##### 



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 ___________________________________________ Form 10-K [X]
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934or[   ]
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934For the Fiscal Year Ended:
    Commission File Number:December 31,
2004
    333-84068
 (CRUM & FORSTER LOGO) Crum & Forster Holdings Corp. (Exact Name of
Registrant as Specified in its Charter)
 Delaware
    
    04-3611900(State or Other Jurisdiction of
Incorporation or Organization)
    
    (I.R.S. Employer Identification Number)
 Crum & Forster Holdings Corp.
305 Madison Avenue, Morristown, New Jersey 07962
(973) 490-6600(Address, including zip code, and telephone number,
including area code, of registrants principal executive offices) Securities registered pursuant to Section 12(b) of the Act:  Securities registered pursuant to Section 12(g) of the Act:  Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past
90 days.              Yes
[X]     No [  ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this
Form 10-K.                                      [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [  
]     No
[X]
 State the aggregate market value of the voting and non-voting common equity held by non-affiliates
computed by reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of the registrants most recently
completed second fiscal quarter.       Not applicable Indicate the number of shares outstanding of each of the registrants classes of common stock, as
of the latest practicable date: Class
    
    Number of Shares Outstanding at February 28, 2005Common Stock, $.01 Par Value
    
    100
 Documents Incorporated by Reference
     None




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##### 



CRUM & FORSTER HOLDINGS CORP. Form 10-K Index Statements Regarding Forward-Looking Information
    
        4PART IITEM 1.
    
    BUSINESS
    
    5Overview
    
        5Corporate Structure
    
        5Lines of Business
    
    7Geographic Distribution
    
    9Business Development and Methods of Distribution
    
    10Pricing and Underwriting
    
    11Catastrophe Management
    
    12Reinsurance
    
    13Claims Management
    
    16Reserves
    
    17Asbestos, Environmental and Other Latent Exposures
    
    20Investments
    
    26Competition
    
    27Ratings
    
    28Insurance Regulatory Matters
    
    28Employees
    
    34Risk Factors
    
    35ITEM 2.
    
    PROPERTIES
    
    43ITEM 3.
    
    LEGAL PROCEEDINGS
    
    43Litigation
    
    43Insurance Industry Investigations
    
    43ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    44PART IIITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    44ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    44ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND  RESULTS OF OPERATIONS
    
    46Critical Accounting Policies and Estimates
    
    46Summary of Operations
    
    50Results of Operations
    
    52Liquidity and Capital Resources
    
    58Contractual Obligations
    
    60Regulatory Issues
    
    61ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    62Interest Rate Risk
    
    62Equity Price Risk
    
    62Foreign Currency Exchange Rate Risk
    
    63ITEM 8.
    
    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
    
    64Index to Consolidated Financial Statements
    
    64Report of Independent Registered Public Accounting Firm
    
    65Consolidated Balance Sheets at December 31, 2004 and 2003
    
    66Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002
    
    67Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2004, 2003 and 2002
    
    68Consolidated
Statements of Comprehensive Income for the Years Ended December 31,
2004, 2003 and 2002
    
        69Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
    
    70Notes to Consolidated Financial Statements
    
    71
 2




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##### 



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    95ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    95Evaluation of Disclosure Controls and Procedures
    
    95Changes in Internal Controls Over Financial Reporting
    
    95ITEM 9B.
    
    OTHER INFORMATION
    
    95PART IIIITEM 10.
    
    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
    
    95Directors and Executive Officers
    
    95Key Employees of the Operating Companies
    
    96Audit Committee and Audit Committee Financial Expert
    
    97Compensation of Directors
    
    97Code of Ethics
    
    97ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    98Executive Compensation
    
    98Employment and Retirement Agreements; Change of Control Arrangements
    
    99Compensation Committee Interlocks and Insider Participation
    
    101ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
    
    101ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    101Investment Agreements
    
    101Investments in and Transactions With Affiliates
    
    102Reinsurance Arrangements
    
    102Claims Services and Management Arrangements
    
    103Information Technology Services Agreement
    
    103Benefit Claims Payment Agreement
    
    103Fairfax Insurance Coverage
    
    104Tax Sharing Arrangements
    
    104Borrowing from Fairfax
    
    104Other Agreement
    
    104ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    105Audit Fees
    
    105Audit-Related Fees
    
    105Tax Fees
    
    105All Other Fees
    
    105Audit Committee Pre-Approval Policies and Procedures
    
    105PART IVITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    105Financial Statement Schedules
    
    105Exhibits
    
    106SIGNATURES
    
    109POWER OF ATTORNEY
    
    109INDEX TO FINANCIAL STATEMENTS AND RELATED FINANCIAL STATEMENT SCHEDULES
    
    110Report of Independent Registered Public Accounting Firm on Financial Statement Schedules
    
    111Schedule ISummary of Investments Other Than Investments in Related Parties
    
    112Schedule IICondensed Parent Company Only Balance Sheets at December 31, 2004 and 2003
    
    113Schedule IICondensed Parent Company Only Statements of Income for the Years Ended December 31, 2004, 2003 and 2002
    
    114Schedule IICondensed Parent
Company Only Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
    
    115Schedule VValuation and Qualifying Accounts
    
    116EXHIBITS
 3




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##### 



The following annual report on Form 10-K relates to the business operations and financial results
of Crum & Forster Holdings Corp. and subsidiaries. References in this report to the Company or
Crum & Forster refer to Crum & Forster Holdings Corp. and its direct and indirect subsidiaries,
including United States Fire Insurance Company (US Fire), The North River Insurance Company
(North River), Crum & Forster Indemnity Company (CF Indemnity), Crum and Forster Insurance
Company (CF Insurance) and Crum & Forster Underwriters Co. of Ohio (CF Underwriters).
Effective July 1, 2004, CF Underwriters was merged into US Fire. US Fire owns 100% of the stock of
Crum & Forster Specialty Insurance Company (CF Specialty). North River owns 100% of the stock of
Seneca Insurance Company Inc. (Seneca) and its subsidiaries. References to Fairfax refer to
Fairfax Financial Holdings Limited, which holds a 100% indirect interest in Fairfax Inc., Crum &
Forsters parent company. The Companys principal executive offices are located at 305 Madison Avenue, Morristown, NJ 07962
and its telephone number at that address is (973) 490-6600. The Companys website is
http://www.cfins.com. The Companys annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments, if any, to these reports filed or furnished pursuant to
Section 13(c) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on this
website as soon as practicable after they have been electronically filed with, or furnished to, the
Securities and Exchange Commission. STATEMENTS REGARDING FORWARD-LOOKING INFORMATION This report contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These are statements that relate to future periods and include
statements regarding the Companys anticipated performance. Generally, the words anticipates,
believes, expects, intends, estimates, projects, plans, target, potential,
likely, may, could, should and similar expressions identify forward-looking statements.
These forward-looking statements involve known and unknown risks, uncertainties and other important
factors that could cause the Companys actual results, performance or achievements or industry
results, to differ materially from any future results, performance or achievements expressed or
implied by these forward-looking statements. These risks, uncertainties and other important
factors, which are described elsewhere in this report, include, but are not limited to, the
following:  
    Lowering or loss of one of the Companys financial strength ratings;
    Insufficient loss reserves, including reserves for asbestos, environmental and other latent claims;
    Occurrence of natural or man-made catastrophic events;
    Competitive conditions in the insurance market;
    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;
    Loss of key producers;
    Exposure to emerging claims and coverage issues;
    Inability to realize the Companys investment objectives;
    Inability of certain of the Companys insurance subsidiaries to pay dividends;
    Inability to obtain reinsurance coverage on reasonable terms and prices;
    Exposure to credit risk, in the event reinsurers or insureds that owe the Company
premiums or reimbursement of deductibles paid by the Company on their behalf fail to pay;
    Adverse developments in the prospects or results of operations of Fairfax or its affiliates;
    Loss of key employees;
    Changes in governmental regulations;
    Exposure to credit risks on novated policies; and
    Limited ability to borrow. Although the Company believes that these statements are based upon reasonable assumptions,
management can give no assurance that the Companys goals will be achieved. Given these
uncertainties, prospective investors are cautioned not to place undue reliance on these
forward-looking statements. Any forward-looking statements made in this report are made by the
Company as of the date of this report. Except as otherwise required by federal securities laws,
the Company undertakes no obligation to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. 4




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##### 



PART I 
 ITEM 1. BUSINESS 
 Overview Crum & Forster is a national commercial property and casualty insurance company with a focused
underwriting strategy, targeting specialty classes of business and underserved market
opportunities. The Company writes a broad range of commercial coverage, including workers
compensation, general liability, property, commercial automobile, commercial multi-peril and
surety. The Company generally conducts business on a brokerage basis through its home office and a
regional branch network, allowing it to centrally control the underwriting process, respond to
local market conditions and build close relationships with producers and insureds. The Company has
over 1,000 producers located throughout the United States. These producers include national
brokers, independent regional retail firms and wholesale brokers. The Companys two largest
producers accounted for 14% and 6% of gross premiums written in 2004. The Companys objective is to expand opportunistically into classes of business or market segments
that are consistent with its underwriting expertise and have the potential to generate an
underwriting profit. Management believes the Companys ability to identify and react to changing
market conditions provides it with a competitive advantage. Based on the experience and
underwriting expertise of management, the Company seeks to write new lines of business and expand
existing classes of business depending upon market conditions and expected profitability. The
Company offers insurance products designed to meet specific insurance needs of targeted insured
groups and underwrites specific types of coverage for markets that are generally underserved by the
industry. In 2004, the Company generated $1,139 million of gross premiums written, $918.3 million of net
premiums written and $1,072.3 million of total revenues. Approximately 66% of the Companys 2004
business related to casualty coverage and 34% to property coverage, as measured by gross premiums
written. For the year ended December 31, 2004, the Companys combined ratio was 111.8%, including
a 10.6 percentage point impact from hurricanes Charley, Frances, Jeanne and Ivan. As of December
31, 2004, the Company had cash and invested assets of $3.2 billion, total assets of $6.0 billion,
stockholders equity of $881.2 million and policyholders surplus of $1.2 billion. 
 Corporate Structure Crum & Forster is a Delaware holding company, which is 100% owned by Fairfax Inc., a Wyoming
holding company. Fairfax Inc. is wholly-owned by FFHL Group Ltd., a Canadian holding company,
which is owned by 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. Crum & Forster was established for the purpose of holding the capital stock of Crum & Forster
Holding Inc. (Holding), another wholly-owned subsidiary of Fairfax Inc., and had no operations
prior to becoming the parent of Holding. On June 5, 2003, a merger of entities under common
control occurred at historical cost, whereby the capital stock of Holding was contributed to Crum &
Forster and, accordingly, Crum & Forster became the parent of Holding. Crum & Forster is a major component of the U.S. commercial property and casualty insurance
operations of Fairfax, which is principally engaged in property and casualty insurance and
reinsurance, investment management and insurance claims management. Crum & Forster was acquired by
Fairfax on August 13, 1998. 5




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##### 



Each of the Companys major subsidiaries is depicted below: (CHART) 6




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##### 



The Company acquired Seneca and its subsidiaries in August 2000 and acquired CF Specialty (formerly
Transnational Insurance Company) in December 2000. US Fire and CF Indemnity completed a
redomestication from New York to Delaware in December 2003. The Company merged Crum & Forster
Underwriters Co. of Ohio into US Fire effective July 1, 2004. Crum & Forsters insurance subsidiaries, except CF Specialty and Seneca and its subsidiaries,
participate in an intercompany pooling arrangement pursuant to which the premiums, losses and other
underwriting expenses of each participant are pooled by means of mutual reinsurance on a
fixed-percentage basis as follows: US Fire, 76%, North River, 22%, CF Insurance, 1% and CF
Indemnity, 1%. The intercompany agreement provides that US Fire, acting as the lead company,
assumes from the other pool participants 100% of their premiums, losses and other underwriting
expenses, and, in turn, cedes to each pool participant its participating percentage of premiums,
losses and other underwriting expenses. The pooling arrangement permits each pool participant to
rely on the capacity of the entire pool, rather than solely on its own capital and surplus.
Further, it prevents any one pool participant from suffering undue losses, as all pool participants
share underwriting profits and losses in proportion to their respective pool participation
percentages. CF Specialty and Seneca and its subsidiaries operate independently from the pool. 
 Lines of Business Crum & Forster offers a broad range of property and casualty insurance coverage to commercial
accounts located throughout the United States. In 2004, 2003 and 2002, the Company reported $1,139
million, $1,104.2 million and $898.4 million, respectively, of gross premiums written in six major
lines of business. Gross premiums written for each of these lines of business are summarized as
follows: Years Ended December 31,(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Workers compensation
    
    $
    311.3
    
    
    
    27.3
    %
    
    $
    288.0
    
    
    
    26.0
    %
    
    $
    205.6
    
    
    
    22.9
    %General liability
    
    
    252.8
    
    
    
    22.2
    
    
    
    254.9
    
    
    
    23.1
    
    
    
    215.7
    
    
    
    24.0Property
    
    
    299.1
    
    
    
    26.3
    
    
    
    319.2
    
    
    
    28.9
    
    
    
    270.2
    
    
    
    30.1Commercial automobile
    
    
    190.1
    
    
    
    16.7
    
    
    
    168.6
    
    
    
    15.3
    
    
    
    131.6
    
    
    
    14.6Commercial multi-peril
    
    
    52.1
    
    
    
    4.6
    
    
    
    42.9
    
    
    
    3.9
    
    
    
    49.7
    
    
    
    5.5Surety
    
    
    33.6
    
    
    
    2.9
    
    
    
    30.6
    
    
    
    2.8
    
    
    
    25.6
    
    
    
    2.9Total gross premiums written
    
    $
    1,139.0
    
    
    
    100.0
    %
    
    $
    1,104.2
    
    
    
    100.0
    %
    
    $
    898.4
    
    
    
    100.0
    %
 Workers compensationprovides coverage for the obligations of an employer under state law to
provide its employees with specified benefits for work-related injuries, deaths and diseases,
regardless of fault. Typically, there are four types of benefits payable under workers
compensation policies: medical benefits, disability benefits, death benefits and vocational
rehabilitation benefits. The benefits payable and the duration of such benefits are set by statute
and vary by state and with the nature and severity of the injury or disease and the wages,
occupation and age of the employee. The Company offers three types of workers compensation
products:  
    guaranteed cost products, in which policy premiums are fixed for the period of
coverage and do not vary as a result of the insureds loss experience;
    large deductible policies; and
    retrospectively rated policies. Generally, premiums are primarily a function of:  
    the applicable premium rate, which varies according to the employees duties and the business of the employer;
    the insured employers experience modification factor (where applicable); and
    the insured employers payroll. Generally, a deposit
premium is paid at the beginning of the policy period and periodic installments are paid during the policy period. The final premium is determined at the end of the
policy period and after the employers payroll records are audited. Premiums are continually
reviewed for adequacy using an actuarial analysis of current and anticipated trends. 7




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The Company applies a comprehensive approach to workers compensation business that benefits both
Crum & Forster and its insureds. Loss prevention services focused on workplace safety and the
prevention of accidents are provided to the Companys insureds. The Company emphasizes loss cost
containment methods, which involve employers, employees and care providers that focus on
cost-effective quality care and early return to work for injured employees. The Company also
strives to prevent costs associated with fraudulent claims by applying a proactive approach to
investigation and litigation of claims, where appropriate. The distribution of total workers compensation gross premiums written by type of coverage is
summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Guaranteed cost
    
    
    78.3
    %
    
    
    80.6
    %
    
    
    79.7
    %Large deductible
    
    
    15.4
    
    
    
    19.3
    
    
    
    17.6Retrospectively rated
    
    
    6.3
    
    
    
    0.1
    
    
    
    2.7Total workers compensation
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 With respect to deductible policies, the average insured retention is approximately $250,000 and
the average premium discount from standard premium, recognizing the reduced net loss exposure, is
approximately 72%. The apparent increase in retrospectively rated premium as a percentage of the
workers compensation total is primarily due to several larger policies which were written on a
modified retrospectively rated plan, whereby all final premium is determined within approximately
18 months from the inception date of the policy. General liabilityprovides coverage for liability exposures, including bodily injury and
third-party property damage arising from products sold and general business operations. General
liability also includes coverage to protect insureds against third-party personal injury. This
includes umbrella coverage, which provides additional insurance protection to businesses for
amounts that exceed the limits of their primary liability policies with the Company or another
insurance carrier. Approximately 77% of the Companys umbrella premiums are for accounts for which
the underlying liability coverage is provided by another insurance carrier. In 2004, approximately
85% of the Companys umbrella gross premiums written were associated with policies having an
attachment point of $1 million. The average umbrella policy limit written in 2004 was
approximately $10 million. The Company also writes specialty classes, such as directors and
officers liability, which involves coverage for liability
arising from the actions of directors and officers in their official capacities,
and employment practices liability, which protects the insured from liability arising from
employment policies and plans, such as discrimination and harassment. The distribution of the Companys total
general liability gross premiums written by type of coverage is summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Umbrella liability
    
    
    34.0
    %
    
    
    30.8
    %
    
    
    33.9
    %Products liability
    
    
    10.5
    
    
    
    7.9
    
    
    
    16.5Directors and officers
liability
    
    
    9.7
    
    
    
    11.5
    
    
    
    9.4Employment practices liability
    
    
    3.8
    
    
    
    2.8
    
    
    
    2.2All other general liability
    
    
    42.0
    
    
    
    47.0
    
    
    
    38.0Total general liability
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Propertyprovides coverage for loss or damage to buildings, inventory and equipment and financial
loss due to business interruption resulting from covered property damage. Policies are typically
all risk in nature, providing protection from natural disasters, including losses from
hurricanes, windstorms, earthquakes, hail and severe winter weather, and other events, such as
theft and vandalism, fires, explosions and storms. Certain risks, such as war and nuclear risk,
are generally excluded from all policies. Property insurance is principally provided through fire
and allied lines and inland marine coverage. Fire and allied lines insure business property for
damage and protect businesses from financial loss due to business interruption. Inland marine
provides coverage for goods in transit and builders risk for buildings in the course of
construction and for tools and contractors equipment. Policies written on an excess basis
comprised approximately 18%, 23% and 38% of property gross premiums written in 2004, 2003 and 2002,
respectively. The proportion of property writings comprised of policies written on an excess basis
decreased in 2003 principally due to the willingness of some competitors to offer large primary
limits of coverage, thereby reducing the insureds need to purchase excess property policies. 8




