##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


or


o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For the Quarterly Period Ended: September 30, 2006
    
    Commission File Number: 333-84068





Crum & Forster Holdings Corp.


(Exact Name of Registrant as Specified in its Charter)


Delaware
    
    04-3611900(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation or Organization)
    
    Identification Number)


305 Madison Avenue, Morristown, New Jersey 07962


(Address
of principal executive office)


(973) 490-6600 (Registrants telephone number, including area code)
 o þ
  o o þ
 o þ
  Class
Common Stock, $.01 Par Value
    

Number of Shares Outstanding at November 2, 2006

100




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##### 



CRUM & FORSTER HOLDINGS CORP.
 Form 10-Q
 Index
 PageNumberPART I FINANCIAL INFORMATIONITEM 1.
    
    FINANCIAL STATEMENTSConsolidated Balance Sheets at September 30, 2006 (Unaudited) and December 31, 2005
    
    
    3Consolidated Statements of Income for the Three and Nine Months Ended September
30, 2006 and 2005 (Unaudited)
    
    
    4Consolidated Statements of Shareholders Equity for the Nine Months Ended
September 30, 2006 and 2005 (Unaudited)
    
    
    5Consolidated Statements of Comprehensive Income for the Three and Nine Months
Ended September 30, 2006 and 2005 (Unaudited)
    
    
    6Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006
and 2005 (Unaudited)
    
    
    7Notes to the Consolidated Financial Statements
    
    
    8ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    19ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    30ITEM 4.
    
    CONTROLS AND PROCEDURES
    
    
    32PART II OTHER INFORMATIONITEM 1.
    
    LEGAL PROCEEDINGS
    
    
    33ITEM 1A.
    
    RISK FACTORS
    
    
    33ITEM 6.
    
    EXHIBITS
    
    
    33SIGNATURES
    
    
    34INDEX TO EXHIBITS
    
    
    35EX-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 31,2006
    
    
    2005(Unaudited)ASSETSInvestments:Fixed income securities, at fair value (amortized cost of $1,830,214 and
$2,073,443 in 2006 and 2005, respectively)
    
    $
    1,741,532
    
    
    $
    1,991,118Equity securities, at fair value (cost of $512,238 and $503,942 in 2006 and
2005, respectively)
    
    
    537,495
    
    
    
    595,944Other invested assets
    
    
    315,910
    
    
    
    391,132Total investments
    
    
    2,594,937
    
    
    
    2,978,194Cash and cash equivalents
    
    
    632,266
    
    
    
    245,441Assets pledged for short-sale obligations
    
    
    540,641
    
    
    
    496,903Accrued investment income
    
    
    17,644
    
    
    
    37,780Premiums receivable
    
    
    245,122
    
    
    
    245,795Reinsurance recoverable
    
    
    1,627,271
    
    
    
    1,806,082Reinsurance recoverable from affiliates
    
    
    258,581
    
    
    
    304,033Prepaid reinsurance premiums
    
    
    27,362
    
    
    
    31,308Deferred income taxes
    
    
    240,817
    
    
    
    175,207Deferred policy acquisition costs
    
    
    85,694
    
    
    
    70,807Other assets
    
    
    320,170
    
    
    
    91,329Total assets
    
    $
    6,590,505
    
    
    $
    6,482,879LIABILITIESUnpaid losses and loss adjustment expenses
    
    $
    3,511,268
    
    
    $
    3,673,034Unearned premiums
    
    
    591,285
    
    
    
    499,551Accounts payable and other liabilities
    
    
    343,308
    
    
    
    264,525Funds held under reinsurance contracts
    
    
    280,602
    
    
    
    277,868Deferred income on retroactive insurance
    
    
    174,249
    
    
    
    184,498Short-sale obligations
    
    
    378,772
    
    
    
    329,740Long-term debt
    
    
    292,990
    
    
    
    292,470Total liabilities
    
    
    5,572,474
    
    
    
    5,521,686SHAREHOLDER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
    
    
    (29,730
    )
    
    
    53,443Retained earnings
    
    
    306,768
    
    
    
    166,757Total shareholders equity
    
    
    1,018,031
    
    
    
    961,193Total liabilities and shareholders equity
    
    $
    6,590,505
    
    
    $
    6,482,879
 The accompanying notes are an integral part of the consolidated financial statements.
 3




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##### Table of Contents



CRUM & FORSTER HOLDINGS CORP.
 
 CONSOLIDATED STATEMENTS OF INCOME
 (Dollars in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)REVENUESPremiums earned
    
    $
    279,631
    
    
    $
    191,898
    
    
    $
    791,178
    
    
    $
    665,432Investment income
    
    
    21,096
    
    
    
    28,177
    
    
    
    170,375
    
    
    
    96,555Realized investment gains
    
    
    45,501
    
    
    
    22,641
    
    
    
    177,039
    
    
    
    94,885Total revenues
    
    
    346,228
    
    
    
    242,716
    
    
    
    1,138,592
    
    
    
    856,872EXPENSESLosses and loss adjustment expenses
    
    
    190,457
    
    
    
    169,632
    
    
    
    541,150
    
    
    
    485,802Policy acquisition costs
    
    
    42,139
    
    
    
    33,344
    
    
    
    110,918
    
    
    
    98,100Other underwriting expenses
    
    
    39,874
    
    
    
    31,781
    
    
    
    120,496
    
    
    
    97,408Interest expense
    
    
    8,250
    
    
    
    8,233
    
    
    
    24,734
    
    
    
    24,682Other expense, net
    
    
    1,815
    
    
    
    323
    
    
    
    6,059
    
    
    
    3,519Total expenses
    
    
    282,535
    
    
    
    243,313
    
    
    
    803,357
    
    
    
    709,511Income (loss) before income taxes and equity
in earnings of investees
    
    
    63,693
    
    
    
    (597
    )
    
    
    335,235
    
    
    
    147,361Income tax expense (benefit)
    
    
    21,674
    
    
    
    (1,024
    )
    
    
    115,139
    
    
    
    48,934Income before equity in earnings of investees
    
    
    42,019
    
    
    
    427
    
    
    
    220,096
    
    
    
    98,427Equity in earnings of investees, net of tax
    
    
    3,846
    
    
    
    5,674
    
    
    
    9,915
    
    
    
    14,428NET INCOME
    
    $
    45,865
    
    
    $
    6,101
    
    
    $
    230,011
    
    
    $
    112,855
 The accompanying notes are an integral part of the consolidated financial statements.
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##### Table of Contents



CRUM & FORSTER HOLDINGS CORP.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (Dollars in thousands)
 Nine Months EndedSeptember 30,2006
    
    
    2005(Unaudited)COMMON STOCKBalance, beginning and end of period
    
    $
    
    
    
    $
    ADDITIONAL PAID-IN CAPITALBalance, beginning and end of period
    
    
    740,993
    
    
    
    740,993ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, NET OF TAXBalance, beginning of period
    
    
    53,443
    
    
    
    55,875Unrealized investment losses, net of transfers to realized investment gains and losses
    
    
    (87,839
    )
    
    
    (30,632
    )Foreign currency translation
    
    
    4,666
    
    
    
    1,680Balance, end of period
    
    
    (29,730
    )
    
    
    26,923RETAINED EARNINGSBalance, beginning of period
    
    
    166,757
    
    
    
    84,321Net income
    
    
    230,011
    
    
    
    112,855Dividends to shareholder
    
    
    (90,000
    )
    
