##### 



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:
    

Commission
File Number:September 30, 2007
    

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. Employer Identification Number)Incorporation or Organization)
 305 Madison Avenue, Morristown, New Jersey 07962
 Address of principal executive office  (973) 490-6600  (Registrants telephone number, including area code)
 þ o
  Large accelerated filer o
    
    Accelerated filer o
    

Non-accelerated
filer þ
 o þ
  Class
    
    Number of Shares Outstanding at November 1, 2007Common Stock, $.01 Par Value
    
    100




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##### 



CRUM & FORSTER HOLDINGS CORP.
 Form 10-Q
 Index
  
 PageNumberPART I 
FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS  UNAUDITEDConsolidated Balance Sheets at September 30, 2007 and December 31, 2006
    
    3Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2007 and 2006
    
    4Consolidated Statements of Shareholders Equity for the Nine Months Ended September 30, 2007 and 2006
    
    5Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2007 and 2006
    
    6Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006
    
    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
    
    32ITEM 4. CONTROLS AND PROCEDURES
    
    33PART II 
OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS
    
    34ITEM 6. EXHIBITS
    
    34SIGNATURES
    
    35INDEX TO EXHIBITS
    
    36
  2




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##### 



PART I
FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 CRUM & FORSTER HOLDINGS CORP.
 
 CONSOLIDATED BALANCE SHEETS
 UNAUDITED
 (Dollars in thousands, except per share amounts)
 September 30,
    
    
    December 31,2007
    
    

2006ASSETSInvestments:Fixed income securities, at fair value (amortized cost of $1,833,714 and $2,087,065 in 2007
and 2006, respectively)
    
    $
    1,726,380
    
    
    $
    1,984,242Equity securities, at fair value (cost of $646,822 and $640,880 in 2007 and 2006, respectively)
    
    
    698,321
    
    
    
    667,718Other invested assets
    
    
    480,914
    
    
    
    357,849Hybrid financial instruments, at fair value
    
    
    134,770
    
    
    
    Short-term investments at cost, which approximates fair value
    
    
    63,524
    
    
    
    14,130Total investments
    
    
    3,103,909
    
    
    
    3,023,939Cash and cash equivalents
    
    
    326,742
    
    
    
    366,743Assets pledged for short-sale obligations
    
    
    871,016
    
    
    
    535,594Accrued investment income
    
    
    18,227
    
    
    
    34,581Premiums receivable
    
    
    228,852
    
    
    
    249,913Reinsurance recoverable
    
    
    1,366,691
    
    
    
    1,479,331Reinsurance recoverable from affiliates
    
    
    240,767
    
    
    
    254,595Prepaid reinsurance premiums
    
    
    22,248
    
    
    
    25,430Deferred income taxes
    
    
    190,589
    
    
    
    285,902Deferred policy acquisition costs
    
    
    80,618
    
    
    
    83,964Other assets
    
    
    83,537
    
    
    
    103,562Total assets
    
    $
    6,533,196
    
    
    $
    6,443,554LIABILITIESUnpaid losses and loss adjustment expenses
    
    $
    3,275,814
    
    
    $
    3,371,549Unearned premiums
    
    
    539,630
    
    
    
    576,182Funds held under reinsurance contracts
    
    
    249,451
    
    
    
    243,316Accounts payable and other liabilities
    
    
    234,871
    
    
    
    298,101Deferred income on retroactive insurance
    
    
    157,199
    
    
    
    168,018Short-sale obligations
    
    
    654,207
    
    
    
    400,163Long-term debt
    
    
    312,870
    
    
    
    293,170Total liabilities
    
    
    5,424,042
    
    
    
    5,350,499Commitments and contingencies (Note 9)SHAREHOLDER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, net of tax
    
    
    (4,059
    )
    
    
    (36,978
    )Retained earnings
    
    
    372,220
    
    
    
    389,040Total shareholders equity
    
    
    1,109,154
    
    
    
    1,093,055Total liabilities and shareholders equity
    
    $
    6,533,196
    
    
    $
    6,443,554
 The accompanying notes are an integral part of the consolidated financial statements.
 3




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##### 



CRUM & FORSTER HOLDINGS CORP.
 
 CONSOLIDATED STATEMENTS OF INCOME
 UNAUDITED
 (Dollars in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUESPremiums earned
    
    $
    293,375
    
    
    $
    279,631
    
    
    $
    893,903
    
    
    $
    791,178Investment income
    
    
    34,296
    
    
    
    21,096
    
    
    
    109,226
    
    
    
    170,375Realized investment gains
    
    
    70,220
    
    
    
    45,501
    
    
    
    73,627
    
    
    
    177,039Total revenues
    
    
    397,891
    
    
    
    346,228
    
    
    
    1,076,756
    
    
    
    1,138,592EXPENSESLosses and loss adjustment expenses
    
    
    192,468
    
    
    
    190,457
    
    
    
    587,618
    
    
    
    541,150Policy acquisition costs
    
    
    45,629
    
    
    
    42,139
    
    
    
    131,311
    
    
    
    110,918Other underwriting expenses
    
    
    40,928
    
    
    
    39,874
    
    
    
    122,428
    
    
    
    120,496Interest expense
    
    
    6,971
    
    
    
    8,250
    
    
    
    22,835
    
    
    
    24,734Costs related to early retirement of debt
    
    
    
    
    
    
    
    
    
    
    21,188
    
    
    
    Other expense, net
    
    
    1,149
    
    
    
    1,815
    
    
    
    960
    
    
    
    6,059Total expenses
    
    
    287,145
    
    
    
    282,535
    
    
    
    886,340
    
    
    
    803,357Income before income taxes and equity in
earnings of investees
    
    
    110,746
    
    
    
    63,693
    
    
    
    190,416
    
    
    
    335,235Income tax expense
    
    
    37,940
    
    
    
    21,674
    
    
    
    64,147
    
    
    
    115,139Income before equity in earnings of investees
    
    
    72,806
    
    
    
    42,019
    
    
    
    126,269
    
    
    
    220,096Equity in earnings of investees, net of tax
    
    
    10,051
    
    
    
    3,846
    
    
    
    18,146
    
    
    
    9,915NET INCOME
    
    $
    82,857
    
    
    $
    45,865
    
    
    $
    144,415
    
    
    $
    230,011
 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
 UNAUDITED
 (Dollars in thousands)
 Nine Months EndedSeptember 30,2007
    
    
    2006COMMON STOCKBalance, beginning and end of period
    
    $
    
    
    
    $
    ADDITIONAL PAID-IN CAPITALBalance, beginning and end of period
    
    
    740,993
    
    
    
    740,993ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAXBalance, beginning of period
    
