##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   Form 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended:
    
    Commission File Number:September 30, 2004
    
    333-84068
 (CRUM AND FORSTER HOLDINGS CORP LOGO) Crum & Forster Holdings Corp. (Exact Name of Registrant as Specified in its Charter)
 Delaware(State or Other Jurisdiction Of
Incorporation or Organization)
    
    6331(Primary Standard Industrial
Classification Code Number)
    
    04-3611900(I.R.S. Employer
Identification Number)
 Crum & Forster Holdings Corp.
305 Madison Avenue, Morristown, New Jersey 07962
(973) 490-6600(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices) 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 the
filing requirements for at least the past 90 days.
Yes [X]            No [  ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act).
Yes [  ]            No [X] Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date: Class
    
    Number of Shares Outstanding at
October 31, 2004Common Stock, $.01 Par Value
    
    100




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CRUM & FORSTER HOLDINGS CORP. Form 10-Q Index  
 Page NumberPART IFINANCIAL INFORMATIONITEM 1.
    FINANCIAL STATEMENTS (UNAUDITED)Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003
    
    
    3Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2004 and 2003
    
    
    4Consolidated Statements of Shareholders Equity for the Nine Months Ended September 30, 2004 and 2003
    
    
    5Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2004 and 2003
    
    
    6Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
    
    
    7Notes to Consolidated Financial Statements
    
    
    8ITEM 2.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    14ITEM 3.
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    24ITEM 4.
    CONTROLS AND PROCEDURES
    
    
    26PART IIOTHER INFORMATIONITEM 1.
    LEGAL PROCEEDINGS
    
    
    27ITEM 6.
    EXHIBITS
    
    
    27SIGNATURES
    
    
    28INDEX TO EXHIBITS
    
    
    29EX-10.31EX-31.1EX-31.2EX-32.1EX-32.2
   
 2




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##### Table of Contents



PART I
FINANCIAL INFORMATION 
 Item 1. Financial Statements 
 CRUM & FORSTER HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts) September 30,
    
    December 31,2004
    
    2003(Unaudited)ASSETSInvestments:Fixed income securities, at fair value (amortized cost of $2,126,199 and
$620,700 in 2004 and 2003, respectively)
    
    $
    2,089,825
    
    
    $
    636,979Equity securities, at fair value (cost of $410,842 and $273,457 in 2004 and
2003, respectively)
    
    
    434,562
    
    
    
    311,324Other invested assets
    
    
    221,583
    
    
    
    138,208Total investments
    
    
    2,745,970
    
    
    
    1,086,511Cash and cash equivalents
    
    
    334,619
    
    
    
    2,081,878Assets pledged for securities sold, not yet purchased
    
    
    278,852
    
    
    
    Premiums receivable
    
    
    254,149
    
    
    
    276,618Reinsurance recoverable
    
    
    1,536,288
    
    
    
    1,516,112Reinsurance recoverable from affiliates
    
    
    186,892
    
    
    
    164,354Prepaid reinsurance premiums
    
    
    37,004
    
    
    
    39,351Deferred income taxes
    
    
    192,654
    
    
    
    163,379Deferred policy acquisition costs
    
    
    75,033
    
    
    
    71,644Other assets
    
    
    185,270
    
    
    
    187,551Total assets
    
    $
    5,826,731
    
    
    $
    5,587,398LIABILITIESUnpaid losses and loss adjustment expenses
    
    $
    3,340,559
    
    
    $
    3,178,166Unearned premiums
    
    
    529,242
    
    
    
    522,210Deferred income on retroactive reinsurance
    
    
    178,000
    
    
    
    180,524Funds held under reinsurance contracts
    
    
    242,836
    
    
    
    225,632Accounts payable and other liabilities
    
    
    242,620
    
    
    
    283,494Securities sold, not yet purchased
    
    
    200,980
    
    
    
    Long-term debt
    
    
    291,695
    
    
    
    291,257Total liabilities
    
    
    5,025,932
    
    
    
    4,681,283SHAREHOLDERS EQUITYCommon stock, $0.01 par value; 1,000 shares authorized; 100 issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    740,993
    
    
    
    740,993Accumulated other comprehensive (loss) income, net of tax
    
    
    (9,788
    )
    
    
    43,496Retained earnings
    
    
    69,594
    
    
    
    121,626Total shareholders equity
    
    
    800,799
    
    
    
    906,115Total liabilities and shareholders equity
    
    $
    5,826,731
    
    
    $
    5,587,398
 The accompanying notes are an integral part of the consolidated financial statements. 3




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CRUM & FORSTER HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)REVENUESPremiums earned
    
    $
    212,037
    
    
    $
    204,305
    
    
    $
    665,339
    
    
    $
    549,267Investment income
    
    
    27,516
    
    
    
    13,902
    
    
    
    79,983
    
    
    
    53,804Realized
investment (losses) gains
    
    
    (1,953
    )
    
    
    13,913
    
    
    
    45,493
    
    
    
    231,960Total revenues
    
    
    237,600
    
    
    
    232,120
    
    
    
    790,815
    
    
    
    835,031EXPENSESLosses and loss adjustment expenses
    
    
    233,132
    
    
    
    138,536
    
    
    
    554,533
    
    
    
    385,408Policy acquisition costs
    
    
    31,204
    
    
    
    26,218
    
    
    
    93,082
    
    
    
    71,671Other underwriting expenses
    
    
    32,164
    
    
    
    33,765
    
    
    
    96,655
    
    
    
    94,688Interest expense
    
    
    9,060
    
    
    
    8,205
    
    
    
    25,786
    
    
    
    10,477Other expense, net
    
    
    1,554
    
    
    
    5,399
    
    
    
    7,120
    
    
    
    4,864Total expenses
    
    
    307,114
    
    
    
    212,123
    
    
    
    777,176
    
    
    
    567,108(Loss) income before income taxes
    
    
    (69,514
    )
    
    
    19,997
    
    
    
    13,639
    
    
    
    267,923Income tax (benefit) expense
    
    
    (24,737
    )
    
    
    6,143
    
    
    
    4,171
    
    
    
    92,843NET (LOSS) INCOME
    
    $
    (44,777
    )
    
    $
    13,854
    
    
    $
    9,468
    
    
    $
    175,080
 The accompanying notes are an integral part of the consolidated financial statements. 4




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CRUM & FORSTER HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands) Nine Months EndedSeptember 30,2004
    
    2003(Unaudited)COMMON STOCKBalance, beginning and end of period
    
    $
    
    
    
    $
    ADDITIONAL PAID-IN CAPITALBalance, beginning of period
    
    
    740,993
    
    
    
    748,735Capital contribution
    
    
    
    
    
    
    1,076Adjustment for acquisition of affiliates net assets
    
    
    
    
    
    
    (8,818
    )Balance, end of period
    
    
    740,993
    
    
    
    740,993ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXBalance, beginning of period
    
    
    43,496
    
    
    
    26,663Unrealized investment gains and losses, net of
transfers to realized investment gains and losses
    
    
    (53,692
    )
    
    
    11,690Foreign currency translation
    
    
    408
    
    
    
    2,862Balance, end of period
    
    
    (9,788
    )
    
    
    41,215RETAINED EARNINGSBalance, beginning of period
    
    
    121,626
    
    
    
    203,766Net income
    
    
    9,468
    
    
    
    175,080Dividends to shareholder
    
    
    (61,500
    )
    
    
    (217,885
    )Balance, end of period
    
    
    69,594
    
    
    
    160,961TOTAL SHAREHOLDERS EQUITY
    
    $
    800,799
    
    
    $
    943,169
 The accompanying notes are an integral part of the consolidated financial statements. 5




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CRUM & FORSTER HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003(Unaudited)NET (LOSS) INCOME
    
    $
    (44,777
    )
    
    $
    13,854
    
    
    $
    9,468
    
    
    $
    175,080Change in components of other comprehensive (loss) income for the
period, before tax:Unrealized investment gains and losses
    
    
    30,338
    
    
    
    (12,653
    )
    
    
    (82,603
    )
    
    
    17,756Foreign currency translation
    
    
    5,207
    
    
    
    2,470
    
    
    
    628
    
    
    
    4,403Other comprehensive (loss) income for the period, before tax
    
    
    35,545
    
    
    
    (10,183
    )
    
    
    (81,975
    )
    
    
    22,159Deferred income tax (expense) benefit for the period:Deferred income tax (expense) benefit from unrealized
investment gains and losses
    
    
    (10,618
    )
    
    
    4,577
    
    
    
    28,911
    
    
    
    (6,066
    )Deferred income tax (expense) benefit from foreign currency
translation
    
    
    (1,823
    )
    
    
    (864
    )
    
    
    (220
    )
    
    
    (1,541
    )Total deferred income tax (expense) benefit for the period
    
    
    (12,441
    )
    
    
    3,713
    
    
    
    28,691
    
    
    
    (7,607
    )Other comprehensive (loss) income for the period, net of tax
    
    
    23,104
    
    
    
    (6,470
    )
    
    
    (53,284
    )
    
    
    14,552COMPREHENSIVE (LOSS) INCOME
    
    $
    (21,673
    )
    
    $
    7,384
    
    
    $
    (43,816
    )
    
    $
    189,632
 The accompanying notes are an integral part of the consolidated financial statements 6




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CRUM & FORSTER HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) Nine Months EndedSeptember 30,2004
    
    2003(Unaudited)OPERATING ACTIVITIESNet income
    
    $
    9,468
    
    
    $
    175,080Adjustments to reconcile net income to net cash from operating activities:Net accretion of discount on fixed income securities
    
    
    (4,330
    )
    