    
    (67,500
    )Balance, end of period
    
    
    306,768
    
    
    
    129,676TOTAL SHAREHOLDERS EQUITY
    
    $
    1,018,031
    
    
    $
    897,592
 The accompanying notes are an integral part of the consolidated financial statements.
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CRUM & FORSTER HOLDINGS CORP.
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 (Dollars in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)NET INCOME
    
    $
    45,865
    
    
    $
    6,101
    
    
    $
    230,011
    
    
    $
    112,855Change in components of other comprehensive income (loss) for
the period, before tax:Unrealized investment gains (losses)
    
    
    107,014
    
    
    
    (120,670
    )
    
    
    (135,136
    )
    
    
    (47,124
    )Foreign currency translation
    
    
    (622
    )
    
    
    6,796
    
    
    
    7,178
    
    
    
    2,584Other comprehensive income (loss) for the period, before
tax
    
    
    106,392
    
    
    
    (113,874
    )
    
    
    (127,958
    )
    
    
    (44,540
    )Deferred income tax (expense) benefit for the period:Deferred income tax (expense) benefit from unrealized
investment gains and losses
    
    
    (37,455
    )
    
    
    42,234
    
    
    
    47,297
    
    
    
    16,492Deferred income tax benefit (expense) from foreign currency
translation
    
    
    218
    
    
    
    (2,378
    )
    
    
    (2,512
    )
    
    
    (904
    )Total deferred income tax (expense) benefit for the period
    
    
    (37,237
    )
    
    
    39,856
    
    
    
    44,785
    
    
    
    15,588Other comprehensive income (loss) for the period, net of tax
    
    
    69,155
    
    
    
    (74,018
    )
    
    
    (83,173
    )
    
    
    (28,952
    )COMPREHENSIVE INCOME (LOSS)
    
    $
    115,020
    
    
    $
    (67,917
    )
    
    $
    146,838
    
    
    $
    83,903
 The accompanying notes are an integral part of the consolidated financial statements
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##### Table of Contents



CRUM & FORSTER HOLDINGS CORP.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands)
 Nine Months EndedSeptember 30,2006
    
    
    2005(Unaudited)OPERATING ACTIVITIESNet income
    
    $
    230,011
    
    
    $
    112,855Adjustments to reconcile net income to net cash from operating activities:Net accretion of discount on fixed income securities
    
    
    (7,731
    )
    
    
    (2,667
    )Realized investment gains
    
    
    (177,039
    )
    
    
    (94,885
    )Earnings of equity method investees
    
    
    (92,450
    )
    
    
    (30,907
    )Depreciation and amortization
    
    
    2,409
    
    
    
    2,642Deferred income tax benefit
    
    
    (20,826
    )
    
    
    (8,468
    )Other non-cash net income adjustments
    
    
    11,330
    
    
    
    17,758Changes in:Accrued investment income
    
    
    20,136
    
    
    
    14,312Premiums receivable
    
    
    (1,479
    )
    
    
    23,905Reinsurance recoverable
    
    
    204,985
    
    
    
    (317,191
    )Prepaid reinsurance premiums
    
    
    3,946
    
    
    
    3,034Deferred policy acquisition costs
    
    
    (14,887
    )
    
    
    3,528Other assets
    
    
    5,496
    
    
    
    21,304Unpaid losses and loss adjustment expenses
    
    
    (161,766
    )
    
    
    335,058Unearned premiums
    
    
    91,734
    
    
    
    (22,317
    )Accounts payable and other liabilities
    
    
    (11,213
    )
    
    
    32,111Net cash from operating activities
    
    
    82,656
    
    
    
    90,072INVESTING ACTIVITIESPurchases of fixed income securities
    
    
    (153,087
    )
    
    
    (1,533,287
    )Proceeds from sales of fixed income securities
    
    
    393,088
    
    
    
    1,513,604Proceeds from maturities of fixed income securities
    
    
    60,005
    
    
    
    1,255Purchases of equity securities
    
    
    (309,577
    )
    
    
    (152,099
    )Proceeds from sales of equity securities
    
    
    332,973
    
    
    
    190,999Purchases of other invested assets
    
    
    (26,037
    )
    
    
    (78,923
    )Proceeds from sales of other invested assets
    
    
    143,314
    
    
    
    7,206Proceeds from short-sale obligations
    
    
    24,931
    
    
    
    100,013Cash pledged for short-sale obligations
    
    
    (70,702
    )
    
    
    (108,373
    )Purchases of fixed assets
    
    
    (739
    )
    
    
    (353
    )Net cash from investing activities
    
    
    394,169
    
    
    
    (59,958
    )FINANCING ACTIVITIESDividends to shareholder
    
    
    (90,000
    )
    
    
    (67,500
    )Net cash from financing activities
    
    
    (90,000
    )
    
    
    (67,500
    )Net change in cash and cash equivalents
    
    
    386,825
    
    
    
    (37,386
    )Cash and cash equivalents, beginning of period
    
    
    245,441
    
    
    
    429,205Cash and cash equivalents, end of period
    
    $
    632,266
    
    
    $
    391,819SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    $
    15,563
    
    
    $
    15,563Cash paid to parent for income taxes
    
    $
    108,144
    
    
    $
    63,971
 The accompanying notes are an integral part of the consolidated financial statements
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited, 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., a Wyoming holding company. Fairfax Inc. is
ultimately owned by Fairfax Financial Holdings Limited (Fairfax), a Canadian financial
services holding company, which is publicly traded on the Toronto Stock Exchange and the New
York Stock Exchange under the symbols FFH.SV and FFH, respectively. The Company, through
its subsidiaries, offers a full range of commercial property and casualty insurance
distributed through an independent producer force located across the United States.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 and its wholly-owned subsidiaries, including Crum & Forster Holding
Inc., United States Fire Insurance Company (US Fire), The North River Insurance Company
(North River), Crum & Forster Indemnity Company and Crum and Forster Insurance Company.
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. All material
intercompany accounts and transactions have been eliminated in consolidation.Effective January 1, 2006, Fairfax announced that certain of the business of the insurance
companies of Fairmont Specialty Group, affiliates of Fairfax, would be carried on as Fairmont
Specialty, a division of Crum & Forster (Fairmont), thereby giving Fairmont access to the
A- A.M. Best rating of Crum & Forster. The Fairmont business is comprised of standard
commercial and personal lines, bail bonds and accident and health coverages. In return for
the opportunity to quote Fairmont Specialty Groups renewals effective January 1, 2006 and
thereafter, the Company hired substantially all Fairmont Specialty Group employees and
assumed certain operating obligations. Pending regulatory approval of Crum & Forster company
rate and form filings for the Fairmont business, substantially all of the policies
underwritten by Fairmont Specialty through September 30, 2006, were being issued by the
insurance companies of Fairmont Specialty Group and assumed by the Company through a 100%
quota share reinsurance agreement. Commencing in the fourth quarter of 2006, the Company
expects a large portion of the Fairmont business to be written directly by Crum & Forster
companies.The preparation of consolidated 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, and notes related
thereto, included in the Companys Annual Report on Form 10-K for the year ended December 31,
2005 filed with the Securities and Exchange Commission (SEC) on March 22, 2006.The interim financial data at September 30, 2006 and for the three and nine months ended
September 30, 2006 and 2005 is unaudited. However, in the opinion of management, the interim
data includes all adjustments that are necessary for a fair presentation 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. Certain amounts in
the Companys prior year consolidated financial statements have been reclassified to conform
to the 2006 presentation.2.
    