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The distribution of total property gross premiums written, by type of coverage, is summarized as
follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Fire and allied lines
    
    
    80.9
    %
    
    
    82.2
    %
    
    
    80.7
    %Inland marine
    
    
    12.4
    
    
    
    12.7
    
    
    
    13.7Other
    
    
    6.7
    
    
    
    5.1
    
    
    
    5.6Total property
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Commercial automobileprovides coverage for businesses against losses arising from bodily
injury, bodily injury to third parties, property damage to an insureds vehicle, property damage to
other vehicles and other property resulting from the ownership, maintenance or use of automobiles
and trucks in a business. The Company targets insureds with fleets of 25 to 75 vehicles,
particularly those with newer model year vehicles, low driver turnover and good driving records. Commercial multi-perilcombines property and liability coverage under one insurance policy. The
Company typically writes these package policies for smaller businesses where expense advantages can
be gained by combining these coverages rather than purchasing two separate policies. For the years
ended December 31, 2004, 2003 and 2002, approximately 44.5%, 46.1% and 55.2%, respectively, of
commercial multi-peril gross premiums written were attributable to property coverage. Suretyinvolves third-party agreements in which the issuer of the bond (the surety) joins with a
second party (the principal) in guaranteeing to a third party (the owner/obligee) the
fulfillment of some obligation on the part of the principal. The surety generally has a right to
recover from the principal any losses or expenses paid to the owner/obligee. Surety is generally classified into two broad types: contract bonds and commercial bonds. Contract
bonds secure a contractors performance and/or payment obligation, generally with respect to a
construction project, and are typically required by federal, state and local governments for public
works projects. The Companys average contract bond amount was approximately $1.7 million in 2004,
with an average job length of approximately 1.2 years. Commercial bonds cover obligations
typically required by law or regulation such as bail bonds and license and permit bonds. Bail
bonds provide for the issuance of financial security to a court to guarantee the return, at
specific dates, of a person facing criminal charges. The distribution of the Companys total surety gross premiums written, by type of coverage, is
summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Contract bonds
    
    
    77.8
    %
    
    
    69.6
    %
    
    
    66.4
    %Bail bonds
    
    
    13.6
    
    
    
    17.2
    
    
    
    20.6Other commercial bonds
    
    
    8.6
    
    
    
    13.2
    
    
    
    13.0Total surety
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 
 Geographic Distribution The Company is licensed and currently writes insurance in all 50 states. For the year ended
December 31, 2004, the top ten states represented 74.7% of direct premiums written. 9




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The distribution of direct premiums written by state, as a percentage of total direct premiums
written, is summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002California
    
    
    22.0
    %
    
    
    22.6
    %
    
    
    15.6
    %New York
    
    
    11.0
    
    
    
    10.5
    
    
    
    12.0Florida
    
    
    9.8
    
    
    
    9.8
    
    
    
    11.4New Jersey
    
    
    7.1
    
    
    
    7.2
    
    
    
    6.1Texas
    
    
    6.3
    
    
    
    7.0
    
    
    
    7.1Pennsylvania
    
    
    6.1
    
    
    
    6.2
    
    
    
    6.0Illinois
    
    
    4.1
    
    
    
    4.5
    
    
    
    5.9Massachusetts
    
    
    3.8
    
    
    
    3.4
    
    
    
    3.8Georgia
    
    
    2.5
    
    
    
    2.1
    
    
    
    1.8Colorado
    
    
    2.0
    
    
    
    2.2
    
    
    
    2.6All other states1
    
    
    25.3
    
    
    
    24.5
    
    
    
    27.7Total direct premiums written
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  1
    No other state comprised more than 1.9% of total direct premiums
written in 2004, 2003 or 2002. The Company has
significantly expanded its workers compensation writings in
California since 2000. Despite the fact that California workers
compensation results have historically been unprofitable for much of
the industry, the Company saw an opportunity for profitable growth
based on: (a) a displaced workers compensation market in
California which enabled the Company to be very conservative in risk
selection and pricing; (b) the establishment of
newly staffed underwriting centers in Los Angeles and San Francisco
with very technically strong and experienced local workers
compensation underwriters; (c) freedom from loss experience
legacy issues in the state; and (d) high workers compensation
rates in California relative to other states and a promising
environment for regulatory reform that should further improve the
states performance. In 2003 and 2004,
significant insurance regulatory reform took place in California. The combination of these reform efforts and strong rate
increases over the past few years has led to a dramatic improvement
in the industrys workers compensation accident year loss
ratios. As of September 30, 2004, the Workers Compensation
Insurance Rating Bureau of California projects the workers
compensation ultimate accident year loss ratio to fall from 138.4% in
2000 to 57.3% in 2003. 
 Business Development and Methods of Distribution The Companys gross premiums written are derived from renewal of in-force policies, generation of
new policies and endorsement activity, including additional or return premiums due upon audit.
Central to the Companys premium production management are efforts to maintain or improve renewal
retention rates and to increase the Companys new business production through improvements in the
quote ratio (the ratio of quotes issued to submissions received) and the hit ratio (the ratio
of new policies bound to quotes issued), while first and foremost maintaining adequate rates for
the exposures. Crum & Forster depends on producers to provide it with access to a wide range of business
opportunities. The Companys ability to develop strong and mutually beneficial relationships, and
successfully market its products and services to producers, is paramount to its success.
Generally, the Companys business is distributed through more than 1,000 producers located
throughout the United States. Crum & Forster intends to continue to expand its producer force.
The Company offers its producers underwriting expertise and timely policy processing, which assists
them in placing business in underserved markets. The Companys service extends to loss control and
claims services, particularly on large accounts where this expertise is highly valued by both the
producer and the insured. Producers are compensated principally on the basis of commissions negotiated between the producer
and the Company on an individual policy basis. Additionally, the Company pays contingent
commissions to certain producers based on achievement by the producer of agreed-upon targets in
such areas as renewal retention and new business production. Out of total producer compensation
incurred in 2004, 2003 and 2002 of $128.2 million, $125.2 million and $99.9 million respectively,
contingent commissions paid to producers in those years totaled $12 million, $8.9 million and $4.4
million, respectively. Due to early termination in 2004 of such agreements by certain producers,
payments in 2005 related to 2004 will be lower by approximately $2 million. Crum & Forsters producers generally fall into three categories: national brokers, independent
regional retail firms and wholesale brokers. Each of these channels has its own distinct
distribution characteristics and customers. National brokers generally have a significant number
of locations throughout the United States and target larger risks requiring complex insurance
analysis and placement. The Companys policies with these producers tend to be larger, loss rated
casualty products and excess property policies. Independent regional retail firms generally
operate in a limited geographic region. These producers often focus on mid-size accounts.
Wholesale brokers primarily produce business that retail firms have difficulty placing because it
is unique, unusual or hazardous. 10




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##### 



The percentage of business from these categories of producers, based on gross premiums written, is
summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002National brokers
    
    
    34.9
    %
    
    
    34.4
    %
    
    
    34.8
    %Wholesale brokers
    
    
    33.5
    
    
    
    32.2
    
    
    
    26.3Independent regional retail firms
    
    
    31.6
    
    
    
    33.4
    
    
    
    38.9Total direct premiums written.
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Gross premiums written from new business by producer category are as follows: Years Ended December 31,(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002National brokers
    
    $
    134.0
    
    
    $
    178.8
    
    
    $
    170.4Wholesale brokers
    
    
    163.9
    
    
    
    202.4
    
    
    
    161.7Independent regional retail firms
    
    
    123.8
    
    
    
    157.3
    
    
    
    132.1Total gross premiums written from new business
    
    $
    421.7
    
    
    $
    538.5
    
    
    $
    464.2
 During 2004, the Companys new business production decreased by approximately 22% as the market has
softened and competition for new business, particularly from higher rated companies, has
intensified. The Companys business strategy is designed to increase gross premiums written
through increasing volume with existing producers, while selectively adding new producers. Renewal
retention rates have increased by five percentage points despite the softening market. For discussions of recent investigations by governmental authorities into certain business
practices within the insurance industry, see Risk FactorsCertain business practices of the
insurance industry have become the subject of investigations by government authorities and other
parties and Item 3. Legal Proceedings. 
 Pricing and Underwriting The Company adheres to a disciplined underwriting strategy that focuses on profitability without
regard to premium growth or market share. Each policy is individually underwritten based on the
particular risk and class of business. Prices are set based on these risk characteristics and
consider other factors such as estimated frequency and severity of expected losses, the expenses of
producing the business and managing claims and an allowance for an underwriting profit. The
Companys disciplined underwriting strategy may restrict its premium growth when market conditions
do not meet pricing and underwriting standards. The Companys underwriting process is centrally controlled by profit center executives in the home
office, who have extensive experience in the insurance industry. Each executive is held
accountable for the underwriting results of his or her line of business. Underwriting authority
levels are established based on characteristics such as class of business, hazard grade and policy
limit and are assigned based on the experience and expertise of the underwriter. Regional
underwriting profit center managers report to the home office executives on all underwriting
matters. Field underwriters have limited authority to underwrite policies, with the result that a
significant amount of business is underwritten directly by underwriters in the home office. The Companys
business is either manually rated or loss-rated, generally depending on the size
of the risk to be priced. Manual rating begins with a classification rate provided by an
industry-rating bureau. Deviations from this rate based on the individual characteristics and loss
history of the risk, as well as the desirability of the class of business, are then determined.
Loss rating is used where there is no appropriate classification rate, and the rate is
developed entirely on the basis of the specific characteristics of the individual risk. A
significant portion of the Companys business is large enough to be rated on its own loss history.
This loss rated business is within the workers compensation, general liability and commercial
automobile lines of business and includes guaranteed cost policies, where policy premiums are
fixed, and loss sensitive rating programs, where the ultimate costs to the insured are dependent
upon its loss experience. The underwriting of larger loss rated business requires approval by home
office underwriting and actuarial personnel. Loss sensitive business includes retrospectively rated policies, in which premiums are adjusted
based on the actual loss experience of the insured, and large deductible policies, where the
insured must reimburse the Company for any losses within the deductible.
Both of these loss sensitive products expose Crum & Forster to potential credit risk since the
Company may be
 due payment from the insured after coverage has been provided. Loss sensitive policies are subject
to extensive financial analysis prior to binding, and generally require that the insured provide
collateral as a condition to writing the policy. For further discussion of such credit risk, see
"Risk Factors. 11




---



##### 



A significant amount of the Companys current property business is written in excess of one or more
underlying insurance policies. Pricing of excess property business requires significant
underwriting expertise. Consideration is also given to pricing as a percentage of total insured
value. Inland marine is typically rated individually by the underwriter based on the
characteristics of the risk and the class of business, without the use of an industry manual rate.
The Companys underwriting of property also considers the aggregate exposures to natural
catastrophic losses and attempts to mitigate such exposure. The Company monitors total insured
values in areas most susceptible to a hurricane or earthquake event and uses modeling software to
quantify the probable maximum loss on such events. Catastrophe exposure is also considered when
pricing individual property risks. Surety underwriting requires significant financial analysis, as well as underwriting expertise.
Collateral may be required as a condition to writing the bond. In the Companys bail bond
business, Crum & Forster deals with one agent, who, in turn, deals with a significant number of
agents nationally. These obligations are secured by both the one agent Crum & Forster deals with
and its agents. The Company must approve, prior to binding, all bail bonds with values in excess
of $500,000. The Company closely monitors its underwriting on an ongoing basis to enforce compliance with
standards throughout the field organization. At the Companys principal insurance subsidiaries, a
premium register, which lists each policy processed on the prior day, is distributed daily to
senior management and to the home office underwriting executives. On larger policies, a more
detailed underwriting summary sheet is prepared and distributed to senior management and the home
office underwriting executives on a timely basis. This report identifies the insured name, line of
business, policy premium, commission, prior loss history and other relevant information relating to
the risk. A detailed price monitoring process is conducted by actuarial personnel, with
region and line of business pricing results released on a weekly and monthly basis. These pricing
results include price increases on policies that are renewed and new business prices versus
established targets that are intended to produce an underwriting profit. Large accounts, which are
rated based on their own loss history, are monitored separately with an expected combined ratio
quantified for each account. 
 Catastrophe Management Catastrophes can be caused by various natural and man-made events. Natural catastrophic events
include hurricanes, tornados, windstorms, earthquakes, hailstorms, explosions, severe winter
weather and fires, and man-made catastrophic events include terrorist acts, riots, crashes and
derailments. The incidence and severity of catastrophes are inherently unpredictable. The extent
of losses from a catastrophe is a function of both the total amount of insured exposure in the area
affected by the event and the severity of the event. Most catastrophes are restricted to small
geographic areas; however, hurricanes, tornados, windstorms and earthquakes may produce significant
damage in large, heavily populated areas. Catastrophes can cause losses in a variety of property
and casualty lines for which the Company provides insurance. For example, the terrorist attacks on
September 11, 2001 caused losses in several of the Companys lines, including business
interruption, business personal property and workers compensation. Insurance companies are not permitted to reserve for a catastrophe until it has occurred. It is
therefore possible that a catastrophic event or multiple catastrophic events could have a material
adverse effect upon the Companys net income and financial condition. Increases in the value and
geographic concentration of insured property and the effects of inflation could increase the
severity of claims from future catastrophic events. In addition, states have, from time to time,
passed legislation that has had the effect of limiting the ability of insurers to manage
catastrophic risk, such as legislation prohibiting insurers from withdrawing from catastrophe-prone
areas. The Company closely monitors catastrophe exposure on an individual risk and book of business basis.
Each property risk is written with an occurrence limit and every policy with catastrophe exposure
has a significant minimum deductible for the catastrophe exposure. A catastrophe risk analysis is
run on each account with catastrophe exposure to assess the potential loss. On a book of business basis, Crum & Forster monitors its aggregate property exposure each month.
The Company runs an extensive catastrophe model each quarter to assess its probable maximum loss on
both a 250-year and 100-year event basis. After September 11, 2001, the Company began to monitor
its concentration of workers compensation exposures in more detail. As a result of database
enhancements and increased information gathered on the Companys insureds, a significant majority
of employees are captured by location in the systems. Accumulations are managed by zip code and
monitored during the quoting process. The Company has entered into property and workers compensation catastrophe reinsurance
arrangements that are designed to protect it in the event of catastrophes. 12




---



##### 



Reinsurance In order to control the exposure to losses and protect capital resources, the Company cedes a
portion of its gross policy premiums to reinsurers in exchange for the reinsurers agreement to
share a portion of the covered losses. Reinsurance is a practice whereby one insurer, called the
reinsurer, agrees to indemnify another insurer, called the ceding insurer, for all or part of
the potential liability arising from one or more insurance policies issued by the ceding insurer.
The purchase of reinsurance does not discharge the Company from primary liability to its
policyholders. The net liability retained on individual risks varies by product and by the nature
of the risk. Insured liabilities can be reinsured either by treaty, wherein reinsurers agree in
advance to provide coverage above retained limits or for a specified percentage of losses
attributable to specific policies, or by facultative arrangements, wherein reinsurance is provided
for individual risks based on individual negotiations. The Companys maximum retention and reinsured limits for policies currently being written are
summarized as follows: MaximumReinsured(dollars in millions)
    
    Maximum Retention
    
    Limits1General liability per risk:Umbrella
    
    $ 2.0
    
    
    $   23.0Directors and officers liability  primary policies
    
    $ 2.0
    
    
    $     8.0Directors and officers liability  excess policies
    
    Variable Quota Share2
    
    
    $     8.0Workers compensation per occurrence
    
    $ 2.0
    
    
    $ 198.0Property per risk
    
    $ 2.0
    
    
    $   23.0Surety per principal
    
    $ 7.5
    
    
    $     7.5Surety per bond  commercial
    
    80% Quota Share3
    
    
    $     4.0Surety per bond  contract
    
    Variable Quota Share4
    
    
    $   27.1
  1
    Represents the amount of loss protection above the net retention on an
excess of loss basis, unless otherwise noted. Certain layers within these reinsured
limits are subject to aggregate limits and reinstatement provisions.2
    The Company retains 40% of policies with limits up to $5 million and 20% of
policies with limits in excess of $5 million up to $10 million.3
    The Companys maximum retention is 80% of $20 million, or $16 million. The
average retention at December 31, 2004 for bonds ceded to the current treaty year was
approximately $127,000 per bond.4
    The Companys percentage retention varies based on the bond limit, from 80% of
bond limits up to $2 million to 22.5% of bond limits in excess
of $15 million up to $35 million. The average retention at December 31, 2004 for bonds ceded to the current
treaty year was approximately $1 million per bond. In general, other general liability policies and commercial automobile policies are written
with limits of $1 million per occurrence and are not reinsured.
General liability policies typically contain a $2 million
aggregate limit. The Company manages its exposure to catastrophes by monitoring the accumulation of insured value in
catastrophe-prone areas. The Companys property catastrophe reinsurance treaty protects it in the
event of property losses arising from one defined catastrophic occurrence or series of events.
This treaty provides $295 million of aggregate coverage in excess of the $25 million net retention.
There is approximately 2.5% co-participation on the reinsured layer, which amounts to an
additional retained loss of $7.4 million in the event that the entire treaty limit is utilized.
Under certain conditions, the Company may recover $22.5 million of the $25 million net retention
per occurrence. From March 19, 2003 to December 31, 2004, the Company purchased terrorism coverage from nSpire Re
Limited (nSpire, formerly ORC Re Limited), a subsidiary of Fairfax, for acts certified in
accordance with the Terrorism Risk Insurance Act of 2002 (TRIA) in an amount and on terms which
reduced the Companys exposure to such acts to the amount of the deductible based on Crum &
Forsters pro-forma stand-alone direct premiums earned. The contract was not renewed for 2005. As
a result, in the event of a TRIA-certified terrorist act in 2005, the Company could incur a loss of
up to the aggregate deductible of participating Fairfax insurers, or $300 million, subject to
terrorism reinsurance coverage provided by the Companys other reinsurance contracts. For further
discussion of TRIA, see Catastrophe Management, Regulatory MattersTerrorism Risk Insurance
Act of 2002 and Risk Factors. For a detailed discussion of the Companys reinsurance agreements, see Note 7 and Note 10 to the
consolidated financial statements included in Item 8. Financial Statements and Supplemental Data. 13




---



##### 



As of December 31, 2004 and 2003, reinsurance recoverable was $1.8 billion and $1.7 billion,
respectively, net of uncollectible reinsurance reserves. Included in net reinsurance recoverable
at December 31, 2004 and 2003 are reserves for uncollectible paid and unpaid reinsurance totaling
$40.9 million and $39.9 million, respectively. Reinsurance recoverable at December 31, 2004 was due from approximately 315 reinsurers. Set forth
below is a table showing the ten largest reinsurance recoverable balances by reinsurer. Amounts
recoverable from pools and associations and contingent obligations associated with structured
settlements with life insurance companies amounted to an additional $178.6 million, or 9.9% of the
total reinsurance recoverable balance at December 31, 2004. At December 31, 2004A.M. Best
    
    Security
    
    
    Reinsurance
    
    
    % of(dollars in millions)
    
    Rating1
    
    Provided
    
    
    Recoverable
    
    
    TotalInter-Ocean Reinsurance Company Limited
(Inter-Ocean)
    
    A
    
    
    $ 452.0
    2
    
    $
    452.0
    
    
    
    25.0
    %North American Specialty Insurance Company
    
    A+
    
    
    176.9
    3
    
    
    371.0
    
    
    
    20.6TIG Insurance Company(TIG)4
    
    B+
    
    
    -
    
    
    
    134.4
    
    
    
    7.4Swiss Reinsurance America Corp (Swiss Re)
    
    A+
    
    
    -
    
    
    
    105.5
    
    
    
    5.8General Reinsurance Corp.
    
