• 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 months ended March 31, 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. Our results for the first three 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 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 or losses 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 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, 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 2009 first quarter, our net realized capital losses of $5.6 million included $66.1 million of impairment charges. Of the $66.1 million of impairment charges, $45.9 million related to energy sector equity holdings, $9.2 million related to holdings in various other equity sectors and $11.0 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 extending through the first quarter of 2009. If U.S. equity market conditions persist or deteriorate further during 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, 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. 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 during the 2009 first quarter, 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.
The following table summarizes our consolidated revenues, costs and expenses and earnings for the three months ended March 31, 2009 and 2008.

                                                                       Three months ended March 31,
(in millions)                                                           2009                  2008

Revenues
Net premiums earned                                                $      218.0          $      245.5
Net investment income                                                      27.9                  35.3
Net realized capital (losses) gains                                        (5.6 )                74.7
Other income                                                                0.5                   0.1

Total revenues                                                            240.8                 355.6

Costs and expenses
Loss and loss adjustment expenses                                         112.8                 135.2
Commissions, brokerage and other underwriting expenses                     67.4                  70.4
Other operating expenses                                                    9.2                  11.7
Corporate administration                                                    0.8                  10.0
Interest expense                                                            0.2                   0.2

Total costs and expenses                                                  190.4                 227.5

Earnings from continuing operations, before income taxes                   50.4                 128.1
Income taxes                                                                5.8                  37.5

Earnings from continuing operations                                        44.6                  90.6
Earnings from discontinued operations, net of tax*                            -                   5.3


Net earnings                                                       $       44.6          $       95.9


Revenues:
AIHL                                                               $      186.9          $      273.8
Corporate activities**                                                     53.9                  81.8

(Losses) earnings from continuing operations, before income
taxes:
AIHL                                                                      ($2.2 )        $       57.0
Corporate activities**                                                     52.6                  71.1

* Discontinued operations consist of the operations of Darwin Professional Underwriters, Inc., or "Darwin," net of minority interest expense and the gain on disposition in 2008. Additional information regarding the results of discontinued operations can be found in Note 2 to the Notes to the Consolidated Financial Statements set forth in Item 8 of our 2008 10-K.

** Corporate
activities
consist of
Alleghany
Properties,
Homesite, ORX
and corporate
activities at
the parent
level.

Operating Results
Our earnings from continuing operations before income taxes in the first three months of 2009 decreased from the corresponding 2008 period, primarily reflecting net realized capital losses in the 2009 period, compared with substantial net realized capital gains in the 2008 period. The 2009 net realized capital losses 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, partially offset by sales at the parent level of common stock of Burlington

Northern Santa Fe Corporation, or "Burlington Northern." The 2008 first quarter net realized capital gains primarily reflect sales at the parent level of common stock of Burlington Northern, partially offset by impairment charges for unrealized losses that were deemed to be other than temporary. Additional information regarding our investments can be found on pages 26 through 28 herein.
Net premiums earned in the 2009 first quarter decreased from the corresponding 2008 period primarily reflecting the impact of continuing competition at each of our insurance operating units. Loss and loss adjustment expenses decreased in the 2009 first quarter 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. The decrease in other operating expenses and corporate administration expense in the 2009 period primarily reflects lower incentive compensation accruals at the subsidiary and parent levels, respectively, due in part to less favorable investment results and the resulting reduction in earnings.
The effective tax rate on earnings from continuing operations before income taxes was 11.5 percent for the first three months of 2009, compared with 29.3 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 March 31,
2009

Gross premiums written               $ 250.1                -        $ 42.1        $  16.4        $ 308.6
Net premiums written                   149.7                -          38.2           15.3          203.2

Net premiums earned (1)              $ 160.7                         $ 41.9        $  15.4        $ 218.0
Loss and loss adjustment
expenses                                77.5                -          20.9           14.4          112.8
Commission, brokerage and other
underwriting expenses (2)               41.0                -          18.8            7.6           67.4

Underwriting profit (loss) (3)       $  42.2                -        $  2.2          ($6.6 )      $  37.8

Net investment income (1)                                                                            27.0
Net realized capital losses (1)                                                                     (58.6 )
Other income (1)                                                                                      0.5
Other expenses (2)                                                                                   (8.9 )


Losses from continuing
operations, before income taxes                                                                     ($2.2 )


Loss ratio (4)                          48.2 %              -          50.0 %         93.5 %         51.7 %
Expense ratio (5)                       25.5 %              -          44.8 %         49.4 %         30.9 %

Combined ratio (6)                      73.7 %              -          94.8 %        142.9 %         82.6 %

Three months ended March 31,
2008
Gross premiums written               $ 255.1        $     0.2        $ 55.2        $  23.3        $ 333.8
Net premiums written                   152.4              0.2          46.0           21.1          219.7