    Recent Accounting PronouncementsIn September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 158, Employers Accounting for Defined Benefit
Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and
132(R)(SFAS 158). SFAS 158 requires companies to recognize the overfunded or
underfunded status of a defined benefit pension or other post-retirement plan as an asset or
liability in its balance sheet and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income, effective for fiscal years ending after
December 15, 2006. SFAS 158 also requires companies to measure the funded status of the plan
as of the date of its fiscal year-end, with limited exceptions, effective for fiscal years
ending after December 15, 2008. The Company is currently evaluating the impact of SFAS 158 on
its results of operations and financial position.In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS
157 defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles and expands disclosures about fair value
measurements. The provisions of SFAS 157 are effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the effects of SFAS 157 but does not
expect its implementation to have a material impact on its results of operations or financial
position.
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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 In September 2006, the SEC issued Staff Accounting Bulletin No. 108, Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements(SAB 108). SAB 108 provides interpretive guidance on how the effects of the
carryover or reversal of prior year misstatements should be considered in quantifying a
current year misstatement. The SEC staff believes that companies should quantify errors using
both a balance sheet and an income statement approach and evaluate whether either approach
results in quantifying a misstatement that, when all relevant quantitative and qualitative
factors are considered, is material. SAB 108 is effective for fiscal years ending after
November 15, 2006. The Company does not expect the adoption of SAB 108 to have a material
impact on its results of operations or financial position.In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes  an interpretation of FASB Statement No. 109(FIN 48) which clarifies the
accounting for uncertainty in income taxes recognized in a companys financial statements in
accordance with SFAS No. 109, Accounting for
Income Taxes. Specifically, the pronouncement prescribes a recognition threshold and a
measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The interpretation also provides
guidance on the related derecognition, classification, interest and penalties, accounting for
interim periods, disclosure and transition of uncertain tax positions. The interpretation is
effective for fiscal years beginning after December 15, 2006. The Company is currently
evaluating the impact of FIN 48 on its results of operations and financial position.In February 2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial
Instruments   an amendment of FASB Statements Nos. 133 and 140(SFAS 155). SFAS 155 amends
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities, and clarifies SFAS No. 133 Implementation Issue D-1, Application of SFAS No. 133
to Beneficial Interests in Securitized Financial Assets. SFAS 155 applies to certain
hybrid financial instruments which are instruments that contain embedded derivatives. The
standard establishes a requirement to evaluate beneficial interests in securitized financial
assets to determine if the interests represent freestanding derivatives or are hybrid
financial instruments containing embedded derivatives requiring bifurcation. SFAS 155 also
permits an election for fair value measurement of any hybrid financial instrument containing
an embedded derivative that otherwise would require bifurcation under
SFAS No. 133. The fair
value election can be applied to existing instruments on an instrument-by-instrument basis at
the date of adoption and to new instruments on a prospective basis. The statement is
applicable in fiscal years beginning after September 15, 2006. The Company is currently
evaluating the impact of SFAS 155 on its results of operations and financial position.In November 2005, the FASB issued FASB Staff Position Nos. FAS 115-1 and FAS 124-1, The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments
(FSP), which nullifies certain requirements and carries forward other requirements of
Emerging Issues Task Force Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments. The FSP addresses the determination as to when an
investment is considered impaired, whether that impairment is other-than-temporary and the
measurement of an impairment loss. The guidance in the FSP is effective for reporting
periods beginning after December 15, 2005. The adoption of the FSP had no impact on the
Companys consolidated financial statements.In September 2005, the American Institute of Certified Public Accountants issued Statement of
Position 05-1, Accounting by Insurance Enterprises for Deferred Acquisition Costs in
Connection with Modifications or Exchanges of Insurance Contracts(SOP 05-1). SOP 05-1
provides guidance on accounting by insurance enterprises for deferred acquisition costs on
internal replacements of insurance and investment contracts other than those specifically
described in SFAS No. 97, Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and For Realized Gains and Losses from the Sale of Investments. SOP
05-1 defines an internal replacement as a modification in product benefits, features, rights
or coverage that occurs by the exchange of a contract for a new contract, or by amendment,
endorsement or rider to a contract, or by the election of a feature or coverage within a
contract. Under SOP 05-1, modifications that result in a substantially unchanged contract
will be accounted for as a continuation of the replaced contract. A replacement
contract that is substantially changed will be accounted for as an extinguishment of the
replaced contract, resulting in a release of unamortized deferred acquisition costs, unearned
revenue and deferred sales inducements associated with the replaced contract. The provisions
of SOP 05-1 are effective for internal replacements occurring in fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact of SOP 05-1 on its results
of operations and financial position.In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections
(SFAS 154), which replaces Accounting Principles Board Opinion No. 20, Accounting Changes,
and SFAS No. 3, Reporting Changes in Interim Financial Statements.SFAS 154 requires changes
in accounting principles to be applied retrospectively to prior period financial statements
where practicable. In addition, adoption of a change in accounting principle required by the
issuance of a new accounting standard would also require retroactive restatement, unless the
new standard includes specific transition provisions. This statement is applicable in fiscal
years beginning after December 15, 2005. The adoption of SFAS 154 had no impact on the
Companys consolidated financial statements.
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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 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 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Gross unpaid losses and LAE, beginning of
period
    
    $
    3,562,337
    
    
    $
    3,409,578
    
    
    $
    3,673,034
    
    
    $
    3,370,936Less ceded unpaid losses and LAE
    
    
    1,545,870
    
    
    
    1,400,903
    
    
    
    1,682,768
    
    
    
    1,360,996Net unpaid losses and LAE, beginning of
period
    
    
    2,016,467
    
    
    
    2,008,675
    
    
    
    1,990,266
    
    
    
    2,009,940Losses and LAE incurred related to:Current period
    
    
    213,594
    
    
    
    178,254
    
    
    
    569,029
    
    
    
    506,758Prior years
    
    
    (23,137
    )
    
    
    (8,622
    )
    
    
    (27,879
    )
    
    
    (20,956
    )Total losses and LAE incurred
    
    
    190,457
    
    
    
    169,632
    
    
    
    541,150
    
    
    
    485,802Losses and LAE paid related to:Current period
    
    
    58,541
    
    
    
    42,586
    
    
    
    95,025
    
    
    
    82,609Prior years
    
    
    104,389
    
    
    
    87,196
    
    
    
    392,397
    
    
    
    364,608Total losses and LAE paid
    
    
    162,930
    
    
    
    129,782
    
    
    
    487,422
    
    
    
    447,217Net unpaid losses and LAE, end of period
    
    
    2,043,994
    
    
    
    2,048,525
    
    
    
    2,043,994
    
    
    
    2,048,525Add ceded unpaid losses and LAE
    
    
    1,467,274
    
    
    
    1,657,469
    
    
    
    1,467,274
    
    
    
    1,657,469Gross unpaid losses and LAE, end of period
    
    $
    3,511,268
    
    
    $
    3,705,994
    
    
    $
    3,511,268
    
    
    $
    3,705,994
 A reconciliation of the ceded unpaid losses and LAE in the table above to the reinsurance
recoverable reflected on the consolidated balance sheet follows:
 September 30,2006Ceded unpaid losses and LAE in the table above
    
    $
    1,467,274Reconciling items:Reinsurance receivable on paid losses and LAE
    
    
    71,214Unamortized retroactive reinsurance recoverable
    
    
    368,874Loss sensitive cession1
    
    
    (21,510
    )Total reconciling items
    
    
    418,578Reinsurance recoverable on the consolidated balance sheet
    
    $
    1,885,852
 
 1Equals additional premiums due on retrospectively rated
insurance policies that inure to the benefit of the reinsurer. 10




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 4.
    