    
    (36,978
    )
    
    
    53,443Cumulative effect of adoption of Statement of Financial Accounting Standards No. 155
    
    
    (10,146
    )
    
    
    Unrealized investment gains (losses), net of transfers to realized investment gains
and losses
    
    
    24,856
    
    
    
    (87,839
    )Foreign currency translation
    
    
    18,209
    
    
    
    4,666Balance, end of period
    
    
    (4,059
    )
    
    
    (29,730
    )RETAINED EARNINGSBalance, beginning of period
    
    
    389,040
    
    
    
    166,757Cumulative effect of adoption of Statement of Financial Accounting Standards No.
155 and equity method investee adoption of FASB Interpretation No. 48
    
    
    9,465
    
    
    
    Net income
    
    
    144,415
    
    
    
    230,011Dividends to shareholder
    
    
    (170,700
    )
    
    
    (90,000
    )Balance, end of period
    
    
    372,220
    
    
    
    306,768TOTAL SHAREHOLDERS EQUITY
    
    $
    1,109,154
    
    
    $
    1,018,031
 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 INCOME
 UNAUDITED
 (Dollars in thousands)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006NET INCOME
    
    $
    82,857
    
    
    $
    45,865
    
    
    $
    144,415
    
    
    $
    230,011Change in components of other comprehensive income (loss) for
the period, before tax:Unrealized investment gains (losses), net of transfers to
realized investment gains and losses
    
    
    75,307
    
    
    
    107,014
    
    
    
    38,210
    
    
    
    (135,136
    )Foreign currency translation
    
    
    12,717
    
    
    
    (622
    )
    
    
    28,014
    
    
    
    7,178Other comprehensive income (loss) for the period, before
tax
    
    
    88,024
    
    
    
    106,392
    
    
    
    66,224
    
    
    
    (127,958
    )Deferred income tax (expense) benefit for the period:Deferred income tax (expense) benefit from unrealized
investment gains and losses
    
    
    (26,338
    )
    
    
    (37,455
    )
    
    
    (13,354
    )
    
    
    47,297Deferred income tax (expense) benefit from foreign currency
translation
    
    
    (4,451
    )
    
    
    218
    
    
    
    (9,805
    )
    
    
    (2,512
    )Total deferred income tax (expense) benefit for the period
    
    
    (30,789
    )
    
    
    (37,237
    )
    
    
    (23,159
    )
    
    
    44,785Other comprehensive income (loss) for the period, net of tax
    
    
    57,235
    
    
    
    69,155
    
    
    
    43,065
    
    
    
    (83,173
    )COMPREHENSIVE INCOME
    
    $
    140,092
    
    
    $
    115,020
    
    
    $
    187,480
    
    
    $
    146,838
 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
 UNAUDITED
 (Dollars in thousands)
 Nine Months EndedSeptember 30,2007
    
    

2006OPERATING ACTIVITIESNet income
    
    $
    144,415
    
    
    $
    230,011Adjustments to reconcile net income to net cash from operating activities:Net accretion of discount on fixed income securities
    
    
    (7,136
    )
    
    
    (7,731
    )Realized investment gains
    
    
    (73,627
    )
    
    
    (177,039
    )Earnings of equity method investees, net of dividends
    
    
    (23,995
    )
    
    
    (11,414
    )Earnings of investment companies and similar equity method investees
    
    
    (9,177
    )
    
    
    (81,036
    )Depreciation and amortization
    
    
    2,382
    
    
    
    2,409Deferred income tax expense (benefit)
    
    
    72,522
    
    
    
    (20,826
    )Non-cash costs related to early retirement of debt
    
    
    9,216
    
    
    
    Other non-cash net income adjustments
    
    
    6,982
    
    
    
    11,330Changes in:Accrued investment income
    
    
    16,354
    
    
    
    20,136Premiums receivable
    
    
    21,811
    
    
    
    (1,479
    )Reinsurance recoverable
    
    
    114,050
    
    
    
    204,985Prepaid reinsurance premiums
    
    
    3,182
    
    
    
    3,946Deferred policy acquisition costs
    
    
    3,346
    
    
    
    (14,887
    )Other assets
    
    
    207
    
    
    
    5,496Unpaid losses and loss adjustment expenses
    
    
    (95,735
    )
    
    
    (161,766
    )Unearned premiums
    
    
    (36,552
    )
    
    
    91,734Accounts payable and other liabilities
    
    
    (98,313
    )
    
    
    (11,213
    )Net cash from operating activities
    
    
    49,932
    
    
    
    82,656INVESTING ACTIVITIESPurchases of fixed income securities
    
    
    (149,314
    )
    
    
    (153,087
    )Proceeds from sales of fixed income securities
    
    
    209,153
    
    
    
    393,088Proceeds from maturities of fixed income securities
    
    
    2,025
    
    
    
    60,005Purchases of equity securities
    
    
    (202,957
    )
    
    
    (309,577
    )Proceeds from sales of equity securities
    
    
    203,094
    
    
    
    332,973Purchases of other invested assets
    
    
    (25,862
    )
    
    
    (26,037
    )Proceeds from sales of other invested assets
    
    
    62,155
    
    
    
    143,314Proceeds from sales of hybrid financial instruments
    
    
    2,259
    
    
    
    Purchases of short term investments
    
    
    (138,282
    )
    
    
    Proceeds from sales of short term investments
    
    
    88,888
    
    
    
    Proceeds from short-sale obligations
    
    
    231,688
    
    
    
    24,931Cash pledged for short-sale obligations
    
    
    (253,516
    )
    
    
    (70,702
    )Purchases of fixed assets
    
    
    (804
    )
    
    
    (739
    )Net cash from investing activities
    
    
    28,527
    
    
    
    394,169FINANCING ACTIVITIESDividends to shareholder
    
    
    (128,818
    )
    
    
    (90,000
    )Issuance of 7 3/4% long-term debt
    
    
    330,000
    
    
    
    Repayment of 10 3/8% long-term debt
    
    
    (295,730
    )
    
    
    New debt issuance costs
    
    
    (23,912
    )
    
    
    Net cash used in financing activities
    
    
    (118,460
    )
    
    
    (90,000
    )Net change in cash and cash equivalents
    
    
    (40,001
    )
    
    
    386,825Cash and cash equivalents, beginning of period
    
    
    366,743
    
    
    
    245,441Cash and cash equivalents, end of period
    
    $
    326,742
    
    
    $
    632,266SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    $
    12,324
    
    
    $
    15,563Cash paid to parent for income taxes
    
    $
    43,261
    
    
    $
    108,144SUPPLEMENTAL NON-CASH OPERATING AND FINANCING ACTIVITIESNote received from parent in partial settlement of the Companys tax net operating losses
    
    $
    41,882
    
    
    $
    In-kind dividend payment to parent representing cancellation of the aforementioned note
    
    $
    41,882
    
    
    $
    
 The accompanying notes are an integral part of the consolidated financial statements.
 7




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##### 



NOTES TO 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 symbol FFH. 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, Crum & Forster Holding Inc. and their wholly-owned subsidiaries,
including 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 conducted 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, the policies underwritten by Fairmont were
issued initially by the insurance companies of Fairmont Specialty Group and assumed by the
Company through a 100% quota share reinsurance agreement. As of September 30, 2007,
substantially all Fairmont business is written directly by Crum & Forster.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,
2006, filed with the Securities and Exchange Commission (SEC) on March 9, 2007.The interim financial data at September 30, 2007 and for the three and nine months ended
September 30, 2007 and 2006 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 2007 presentation.
 8




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 2.
    
