			—				10,132
Earnings from continuing operations		$	90,575			$	103,568
Adjustments to reconcile earnings from continuing operations to net cash provided by operating activities:
Depreciation and amortization			16,347				11,234
Net realized capital (gains) losses			(139,974	)			(115,064	)
Other than temporary impairment losses			75,801				62,135
(Increase) decrease in other assets			(9,124	)			(13,103	)
(Increase) decrease in reinsurance receivable, net of reinsurance payable			67,143				295
(Increase) decrease in premium balances receivable			(56,715	)			(30,140	)
(Increase) decrease in ceded unearned premium reserves			(13,191	)			4,373
(Increase) decrease in deferred acquisition costs			(2,512	)			(2,108	)
Increase (decrease) in other liabilities and current taxes			(28,921	)			(34,528	)
Increase (decrease) in unearned premiums			58,621				(10,760	)
Increase (decrease) in losses and loss adjustment expenses			6,385				123,397
Net adjustments			(26,140	)			(4,269	)
Net cash provided by operating activities from continuing operations			64,435				99,299
Net cash provided by operating activities from discontinued operations			—				65,182
Net cash provided by operating activities			64,435				164,481
Cash flows from investing activities
Purchase of investments			(834,520	)			(621,148	)
Sales of investments			541,070				441,822
Maturities of investments			144,498				220,855
Purchases of property and equipment			(3,049	)			(2,646	)
Net change in short-term investments			298,557				(158,930	)
Other, net			6,519				(206	)
Net cash provided by investing activities from continuing operations			153,075				(120,253	)
Net cash provided by investing activities from discontinued operations			—				(66,211	)
Net cash (used in) provided by investing activities			153,075				(186,464	)
Cash flows from financing activities
Treasury stock acquisitions			(35,691	)			(1,927	)
Convertible preferred stock acquisitions			(117,358	)			—
Convertible preferred stock dividends paid			(7,456	)			(8,741	)
Tax benefit on stock based compensation			312				2,330
Other, net			(501	)			1,370
Net cash provided by (used in) financing activities from continuing operations			(160,694	)			(6,968	)
Net cash provided by (used in) financing activities from discontinued operations			—				—
Net cash provided by (used in) financing activities			(160,694	)			(6,968	)
Cash flows of discontinued operations
Operating activities			—				(65,182	)
Investing activities			—				66,211
Financing activities			—				—
Net cash provided by (used in) discontinued operations			—				1,029
Net cash provided by (used in) continuing operations			56,816				(27,922	)
Cash at beginning of period			18,125				57,646
Cash at end of period		$	74,941			$	29,724
Supplemental disclosures of cash flow information
Cash paid during the period for:
Interest		$	1			$	72
Income taxes paid (refunds received)		$	25,906			$	93,718

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, 2008 (the “2008 10-K”) and the Quarterly Report on Form 10-Q for the quarter ended March 31, 2009, 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 Employers Direct Corporation (“EDC”). AIHL Re LLC (“AIHL Re”), a captive reinsurance subsidiary of AIHL, has in the past provided reinsurance to Alleghany operating units and affiliates. In addition, Alleghany owns approximately 33 percent of the outstanding shares of common stock of Homesite Group Incorporated (“Homesite”), a national, full-service, mono-line provider of homeowners insurance, and approximately 38 percent of ORX Exploration, Inc. (“ORX”), a regional oil and gas exploration and production company. These investments are 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. Alleghany also owned approximately 55 percent of Darwin Professional Underwriters, Inc. (“Darwin”) until its disposition on October 20, 2008. Accordingly, the operations of Darwin have been reclassified as discontinued operations for all periods presented. See Note 2 to the Notes to the Consolidated Financial Statements set forth in Item 8 of the 2008 10-K.

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 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 2009 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 date of Darwin’s disposition. GAAP requires that capital gains taxes be accrued for over time as income is reported, from the date of Darwin’s initial public offering in May 2006 until the date of Darwin’s disposition. As a result, for the six month period ended June 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. These corrections are not material to Alleghany’s consolidated financial statements.

2. Recent Accounting Pronouncements

Recently Adopted

In December 2007, Financial Accounting Standards Board (“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 adopted SFAS 141R and SFAS 160 for all business combinations initiated after December 31, 2008, and the implementation did not have a material impact on its results of operations and financial condition.

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 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, FASB 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 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.

In April 2009, FASB Staff Position No. 157-4 (“FSP FAS157-4”) was issued. FSP FAS157-4 provides guidelines for making fair value measurements more consistent with the principles

presented in SFAS 157 regarding the determination of when a market is not considered to be active and when a transaction is not considered to be distressed. The determination of whether a market is not considered to be active is based on an evaluation of a number of factors. If such factors indicate that a market is not active, it must then be determined whether a quoted price from that market is associated with a distressed transaction based on the facts and circumstances. FSP FAS157-4 also provides for additional financial statement disclosure. FSP FAS157-4 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Alleghany adopted the provisions of FSP FAS157-4 in the second quarter of 2009, and the implementation did not have a material impact on its results of operations and financial condition. See Note 7.