    
    (18,556
    )Realized investment gains
    
    
    (45,493
    )
    
    
    (231,960
    )Equity in (earnings) losses of investees
    
    
    (15,388
    )
    
    
    862Depreciation and amortization
    
    
    3,695
    
    
    
    5,113Deferred income tax (benefit) expense
    
    
    (584
    )
    
    
    71,389Other non-cash net income adjustments
    
    
    18,719
    
    
    
    9,189Changes in:Premiums receivable
    
    
    16,844
    
    
    
    (46,663
    )Reinsurance recoverable
    
    
    (7,964
    )
    
    
    113,898Prepaid reinsurance premiums
    
    
    2,347
    
    
    
    12,815Deferred policy acquisition costs
    
    
    (3,389
    )
    
    
    (12,342
    )Other assets
    
    
    6,155
    
    
    
    16,189Unpaid losses and loss adjustment expenses
    
    
    162,393
    
    
    
    (141,932
    )Unearned premiums
    
    
    7,032
    
    
    
    86,592Funds held under reinsurance contracts
    
    
    (33,164
    )
    
    
    144Accounts payable and other liabilities
    
    
    1,227
    
    
    
    49,727Net cash from operating activities
    
    
    117,568
    
    
    
    89,545INVESTING ACTIVITIESPurchases of fixed income securities
    
    
    (3,028,598
    )
    
    
    (3,322,892
    )Proceeds from sales of fixed income securities
    
    
    1,281,799
    
    
    
    4,824,361Proceeds from maturities of fixed income securities
    
    
    171,650
    
    
    
    38,800Purchases of equity securities
    
    
    (154,672
    )
    
    
    (2,465
    )Proceeds from sales of equity securities
    
    
    31,114
    
    
    
    72,349Purchases of other invested assets
    
    
    (110,583
    )
    
    
    (27,388
    )Proceeds from sales of other invested assets
    
    
    11,560
    
    
    
    5,236Proceeds from securities sold, not yet purchased
    
    
    199,746
    
    
    
    Cash pledged for securities sold, not yet purchased
    
    
    (201,879
    )
    
    
    Purchases of fixed assets
    
    
    (2,490
    )
    
    
    (1,406
    )Net cash from investing activities
    
    
    (1,802,353
    )
    
    
    1,586,595FINANCING ACTIVITIESDividends to shareholder
    
    
    (61,500
    )
    
    
    (217,885
    )Deferred financing costs
    
    
    (974
    )
    
    
    (10,509
    )Issuance of long-term debt, net of discount
    
    
    
    
    
    
    290,955Interest escrow deposit
    
    
    
    
    
    
    (63,115
    )Capital contribution
    
    
    
    
    
    
    1,076Net cash from financing activities
    
    
    (62,474
    )
    
    
    522Net change in cash and cash equivalents
    
    
    (1,747,259
    )
    
    
    1,676,662Cash and cash equivalents, beginning of period
    
    
    2,081,878
    
    
    
    209,146Cash and cash equivalents, end of period
    
    $
    334,619
    
    
    $
    1,885,808SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    $
    15,842
    
    
    $
    Cash paid to parent for income taxes
    
    $
    63,296
    
    
    $
    22,473
 The accompanying notes are an integral part of the consolidated financial statements. 7




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  1.
    
    Organization and Basis of PresentationCrum & Forster Holdings Corp. (the Company or Crum & Forster) is a
Delaware holding company which is 100% owned by Fairfax Inc. (Fairfax),
a Wyoming holding company. Fairfax is wholly-owned by FFHL Group Ltd., a
Canadian holding company, which is owned by Fairfax Financial Holdings
Limited (Fairfax Financial), a Canadian financial services holding
company which is publicly traded on the Toronto Stock Exchange and on the
New York Stock Exchange under the symbol FFH. The Company, through its
subsidiaries, provides a full range of commercial property and casualty
insurance distributed through an independent producer force located across
the United States.Crum & Forster was established for the purpose of holding the capital
stock of Crum & Forster Holding Inc. (Holding), another wholly-owned
subsidiary of Fairfax, and had no operations prior to becoming the parent
of Holding. On June 5, 2003, a merger of entities under common control
occurred at historical cost, whereby the capital stock of Holding was
contributed to Crum & Forster and, accordingly, Crum & Forster became the
parent of Holding. The consolidated financial statements of Holding and
its subsidiaries have become the Companys historical financial
statements.These consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of
America (GAAP) and include the accounts of the Company, Holding and
their wholly-owned subsidiaries, including United States Fire Insurance
Company (US Fire), The North River Insurance Company (North River),
Crum & Forster Indemnity Company, Crum and Forster Insurance Company and
Crum & Forster Underwriters Co. of Ohio (CF Underwriters). Effective
July 1, 2004, CF Underwriters was merged into US Fire. US Fire owns 100%
of the stock of Crum & Forster Specialty Insurance Company. North River
owns 100% of the stock of Seneca Insurance Company, Inc. and its
subsidiaries.The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses and disclosure of
contingent assets and liabilities. Such estimates and assumptions may
differ from actual results. Certain financial information that is
normally included in annual financial statements, including certain
financial statement footnotes, prepared in accordance with GAAP, is not
required for interim reporting purposes and has been condensed or omitted
herein. These consolidated financial statements should be read in
conjunction with the Companys consolidated financial statements as of
December 31, 2003 and related notes thereto included in the Companys
Registration Statement on Form S-4 (Registration No. 333-107722), to which
Amendment No. 4 was filed with the Securities and Exchange Commission on
March 15, 2004.The interim financial data as of September 30, 2004 and for the three and
nine months ended September 30, 2004 and 2003 is unaudited. However, in
the opinion of management, the interim data includes all adjustments,
consisting of normal recurring accruals, necessary for a fair statement of
the Companys results for the interim periods. The results of operations
for the interim periods are not necessarily indicative of the results to
be expected for the full year. All significant intercompany amounts have
been eliminated.Certain amounts in the Companys prior year consolidated financial
statements have been reclassified to conform to the 2004 presentation.2.
    
    New Accounting PronouncementIn January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, (FIN
46) to address when it is appropriate to consolidate financial interests
in a variable interest entity (VIE), a new term to define a business
structure that either does not have equity investors with voting or other
similar rights or has equity investors that do not provide sufficient
financial resources to support its activities. For such entities, FIN 46
imposes a consolidation model that focuses on the relative exposures of
the participants to the economic risks or rewards associated with a VIEs
activities, including those conveyed by derivatives, credit enhancements
and other arrangements, where one party is the primary beneficiary and,
therefore, is required to consolidate the VIE. 8




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Dollars in thousands)  The consolidation requirements of FIN 46 began to be phased-in during the
first quarter of 2003, with immediate application to all new VIEs created
after January 31, 2003. In December 2003, the FASB issued a revision to
FIN 46 which, among other things, delayed the required implementation for
VIEs existing prior to February 1, 2003 and held by public companies to
the first interim period ending after March 15, 2004. The adoption of FIN
46 had no impact on the Companys consolidated financial statements.3.
    
    Unpaid Losses and Loss Adjustment ExpensesChanges in the Companys liability for unpaid losses and loss adjustment
expenses (LAE) are summarized as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Gross unpaid losses and LAE, beginning of
period
    
    $
    3,192,419
    
    
    $
    3,137,886
    
    
    $
    3,178,166
    
    
    $
    3,235,101Less ceded unpaid losses and LAE
    
    
    1,300,841
    
    
    
    1,672,440
    
    
    
    1,321,004
    
    
    
    1,756,404Net unpaid losses and LAE, beginning of period
    
    
    1,891,578
    
    
    
    1,465,446
    
    
    
    1,857,162
    
    
    
    1,478,697Losses and LAE incurred related to:Current period
    
    
    251,569
    
    
    
    138,529
    
    
    
    568,053
    
    
    
    385,524Prior years
    
    
    (18,437
    )
    
    
    7
    
    
    
    (13,520
    )
    
    
    (116
    )Total losses and LAE incurred
    
    
    233,132
    
    
    
    138,536
    
    
    
    554,533
    
    
    
    385,408Losses and LAE paid related to:Current period
    
    
    41,115
    
    
    
    27,352
    
    
    
    76,237
    
    
    
    57,863Prior years
    
    
    99,731
    
    
    
    122,736
    
    
    
    351,594
    
    
    
    352,348Total losses and LAE paid
    
    
    140,846
    
    
    
    150,088
    
    
    
    427,831
    
    
    
    410,211Net unpaid losses and LAE, end of period
    
    
    1,983,864
    
    
    
    1,453,894
    
    
    
    1,983,864
    
    
    
    1,453,894Add ceded unpaid losses and LAE
    
    
    1,356,695
    
    
    
    1,639,275
    
    
    
    1,356,695
    
    
    
    1,639,275Gross unpaid losses and LAE, end of period
    
    $
    3,340,559
    
    
    $
    3,093,169
    
    
    $
    3,340,559
    
    
    $
    3,093,169
  During the third quarter of 2004, the Company incurred losses and LAE of
approximately $89,700 (excluding reinsurance reinstatement premiums of
approximately $10,300) principally associated with hurricanes Charley,
Frances, Ivan and Jeanne.4.
    