    Recent Accounting PronouncementsIn February 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities  Including an Amendment of FASB Statement No. 115(SFAS 159),
which provides the option to measure many financial instruments and certain other assets and
liabilities at fair value on an instrument-by-instrument basis. SFAS 159 is effective for
fiscal years beginning after November 15, 2007. The Company is currently evaluating the
impact of adoption of SFAS 159 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. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The
Company is currently evaluating the effects of SFAS 157 but does not expect its adoption to
have a material impact on its results of operations or financial position.In June 2006, the FASB issued FASB Interpretation 48, Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement No. 109(FIN 48). The interpretation clarifies
the accounting for uncertainty in income taxes recognized in a companys financial statements
in accordance with SFAS 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 adopted FIN 48 on January 1, 2007 and although its adoption
did not have a direct impact on the Companys results of operations or financial position,
adoption of FIN 48 by one of the Companys equity method investees resulted in the Company
recording a cumulative adjustment of $681, net of tax, to opening retained earnings.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
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 requiring bifurcation. SFAS 155 also permits an election
for fair value measurement of any hybrid financial instrument that otherwise would require
bifurcation under SFAS 133. Changes in fair value are recorded as realized investment gains
or losses. 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 effective for fiscal years beginning after September 15,
2006. The Company elected fair value measurement of its hybrid financial instruments, which
are comprised of convertible bonds, effective with its adoption of SFAS 155 on January 1,
2007. Prior to January 1, 2007, the Company bifurcated its hybrid financial instruments and
changes in the fair value of the host instrument were recorded as unrealized investment gains
and losses while changes in the fair value of the embedded derivative were recorded as
realized investment gains and losses. At December 31, 2006, the fair value of the host
instruments included in fixed income securities was $136,222 and the fair value of embedded
derivatives included in other invested assets was $7,372.  Upon adoption of SFAS 155, the
Company recorded a cumulative adjustment of $10,146, inclusive of an adjustment of $301 in
respect of adoption of SFAS 155 by one of the Companys equity method investees, net of tax,
to reclassify unrealized investment gains associated with the host instruments to opening
retained earnings.  At September 30, 2007, the fair value of the Companys hybrid financial
instruments was $134,770.
 9




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##### 



NOTES TO 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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Gross unpaid losses and LAE, beginning of
period
    
    $
    3,317,465
    
    
    $
    3,562,337
    
    
    $
    3,371,549
    
    
    $
    3,673,034Less ceded unpaid losses and LAE
    
    
    1,287,904
    
    
    
    1,545,870
    
    
    
    1,355,253
    
    
    
    1,682,768Net unpaid losses and LAE, beginning of
period
    
    
    2,029,561
    
    
    
    2,016,467
    
    
    
    2,016,296
    
    
    
    1,990,266Losses and LAE incurred related to:Current period
    
    
    202,331
    
    
    
    213,594
    
    
    
    624,280
    
    
    
    569,029Prior years
    
    
    (9,863
    )
    
    
    (23,137
    )
    
    
    (36,662
    )
    
    
    (27,879
    )Total losses and LAE incurred
    
    
    192,468
    
    
    
    190,457
    
    
    
    587,618
    
    
    
    541,150Losses and LAE paid related to:Current period
    
    
    75,124
    
    
    
    58,541
    
    
    
    139,452
    
    
    
    95,025Prior years
    
    
    130,880
    
    
    
    104,389
    
    
    
    448,437
    
    
    
    392,397Total losses and LAE paid
    
    
    206,004
    
    
    
    162,930
    
    
    
    587,889
    
    
    
    487,422Net unpaid losses and LAE, end of period
    
    
    2,016,025
    
    
    
    2,043,994
    
    
    
    2,016,025
    
    
    
    2,043,994Add ceded unpaid losses and LAE
    
    
    1,259,789
    
    
    
    1,467,274
    
    
    
    1,259,789
    
    
    
    1,467,274Gross unpaid losses and LAE, end of period
    
    $
    3,275,814
    
    
    $
    3,511,268
    
    
    $
    3,275,814
    
    
    $
    3,511,268
 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 30,2007Ceded unpaid losses and LAE in the table above
    
    $
    1,259,789Reconciling items:Reinsurance receivable on paid losses and LAE
    
    
    50,748Unamortized retroactive reinsurance recoverable
    
    
    318,431Loss sensitive cession1
    
    
    (21,510
    )Total reconciling items
    
    
    347,669Reinsurance recoverable on the consolidated balance sheet
    
    $
    1,607,458
 
 1
    
    Equals additional premiums due on retrospectively rated
insurance policies that inure to the benefit of the reinsurer. 10




---



##### 



NOTES TO 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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006AsbestosGross unpaid losses and allocated LAE
(ALAE), beginning of period
    
    $
    421,380
    
    
    $
    441,752
    
    
    $
    443,055
    
    
    $
    469,199Less ceded unpaid losses and ALAE
    
    
    92,426
    
    
    
    84,965
    
    
    
    94,817
    
    
    
    92,418Net unpaid losses and ALAE, beginning of period
    
    
    328,954
    
    
    
    356,787
    
    
    
    348,238
    
    
    
    376,781Net losses and ALAE incurred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net paid losses and ALAE
    
    
    8,268
    
    
    
    14,860
    
    
    
    27,552
    
    
    
    34,854Net unpaid losses and ALAE, end of period
    
    
    320,686
    
    
    
    341,927
    
    
    
    320,686
    
    
    
    341,927Add ceded unpaid losses and ALAE
    
    
    89,498
    
    
    
    80,440
    
    
    
    89,498
    
    
    