    Asbestos and Environmental 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 such issues as whether or not coverage exists,
definition of an occurrence, determination of ultimate damages and allocation of such damages
to financially responsible parties.Changes in the Companys liability for asbestos and environmental exposures are summarized as
follows:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005AsbestosGross unpaid losses and allocated LAE
(ALAE), beginning of period
    
    $
    441,752
    
    
    $
    480,529
    
    
    $
    469,199
    
    
    $
    522,685Less ceded unpaid losses and ALAE
    
    
    84,965
    
    
    
    104,798
    
    
    
    92,418
    
    
    
    113,891Net unpaid losses and ALAE, beginning of period
    
    
    356,787
    
    
    
    375,731
    
    
    
    376,781
    
    
    
    408,794Net losses and ALAE incurred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net paid losses and ALAE
    
    
    14,860
    
    
    
    16,040
    
    
    
    34,854
    
    
    
    49,103Net unpaid losses and ALAE, end of period
    
    
    341,927
    
    
    
    359,691
    
    
    
    341,927
    
    
    
    359,691Add ceded unpaid losses and ALAE
    
    
    80,440
    
    
    
    102,645
    
    
    
    80,440
    
    
    
    102,645Gross unpaid losses and ALAE, end of period
    
    $
    422,367
    
    
    $
    462,336
    
    
    $
    422,367
    
    
    $
    462,336
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005EnvironmentalGross unpaid losses and ALAE, beginning of period
    
    $
    105,743
    
    
    $
    113,453
    
    
    $
    111,536
    
    
    $
    123,353Less ceded unpaid losses and ALAE
    
    
    35,491
    
    
    
    38,349
    
    
    
    37,293
    
    
    
    38,190Net unpaid losses and ALAE, beginning of period
    
    
    70,252
    
    
    
    75,104
    
    
    
    74,243
    
    
    
    85,163Net losses and ALAE incurred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net paid losses and ALAE
    
    
    1,177
    
    
    
    2,365
    
    
    
    5,168
    
    
    
    12,424Net unpaid losses and ALAE, end of period
    
    
    69,075
    
    
    
    72,739
    
    
    
    69,075
    
    
    
    72,739Add ceded unpaid losses and ALAE
    
    
    35,885
    
    
    
    38,693
    
    
    
    35,885
    
    
    
    38,693Gross unpaid losses and ALAE, end of period
    
    $
    104,960
    
    
    $
    111,432
    
    
    $
    104,960
    
    
    $
    111,432
 The Company also maintains reserves for other latent exposures such as those associated with
silica, chemicals, lead, mold and gas and vapors of $21,139 and $24,044, net of reinsurance,
as of September 30, 2006 and December 31, 2005, respectively.
 11




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 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 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Premiums written:Direct
    
    $
    292,692
    
    
    $
    268,950
    
    
    $
    899,508
    
    
    $
    812,048Assumed from other companies, pools or
associations
    
    
    43,861
    
    
    
    4,258
    
    
    
    125,645
    
    
    
    13,733Ceded to other companies, pools or associations
    
    
    (44,047
    )
    
    
    (84,083
    )
    
    
    (138,295
    )
    
    
    (179,632
    )Net premiums written
    
    $
    292,506
    
    
    $
    189,125
    
    
    $
    886,858
    
    
    $
    646,149Premiums earned:Direct
    
    $
    290,940
    
    
    $
    272,652
    
    
    $
    854,154
    
    
    $
    835,042Assumed from other companies, pools or
associations
    
    
    35,232
    
    
    
    4,709
    
    
    
    79,265
    
    
    
    13,056Ceded to other companies, pools or associations
    
    
    (46,541
    )
    
    
    (85,463
    )
    
    
    (142,241
    )
    
    
    (182,666
    )Premiums earned
    
    $
    279,631
    
    
    $
    191,898
    
    
    $
    791,178
    
    
    $
    665,432
 The increase in assumed premiums written and earned in the three and nine months ended
September 30, 2006, as compared to the corresponding prior year periods, is principally due
to the assumption of premiums written by Fairmont. For further details, see Note 1 to the
consolidated financial statements.
 The components of the Companys total reinsurance recoverable are summarized as follows:
 September 30,
    
    
    December 31,2006
    
    
    2005Reinsurance recoverable on unpaid losses and LAE
    
    $
    1,814,638
    
    
    $
    2,040,381Reinsurance receivable on paid losses and LAE
    
    
    71,214
    
    
    
    69,734Total reinsurance recoverable
    
    $
    1,885,852
    
    
    $
    2,110,115
 The reinsurance recoverable balances above are net of reserves for uncollectible reinsurance
of $41,383 and $34,441 at September 30, 2006 and December 31, 2005, respectively.Corporate aggregate reinsuranceCrum & Forsters underwriting results are significantly affected by reinsurance. The Company
purchases reinsurance to limit its exposure to loss from any one claim or occurrence (per
risk or per occurrence reinsurance), from aggregate loss experience for an accident year
that exceeds an amount the Company is willing to accept and from adverse development of prior
years loss and LAE reserves (the latter two types of reinsurance are referred to herein as
corporate aggregate reinsurance, as distinct from the aforementioned per risk or per
occurrence reinsurance). The Companys corporate aggregate reinsurance contracts are of
the type commonly referred to as finite reinsurance and cover or covered, in varying
amounts and on varying terms, accident years 2002 and prior.In general, contracts covering past insurable events, such as adverse loss development
covers, are categorized as retroactive reinsurance, as opposed to contracts covering future
insurable events, which are referred to as prospective reinsurance. Amounts ceded under
prospective contracts are recognized, as to premiums, as a reduction of premiums written and
earned in the period in which premiums are ceded and, as to losses, as a reduction of
incurred losses as the losses are ceded to the reinsurer. Under retroactive contracts, the
excess of reinsurance recoverable due from reinsurers pursuant to the contract over premiums
paid for coverage is deferred and amortized as a reduction of incurred losses over the
expected period of recovery, generally many years, using the interest method. Under both
prospective and retroactive contracts, funds held interest, if applicable, is recognized as a
reduction of investment income in the period in which the interest is credited to the funds
held account.
 12




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 The effect of prospective and retroactive corporate aggregate reinsurance on components of
the Companys consolidated statements of income is summarized as follows (increase (decrease)
in indicated component):
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Investment income
    
    $
    (4,818
    )
    
    $
    (4,830
    )
    
    $
    (14,470
    )
    
    $
    (13,753
    )Losses and LAE
    
    
    (3,435
    )
    
    
    1,039
    
    
    
    (10,249
    )
    
    
    (6,342
    )Decrease in income before income taxes
    
    $
    (1,383
    )
    
    $
    (5,869
    )
    
    $
    (4,221
    )
    