In April 2009, FASB Staff Position No. 115-2 and 124-2 (“FSP FAS115-2 and 124-2”) was issued. FSP FAS115-2 and 124-2 provides additional guidance in accounting for and presenting impairment losses on debt securities. If a decline in fair value below the amortized cost exists at the balance sheet date for a debt security, and the entity intends to sell the security or it is more likely than not that the entity will sell the debt security before recovery of its cost basis, an other than temporary impairment exists. Furthermore, the amount of the impairment related to the credit losses must be recognized in earnings, whereas the amount of the impairment related to other factors must be recognized in other comprehensive income. FSP FAS115-2 and 124-2 also provides for additional financial statement disclosure. FSP FAS115-2 and 124-2 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Alleghany adopted the provisions of FSP FAS115-2 and 124-2 in the second quarter of 2009, and the implementation did not have a material impact on its results of operations and financial condition. As part of its implementation of FSP FAS 115-2 and 124-2, Alleghany has determined that current and prior period other than temporary impairment losses on debt securities are credit-related. See Note 7.

In April 2009, FASB Staff Position No. 107-1 and APB28-1 (“FSP FAS107-1 and APB28-1”) was issued. FSP FAS107-1 and APB28-1 amend existing fair value disclosure requirements for financial instruments by requiring that such disclosures be made in interim financial statements. FSP FAS107-1 and APB28-1 is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. Alleghany adopted the provisions of FSP FAS107-1 and APB28-1 in the second quarter of 2009, and the implementation did not have a material impact on its results of operations and financial condition. See Note 7.

In May 2009, FASB Statement No. 165, “Subsequent Events” (“SFAS 165”), was issued. SFAS 165 establishes general standards related to events that occur after the balance sheet date but before financial statements are issued. SFAS 165 describes the circumstances where events or transactions occurring after the balance sheet date should be recognized in the financial statements and provides for additional financial statement disclosure. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. Alleghany adopted SFAS 165 in the 2009 second quarter, and the implementation did not have a material impact on its results of operations and financial condition. Alleghany has evaluated subsequent events through August 6, 2009.

Future Application of Accounting Standards

In June 2009, FASB Statements No. 166, “Accounting for Transfers of Financial Assets” (“SFAS 166”), and No. 167, “Amendments to FASB Interpretation No. 46(R)” (“SFAS 167”), were issued. SFAS 166 and SFAS 167 change the way entities account for securitizations and special-

purpose entities. SFAS 166 is a revision to Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” and, among other things, will eliminate the concept of a “qualifying special-purpose entity,” change the requirements for derecognizing financial assets, and require additional disclosure about transfers of financial assets, including securitization transactions and an entity’s continuing exposure to the risks related to transferred financial assets. SFAS 167 is a revision to FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities,” and will change how a company determines when an entity that is insufficiently capitalized or is not controlled through voting rights (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. SFAS 166 and SFAS 167 are generally effective for periods beginning in 2010. Alleghany will adopt SFAS 166 and SFAS 167 in the 2010 first quarter, and Alleghany does not believe the implementation will have a material impact on its results of operations and financial condition. Alleghany did not have any off-balance sheet arrangements outstanding at June 30, 2009 or December 31, 2008, including those that may involve the types of entities contemplated in SFAS 166 and SFAS 167.

In June 2009, FASB Statements No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162” (“SFAS 168”), was issued. SFAS 168 establishes the FASB Accounting Standards Codification as the single source of authoritative accounting principles in the preparation of financial statements in conformity with GAAP. SFAS 168 is effective for interim and annual periods ending after September 15, 2009. Alleghany will adopt SFAS 168 in the 2009 third quarter, and Alleghany does not believe the implementation will have any impact on its results of operations and financial condition.

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 six months ended June 30, 2009 and 2008 (in millions, except share amounts):

		Three months ended June 30,								Six months ended June 30,
		2009				2008				2009				2008
Net earnings		$	46.0			$	17.8			$	90.6			$	113.7
Preferred dividends*			2.2				4.3				6.2				8.6
Income available to common stockholders for basic earnings per share			43.8				13.5				84.4				105.1
Preferred dividends*			2.2				—				6.2				8.6
Effect of other dilutive securities			—				—				(1.1	)			0.1
Income available to common stockholders for diluted earnings per share		$	46.0			$	13.5			$	89.5			$	113.8
Weighted average shares outstanding applicable to basic earnings per share			8,556,911				8,507,719				8,506,208				8,502,135
Preferred stock*			651,474				—				860,242				1,017,928
Effect of other dilutive securities			—				—				4,973				20,708
Adjusted weighted average shares outstanding applicable to diluted earnings per share			9,208,385				8,507,719				9,371,423				9,540,771

Contingently issuable shares of 34,072 and 49,476 were potentially available during the first six months of 2009 and 2008, 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 at June 30, 2009.