    80,440Gross unpaid losses and ALAE, end of period
    
    $
    410,184
    
    
    $
    422,367
    
    
    $
    410,184
    
    
    $
    422,367
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006EnvironmentalGross unpaid losses and ALAE, beginning of period
    
    $
    96,813
    
    
    $
    105,743
    
    
    $
    110,636
    
    
    $
    111,536Less ceded unpaid losses and ALAE
    
    
    32,250
    
    
    
    35,491
    
    
    
    37,103
    
    
    
    37,293Net unpaid losses and ALAE, beginning of period
    
    
    64,563
    
    
    
    70,252
    
    
    
    73,533
    
    
    
    74,243Net losses and ALAE incurred
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net paid losses and ALAE
    
    
    (136
    )
    
    
    1,177
    
    
    
    8,834
    
    
    
    5,168Net unpaid losses and ALAE, end of period
    
    
    64,699
    
    
    
    69,075
    
    
    
    64,699
    
    
    
    69,075Add ceded unpaid losses and ALAE
    
    
    30,957
    
    
    
    35,885
    
    
    
    30,957
    
    
    
    35,885Gross unpaid losses and ALAE, end of period
    
    $
    95,656
    
    
    $
    104,960
    
    
    $
    95,656
    
    
    $
    104,960
 The Company also maintains reserves for other latent exposures such as those associated with
silica, gas and vapors, lead, mold, chemical, welding fumes and pesticides of $18,524 and
$21,758, net of reinsurance, as of September 30, 2007 and December 31, 2006, respectively.
 11




---



##### 



NOTES TO 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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Premiums written:Direct
    
    $
    286,480
    
    
    $
    292,692
    
    
    $
    937,519
    
    
    $
    899,508Assumed from other companies,
pools or associations
    
    
    10,412
    
    
    
    43,861
    
    
    
    31,899
    
    
    
    125,645Ceded to other companies, pools or
associations
    
    
    (30,113
    )
    
    
    (44,047
    )
    
    
    (108,885
    )
    
    
    (138,295
    )Net premiums written
    
    $
    266,779
    
    
    $
    292,506
    
    
    $
    860,533
    
    
    $
    886,858Premiums earned:Direct
    
    $
    309,585
    
    
    $
    290,940
    
    
    $
    939,386
    
    
    $
    854,154Assumed from other companies,
pools or associations
    
    
    14,565
    
    
    
    35,232
    
    
    
    66,584
    
    
    
    79,265Ceded to other companies, pools or
associations
    
    
    (30,775
    )
    
    
    (46,541
    )
    
    
    (112,067
    )
    
    
    (142,241
    )Premiums earned
    
    $
    293,375
    
    
    $
    279,631
    
    
    $
    893,903
    
    
    $
    791,178
 The components of the Companys total reinsurance recoverable are summarized as follows:
 September 30,
    
    
    December 31,2007
    
    
    2006Reinsurance recoverable on unpaid losses and LAE
    
    $
    1,556,710
    
    
    $
    1,662,993Reinsurance receivable on paid losses and LAE
    
    
    50,748
    
    
    
    70,933Total reinsurance recoverable
    
    $
    1,607,458
    
    
    $
    1,733,926
 The reinsurance recoverable balances above are net of reserves for uncollectible reinsurance
of $48,253 and $42,777 at September 30, 2007 and December 31, 2006, respectively.Corporate Aggregate ReinsuranceCrum & Forsters underwriting results are significantly affected by reinsurance. The Company
currently purchases, or has in the past purchased, 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




---



##### 



NOTES TO 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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Investment income
    
    $
    (4,214
    )
    
    $
    (4,818
    )
    
    $
    (12,552
    )
    
    $
    (14,470
    )Losses and LAE
    
    
    (4,045
    )
    
    
    (3,435
    )
    
    
    (10,819
    )
    
    
    (10,249
    )Decrease in income before income taxes
    
    $
    (169
    )
    
    $
    (1,383
    )
    
    $
    (1,733
    )
    
    $
    (4,221
    )
 At September 30, 2007, reinsurance recoverable includes $398,621 and $391,825 related to
prospective and retroactive corporate aggregate reinsurance contracts, respectively, of which
$493,525 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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Ceded losses and LAE
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Less: funds held interest charged to investment income
    
    
    572
    
    
    
    728
    
    
    
    1,809
    
    
    
    2,404Decrease in income before income taxes
    
    $
    (572
    )
    
    $
    (728
    )
    
    $
    (1,809
    )
    
    $
    (2,404
    )
 The above activity arises from one prospective contract. The reinsurance recoverable and
funds held balances in respect of such contract were $31,121 and $28,612, respectively, at
September 30, 2007 ($37,651 and $33,333, respectively, at December 31, 2006).Retroactive Corporate Aggregate ReinsuranceAn analysis of activity in retroactive corporate aggregate reinsurance contracts follows:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Increase in reinsurance recoverable
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Less: related premiums paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income deferred during the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amortization of deferred income
    
    
    (4,045
    )
    
    
    (3,435
    )
    
    
    (10,819
    )
    
    
    (10,249
    )Change in deferred income
    
    
    (4,045
    )
    
    
    (3,435
    )
    
    
    (10,819
    )
    
    
    (10,249
    )Deferred income on retroactive
reinsurancebeginning of period
    
    
    161,244
    
    
    
    177,684
    
    
    
    168,018
    
    
    
    184,498Deferred income on retroactive
reinsuranceend of period
    
    $
    157,199
    
    
    $
    174,249
    
    
    $
    157,199
    
    
    $
    174,249Funds held interest charged during the period
    
    $
    3,642
    
    
    $
    4,090
    
    
    $
    10,743
    
    
    $
    12,066
 The above activity arises from two retroactive contracts. The reinsurance recoverable and
funds held balances in respect of the first contract were $372,577 and $217,128,
respectively, at September 30, 2007 ($372,577 and $206,385, respectively, at December 31,
2006). There were no reinsurance recoverable or funds held balances in respect of the second
contract at September 30, 2007 and December 31, 2006 as the Company has reduced the funds
held balance to offset the reinsurance recoverable balance pursuant to a commutation
provision contained in the contract. 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, 2006, filed with the SEC on March
9, 2007.
 13




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 6.
    