    $
    (7,411
    )
 At September 30, 2006, reinsurance recoverable includes $407,733 and $428,808 related to
prospective and retroactive corporate aggregate reinsurance contracts, respectively, of which
$489,177 has been recognized as a reduction of incurred losses and LAE on the Companys
consolidated statements of income.
 Prospective corporate aggregate reinsuranceAn analysis of activity in prospective corporate aggregate reinsurance contracts follows:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Ceded losses and LAE
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Less: funds held interest charged to investment income
    
    
    728
    
    
    
    1,097
    
    
    
    2,404
    
    
    
    3,521Decrease in income before income taxes
    
    $
    (728
    )
    
    $
    (1,097
    )
    
    $
    (2,404
    )
    
    $
    (3,521
    )
 The above activity arises from one prospective contract. The reinsurance recoverable and
funds held balances in respect of such contract were $40,233 and $35,260, respectively, at
September 30, 2006 ($53,145 and $45,769, respectively, at December 31, 2005).Retroactive corporate aggregate reinsuranceAn analysis of activity in retroactive corporate aggregate reinsurance contracts follows:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Increase in reinsurance recoverable due from insurers
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Less: related premiums paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income deferred during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred income
    
    
    (3,435
    )
    
    
    1,039
    
    
    
    (10,249
    )
    
    
    (6,342
    )Change in deferred income
    
    
    (3,435
    )
    
    
    1,039
    
    
    
    (10,249
    )
    
    
    (6,342
    )Deferred income on retroactive reinsurance, beginning of
period
    
    
    177,684
    
    
    
    215,979
    
    
    
    184,498
    
    
    
    223,360Deferred income on retroactive reinsurance, end of period
    
    $
    174,249
    
    
    $
    217,018
    
    
    $
    174,249
    
    
    $
    217,018Funds held interest charged during the period
    
    $
    4,090
    
    
    $
    3,733
    
    
    $
    12,066
    
    
    $
    10,232
 The above activity arises from two retroactive contracts. The reinsurance recoverable and
funds held balances in respect of the first contract were $377,020 and $204,040,
respectively, at September 30, 2006 ($377,020 and $193,944, respectively, at December 31,
2005). The reinsurance recoverable and funds held balances in respect of the second contract
were $32,540 and $39,832, respectively, at September 30, 2006 ($32,540 and $37,862,
respectively, at December 31, 2005). For additional information on the Companys prospective
and retroactive corporate aggregate reinsurance contracts, refer to the Companys Annual
Report on Form 10-K for the year ended December 31, 2005 filed with the SEC on March 22,
2006.
 13




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 6.
    
    InvestmentsDerivative Instruments and Hedging ActivitiesDuring the three months ended September 30, 2006, the Company purchased $6,997 of credit
default swaps on securities issued by various U.S. companies in the banking, mortgage and
insurance industries, bringing the total cost of credit default swaps held at September 30,
2006 to $77,621 ($70,624 at December 31, 2005). The fair value of the credit default swaps
was $22,546 and $33,559, at September 30, 2006 and December 31, 2005, respectively, and is
included in other invested assets on the consolidated balance sheets. These credit default
swaps serve as economic hedges against declines in the fair value of various financial assets owned by the Company arising from potential financial
difficulties associated with any or all of these issuers or the industries in which they
operate.The convertible bonds held by the Company, which contain embedded derivatives, are accounted
for under SFAS No. 133, which states that changes in the fair value attributable to the embedded derivative are
required to be recognized in realized investment gains and losses on the consolidated
statements of income. The estimated fair value of the embedded derivatives was $8,340 at
September 30, 2006, and is included in other invested assets on the consolidated balance
sheets. For further details in respect of certain investment accounting adjustments, see
Note 9 to the consolidated financial statements.In June 2006, as an economic hedge against a rising interest rate environment and
deteriorating conditions in the residential housing market, the Company sold short securities
of certain U.S. mortgage insurance companies totaling $24,931. The obligation to purchase the
securities is included, at fair value, in short-sale obligations on the consolidated balance
sheet and amounted to $24,918 at September 30, 2006.In July 2004 and January 2005 as an economic hedge against a decline in the U.S. equity
markets, the Company executed short-sales of Standard & Poors Depositary Receipts (SPDRs)
totaling approximately $300,000. Simultaneously, the Company purchased two-year S&P Index
call options (Options) limiting the potential loss on the future purchase of the SPDRs.
The total cost of the Options was $8,217. Certain of these options expired in July 2006 and
replacement six-month options, which will expire in January 2007, were purchased at a cost of
$1,900. The Options limit the potential loss to the Company upon purchase of the SPDRs to
approximately $70,000. Both the obligations to purchase the SPDRs and the Options are
carried at fair value on the consolidated financial statements. The fair value of the
obligation to purchase the SPDRs is included in short-sale obligations and the fair value of
the Options is included in other invested assets on the consolidated balance sheets. The
fair values of the SPDRs obligation and the Options at September 30, 2006 amounted to a
liability of $353,854 ($329,740 at December 31, 2005) and an asset of $4,666 ($6,358 at
December 31, 2005), respectively.In connection with the short-sale transactions described above, the Company has pledged cash
and U.S. Treasury securities as collateral for the obligation to purchase the securities sold
short. These assets are recorded at fair value in assets pledged for short-sale obligations
on the consolidated balance sheets. At September 30, 2006, the fair value of the assets
pledged for the short-sale obligations totaled $540,641 ($496,903 at December 31, 2005).Changes in the fair value for the transactions described above and other derivatives have
been included in realized investment gains in the consolidated statements of income as
follows:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Credit default swaps
    
    $
    (13,322
    )
    
    $
    (18,754
    )
    
    $
    (18,010
    )
    
    $
    (15,304
    )Embedded derivatives
    
    
    831
    
    
    
    
    
    
    
    (4,011
    )
    
    
    Short-sale transactions and related options
    
    
    (14,544
    )
    
    
    (9,169
    )
    
    
    (27,693
    )
    
    
    (12,575
    )Warrants, swaps and other derivatives
    
    
    (323
    )
    
    
    584
    
    
    
    (732
    )
    
    
    (2,317
    )Realized investment losses
    
    $
    (27,358
    )
    
    $
    (27,339
    )
    
    $
    (50,446
    )
    
    $
    (30,196
    )
 The Company also incurs additional expense in an amount equal to the dividend earnings on the
short-sale obligations. Dividend earnings on the short-sale obligations amounted to $1,554
and $4,403, respectively, for the three and nine months ended September 30, 2006 as compared
to $1,382 and $3,912, for the three and nine months ended September 30, 2005, respectively,
and are recorded as an investment expense on the consolidated statements of income.
 14




