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                              ALLEGHANY CORPORATION
                     SUBSIDIARY DIRECTORS' STOCK OPTION PLAN

1. PURPOSE. The purpose of the Alleghany Corporation Subsidiary Directors' Stock
Option Plan (the "Plan") is to advance the interests of Alleghany Corporation
(the "Corporation"), its Subsidiaries (as defined below) and its stockholders by
encouraging increased stock ownership by members of the boards of directors of
the Subsidiaries who are not employees or directors of the Corporation or
employees of any of the Subsidiaries, in order to promote long-term stockholder
value through continuing ownership of the Corporation's common stock.

2. ADMINISTRATION. The Plan shall be administered by the Compensation Committee
of the Board of Directors of the Corporation (the "Committee"). The Committee
shall have all the powers vested in it by the terms of the Plan, such powers to
include selecting the Non-Employee Subsidiary Directors (as defined below) who
shall receive awards of nonqualified stock options made under the Plan
("Options"), determining the amount of Options to be awarded and the terms and
conditions of awards of Options, and prescribing the form of the agreement
embodying awards of Options, all within the limitations described herein. The
Committee shall have the power to construe the Plan, to determine all questions
arising thereunder and, subject to the provisions of the Plan, to adopt and
amend such rules and regulations for the administration of the Plan as it may
deem desirable. Any decision of the Committee in the administration of the Plan
shall be final and conclusive. Except to the extent prohibited by applicable law
or the applicable rules of a stock exchange, the Committee may allocate all or
any portion of its responsibilities and powers to any one or more of its members
and may delegate all or any part of its responsibilities and powers to any
person or persons selected by it. Any such allocation or delegation may be
revoked by the Committee at any time. No member of the Committee shall be liable
for anything done or omitted to be done by him or her or by any other member of
the Committee in connection with the Plan, except for his or her own willful
misconduct or as expressly provided by statute.

3. PARTICIPATION. Each member of a board of directors of any Subsidiary of the
Corporation who is not an employee or director of the Corporation or an employee
of any of the Subsidiaries (a "Non-Employee Subsidiary Director") shall be
eligible to receive Options under the Plan. As used herein, the term
"Subsidiary" means any corporation at least 40 percent of whose outstanding
voting stock is owned, directly or indirectly, by the Corporation.

4. AWARDS UNDER THE PLAN.

      (a) Types of Awards. Awards under the Plan shall consist only of Options,
which are rights to purchase shares of common stock, par value $1.00 per share,
of the Corporation (the "Common Stock" ). Such Options are subject to the terms,
conditions and restrictions specified in Paragraph 5 below.

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      (b) Maximum Number of Shares That May Be Issued. There may be issued under
the Plan pursuant to the exercise of Options an aggregate of not more than
25,000 shares of Common Stock, subject to adjustment as provided in Paragraph 6
below.

      (c) Rights With Respect to Shares. A Non-Employee Subsidiary Director to
whom an Option is granted (and any person succeeding to such a Non-Employee
Subsidiary Director's rights pursuant to the Plan) shall have no rights as a
stockholder with respect to any shares of Common Stock issuable pursuant to any
such Option until the date of the issuance of a stock certificate to him or her
for such shares. Except as provided in Paragraph 6 below, no adjustment shall be
made for dividends, distributions or other rights (whether ordinary or
extraordinary, and whether in cash, securities or other property) for which the
record date is prior to the date such stock certificate is issued.

5. NONQUALIFIED STOCK OPTIONS. Each Option granted under the Plan shall be
evidenced by an agreement in such form as the Committee shall prescribe from
time to time in accordance with the Plan and shall comply with the following
terms and conditions:

      (a) The Option exercise price shall be the fair market value of the shares
of Common Stock subject to such Option on the date the Option is granted, which
shall be the average of the high and the low sales prices of a share of Common
Stock on the date of grant as reported on the New York Stock Exchange Composite
Transactions Tape or, if the New York Stock Exchange is closed on that date, on
the last preceding date on which the New York Stock Exchange was open for
trading.

      (b) Subject to Section 5(d) hereof and except as otherwise determined by
the Committee, the Option shall have a term of 10 years from the date it is
granted.

      (c) The Option shall be transferable only by will or the laws of descent
and distribution, and shall be exercisable during the optionee's lifetime only
by him or her.

      (d) The Option shall not be exercisable:

            (i) before the expiration of one year from the date it is granted or
      after the expiration of ten years from the date it is granted and may be
      exercised during such period as follows: one-third (33-1/3 percent) of the
      total number of shares of Common Stock covered by the Option shall become
      exercisable each year beginning with the first anniversary of the date it
      is granted; provided that an Option shall automatically become immediately
      exercisable in full when the Non-Employee Subsidiary Director ceases to be
      a Non-Employee Subsidiary Director for any reason other than death;

            (ii) unless payment in full is made for the shares of Common Stock
      being acquired thereunder at the time of exercise; such payment shall be
      made