    Asbestos and Environmental Unpaid Losses and Loss Adjustment ExpensesThe Company has exposure to asbestos and environmental claims arising from
the sale of general liability, commercial multi-peril and umbrella
insurance policies, the majority of which were written for accident years
1985 and prior.Estimation of ultimate liabilities for these exposures is unusually
difficult due to outstanding issues such as whether or not coverage
exists, definition of an occurrence, determination of ultimate damages and
allocation of such damages to financially responsible parties. 9




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Dollars in thousands)  Changes in the Companys liability for asbestos and environmental
exposures are summarized as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003AsbestosGross unpaid losses and allocated LAE (ALAE),
beginning of period
    
    $
    451,473
    
    
    $
    327,219
    
    
    $
    495,195
    
    
    $
    370,875Less ceded unpaid losses and ALAE
    
    
    114,702
    
    
    
    88,636
    
    
    
    128,787
    
    
    
    106,073Net unpaid losses and ALAE, beginning of period
    
    
    336,771
    
    
    
    238,583
    
    
    
    366,408
    
    
    
    264,802Net losses and ALAE incurred
    
    
    
    
    
    
    715
    
    
    
    517
    
    
    
    2,638Net paid losses and ALAE
    
    
    9,788
    
    
    
    11,033
    
    
    
    39,942
    
    
    
    39,175Net unpaid losses and ALAE, end of period
    
    
    326,983
    
    
    
    228,265
    
    
    
    326,983
    
    
    
    228,265Add ceded unpaid losses and ALAE
    
    
    114,260
    
    
    
    86,838
    
    
    
    114,260
    
    
    
    86,838Gross unpaid losses and ALAE, end of period
    
    $
    441,243
    
    
    $
    315,103
    
    
    $
    441,243
    
    
    $
    315,103
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003EnvironmentalGross unpaid losses and ALAE, beginning of period
    
    $
    121,070
    
    
    $
    161,464
    
    
    $
    130,511
    
    
    $
    163,165Less ceded unpaid losses and ALAE
    
    
    39,421
    
    
    
    59,754
    
    
    
    31,675
    
    
    
    57,373Net unpaid losses and ALAE, beginning of period
    
    
    81,649
    
    
    
    101,710
    
    
    
    98,836
    
    
    
    105,792Net losses and ALAE incurred
    
    
    
    
    
    
    4
    
    
    
    7
    
    
    
    5Net paid losses and ALAE
    
    
    2,324
    
    
    
    3,676
    
    
    
    19,518
    
    
    
    7,759Net unpaid losses and ALAE, end of period
    
    
    79,325
    
    
    
    98,038
    
    
    
    79,325
    
    
    
    98,038Add ceded unpaid losses and ALAE
    
    
    39,628
    
    
    
    59,266
    
    
    
    39,628
    
    
    
    59,266Gross unpaid losses and ALAE, end of period
    
    $
    118,953
    
    
    $
    157,304
    
    
    $
    118,953
    
    
    $
    157,304
  The Company also maintains reserves for other latent exposures such as
those associated with silica, lead, chemicals, sick building syndrome,
mold and gas and vapors of $23,144 and $26,701, net of reinsurance, as of
September 30, 2004 and December 31, 2003, respectively.5.
    
    ReinsuranceThe components of the Companys net premiums written and premiums
earned are summarized as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Premiums written:Direct
    
    $
    295,489
    
    
    $
    303,259
    
    
    $
    832,557
    
    
    $
    801,658Assumed from other companies, pools or
associations
    
    
    3,929
    
    
    
    5,338
    
    
    
    10,832
    
    
    
    13,047Ceded to other companies, pools or associations
    
    
    (68,185
    )
    
    
    (53,892
    )
    
    
    (168,671
    )
    
    
    (166,033
    )Net premiums written
    
    $
    231,233
    
    
    $
    254,705
    
    
    $
    674,718
    
    
    $
    648,672
 10




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Dollars in thousands) Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Premiums earned:Direct
    
    $
    278,782
    
    
    $
    256,692
    
    
    $
    825,717
    
    
    $
    714,097Assumed from other companies, pools or
associations
    
    
    3,190
    
    
    
    5,236
    
    
    
    10,640
    
    
    
    13,653Ceded to other companies, pools or associations
    
    
    (69,935
    )
    
    
    (57,623
    )
    
    
    (171,018
    )
    
    
    (178,483
    )Premiums earned
    
    $
    212,037
    
    
    $
    204,305
    
    
    $
    665,339
    
    
    $
    549,267
 The components of the Companys total reinsurance recoverable are
summarized as follows: September 30,
    
    December 31,2004
    
    2003Reinsurance recoverable on unpaid losses and LAE
    
    $
    1,671,550
    
    
    $
    1,614,022Reinsurance receivable on paid losses and LAE
    
    
    51,630
    
    
    
    66,444Total reinsurance recoverable
    
    $
    1,723,180
    
    
    $
    1,680,466
  6.
    
    Long-Term DebtOn June 5, 2003, concurrent with the merger of entities under common
control described in Note 1 above, Crum & Forster Funding Corp., an
unaffiliated special purpose entity, issued $300,000 aggregate principal
amount of senior notes (the Notes) in a private placement, with the sole
intent of having obligations under such Notes only until the Company could
assume such obligations. On June 30, 2003, the Company assumed Crum &
Forster Funding Corp.s obligations under the Notes. The Notes, which
bear interest payable semi-annually at 10.375%, mature on June 15, 2013.
The net proceeds from the offering of approximately $290,955 were used to
fund an interest escrow account in the amount of approximately $63,115 to
make the first four semi-annual interest payments on the Notes and to pay
a dividend to Fairfax in the amount of $217,885, with the remainder used
to pay related financing costs. The Notes contain certain restrictions on
incurrence of additional indebtedness, dividend payments to Fairfax, asset
sales and certain transactions with affiliates. In addition, the Company
was required by the terms of the Notes to use its best efforts to register
the Notes, or similar instruments with substantially the same terms to be
exchanged for the Notes, with the Securities and Exchange Commission.
Pursuant to an exchange offer, which was completed on April 20, 2004, the
Company issued $300,000 aggregate principal amount of registered notes
with substantially the same terms as the Notes, in exchange for all of the
outstanding Notes. As required by the terms of the Notes, additional
interest of $279 was incurred for the period from December 28, 2003
through April 19, 2004, after which such additional interest was no longer
payable on the Notes.For the nine months ended September 30, 2004, total interest expense on
the Notes was $24,942, including additional interest described above,
accretion of the discount on the Notes and amortization of related
deferred financing costs.Concurrent with the issuance of the Notes, the Company entered into a
non-interest bearing standby credit agreement, subordinate to the Notes,
whereby Fairfax Financial agreed, under certain conditions, to lend up to
$40,000 to Crum & Forster in order to meet certain corporate obligations.
Borrowings under this agreement, if any, are due in June 2018. Through
September 30, 2004, there have been no borrowings under this agreement. 11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Dollars in thousands)  7.
    
    InvestmentsIn July 2004, as an economic hedge against a decline in the equity
markets, the Company executed a short sale of approximately $200,000 of
Standard & Poors Depositary Receipts (SPDRs). Simultaneously, the
Company purchased two-year S&P Index call options
(Options) limiting the
potential loss on the future purchase of the SPDRs to $40,000. The cost
of the Options was $6,000. Both the obligation to purchase the SPDRs and
the Options are carried at fair value in the consolidated financial
statements. The fair value of the obligation to purchase the SPDRs is
included in securities sold, not yet purchased and the fair value of the
Options is included in other invested assets in the consolidated balance
sheet. As of September 30, 2004, the net change in the fair values of the
SPDRs and the Options totaled a loss of $2,733 and was included in
realized investment (losses) gains on the consolidated statement of
operations. The Company also incurs interest expense in an amount equal
to the dividend earnings on the SPDRs sold. Interest expense of $844 was
recorded for the three months ended September 30, 2004.The Company pledged approximately $278,000 in cash and United States
Treasury securities as collateral for the obligation to purchase the
SPDRs. These assets are recorded in assets pledged for securities sold,
not yet purchased on the consolidated balance sheet.In April 2004, the Company invested $30,000 in shares of HWIC Asia Fund
(HWIC), bringing the total investment in HWIC to $76,210. HWIC is an
investment fund owned 100% by Fairfax Financial affiliates that invests in
a diversified portfolio of listed equity and equity-related securities in
Asia.8.
    
    Commitments and ContingenciesThe Companys subsidiaries are involved in various lawsuits and
arbitration proceedings arising in the ordinary course of business. While
the ultimate outcome of such matters cannot be predicted with certainty,
in the opinion of management, no such matter is likely to have a material
adverse effect on the Companys consolidated financial position. However,
it should be noted that the frequency of large damage awards, including
large punitive damage awards that bear little or no relation to actual
economic damages incurred by plaintiffs in some jurisdictions, continues
to create the potential for an unpredictable judgment in any given matter.9.
    