(c) Asbestos and Environmental Exposure

AIHL’s reserve for unpaid losses and loss adjustment expenses includes $19.5 million of gross reserves and $19.4 million of net reserves at June 30, 2009, and $20.4 million of gross reserves and $20.3 million of net reserves at December 31, 2008, 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 its results of operations, may be necessary in the future, Alleghany

believes that CATA’s asbestos and environmental reserves are adequate at June 30, 2009. 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 2008
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 Products Liability Indemnification is divided into two parts, the first relating to products liability claims arising in respect of events occurring during the period prior to Alleghany’s acquisition of the World Minerals business from Johns Manville Corporation, Inc. (f/k/a Manville Sales Corporation) (“Manville”) in July 1991 (the “Manville Period”), and the second relating to products liability claims arising in respect of events occurring during the period of Alleghany ownership (the “Alleghany Period”). Under the terms of the Stock Purchase Agreement, Alleghany will provide indemnification at a rate of 100 percent for the first $100.0 million of losses arising from products liability claims relating to the Manville Period and at a rate of 50 percent for the next $100.0 million of such losses, so that Alleghany’s maximum indemnification obligation in respect of products liability claims relating to the Manville Period is $150.0 million. This indemnification obligation in respect of Manville Period products liability claims will expire on July 31, 2016. The Stock Purchase Agreement states that it is the intention of the parties that, with regard to losses incurred in respect of products liability claims relating to the Manville Period, recovery should first be sought from Manville, and that Alleghany’s indemnification obligation in respect of products liability claims relating to the Manville Period is intended to indemnify the Purchaser for such losses which are not recovered from Manville within a reasonable period of time after recovery is sought from Manville. In connection with World Minerals’ acquisition of the assets of the industrial minerals business of Manville in 1991, Manville agreed to indemnify World Minerals for certain product liability claims, in respect of products of the industrial minerals business manufactured during the Manville Period, asserted against World Minerals through July 31, 2006. In June 2006, Manville agreed to extend its indemnification for such claims asserted against World Minerals through July 31, 2009. Notwithstanding the recent expiration of the Manville indemnity, World Minerals did not assume in its 1991 acquisition of the Manville industrial minerals business assets liability for product liability claims to the extent that such claims relate, in whole or in part, to the Manville Period, and Manville should continue to be responsible for such claims.

With respect to the Contract Indemnification, 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 2008 10-K.

Based on Alleghany’s historical experience and other analyses, in July 2005, Alleghany established a $600 thousand reserve in connection with the Products Liability Indemnification for the Alleghany Period. Such reserve was $321 thousand at June 30, 2009.

(e) Equity Holdings Concentration

At June 30, 2009, 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 $73.5 million. During the first six months of 2009, Alleghany sold approximately 2.0 million shares of Burlington Northern common stock, resulting in a pre-tax gain of $113.1 million. During the first six months of 2008, Alleghany sold approximately 1.0 million shares of Burlington Northern common stock, resulting in a pre-tax gain of $78.1 million.

At June 30, 2009, 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 $413.7 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. In addition, AIHL Re is a wholly-owned subsidiary of AIHL that has in the past provided 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 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 2008 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 June 30,								Six months ended June 30,
(in millions)		2009				2008				2009				2008
Revenues:
AIHL insurance group:
Net premiums earned
RSUI		$	159.2			$	174.2			$	319.9			$	352.0
CATA			41.2				48.0				83.2				94.9
EDC			4.1				18.0				19.5				38.6
AIHL Re			—				—				—				0.2
			204.5				240.2				422.6				485.7
Net investment income			27.7				30.6				54.7				62.2
Net realized capital gains			19.0				24.3				26.5				35.9
Other than temporary impairment losses(1)			(9.7	)			(47.1	)			(75.8	)			(62.1	)
Other income			0.4				0.1				0.9				0.2
Total insurance group			241.9				248.1				428.9				521.9
Corporate activities:
Net investment income(2)			(3.0	)			4.2				(3.1	)			7.9
Net realized capital gains(3)			60.5				1.0				113.5				79.1
Other than temporary impairment losses			—				—				—				—
Other income			0.1				—				0.1				—
Total		$	299.5			$	253.3			$	539.4			$	608.9
Earnings from continuing operations, before income taxes:
AIHL insurance group:
Underwriting profit (loss)(4)
RSUI (5)		$	40.8			$	54.7			$	83.0			$	93.3
CATA			3.7				3.5				5.9				7.7
EDC (6)			(54.1	)			(29.9	)			(60.7	)			(33.0	)
AIHL Re			—				—				—				0.1
			(9.6	)			28.3				28.2				68.1
Net investment income			27.7				30.6				54.7				62.2
Net realized capital gains			19.0				24.3				26.5				35.9
Other than temporary impairment losses(1)			(9.7	)			(47.1	)			(75.8	)			(62.1	)
Other income, less other expenses			(11.4	)			(11.5	)			(19.8	)			(22.5	)
Total insurance group			16.0				24.6				13.8				81.6
Corporate activities:
Net investment income(2)			(3.0	)			4.2				(3.1	)			7.9
Net realized capital gains(3)			60.5				1.0				113.5				79.1
Other than temporary impairment losses			—				—				—				—
Other income			0.1				—				0.1				—
Corporate administration and other expenses			7.7				9.2				8.0				19.8
Interest expense			0.2				0.2				0.3				0.3
Total		$	65.7			$	20.4			$	116.0			$	148.5

6. Reinsurance

As discussed in the 2008 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, 2009. RSUI has placed all of its catastrophe reinsurance program for the 2009-2010 period. The new 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. The new program is substantially similar to the expired program. In addition, RSUI’s property per risk reinsurance program for the 2009-2010 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, 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, 2009 on the same terms as the expiring treaty, providing 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 D&O liability line quota share reinsurance treaty renewed on July 1, 2009 on the same terms as the expiring treaty, providing 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 consolidated financial instruments as of June 30, 2009 and December 31, 2008 were as follows (in millions):