    A++
    
    
    0.2
    3
    
    
    66.0
    
    
    
    3.7Federal Insurance Company
    
    A++
    
    
    48.5
    3
    
    
    58.3
    
    
    
    3.2American Re-Insurance Company (American Re)
    
    A
    
    
    -
    
    
    
    33.5
    
    
    
    1.9Employers Reinsurance Corporation
    
    A
    
    
    -
    
    
    
    29.8
    
    
    
    1.7nSpire
    
    9
    
    
    26.5
    5
    
    
    26.5
    
    
    
    1.5Converium Reinsurance (N.A.)
    
    B
    
    
    -
    
    
    
    20.0
    
    
    
    1.1Other
    
    
    
    
    53.5
    6
    
    
    507.8
    7
    
    
    28.1Total reinsurance recoverable
    
    
    
    
    $ 757.6
    
    
    $
    1,804.8
    8
    
    
    100.0
    %
  1
    The A.M. Best rating system includes ratings of A++ and A+ (which are
Superior ratings), A and A- (which are Excellent ratings), B++ and B+
(which are Very Good ratings) and nine lower ratings categories.2
    Includes the value of Delaware Reg. 1003 compliant trust accounts (Trusts) as
of December 31, 2004 in the amount of $323.3 million and $128.7 million in letters of
credit.3
    Funds held balances as of December 31, 2004.4
    Effective December 16, 2002, International Insurance Company merged with TIG, a
Fairfax subsidiary. TIG had capital and surplus as of
December 31, 2004 of $742 million. These recoverable balances arise principally from a restructuring in 1993,
prior to Fairfaxs acquisition of Crum & Forster.5
    Includes $20.6 million in letters of credit and the value of Trusts as of
December 31, 2004 in the amount of $5.9 million.6
    Includes $39.5 million of letters of credit and $14.0 million of funds held.7
    92% of these recoverable balances, after applying the associated collateral,
are from companies having an A.M. Best rating of A- or better.8
    Includes reserve for uncollectible reinsurance of $40.9 million.9
    Not rated. Affiliated reinsurers The Company has reinsurance agreements in effect with affiliates of Fairfax. As is the case with
all reinsurance agreements, Crum & Forster bears credit risk regarding these agreements, both with
respect to reinsurance recoverable reflected on the Companys balance sheet as well as to
contingent liabilities associated with reinsurance recoverable on future claims. For the years
ended December 31, 2004, 2003 and 2002, the Company ceded premiums of $51 million, $54.8 million
and $63.8 million, respectively, to affiliates under these reinsurance contracts. Reinsurance recoverable balances from affiliated reinsurers reflected on the balance sheet are
summarized as follows: At December 31, 2004TotalReinsurance
    
    
    Paid
    
    
    Outstanding(dollars in millions)
    
    Recoverable
    
    
    Recoverable
    
    
    Reserves1
    
    
    CollateralTIG
    
    
    $ 134.4
    
    
    
    $ 0.9
    
    
    
    $ 133.5
    
    
    
    $       -nSpire
    
    
    26.5
    
    
    
    1.4
    
    
    
    25.1
    
    
    
    26.5Fairmont Specialty Insurance Company (Fairmont,
formerly Ranger Insurance Company)
    
    
    14.8
    
    
    
    1.0
    
    
    
    13.8
    
    
    
    -Odyssey America Reinsurance Corporation
    
    
    11.3
    
    
    
    0.5
    
    
    
    10.8
    
    
    
    -Clearwater Insurance Company (formerly Odyssey
Reinsurance Corporation)
    
    
    8.8
    
    
    
    0.1
    
    
    
    8.7
    
    
    
    -Total affiliated reinsurance recoverable balances
    
    
    $ 195.8
    
    
    
    $ 3.9
    
    
    
    $ 191.9
    
    
    
    $ 26.5
  1
    Includes case reserves and IBNR. 14




---



##### 



For a detailed description of the Companys reinsurance arrangements with affiliates, see Note
10 to the consolidated financial statements included in Item 8. Financial Statements and
Supplementary Data and Item 13. Certain Relationships and Related TransactionsReinsurance
Arrangements. Corporate aggregate reinsurance Crum & 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
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 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. No such reinsurance has been
purchased for subsequent accident years. Per risk reinsurance designed to limit exposure to loss
from any one claim or occurrence generally responds at the individual claim or occurrence level and
is priced based on underlying loss costs and exposures. As a result, loss experience, net of the
effect of this reinsurance, is generally consistent with the underlying gross loss experience.
Reinsurance designed to limit accident year losses in the aggregate or adverse development of prior
years loss and LAE reserves may significantly affect the reported loss experience for a given
period in amounts or directions that are not consistent with the loss experience of the underlying
policies. The prices paid for corporate aggregate reinsurance may also affect the underwriting
expense ratios by reducing the net premiums earned, upon which the ratio is calculated. Therefore,
management believes that presenting the Companys results net of per risk reinsurance but before
benefit of corporate aggregate reinsurance generally provides a more accurate portrayal of the
actual loss experience of the underlying policies. The Companys corporate aggregate reinsurance contracts provide either current accident year
protection or adverse development protection related to prior accident years. 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. Coverage under these contracts is generally triggered
when the loss ratio for the subject period exceeds a specified level, or when reserves related to
all periods prior to a certain date exceed a stated amount. The Company will recover ceded losses
and LAE from its reinsurers as it settles the related claims, which may occur over several years.
These contracts may provide for future payments to be made by Crum & Forster when it cedes losses
under such policies and generally provide that interest expense is charged to the Company, for the
benefit of the reinsurers, on any premiums withheld. Interest rates specified in these contracts
are 7.0% to 7.5%. 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 to 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. An analysis of activity in prospective corporate aggregate reinsurance contracts follows: Years Ended December 31,(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Ceded losses
    
    
    $  10.0
    
    
    
    $   1.1
    
    
    
    $         -Less: ceded premiums
    
    
    7.6
    
    
    
    0.1
    
    
    
    32.3Less: funds held interest
    
    
    9.2
    
    
    
    7.5
    
    
    
    11.4Pre-tax earnings impact
    
    
    $  (6.8
    )
    
    
    $  (6.5
    )
    
    
    $  (43.7
    )
 As of December 31, 2004, one prospective contract, covering accident year 2002 only, has an unused
limit available of $96.3 million in the event the net loss and LAE ratio for accident year 2002,
before the effect of this contract, exceeds 70%. The subject loss and LAE ratio as valued at
December 31, 2004 is 63.2%. No additional premium or funds held
interest will be due under this
contract upon usage of the remaining limit. The reinsurer under this contract is nSpire, a Fairfax affiliate. For further discussion of
reinsurance contracts with affiliates, see Note 10 to the consolidated financial statements
included in Item 8. Financial Statements and Supplementary Data and Item 13. Certain
Relationships and Related TransactionsReinsurance Arrangements. 15




---



##### 



An analysis of activity in retroactive corporate aggregate reinsurance contracts follows: Years Ended December 31,(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Increase in reinsurance recoverable due from reinsurers
    
    $
    117.7
    
    
    $
    98.6
    
    
    $
    10.0Less: related premiums paid
    
    
    56.5
    
    
    
    37.8
    
    
    
    3.5Income deferred during the year
    
    
    61.2
    
    
    
    60.8
    
    
    
    6.5Amortization of deferred income
    
    
    (18.3
    )
    
    
    (13.1
    )
    
    
    (8.3
    )Change in deferred income
    
    
    42.9
    
    
    
    47.7
    
    
    
    (1.8
    )Deferred income on retroactive reinsurancebeginning of year
    
    
    180.5
    
    
    
    132.8
    
    
    
    134.6Deferred income on retroactive reinsuranceend of year
    
    $
    223.4
    
    
    $
    180.5
    
    
    $
    132.8Funds held interest charged during the year
    
    $
    21.3
    
    
    $
    11.0
    
    
    $
    5.9
 As of December 31, 2004, the Company has available unused limits under two retroactive contracts
with unaffiliated reinsurers. One contract covers accident periods prior to August 13, 1998 and
has an unused limit available of $34.8 million, subject to sub-limits by line of business. There
are no additional premiums or funds held interest due when the remaining coverage is used. The
second contract, under which limits of approximately $29 million are available, covers accident
years 2000 and prior. Premiums of approximately $12.2 million and funds held interest at an annual
rate of 7% from October 1, 2001 to the end of the quarter in which the losses are ceded will be due
upon usage of the remaining limit. The effect of prospective and retroactive corporate aggregate reinsurance on components of the
Companys consolidated statements of income is summarized as follows: Years Ended December 31,(dollars in millionsincrease (decrease))
    
    2004
    
    
    2003
    
    
    2002Premiums earned
    
    $
    (7.6
    )
    
    $
    (0.1
    )
    
    $
    (32.3
    )Investment income
    
    
    (30.5
    )
    
    
    (18.5
    )
    
    
    (17.3
    )Losses and LAE
    
    
    (28.3
    )
    
    
    (14.2
    )
    
    
    (8.3
    )Income before income taxes
    
    $
    (9.8
    )
    
    $
    (4.4
    )
    
    $
    (41.3
    )
 The Company estimates, assuming no additional premiums are credited to the funds held accounts,
that the amount of interest to be charged against investment income on prospective and retroactive
corporate aggregate reinsurance contracts will be approximately $19.2 million, $18.6 million and
$17.6 million in 2005, 2006 and 2007, respectively. As of December 31, 2004, reinsurance recoverable includes $444.1 million and $455.5 million related
to prospective and retroactive corporate aggregate reinsurance contracts, respectively, of which
$507.2 million has been recognized as a reduction of incurred losses and LAE on the Companys
consolidated statements of income. 
 Claims Management Crum & Forster has developed claims cost management methodologies designed to monitor, control and
measure all aspects of the claims resolution process. The Company has also developed and
implemented competitive medical management and managed care programs to control workers
compensation claim costs. The Companys claims management philosophy emphasizes:  
    maintenance of timely and adequate reserves for claims and the cost-effective delivery
of claims services by controlling losses and LAE;
    financial integrity through the employment of investigative specialists, who attempt to
limit fraudulent claims activity, and a program to pursue appropriate subrogation and
recovery opportunities; and 16




---



##### 




    exceptional customer service whereby the Company applies its resources toward pursuing
timely investigation and resolution of customer claims and reducing claims costs. Substantially all claims are handled by regional offices, with the exception of umbrella,
high-value casualty and large property claims, which are handled in the home office. As of
December 31, 2004, the Company had 350 employees dedicated to claims management and administration,
74 of whom were located at the Companys headquarters, principally providing supervisory and
control functions and certain claims handling. These employees include adjusters, litigation
specialists, regional and corporate claims management, line specialists and support staff. The
Company regularly conducts internal reviews and audits to monitor the regional offices adherence
to claims policies and procedures, the adequacy of case reserves, LAE, productivity and service
standards. Pending and new claim counts by line of business, excluding asbestos, environmental and other
latent claims, are summarized as follows: At December 31,2004
    
    
    2003
    
    
    2002Workers compensation1
    
    
    11,293
    
    
    
    10,475
    
    
    
    11,361General liability
    
    
    4,687
    
    
    
    6,219
    
    
    
    7,203Commercial automobile
    
    
    4,141
    
    
    
    3,920
    
    
    
    4,745All other
    
    
    1,916
    
    
    
    1,690
    
    
    
    1,260Total pending claims
    
    
    22,037
    
    
    
    22,304
    
    
    
    24,569
  1
    
    Excludes medical only claim counts Years Ended December 31,2004
    
    
    2003
    
    
    2002Workers compensation1
    
    
    8,053
    
    
    
    7,261
    
    
    
    7,809General liability
    
    
    3,647
    
    
    
    4,799
    
    
    
    5,071Commercial automobile
    
    
    11,845
    
    
    
    9,981
    
    
    
    11,574All other
    
    
    4,009
    
    
    
    4,098
    
    
    
    4,965Total new claims
    
    
    27,554
    
    
    
    26,139
    
    
    
    29,419
  1
    
    Excludes medical only claim counts of 17,957, 17,333 and 17,669 for the
years ended December 31, 2004, 2003 and 2002, respectively. Since 1985, Crum & Forster has used a specialized claims unit to manage its asbestos,
environmental and other latent claims. Currently, the Company employs RiverStone Claims Management
LLC (RiverStone), a Fairfax affiliate focused on providing claim and reinsurance recovery
services with respect to asbestos, environmental and other latent exposure claims to Fairfax and
its affiliates. 
 Reserves Property and casualty insurers establish reserves to provide for future amounts needed to pay
claims with respect to insured events that have occurred, including events that have not yet been
reported to the insurer. Reserves are also established for LAE, representing the estimated
expenses of adjusting claims, including legal and other fees, and general expenses of administering
the claims settlement process. After a claim is reported, claims personnel establish a case reserve, where appropriate, for the
estimated amount of the ultimate loss payment. The estimate reflects the informed judgment of
management based on reserving practices and managements experience and knowledge regarding the
nature and value of the specific type of claim with the goal of setting reserves at the ultimate
expected loss amount as information becomes available. Claims personnel review and update their
estimates as additional information becomes available and claims proceed towards resolution. In
addition, reserves are also established, on an aggregate basis, for losses incurred but not
reported (IBNR) to the insurer and for potential further loss development on reported claims,
including LAE. As of December 31, 2004, total gross reserves for unpaid losses and LAE were $3.4
billion, of which $1.5 billion related to case reserves and $1.9 billion related to IBNR reserves. 17




---



##### 



The Company derives estimates for unreported claims and development on reported claims principally
from actuarial analyses of historical patterns of loss development by accident year for each type
of exposure and market segment. Similarly, the Company derives estimates of unpaid LAE principally
from actuarial analyses of historical development patterns of the
relationship of LAE to losses for each line of business and type of exposure. Management compares historical and current
case, settlement and payment patterns by business line to establish loss trends that recognize the
new development patterns and retention levels. The Company has
instituted organizational and process improvements over the past five
years that have affected its claims settlement philosophy and its
historical paid and incurred claims patterns. The historical patterns
upon which management typically would rely to develop reserves are
not consistent with current lines of business, net retention levels,
premium sizes, risk profiles of insureds and other operational
changes. During the same time period, soft market conditions in the
immediate prior accident years caused deteriorating trends in the
Companys underwriting results. The combination of these factors
over the past five years has made interpretation of the underlying
data trends and quantification of reserve adequacy extremely
difficult. The process of estimating loss reserves is imprecise due to a number of variables. These variables
are affected by both internal and external events such as changes in claims handling procedures,
inflation, judicial trends and legislative changes. Many of these items are not directly
quantifiable, particularly on a prospective basis. Additionally, there may be significant
reporting lags between the occurrence of the insured event and the time it is actually reported to
the insurer. The Company continually refines reserve estimates in a regular ongoing process as
historical loss experience develops and additional claims are reported and settled. The Company
reflects adjustments to reserves in the results of operations in the periods in which the estimates
are changed. In establishing reserves, estimated recoveries for reinsurance, salvage and
subrogation are taken into account. The aggregate reserves are also reviewed at least annually by
a nationally recognized actuarial firm. The Companys internal actuaries conduct full reserve studies using generally accepted actuarial
methods every six months, from which point estimates of ultimate losses and LAE by line of business
are selected. These target loss ratios are used to determine loss and allocated LAE expectations
each month by accident year within each line of business. Each month, reported losses are reviewed
against these expectations to evaluate loss emergence trends. The recorded estimate and the high and low ends of the Companys internal actuaries range of
reserves for each line of business is summarized as follows: At December 31, 2004Low End of
    
    
    High End of(dollars in millions)
    
    Reserves
    
    
    Actuarial Range
    
    
    Actuarial RangeGeneral liability
    
    $
    721.4
    
    
    $
    612.5
    
    
    $
    806.6Workers compensation
    
    
    713.6
    
    
    
    701.6
    
    
    
    783.4Asbestos, environmental and other latent
    
    
    516.0
    
    
    
    367.9
    
    
    
    673.2Commercial automobile
    
    
    209.5
    
    
    
    183.4
    
    
    
    218.0Property
    
    
    133.4
    
    
    
    89.6
    
    
    
    145.5Other
    
    
    208.5
    
    
    
    148.8
    
    
    
    244.6Net of per risk reinsurance, gross of corporate aggregate reinsurance
    
    
    2,502.4
    
    
    
    2,103.8
    
    
    
    2,871.3Corporate aggregate reinsurance
    
    
    507.2
    
    
    
    424.9
    
    
    
    510.6Total reserves, net of per risk reinsurance and corporate aggregate
reinsurance
    
    
    1,995.2
    
    
    $
    1,678.9
    
    
    $
    2,360.7Ceded unpaid losses and LAE
    
    
    1,361.0Gross unpaid losses and LAE
    
    $
    3,356.2
 Loss development data A reconciliation of the net liability for unpaid losses and LAE is provided in Note 5 to the
consolidated financial statements included in Item 8. Financial Statements and Supplementary
Data. Reserves for losses and LAE were increased in each year based on the latest actuarial
estimates. The components of development of prior years loss and LAE reserves are summarized as
follows: Years Ended December 31,(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Workers compensation
    