    Segment ReportingThe Company operates in the commercial property and casualty insurance
business. Premiums earned for the Companys lines of business are
summarized as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Workers compensation
    
    $
    67,990
    
    
    $
    60,172
    
    
    $
    202,940
    
    
    $
    147,635General liability
    
    
    46,940
    
    
    
    41,256
    
    
    
    147,220
    
    
    
    115,999Property
    
    
    38,059
    
    
    
    56,075
    
    
    
    139,767
    
    
    
    154,503Commercial automobile
    
    
    42,508
    
    
    
    33,766
    
    
    
    127,860
    
    
    
    93,365Commercial multi-peril
    
    
    11,116
    
    
    
    8,093
    
    
    
    31,669
    
    
    
    24,525Surety
    
    
    5,424
    
    
    
    4,943
    
    
    
    15,883
    
    
    
    13,240Total
    
    $
    212,037
    
    
    $
    204,305
    
    
    $
    665,339
    
    
    $
    549,267
 12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS   (Continued)
(Dollars in thousands) The losses and LAE and loss and LAE ratios of the Companys lines of
business are summarized as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    Ratio
    
    Amount
    
    RatioWorkers compensation
    
    $
    63,529
    
    
    
    93.4
    %
    
    $
    48,762
    
    
    
    81.0
    %
    
    $
    174,350
    
    
    
    85.9
    %
    
    $
    117,659
    
    
    
    79.7
    %General liability
    
    
    48,787
    
    
    
    103.9
    %
    
    
    28,335
    
    
    
    68.7
    %
    
    
    119,794
    
    
    
    81.4
    %
    
    
    79,329
    
    
    
    68.4
    %Property
    
    
    89,725
    
    
    
    235.8
    %
    
    
    31,733
    
    
    
    56.6
    %
    
    
    151,910
    
    
    
    108.7
    %
    
    
    105,205
    
    
    
    68.1
    %Commercial automobile
    
    
    24,170
    
    
    
    56.9
    %
    
    
    24,346
    
    
    
    72.1
    %
    
    
    88,006
    
    
    
    68.8
    %
    
    
    67,311
    
    
    
    72.1
    %Commercial multi-peril
    
    
    3,227
    
    
    
    29.0
    %
    
    
    3,858
    
    
    
    47.7
    %
    
    
    13,611
    
    
    
    43.0
    %
    
    
    12,488
    
    
    
    50.9
    %Surety
    
    
    3,694
    
    
    
    68.1
    %
    
    
    1,502
    
    
    
    30.4
    %
    
    
    6,862
    
    
    
    43.2
    %
    
    
    3,416
    
    
    
    25.8
    %Total
    
    $
    233,132
    
    
    
    109.9
    %
    
    $
    138,536
    
    
    
    67.8
    %
    
    $
    554,533
    
    
    
    83.3
    %
    
    $
    385,408
    
    
    
    70.2
    %
 In the three months ended September 30, 2004, the Company incurred losses
and LAE of approximately $89,700 (excluding reinsurance reinstatement
premiums of approximately $10,300) principally associated with hurricanes
Charley, Frances, Ivan and Jeanne. Such losses primarily affected the
property line of business. In addition, in the normal course of periodic
re-estimation of loss and LAE reserves, the Company reallocated its reserves among lines of business and prior accident years which
adversely affected the 2004 calendar year loss and LAE ratios of the
workers compensation, general liability and surety lines of business and
favorably affected the other lines of business. The Company does not allocate investment results or certain corporate
expenses for the purpose of evaluating the financial performance of each
line of business. 13




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations The following discussion relates to the consolidated results of operations,
financial condition, liquidity and capital resources and critical accounting
policies and estimates of the Company for the interim periods indicated.
References within this discussion to the Company or Crum & Forster refer to
Crum & Forster Holdings Corp. and its direct and indirect subsidiaries,
including United States Fire Insurance Company (US Fire), The North River
Insurance Company (North River), Crum & Forster Indemnity Company (CF
Indemnity), Crum and Forster Insurance Company (CF Insurance) and Crum &
Forster Underwriters Co. of Ohio (CF Underwriters). Effective July 1, 2004,
CF Underwriters was merged into US Fire. US Fire owns 100% of the stock of
Crum & Forster Specialty Insurance Company. North River owns 100% of the stock
of Seneca Insurance Company, Inc. and its subsidiaries. References to
Fairfax refer to Fairfax Inc., Crum & Forsters parent company. References
to Fairfax Financial refer to Fairfax Financial Holdings Limited, which holds
a 100% indirect interest in Fairfax Inc. Certain financial information that is normally included in annual financial
statements, including certain financial statement footnotes, prepared in
accordance with GAAP, is not required for interim reporting purposes and has
been condensed or omitted herein. This discussion, and the related
consolidated financial statements, should be read in conjunction with the
Companys consolidated financial statements as of December 31, 2003 and related
notes thereto included in the Companys Registration Statement on Form S-4
(Registration No. 333-107722), to which Amendment No. 4 was filed with the
Securities and Exchange Commission on March 15, 2004. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the full year. All dollar amounts are in thousands, unless otherwise indicated. Forward-looking Statements This report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act
of 1934 and the Private Securities Litigation Reform Act of 1995. These are
statements that relate to future periods and include statements regarding the
Companys anticipated performance. In addition, the outcome of pending motions
or appeals, if any, related to litigation discussed herein is unknown. Generally, the words, anticipates, believes, expects, intends,
estimates, projects, plans, target, potential, likely, may,
could, should and similar expressions identify forward-looking statements.
These forward-looking statements involve known and unknown risks, uncertainties
and other important factors that could cause the Companys actual results,
performance or achievements, or industry results, to differ materially from any
future results, performance or achievements expressed or implied by these
forward-looking statements. These risks, uncertainties and other important
factors include, but are not limited to, the following:  
    
    Lowering or loss of one of the Companys financial strength ratings;  
    
    Insufficient loss reserves, including reserves for asbestos, environmental and other latent claims;  
    
    Occurrence of natural or unnatural catastrophic events;  
    
    Competitive conditions in the insurance market;  
    
    Exposure to emerging claims and coverage issues;  
    
    Loss of key producers;  
    
    Inability to realize the Companys investment objectives;  
    
    Inability of certain of the Companys insurance subsidiaries to pay dividends;  
    
    Inability to obtain reinsurance coverage on reasonable terms and prices;  
    
    Exposure to credit risk, in the event reinsurers or insureds that
owe the Company premiums or reimbursement of deductibles paid by the
Company on their behalf fail to pay;  
    
    Adverse developments in the prospects or results of operations of Fairfax or its affiliates;  
    
    Loss of key employees;  
    
    Changes in governmental regulations;  
    
    Exposure to credit risks on novated policies; and  
    
    Limited ability to borrow. 14




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##### Table of Contents



Additional information regarding these factors, and others that could cause
actual results to differ materially from expectations, is included in the
Companys Registration Statement on Form S-4 (Registration No. 333-107722), to
which Amendment No. 4 was filed with the SEC on March 15, 2004. The
information appearing under Risk factors in such Registration Statement is
incorporated by reference into, and made a part of, Part II of this Form 10-Q.
Any forward-looking statements made in this quarterly report are made by the
Company as of the date of this quarterly report. Except as otherwise required
by federal securities laws, the Company undertakes no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. Critical Accounting Policies and Estimates The Companys financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America. These
principles require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of material
contingent assets and liabilities as of the balance sheet dates and the
revenues and expenses reported during the relevant periods. In general,
managements estimates are based on historical experience, evaluation of
current trends, information from third party professionals and various other
assumptions that are believed to be reasonable under the known facts and
circumstances. The accounting policies and estimates summarized below are those that require
Crum & Forster to make assumptions about highly uncertain matters. If
management were to make different assumptions about those matters, or if actual
results were to differ significantly from those estimates, the reported
consolidated results of operations and financial condition could be materially
affected. The Companys significant accounting policies are described in full detail in
Note 2 to the Companys consolidated financial statements as of December 31,
2003 included in its Registration Statement on Form S-4 (Registration No.
333-107722), to which Amendment No. 4 was filed with the SEC on March 15, 2004. Unpaid Losses and Loss Adjustment Expenses Unpaid losses and loss adjustment expenses (LAE) include reserves for unpaid
reported losses and for losses incurred but not reported (IBNR). For
reported losses, the Company establishes case reserves within the parameters of
coverage provided in the insurance policy, which represent the estimated
ultimate cost of events or conditions that have been reported to, or
specifically identified by the Company. The estimates reflect the judgment of
claims personnel based on general reserving practices, the experience and
knowledge of such personnel regarding the nature of the specific claim and,
where appropriate, advice of counsel, with the goal of setting the reserve at
the ultimate expected loss amount as soon as information becomes available.
For IBNR losses, reserves are estimated using established actuarial methods. Because much of the coverage the Company offers involves claims that may not
ultimately be settled for many years after they are incurred, subjective
judgments as to the ultimate exposure to losses are an integral and necessary
component of the loss reserving process. For certain catastrophic events,
there is considerable uncertainty underlying the assumptions and associated
estimated reserves for losses and LAE. The Companys reserves are continually
reviewed using a variety of statistical and actuarial techniques to analyze
current claim costs, frequency and severity data and prevailing economic,
social and legal factors. Other variables such as past loss experience,
changes in legislative conditions, changes in judicial interpretation of legal
liability and policy coverage, changes in claims handling practices and
inflation are also taken into consideration. Reserves are also established to
provide for the estimated expense of settling claims, including legal and other
fees, and the general expenses of administering the claims adjustment process. Reserves for asbestos and environmental exposures cannot be estimated solely
with the traditional loss reserving techniques, which rely on historical
accident year development factors and take into consideration the previously
mentioned variables. Asbestos and environmental reserves are more difficult to
estimate than other loss reserves because of legal issues, societal factors and
difficulty in determining the parties who may ultimately be held liable.
Therefore, in addition to taking into consideration the traditional variables
that are utilized to arrive at other loss reserve amounts, Crum & Forster also
looks at past and anticipated future asbestos claim filings against each
insured, past settlement values of similar asbestos claims, an analysis of each
insureds potential liability, the jurisdictions involved, the potential role
of other insurance, the length of time necessary to clean up polluted sites,
controversies surrounding the identity of the responsible party, the degree of
remediation deemed to be necessary, the estimated time period for litigation
expenses, judicial expansions of coverage, case law and the history of prior
claim development. Generally, case reserves are established when sufficient
information has been obtained to indicate coverage under a specific insurance
policy. End of period reserves in relation to paid losses in a period are also
considered. Furthermore, IBNR reserves are established to cover additional
estimated exposures on both known and unasserted claims. The reserves are
continually reviewed and updated as additional information is obtained. 15