                  (A) in United States dollars by cash or check, or

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                  (B) in lieu thereof, by tendering to the Corporation shares of
            Common Stock owned by the person exercising the Option and having a
            fair market value equal to the cash exercise price applicable to
            such Option, such fair market value to be the average of the high
            and the low sales prices of a share of Common Stock on the date of
            exercise as reported on the New York Stock Exchange Composite
            Transactions Tape, or, if the New York Stock Exchange is closed on
            that date, on the last preceding date on which the New York Stock
            Exchange was open for trading, or

                  (C) by a combination of United States dollars and shares of
            Common Stock as aforesaid; and

            (iii) unless the person exercising the Option has been, at all times
      during the period beginning with the date of grant of the Option and
      ending on the date of such exercise, a Non-Employee Subsidiary Director,
      except that

                  (A) if such person shall cease to be such a Non-Employee
            Subsidiary Director for reasons other than death, while holding an
            Option that has not expired and has not been fully exercised, such
            person, at any time within one year of the date he or she ceased to
            be such a Non-Employee Subsidiary Director (but in no event after
            the Option has expired under the provisions of subparagraph 5(d)(i)
            above), may exercise the Option with respect to any shares of Common
            Stock as to which he or she has not exercised the Option on the date
            he or she ceased to be such a Non-Employee Subsidiary Director; or

                  (B) if any person to whom an Option has been granted shall die
            holding an Option that has not been fully exercised, his or her
            executors, administrators, heirs or distributees, as the case may
            be, may, at any time within one year after the date of such death
            (but in no event after the Option has expired under the provisions
            of subparagraph 5(d)(i) above), exercise the Option with respect to
            any shares of Common Stock as to which the decedent could have
            exercised the Option at the time of his or her death.

6. DILUTION AND OTHER ADJUSTMENTS. In the event of any change in the outstanding
shares of Common Stock by reason of any stock split, stock dividend,
recapitalization, merger, consolidation, reorganization, combination or exchange
of shares or other similar event, the number or kind of shares that may be
issued under the Plan pursuant to subparagraphs 4(a) and 4(b) above shall be
automatically adjusted to give effect to the occurrence of such event, and the
number or kind of shares subject to, or the Option exercise price per share
under, any outstanding Option shall be automatically adjusted so that the
proportionate interest of the participant shall be maintained as before the
occurrence of such event; such adjustment in outstanding Options shall be made
without change in the total Option exercise price applicable to the unexercised
portion of such

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Options and with a corresponding adjustment in the Option exercise price per
share, and such adjustment shall be conclusive and binding for all purposes of
the Plan.

7. MISCELLANEOUS PROVISIONS.

      (a) Except as expressly provided for in the Plan, no Non-Employee
Subsidiary Director or other person shall have any claim or right to be granted
an Option under the Plan. Neither the Plan nor any action taken hereunder shall
be construed as giving any Non-Employee Subsidiary Director any right to be
retained in the service of a Subsidiary.

      (b) A participant's rights and interest under the Plan may not be assigned
or transferred in whole or in part either directly or by operation of law or
otherwise (except, in the event of a participant's death, by will or the laws of
descent and distribution), including, but not by way of limitation, execution,
levy, garnishment, attachment, pledge, bankruptcy or in any other manner, and no
such right or interest of any participant in the Plan shall be subject to any
obligation or liability of such participant.

      (c) No shares of Common Stock shall be issued hereunder unless counsel for
the Corporation shall be satisfied that such issuance will be in compliance with
applicable federal, state and other securities laws.

      (d) It shall be a condition to the obligation of the Corporation to issue
shares of Common Stock upon exercise of an Option, that the participant (or any
beneficiary or person entitled to act under subparagraph 5(d)(iii)(B) above) pay
to the Corporation, upon its demand, such amount as may be requested by the
Corporation for the purpose of satisfying any liability to withhold federal,
state, local or foreign income or other taxes. If the amount requested is not
paid, the Corporation may refuse to issue shares of Common Stock.

      (e) The expenses of the Plan shall be borne by the Corporation.

      (f) The Plan shall be unfunded. The Corporation shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the issuance of shares upon exercise of any Option under the
Plan and issuance of shares upon exercise of Options shall be subordinate to the
claims of the Corporation's general creditors.

      (g) By accepting any Option or other benefit under the Plan, each
participant and each person claiming under or through him or her shall be
conclusively deemed to have indicated his or her acceptance and ratification of,
and consent to, the Plan, the terms and conditions of any agreement embodying
awards of Options and any action taken under the Plan by the Corporation or the
Committee.

      (h) The appropriate officers of the Corporation shall cause to be filed
any reports, returns or other information regarding Options hereunder or any
shares of Common Stock issued pursuant hereto as may be required by Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended, or any other
applicable statute, rule or regulation.

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8. AMENDMENT OR DISCONTINUANCE. The Plan may be amended by the Committee at any
time and from time to time as the Committee shall deem advisable. No amendment
of the Plan shall materially and adversely affect any right of any participant
with respect to any Option theretofore granted without such participant's
written consent.

9. TERMINATION. The Plan shall terminate upon the earlier of the following dates
or events to occur: (a) upon the adoption of a resolution of the Board
terminating the Plan; or (b) [July 31, 2003]. No termination of the Plan shall
materially and adversely affect any of the rights or obligations of any person,
without his or her consent, under any Option theretofore granted under the Plan.

July 21, 1998

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