    $
    29.7
    
    
    $
    (18.6
    )
    
    $
    39.3General liability
    
    
    75.0
    
    
    
    132.1
    
    
    
    (17.3
    )Property
    
    
    (27.2
    )
    
    
    6.4
    
    
    
    11.9Commercial automobile
    
    
    (3.2
    )
    
    
    1.1
    
    
    
    26.4Commercial multi-peril
    
    
    18.3
    
    
    
    10.9
    
    
    
    (34.1
    )Other
    
    
    5.0
    
    
    
    0.3
    
    
    
    0.4Total unfavorable development, net of per risk reinsurance
    
    
    97.6
    
    
    
    132.2
    
    
    
    26.6Amortization of deferred gain under retroactive corporate aggregate reinsurance
    
    
    (18.3
    )
    
    
    (13.1
    )
    
    
    (8.3
    )Cessions to prospective corporate aggregate reinsurance
    
    
    (10.0
    )
    
    
    (1.1
    )
    
    
    -Total unfavorable development, net of per risk and corporate aggregate
reinsurance
    
    
    69.3
    
    
    
    118.0
    
    
    
    18.3Add back: Per risk and corporate aggregate reinsurance
    
    
    70.8
    
    
    
    (22.9
    )
    
    
    25.4Total unfavorable development gross of reinsurance
    
    $
    140.1
    
    
    $
    95.1
    
    
    $
    43.7
 18




---



##### 



For a detailed discussion of adverse development, see Item 7. Managements Discussion and Analysis
of Financial Condition and Results of OperationsResults of OperationsLosses and loss adjustment
expenses. The following loss and LAE reserve development table illustrates the development of balance sheet
liabilities from 1994 through 2004 and the subsequent changes in those reserves, presented on a
historical basis. The first line of the table is the estimated liability for unpaid losses and
LAE, net of reinsurance recoverable, recorded at the balance sheet date for each year. The lower
section of the table shows the updated amount of the previously recorded liability based on
experience, as of the close of each succeeding year. Care must be taken to avoid misinterpretation
by those unfamiliar with this information or familiar with other data commonly reported by the
insurance industry. The accompanying data is not accident year data, but rather, a display of 1994
to 2004 calendar year-end reserves and the subsequent changes in those reserves. Ten-year analysis of consolidated loss and LAE development presented net of reinsurance with
supplemental gross data Years Ended December 31,(dollars in millions)
    
    1994
    
    
    1995
    
    
    1996
    
    
    1997
    
    
    1998
    
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Reserves for unpaid losses and
LAE (net of reinsurance
recoverable)
    
    $
    2,178
    
    
    $
    2,195
    
    
    $
    2,400
    
    
    $
    2,406
    
    
    $
    2,517
    
    
    $
    2,212
    
    
    $
    1,757
    
    
    $
    1,561
    
    
    $
    1,479
    
    
    $
    1,857
    
    
    $
    1,995Paid (cumulative) as of:One year later
    
    
    560
    
    
    
    508
    
    
    
    568
    
    
    
    576
    
    
    
    675
    
    
    
    753
    
    
    
    677
    
    
    
    449
    
    
    
    160
    
    
    
    461Two years later
    
    
    932
    
    
    
    887
    
    
    
    965
    
    
    
    1,071
    
    
    
    1,239
    
    
    
    1,297
    
    
    
    1,023
    
    
    
    526
    
    
    
    515Three years later
    
    
    1,218
    
    
    
    1,165
    
    
    
    1,333
    
    
    
    1,501
    
    
    
    1,648
    
    
    
    1,559
    
    
    
    1,094
    
    
    
    815Four years later
    
    
    1,405
    
    
    
    1,445
    
    
    
    1,665
    
    
    
    1,789
    
    
    
    1,914
    
    
    
    1,620
    
    
    
    1,322Five years later
    
    
    1,603
    
    
    
    1,702
    
    
    
    1,854
    
    
    
    1,996
    
    
    
    1,911
    
    
    
    1,841Six years later
    
    
    1,801
    
    
    
    1,841
    
    
    
    2,011
    
    
    
    1,944
    
    
    
    2,074Seven years later
    
    
    1,907
    
    
    
    1,971
    
    
    
    1,934
    
    
    
    2,077Eight years later
    
    
    2,016
    
    
    
    1,875
    
    
    
    2,058Nine years later
    
    
    1,894
    
    
    
    1,987Ten years later
    
    
    1,998Liability re-estimated as of:One year later
    
    
    2,283
    
    
    
    2,369
    
    
    
    2,405
    
    
    
    2,574
    
    
    
    2,532
    
    
    
    2,244
    
    
    
    1,940
    
    
    
    1,579
    
    
    
    1,597
    
    
    
    1,926Two years later
    
    
    2,411
    
    
    
    2,342
    
    
    
    2,565
    
    
    
    2,578
    
    
    
    2,521
    
    
    
    2,432
    
    
    
    1,957
    
    
    
    1,732
    
    
    
    1,703Three years later
    
    
    2,383
    
    
    
    2,473
    
    
    
    2,560
    
    
    
    2,569
    
    
    
    2,585
    
    
    
    2,447
    
    
    
    2,081
    
    
    
    1,841Four years later
    
    
    2,478
    
    
    
    2,461
    
    
    
    2,557
    
    
    
    2,583
    
    
    
    2,599
    
    
    
    2,571
    
    
    
    2,191Five years later
    
    
    2,460
    
    
    
    2,461
    
    
    
    2,567
    
    
    
    2,599
    
    
    
    2,720
    
    
    
    2,667Six years later
    
    
    2,459
    
    
    
    2,467
    
    
    
    2,570
    
    
    
    2,729
    
    
    
    2,786Seven years later
    
    
    2,460
    
    
    
    2,454
    
    
    
    2,699
    
    
    
    2,806Eight years later
    
    
    2,443
    
    
    
    2,590
    
    
    
    2,785Nine years later
    
    
    2,586
    
    
    
    2,686Ten years later
    
    
    2,660Cumulative redundancy/(deficiency)
    
    
    (482
    )
    
    
    (491
    )
    
    
    (385
    )
    
    
    (400
    )
    
    
    (269
    )
    
    
    (455
    )
    
    
    (434
    )
    
    
    (280
    )
    
    
    (224
    )
    
    
    (69
    )
    
    
    -End of year:Gross liability
    
    
    2,958
    
    
    
    3,251
    
    
    
    3,432
    
    
    
    3,586
    
    
    
    3,622
    
    
    
    3,516
    
    
    
    3,327
    
    
    
    3,438
    
    
    
    3,235
    
    
    
    3,178
    
    
    
    3,356Re-estimated reinsurance
recoverable
    
    
    780
    
    
    
    1,056
    
    
    
    1,032
    
    
    
    1,180
    
    
    
    1,105
    
    
    
    1,304
    
    
    
    1,570
    
    
    
    1,877
    
    
    
    1,756
    
    
    
    1,321
    
    
    
    1,361Net liability
    
    
    2,178
    
    
    
    2,195
    
    
    
    2,400
    
    
    
    2,406
    
    
    
    2,517
    
    
    
    2,212
    
    
    
    1,757
    
    
    
    1,561
    
    
    
    1,479
    
    
    
    1,857
    
    
    
    1,995One year later:Gross re-estimated liability
    
    
    3,457
    
    
    
    3,489
    
    
    
    3,653
    
    
    
    3,729
    
    
    
    3,737
    
    
    
    3,689
    
    
    
    3,702
    
    
    
    3,481
    
    
    
    3,330
    
    
    
    3,318Re-estimated reinsurance
recoverable
    
    
    1,174
    
    
    
    1,120
    
    
    
    1,248
    
    
    
    1,155
    
    
    
    1,205
    
    
    
    1,445
    
    
    
    1,762
    
    
    
    1,902
    
    
    
    1,733
    
    
    
    1,392Net re-estimated liability
    
    
    2,283
    
    
    
    2,369
    
    
    
    2,405
    
    
    
    2,574
    
    
    
    2,532
    
    
    
    2,244
    
    
    
    1,940
    
    
    
    1,579
    
    
    
    1,597
    
    
    
    1,926Two years later:Gross re-estimated liability
    
    
    3,643
    
    
    
    3,673
    
    
    
    3,782
    
    
    
    3,806
    
    
    
    3,858
    
    
    
    4,024
    
    
    
    3,697
    
    
    
    3,614
    
    
    
    3,487Re-estimated reinsurance
recoverable
    
    
    1,232
    
    
    
    1,331
    
    
    
    1,217
    
    
    
    1,228
    
    
    
    1,337
    
    
    
    1,592
    
    
    
    1,740
    
    
    
    1,882
    
    
    
    1,784Net re-estimated liability
    
    
    2,411
    
    
    
    2,342
    
    
    
    2,565
    
    
    
    2,578
    
    
    
    2,521
    
    
    
    2,432
    
    
    
    1,957
    
    
    
    1,732
    
    
    
    1,703Three years later:Gross re-estimated liability
    
    
    3,823
    
    
    
    3,779
    
    
    
    3,847
    
    
    
    3,890
    
    
    
    4,063
    
    
    
    4,011
    
    
    
    3,791
    
    
    
    3,765Re-estimated reinsurance
recoverable
    
    
    1,440
    
    
    
    1,306
    
    
    
    1,287
    
    
    
    1,321
    
    
    
    1,478
    
    
    
    1,564
    
    
    
    1,710
    
    
    
    1,924Net re-estimated liability
    
    
    2,383
    
    
    
    2,473
    
    
    
    2,560
    
    
    
    2,569
    
    
    
    2,585
    
    
    
    2,447
    
    
    
    2,081
    
    
    
    1,841Four years later:Gross re-estimated liability
    
    
    3,889
    
    
    
    3,836
    
    
    
    3,922
    
    
    
    3,988
    
    
    
    4,037
    
    
    
    4,099
    
    
    
    3,950Re-estimated reinsurance
recoverable
    
    
    1,411
    
    
    
    1,375
    
    
    
    1,365
    
    
    
    1,405
    
    
    
    1,438
    
    
    
    1,528
    
    
    
    1,759Net re-estimated liability
    
    
    2,478
    
    
    
    2,461
    
    
    
    2,557
    
    
    
    2,583
    
    
    
    2,599
    
    
    
    2,571
    
    
    
    2,191
 19




---



##### 



Years Ended December 31,(dollars in millions)
    
    1994
    
    
    1995
    
    
    1996
    
    
    1997
    
    
    1998
    
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004Five years later:Gross re-estimated liability
    
    
    3,942
    
    
    
    3,905
    
    
    
    3,979
    
    
    
    3,968
    
    
    
    4,116
    
    
    
    4,227Re-estimated reinsurance
recoverable
    
    
    1,482
    
    
    
    1,444
    
    
    
    1,412
    
    
    
    1,369
    
    
    
    1,396
    
    
    
    1,560Net re-estimated liability
    
    
    2,460
    
    
    
    2,461
    
    
    
    2,567
    
    
    
    2,599
    
    
    
    2,720
    
    
    
    2,667Six years later:Gross re-estimated liability
    
    
    4,005
    
    
    
    3,943
    
    
    
    3,952
    
    
    
    4,060
    
    
    
    4,200Re-estimated reinsurance
recoverable
    
    
    1,546
    
    
    
    1,476
    
    
    
    1,382
    
    
    
    1,331
    
    
    
    1,414Net re-estimated liability
    
    
    2,459
    
    
    
    2,467
    
    
    
    2,570
    
    
    
    2,729
    
    
    
    2,786Seven years later:Gross re-estimated liability
    
    
    4,033
    
    
    
    3,902
    
    
    
    4,050
    
    
    
    4,157Re-estimated reinsurance
recoverable
    
    
    1,573
    
    
    
    1,448
    
    
    
    1,351
    
    
    
    1,351Net re-estimated liability
    
    
    2,460
    
    
    
    2,454
    
    
    
    2,699
    
    
    
    2,806Eight years later:Gross re-estimated liability
    
    
    3,991
    
    
    
    4,024
    
    
    
    4,159Re-estimated reinsurance
recoverable
    
    
    1,548
    
    
    
    1,434
    
    
    
    1,374Net re-estimated liability
    
    
    2,443
    
    
    
    2,590
    
    
    
    2,785Nine years later:Gross re-estimated liability
    
    
    4,125
    
    
    
    4,144Re-estimated reinsurance
recoverable
    
    
    1,539
    
    
    
    1,458Net re-estimated liability
    
    
    2,586
    
    
    
    2,686Ten years later:Gross re-estimated liability
    
    
    4,218Re-estimated reinsurance
recoverable
    
    
    1,558Net re-estimated liability
    
    
    2,660Gross cumulative deficiency
    
    
    (1,260
    )
    
    
    (893
    )
    
    
    (727
    )
    
    
    (571
    )
    
    
    (578
    )
    
    
    (711
    )
    
    
    (623
    )
    
    
    (327
    )
    
    
    (252
    )
    
    
    (140
    )
    
    
    -
 
 Asbestos, Environmental and Other Latent Exposures General The Company has written general liability, commercial multi-peril and umbrella policies under which
policyholders continue to present asbestos-related injury claims, claims alleging injury, damage or
clean up costs arising from environmental pollution and other latent claims. The vast majority of
these claims are presented under policies written many years ago. There is a great deal of uncertainty surrounding latent liabilities. This uncertainty affects the
ability of insurers and reinsurers to estimate the ultimate amount of unpaid claims and related
settlement expenses. The majority of these claims differ from other types of contractual claims
because there is limited consistent precedent to determine what, if any, coverage exists or which,
if any, policy years and insurers/reinsurers may be liable. These uncertainties are exacerbated by
inconsistent court decisions and judicial and legislative interpretations of coverage that, in many
cases, have expanded theories of liability. The industry as a whole is engaged in extensive
litigation over these coverage and liability issues and is, thus, confronted with continuing
uncertainty in its efforts to quantify latent exposures. As a result, conventional actuarial
reserving techniques cannot be used to estimate the ultimate cost of such claims. In light of the intensive claim settlement process for these claims, which involves comprehensive
fact gathering and subject matter expertise, management believes it is prudent to have a
centralized claim facility to handle these claims. Since 1985, Crum & Forster has had a
specialized claims unit dedicated to the management and settlement of latent claims. In 2000, the
Company entered into an agreement with RiverStone, a subsidiary of Fairfax, for latent claims
handling services. RiverStones latent claims staff focuses on defending Crum & Forster, as well
as other Fairfax subsidiaries, against unwarranted claims, pursuing aggressive claims handling and
proactive resolution strategies, while minimizing costs. Almost half of the claims management team
and claims handling professionals at RiverStone are experienced attorneys. An analysis of gross and net reserves (net of per risk reinsurance, but before the benefit of
corporate aggregate reinsurance) from asbestos, environmental and other latent exposures is
presented below: Years Ended December 31,2004
    
    
    2003
    
    
    2002(dollars in millions)
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    NetUnpaid latent losses and allocated LAE (ALAE),
beginning of the year
    
    $
    666.5
    
    
    $
    491.9
    
    
    $
    577.6
    
    
    $
    398.9
    
    
    $
    566.1
    
    
    $
    380.2Latent losses and ALAE incurred during the year
    
    
    113.5
    
    
    
    100.5
    
    
    
    194.6
    
    
    
    153.6
    
    
    
    68.8
    
    
    
    67.8Latent losses and ALAE paid during the year
    
    
    98.6
    
    
    
    76.4
    
    
    
    105.7
    
    
    
    60.6
    
    
    
    57.3
    
    
    
    49.1Unpaid latent losses and ALAE, end of the year
    
    $
    681.4
    
    
    $
    516.0
    
    
    $
    666.5
    
    
    $
    491.9
    
    
    $
    577.6
    
    
    $
    398.9
 20




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##### 



An analysis of the number of insureds with open asbestos, environmental and other latent claims is
presented below: Asbestos
    
    
    Environmental
    
    
    Other Latent
    
    
    Total LatentNumber of insureds open at December 31, 2002
    
    
    336
    
    
    
    363
    
    
    
    194
    
    
    
    893Opened during the year
    
    
    199
    
    
    
    115
    
    
    
    110
    
    
    
    424Settled during the year
    
    
    105
    
    
    
    122
    
    
    
    90
    
    
    
    317Number of insureds open at December 31, 2003
    
    
    430
    
    
    
    356
    
    
    
    214
    
    
    
    1,000Opened during the year
    
    
    154
    
    
    
    107
    
    
    
    84
    
    
    
    345Settled during the year
    
    
    132
    
    
    
    117
    
    
    
    111
    
    
    
    360Number of insureds open at December 31, 2004
    
    
    452
    
    
    
    346
    
    
    
    187
    
    
    