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##### Table of Contents



In recent years, the Company has continued to see the emergence of asbestos
trends noted above, including an increased number of claimants filing asbestos
claims against its insureds, an increased value of claims against viable
asbestos defendants as co-defendants seek bankruptcy protection and an
increased number of insureds asserting that their asbestos claims are not
subject to aggregate limits and that each individual bodily injury claim should
be treated as a separate occurrence. Management is currently studying these
trends and has engaged an independent actuary to conduct a ground-up review of
the Companys asbestos reserves, which is expected to be completed during the
fourth quarter of 2004. Due to the inherent uncertainties described above and
to the potential impact of recent trends, the Companys ultimate liability for
asbestos claims may vary substantially from the amount currently reserved. Other Than Temporary Declines in Value of Investments Declines in the market values of invested assets below carrying value are
evaluated for other than temporary impairment on a quarterly basis.
Recognition of impairment losses for declines in the value of fixed income
investments and equity securities attributable to issuer-specific events is
based upon all relevant facts and circumstances for each investment. For fixed
income investments with unrealized losses due to market conditions or
industry-related events, management considers the Companys intent and ability
to hold the investments for a period of time to allow a market recovery, or to
maturity, in the process of evaluating whether securities with unrealized
losses have suffered an other than temporary decline. Significant assumptions
and management judgment are involved in determining if the decline is other
than temporary. See Liquidity and Capital ResourcesInsurance Operating
Subsidiaries below for further discussion of investments in an unrealized loss
position. Reinsurance Recoverable Amounts recoverable from reinsurers are initially estimated in conjunction with
the establishment of reserves for unpaid losses and LAE. These amounts may be
adjusted as actual case reserves are recorded and reinsured claims are settled.
The ceding of risk to reinsurers does not relieve an operating company of its
primary obligation to policyholders as the direct insurer. Accordingly, the
Company is exposed to the risk that any reinsurer may be unable, or unwilling,
to meet its obligations assumed under reinsurance agreements. The Company
attempts to mitigate this risk by entering into reinsurance arrangements only
with reinsurers that have credit ratings and statutory surplus above certain
levels and by obtaining collateral. An estimated allowance for uncollectible reinsurance recoverable is recorded on
the basis of periodic evaluation of balances due from reinsurers, judgments
regarding reinsurer solvency, known disputes, reporting characteristics of the
underlying reinsured business, historical experience, current economic
conditions and the state of insurer/reinsurer relations in general,
and at Crum & Forsters insurance operating companies in particular. Overview The Company is a national commercial property and casualty insurance company
with a focused underwriting strategy, targeting specialty classes of business
and overlooked market opportunities. Operating through its home office and
regional branch network, the Company writes a broad range of commercial
coverage, including workers compensation, general liability, property,
commercial automobile, commercial multi-peril and surety. The Company
generally conducts business on a brokerage basis through approximately 1,000
producers located throughout the United States. The Companys two largest
producers accounted for approximately 14% and 6% of gross premiums written for
the nine months ended September 30, 2004. The Companys objective is to expand opportunistically into classes of business
or market segments that are consistent with its underwriting expertise and have
the potential to generate an underwriting profit. Management believes the
Companys ability to identify and react to changing market conditions provides
it with a competitive advantage. Based on the experience and underwriting
expertise of management, the Company seeks to write new lines of business and
expand existing classes of business based on market conditions and expected
profitability. The Company offers insurance products designed to meet specific
insurance needs of targeted insured groups, underwriting specific types of
coverage for markets that are generally underserved by the industry, while
focusing on markets within its areas of underwriting expertise. 16




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##### Table of Contents



The profitability of property and casualty insurance companies is primarily
determined by its underwriting results and investment performance. Underwriting
results are the net result of a companys premiums earned and amounts paid, or
expected to be paid, to settle insured claims and other general and
administrative expenses. The insurance business is unique in that premiums
charged for insurance coverage are set without certainty of the ultimate claim
costs to be incurred on a given policy. This requires that liabilities be
estimated and recorded in recognition of future loss and settlement
obligations. Due to the inherent uncertainty in estimating these liabilities,
there can be no assurance that actual liabilities will not exceed recorded
amounts or premiums received. The ultimate 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. Insurance premium
prices are also influenced by available insurance capacity or the industrys
willingness to deploy capital to cover each insurable risk. Premiums collected are invested until funds are required to pay settled claims.
Insurance company investment portfolios generally must provide a balance
between total return, capital preservation and liquidity in order to have
adequate funds available for payment of claims as they are settled. The
Company follows a long-term, value-oriented investment philosophy, with the goal
of optimizing investment returns viewed on a total return basis, without
reaching for yield, while maintaining a sensitivity to liquidity requirements.
The Company intends to protect its capital from loss and invest in debt and
equity securities that it believes are selling at prices below their intrinsic
value. Management
measures the results of operations by monitoring certain indicators of
growth and profitability. Growth is generally measured in terms of gross
premiums written. Management further reviews growth in its gross premiums
written in terms of its rate of retention of existing insureds, increases or
decreases in the pricing of renewed policies and the growth in new business
premiums. Underwriting profitability is measured both in dollars and by the combined
ratio, a standard industry measure. Underwriting profit or loss equals premiums
earned less losses and LAE, policy acquisition costs and other underwriting
expenses, and excludes investment results, interest expense and other income or
expense. The combined ratio expresses underwriting results as a percentage of
premiums earned and generally comprises two components: the loss ratio which is
the percentage of losses and LAE to premiums earned and the expense ratio which
is the percentage of the sum of policy acquisition costs and other underwriting
expenses to premiums earned. A combined ratio less than 100% indicates an
underwriting profit; a combined ratio greater than 100% indicates an
underwriting loss. The property and casualty insurance business is cyclical and influenced by many
factors, including price competition, economic conditions, natural and man-made
disasters (for example, hurricanes, earthquakes and terrorism), interest rates,
state regulations, court decisions and changes in the law. Market
competition has intensified throughout 2004, particularly in the third quarter. Renewal pricing in
the casualty lines increased by approximately 8% through June 30, 2004 but
declined by approximately 1% in the third quarter of 2004, resulting in an
overall renewal price increase of approximately 4% for the nine months ended
September 30, 2004. Renewal pricing in the property lines declined by
approximately 6% through September 30, 2004. Management continues to believe
that rates remain adequate relative to the risks assumed in both the casualty
and property lines of business. Management is committed to maintaining rate
adequacy even at the expense of premium growth. The Companys renewal
retention rate has improved overall to approximately 66% in the first nine
months of 2004 from approximately 61% in the first nine months of 2003. The
casualty renewal retention rate increased by approximately 10 percentage points
in the third quarter of 2004, following a decline of approximately
five percentage
points through June 30, 2004, while the 2004 renewal retention rate in the
property line of business has consistently exceeded the 2003 rate by 10 or more
points. New business for the nine months ended September 30, 2004 was
approximately 18% lower than the prior year, principally in the
property lines,
due to more competitive market conditions, including expanded availability of
coverage from higher rated companies. 17




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##### Table of Contents



Results of Operations The components of the Companys net income, and certain ratios based thereon,
are summarized as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Gross premiums written
    
    $
    299,418
    
    
    $
    308,597
    
    
    $
    843,389
    
    
    $
    814,705Net premiums written
    
    $
    231,233
    
    
    $
    254,705
    
    
    $
    674,718
    
    
    $
    648,672Premiums earned
    
    $
    212,037
    
    
    $
    204,305
    
    
    $
    665,339
    
    
    $
    549,267Investment income
    
    
    27,516
    
    
    
    13,902
    
    
    
    79,983
    
    
    
    53,804Realized investment (losses) gains
    
    
    (1,953
    )
    
    
    13,913
    
    
    
    45,493
    
    
    
    231,960Total revenues
    
    
    237,600
    
    
    
    232,120
    
    
    
    790,815
    
    
    
    835,031Losses and loss adjustment expenses
    
    
    233,132
    
    
    
    138,536
    
    
    
    554,533
    
    
    
    385,408Policy acquisition costs
    
    
    31,204
    
    
    
    26,218
    
    
    
    93,082
    
    
    
    71,671Other underwriting expenses
    
    
    32,164
    
    
    
    33,765
    
    
    
    96,655
    
    
    
    94,688Interest expense
    
    
    9,060
    
    
    
    8,205
    
    
    
    25,786
    
    
    
    10,477Other expense, net
    
    
    1,554
    
    
    
    5,399
    
    
    
    7,120
    
    
    
    4,864Total expenses
    
    
    307,114
    
    
    
    212,123
    
    
    
    777,176
    
    
    
    567,108(Loss) income before income taxes
    
    
    (69,514
    )
    
    
    19,997
    
    
    
    13,639
    
    
    
    267,923Income tax (benefit) expense
    
    
    (24,737
    )
    
    
    6,143
    
    
    
    4,171
    
    
    
    92,843Net (loss) income
    
    $
    (44,777
    )
    
    $
    13,854
    
    
    $
    9,468
    
    
    $
    175,080Loss and LAE ratio
    
    
    109.9
    %
    
    
    67.8
    %
    
    
    83.3
    %
    
    
    70.2
    %Underwriting expense ratio
    
    
    29.9
    
    
    
    29.4
    
    
    
    28.5
    
    
    