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 Other Investment TransactionsIn September 2006, the Company acquired an additional 196,538 units of the Dalton Greater
China Fund, an affiliate, for consideration of $5,281, bringing the total investment in
Dalton to $13,266. The units were purchased from various Fairfax companies at fair value.
At September 30, 2006, the carrying value of Dalton was $15,998 ($7,985 at December 31,
2005).In July 2006, the Company purchased 333,989 units of the Chou Associates Management Fund
(Chou), a related party, for consideration of $25,000.
The President and Chief Executive Officer of Chou is a Vice President of Fairfax. At September 30, 2006, the carrying
value of Chou was $25,479.In June 2006, the Company recorded a $5,400 other than temporary impairment charge,
substantially all of which was in respect of its investment in Advent Capital (Holdings) PLC,
(Advent), an affiliated company. At September 30, 2006, the Companys investment in Advent
had a fair value of $14,288 ($13,347 at December 31, 2005).In June 2006, the Company redeemed approximately 78% of its interest in HWIC Asia Fund
(HWIC), an affiliated equity method investee, for proceeds of $118,675 and a realized
investment gain of $5,053. At September 30, 2006, the Companys remaining investment in HWIC
has a carrying value of $36,474 ($135,297 at December 31, 2005) on the consolidated balance
sheet.In February 2006, the Company sold its remaining shares of Zenith National Insurance Corp.
common stock for proceeds of $169,311 and a realized investment gain of $106,578.The Company owns 1.2% of the common stock of Odyssey Re Holdings Corp. (Odyssey), for which
the Company uses the equity method of accounting. The Company has determined that the
cumulative effect on the Companys results of Odysseys restatement of its financial
statements as of and for each of the six years ended December 31, 2005 and for the quarter
ended March 31, 2006, was not material.Included in other assets and accounts payable and other liabilities on the consolidated
balance sheet at September 30, 2006, was $235,547 and $90,059, respectively, in respect of
proceeds receivable and payable from unsettled trades. Cash in respect of these unsettled
trades was received and paid in October 2006.At September 30, 2006, accumulated other comprehensive income (loss), net of tax, was a loss
of $29,730 as compared to income of $53,443 at December 31, 2005. The decrease in
accumulated other comprehensive income in the nine months ended September 30, 2006 is
principally the result of a reduction of unrealized investment gains attributable to the sale
of certain equity securities, including approximately $92.3 million on the aforementioned
sale of Zenith common stock.
 15




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 7.
    
    Commitments and ContingenciesOn September 7, 2005, Fairfax announced that it received a subpoena from the SEC requesting
documents regarding any non-traditional insurance or reinsurance transactions entered into or
offered by Fairfax and the entities in its consolidated group, which includes the Company.
The U.S. Attorneys Office for the Southern District of New York is reviewing documents
provided to the SEC in response to the subpoena and is participating in the investigation of
these matters. Fairfax and entities in its consolidated group are cooperating fully with
these requests. Fairfax and certain of the entities in its consolidated group, including the
Company, have prepared presentations and provided documents to the SEC and the U.S.
Attorneys Office, and employees of Fairfax and certain of the entities in its consolidated
group, including senior officers, have attended or have been requested to attend interviews
conducted by the SEC and the U.S. Attorneys Office. The Company is cooperating fully in
addressing its obligations under this subpoena. This inquiry is ongoing and the Company
continues to comply with requests from the SEC and the U.S. Attorneys office. At the
present time, the Company cannot predict the outcome of these matters, or the ultimate effect
on the Companys consolidated financial statements, which effect could be material and
adverse. No assurance can be made that the Company will not be subject to further requests
or other regulatory proceedings of a similar kind.The Company and US Fire, among numerous other insurance company and insurance broker
defendants, have been named as defendants in a class action suit filed by policyholders
alleging, among other things, that the defendants used the contingent commission structure to
deprive policyholders of free competition in the market for insurance. The action is pending
in the U.S. District Court for the District of New Jersey. Plaintiffs seek certification of
a nationwide class consisting of all persons who between August 26, 1994 and the date of
class certification engaged the services of any one of the broker defendants and who entered into or renewed a contract of insurance with one of the insurer defendants. The
Company and US Fire intend to defend vigorously the action.In the ordinary course of their business, Crum & Forsters subsidiaries receive claims
asserting alleged injuries and damages from asbestos and other hazardous waste and toxic
substances and are subject to related coverage litigation. The conditions surrounding the
final resolution of these claims and the related litigation continue to change. Currently,
it is not possible to predict judicial and legislative changes and their impact on the future
development of asbestos and environmental claims and litigation. This trend will be affected
by future court decisions and interpretations, as well as changes in applicable legislation
and the possible implementation of a proposed federal compensation scheme for
asbestos-related injuries. As a result of these uncertainties, additional liabilities may
arise for amounts in excess of current reserves for asbestos, environmental and other latent
exposures. These additional amounts, or a range of these additional amounts, cannot
currently be reasonably estimated. As a result of these claims, management continually reviews required reserves and reinsurance recoverable. In each of these areas of exposure,
the Company litigates individual cases when appropriate and endeavors to settle other claims
on favorable terms.The Companys subsidiaries are involved in various lawsuits and arbitration proceedings
arising in the ordinary course of business. While the 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 net income, financial position or
liquidity. However, it should be noted that the frequency of large damage awards in some
jurisdictions, including punitive damage awards that bear little or no relation to actual
economic damages incurred by plaintiffs, continues to create the potential for an
unpredictable judgment in any given matter.
 16




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 8.
    
    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 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Workers compensation
    
    $
    72,163
    
    
    $
    69,735
    
    
    $
    212,034
    
    
    $
    218,010General liability
    
    
    68,808
    
    
    
    49,595
    
    
    
    194,460
    
    
    
    151,214Property
    
    
    66,110
    
    
    
    9,019
    
    
    
    177,854
    
    
    
    106,177Commercial automobile
    
    
    52,870
    
    
    
    47,022
    
    
    
    153,220
    
    
    
    138,072Commercial multi-peril
    
    
    15,858
    
    
    
    11,665
    
    
    
    42,190
    
    
    
    34,693Surety
    
    
    3,822
    
    
    
    4,862
    
    
    
    11,420
    
    
    
    17,266Total premiums earned
    
    $
    279,631
    
    
    $
    191,898
    
    
    $
    791,178
    
    
    $
    665,432
 The losses and LAE and losses and LAE ratios of the Companys lines of business are
summarized as follows:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioWorkers compensation
    
    $
    51,783
    
    
    
    71.8
    %
    
    $
    61,154
    
    
    
    87.7
    %
    
    $
    150,234
    
    
    
    70.9
    %
    
    $
    183,925
    
    
    
    84.4
    %General liability
    
    
    36,570
    
    
    
    53.1
    %
    
    
    35,148
    
    
    
    70.9
    %
    
    
    136,467
    
    
    
    70.2
    %
    
    
    104,107
    
    
    
    68.8
    %Property
    
    
    65,933
    
    
    
    99.7
    %
    
    
    35,099
    
    
    
    389.2
    %
    
    
    142,817
    
    
    
    80.3
    %
    
    
    81,976
    
    
    
    77.2
    %Commercial automobile
    
    
    32,120
    
    
    
    60.8
    %
    
    
    30,902
    
    
    
    65.7
    %
    
    
    93,804
    
    
    
    61.2
    %
    
    
    77,266
    
    
    
    56.0
    %Commercial multi-peril
    
    
    69
    
    
    
    0.4
    %
    
    
    2,183
    
    
    
    18.7
    %
    
    
    3,297
    
    
    
    7.8
    %
    
    
    9,644
    
    
    
    27.8
    %Surety
    
    
    3,982
    
    
    
    104.2
    %
    
    
    5,146
    
    
    
    105.8
    %
    
    
    14,531
    
    
    
    127.2
    %
    
    
    28,884
    
    
    
    167.3
    %Total
    
    $
    190,457
    
    
    
    68.1
    %
    
    $
    169,632
    
    
    
    88.4
    %
    
    $
    541,150
    
    
    
    68.4
    %
    
    $
    485,802
    
    
    