		June 30, 2009								December 31, 2008
		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Assets
Investments (excluding equity-method investments)*		$	3,971.7			$	3,971.7			$	4,057.7			$	4,057.7

In September 2006, 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 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. 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 market participant assumptions developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs are the reporting entity’s own assumptions about market participant assumptions developed based on the best information available under the circumstances. In assessing the appropriateness of using observable inputs in making its fair value determinations, Alleghany considers whether the market for a particular security is “active” or not based on all the relevant facts and circumstances. For example, Alleghany may consider a market to be inactive if there are relatively few recent transactions or if there is a significant decrease in market volume. Furthermore, Alleghany considers whether observable transactions are “orderly” or not. Alleghany does not consider a transaction to be orderly if there is evidence of a forced liquidation or other distressed condition, and as such, little or no weight is given to that transaction as an indicator of fair value.

The hierarchy is broken down into three levels based on the reliability of inputs as follows:

	•		“Level 1” — Valuations are based on unadjusted quoted prices in active markets 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. Alleghany’s assets utilizing Level 1 inputs generally include common stocks and debt securities issued directly by the U.S. Government, where Alleghany’s valuations are based on quoted market prices.
	•		“Level 2” — 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. Alleghany’s assets

			utilizing Level 2 inputs generally include debt securities other than debt issued directly by the U.S. Government and preferred stocks. Substantially all of the determinations of value in this category are based on a single quote from third-party dealers and pricing services. As Alleghany generally does not make any adjustments thereto, such quote typically constitutes the sole input in Alleghany’s determination of the fair value of these types of securities. In developing a quote, such third parties 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 its 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. Such quotes are generally non-binding.
	•		“Level 3” — 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 Alleghany. Alleghany’s 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 Alleghany’s determination of the fair value.

     Alleghany validates the reasonableness of its fair value determinations for Level 2 securities by testing the methodology of the relevant third-party dealer or pricing service that provides the quotes upon which the fair value determinations are made. Alleghany tests the methodology by comparing such quotes with prices from executed market trades when such trades occur. Alleghany discusses with the relevant third-party dealer or pricing service any identified material discrepancy between the quote derived from its methodology and the executed market trade in order to resolve the discrepancy. Alleghany uses the quote from the third-party dealer or pricing service unless Alleghany determines that the methodology used to produce such quote is not in compliance with GAAP. In addition to such procedures, Alleghany also compares the aggregate amount of the fair value for such Level 2 securities with the aggregate fair value provided by a third-party financial institution. Furthermore, Alleghany reviews the reasonableness of its classification of securities within the three-tiered hierarchy to ensure that the classification is consistent with SFAS 157.

     The estimated carrying values of Alleghany’s financial instruments as of June 30, 2009 and December 31, 2008 allocated among the three levels set forth above were as follows (in millions):

		Level 1				Level 2				Level 3				Total
As of June 30, 2009
Assets
Equity securities:
Common stock		$	579.7			$	—			$	—			$	579.7
Preferred stock			—				32.1				—				32.1
Debt securities:
U.S. Government obligations			232.5				197.7				—				430.2
Mortgage and asset-backed securities*			—				548.1				3.7				551.8
States, municipalities, political subdivisions			—				1,393.0				—				1,393.0
Foreign			—				158.2				—				158.2
Corporate bonds and other			—				454.5				—				454.5
			232.5				2,751.5				3.7				2,987.7
Short-term investments			141.8				200.2				—				342.0
Other invested assets**			—				—				30.2				30.2
Investments (excluding equity-method investments)		$	954.0			$	2,983.8			$	33.9			$	3,971.7
As of December 31, 2008
Assets
Equity securities:
Common stock		$	619.8			$	—			$	—			$	619.8
Preferred stock			—				9.7				—				9.7
Debt securities:
U.S. Government obligations			266.3				20.3				—				286.6
Mortgage and asset-backed securities*			—				653.8				0.7				654.5
States, municipalities, political subdivisions			—				1,434.1				—				1,434.1
Foreign			—				177.3				—				177.3
Corporate bonds and other			—				207.5				—				207.5
			266.3				2,493.0				0.7				2,760.0
Short-term investments			175.9				460.3				—				636.2
Other invested assets**			—				—				32.0				32.0
Investments (excluding equity-method investments)		$	1,062.0			$	2,963.0			$	32.7			$	4,057.7

(b) Available-For-Sale Securities

The available-for-sale securities at June 30, 2009 and December 31, 2008 are summarized as follows (in millions):

June 30, 2009

			Amortized				Gross				Gross
		Cost				Unrealized				Unrealized				Fair
		or Cost				Gains				Losses				Value
Consolidated
Equity securities:
Common stock		$	480.0			$	122.1			$	(22.4	)		$	579.7
Preferred stock			20.2				11.9				—				32.1
Debt securities:
U.S. Government obligations			422.6				7.7				(0.1	)			430.2
Mortgage and asset-backed securities*			577.7				9.2				(35.1	)			551.8
States, municipalities, political subdivisions			1,362.5				34.3				(3.8	)			1,393.0
Foreign			154.6				5.8				(2.2	)			158.2
Corporate bonds and other			448.4				7.0				(0.9	)			454.5
			2,965.8				64.0				(42.1	)			2,987.7
Short-term investments			342.0				—				—				342.0
		$	3,808.0			$	198.0			$	(64.5	)		$	3,941.5
Industry Segment
AIHL insurance group		$	3,631.3			$	134.1			$	(64.0	)		$	3,701.4
Corporate activities			176.7				63.9				(0.5	)			240.1
		$	3,808.0			$	198.0			$	(64.5	)		$	3,941.5