    Investments and Short-Sale ObligationsDerivative Transactions and Short-Sale ObligationsThe Company has purchased credit default swaps on securities issued by various U.S. companies
in the banking, mortgage and insurance industries. 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. During the nine months ended September 30,
2007, the Company purchased $10,012 of credit default swaps and sold a credit default swap
(with a cost and fair value of $270 and $2,259, respectively), bringing the total cost of
credit default swaps held at September 30, 2007 to $87,363 as compared to $77,621 at December
31, 2006. The fair value of the credit default swaps was $109,774 and $16,702, at September
30, 2007 and December 31, 2006, respectively, and is included in other invested assets on the
consolidated balance sheets. The notional value of the credit default swaps was $5.2 billion
and $4.2 billion at September 30, 2007 and December 31, 2006, respectively, with an average
term to expiration of 3.9 years as of September 30, 2007.During the three months ended September 30, 2007, the Company executed additional short-sales
of Standard & Poors Depositary Receipts (SPDRs) of approximately $200,000, bringing the
total short positions held in SPDRs to approximately $500,000 at September 30, 2007. These
short positions serve as an economic hedge against a decline in the U.S. equity markets. In
connection with the SPDRs transactions, the Company has purchased S&P Index call options (the
Options) limiting the potential loss on the future purchase of the SPDRs to approximately
$189,000 at September 30, 2007 ($70,000 at December 31, 2006). 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, 2007 amounted to a liability of $610,713 and an asset of $170 at September 30,
2007 and a liability of $375,558 and an asset of $9,925 at December 31, 2006.As an economic hedge against rising interest rates and deteriorating conditions in the
residential housing market, the Company holds short positions on securities of certain U.S.
financial guarantee insurance companies, mortgage insurance companies and financial
institutions totaling approximately $50,000 and $25,000 at September 30, 2007 and December
31, 2006, respectively. The obligation to purchase these securities is included, at fair
value, in short-sale obligations on the consolidated balance sheets and amounted to $43,494
and $24,605, at September 30, 2007 and December 31, 2006, respectively.In connection with the short-sales of SPDRs and common stocks 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, 2007, the fair
value of the assets pledged for the short-sale obligations totaled $871,016 ($535,594 at
December 31, 2006).The Company also has investments in warrants, which are contracts that grant the holder the
right to purchase an underlying financial instrument at a given price and time. The fair
value of the warrants, which are included in other invested assets on the consolidated
balance sheets, was $7,696 and $9,645 at September 30, 2007 and December 31, 2006,
respectively.Changes in fair value of the
transactions described above and of the Companys hybrid financial
instruments have been included in realized investment gains and losses in the consolidated
statements of income as follows:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Credit default swaps
    
    $
    73,510
    
    
    $
    (13,322
    )
    
    $
    85,319
    
    
    $
    (18,010
    )SPDRs sold short
    
    
    (12,555
    )
    
    
    (17,013
    )
    
    
    (35,292
    )
    
    
    (24,115
    )Common stocks sold short
    
    
    12,085
    
    
    
    589
    
    
    
    12,936
    
    
    
    14S&P Index call options
    
    
    3,453
    
    
    
    1,880
    
    
    
    5,612
    
    
    
    (3,592
    )Warrants and other derivatives
    
    
    1,846
    
    
    
    (323
    )
    
    
    (1,949
    )
    
    
    (732
    )Hybrid financial instruments
    
    
    (8,172
    )
    
    
    831
    
    
    
    (19,189
    )
    
    
    (4,011
    )Amount
included in realized investment gains (losses)
    
    $
    70,167
    
    
    $
    (27,358
    )
    
    $
    47,437
    
    
    $
    (50,446
    )
 14




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 The Company also incurs an expense in an amount equal to the dividend earnings on the
short-sale obligations. Dividend earnings on the short-sale obligations amounted to $2,935
and $6,171, respectively, for the three and nine months ended September 30, 2007 as compared
to $1,554 and $4,403, respectively, for the three and nine months ended September 30, 2006,
and are recorded as a reduction of investment income on the consolidated statements of
income.Other Investment TransactionsOn March 15, 2007, the Company sold its 1.1% ownership interest in Odyssey Re Holdings Corp.,
an affiliated equity method investee, to TIG Insurance Company, a subsidiary of Fairfax, for
proceeds of $30,160 and a realized investment gain of $8,300. The transaction was completed
at fair market value.7.
    
    Long-Term DebtLong-term debt, net of unamortized discount, is comprised as follows:
 September 30,
    
    
    December 31,2007
    
    
    20067-3/4% Senior Notes due 2017
    
    $
    308,689
    
    
    $
    10-3/8% Senior Notes due 2013
    
    
    4,181
    
    
    
    293,170Total
    
    $
    312,870
    
    
    $
    293,170
 On May 7, 2007, the Company issued pursuant to a private offering (the Offering) $330,000
aggregate principal amount of 7-3/4% senior notes due May 1, 2017 (the 2017 Notes) at an
issue price of 100%. The 2017 Notes are redeemable at the option of the Company beginning
May 1, 2012, at prices set forth in the indenture governing the 2017 Notes. Net proceeds of
the Offering to the Company, after commissions and expenses, were approximately $325,100. In
connection with the sale of the 2017 Notes, the Company entered into a registration rights
agreement under which the Company agreed to use its reasonable best efforts to register with
the SEC notes having substantially the same terms as the 2017 Notes, as part of an offer to
exchange freely tradeable exchange notes for the 2017 Notes. The Company filed a
registration statement on Form S-4 with the SEC, in connection with the exchange offer, on
June 29, 2007, which was declared effective by the SEC on July 13, 2007. The exchange offer
was completed on August 16, 2007.On May 21, 2007, the Company completed a cash tender offer (the Tender Offer) to purchase
any and all of its outstanding $300,000 aggregate principal amount of 10-3/8% senior notes
due June 15, 2013 (the 2013 Notes). In conjunction with the Tender Offer, the Company
entered into a supplemental indenture eliminating substantially all restrictive covenants and
certain event of default provisions contained in the indenture under which the 2013 Notes
were issued. Pursuant to the Tender Offer, all but $4,270 aggregate principal amount of the
2013 Notes were purchased and cancelled. The Company paid total consideration of
approximately $325,700 to purchase the 2013 Notes tendered and, in addition, paid accrued
interest of approximately $12,100. The purchase of the 2013 Notes was funded with proceeds
from the sale of the aforementioned 2017 Notes and available cash on hand.For the nine months ended September 30, 2007, the Company recognized costs related to the
early retirement of its 2013 Notes of $21,188, which were comprised of premium payments,
related fees and expenses and write-off of unamortized deferred financing costs. For the
nine months ended September 30, 2007 and 2006, total interest expense on the 2013 and 2017
Notes was $22,835 and $24,734, respectively, including amortization of related premiums and
deferred financing costs.8.
    