    30.3Combined ratio
    
    
    139.8
    %
    
    
    97.2
    %
    
    
    111.8
    %
    
    
    100.5
    %
 Net loss for the three months ended September 30, 2004 was $44,777 and net
income for the nine months ended September 30, 2004 was $9,468, compared with
net income of $13,854 and $175,080, for the three and nine months ended
September 30, 2003, respectively.
The lower net income was principally the net result of lower underwriting
results, lower realized investment gains and higher interest expense, partially
offset by increased investment income for the three and nine months ended
September 30, 2004, as compared to the same periods in 2003. During the third
quarter of 2004, underwriting results were adversely affected by net
catastrophe losses of approximately $100,000, principally associated with
hurricanes Charley, Frances, Ivan and Jeanne. The 2003 realized investment
gains reflect the significant rally in the fixed income markets in the spring
of 2003. Higher interest expense in 2004 arose primarily from the issuance of
$300,000 aggregate principal amount of 10.375% senior notes (the Notes)
effective June 5, 2003. Investment income for the three and nine months ended
September 30, 2004 increased due to the combined effects of reinvestment of
cash balances into longer duration fixed income securities in 2004 as compared
to 2003 and higher earnings from an equity method investee that was not
purchased until the second quarter of 2003. The increase in the combined ratio
principally reflects the adverse effect of catastrophe losses in the third
quarter of 2004, which added 46.8 and 15.0 points to the combined ratio for the
three and nine months ended September 30, 2004, respectively. 18




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##### Table of Contents



Underwriting Results Gross Premiums Written The Companys gross premiums written by line of business are summarized as
follows:  Three Months Ended September 30,2004
    
    2003
    
    Increase/(Decrease)
    
    PercentChangeWorkers compensation
    
    $
    89,974
    
    
    $
    96,004
    
    
    $
    (6,030
    )
    
    
    (6.3
    )%General liability
    
    
    61,935
    
    
    
    67,776
    
    
    
    (5,841
    )
    
    
    (8.6
    )%Property
    
    
    80,813
    
    
    
    86,601
    
    
    
    (5,788
    )
    
    
    (6.7
    )%Commercial automobile
    
    
    44,709
    
    
    
    39,705
    
    
    
    5,004
    
    
    
    12.6
    %Commercial multi-peril
    
    
    13,861
    
    
    
    10,863
    
    
    
    2,998
    
    
    
    27.6
    %Surety
    
    
    8,126
    
    
    
    7,648
    
    
    
    478
    
    
    
    6.3
    %Total
    
    $
    299,418
    
    
    $
    308,597
    
    
    $
    (9,179
    )
    
    
    (3.0
    )%Nine Months Ended September 30,2004
    
    2003
    
    Increase/(Decrease)
    
    PercentChangeWorkers compensation
    
    $
    226,578
    
    
    $
    210,219
    
    
    $
    16,359
    
    
    
    7.8
    %General liability
    
    
    191,708
    
    
    
    190,130
    
    
    
    1,578
    
    
    
    0.8
    %Property
    
    
    217,970
    
    
    
    236,930
    
    
    
    (18,960
    )
    
    
    (8.0
    )%Commercial automobile
    
    
    144,475
    
    
    
    123,144
    
    
    
    21,331
    
    
    
    17.3
    %Commercial multi-peril
    
    
    38,752
    
    
    
    31,605
    
    
    
    7,147
    
    
    
    22.6
    %Surety
    
    
    23,906
    
    
    
    22,677
    
    
    
    1,229
    
    
    
    5.4
    %Total
    
    $
    843,389
    
    
    $
    814,705
    
    
    $
    28,684
    
    
    
    3.5
    %
 For the three months ended September 30, 2004, gross premiums written decreased
as compared to the three months ended September 30, 2003,
the first year over year quarterly decline
since March 2002. This decline was primarily due to a reduction in new business of approximately 29% and a price decrease on renewal policies of
approximately 3%, partially offset by an increase in the renewal retention rate
of approximately 10 percentage points. For the nine months ended September 30, 2004, gross
premiums written increased over the nine months ended September 30, 2004
primarily due to an increase in the renewal retention rate of approximately
five percentage points and an increase in pricing on renewal policies of
approximately 1%, partially offset by a decrease in new business of
approximately 18%. New business declined for both the three and nine months
ended September 30, 2004 as the market has softened and competition for new
business, particularly from higher rated companies, has intensified. Renewal
retention rates increased for both the three and nine months ended September
30, 2004, despite the softening market, as a result of the maturing of the
Companys book of business. Casualty For the three months ended September 30, 2004, gross premiums written in
casualty lines, which include the workers compensation, general liability and
commercial automobile lines of business, decreased by $6,867, or 3.4%, compared
to the three months ended September 30, 2003 due to a reduction in new business
and price decreases as a result of increased competition in the marketplace.
Partially offsetting these decreases was an increase in the renewal retention
rate. For the nine months ended September 30, 2004, gross premiums written
increased by $39,268, or 7.5%, as compared to the same period in 2003 due to
price increases on renewal policies and a modest increase in the renewal
retention rate, partially offset by a reduction in new business. The renewal
retention rate was negatively affected by increased competition and the
discontinuance of certain business programs accounting for approximately
$17,000 of gross premiums written in 2003. 19




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##### Table of Contents



Property For the three and nine months ended September 30, 2004, gross premiums written
in property lines, which include the property, commercial multi-peril and
surety lines of business, decreased by $2,312, or 2.2%, and $10,584, or 3.6%,
respectively, as compared to the three and nine months ended September 30,
2003, due to reductions in new business and price decreases on renewal
policies, partially offset by an increase in the renewal retention rate. For
both the three and nine months ended September 30, 2004, property production
was affected by softening market conditions, characterized by increased
capacity in the marketplace and decreasing rates. Net Premiums Written For the three months ended September 30, 2004, net premiums written decreased
by $23,472, or 9.2%, as compared to the three months ended September 30, 2003.
For the nine months ended September 30, 2004, net premiums written increased by
$26,046, or 4.0%, over the nine months ended September 30, 2003. The change in
net premiums written was generally in line with the growth in gross premiums
written after giving effect in the third quarter of 2004 to reinsurance
reinstatement premiums associated with catastrophe losses and aggregate stop
loss reinsurance premiums arising from the reallocation of prior years loss
reserves. Premiums Earned For the three and nine months ended September 30, 2004, premiums earned
increased by $7,732, or 3.8%, and $116,072, or 21.1%, as compared to the three
and nine months ended September 30, 2003, respectively. Premiums earned
reflect the amount of net premiums written applicable to the portion of the
policy term that expires in a given period. The Company generally earns
premiums on a pro rata basis over the period in which the coverage is provided.
The larger increase in premiums earned relative to net premiums written was
principally attributable to the lag in recognition of the increased premiums
written in the latter part of 2003. Premiums earned were also affected by
reinstatement premiums associated with the catastrophe losses and aggregate
stop loss reinsurance premiums arising from the reallocation of prior years
loss reserves in the third quarter of 2004. Losses and LAE For the three and nine months ended September 30, 2004, the Companys calendar
year loss and LAE ratio increased to 109.9% and 83.3%, respectively, from 67.8%
and 70.2% for the three and nine months ended September 30, 2003, respectively.
The deterioration in the calendar year loss and LAE ratios in 2004 versus 2003
is attributable to catastrophe losses incurred in the third quarter of 2004.
The accident year loss and LAE ratio increased to 84.4% in 2004 from 69.5% in
2003, also principally attributable to catastrophe losses in the third quarter
of 2004. Underwriting Expenses Underwriting expenses are comprised of policy acquisition costs and other
underwriting expenses. Policy acquisition costs are comprised principally of
commissions paid to producers and premium taxes. Other underwriting expenses
consist of other operating expenses associated with the Companys underwriting
activities and include salaries and benefits, information technology and rent,
but exclude interest expense and other corporate income and expense items. The Companys acquisition expense ratio increased to 14.7% and 14.0% for the
three and nine months ended September 30, 2004, respectively, from 12.8% and
13.1% for the three and nine months ended September 30, 2003, respectively,
primarily due to reinsurance reinstatement premiums associated with catastrophe
losses, aggregate stop loss reinsurance premiums arising from the reallocation
of prior years loss reserves and lower amounts of ceded premiums on which a
ceding commission is paid to the Company by reinsurers. The Companys other underwriting expense ratio declined to 15.2% and 14.5% for
the three and nine months ended September 30, 2004, respectively, from 16.6%
and 17.2% for the three and nine months ended September 30, 2003, respectively,
due to higher premiums earned. 20




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##### Table of Contents



Investment Results For the three months ended September 30, 2004, the Company reported realized
investment losses of $1,953, compared to realized investment gains of $13,913
for the three months ended September 30, 2003. For the nine months ended
September 30, 2004, the Company reported realized investment gains of $45,493,
compared to realized investment gains of $231,960 for the nine months ended
September 30, 2003. These declines in realized investment gains primarily
reflect the significant rally in the fixed income markets in the spring of
2003. The components of those investment gains are summarized as follows: Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Fixed income securities:United States government and government agencies and
authorities
    
    $
    
    
    
    $
    3,673
    
    
    $
    26,176
    
    
    $
    115,860Foreign governments
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    179Public utilities
    
    
    19
    
    
    
    2,003
    
    
    
    3,472
    
    
    
    21,651Other corporate bonds
    
    
    1,383
    
    
    
    6,393
    
    
    
    5,957
    
    
    
    42,830Total fixed income securities
    
    
    1,402
    
    
    
    12,069
    
    
    
    35,605
    
    
    
    180,520Equity securities:Common stocks of banks, trusts and insurance companies
    
    
    1,051
    
    
    
    
    
    
    
    2,995
    
    
    
    14,175Common stocks of industrial and other companies
    
    
    
    
    
    
    1,753
    
    
    
    10,828
    
    
    
    37,103Preferred stocks of banks, trusts and insurance companies
    
    
    
    
    
    
    718
    
    
    
    
    
    
    