December 31, 2008

			Amortized				Gross				Gross
		Cost				Unrealized				Unrealized				Fair
		or Cost				Gains				Losses				Value
Consolidated
Equity securities:
Common stock		$	453.5			$	215.0			$	(48.7	)		$	619.8
Preferred stock			9.7				—				—				9.7
Debt securities:
U.S. Government obligations			274.7				11.9				—				286.6
Mortgage and asset-backed securities*			707.7				10.1				(63.3	)			654.5
States, municipalities, political subdivisions			1,421.8				23.4				(11.1	)			1,434.1
Foreign			172.5				6.6				(1.8	)			177.3
Corporate bonds and other			205.1				4.1				(1.7	)			207.5
			2,781.8				56.1				(77.9	)			2,760.0
Short-term investments			636.2				—				—				636.2
		$	3,881.2			$	271.1			$	(126.6	)		$	4,025.7
Industry Segment
AIHL insurance group		$	3,624.0			$	79.2			$	(125.9	)		$	3,577.3
Corporate activities			257.2				191.9				(0.7	)			448.4
		$	3,881.2			$	271.1			$	(126.6	)		$	4,025.7

The amortized cost and estimated fair value of debt securities at June 30, 2009 by contractual maturity are shown below (in millions). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

		Amortized Cost				Fair Value
Short-term investments due in one year or less		$	342.0			$	342.0
Mortgage and asset-backed securities*			577.7				551.8
Debt securities
One year or less			175.3				177.3
Over one through five years			1,275.1				1,303.0
Over five through ten years			432.1				442.5
Over ten years			505.6				513.1
Equity securities			500.2				611.8
		$	3,808.0			$	3,941.5

The proceeds from sales of available-for-sale securities were $541.1 million for the six months ended June 30, 2009. The amounts of gross realized gains and gross realized losses of available-for-sale securities were $157.2 million and $81.0 million, respectively, for the six months ended June 30, 2009. The gross loss amounts include impairment charges, as discussed below.

(c) Other Than Temporary Impairment Losses

Alleghany holds its equity and debt securities as available for sale, and as such, these securities are recorded at fair value. Alleghany continually monitors the difference between cost and the estimated fair value of its investments, which involves uncertainty as to whether declines in value are temporary in nature. If Alleghany believes a decline in the value of a particular investment is temporary, Alleghany records the decline as an unrealized loss in common stockholders’ equity. If the decline is believed to be other than temporary, it is written down to the carrying value of the investment and a loss is recorded on Alleghany’s statement of earnings. In addition, under FAS FSP115-2 and 124-2, any portion of such decline that relates to debt securities that is believed to arise from factors other than credit is to be recorded as a component of other comprehensive income.

Management’s assessment of a decline in value includes, among other things: (i) the duration of time and the relative magnitude to which fair value of the investment has been below cost; (ii) the financial condition and near-term prospects of the issuer of the investment; (iii) extraordinary events, including negative news releases and rating agency downgrades, with respect to the issuer of the investment; (iv) Alleghany’s ability and intent to hold an equity security for a period of time sufficient to allow for any anticipated recovery; and (v) whether it is more likely than not that Alleghany will sell a debt security before recovery of its amortized cost basis. A debt security is deemed impaired if it is probable that Alleghany will not be able to collect all amounts due under the security’s contractual terms. An equity security is deemed impaired if, among other things, its decline in estimated fair value has existed for twelve months or more or if its decline in estimated fair value from its cost is greater than 50 percent, absent compelling evidence to the contrary. Further, for securities expected to be sold, an other than-temporary impairment charge

is recognized if Alleghany does not expect the fair value of a security to recover its cost prior to the expected date of sale. If that judgment changes in the future, Alleghany may ultimately record a realized loss after having originally concluded that the decline in value was temporary. Risks and uncertainties are inherent in the methodology Alleghany uses to assess other than temporary declines in value. Risks and uncertainties could include, but are not limited to, incorrect assumptions about financial condition, liquidity or future prospects, inadequacy of any underlying collateral and unfavorable changes in economic or social conditions, interest rates or credit ratings.

Other than temporary impairment losses in the first six months of 2009 reflect $75.8 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 $75.8 million, $47.6 million related to equity holdings in the energy sector, $16.4 million related to holdings in various other equity sectors and $11.8 million related to debt security holdings (all of which were deemed to be credit-related). Of the $75.8 million of impairment losses, $9.7 million was incurred in the second quarter of 2009, which included $0.8 million related to debt security holdings (all of which were deemed to be credit-related). 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. Such severe declines are primarily related to a significant deterioration of U.S. equity and, to a lesser extent, residential housing market conditions during the latter part of 2008 and the first quarter of 2009, which abated somewhat in the 2009 second quarter. Other than temporary impairment losses in the first six months of 2008 reflect $62.1 million of impairment losses related to unrealized losses that were deemed to be other than temporary and, as such, are required to be charged against earnings. Of the $62.1 million of impairment losses, $47.1 million was incurred in the second quarter of 2008 and related to equity holdings primarily in the energy and financial services sectors.