    985
 Asbestos claims exposure Asbestos is the most significant and difficult mass tort for the insurance industry in terms of
claim volume and dollar exposure. The litigation environment has become increasingly adverse.
Plaintiffs often are able to choose from a number of potential venues to bring an action in the
court that they expect will be most advantageous to their claims. Many of the lawsuits are filed
in a small number of plaintiff-oriented jurisdictions where significant verdicts have historically
been rendered against commercial defendants. Tort reform in certain jurisdictions initially
resulted in increased filings by plaintiffs seeking to avoid the potential effective date of the
reform legislation in 2003. In general, the number of new claims filed in 2004 declined slightly,
but it is too soon to predict whether this will constitute a trend in new filings. Management
believes that the insurance industry has been adversely affected by judicial interpretations that
have had the effect of maximizing insurance recoveries for asbestos claims, from both a coverage
and liability perspective. Even when these claims are resolved without loss payment, as a large
portion of them are, significant costs are incurred to defend the claims. Generally, only policies
underwritten prior to 1986 have potential asbestos exposure since most policies underwritten after
this date contain an absolute asbestos exclusion. Over the past several years, the industry has experienced an increase in the number of asbestos
claimants, including claims by individuals who do not appear to be impaired by asbestos exposure.
It is generally expected throughout the industry that this trend will continue. The reasons for
this evident increase are many: more intensive advertising by lawyers seeking additional claimants;
increased focus by plaintiffs on new and previously peripheral defendants; and an increase in the
number of entities seeking bankruptcy protection. To date, this continued flow of claims has
forced 71 manufacturers and users of asbestos products into bankruptcy. These bankruptcies have,
in turn, aggravated both the volume and the value of claims against viable asbestos defendants.
Accordingly, there is a high degree of uncertainty with respect to future exposure from asbestos
claims, both in identifying which additional insureds may become targets in the future and in
predicting the total number of asbestos claimants. Early asbestos claims focused on manufacturers and distributors of asbestos-containing products.
Thus, the claims at issue largely arose out of the products hazard and typically fell within the
policies aggregate limits of liability. Increasingly, insureds have been asserting that their
asbestos claims are not subject to these aggregate limits and that each individual bodily injury
claim should be treated as a separate occurrence, potentially creating even greater exposure for
primary insurers. Generally, insureds who assert these positions are installers of asbestos
products or property owners who allegedly had asbestos on their property. In addition, in an
effort to seek additional insurance coverage, some insureds that have eroded their aggregate limits
are submitting new asbestos claims as non-product, or attempting to reclassify previously
resolved claims as non-product claims. Unlike product exposures, these non-product exposures are
argued not to be subject to aggregate limits, creating potentially greater exposure. The extent to
which insureds will be successful in obtaining coverage on this basis is uncertain and court
decisions have been inconsistent to date. Accordingly, it is difficult to predict the ultimate
size of the claims for non-product coverage. Many coverage disputes with insureds are resolved only through aggressive settlement efforts.
Settlements involving bankrupt insureds may include extensive releases, which are favorable to the
Company but which could result in settlements earlier and for larger amounts than originally
expected. As it has done in the past, RiverStone will continue to aggressively pursue settlement
opportunities. Additionally, in 1994, Congress enacted a new section of the bankruptcy code aimed at facilitating
the reorganization of businesses with large asbestos liabilities. Under this law, an asbestos
defendant can receive a discharge from present and future asbestos claims by following the
provisions of the bankruptcy code. Insurers of the defendant have typically been excluded from the
pre-petition negotiations between the asbestos defendant and the asbestos plaintiffs lawyers,
although the typical plan presumes the insurers will pay for claims under negotiation. These
pre-packaged bankruptcies can inflate claim costs and accelerate the timing of claims payments,
and it is likely that additional defendants will seek protection under this provision in the
future. 21




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##### 



The Companys asbestos exposure is related mostly to insureds that are peripheral defendants,
including a mix of manufacturers, distributors and installers of asbestos-containing products, as
well as premises owners. For the most part, these insureds are defendants on a regional rather
than a nationwide basis. As the financial assets and insurance recoveries of traditional asbestos
defendants have been depleted, plaintiffs are increasingly focusing on these peripheral defendants. An analysis of gross and net reserves from asbestos exposures is presented in Note 6 to the
consolidated financial statements included in Item 8. Financial Statements and Supplementary
Data. The following table presents an analysis of the estimated distribution of all policies, listed by
attachment point, against which asbestos claims have been presented: At December 31, 2004Attachment Point
    
    Estimated % of
    
    
    Estimated % of(dollars in millions)
    
    Total Policies
    
    
    Total Policy Limits$0 to $1
    
    
    75.1
    %
    
    
    48.6
    %$1 to $10
    
    
    18.9
    
    
    
    39.0$10 to $20
    
    
    1.8
    
    
    
    4.1$20 to $50
    
    
    2.2
    
    
    
    4.0Above $50
    
    
    2.0
    
    
    
    4.3Total policies with asbestos claims
    
    
    100.0
    %
    
    
    100.0
    %
 Reserves for asbestos cannot be estimated with traditional loss reserving techniques that rely on
historical accident year loss development factors. Since each insured presents different liability
and coverage issues, the Company evaluates its asbestos exposure on an insured-by-insured basis.
Crum & Forster utilizes sophisticated methodologies, which draw upon Company experience and
supplemental databases, to assess asbestos liabilities on reported claims. These methodologies
utilize comprehensive ground-up, exposure-based analyses. In 2004, Crum & Forster also retained an
outside actuarial consultant to perform an independent ground-up evaluation of its asbestos
reserves. For further information on reserve strengthening actions taken in 2004, see Item 7.
Managements Discussion and Analysis of Financial Condition and Results of OperationsResults of
OperationsLosses and loss adjustment expenses. In the course of the insured-by-insured evaluation, the following factors are considered: available
insurance coverage, including the role of any umbrella or excess insurance issued to the insured;
limits, deductibles and self-insured retentions; an analysis of each insureds potential liability;
the jurisdictions involved; past and anticipated future asbestos claim filings against the insured;
loss development on pending claims; past settlement values of similar claims; allocated claim
adjustment expenses; the potential role of other insurance; and applicable coverage defenses. The
evaluations are based on current trends without any assumption of potentially favorable or
unfavorable legislation in the future. In addition to estimating liabilities for reported asbestos claims, reserves for IBNR claims are
estimated using information as to the reporting patterns of known insureds, historical settlement
costs per insured and characteristics of insureds such as the number of coverage years. Once the gross ultimate exposure for indemnity and ALAE is determined for each insured and policy
year, the amount ceded to reinsurers is estimated by reviewing the applicable reinsurance treaty
and examining past ceded claim experience. 22




---



##### 



The carried gross reserves, by insured category, are summarized as follows: At December 31, 2004Number of
    
    
    % of Total
    
    
    Total
    
    
    % of Total
    
    
    Average Reserve(dollars in millions)
    
    Insureds
    
    
    2004 Paid
    
    
    Reserves
    
    
    Reserves
    
    
    per InsuredInsureds with settlement agreements:Structured settlements
    
    
    1
    
    
    
    -
    %
    
    $
    2.0
    
    
    
    0.4
    %
    
    $
    2.0Coverage in place
    
    
    3
    
    
    
    1.5
    
    
    
    15.4
    
    
    
    2.9
    
    
    $
    5.1Total insureds with settlement
agreements
    
    
    4
    
    
    
    1.5
    
    
    
    17.4
    
    
    
    3.3
    
    
    $
    4.4Other open insureds:Active (insureds with past paid indemnity)
    
    
    161
    
    
    
    96.6
    
    
    
    290.6
    
    
    
    55.6
    
    
    $
    1.8Not active
    
    
    287
    
    
    
    1.7
    
    
    
    75.3
    
    
    
    14.4
    
    
    $
    0.3Total other open insureds
    
    
    448
    
    
    
    98.3
    
    
    
    365.9
    
    
    
    70.0
    
    
    $
    0.8Additional unallocated IBNR
    
    
    -
    
    
    
    -
    
    
    
    123.5
    
    
    
    23.7Total direct unpaid losses and ALAE
    
    
    452
    
    
    
    99.8
    
    
    
    506.8
    
    
    
    97.0Assumed reinsurance
    
    
    
    
    
    
    0.2
    
    
    
    15.9
    
    
    
    3.0Total gross unpaid losses and ALAE
    
    
    
    
    
    
    100.0
    %
    
    $
    522.7
    
    
    
    100.0
    %
 Reflecting its historical underwriting profile, the Company has only a handful of settlement
agreements in place as the vast majority of its asbestos claims arise from peripheral defendants
who tend to be smaller insureds with a lower amount of limits exposed, as evidenced by the low
average gross reserve amount per insured. Crum & Forster is the lead insurer on less than 20% of
its reported asbestos claims. Reserves for each of the open insureds are established based on an
exposure analysis, as described above. Additional unallocated IBNR represents a loss reserve
provision for additional claims to be reported in the future, as well as the re-opening of any
claim closed in the past. The Companys two largest insureds with
asbestos exposure, measured in terms of share of the Companys total
net asbestos liabilities at December 31, 2004, accounted for 31.4%
and 4.9%, respectively, of total net unpaid losses and ALAE at
December 31, 2004 and 32.7%
and 0.1%, respectively, of total net paid losses and ALAE for the
year ended December 31, 2004. Recently, there have been numerous bankruptcies of insureds stemming from an increase in asbestos
claimants, and the number of such bankruptcies now totals some 71 companies. These bankruptcies
represent companies that were heavily exposed to asbestos liabilities. The Companys future
exposure to the asbestos liabilities, however, is limited. The Companys exposure and potential future exposure to those entities is summarized as follows: At December 31, 2004Number of
    
    
    Remaining(dollars in millions)
    
    Bankruptcies
    
    
    Policy LimitsNo insurance coverage issued to policyholder
    
    
    53
    
    
    $
    -Resolved
    
    
    15
    
    
    
    -Potential future exposure
    
    
    3
    
    
    
    25Total
    
    
    71
    
    
    $
    25
 The Company did not issue insurance to 53 of the 71 companies. It did issue insurance coverage to
the remaining 18 companies; however, it has resolved the asbestos claims of 15 of these insureds.
With respect to the other three insureds, Crum & Forster has $25 million of policy limits
remaining. As part of the overall review of the Companys asbestos exposure, management compares the level of
reserves to various industry benchmarks. The most widely reported benchmark is the survival ratio,
which represents the outstanding loss and ALAE reserves (including IBNR) at December 31 divided by
the average paid losses and ALAE for the past three years. The resulting ratio is a simple measure
of the estimated number of years before the year-end loss and ALAE reserves would be exhausted
using recent payment run rates. The higher the ratio, the more years the loss and ALAE reserves
would be expected to cover. Because there is a high degree of certainty regarding the ultimate liabilities for those claims
subject to settlement agreements, the Company also presents its
survival ratio excluding those outstanding loss reserves and
historical loss payments. 23




---



##### 



The asbestos survival ratios based on net loss and ALAE reserves, net of
per risk reinsurance but before the benefit of corporate aggregate reinsurance, are presented
below: At December 31, 2004Amounts
    
    
    AmountsSubject to
    
    
    Net ofSettlement
    
    
    Settlement(dollars in millions)
    
    Reported
    
    
    Agreements
    
    
    AgreementsNet unpaid losses and ALAE
    
    $
    408.8
    
    
    $
    6.7
    
    
    $
    402.13-year average net paid losses and ALAE
    
    $
    42.4
    
    
    $
    0.9
    
    
    $
    41.53-year survival ratios
    
    
    9.6
    
    
    
    
    
    
    
    9.7
 Another industry benchmark that management reviews is the relationship of asbestos loss and ALAE
reserves to the estimated ultimate asbestos loss, i.e., the sum of cumulative paid losses and the
year-end outstanding loss reserves. These comparisons are summarized as follows: Net1 % of Total$
    
    
    % of TotalCrum & Forster (dollars in millions)Paid losses and ALAE as of December 31, 2004
    
    $
    304.8
    
    
    
    42.7
    %Reserves (case and IBNR) as of December 31, 2004
    
    
    408.8
    
    
    
    57.3Ultimate losses and ALAE as of December 31, 2004
    
    $
    713.6
    
    
    
    100.0
    %Industry, as represented by A.M. Best Company (A.M. Best)2(dollars in billions)Paid losses and ALAE as of December 31, 2003
    
    $
    28.6
    
    
    
    44.0
    %Reserves (case and IBNR) as of December 31, 2003
    
    
    36.4
    
    
    
    56.0Ultimate losses and ALAE as of December 31, 2003
    
    $
    65.0
    
    
    
    100.0
    %
  1
    Net of per risk reinsurance, but before the benefit of corporate
aggregate reinsurance.2
    Extracted from an A.M. Best report dated December 6, 2004. This report
states that the industry had paid an additional $2.6 billion on asbestos losses in
calendar year 2003, for a total of $28.6 billion, or 44% of A.M. Bests total
ultimate industry loss estimate of $65 billion. As a result of the processes, procedures and analyses described above, management believes
that the reserves carried for asbestos claims at December 31, 2004 are appropriate based upon known
facts, current law and managements judgment. However, there are a number of uncertainties
surrounding the ultimate value of these claims, which may result in changes in these estimates as
new information emerges. Among these are the following: the unpredictability inherent in
litigation; any impact from the bankruptcy protection sought by asbestos producers and defendants;
an unanticipated increase in the number of asbestos claimants; the resolution of disputes
pertaining to the amount of coverage for non-product claims asserted under premises/operations
general liability policies; and future developments regarding the ability to recover reinsurance on
asbestos claims. It is also not possible to predict, nor has management assumed, any changes in
the legal, social or economic environments and their impact on future asbestos claim development.
The carried asbestos reserves also do not reflect any effects of future legislation. During 2004 and 2003, the trends noted above have continued, including increased numbers of
claimants filing asbestos claims against the Companys insureds, increased value of claims against
viable asbestos defendants as co-defendants seek bankruptcy protection and an increased number of
insureds asserting that their asbestos claims are not subject to aggregate limits and that each
individual bodily injury claim should be treated as a separate occurrence. As a result of these
trends, the Company significantly strengthened its asbestos reserves by $149.8 million, principally
in the fourth quarter of 2003. In 2004, based on the Companys internal actuarial review and an
independent actuarial firms ground-up study of asbestos reserves, the Company strengthened its
asbestos reserves by $90.5 million. Although fewer claims were filed in 2004, as compared to 2003,
it is too early to draw conclusions from this modest decline. Claim values continue to escalate as
more co-defendants seek bankruptcy protection. Management continues to study these trends and
update its detailed exposure analyses as data becomes available. Due to the inherent uncertainties
described above, the Companys ultimate liability for asbestos claims may vary substantially from
the amount currently recorded. 24




---



##### 



Environmental pollution exposure Hazardous waste sites present another significant potential exposure. The federal Superfund law
and comparable state statutes govern the cleanup and restoration of toxic waste sites and formalize
the concept of legal liability for cleanup and restoration by potentially responsible parties
(PRPs). These laws establish the means to pay for cleanup of waste sites if PRPs fail to do so
and to assign liabilities to PRPs. Most PRPs named to date are parties who have been generators,
transporters, past or present land owners or past or present site operators. Most sites have
multiple PRPs. Most insurance policies issued to PRPs did not expressly cover the costs of
pollution cleanup since pollution was not a recognized hazard at the time many of these policies
were issued. Over time, judicial interpretations in many cases have found that the scope of
coverage of the policies included pollution exposure. Since 1986, however, most general liability
policies exclude coverage for such exposures. There is great uncertainty involved in estimating liabilities related to these exposures. First,
the number of waste sites subject to cleanup is unknown. To date, approximately 1,575 cleanup
sites have been identified by the Environmental Protection Agency (EPA) and included on its
National Priorities List. State authorities have identified many additional sites. Second, the
liabilities of the insureds themselves are difficult to estimate. At any given site, the
allocation of remediation cost among the PRPs varies greatly depending upon a variety of factors.
Third, different courts have been presented with liability and coverage issues regarding pollution
claims and have reached inconsistent decisions on several issues. These uncertainties are unlikely
to be resolved in the near future. Uncertainties also remain as to the Superfund law itself. The excise tax imposed to fund Superfund
lapsed at the end of 1995 and has not been renewed. While a number of proposals to reform
Superfund have been put forward by various parties, no reforms have been enacted by Congress since
then. It is unclear what position Congress or the Bush administration will take and what
legislation, if any, will be enacted in the future. At this time, it is not possible to predict
what form any reforms might take and the effect on the insurance industry. In the absence of
federal movement on Superfund, though, the enforcement of Superfund liability is shifting to the
states that are reconsidering state-level cleanup statutes and regulations. As individual states
move forward, the potential for conflicts among states becomes greater, increasing the uncertainty
of the cost to remediate state sites. Crum & Forsters environmental pollution losses have been developing as expected over the past few
years with new reports trending downward. Claims against Fortune 500 companies are declining, and,
while insureds with single-site exposures are still active, the Company has resolved the majority
of disputes with respect to insureds with a large number of sites. In many cases, claims are being
settled for less than initially anticipated due to improved site remediation technology and
effective policy buybacks. One potentially negative trend is an apparent increase in the filing of
natural resource damage (NRD) suits by a number of states and Native American tribes seeking to
recover funds for damages to natural resources, such as fishing rights and wildlife depletion.
This is a relatively new occurrence, so ultimate costs associated with this new latent litigation
remain uncertain. An analysis of gross and net reserves from environmental exposures is presented in Note 6 to the
consolidated financial statements included in Item 8. Financial Statements and Supplementary
Data. Many insureds have presented claims against the Company for defense costs and for indemnification
in connection with environmental pollution matters. As with asbestos reserves, exposure for
environmental pollution cannot be estimated with traditional loss reserving techniques that rely on
historical accident year loss development factors. Since each insured presents different liability
and coverage issues, the methodology used to establish environmental reserves is similar to that
used for asbestos liabilities. In the course of performing these individual insured assessments, the following factors are
considered: the insureds probable liability and available coverage; relevant judicial
interpretations; the nature of the alleged pollution activities of the insured at each site; the
number of sites; the total number of PRPs at each site; the nature of environmental harm and the
corresponding remedy at each site; the ownership and general use of each site; the involvement of
other insurers and the potential for other available coverage; and the applicable law in each
jurisdiction. A provision for IBNR is developed, using methodology similar to that for asbestos
liabilities, and an estimate of ceded reinsurance recoveries is calculated. The Companys environmental survival ratio calculation, based on loss and ALAE reserves, net of per
risk reinsurance, but before the benefit of corporate aggregate reinsurance, is presented below: (dollars in millions)
    