    73.0
    %
 In the normal course of its periodic re-estimation of loss and LAE reserves, the Company may
increase or decrease loss and LAE reserves associated with prior years and may also adjust
the estimated loss and LAE ratios for the current accident year. These adjustments are made
by accident year within each line of business. For the nine months ended September 30, 2006
and 2005, net favorable development of prior years loss and LAE reserves reduced the
calendar period loss and LAE ratio for all lines by 3.5% and 3.2%, respectively. The nine
months current accident year loss and LAE ratio for all lines of business was 71.9% for 2006
and 76.2% for 2005.Significant variations in the 2006 calendar period loss and LAE ratio compared to the same
period in 2005 of the major lines of business may be explained as follows: (1) workers
compensation  the improvement was principally attributable to favorable development in 2006
of prior years reserves, particularly as respects California business; (2) general
liability  in the third quarter of 2006, the Company recognized favorable development in
umbrella and other general liability exposures, due in part to favorable settlements of prior
years claims; (3) property  the favorable effect of a lack of major hurricanes striking the U.S. in the third quarter of 2006 was
offset in part by an increased frequency of large fire losses; and (4) commercial automobile
 the deterioration in the nine month period was due to an increase in large claims in 2006.
In the third quarter of 2006, the Company recognized favorable development of commercial
automobile reserves due to continued lower than expected loss activity on the 2003 and prior
years.The Company does not allocate investment results or certain corporate expenses for purposes
of evaluating financial performance of each line of business.
 17




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 9.
    
    Accounting Adjustments in Respect of Certain InvestmentsDuring the third quarter of 2006, the Company identified and recorded two adjustments
associated with its accounting for investments. The net effect of these adjustments was a
decrease in investment income in the three months ended September 30, 2006 of $6,962 pre-tax
($4,525 after-tax) and an increase in investment income in the nine months ended September
30, 2006 of $2,589 pre-tax ($1,683 after-tax). The first adjustment was in respect of an
overstatement of investment income of $9,551 pre-tax ($6,208 after-tax) in the second quarter
of 2006, when the Company incorrectly recorded investment income based on a cash distribution
received from one of its equity method investees, instead of reducing its investment balance.
This error has been corrected by reducing investment income in the third quarter by $9,551
pre-tax ($6,208 after-tax). There is no year to date effect on investment income from this
adjustment. The second adjustment was in respect of an error which occurred in 2002, related
to the carrying value of an investment in an affiliated equity method investee. Correction
of this error in the third quarter of 2006 increased investment income by $2,589 pre-tax
($1,683 after-tax). Management has evaluated the financial impact of these accounting
adjustments and concluded that the effect both individually and in the aggregate was not
material to the current period or any prior period. Accordingly, prior period financial
statements have not been restated.During the second quarter of 2006, the Company identified and recorded certain adjustments
associated with its accounting for investments. The adjustments relate principally to three
areas: (1) equity method accounting  the Company did not properly reflect adjustments to
realized investment gains and losses reported by equity method investees arising from basis
differences associated with initial purchases or changes in ownership percentages. These
adjustments relate principally to the Companys investments in Northbridge Financial
Corporation (Northbridge) and HWIC; (2) partnership accounting  several of the Companys
partnership interests were recorded on the equity method of accounting pursuant to Statement
of Position 78-9, Accounting for Investments in Real Estate Ventures, even though the Company
did not have the ability to exercise significant influence over the investees. In such
circumstances, the Company should have retained the investment company accounting of the
investees; and (3) embedded derivatives mark-to-market  the Company did not properly reflect
the mark to market through earnings of derivative features embedded in convertible bonds
pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities.
Several of the Companys equity investees also held the same or similar securities with
embedded derivatives. The Company determined that the investees also did not properly
bifurcate their investments, which required adjustments to the Companys financial
statements. Management evaluated the financial impact of these accounting adjustments and
concluded that the effect both individually and in the aggregate was not material to the
second quarter results or any prior period. Accordingly, prior period financial statements
were not restated. Instead, the Company recorded a cumulative charge to net income in the
three months ended June 30, 2006 of $5,678 pre-tax ($3,691 after- tax) for these adjustments.
Of the $5,678 pre-tax charge, $4,255 was recorded as a charge to realized investment gains,
$3,534 ($2,297 after-tax) was recorded as a charge to equity in earnings of investees
(including $456 of previously waived immaterial adjustments) and $2,111 was recorded as an
increase to investment income on the consolidated statements of income. In addition, the
Company recorded a $7,369 increase to accumulated other comprehensive income, net of tax,
that together with the aforementioned $3,691 charge to net income, resulted in a $3,678
increase in shareholders equity.The aggregate effect of the second and third quarter adjustments resulted in a reduction to income
for the nine months ended September 30, 2006 of $3,089 pre-tax ($2,008 after tax).
 18




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    Statements Regarding Forward-Looking Information
  
    
    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 man-made catastrophic events;
    
    Competitive conditions in the insurance market;
    
    Inability to obtain reinsurance coverage on reasonable terms and prices;
    
    Changes in the business or regulatory environment in which the Company operates as a
result of recent insurance industry investigations by government authorities and other
parties;
    
    SEC requests for information from the Company;
    
    Inability to realize the Companys investment objectives;
    
    Loss of key producers;
    
    Exposure to emerging claims and coverage issues;
    
    Restrictions on the ability of the Companys insurance subsidiaries to pay dividends;
    
    Subordination of debt securities to the obligations and liabilities of the Companys insurance subsidiaries;
    
    Exposure to credit risk, in the event reinsurers or policyholders 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.
 19




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##### Table of Contents



Critical Accounting Policies and Estimates
    Unpaid losses and loss adjustment expenses
     20




---



##### Table of Contents



Other than temporary declines in value of investments
    Insurance Subsidiaries
 Reinsurance recoverable
    Deferred income tax assets
   21




---



##### Table of Contents



 Accounting for Income Taxes
 Summary of Operations
       22




---



##### Table of Contents



23




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Gross premiums written
    
    $
    336,553
    
    
    $
    273,208
    
    
    $
    1,025,153
    
    
    $
    825,781Net premiums written
    
    $
    292,506
    
    
    $
    189,125
    
    
    $
    886,858
    
    
    $
    646,149Premiums earned
    
    $
    279,631
    
    
    $
    191,898
    
    
    $
    791,178
    
    
    $
    665,432Losses and LAE
    
    
    190,457
    
    
    
    169,632
    
    
    
    541,150
    
    
    
    485,802Underwriting expenses
    
    
    82,013
    
    
    
    65,125
    
    
    
    231,414
    
    
    
    195,508Underwriting income
    
    
    7,161
    
    
    
    (42,859
    )
    
    
    18,614
    
    
    
    (15,878
    )Investment income and realized investment gains and losses
    
    
    66,597
    
    
    
    50,818
    
    
    
    347,414
    
    
    
    191,440Interest and other expense
    
    
    10,065
    
    
    
    8,556
    
    
    
    30,793
    
    
    
    28,201Income (loss) before income taxes and equity in earnings
of investees
    
    
    63,693
    
    
    
    (597
    )
    
    
    335,235
    
    
    
    147,361Income tax expense (benefit)
    
    
    21,674
    
    
    
    (1,024
    )
    
    
    115,139
    
    
    
    48,934Income before equity in earnings of investees
    
    
    42,019
    
    
    
    427
    
    
    
    220,096
    
    
    
    98,427Equity in earnings of investees, net of tax
    
    
    3,846
    
    
    
    5,674
    
    
    
    9,915
    
    
    