After adjusting the cost basis of securities for the recognition of unrealized losses through impairment charges, the gross unrealized investment losses and related fair value for debt securities and equity securities at June 30, 2009 and December 31, 2008, were as follows (in millions):

June 30, 2009

						Gross
		Fair				unrealized
		value				losses
Debt securities
U.S. Government obligations
Less than 12 months		$	22.9			$	0.1
More than 12 months			—				—
Mortgage & asset-backed securities
Less than 12 months			104.2				2.9
More than 12 months			150.5				32.2
States, municipalities & political subdivisions
Less than 12 months			152.6				1.8
More than 12 months			48.0				2.0
Foreign
Less than 12 months			28.0				2.0
More than 12 months			0.8				0.2
Corporate bonds and other
Less than 12 months			52.7				0.8
More than 12 months			1.7				0.1
Total debt securities
Less than 12 months			360.4				7.6
More than 12 months			201.0				34.5
Equity securities — Common Stock
Less than 12 months			145.1				22.4
More than 12 months			—				—
Equity securities — Preferred Stock
Less than 12 months			—				—
More than 12 months			—				—
Total temporarily impaired securities
Less than 12 months			505.5				30.0
More than 12 months			201.0				34.5
Total		$	706.5			$	64.5

December 31, 2008

						Gross
		Fair				unrealized
		value				losses
Debt securities
U.S. Government obligations
Less than 12 months		$	—			$	—
More than 12 months			—				—
Mortgage & asset-backed securities
Less than 12 months			311.9				46.1
More than 12 months			57.0				17.2
States, municipalities & political subdivisions
Less than 12 months			380.1				8.6
More than 12 months			20.9				2.5
Foreign
Less than 12 months			54.9				1.8
More than 12 months			—				—
Corporate bonds and other
Less than 12 months			39.8				1.1
More than 12 months			11.4				0.6
Total debt securities
Less than 12 months			786.7				57.6
More than 12 months			89.3				20.3
Equity securities — Common Stock
Less than 12 months			151.5				48.7
More than 12 months			—				—
Equity securities — Preferred Stock
Less than 12 months			—				—
More than 12 months			—				—
Total temporarily impaired securities
Less than 12 months			938.2				106.3
More than 12 months			89.3				20.3
Total		$	1,027.5			$	126.6

As of June 30, 2009, Alleghany held a total of 205 debt and equity securities that were in an unrealized loss position, of which 69 securities, all related to debt securities, were in an unrealized loss position continuously for 12 months or more. At June 30, 2009, substantially all of Alleghany’s debt securities were rated investment grade, and non-income producing invested assets were insignificant.

8. Income Taxes

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 enterprise’s financial statements in accordance with FASB Statement No. 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. Alleghany adopted the provisions of this Interpretation as of January 1, 2007. The adoption of this Interpretation did not have any material impact on Alleghany’s results of operations and financial condition. As of June

30, 2009, Alleghany believes there were no material uncertain tax positions that would require disclosure under this Interpretation.

The effective tax rate on earnings from continuing operations before income taxes was 21.9 percent for the first six months of 2009, compared with 30.2 percent for the corresponding 2008 period. The lower effective tax rate primarily reflects the greater impact of tax-exempt income on Alleghany’s reduced earnings in the 2009 period.

9. Mandatory Convertible Preferred Stock

As discussed in Note 9(a) to the Notes to the Consolidated Financial Statements set forth in Item 8 of the 2008 10-K, on June 23, 2006, Alleghany completed an offering of 1,132,000 shares of its 5.75% mandatory convertible preferred stock (the “Preferred Stock”) at a public offering price of $264.60 per share, resulting in net proceeds of $290.4 million.

In November 2008, the Alleghany Board of Directors authorized the repurchase of shares of the Preferred Stock. Prior to the mandatory conversion date of June 15, 2009, Alleghany repurchased an aggregate of 442,998 shares of the Preferred Stock in the open market for approximately $117.4 million, at an average price per share of $264.92.

On June 15, 2009, all outstanding shares of the Preferred Stock were mandatorily converted into shares of Alleghany common stock. Each outstanding share of the Preferred Stock was automatically converted into 1.0139 shares of Alleghany common stock based on the arithmetic average of the daily volume-weighted average price per share of Alleghany common stock for each of the 20 consecutive trading days ending on June 10, 2009, or $260.9733 per share. Alleghany issued approximately 698,009 shares of its common stock for the 688,621 shares of the Preferred Stock that were outstanding at the date of the mandatory conversion.

10. EDC

EDC reported an underwriting loss of $60.7 million for the first six months of 2009, primarily reflecting a substantial decrease in net earned premiums from the corresponding 2008 period, a $34.5 million reserve increase, and an $8.0 million increase in its premium deficiency reserve. In addition, EDC also recorded a pre-tax non-cash impairment charge of $11.2 million as of June 30, 2009, which is classified as a net realized capital loss in its consolidated statement of earnings. In June 2009, EDC determined that it was unable to write business at rates it deemed adequate due to the current state of the California workers’ compensation market. As a result, EDC determined to cease soliciting new or renewal business on a direct basis commencing August 1, 2009 and took corresponding expense reduction steps, including staff reductions, in light of such determination. As a result of EDC’s determination to cease writing business on a direct basis and certain other factors, on June 30, 2009, A.M. Best downgraded its rating of EDC’s subsidiary, Employers Direct Insurance Company from A- (Excellent) with a negative outlook to B++ (Good) with a stable outlook.