    718Total equity securities
    
    
    1,051
    
    
    
    2,471
    
    
    
    13,823
    
    
    
    51,996Other invested assets
    
    
    (4,406
    )
    
    
    (627
    )
    
    
    (3,935
    )
    
    
    (556
    )Total realized investment (losses) gains
    
    $
    (1,953
    )
    
    $
    13,913
    
    
    $
    45,493
    
    
    $
    231,960
 The Companys investment income was $27,516 and $79,983 for the three and nine
months ended September 30, 2004, respectively, as compared to $13,902 and
$53,804 for the three and nine months ended September 30, 2003, respectively.
For the three and nine months ended September 30, 2004, the increase in
investment income of $13,614, or 97.9%, and $26,179, or 48.7%, respectively,
was due to the combined effects of reinvestment of cash balances into longer
duration fixed income securities in 2004 compared to 2003 and higher earnings
from an equity method investee that was not purchased until the second quarter
of 2003. Other Income and Expense For the three and nine months ended September 30, 2004, other expense, net was
$1,554 and $7,120, respectively, as compared to $5,399 and $4,864 for the three
and nine months ended September 30, 2003, respectively. The lower expense for
the three months ended September 30, 2004 was primarily the result of
non-recurring corporate expenses incurred in August 2003. The increased
expense in the nine months ended September 30, 2004 was primarily the result of
a retirement benefits agreement with the former Chairman of the Companys
insurance operating subsidiaries. Liquidity and Capital Resources Holding Company As a holding company with no direct operations, Crum & Forster Holdings Corp.s
assets consist primarily of its investments in the capital stock of its
insurance subsidiaries, $31,516 of restricted cash and investments held in an
interest escrow account for the payment of the next two interest payments on
the Notes and deferred tax assets associated with holding company net operating
losses. Crum & Forsters ability to satisfy corporate obligations, principally
interest on the Notes, is primarily dependent on the dividend paying capacity
of such subsidiaries. State insurance laws restrict the amount of shareholder
dividends that insurance companies may pay without prior approval of regulatory
authorities. The ability of the Companys insurance subsidiaries to pay dividends depends,
among other things, on such subsidiaries having positive statutory earned
surplus. The Companys principal insurance subsidiaries are US Fire
and North
River. On March 29, 2004, US Fire 21




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##### Table of Contents



paid a
cash shareholder dividend of $80,000. On March 30, 2004 and June 25, 2004, Crum
& Forster paid cash shareholder dividends to Fairfax in the amounts of $42,500
and $19,000, respectively. The remaining amount was allocated for the payment
of corporate expenses. US Fire may not pay further shareholder dividends in
2004. North River is not permitted to pay dividends in 2004, as it did not
have positive statutory earned surplus at December 31, 2003. As of September
30, 2004, US Fire had statutory earned surplus of approximately $94,000 and North River
reported negative statutory earned surplus of approximately $6,000. Based on consolidated
net income through September 30, 2004, the Company may not pay further
shareholder dividends under the terms of the Senior Notes. The Notes, which bear interest payable semi-annually at 10.375%, mature on June
15, 2013. The net proceeds from the offering of $290,955 were used to fund an
interest escrow account of approximately $63,115 to make the first four
semi-annual interest payments and to pay a dividend to Fairfax in the amount of
$217,885, with the remainder used to pay related financing costs. Under the terms of the Notes, the Company has significant restrictions on the
amount of new debt that may be incurred. Pursuant to a non-interest bearing
standby credit agreement between Fairfax Financial and the Company, under
certain circumstances, the Company has the ability to borrow up to $40,000 from
Fairfax Financial to meet certain corporate obligations. Borrowings under this
agreement, if any, bear no interest and are due in June 2018. Through
September 30, 2004, there have been no borrowings under this agreement. Insurance Operating Subsidiaries At Crum & Forsters insurance operating subsidiaries, cash provided by
operating activities primarily consists of premium collections, reinsurance
recoveries and investment income. Cash provided from these sources is
generally used for payment of losses and LAE, policy acquisition costs,
operating expenses, ceded reinsurance premiums, income taxes and shareholder
dividends, when permitted. Management believes that, for the foreseeable
future, cash flows from operations at the Companys operating subsidiaries will
be sufficient to pay their operating expenses. Cash provided by operating activities for the nine months ended September 30,
2004 was $117,568, as compared to $89,545 for the nine months ended September
30, 2003. The principal reasons for improved cash flows from operations in
2004 were growth in premiums written, partially offset by increased income tax
payments. Income tax payments were higher by $40,823 for the nine months ended
September 30, 2004, as compared to the same period in 2003, as the majority of
the Companys subsidiary net operating losses were utilized in late 2003. Purchases of available-for-sale securities comprised the majority of cash used
in investing activities for the nine months ended September 30, 2004. Cash
used in investing activities was $1,802,353 for the nine months ended September
30, 2004, reflecting primarily purchases of United States Treasury securities
in the first quarter of 2004, as compared to cash provided by investing
activities of $1,586,595 for the nine months ended September 30, 2003, which
primarily reflected significant sales of investments in the second quarter of
2003. Certain operating subsidiaries have entered into securities repurchase
agreements that allow these companies to sell securities to, and repurchase
such securities from, Fairfax Financial. Under these agreements, US Fire and
North River may sell a maximum of $100,000 of securities to Fairfax Financial
at any one time and CF Indemnity, CF Insurance and CF Underwriters are limited
to sales of $5,000 each. These arrangements have not been utilized since 2000.
Effective July 1, 2004, CF Underwriters was merged into US Fire and CF
Underwriters securities repurchase agreement was no longer in effect. Shareholders equity was $800,799 at September 30, 2004 as compared to $906,115
at December 31, 2003. The decrease was primarily the result of dividends paid
to Fairfax and unrealized losses on investments during 2004. The Companys
combined statutory policyholders surplus was approximately $1,067,385 at
September 30, 2004, as compared to $1,107,435 at December 31, 2003. Effective
March 30, 2004, the State of Delaware enacted legislation to adopt certain
insurance accounting standards promulgated by the National Association of
Insurance Commissioners. The adoption of such standards resulted in an
increase in the Companys combined statutory policyholders surplus of $28,138,
principally relating to the recognition of goodwill. The decline in the
Companys combined statutory surplus was attributable to a dividend payment of
$80,000 offset by the aforementioned goodwill adjustment. 22




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##### Table of Contents



The aggregate carrying value of the Companys investment portfolio, including
cash and cash equivalents, was $3,080,589 at September 30, 2004. Investments
in available-for-sale fixed income and equity securities are summarized as
follows: At September 30, 2004Cost or
    
    Gross
    
    GrossAmortized
    
    Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    Fair ValueFixed income securities:United States government and government agencies and
authorities
    
    $
    1,760,347
    
    
    $
    5,499
    
    
    $
    48,280
    
    
    $
    1,717,566States, municipalities and political subdivisions
    
    
    8,999
    
    
    
    264
    
    
    
    
    
    
    
    9,263Public utilities
    
    
    45,275
    
    
    
    10,439
    
    
    
    
    
    
    
    55,714Other corporate bonds
    
    
    311,578
    
    
    
    16,235
    
    
    
    20,531
    
    
    
    307,282Total fixed income securities
    
    
    2,126,199
    
    
    
    32,437
    
    
    
    68,811
    
    
    
    2,089,825Equity securities:Common stocks of banks, trusts and insurance companies
    
    
    195,691
    
    
    
    50,737
    
    
    
    17,082
    
    
    
    229,346Common stocks of industrial and other companies
    
    
    215,151
    
    
    
    10,723
    
    
    
    20,658
    
    
    
    205,216Total equity securities
    
    
    410,842
    
    
    
    61,460
    
    
    
    37,740
    
    
    
    434,562Total investments available for sale
    
    $
    2,537,041
    
    
    $
    93,897
    
    
    $
    106,551
    
    
    $
    2,524,387
 Certain individual investments within the Companys available-for-sale
securities portfolio had gross unrealized losses as of September 30, 2004
totaling $106,551, of which $68,811 was attributed to fixed income securities,
and $37,740 was attributed to equity securities. United States Treasury
securities, the majority of which mature in 2018 or beyond, accounted for
$48,280 of the gross unrealized losses in the fixed income portfolio. Gross
unrealized losses of $106,551 represented 5.1% of the cost of such securities
in the aggregate. An aging of available-for-sale securities in a loss
position follows: At September 30, 2004TotalGreater
    
    Gross0 to 6
    
    7 to 12
    
    Than 12
    
    UnrealizedMonths
    
    Months
    
    Months
    
    LossesFixed income securities:United States government and government
agencies and authorities
    
    $
    1,849
    
    
    $
    45,779
    
    
    $
    652
    
    
    $
    48,280Other corporate bonds
    
    
    5,582
    
    
    
    14,949
    
    
    
    
    
    
    
    20,531Total fixed income securities
    
    
    7,431
    
    
    
    60,728
    
    
    
    652
    
    
    
    68,811Equity securities:Common stocks of banks, trusts and insurance
companies
    
    
    6,022
    
    
    
    11,060
    
    
    
    
    
    
    
    17,082Common stocks of industrial and other companies
    
    
    17,494
    
    
    
    3,164
    
    
    
    
    
    
    
    20,658Total equity securities
    
    
    23,516
    
    
    
    14,224
    
    
    
    
    
    
    
    37,740Total investments available for sale
    
    $
    30,947
    
    
    $
    74,952
    
    
    $
    652
    
    
    $
    106,551
 The amortized cost and fair value of fixed income securities by contractual
maturity are shown below. Actual maturities may differ from maturities shown
below due to the existence of call or put features. At September 30, 2004,
securities containing call and put features represented 2.3% and 2.4%,
respectively, of total fair value of the fixed income portfolio. 23