December 31,2004Net unpaid losses and ALAE
    
    $
    85.23-year average net paid losses and ALAE
    
    $
    16.23-year environmental survival ratio
    
    
    5.3
 25




---



##### 



Other latent claims exposure In addition to asbestos and environmental pollution, Crum & Forster faces exposure to other types
of mass tort claims. These other latent claims include silica, chemicals, lead, sick building
syndrome, gas and vapors, repetitive stress, paint and mold. An analysis of gross and net reserves from other latent exposures is presented in Note 6 to the
consolidated financial statements included in Item 8. Financial Statements and Supplementary
Data. Similar to asbestos and pollution, traditional actuarial techniques cannot be used to estimate
ultimate liability for these exposures. Management sets reserves for other latent exposures at a
selected survival ratio (currently using 9.5 years) and selects a gross to net ratio based on the
gross to net ratio of historical payments. Summary Management believes that the asbestos, environmental and other latent reserves reported at December
31, 2004 are reasonable estimates of the ultimate remaining liability for these claims based on
facts currently known, the present state of the law and coverage litigation, current assumptions
and the reserving methodologies employed. These latent reserves are continually monitored by
management and reviewed by independent consulting actuaries. New developments will continue to be
evaluated as they arise in order to supplement the ongoing analyses and reviews of the latent
exposures. Due to the inherent uncertainties described above, the Companys ultimate liability for
asbestos, environmental and other latent claims may vary substantially from the amount currently
recorded. 
 Investments The Companys investment strategy is to maximize the total return of the portfolio while prudently
preserving invested capital for the protection of policyholders and providing sufficient liquidity
for the payment of claims and other obligations. Management believes that Crum & Forsters
investment policy provides the flexibility to implement this strategy. The investments of
Crum & Forster Holdings Corp. and its insurance subsidiaries are
managed by Hamblin Watsa Investment Counsel Ltd. (Hamblin Watsa), a subsidiary of Fairfax. For
further information on the investment agreements with Hamblin Watsa, see Item 13. Certain
Relationships and Related TransactionsInvestment Agreements. The investment guidelines, as
promulgated by each insurance subsidiarys investment committee and as set forth in each insurance
subsidiarys respective investment agreement with Hamblin Watsa, stress preservation of capital,
market liquidity, diversification of risk and long-term, value-oriented investments. The members
of the investment committee of Fairfax, all of whom are officers of
Hamblin Watsa, also constitute the investment committees of the Company and its insurance
subsidiaries. Long-term investments generally are made using a value approach, by investing in securities which
Hamblin Watsa believes are selling below their intrinsic value, to protect capital from loss and
generate above-average long-term total returns. 26




---



##### 



Equities are selected on the basis of prices which are perceived to be selling at a discount to
Hamblin Watsas estimate of intrinsic values. Downside protection is obtained by seeking a margin
of safety in terms of a sound financial position. Fixed income securities are selected on the basis of yield spreads over U.S. Treasury bonds,
subject to stringent credit analysis. Despite a low-yield environment, the Company has not
attempted to reach for yield by investing in significant amounts of non-investment grade
securities. Securities meeting these criteria may not be readily available, in which case U.S.
Treasury bonds are generally emphasized. The Companys investments are subject to market risks and
fluctuations, as well as to risks inherent in particular securities. For further discussion of
market risks, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk. On the whole, the availability of equity securities meeting the Companys value-based criteria will
dictate the portfolios exposure to equities. Similarly, the availability of attractive yield
spreads and strong credit will determine the level of exposure to corporate bonds. As part of the
Companys review and monitoring process, the impact of a simultaneous substantial reduction in
equity and bond prices on insurance regulatory capital is tested regularly to ensure that capital
adequacy will be maintained at all times. The Companys insurance subsidiaries have invested in certain equity securities of affiliates of
Fairfax. The historical cost of investments in the securities of entities which are affiliates of
Fairfax and the carrying value of such investments as reflected in the Companys balance sheets are
summarized in Note 4 to the consolidated financial statements included in Item 8. Financial
Statements and Supplementary Data. The composition of the fair value of the Companys fixed income investment portfolio by rating, as
assigned by Standard & Poors or Moodys, using the lower of these ratings for any security where
there is a split rating, is summarized as follows: At December 31,Rating
    
    2004
    
    
    2003AAA/Aaa
    
    
    95.5
    %
    
    
    64.4
    %AA/Aa2
    
    
    0.1
    
    
    
    0.2A/A2
    
    
    -
    
    
    
    7.7BBB/Baa2
    
    
    -
    
    
    
    2.6BB/Ba2
    
    
    0.7
    
    
    
    -B/B2
    
    
    -
    
    
    
    4.1CCC/Caa or lower, or not rated.
    
    
    3.7
    
    
    
    21.0Total fixed income portfolio
    
    
    100.0
    %
    
    
    100.0
    %
 As of December 31, 2004, the Companys fixed income securities had a dollar-weighted average rating
of AA, an average duration of 10.9 years and an average yield to maturity of 5.5% before
investment expenses. The higher proportion of investment grade securities at December 31, 2004 was
primarily due to the investment of more than $1 billion of cash and cash equivalents, principally
in U.S. Treasury securities, in March of 2004. For additional information about investments, see Item 7. Managements Discussion and Analysis of
Financial Condition and Results of Operations and Note 4 to the consolidated financial statements
contained in Item 8. Financial Statements and Supplementary Data. 
 Competition The property and casualty insurance industry is highly competitive. According to A.M. Best, there
are approximately 1,000 property and casualty organizations in the United States, comprised of
approximately 2,400 property and casualty companies, as reported in Bests Aggregates & Averages,
Property/Casualty, 2004 Edition. Of those organizations, the top 50 accounted for approximately
78% of the consolidated industrys total net premiums written in 2003 and no one company, or
company group, had a market share greater than 11%. Based on Bests Aggregates & Averages,
Property/Casualty, 2004 Edition, management believes that Crum & Forster ranked approximately 46th
by net premiums written in commercial lines in 2003. The Company competes with large, national insurers who often have greater financial strength and
broader product offerings. In addition, the Company competes with regional companies who have an
in-depth knowledge of the local insurance marketplace and who are positioned to be responsive to
local needs. 27




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Competition in the commercial lines property and casualty insurance industry is based on many
factors, including overall financial strength of the insurer, ratings by rating agencies, premiums
charged, policy terms and conditions, services offered, reputation and experience. The Companys
challenge is to retain existing business and attract new business on terms offering acceptable
return potentials in an environment in which both established competitors and newer entrants are
aggressively seeking premium growth. Market competition intensified throughout 2004, across virtually all lines of business,
particularly in the third and fourth quarters. New business declined as the market has softened
and competition for new business, particularly from higher rated companies, has intensified. The
Company faces competition from domestic and foreign insurers, many of which may be perceived to
provide greater security to insureds and many of which are larger and have greater financial,
marketing and management resources than Crum & Forster. No assurance can be made that the Company will not face increased competition in the future and
that such increased competition will not have a material adverse effect on Crum & Forster. For
further discussion, see Risk Factors. 
 Ratings Financial strength ratings issued by third party rating agencies are used by insurance consumers
and insurance intermediaries as an important means of assessing the financial strength and quality
of insurers. Higher ratings generally indicate relative financial stability and a strong ability
to pay claims. Ratings focus on the following factors: capital resources, financial strength,
demonstrated management expertise in the insurance business, credit analysis, systems development,
marketing, investment operations, minimum policyholders surplus requirements and capital
sufficiency to meet projected growth, as well as access to such traditional capital as may be
necessary to continue to meet standards for capital adequacy. Crum & Forsters insurance
subsidiaries have an A financial strength rating with a negative outlook (the fourth highest of
fifteen rating categories) from A.M. Best, a rating agency and publisher for the insurance
industry, and a BBB financial strength rating (the fourth highest of nine rating categories) from
Standard & Poors, Insurance Rating Services, also a rating agency for the insurance industry. Crum & Forsters current ratings are the lowest necessary to compete in its targeted markets. The
Company may not maintain its financial strength ratings from the rating agencies. A downgrade or
withdrawal of any rating could severely limit or prevent the Company
from writing quality new or renewal business, securing adequate reinsurance on
acceptable terms and retaining its key management and employees. A.M. Best has advised the Company that, although it is encouraged by the improved
underlying trends exhibited in its recent underwriting performance, the ratings outlook is negative
and contingent upon managements ability to ultimately achieve overall earnings stability,
specifically with regard to adequacy of asbestos reserves, and improved financial flexibility of
the Companys ultimate parent, Fairfax. According to A.M. Best, a negative outlook indicates that
A.M. Best believes that the rated insurer is experiencing unfavorable financial and/or market
trends relative to its rating level and, if such trends continue, it has a good possibility of
having its rating lowered. The Companys ratings by these rating agencies are based on a variety
of factors, many of which are outside of its control, including the financial condition of Fairfax
and its other subsidiaries and affiliates, the financial condition or actions of parties from which
the Company has obtained reinsurance and factors relating to the sectors in which the Company or
its reinsurers conduct business and the statutory surplus of its insurance subsidiaries, which is
adversely affected by underwriting losses and dividends paid by them to Crum & Forster. The financial strength ratings assigned by rating agencies to insurance companies represent
independent opinions of an insurers financial strength and its ability to meet ongoing obligations
to policyholders, and are not directed toward the protection of investors. Ratings by rating
agencies of insurance companies are not ratings of securities or recommendations to buy, hold or
sell any security. 
 Insurance Regulatory Matters The Company and its subsidiaries are subject to regulation under relevant insurance statutes,
including insurance holding company statutes, of various jurisdictions, including Delaware, the
domiciliary state of US Fire and CF Indemnity, New Jersey, the domiciliary state of North River and
CF Insurance, New York, the domiciliary state of Seneca, and Arizona, the domiciliary state of CF
Specialty and Seneca Specialty. In addition, the Company is subject to regulation by the insurance
regulators of other states in which its insurance subsidiaries do business. General Crum & Forsters insurance subsidiaries are subject to detailed regulation throughout the United
States. Although there is limited federal regulation of the insurance business, each state has a
comprehensive system for regulating insurers operating in that state. The laws of the various
states establish supervisory agencies with broad authority to regulate, among other things,
licenses to transact business, premium rates for certain coverage, trade practices, market conduct,
agent licensing, policy forms, underwriting and claims practices,
reserve adequacy, transactions
with affiliates and insurer solvency. Many states also regulate
investment activities on the basis of quality, distribution and other quantitative criteria. Further, most states compel
participation in, and regulate composition of, various shared market mechanisms. States have also
enacted legislation that regulates insurance holding company systems, including acquisitions,
dividends, terms of affiliate transactions and other related matters. 28




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Effective December 31, 2003, US Fire and CF Indemnity were re-domesticated from New York to Delaware.
In Delaware, earned surplus equals unassigned surplus, whereas in New York, gross unrealized
investment gains and deferred tax assets are both deducted from unassigned surplus. In addition,
intercompany income tax payments must be held in escrow under certain circumstances in New York.
There is no such requirement in Delaware. Insurance companies are also affected by a variety of state and federal legislative and regulatory
measures and judicial decisions that define and qualify the risks and benefits for which insurance
is sought and provided. These include redefinitions of risk exposure in such areas as product
liability, environmental damage and workers compensation. In addition, individual state insurance
departments may prevent premium rates for some classes of business from reflecting the level of
risk assumed by the insurer for those classes. Such developments may result in adverse effects on
the profitability of various lines of insurance. In some cases, these adverse effects on
profitability can be minimized, when possible, through the repricing of coverage, if permitted by
applicable regulations, or the limitation or cessation of the affected business, which, in some
cases, may be restricted by state law. Most states have insurance laws requiring that property and casualty rate schedules, policy or
coverage forms and other information be filed with each such states regulatory authority. In many
cases, such rates and/or policy forms must be approved prior to use. A few states have recently
considered or enacted limitations on the ability of insurers to share data used to compile rates.
Such limitations have not had, and are not expected to have, a significant impact on the Company. Possible legislative and regulatory changes Recently, the insurance industry has been subject to increased scrutiny by regulators and
legislators. The National Association of Insurance Commissioners (NAIC) and a number of state
legislatures have considered or adopted legislative proposals that alter and, in many cases,
increase the authority of state agencies to regulate insurance companies and holding company
systems. In addition, several committees of Congress have made inquiries and conducted hearings as
part of a broad study of the regulation of insurance companies, and legislation has been introduced
in several of the past sessions of Congress which, if enacted, could result in the federal
government assuming some role in the regulation of the insurance industry. Although the federal
government does not regulate the business of insurance directly, federal initiatives often affect
the insurance business in a variety of ways. Legislation has been introduced in Congress that would require, as an essential element of an
asbestos claim, a certification of physical impairment to which asbestos exposure was a substantial
contributing factor. To date, Congress has taken no action on that legislation. In addition, a
bill entitled the Fairness in Asbestos Injury Resolution Act (the FAIR Act) has been introduced
in Congress to address the rising number of asbestos personal injury claims in the U.S. If enacted
in its current form, the FAIR Act would establish a trust fund, which would provide the exclusive
remedy for asbestos personal injury victims. As currently drafted, the FAIR Act would also create
a medical certification requirement as a predicate to making an asbestos claim and would implement
a schedule of standardized award values for the various asbestos-related injuries for which relief
is proposed under the program. Management is currently not able to predict whether this bill will
be enacted, nor can it predict the provisions that its final form might contain in the event it
becomes law. At this preliminary stage, management is unable to predict the impact that such
legislation could have on the Companys operations. For a discussion of various investigations by governmental authorities regarding certain insurance
industry business practices, see Risk FactorsCertain business practices of the insurance
industry have become the subject of investigations by government authorities and other parties and
Item 3. Legal ProceedingsInsurance Industry Investigations. It is not possible to predict the outcome of any of the foregoing legislative, investigative,
administrative or congressional activities or the potential effects thereof on the Company. Recent regulatory examinations Insurance companies are required to file detailed annual reports with state insurance regulators in
each state in which they do business, and their business and accounts are subject to examination by
such regulators at any time. In addition, these insurance regulators periodically examine each
insurers financial condition, adherence to statutory accounting practices and compliance with
insurance department rules and regulations. 29




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A draft of the 1998 examination report of US Fire was released by the New York Insurance Department
(NYID) for review and response, and contained no financial adjustments. The NYID has not
finalized this examination report pending resolution of the Companys objection to the NYIDs
recommendation that it treat large deductible recoveries as taxable premiums. Premium tax amounts
related to large deductible recoveries are immaterial to the Company. The NYID has completed and filed its examination of Seneca for the period from January 1, 1997
through December 31, 2000. There were no financial adjustments contained in the report. Examinations for US Fire and CF Indemnity for the three-year and one-year periods ending December
31, 2001, respectively, are still pending final review at the NYID. The draft examination reports
are expected to be received shortly, and it is expected that they will include adjustments reducing
policyholders surplus by approximately $108 million and $1 million, respectively. The adjustments
reflect subsequent development on loss and LAE reserves for accident years 2001 and prior. In
addition, the NYID disallowed credits for available reinsurance that would have covered most of the
subsequent development since the reinsurance contract was with an unauthorized reinsurer, which
requires 100% collateralization. These policyholders surplus adjustments have no impact on the
Companys surplus as of December 31, 2004 since subsequent reserve strengthening actions have
covered the reserve deficiencies noted in the examination reports and actual cessions to
unauthorized reinsurers are now fully collateralized. The New Jersey Department of Banking and Insurance has completed and filed its examinations of
North River and CF Insurance for the four-year period ending December 31, 2001. The report
contained adjustments reducing North Rivers and CF Insurances policyholders surplus as of the
examination date by $12.9 million and $0.6 million, respectively, for subsequent development on
losses and LAE for accident years 2001 and prior. The policyholders surplus adjustments have no
impact on policyholders surplus as of December 31, 2004 since subsequent reserve strengthening
actions have covered the reserve deficiencies noted in the examination reports. As part of the redomestication process of US Fire and CF Indemnity, the Delaware Insurance
Department completed an independent review of the Companys loss reserves as of 2002 and found them
to be adequate. The Department of Insurance of the State of Arizona has completed a financial examination of CF
Specialty as of December 31, 2003. The final examination report was filed on December 20, 2004 and
contained no adjustments to the financial statements filed by the Company. The Maryland Insurance Administration (MIA) conducted a market conduct examination of the
property & casualty business of US Fire and North River for the period from July 1, 2001 to June
30, 2002. Certain violations identified by the examination required re-rating of policies, which
resulted in approximately $74,000 of return premium, and a fine of $35,000 was assessed. The California Insurance Department (CID) has completed the field portion of a market conduct
examination, which focused on the advertising, marketing, underwriting, premium development, risk
selection and rejection practices of US Fire and North River. The examination covered policies in
effect during 2003. To date, the Company has not received a draft report from the CID. Applicable state insurance laws, rather than federal bankruptcy laws, apply to the liquidation or
reorganization of insurance companies. Regulation of dividends and other payments from the Companys insurance subsidiaries Crum & Forster Holdings Corp. is a legal entity separate and distinct from its subsidiaries. As a
holding company with no other business operations, the Companys primary sources of cash to meet
its obligations, including principal and interest payments with respect to indebtedness, are
available dividends and other statutorily permitted payments, such as management and other fees,
from the Companys insurance subsidiaries. The Companys insurance subsidiaries are subject to
various state legal and regulatory restrictions, including regulatory restrictions imposed as a
matter of administrative policy, applicable generally to any insurance company in its state of
domicile, that limit the amount of dividends or distributions an insurance company may pay to its
shareholders without prior regulatory approval. The restrictions are generally based on certain
levels or percentages of surplus, investment income and operating income, as determined in
accordance with Statutory Accounting Procedures (SAP), which differ from generally accepted
accounting principles (GAAP). Generally, dividends may be paid only out of earned surplus. In
every case, surplus subsequent to the payment of any dividends must be reasonable in relation to an
insurance companys outstanding liabilities and must be adequate to meet its financial needs. 30