    Income TaxesIn the third quarter of 2007, the Company entered into a new tax sharing agreement with
Fairfax that permits the Company and its subsidiaries to elect to file federal income tax
returns on a consolidated basis for tax sharing purposes. The Company has made this election
effective January 1, 2007. Accordingly, tax sharing for the third quarter 2007 reflected the
utilization of holding company net operating losses (NOLs) in the amount of $79,697, which
was paid by Fairfax in the form of cash of $37,815 and a note for $41,882. This cash and
note at the holding company permitted the payment of a dividend of $79,700 to Fairfax in the
third quarter of 2007. The election going forward will avoid the generation of holding
company NOLs, provided the subsidiaries earn sufficient taxable income to offset holding
company losses.
 15




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 9.
    
    Commitments and ContingenciesOn September 7, 2005, Fairfax announced that it had 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, which
included civil RICO, federal antitrust and various state law claims, 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 the 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. In October 2006, the
court partially granted defendants motion to dismiss the plaintiffs complaint, subject to
plaintiffs filing an amended statement of their case. Plaintiffs thereafter filed their
supplemental statement of particularity and amended case statement. In response,
defendants filed a renewed motion to dismiss. On August 31, 2007, the Court dismissed the
antitrust claims with prejudice. On September 28, 2007, the court dismissed the RICO case
with prejudice and declined to accept supplemental jurisdiction over plaintiffs state law
claims. The Judge gave the plaintiffs 30 days to re-plead a basis for federal jurisdiction
over the state law claims, but the plaintiffs elected instead to file a notice of appeal of
the dismissal orders to the U.S. Court of Appeals for the Third Circuit. Crum &
Forster Holdings Corp. and US Fire continue to be named as defendants and intend to
vigorously defend the action.Kelly-Moore Paint Company, Inc. (Kelly-Moore) filed litigation against the Company in the
San Francisco Superior Court (California) in connection with certain general liability and umbrella
liability policies issued to it. The litigation seeks coverage for bodily injury claims arising out
of exposure to asbestos-containing products that Kelly-Moore and/or a subsidiary sold between 1960
and 1978. It also seeks breach of contract and bad faith damages. In May 2006, Kelly-Moore filed
a second amended complaint seeking to recover from the Company defense costs it allegedly paid to
defend asbestos claims. Kelly-Moore also seeks payment of sums for contribution and/or subrogation
pursuant to three other excess insurers assigned claims based on defense payments allegedly made
on Kelly-Moores behalf. The Company has learned through discovery and submissions to the court
filed by Kelly-Moore that Kelly-Moore is seeking $53 million for the defense costs, plus interest,
and an additional $33 million for the contribution/subrogation claims. Kelly-Moore also seeks to
recover extra-contractual damages as part of its bad faith claim. The Company anticipates that
Kelly-Moore will allege it is entitled to bad faith and punitive damages in a material amount.
While the Company does not believe that any of these allegations has merit as a matter of law, we
cannot predict with certainty the ultimate outcome of the claims. We do not expect the outcome to
have a material adverse effect on the Companys financial condition. The Company has been
vigorously defending against the claims of Kelly-Moore, and will continue to do so. The Company
filed a cross-complaint against Kelly-Moore seeking reimbursement of certain substantial loss and
expense payments made to or on behalf of Kelly-Moore to date.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. These lawsuits and arbitration proceedings
include, in some cases, claims for extra-contractual or bad faith damages, or claims for
imposition of statutory penalties or multipliers. 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




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 10.
    
    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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Workers compensation
    
    $
    64,076
    
    
    $
    72,163
    
    
    $
    197,218
    
    
    $
    212,034General liability
    
    
    55,944
    
    
    
    59,238
    
    
    
    177,570
    
    
    
    171,515Commercial automobile
    
    
    52,599
    
    
    
    51,332
    
    
    
    159,678
    
    
    
    151,102Property
    
    
    66,976
    
    
    
    65,003
    
    
    
    209,406
    
    
    
    175,860Commercial multi-peril
    
    
    21,940
    
    
    
    15,858
    
    
    
    57,983
    
    
    
    42,190Other
    
    
    31,840
    
    
    
    16,037
    
    
    
    92,048
    
    
    
    38,477Total premiums earned
    
    $
    293,375
    
    
    $
    279,631
    
    
    $
    893,903
    
    
    $
    791,178
 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 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioAccident year loss
and LAE ratios:Workers compensation
    
    $
    50,455
    
    
    
    78.7
    %
    
    $
    57,138
    
    
    
    79.2
    %
    
    $
    153,777
    
    
    
    78.0
    %
    
    $
    165,726
    
    
    
    78.2
    %General liability
    
    
    40,326
    
    
    
    72.1
    %
    
    
    38,139
    
    
    
    64.4
    %
    
    
    123,751
    
    
    
    69.7
    %
    
    
    117,192
    
    
    
    68.3
    %Commercial automobile
    
    
    31,953
    
    
    
    60.7
    %
    
    
    32,367
    
    
    
    63.1
    %
    
    
    102,344
    
    
    
    64.1
    %
    
    
    95,328
    
    
    
    63.1
    %Property
    
    
    46,270
    
    
    
    69.1
    %
    
    
    66,388
    
    
    
    102.1
    %
    
    
    151,149
    
    
    
    72.2
    %
    
    
    140,597
    
    
    
    79.9
    %Commercial multi-peril
    
    
    12,765
    
    
    
    58.2
    %
    
    
    9,260
    
    
    
    58.4
    %
    
    
    35,528
    
    
    
    61.3
    %
    
    
    24,880
    
    
    
    59.0
    %Other
    
    
    20,562
    
    
    
    64.6
    %
    
    
    10,302
    
    
    
    64.2
    %
    
    
    57,731
    
    
    
    62.7
    %
    
    
    25,306
    
    
    
    65.8
    %Total accident
year losses and
LAE
    
    
    202,331
    
    
    
    69.0
    %
    
    
    213,594
    
    
    
    76.4
    %
    
    
    624,280
    
    
    
    69.8
    %
    
    
    569,029
    
    
    
    71.9
    %Prior years loss
development
    
    
    (9,863
    )
    
    
    (3.4
    )%
    
    
    (23,137
    )
    
    
    (8.3
    )%
    
    
    (36,662
    )
    
    
    (4.1
    )%
    
    
    (27,879
    )
    
    
    (3.5
    )%Calendar year losses
and LAE
    
    $
    192,468
    
    
    
    65.6
    %
    
    $
    190,457
    
    
    
    68.1
    %
    
    $
    587,618
    
    
    
    65.7
    %
    
    $
    541,150
    
    
    
    68.4
    %
 The Company does not allocate investment results or certain corporate expenses for purposes
of evaluating financial performance of each line of business.
 17




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
 11.
    