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##### Table of Contents



At September 30, 2004Amortized Cost
    
    Fair ValueDue in one year or less
    
    $
    4,787
    
    
    $
    4,811Due after one year through five years
    
    
    61,154
    
    
    
    51,881Due after five years through ten years
    
    
    36,156
    
    
    
    41,679Due after ten years through twenty years
    
    
    1,318,382
    
    
    
    1,282,168Due after twenty years
    
    
    705,720
    
    
    
    709,286Total fixed income investments
    
    $
    2,126,199
    
    
    $
    2,089,825
 The Companys investment portfolio has exposure to credit risk primarily
related to fixed income securities. The Company seeks to control this exposure
by emphasizing investment grade credit quality in the fixed income securities
purchased. Management believes that this concentration in investment grade
securities reduces its exposure to credit risk on these fixed income
investments to an acceptable level. As of September 30, 2004, the Companys
fixed income securities had a weighted average credit rating of AA. As of September 30, 2004 and December 31, 2003, 95.8% and 74.9%, respectively,
of the Companys fixed income portfolio consisted of securities rated
investment grade. The higher proportion of investment grade securities at
September 30, 2004 was due primarily to the reinvestment of more than $1.0
billion of cash and cash equivalents principally in United States Treasury
securities in March of 2004. Ratings Insurance companies are rated by ratings agencies to provide both industry
participants and insurance consumers with meaningful information on specific
insurance companies. Higher ratings generally indicate relative financial
stability and a strong ability to pay claims. Ratings focus on the following
factors: capital resources, financial strength, demonstrated management
expertise in the insurance business, credit analysis, systems development,
marketing, investment operations, minimum policyholders surplus requirements
and capital sufficiency to meet projected growth, as well as access to such
traditional capital as may be necessary to continue to meet standards for
capital adequacy. The Companys insurance operating subsidiaries have an A-
financial strength rating, with a negative outlook, from A.M. Best and a BBB
financial strength rating from Standard & Poors. A.M. Best has advised the
Company that although it is encouraged by improved underlying trends exhibited
in the Companys recent underwriting performance, the ratings outlook is
negative, and contingent upon managements ability to ultimately achieve
overall earnings stability, specifically with regard to adequacy of asbestos
reserves, and improved financial flexibility of the Companys ultimate parent,
Fairfax Financial. The financial strength ratings assigned by rating agencies to insurance
companies represent independent opinions of an insurers financial strength and
its ability to meet ongoing obligations to policyholders, and are not directed
toward the protection of investors. Ratings by rating agencies of insurance
companies are not ratings of securities or recommendations to buy, hold or sell
any security, such as the Notes. Regulatory Matter Effective January 1, 2004 and July 1, 2004, the State of California adopted
certain Workers Compensation reform legislation, which would take effect over
the course of several months, with the greatest impact starting in January
2005. The legislation requires, among other things, for carriers to file a
loss cost reduction. The total rate impact of the changes in loss costs and
other expense items filed by the Company in 2004 amounts to a reduction of
4.8%. The full impact of these regulatory changes cannot be determined at the
current time. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company is principally exposed to three types of market risk related to its
investment operations. These risks include interest rate risk, equity price
risk and foreign currency exchange risk. The term market risk refers to the
risk of loss arising from adverse changes in market rates and prices, such as
interest rates, equity prices and foreign currency exchange rates. All market
sensitive instruments discussed here relate to the Companys investment assets,
which are classified as available-for-sale. 24




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##### Table of Contents



Interest Rate Risk The Companys fixed income portfolio is exposed to interest rate risk.
Fluctuations in interest rates have a direct impact on the market values of
these securities. As interest rates rise, market values of fixed income
investments fall, and vice versa. The table below displays the potential impact of market value fluctuations on
the Companys fixed income portfolio based on parallel 200 basis point shifts
in interest rates up and down, in 100 basis points increments. This analysis
was performed on each security individually. At September 30, 2004Fair Valueof Fixed Income
    
    Hypothetical
    
    HypotheticalPercent Change in Interest Rates
    
    Portfolio
    
    $ Change
    
    % Change200 basis point decline
    
    $
    2,647,851
    
    
    $
    558,026
    
    
    
    26.7
    %100 basis point decline
    
    $
    2,346,562
    
    
    $
    256,737
    
    
    
    12.3
    %Base scenario
    
    $
    2,089,825
    
    
    $
    
    
    
    
    
    %100 basis point rise
    
    $
    1,875,418
    
    
    $
    (214,407
    )
    
    
    (10.3
    )%200 basis point rise
    
    $
    1,692,917
    
    
    $
    (396,908
    )
    
    
    (19.0
    )%
 Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including the maintenance of the existing level
and composition of fixed income security assets, and should not be relied on as
indicative of future results. Certain shortcomings are inherent in the method
of analysis presented in the computation of the fair value of fixed rate
instruments. Actual values may differ from those projections presented should
market conditions vary from assumptions used in the calculation of the fair
value of individual securities, including non-parallel shifts in the term
structure of interest rates and changing individual issuer credit spreads. Equity Price Risk As of September 30, 2004, 14.1% of the Companys total investment portfolio,
including cash and cash equivalents, was in equity securities (unaffiliated and
affiliated). Marketable equity securities, which represented approximately
13.6% of the total investment portfolio, are exposed to equity price risk,
defined as the potential for loss in market value owing to a decline in equity
prices. A hypothetical 10.0% decline in the price of each of these marketable
equity securities would result in a total decline of approximately $41,999, at
September 30, 2004, in the fair value of the equity portfolio. In July 2004, as an economic hedge against a decline in the equity markets, the
Company executed a short sale of approximately $200,000 of Standard & Poors
Depositary Receipts (SPDRs). Simultaneously, the Company
purchased
two-year S&P Index call options, limiting the potential loss on the future purchase of the
SPDRs to $40,000. The Company expects that a
decrease in the SPDRs obligation will reduce losses in its equity
portfolio in the event of a decline in the equity markets. Foreign Currency Exchange Rate Risk Through investments in foreign securities, the Company is exposed to foreign
currency exchange rate risk. Foreign currency exchange rate risk is the
potential for loss in market value owing to a decline in the U.S. dollar value
of these investments due to a decline in the exchange rate of the foreign
currency in which these assets are denominated. As of September 30, 2004, the
Companys total exposure to foreign denominated securities in U.S. dollar terms
was approximately $383,350, or 12.4%, of the total investment portfolio,
including cash and cash equivalents. The primary foreign currency exposures
were in Canadian dollar denominated securities and British pound denominated
securities, which represented 4.8% and 3.3%, respectively, of the total
investment portfolio, including cash and cash equivalents, as of September 30,
2004. The potential impact of a hypothetical 10.0% decline in each of the
foreign exchange rates on the valuation of investment assets denominated in
those respective foreign currencies would result in a decline in the fair value
of the total investment portfolio of approximately $38,335 at September 30,
2004. 25




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##### Table of Contents



Item 4. Controls and Procedures Evaluation of disclosure controls and procedures. The Companys principal executive officer and its principal financial officer
have evaluated the effectiveness of the Companys disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as amended, as of the end of the period covered by this
report. Based on that evaluation, such officers have concluded that the
Companys disclosure controls and procedures are effective as of the end of
such period. Changes in internal control over financial reporting. During the period covered by this report, there has been no change in the
Companys internal control over financial reporting that has materially
affected, or is reasonably likely to materially affect, the Companys internal
control over financial reporting. The design of any system of controls and procedures is based in part upon
certain assumptions about the likelihood of future events. There can be no
assurance that any design will succeed in achieving its stated goals under all
potential future conditions, regardless of how remote. 26




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##### Table of Contents



Part II
OTHER INFORMATION 
 Item 1. Legal Proceedings The Companys subsidiaries are involved in various lawsuits and arbitration
proceedings arising in the ordinary course of business. While the ultimate
outcome of such matters cannot be predicted with certainty, in the opinion of
management, no such matter is likely to have a material adverse effect on the
Companys consolidated financial position. However, it should be noted that
the frequency of large damage awards, including large punitive damage awards
that bear little or no relation to actual economic damages incurred by
plaintiffs in some jurisdictions, continues to create the potential for an
unpredictable judgment in any given matter. 
 Item 6. Exhibits See Index to Exhibits. 27




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##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. CRUM & FORSTER HOLDINGS CORP.(Registrant)Date: November 5, 2004
    
    By:
    
    /s/  Nikolas Antonopoulos
Nikolas Antonopoulos
Chief Executive Officer and PresidentDate: November 5, 2004
    
    By:
    
    /s/  Mary Jane Robertson
Mary Jane Robertson
Executive Vice President, Chief Financial Officer and Treasurer
 28




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##### Table of Contents



INDEX TO EXHIBITS Exhibit No.  *10.31
    
    Retirement and Consulting Agreement of Bruce Esselborn effective as
of June 15, 2004.  *31.1
    
    Certification of Chief Executive Officer and President pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.  *31.2
    
    Certification of Executive Vice President, Chief Financial Officer
and Treasurer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.  *32.1
    
    Certification of Chief Executive Officer and President pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.  *32.2
    
    Certification of Executive Vice President, Chief Financial Officer
and Treasurer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.  99.1
    
    Risk factors (incorporated into Part II of this Form 10-Q by reference
to the section entitled Risk factors in the Companys Registration
Statement on Form S-4 (Registration No. 333-107722), to which Amendment
No. 4 was filed with the Securities and Exchange Commission on March 15,
2004).   *
    
    Filed herewith 29