In the 2009 second quarter, EDC increased its loss and loss adjustment expense reserves in the amount of $34.5 million, compared with a $24.7 million reserve increase in the 2008 second quarter. Of the $34.5 million reserve increase, $26.5 million related to prior accident years and $8.0 million related to the 2009 accident year. With respect to the $26.5 million increase for prior accident years, $17.7 million primarily reflected higher than expected paid losses and $8.8 million was attributable to the estimated impact of recent judicial decisions by the Workers Compensation

Appeals Board (“WCAB”) related to permanent disability determinations that have materially weakened prior workers’ compensation reforms instrumental in reducing medical and disability costs in earlier years. Cumulative paid losses in respect of prior accident years were expected to be lower through June 30, 2009 than the actual cumulative paid losses through that date. This amount of higher cumulative paid losses, expressed as a percentage of carried loss and loss adjustment expense reserves at the beginning of the year, was 1.5 percent. With respect to the $8.0 million reserve increase for the 2009 accident year, $6.2 million primarily reflected higher than expected paid losses and the remainder was attributable to the estimated impact of the WCAB decisions. Of EDC’s 2008 second quarter $24.7 million reserve increase, $14.9 million related to prior accident years and $9.8 million related to the 2008 accident year.

The $11.2 million pre-tax non-cash impairment charge as of June 30, 2009 represents the entire carrying value of EDC’s trade names, originally determined to have indefinite useful lives, renewal rights, distribution rights and database development, net of accumulated amortization. In addition, immaterial accruals were established related to terminated employee severance payments and other charges.

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,

	•		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 debt 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, 2008, or the “2008 10-K,” for a more complete description of our critical accounting estimates.

Consolidated Results of Operations

     The following discussion and analysis presents a review of our results for the three and six months ended June 30, 2009 and 2008. 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 Operations” and “Risk Factors” contained in our 2008 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2009. Our results for the first six months of 2009 are not indicative of operating results in future periods.

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, has in the past provided 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, we own approximately 33 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 approximately 38 percent of the voting interests of ORX Exploration, Inc., or “ORX,” a regional gas and oil 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 and 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. For example, RSUI’s pre-tax catastrophe losses, net of reinsurance, were $97.9 million in 2008, primarily reflecting 2008 third quarter hurricane net losses of $80.9 million from Hurricanes Ike, Gustav and Dolly, compared with net catastrophe losses of $47.1 million in 2007 and $14.8 million in 2006. 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 and casualty lines, and most of our past catastrophe-related claims have resulted from severe hurricanes.

     Our profitability is also affected by net realized capital gains, other than temporary impairment losses and net 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 debt securities, although we also invest in equity securities. The return on debt securities is primarily impacted by general 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. Other than temporary impairment losses relate to unrealized losses that are deemed to be other than temporary and, as such, are required to be charged against earnings regardless of whether we continue to hold the applicable security. In the first six months of 2009, our other than temporary impairment losses were $75.8 million, of which $9.7 million was incurred in the second quarter of 2009. Of the $75.8 million, $47.6 million related to equity holdings in the energy sector, $16.4 million related to holdings in various other equity sectors and $11.8 million related to debt 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 their cost as of the balance sheet date. Such severe declines are primarily related to a significant deterioration of U.S. equity market conditions during the latter part of 2008 and the first quarter of 2009, which abated somewhat in the 2009 second quarter. If the U.S. equity market deteriorates during the remainder of 2009, we may be required to record additional impairment charges later in 2009, which could have a material adverse impact on our results of operations.

     The profitability of our insurance operating units is also impacted by competition generally, and price competition in particular. 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 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. Our insurance operating units began to experience increased competition in certain of their lines of business during 2006. This competitive environment continued during 2007, 2008 and the first half of 2009, resulting in fewer opportunities to write business and/or 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.

Consolidated Results of Operations

     The following table summarizes our consolidated revenues, costs and expenses and earnings for the three and six months ended June 30, 2009 and 2008.

		Three months ended June 30,								Six months ended June 30,
(in millions)		2009				2008				2009				2008
Revenues
Net premiums earned		$	204.5			$	240.2			$	422.6			$	485.7
Net investment income			24.6				34.8				51.6				70.1
Net realized capital gains			79.5				25.3				140.0				115.0
Other than temporary impairment losses			(9.7	)			(47.1	)			(75.8	)			(62.1	)
Other income			0.6				0.1				1.0				0.2
Total revenues		$	299.5			$	253.3			$	539.4			$	608.9
Costs and expenses
Loss and loss adjustment expenses		$	143.9			$	139.4			$	256.7			$	274.7
Commissions, brokerage and other underwriting expenses			70.2				72.5				137.7				143.0
Other operating expenses			12.3				12.3				21.5				24.0
Corporate administration			7.2				8.5				7.1				18.4
Interest expense			0.2				0.2				0.4				0.3
Total costs and expenses			233.8				232.9				423.4				460.4
Earnings from continuing operations, before income taxes			65.7				20.4				116.0				148.5
Income taxes			19.7				7.4				25.4				44.9
Earnings from continuing operations			46.0				13.0				90.6				103.6
Discontinued operations*
Operations			—				10.7				—				22.2
Income taxes			—				5.9				—				12.1
Earnings from discontinued operations, net of tax			—				4.8				—				10.1
Net earnings		$	46.0			$	17.8			$	90.6			$	113.7
Revenues:
AIHL		$	241.9			$	248.1			$	428.9			$	521.9
Corporate activities**			57.6				5.2				110.5				87.0
Earnings (loss) from continuing operations, before income taxes:
AIHL		$	16.0			$	24.6			$	13.8			$	81.6
Corporate activities**			49.7				(4.2	)			102.2				66.9