    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 was corrected by reducing investment income in the third quarter by $9,551
pre-tax ($6,208 after-tax). There was no year to date effect on investment income from this
adjustment as of September 30, 2006. 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 evaluated the financial
impact of these accounting adjustments and concluded that the effect both individually and in
the aggregate was not material to the third quarter of 2006 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 Asia Fund (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 2006 results or any prior period. Accordingly, prior period financial
statements were not restated in 2006. 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 in 2006 resulted in a reduction to
income for the nine months ended September 30, 2006 of $3,089 pre-tax ($2,008 after tax).
 18




---



##### 



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 realize the Companys investment objectives;
    
    Inability to obtain reinsurance coverage on reasonable terms and prices, particularly
property catastrophe reinsurance;
    
    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;
    
    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 fail to pay the
Company amounts owed to it;
    
    Adverse developments in the prospects or results of operations of Fairfax or its
affiliates;
    
    Loss of key employees;
    
    Changes in governmental regulations; and
    
    Exposure to credit risks on novated policies.
 19




---



##### 



Critical Accounting Policies and Estimates
    Unpaid Losses and Loss Adjustment Expenses
     20




---



##### 



Other than Temporary Declines in Value of Investments
   Insurance Subsidiaries
 Reinsurance Recoverable
    Deferred Income Tax Assets
   21




---



##### 



Income Taxes
   Summary of Operations
      22




---



##### 



23




---



##### 



Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Gross premiums written
    
    $
    296,892
    
    
    $
    336,553
    
    
    $
    969,418
    
    
    $
    1,025,153Net premiums written
    
    $
    266,779
    
    
    $
    292,506
    
    
    $
    860,533
    
    
    $
    886,858Premiums earned
    
    $
    293,375
    
    
    $
    279,631
    
    
    $
    893,903
    
    
    $
    791,178Losses and LAE
    
    
    192,468
    
    
    
    190,457
    
    
    
    587,618
    
    
    
    541,150Underwriting expenses
    
    
    86,557
    
    
    
    82,013
    
    
    
    253,739
    
    
    
    231,414Underwriting income
    
    
    14,350
    
    
    
    7,161
    
    
    
    52,546
    
    
    
    18,614Investment income and realized investment gains and losses
    
    
    104,516
    
    
    
    66,597
    
    
    
    182,853
    
    
    
    347,414Interest and other expense
    
    
    8,120
    
    
    
    10,065
    
    
    
    23,795
    
    
    
    30,793Costs related to early retirement of debt
    
    
    
    
    
    
    
    
    
    
    21,188
    
    
    
    Income before income taxes and equity in earnings of
investees
    
    
    110,746
    
    
    
    63,693
    
    
    
    190,416
    
    
    
    335,235Income tax expense
    
    
    37,940
    
    
    
    21,674
    
    
    
    64,147
    
    
    
    115,139Income before equity in earnings of investees
    
    
    72,806
    
    
    
    42,019
    
    
    
    126,269
    
    
    
    220,096Equity in earnings of investees, net of tax
    
    
    10,051
    
    
    
    3,846
    
    
    
    18,146
    
    
    
    9,915Net income
    
    $
    82,857
    
    
    $
    45,865
    
    
    $
    144,415
    
    
    $
    230,011Loss and LAE ratio
    
    
    65.6
    %
    
    
    68.1
    %
    
    
    65.7
    %
    
    
    68.4
    %Underwriting expense ratio
    
    
    29.5
    
    
    
    29.3
    
    
    
    28.4
    
    
    
    29.2Combined ratio
    
    
    95.1
    %
    
    
    97.4
    %
    
    
    94.1
    %
    
    
    97.6
    %
    24




---



##### 



Underwriting Results
 Gross Premiums Written
  Three Months Ended September 30,Increase/
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    ChangeWorkers compensation
    
    $
    69,887
    
    
    $
    72,218
    
    
    $
    (2,331
    )
    
    
    (3.2
    )%General liability
    
    
    58,201
    
    
    
    68,820
    
    
    
    (10,619
    )
    
    
    (15.4
    )%Commercial automobile
    
    
    52,288
    
    
    
    53,838
    
    
    
    (1,550
    )
    
    
    (2.9
    )%Property
    
    
    55,010
    
    
    
    97,291
    
    
    
    (42,281
    )
    
    
    (43.5
    )%Commercial multi-peril
    
    
    24,159
    
    
    
    20,999
    
    
    
    3,160
    
    
    
    15.0
    %Other
    
    
    37,347
    
    
    
    23,387
    
    
    
    13,960
    
    
    
    59.7
    %Total gross premiums written
    
    $
    296,892
    
    
    $
    336,553
    
    
    $
    (39,661
    )
    
    
    (11.8
    )%
 Nine Months Ended September 30,Increase/
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    ChangeWorkers compensation
    
    $
    204,547
    
    
    $
    212,119
    
    
    $
    (7,572
    )
    
    
    (3.6
    )%General liability
    
    
    198,310
    
    
    
    233,815
    
    
    
    (35,505
    )
    
    
    (15.2
    )%Commercial automobile
    
    
    158,941
    
    
    
    168,778
    
    
    
    (9,837
    )
    
    
    (5.8
    )%Property
    
    
    235,559
    
    
    
    292,206
    
    
    
    (56,647
    )
    
    
    (19.4
    )%Commercial multi-peril
    
    
    67,436
    
    
    
    58,375
    
    
    
    9,061
    
    
    
    15.5
    %Other
    
    
    104,625
    
    
    
    59,860
    
    
    
    44,765
    
    
    
    74.8
    %Total gross premiums written
    
    $
    969,418
    
    
    $
    1,025,153
    
    
    $
    (55,735
    )
    
    
    (5.4
    )%
  Three Months Ended September 30,Increase/
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    ChangeAccident and health
    
    $
    27,850
    
    
    $
    13,022
    
    
    $
    14,828
    
    
    
    113.9
    %Surety
    
    
    3,462
    
    
    
    3,613
    
    
    
    (151
    )
    
    
    (4.2
    )%Homeowners
    
    
    1,727
    
    
    
    1,811
    
    
    
    (84
    )
    
    
    (4.6
    )%Personal automobile
    
    
    4,308
    
    
    
    4,941
    
    
    
    (633
    )
    
    
    (12.8
    )%Total gross premiums written in other
    
    $
    37,347
    
    
    $
    23,387
    
    
    $
    13,960
    
    
    
    59.7
    %
 Nine Months Ended September 30,Increase/
    
    
    Percent2007
    
    
    2006
    
    
    (Decrease)
    
    
    ChangeAccident and health
    
    $
    81,532
    
    
    $
    35,974
    
    
    $
    45,558
    
    
    