    14,428Net income
    
    $
    45,865
    
    
    $
    6,101
    
    
    $
    230,011
    
    
    $
    112,855Loss and LAE ratio
    
    
    68.1
    %
    
    
    88.4
    %
    
    
    68.4
    %
    
    
    73.0
    %Underwriting expense ratio
    
    
    29.3
    
    
    
    33.9
    
    
    
    29.2
    
    
    
    29.4Combined ratio
    
    
    97.4
    %
    
    
    122.3
    %
    
    
    97.6
    %
    
    
    102.4
    %
    24




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##### Table of Contents



Underwriting results
 Gross premiums written
  Three Months Ended September 30,Increase/
    
    
    Percent2006
    
    
    2005
    
    
    (Decrease)
    
    
    ChangeWorkers compensation
    
    $
    72,218
    
    
    $
    75,811
    
    
    $
    (3,593
    )
    
    
    (4.7
    )%General liability
    
    
    81,842
    
    
    
    60,499
    
    
    
    21,343
    
    
    
    35.3
    %Property
    
    
    99,100
    
    
    
    73,027
    
    
    
    26,073
    
    
    
    35.7
    %Commercial automobile
    
    
    58,779
    
    
    
    48,632
    
    
    
    10,147
    
    
    
    20.9
    %Commercial multi-peril
    
    
    20,999
    
    
    
    13,193
    
    
    
    7,806
    
    
    
    59.2
    %Surety
    
    
    3,615
    
    
    
    2,046
    
    
    
    1,569
    
    
    
    76.7
    %Total gross premiums written
    
    $
    336,553
    
    
    $
    273,208
    
    
    $
    63,345
    
    
    
    23.2
    %
 Nine Months Ended September 30,Increase/
    
    
    Percent2006
    
    
    2005
    
    
    (Decrease)
    
    
    ChangeWorkers compensation
    
    $
    212,119
    
    
    $
    208,394
    
    
    $
    3,725
    
    
    
    1.8
    %General liability
    
    
    269,789
    
    
    
    198,102
    
    
    
    71,687
    
    
    
    36.2
    %Property
    
    
    297,582
    
    
    
    217,490
    
    
    
    80,092
    
    
    
    36.8
    %Commercial automobile
    
    
    177,100
    
    
    
    146,926
    
    
    
    30,174
    
    
    
    20.5
    %Commercial multi-peril
    
    
    58,375
    
    
    
    37,519
    
    
    
    20,856
    
    
    
    55.6
    %Surety
    
    
    10,188
    
    
    
    17,350
    
    
    
    (7,162
    )
    
    
    (41.3
    )%Total gross premiums written
    
    $
    1,025,153
    
    
    $
    825,781
    
    
    $
    199,372
    
    
    
    24.1
    %
  Casualty gross premiums written
   25




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##### Table of Contents



Property gross premiums written
  Net premiums written
  Premiums earned
  Losses and loss adjustment expenses
    26




---



##### Table of Contents



Underwriting expenses
    Investment results
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Average investments, including cash
and cash equivalents, at book
value1
    
    $
    3,807,875
    
    
    $
    3,684,925
    
    
    $
    3,725,919
    
    
    $
    3,550,775Investment income
    
    $
    21,096
    
    
    $
    28,177
    
    
    $
    170,375
    
    
    $
    96,555Realized investment gains
    
    
    45,501
    
    
    
    22,641
    
    
    
    177,039
    
    
    
    94,885Pre-tax equity in earnings of investees
    
    
    5,917
    
    
    
    8,729
    
    
    
    15,254
    
    
    
    22,197Change in unrealized investment gains
(losses) and foreign currency
translation
    
    
    106,392
    
    
    
    (113,874
    )
    
    
    (127,958
    )
    
    
    (44,540
    )Total return on investments
    
    $
    178,906
    
    
    $
    (54,327
    )
    
    $
    234,710
    
    
    $
    169,097Annualized total return on investments
    
    
    18.8
    %
    
    
    (5.9
    )%
    
    
    8.4
    %
    
    
    6.3
    %
 
 1
    
    Includes book value of assets pledged for short-sale obligations of $545,845 at
September 30, 2006 ($493,187 at September 30, 2005).   27




---



##### Table of Contents



Interest and other expense
  Liquidity and Capital Resources
 Holding company
    28




---



##### Table of Contents



Insurance subsidiaries
   .
  At September 30, 2006Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed income securities:United States government and government agencies
and authorities1
    
    $
    1,777,246
    
    
    $
    87
    
    
    $
    115,580
    
    
    $
    1,661,753States, municipalities and political subdivisions
    
    
    4,906
    
    
    
    34
    
    
    
    
    
    
    
    4,940Other corporate fixed income securities
    
    
    208,855
    
    
    
    21,649
    
    
    
    76
    
    
    
    230,428Total fixed income securities
    
    
    1,991,007
    
    
    
    21,770
    
    
    
    115,656
    
    
    
    1,897,121Equity securities:Common stocks
    
    
    494,861
    
    
    
    40,467
    
    
    
    15,981
    
    
    
    519,347Preferred stocks
    
    
    17,377
    
    
    
    771
    
    
    
    
    
    
    
    18,148Total equity securities
    
    
    512,238
    
    
    
    41,238
    
    
    
    15,981
    
    
    
    537,495Total available-for-sale securities
    
    $
    2,503,245
    
    
    $
    63,008
    
    
    $
    131,637
    
    
    $
    2,434,616
 
 1
    
    Includes U.S. Treasury securities pledged for short-sale obligations at a fair value
of $155,589 (cost of $160,793).      29




---



##### Table of Contents



Ratings
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    30




---



##### Table of Contents



Interest Rate Risk
  At September 30, 2006Fair Value ofFixed Income
    
    
    Hypothetical
    
    
    HypotheticalPortfolio
    
    
    $ Change
    
    
    % Change200 basis point decline
    
    $
    2,469,376
    
    
    $
    572,255
    
    
    
    30.2
    %100 basis point decline
    
    $
    2,164,171
    
    
    $
    267,050
    
    
    
    14.1
    %Base scenario
    
    $
    1,897,121
    
    
    
    
    
    
    
    100 basis point increase
    
    $
    1,682,886
    
    
    $
    (214,235
    )
    
    
    (11.3
    )%200 basis point increase
    
    $
    1,501,628
    
    
    $
    (395,493
    )
    
    
    (20.8
    )%
  Equity Price Risk
   Foreign Currency Exchange Rate Risk
  31




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
     Remediation of Material Weakness in Internal Control Over Financial Reporting
    Changes in Internal Control Over Financial Reporting
  32




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##### Table of Contents



Part II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
  33




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##### Table of Contents



SIGNATURES
  CRUM & FORSTER HOLDINGS CORP.(Registrant)Date: November 2, 2006
    
    By:
    
    /s/ Nikolas AntonopoulosNikolas AntonopoulosPresident and Chief Executive OfficerDate: November 2, 2006
    
    By:
    
    /s/ Mary Jane RobertsonMary Jane RobertsonExecutive Vice President, Chief Financial Officer and Treasurer
 34




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##### Table of Contents



INDEX TO EXHIBITS
 Exhibit No.*
    
    31.1 Certification of President and Chief Executive Officer 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 President and Chief Executive Officer 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 
Item 1A. Risk
Factors in the Companys Annual Report on Form 10-K for the year ended
 December 31, 2005
filed with the Securities and Exchange Commission on March 22, 2006).
 
 *
    
    Filed herewith 35