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Delaware laws provide that before a Delaware domiciled insurer may pay any dividend it must have
given notice within five days following the declaration thereof and 10 days prior to the payment
thereof to the state insurance commissioner. During this 10-day
period, the commissioner may, by order, limit or disallow the payment of ordinary dividends if he
or she finds the insurer to be presently or potentially in financial distress. At any time, under
Delaware Insurance Regulations, the state insurance commissioner may issue an order disallowing or
limiting the payment of dividends by an insurer if the commissioner determines that the insurer is
presently or potentially financially distressed or troubled. Without the prior approval of the
state insurance commissioner, a Delaware domiciled insurer may only pay cash dividends from its
earned surplus. Earned surplus is defined as that amount equal to the unassigned funds of an
insurer, as set forth in the most recent annual statement of the insurer submitted to the state
insurance commissioner, including all or part of the surplus arising from unrealized capital gains
or revaluation of assets. Additionally, a Delaware domiciled insurer may not pay any
extraordinary dividend or distribution until (i) 30 days after the state insurance commissioner
has received notice of a declaration of the dividend or distribution and has not within that period
disapproved the payment, or (ii) the state insurance commissioner has approved the payment within
the 30-day period. Under the Delaware Insurance Code, an extraordinary dividend of a property
and casualty insurer is a dividend, the amount of which, together with all other dividends and
distributions made in the preceding 12 months, exceeds the greater of 10% of an insurers surplus
with respect to policyholders, as of the end of the prior calendar year or the insurers statutory
net income, not including realized capital gains, for the prior calendar year. New Jersey laws provide that an insurer domiciled in the state must obtain the approval of the
state insurance commissioner for payment of any dividend which, together with dividends paid in the
previous 12 months, exceeds the greater of (i) 10% of policyholders surplus at the preceding
December 31, or (ii) statutory net income (excluding realized gains) for the 12-month period ending
the preceding December 31. In New Jersey, dividends may not be paid unless prior notice has been
given to the New Jersey Department of Banking and Insurance (NJDOBI) within five business days
after the dividend is declared and 30 days prior to payment. In addition, except for extraordinary
dividends or distributions paid with the approval of the NJDOBI, dividends may be paid by insurers
domiciled in New Jersey only from earned surplus, which means unassigned funds (surplus) as
reported on the insurers annual statement as of December 31 next preceding, less unrealized
capital gains and revaluation of assets. Due to reserve strengthening in recent years and the accounting treatment prescribed for
retroactive reinsurance, US Fire and North River, Crum & Forsters principal insurance
subsidiaries, had negative earned surplus prior to 2003. As of December 31, 2004, US Fire had the
capacity to pay ordinary dividends in the amount of $88.5 million and North River had the capacity
to pay ordinary dividends in the amount of $5 million. As of December 31, 2004, US Fire reported
earned surplus of $173.1 million. As of December 31, 2004, North River had earned surplus of $5
million. No assurance can be given that some or all the domiciliary states of the Companys
insurance subsidiaries will not adopt statutory provisions more restrictive than those currently in
effect. If insurance regulators determine that payment of a dividend or any other payment to an affiliate
(such as payment under a tax-sharing agreement or payment for employee or other services) would,
because of the financial condition of the paying insurance company or otherwise, result in such
insurance company being in a hazardous financial condition, the regulators may prohibit such
payments that would otherwise be permitted without prior approval. Capital adequacy In connection with the licensing of insurance companies, an insurance regulator may limit or
prohibit the writing of new business by an insurance company within its jurisdiction when, in the
regulators judgment, the insurance company is not maintaining adequate statutory surplus or
capital. Crum & Forster does not currently anticipate that any regulator would limit the amount of
new business that its insurance subsidiaries may write given their current levels of statutory
surplus and capital. In order to enhance the regulation of insurer solvency, the NAIC adopted risk-based capital (RBC)
requirements for property and casualty insurance companies. These RBC requirements are designed to
monitor capital adequacy and to raise the level of protection that statutory surplus provides for
policyholders. The RBC formula measures four major areas of risk facing property and casualty
insurers: (i) underwriting risk, which is the risk of errors in pricing and reserve setting; (ii)
asset risk, which is the risk of asset default for fixed-income assets and loss in market value for
equity assets; (iii) credit risk, which is the risk of losses from unrecoverable reinsurance and
the inability of insurers to collect agents receivable balances; and (iv) off-balance sheet risk,
which is primarily the risk created by excessive growth. The RBC formula provides a mechanism for
the calculation of an insurance companys Authorized Control Level (ACL) RBC amount. The NAIC RBC model law stipulates four levels of regulatory action with the degree of regulatory
intervention increasing as the ratio of surplus to RBC decreases. The initial level, the Company
Action Level, requires the insurance company to submit a plan of corrective action to the relevant
insurance commissioner if surplus falls below 200% of the ACL amount. The next level, the
Regulatory Action Level, requires a company to submit a plan of corrective action and also allows
the regulator to perform an examination of a companys business and operations and issue a
corrective order if surplus falls below 150% of the ACL amount. The third level, the ACL, permits
the regulator to place 31




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a company under regulatory control, including rehabilitation or liquidation,
if surplus falls below 100% of that amount. The final action level, the Mandatory Control Level,
requires the insurance commissioner to place a company under regulatory control if surplus falls
below 70% of the ACL amount. Based on the ACL RBC formula, at December 31, 2004, the capital of each of Crum & Forsters
insurance subsidiaries exceeded the Company Action Level, and, as a result, no regulatory or
company action is required. NAIC IRIS ratios In the 1970s, the NAIC developed a set of financial relationships or tests called the Insurance
Regulatory Information System (IRIS) that was designed to facilitate early identification of
companies that may require special attention by insurance regulatory authorities. Insurance
companies submit data on an annual basis to the NAIC, which, in turn, analyzes the data utilizing
ratios covering 12 categories of financial data with defined usual ranges for each category. An
insurance company may fall out of the usual range for one or more ratios because of specific
transactions that are in themselves immaterial or eliminated at the consolidated level. Generally,
an insurance company may become subject to increased scrutiny if it falls outside the usual ranges
on four or more of the ratios. In 2003 and 2002, US Fire, North River, CF Insurance and CF Indemnity each had four of the IRIS
ratios outside the target ranges, two as a result of the reserve strengthening actions of 2003,
2002 and 2001 and one other as a result of increases in premiums written. One ratio, the
investment yield ratio, was outside the normal range due, in part, to historically low yields
available in the market. The Company received regulatory inquiries and responded to such inquiries
with the result that no further action was required. The 2004 IRIS ratios, as prepared by the
Company, are similar to, or slightly better than, those in 2003 and 2002. Investment regulation Crum & Forsters insurance subsidiaries are subject to state laws and regulations that require
diversification of investment portfolios and that limit the amount of investments in certain
investment categories. Failure to comply with these laws and regulations may cause non-conforming
investments to be treated as non-admitted assets for purposes of measuring statutory surplus and,
in some instances, would require divestiture. As of December 31, 2004, management believes the
Companys investments complied with such laws and regulations in all material respects. Guaranty funds All 50 states have separate insurance guaranty fund laws requiring property and casualty insurance
companies doing business within their respective jurisdictions to be members of their guaranty
associations. These associations are organized to pay covered claims (as defined and limited by
the various guaranty association statutes) under insurance policies issued by insolvent insurance
companies. Such guaranty association laws, except the one applicable in New York, create
post-assessment associations which make assessments against member insurers to obtain funds to pay
association covered claims after insurer insolvency occurs. These associations levy assessments
(up to prescribed limits) on all member insurers in a particular state on the basis of the
proportionate share of the premiums written by member insurers in the covered lines of business in
that state. Maximum assessments permitted by law in any one year generally vary between 1% and 2%
of annual direct premiums written by a member in that state. New York has a pre-assessment
guaranty fund that makes assessments prior to the occurrence of an insolvency. Florida, New
Jersey, New York and Pennsylvania have created, by statute, a separate guaranty association for
workers compensation business. Some states permit member insurers to recover assessments paid
through surcharges on policyholders or through full or partial premium tax offsets, while other
states permit recovery of assessments through the rate filing process. Property and casualty guaranty fund assessments incurred by Crum & Forster totaled $8.4 million,
$5.2 million and $3.3 million for 2004, 2003 and 2002, respectively. The Companys policy is to
accrue for insolvencies when the loss is probable and the assessment amount can be reasonably
estimated. In the case of most insurance insolvencies, the Companys ability to reasonably
estimate the insolvent insurers liabilities or develop a meaningful range of the insolvents
liabilities is significantly impaired by inadequate financial data with respect to the estate of
the insolvent company as supplied by the guaranty funds. Although the amount of any assessments
applicable to guaranty funds cannot be predicted with certainty, management believes that future
guaranty association assessments for known insurer insolvencies will not have a material adverse
effect on the Companys results of operations or financial condition. 32




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Shared markets As a condition of their licenses to do business, Crum & Forsters insurance subsidiaries are
required to participate in mandatory property and casualty shared market mechanisms or pooling
arrangements, which provide various insurance coverages to
individuals or other entities that are otherwise unable to purchase such coverage in the commercial insurance
marketplace. The Companys insurance subsidiaries participation in such shared markets or pooling
mechanisms is generally proportionate to the amount of each of the insurance subsidiaries direct
premiums written for the type of coverage written by the specific pooling mechanism in the
applicable state. Many states have laws that establish second-injury funds to provide compensation to injured
employees for aggravation of a prior condition or injury. Insurers writing workers compensation
in those states having second-injury funds are subject to the laws creating the funds, including
the various funding mechanisms that those states have adopted to fund them. Several of the states
having larger second-injury funds utilize a premium surcharge that effectively passes the cost of
the fund to policyholders. Other states assess the insurer based on paid losses and allow the
insurer to recoup the assessment through future premium rates. Commercial automobile insurance and workers compensation lines have mandatory pooling arrangements
on a state-by-state basis for segments of the market that have difficulty finding coverage from
insurers. The shared market mechanisms for providing commercial automobile coverage are generally
assigned risk plans, reinsurance facilities and joint underwriting facilities. Additionally,
another pooling mechanism, a Commercial Automobile Insurance Procedure (CAIP), uses a limited
number of servicing carriers to handle assignments from other insurers. The CAIP servicing carrier
is paid a fee for the responsibility of handling the commercial automobile policies and paying
claims. For workers compensation, the pooling in each state is generally in the form of a
reinsurance-type arrangement with servicing carriers providing the policy services and claims
handling services. The National Council of Compensation Insurance provides services for
calculating member pooling of losses and expenses in 32 states, with the remainder of the states
having their own independent servicing plans. Certain of Crum & Forsters insurance subsidiaries
participate in the Florida Hurricane Catastrophe Fund, a state-mandated catastrophe reinsurance
fund. Business insurance is also subject to pooled insurance on a small scale for commercial
properties insured through the various Fair Access to Insurance Requirements Plans that exist in
most states. The Company reported underwriting losses from participation in such mandatory pools
and underwriting associations of $4.0 million, $5.6 million and $4.7 million in 2004, 2003 and
2002, respectively. The amount of future losses or assessments from the shared market mechanisms and pooling
arrangements described above cannot be predicted with certainty. The underwriting results of these
pools traditionally have been unprofitable. Although it is possible that future losses or
assessments from such mechanisms and pooling arrangements could have a material adverse effect on
results of operations, management does not expect future losses or assessments to have a material
adverse effect on the Companys liquidity or capital resources. Insurance regulation concerning change or acquisition of control The insurance regulatory codes in the respective domiciliary states of Crum & Forsters insurance
subsidiaries each contain similar provisions to the effect that the acquisition of control of a
domestic insurer, or of any person that directly or indirectly controls a domestic insurer, cannot
be consummated without the prior approval of the domiciliary insurance regulator. In general, a
presumption of control arises from the direct or indirect ownership, control and possession with
the power to vote or possession of proxies with respect to 10% or more of the voting securities of
a domestic insurer, or of a person that controls a domestic insurer. An entity or person seeking
to acquire control, directly or indirectly, of a domestic insurance company, or of any person
controlling a domestic insurance company, generally must file with the relevant insurance
regulatory authority a statement relating to the acquisition of control containing certain
information required by statute and published regulations and provide a copy of such statement to
the domestic insurer and obtain the prior approval of such regulatory agency for the acquisition.
In addition, certain state insurance laws contain provisions that require pre-acquisition
notification to state agencies of a change in control of a non-domestic insurance company admitted
in that state. While such pre-acquisition notification statutes do not authorize the state agency
to disapprove the change of control, such statutes do authorize certain remedies, including the
issuance of a cease and desist order with respect to the non-domestic admitted insurers doing
business in the state if certain conditions exist, such as undue market concentration. Terrorism Risk Insurance Act of 2002 TRIA established a program, terminating December 31, 2005, under which the federal government
shares the risk of loss from certain acts of international terrorism with the insurance industry.
The program is applicable to substantially all commercial property and casualty lines of business
and participation by insurers writing such lines is mandatory. Under TRIA, all terrorism
exclusions contained in policies in force on November 26, 2002 were voided. For policies in force
on or after November 26, 2002, insurers are required to make available coverage for losses arising
from acts of terrorism as defined by TRIA on terms and in amounts that may not differ materially
from other policies. To be covered under TRIA, aggregate losses from the act must exceed $5
million, the act must be perpetrated within the U.S. on behalf of a foreign person or interest and
the U.S. Secretary of the Treasury must certify that the act is covered under the program. 33




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Under TRIA, the federal government will reimburse insurers for 90% of losses above a defined
insurer deductible. The deductible for each participating insurer is based on a percentage of the
combined direct premiums earned in the preceding calendar year of the insurer, defined to include
its subsidiaries and affiliates. The percentage is 15% for 2005, and was 10% for 2004 and 7% for
2003. Based on the 2004 direct premiums earned for participating Fairfax insurers of
approximately $2 billion, the aggregate deductible of the Fairfax group for 2005 is approximately
$300 million, all of which would be borne by a single subsidiary were that subsidiary alone to
sustain a loss of $300 million or more. Federal reimbursement of the insurance industry is limited
to $100 billion in each of 2005, 2004 and 2003. Under certain circumstances, the federal
government may require insurers to levy premium surcharges on policyholders to recoup its
reimbursements paid. After November 26, 2002, the Company commenced a process of offering and quoting terrorism coverage
on approximately 16,000 policies and bonds in force as of the enactment date. Additionally, the
Company developed specific underwriting and pricing guidelines for terrorism coverage for
subsequent new and renewal business. For certain classes of business, such as workers
compensation, terrorism coverage is mandatory. For those classes where coverage is not mandatory,
insureds may choose not to accept terrorism coverage. Based on experience through December 31,
2004, approximately 25% of policyholders in the Companys property lines of business accepted
terrorism coverage. Direct premiums written from terrorism coverage in 2004 were approximately $15
million. In general, the Companys 2004 reinsurance contracts provide coverage for domestic acts of
terrorism. Some casualty contracts have additional terrorism coverage for certified acts of
terrorism under TRIA. In particular, the workers compensation contract has coverage up to $100
million and the umbrella contract has coverage equal to two times the coverage limit, up to a
maximum of $50 million. None of the contracts covers acts of terrorism involving nuclear,
biological or chemical events. In 2004 and 2003, Crum & Forster purchased coverage from nSpire, a
subsidiary of Fairfax, for TRIA-certified acts in amounts and on terms that reduced the Companys
exposure to such acts to the amount of the pro-forma deductible based on the Companys stand-alone
direct premiums earned. The contract was not renewed for 2005. TRIA is scheduled to terminate on December 31, 2005 unless extended by the Federal government. In
the event TRIA is not extended, or is extended with significant modifications, terrorism coverage
provided under the Companys policies may change. Where permitted under state insurance
regulations, the Company has begun to utilize conditional terrorism exclusions, which will allow
the cancellation or alteration of terrorism coverage and related premium rates should TRIA lapse or
be modified. Where state insurance regulators disallow the exclusion of terrorism, such as in the
case of workers compensation policies or in certain states where the use of conditional terrorism
exclusions is not permitted, the Companys exposure to losses from non-domestic terrorist acts may
be increased. While the provisions of TRIA and the purchase of terrorism coverage described above currently
mitigate exposure in the event of a large-scale terrorist attack, the Companys effective
deductible is significant and the Companys reinsurance coverage on terrorist acts has been
reduced. In addition, if TRIA is not extended, the Company could be exposed to losses from
terrorist acts for policies in which terrorism exclusions are not allowed by regulatory
authorities. Further, exposure to losses from terrorist acts is not limited to TRIA events since
domestic terrorism is generally not excluded from Crum & Forsters policies and, regardless of the
status of TRIA, some state insurance regulators do not permit terrorism exclusions for various
coverage or causes of loss. Accordingly, management continues to monitor carefully the Companys
concentrations of risk. For additional discussion on TRIA, see  Catastrophe Management and
Risk Factors. Privacy regulation In 2001, privacy provisions of the Gramm-Leach-Bliley Act became fully effective. The provisions
establish consumer protections regarding the security and confidentiality of nonpublic personal
information and require full disclosure of the privacy policies of financial institutions to their
consumer customers. Privacy regulation is an evolving area of state and federal regulation and the
Company continues to monitor developments. Employees As of December 31, 2004, Crum & Forster had 1,079 employees. None of these employees is
represented by a labor union and management considers employee relations to be satisfactory. 34




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Risk Factors The risks described below are those identified by management which could cause the Companys
operating results and financial condition, as well as other information and data included in this
Form 10-K, including the financial statements and accompanying notes thereto, to be materially
adversely affected. This section does not, however, describe all risks applicable to the Company,
its industry or its business, and is intended only as a summary of certain material factors
affecting the Companys business. If there are any negative changes in the financial strength ratings of the Companys insurance
subsidiaries, especially from A.M. Best, it could be very difficult for the Company to write
quality new or renewal business, secure adequate reinsurance on acceptable terms and retain its key
management and employees. Financial strength ratings issued by third party rating agencies are used by insurance consumers
and insurance intermediaries as an important means of assessing the financial strength and quality
of insurers. Higher ratings generally indicate relative financial stability and a strong ability
to pay claims. Ratings focus on the following factors: capital resources, financial strength,
demonstrated management expertise in the insurance business, credit analysis, systems development,
marketing, investment operations, minimum policyholders surplus requirements and capital
sufficiency to meet projected growth, as well as access to such traditional capital as may be
necessary to continue to meet standards for capital adequacy. Crum & Forsters insurance
subsidiaries have an A- financial strength rating with a negative outlook (the fourth highest of
fifteen rating categories) from A.M. Best, a rating agency and publisher for the insurance
industry, and a BBB financial strength rating (the fourth highest of nine rating categories) from
Standard & Poors, also a rating agency for the insurance industry. Crum & Forsters current ratings are the lowest necessary to compete in its targeted markets. The
Company may not maintain its financial strength ratings from the rating agencies. A downgrade or
withdrawal of any rating could severely limit or prevent the Company
from writing quality new or renewal business, securing adequate
reinsurance on acceptable terms and retaining its key management and
employees. A.M. Best has advised the Company that, although it is encouraged by the improved
underlying trends exhibited in its recent underwriting performance, the ratings outlook is negative
and contingent upon managements ability to ultimately achieve overall earnings stability,
specifically with regard to adequacy of asbestos reserves, and improved financial flexibility of
the Companys ultimate parent, Fairfax. According to A.M. Best, a negative outlook indicates that
A.M. Best believes that the rated insurer is experiencing unfavorable financial and/or market
trends, relative to its rating level and, if such trends continue, it has a good possibility of
having its rating lowered. The Companys ratings by these rating agencies are based on a variety
of factors, many of which are outside of its control, including the financial condition of Fairfax
and its other subsidiaries and affiliates, the financial condition or actions of parties from which
the Company has obtained reinsurance, and factors relating to the sectors in which the Company or
its reinsurers conduct business and the statutory surplus of its insurance subsidiaries, which is
adversely affected by underwriting losses and dividends paid by them to Crum & Forster. The financial strength ratings assigned by rating agencies to insurance companies represent
independent opinions of an insurers financial strength and its ability to meet ongoing obligations
to policyholders, and are not directed toward the protection of investors. Ratings by rating
agencies of insurance companies are not ratings of securities or recommendations to buy, hold or
sell any security. The Company may incur a reduction in its net income if its reserves are insufficient. Crum & Forster maintains reserves to cover its estimated ultimate liability for losses and LAE with
respect to reported and unreported claims incurred as of the end of each year. Its gross loss and
LAE reserves were $3.4 billion and $3.2 billion at December 31, 2004 and 2003, respectively. These
reserves do not represent an exact measurement of liability, but are estimates based upon various
factors, including: (i) actuarial projections of what management, at a given time, expects to be
the cost of the ultimate settlement and administration of claims reflecting facts and circumstances
then known; (ii) estimates of future trends in claims severity and frequency; (iii) assessment of
asserted theories of liability; and (iv) analysis of other factors, such as variables in claims
handling procedures, economic factors and judicial and legislative trends and actions. Most, or
all, of these factors are not directly or precisely quantifiable, particularly on a prospective
basis. In many cases, estimates are made more difficult by significant reporting lags between the
occurrence of the insured event and the time it is actually reported to the insurer and additional
lags between the time of reporting and final settlement of claims. During the years ended December 31, 2004, 2003 and 2002, the Company increased its reserves for
prior years losses and LAE by $69.3 million, $118 million and $18.3 million, respectively. The
historical patterns upon which management typically would rely to develop reserves are not
consistent with current lines of business, net retention levels, premium sizes, risk profiles of
insureds and other operational changes. The Companys organizational and process improvements over
the past five years have led to claims settlement philosophy changes that have altered its
historical paid and incurred claims patterns. During the same time period, soft market conditions
in the immediate prior accident years caused deteriorating trends in the Companys underwriting
results. The combination of these factors over the past five years has 35