    126.6
    %Surety
    
    
    10,785
    
    
    
    10,186
    
    
    
    599
    
    
    
    5.9
    %Homeowners
    
    
    5,139
    
    
    
    5,378
    
    
    
    (239
    )
    
    
    (4.4
    )%Personal automobile
    
    
    7,169
    
    
    
    8,322
    
    
    
    (1,153
    )
    
    
    (13.9
    %)Total gross premiums written in other
    
    $
    104,625
    
    
    $
    59,860
    
    
    $
    44,765
    
    
    
    74.8
    %
  25




---



##### 



Casualty gross premiums written
   Property gross premiums written
  Other gross premiums written
  Net Premiums Written
  Premiums Earned
 
 26




---



##### 



Losses and Loss Adjustment Expenses
   Underwriting Expenses
    Investment Results
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Average investments, including cash
and cash equivalents, at book
value1
    
    $
    4,161,348
    
    
    $
    3,807,875
    
    
    $
    4,077,203
    
    
    $
    3,725,919Investment income
    
    $
    34,296
    
    
    $
    21,096
    
    
    $
    109,226
    
    
    $
    170,375Realized investment gains
    
    
    70,220
    
    
    
    45,501
    
    
    
    73,627
    
    
    
    177,039Pre-tax equity in earnings of investees
    
    
    15,463
    
    
    
    5,917
    
    
    
    27,917
    
    
    
    15,254Change in unrealized investment gains
(losses) and            foreign currency
translation
    
    
    88,024
    
    
    
    106,392
    
    
    
    66,224
    
    
    
    (127,958
    )Total return on investments
    
    $
    208,003
    
    
    $
    178,906
    
    
    $
    276,994
    
    
    $
    234,710Annualized total return on investments
    
    
    20.0
    %
    
    
    18.8
    %
    
    
    9.1
    %
    
    
    8.4
    %
 
 1
    
    Includes book value of assets pledged for short-sale obligations of $883,035 at
September 30, 2007 ($545,845 at September 30, 2006).  27




---



##### 



Interest and Other Expense
  Income Taxes
  28




---



##### 



Liquidity and Capital Resources
 Holding Company
     Insurance Subsidiaries
  .
 29




---



##### 



Investment Portfolio
  At September 30, 2007Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed income securities:United States government and government agencies
and authorities1
    
    $
    2,047,038
    
    
    $
    7,507
    
    
    $
    124,093
    
    
    $
    1,930,452States, municipalities and political subdivisions
    
    
    2,835
    
    
    
    15
    
    
    
    6
    
    
    
    2,844Other corporate fixed income securities
    
    
    7,889
    
    
    
    28
    
    
    
    2,804
    
    
    
    5,113Total fixed income securities
    
    
    2,057,762
    
    
    
    7,550
    
    
    
    126,903
    
    
    
    1,938,409Equity securities:Common stocks
    
    
    638,732
    
    
    
    78,976
    
    
    
    27,532
    
    
    
    690,176Preferred stocks
    
    
    8,090
    
    
    
    55
    
    
    
    
    
    
    
    8,145Total equity securities
    
    
    646,822
    
    
    
    79,031
    
    
    
    27,532
    
    
    
    698,321Total available-for-sale securities
    
    $
    2,704,584
    
    
    $
    86,581
    
    
    $
    154,435
    
    
    $
    2,636,730
 
 1
    
    Includes U.S. Treasury securities pledged for short-sale obligations at a fair value
of $212,029 (amortized cost of $224,048).     Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Earnings (losses) of investment companies and
similar equity method investees
    
    $
    1,339
    
    
    $
    (7,574
    )
    
    $
    10,022
    
    
    $
    81,036Pre-tax earnings of other equity method investees
    
    
    15,463
    
    
    
    5,917
    
    
    
    27,917
    
    
    
    15,254Total
earnings (losses) of equity method investees
    
    $
    16,802
    
    
    $
    (1,657
    )
    
    $
    37,939
    
    
    $
    96,290Dividends received from investment companies and
other equity method investees
    
    $
    1,327
    
    
    $
    1,292
    
    
    $
    4,767
    
    
    $
    3,840
 30




---



##### 



Accounting for Certain Hybrid Financial Instruments
- an amendment of FASB Statements Nos. 133 and 140
 Ratings
    31




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    Interest Rate Risk
  At September 30, 2007Fair Value ofFixed Income
    
    Hypothetical
    
    HypotheticalPortfolio
    
    $ Change
    
    % Change200 basis point decline
    
    $
    2,624,446
    
    
    $
    551,267
    
    
    
    26.6
    %100 basis point decline
    
    $
    2,325,912
    
    
    $
    252,733
    
    
    
    12.2
    %Base scenario
    
    $
    2,073,179
    
    
    $
    
    
    
    
    0.0
    %100 basis point increase
    
    $
    1,863,360
    
    
    $
    (209,819
    )
    
    
    (10.1
    )%200 basis point increase
    
    $
    1,683,804
    
    
    $
    (389,375
    )
    
    
    (18.8
    )%
  Equity Price Risk
 
 32




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##### 



Foreign Currency Exchange Rate Risk
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Internal Control Over Financial Reporting
   33




---



##### 



Part II
 OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
      
 ITEM 6. EXHIBITS
  34




---



##### 



SIGNATURES
  CRUM & FORSTER HOLDINGS CORP.(Registrant)Date: November 1, 2007
    
    By:
    
    /s/ Nikolas AntonopoulosNikolas AntonopoulosPresident and Chief Executive OfficerDate: November 1, 2007
    
    By:
    
    /s/ Mary Jane RobertsonMary Jane RobertsonExecutive Vice President, Chief Financial Officer
and Treasurer
 35




---



##### 



INDEX TO EXHIBITS
 Exhibit No.*
    
    
    10.44
    
    
    Crum & Forster Holdings Corp. 2007 Long Term Incentive Plan*
    
    
    10.45
    
    
    Fairfax Inc. and Crum & Forster Holdings Corp. Inter-Company Tax Allocation
Agreement effective as of January 1, 2007*
    
    
    10.46
    
    
    Amended and Restated Employment Agreement of Nikolas Antonopoulos effective as of June
1, 2007*
    
    
    10.47
    
    
    Amended and Restated Employment Agreement of Mary Jane Robertson effective as of June 1,
2007*
    
    
    10.48
    
    
    Amended and Restated Employment Agreement of Joseph Braunstein effective as of June 1,
2007*
    
    
    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 the section
entitled Risk Factors in the Companys Prospectus filed with the SEC pursuant to rule
424(b)(3) on July 13, 2007).
 
 *
    
    Filed herewith 36