Net premiums earned (1)              $ 177.9        $     0.2        $ 46.8        $  20.6        $ 245.5
Loss and loss adjustment
expenses                                94.5                -          23.5           17.2          135.2
Commission, brokerage and other
underwriting expenses (2)               44.8                -          19.1            6.5           70.4

Underwriting profit (loss) (3)       $  38.6        $     0.2        $  4.2          ($3.1 )      $  39.9


Net investment income (1)                                                                            31.6
Net realized capital losses (1)                                                                      (3.4 )
Other income (1)                                                                                      0.1
Other expenses (2)                                                                                  (11.2 )


Earnings from continuing
operations, before income taxes                                                                   $  57.0


Loss ratio (4)                          53.1 %              -          50.2 %         83.8 %         55.1 %
Expense ratio (5)                       25.2 %           18.3 %        40.9 %         31.4 %         28.7 %

Combined ratio (6)                      78.3 %           18.3 %        91.1 %        115.2 %         83.8 %

(1) Represent components of total revenues.

(2) Commission, brokerage and other 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.

(3) 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 profit does not replace net income determined in accordance with GAAP as a measure of profitability; rather, we believe that underwriting profit, which does not include net investment income and other income or net realized capital gains, enhances the understanding of AIHL's insurance operating units' operating results by highlighting net income attributable to their underwriting performance. With the addition of net investment income and other income and net realized capital gains, reported pre-tax net income (a GAAP measure) may show a profit despite an underlying underwriting loss. Where underwriting losses persist over extended periods, an insurance company's ability to continue as an ongoing concern may be at risk. Therefore, we view underwriting profit as an important measure in the overall evaluation of performance.

(4) Loss and loss adjustment expenses divided by net premiums earned, all as determined in accordance with GAAP.

(5) Underwriting expenses divided by net premiums earned, all as determined in accordance with GAAP.

(6) The sum of the loss ratio and expense ratio, all as determined in accordance with GAAP, representing the percentage of each premium dollar an insurance company has to spend on losses (including loss adjustment expenses) and underwriting expenses.

Discussion of individual AIHL operating unit results follows, and AIHL investment results are discussed below under "Investments."
RSUI
The decrease in gross premiums written by RSUI in the first three months of 2009 from the corresponding 2008 period primarily reflects continuing and increasing competition, particularly in RSUI's general liability and umbrella/excess lines of business. RSUI's net premiums earned decreased in the first three months of 2009 from the corresponding 2008 period due primarily to substantially lower premium volume in certain casualty lines of business, partially offset by a modest growth of RSUI's property, binding authority and director and officer, or "D&O," liability lines of business. The binding authority line writes small, specialized coverages pursuant to underwriting authority arrangements with managing general agents.
The decrease in loss and loss adjustment expenses in the first three months of 2009 primarily reflects lower property losses in the 2009 first quarter compared with the corresponding 2008 period, which included a single property loss of approximately $10.0 million arising from a factory explosion. The decrease in commissions, brokerage and other underwriting expenses in the 2009 first quarter primarily reflects the net effect of lower net premium volume, compared with the corresponding 2008 period. All of these decreases were the primary causes for the increase in RSUI's underwriting profit in the first three months of 2009 from the corresponding 2008 period, partially offset by a decline in net premiums earned.
Rates at RSUI in the first three months of 2009, compared with the corresponding 2008 period, reflect overall industry trends of downward pricing as a result of increased competition, although certain lines of business, including property and general and professional liability lines, experienced flattening rate trends in the first three months of 2009. RSUI continued to see fewer qualified opportunities to write business in the first three months of 2009, as a more competitive market causes less business to flow into the wholesale marketplace in which RSUI operates.
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 substantially all of its catastrophe reinsurance program for the 2009-2010 period. Under the new 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. The renewed 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.

CATA
CATA's net premiums earned in the first three months of 2009 decreased from the corresponding 2008 period, primarily reflecting continuing and increasing price competition in CATA's property and casualty (including in excess and surplus markets) and commercial surety lines of business, partially offset by net premiums earned in CATA's recently established specialty markets division. The decrease in loss and loss adjustment expenses in the first three months of 2009 from the corresponding 2008 period primarily reflects a $2.9 million release of prior accident year loss reserves during the 2009 period reflecting favorable loss emergence, compared with a $1.5 million release of prior accident year loss reserves during the corresponding 2008 period, as well as lower net premiums earned in the 2009 period. The $2.9 reserve release was primarily related to surety, including the discontinued contract surety line of business, and casualty prior accident year reserves. The $1.5 million net reserve release during the 2008 first quarter reflects a release of primarily casualty and surety prior year loss reserves, partially offset by a strengthening of property prior year loss reserves. CATA's 2009 reserving actions did not impact the assumptions used in estimating CATA's loss and loss adjustment expense . . .