Operating Results

     Our earnings from continuing operations before income taxes in the 2009 second quarter increased from the corresponding 2008 period, primarily reflecting higher net realized capital gains and lower other than temporary impairment losses, partially offset by lower net premiums earned. The increase in net realized capital gains primarily reflects net realized capital gains from sales at the parent level of common stock of Burlington Northern Santa Fe Corporation, or “Burlington Northern,” of $60.1 million in the 2009 second quarter, compared with no sales of Burlington Northern common stock in the 2008 second quarter. The decrease in other than temporary impairment losses was due in part to comparatively improved equity market returns in the 2009 second quarter compared with the corresponding 2008 period. Net premiums earned in the 2009 second quarter decreased from the corresponding 2008 period, primarily reflecting the impact of continuing competition at our insurance operating units.

     Our earnings from continuing operations before income taxes in the first six months of 2009 decreased from the corresponding 2008 period, primarily reflecting lower net premiums earned, partially offset by higher net realized capital gains. The decrease in net premiums earned primarily reflects the impact of continuing competition at each of our insurance operating units. The increase in net realized capital gains primarily reflects net realized capital gains from sales at the parent level of common stock of Burlington Northern of $113.1 million in the first six months of 2009, compared with $78.1 million of such sales in the corresponding 2008 period.

     Net investment income in the second quarter and first six months of 2009 decreased from the corresponding 2008 period due principally to lower average investment yields and losses on our investments in Homesite and ORX. Additional information regarding our investments can be found on pages 37 through 42 herein.

     Loss and loss adjustment expenses increased in the 2009 second quarter from the corresponding 2008 period, primarily reflecting a net reserve increase at EDC. Loss and loss adjustment expenses decreased in the first six months of 2009 from the corresponding 2008 period, primarily reflecting the net effect of lower net premium volume at our insurance operating units and lower property losses incurred by RSUI in the 2009 period. Additional information regarding these and other reserving actions and other items can be found in the discussion of AIHL’s operating unit results from continuing operations on pages 32 through 36 herein.

     The effective tax rate on earnings from continuing operations before income taxes was 21.9 percent for the first six months of 2009, compared with 30.2 percent for the corresponding 2008 period. The lower effective tax rate primarily reflects the greater impact of tax-exempt income on our reduced earnings in the 2009 period.

AIHL Operating Unit Pre-Tax Results from Continuing Operations

(in millions, except ratios)		RSUI				AIHL Re				CATA				EDC				AIHL
Three months ended June 30, 2009
Gross premiums written		$	337.0				—			$	45.1			$	15.6			$	397.7
Net premiums written			209.5				—				43.4				11.7				264.6
Net premiums earned (1)		$	159.2				—			$	41.2			$	4.1			$	204.5
Loss and loss adjustment expenses			76.0				—				19.0				48.9				143.9
Commission, brokerage and other underwriting expenses (2)			42.4				—				18.5				9.3				70.2
Underwriting profit (loss) (3)		$	40.8				—			$	3.7			$	(54.1	)		$	(9.6	)
Net investment income (1)																			27.7
Net realized capital gains (1)																			19.0
Other than temporary impairment losses (1)																			(9.7	)
Other income (1)																			0.4
Other expenses (2)																			(11.8	)
Earnings from continuing operations, before income taxes																		$	16.0
Loss ratio (4)			47.8	%			—				46.1	%			n/m				70.4	%
Expense ratio (5)			26.6	%			—				45.0	%			n/m				34.4	%
Combined ratio (6)			74.4	%			—				91.1	%			n/m				104.8	%
Three months ended June 30, 2008
Gross premiums written		$	314.4				—			$	56.9			$	19.7			$	391.0
Net premiums written			192.1				—				49.2				18.9				260.2
Net premiums earned (1)		$	174.2				—			$	48.0			$	18.0			$	240.2
Loss and loss adjustment expenses			76.1				—				23.9				39.4				139.4
Commission, brokerage and other underwriting expenses (2)			43.4				—				20.6				8.5				72.5
Underwriting profit (loss) (3)		$	54.7				—			$	3.5			$	(29.9	)		$	28.3
Net investment income (1)																			30.6
Net realized capital gains (1)																			24.3
Other than temporary impairment losses (1)																			(47.1	)
Other income (1)																			0.1
Other expenses (2)																			(11.6	)
Earnings from continuing operations, before income taxes																		$	24.6
Loss ratio (4)			43.7	%			—				49.8	%			218.2	%			58.0	%
Expense ratio (5)			24.9	%			—				43.0	%			47.3	%			30.2	%
Combined ratio (6)			68.6	%			—				92.8	%			265.5	%			88.2	%