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made interpretation of the
underlying data trends and quantification of reserve adequacy
extremely difficult. For further discussion of the Companys
reserves, see Item 7. Managements Discussion and
Analysis of Financial Condition and Results of Operations 
Results of Operations  Losses and loss adjustment expenses. Under GAAP, the Company is only permitted to establish loss and LAE reserves for losses that have
occurred on or before the financial statement date. Case reserves and reserves for IBNR
contemplate these obligations. No contingency reserve allowances are established to account for
future loss occurrences. Losses arising from future events will be estimated and recognized at the
time the losses are incurred and could be substantial. To the extent reserves prove to be
deficient in the future, management will have to increase the Companys reserves by the amount of
such deficiency and incur a charge to earnings in the period such reserves are increased. The
uncertainties regarding the reserves (including reserves for asbestos, environmental and other
latent exposure claims) could result in a liability exceeding the reserves by an amount that would
be material to the Companys financial condition or results of operations in a future period, and
such a liability would reduce future net income and cash flows and the ability of its insurance
subsidiaries to pay dividends or make other distributions to the Company. Even though most insurance policies have policy limits, the nature of property and casualty
insurance is such that losses can exceed policy limits for a variety of reasons and could very
significantly exceed the premiums received on the underlying policies. The Company attempts to
limit its risk of loss through reinsurance, the availability and cost of which is subject to market
conditions and beyond the Companys control. Reserves for asbestos, environmental and other latent claims may be insufficient. There are significant additional uncertainties in estimating the amount of reserves required for
asbestos, environmental and other latent exposure claims. The possibility that these claims would
emerge was often not anticipated at the time the policies were written, and traditional actuarial
reserving methodologies have not been generally useful in accurately estimating ultimate losses and
LAE for these types of claims. In addition, the loss settlement period of certain of these claims
may extend for decades after the expiration of the policy period, and during such time it often
becomes necessary to adjust, sometimes to a significant degree, the estimates of liability on a
claim either upward or downward. Gross asbestos reserves were $522.7 million, $495.2 million and
$370.9 million at December 31, 2004, 2003 and 2002, respectively; gross environmental reserves were
$123.4 million, $130.5 million and $163.2 million, respectively; and gross reserves for other
latent claims were $35.4 million, $40.8 million and $43.5 million, respectively. Asbestos
reserves, net of reinsurance, were $408.8 million, $366.4 million and $264.8 million, at December
31, 2004, 2003 and 2002, respectively; environmental reserves, net of reinsurance, were $85.2
million, $98.8 million and $105.8 million, respectively, and reserves for other latent exposure
claims, net of reinsurance, were $22 million, $26.7 million and $28.3 million, respectively. Among
the uncertainties relating to such reserves are a lack of historical data, long reporting delays
and complex, unresolved legal issues regarding policy coverage and the extent and timing of any
such contractual liability. Courts have reached different, and frequently inconsistent,
conclusions as to when losses occurred, what claims are covered, under what circumstances the
insurer has an obligation to defend, how policy limits are determined and how policy exclusions are
applied and interpreted. Plaintiffs often are able to choose from a number of potential venues to
bring an action in the court that they expect will be most advantageous to their claims. Because
of these uncertainties, the Companys exposure to asbestos, environmental and other latent exposure
claims is more difficult to estimate, and is subject to a higher degree of variability than is its
exposure to non-latent exposure claims. In addition, insurers, including Crum & Forster, are
generally experiencing an increase in the number of asbestos-related claims due to, among other
things, more intensive advertising by lawyers seeking asbestos claimants, an increasing focus by
plaintiffs on new and previously peripheral defendants and an increase in the number of insured
entities seeking bankruptcy protection as a result of asbestos-related liabilities. In addition to
contributing to the increase in claims, the bankruptcy proceedings of insureds may have the effect
of significantly accelerating and increasing loss payments by insurers, including Crum & Forster.
A court has required insurers of a bankrupt company to pay not only claims already made, but
also to make payments for all estimated future claims. Increasingly, policyholders have asserted that their claims for asbestos-related insurance are not
subject to aggregate limits on coverage and that each individual bodily injury claim should be
treated as a separate occurrence under the policy. The Company expects that this trend will
continue. Although it is difficult to predict whether these policyholders will be successful on
the issue, to the extent the issue is resolved in their favor, Crum & Forsters coverage
obligations under the policies at issue could be materially increased and bounded only by the
applicable per-occurrence limits and the number of asbestos bodily injury claims against the
policyholders. Accordingly, it is difficult to predict the ultimate size of the claims for coverage
not subject to aggregate limits. In addition, proceedings have been launched directly against insurers challenging insurers conduct
with respect to asbestos claims, including, in some cases with respect to previous settlements.
The Company anticipates the filing of other direct actions against insurers, potentially including
the Company, in the future. Particularly in light of jurisdictional issues, it is difficult to
predict the outcome of these proceedings, including whether the plaintiffs will be able to sustain
these actions against insurers based on novel legal theories of liability. 36




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In 2004, the Companys total latent reserves were increased by $100.5 million based on the
Companys internal actuarial review and an independent actuarial firms ground-up study of asbestos reserves. During the past three years,
the asbestos-related trends described above both have accelerated and became more visible. The
Company has continued to see the emergence of the trends noted above, including an increased number
of claimants filing asbestos claims against its insureds, an increased value of claims against
viable asbestos defendants as co-defendants seek bankruptcy protection and an increased number of
insureds asserting that their asbestos claims are not subject to aggregate limits and that each
individual bodily injury claim should be treated as a separate occurrence. Due to the inherent
uncertainties described above, the Companys ultimate liability for its asbestos, environmental and
other latent claims may vary substantially from the amounts currently recorded. Catastrophic events could reduce net income. Catastrophes can be caused by various natural and man-made events. Natural catastrophic events
include hurricanes, windstorms, earthquakes, hailstorms, explosions, severe winter weather and
fires. Man-made catastrophic events include terrorist acts, riots, crashes and derailments. The
incidence and severity of catastrophes are inherently unpredictable. The extent of losses from a
catastrophe is a function of both the total amount of insured exposure in the area affected by the
event and the severity of the event. Most catastrophes are restricted to small geographic areas;
however, hurricanes, windstorms and earthquakes may produce significant damage in large, heavily
populated areas. Catastrophes can cause losses in a variety of property and casualty lines for
which the Company provides insurance. For example, the terrorist attacks on September 11, 2001
caused losses in several of the Companys lines, including business interruption, business personal
property and workers compensation. Insurance companies are not permitted to reserve for a
catastrophe until it has occurred, and actual losses could exceed measures the Company might take
to attempt to protect itself. It is therefore possible that a catastrophic event or multiple
catastrophic events could adversely affect the Companys net income and financial condition.
Increases in the value and geographic concentration of insured property and the effects of
inflation could increase the severity of claims from future catastrophic events. In addition,
states have from time to time passed legislation that has had the effect of limiting the ability of
insurers to manage catastrophic risk, such as legislation prohibiting insurers from withdrawing
from catastrophe-prone areas. TRIA became effective on November 26, 2002 and is a three-year federal program scheduled to expire
at the end of 2005, although bills have been introduced in Congress to extend the program. TRIA
voided in-force terrorism exclusions as of November 26, 2002 for certified terrorism acts (i.e.,
those arising from international, not domestic, acts) on all TRIA specified property and casualty
business. TRIA requires covered insurers to make coverage available for certified acts of
terrorism on all new and renewal policies issued after TRIA was enacted. TRIA allows the Company
to assess a premium charge for terrorism coverage and, if the policyholder declines the coverage or
fails to pay the terrorism premium, certified acts of terrorism may then be excluded from the
policy, subject, however, to state-specific requirements such as mandatory coverage for fire losses
in statutory fire policy states. Subject to a premium-based deductible and provided the Company
has otherwise complied with all the requirements as specified in TRIA, the Company is eligible for
reimbursement by the federal government for 90% of covered terrorism related losses arising from a
certified terrorist attack, with such reimbursement ending once the aggregated insured losses for
the entire insurance industry exceed $100 billion in a single program year. Once this $100 billion
loss threshold has been reached for any program year, any insurer covered under TRIA that has met
its deductible will not be responsible for any further loss payments in that program year. TRIA is scheduled to terminate on December 31, 2005 unless extended by the federal government. In
the event TRIA is not extended or is extended with significant modifications, terrorism coverage
provided under the Companys policies may change. Where permitted under state insurance
regulations, the Company has begun to use conditional terrorism exclusions which allow the
cancellation or alteration of terrorism coverage and related premium rates should TRIA lapse or be
modified. Where state insurance regulators disallow the exclusion of terrorism, such as in the case
of workers compensation policies or in certain states where the use of conditional terrorism
exclusions is not permitted, the Companys exposure to losses from non-domestic terrorist acts may
be increased. During 2004, the Companys underwriting results were adversely affected by total net catastrophe
losses of approximately $120.7 million, including reinsurance reinstatement premiums of $13
million, principally associated with hurricanes Charley, Frances, Jeanne and Ivan. Ultimate
exposure to losses from these events may change. The Company operates in a highly competitive environment, which makes it more difficult to attract
and retain business. The commercial lines property and casualty insurance industry is highly competitive and management
believes that it will remain so for the foreseeable future. Prevailing conditions relating to
price, coverage and capacity can change very rapidly in this industry sector. The Company faces
competition from domestic and foreign insurers, many of which may be perceived to provide greater
security to insureds and many of which are larger and have greater financial, marketing and
management resources than Crum & Forster. Competition in the commercial lines property and
casualty insurance industry is based on many factors, including overall financial strength of the
insurer, ratings by rating agencies, 37




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price, policy terms and conditions, services offered,
reputation and experience. The Company faces increased competition across virtually all lines of business, and
such increased competition could make it difficult for Crum & Forster to underwrite new business or
may put downward pressure on the pricing of new business underwritten by the Company. For
additional discussion, see  Competition. Several commercial property and casualty insurers and industry groups and associations currently
offer alternative forms of risk protection in addition to traditional insurance products. These
products, such as large deductible programs and various forms of self-insurance, have been
instituted to allow for better control of risk management and costs. Management cannot predict how
continued growth in alternative forms of risk protection will affect Crum & Forsters future
operations, but it could reduce premium volume. Following the terrorist attacks on September 11, 2001, a number of new insurers and reinsurers have
been formed to compete in the insurance industry and a number of existing market participants have
raised new capital, which may enhance their ability to compete with Crum & Forster. Results in the property and casualty insurance industry are subject to fluctuations and
uncertainty, which may adversely affect managements ability to write policies. The results of companies in the property and casualty insurance industry historically have been
subject to broad fluctuations. These results can be affected significantly by price competition,
volatile and unpredictable developments (including catastrophes), changes in loss reserves
resulting from changing legal environments as different types of claims arise and judicial
interpretations relating to the scope of insurers liability develop, fluctuations in interest
rates and other changes in the investment environment which affect returns on invested assets and
inflationary pressures that affect the size of losses. The property and casualty insurance
industry historically has experienced pricing and profitability cycles related to levels of
industry underwriting capacity. As a result of fluctuations in pricing, the Company may be unable
to obtain business that meets its underwriting standards and pricing expectations. For additional
information, see  Competition and Item 7. Managements Discussion and Analysis of Financial
Condition and Results of Operations. Certain business practices of the insurance industry have become the subject of investigation by
government authorities and other parties. In October 2004, New York States Attorney General filed a civil lawsuit against several
participants in the insurance industry, alleging certain fraudulent and anti-competitive
activities. The Company and its subsidiaries were not defendants in that civil suit. However, the
investigation concerns an evolving area of the law and management can give no assurance regarding
its consequences for the industry or the Company. Subsequent to the announcement of these actions, numerous other state attorneys general and
individual state insurance departments have announced investigations of insurance industry business
practices and a U.S. Congressional committee conducted hearings on several issues relating to
insurance brokers. In addition to these government investigations, class action and other lawsuits
relating to these business practices have been filed against various members of the insurance
industry. Because these governmental investigations and lawsuits continue to grow in number and
spread in scope, it is not possible at this time to determine the ultimate impact on the insurance
industry or the Company. Activities being investigated include participation in contingent commission structures and other
agreements under which brokers receive additional commissions based upon the volume and/or
retention of business placed with an insurer. Industry operating policies and practices may be
impacted by the outcome of these investigations. Negative publicity may also result in increased
regulation and legislative scrutiny of industry practices as well as increased litigation, which
may further increase the costs of doing business and adversely affect profitability by impeding the
Companys ability to market its products and services, requiring a change in market practices,
products or services provided and increasing the regulatory burdens under which the Company
operates. However, management believes that Crum & Forsters commission programs and payments to
brokers and agents comply with applicable laws and regulations. The Company paid contingent
commissions of $12 million in 2004. Certain of the Companys subsidiaries have received formal letters of inquiry and/or requests for
information from the departments of insurance of the States of Arizona, Delaware, New Jersey and
North Carolina. These states, which sent requests to multiple insurance companies and other
industry members, are requesting documents and seeking information relating to the conduct of
business between insurance brokers and certain Company subsidiaries. It is reported that other
governmental and regulatory authorities are conducting similar inquiries, and the Company or its
subsidiaries may receive additional request for information from these authorities. The Company
and its subsidiaries intend to cooperate fully with these requests for information; however, there
can be no assurances as to the ultimate outcome of these inquiries. 38




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Also, New York States Attorney General, the Securities and Exchange Commission and other state
insurance departments have indicated that they are investigating the alleged use of finite and
financial reinsurance products to smooth earnings or to otherwise bolster reported financial
results. The Companys corporate aggregate reinsurance includes both prospective and retroactive
reinsurance contracts that would commonly be classified as finite reinsurance. Neither the Company
nor any of its subsidiaries is a party to any government or state investigations into the use of
finite reinsurance contracts; however, the investigations concerning the use of finite and
financial reinsurance products continue to progress and management cannot give assurance regarding
its ultimate impact on the industry or the Company. For further information on these
investigations, see Item 3. Legal ProceedingsInsurance Industry Investigations. The loss of any of the Companys key producers could have an adverse effect on the Companys
ability to generate business. In 2004, the Companys two largest producers accounted for 14% and 6% of gross premiums written.
The top five producers accounted for approximately 30% of gross premiums written. There are no
long-term commitments from any of the Companys producers, any of which could cease doing business
with Crum & Forster at any time. The Company may not be successful in maintaining its current
relationships with its significant producers and the loss or deterioration of one or more of these
relationships could adversely affect the Companys ability to generate business. The effects of emerging claim and coverage issues on the Companys business are uncertain. As industry practices and legal, judicial, social and other environmental conditions change,
unexpected and unintended issues related to claims and coverage may emerge. These issues may harm
the Companys business by either extending coverage beyond its underwriting intent or by increasing
the number or size of claims. Examples of contemporary claims and coverage issues that have
affected the Company are claims relating to construction defects, welding fumes, natural resource
damages, mold, lead and diet drugs. These claim types present complex coverage and damage
valuation questions, making it difficult for management to estimate the Companys ultimate
liability. The effects of this and other unforeseen emerging claim and coverage issues are extremely hard to
predict and could harm Crum & Forsters business. If the Company is unable to realize its investment objectives, its financial condition may be
adversely affected. The Companys operating results depend in part on the performance of the Companys investment
portfolio. The ability to achieve its investment objectives is affected by general economic
conditions that are beyond managements control. General economic conditions can adversely affect
the markets for interest rate sensitive securities, including the extent and timing of investor
participation in such markets, the level and volatility of interest rates and, consequently, the
value of fixed income securities. Interest rates are highly sensitive to many factors, including
governmental monetary policies, domestic and international economic and political conditions and
other factors beyond the Companys control. General economic conditions, stock market conditions
and many other factors can also adversely affect the equities markets and, consequently, the value
of the equity securities the Company owns. In 2004, 2003 and 2002, the Company had investment
income, including realized investment gains and pre-tax equity in earnings of investees, of $183.8
million, $340.5 million and $155.3 million, respectively. The Company may not be able to realize
its investment objectives, which could reduce net income significantly. The Company is a holding company and is dependent on dividends from its insurance subsidiaries to
pay its obligations, including interest and principal on its debt securities. The Company is a holding company with no direct operations and its principal asset is the capital
stock of several insurance subsidiaries. The Company relies, and expects to rely in the future, on
dividends from these insurance subsidiaries to meet its obligations, including payment of interest
on its debt securities, and, together with refinancing opportunities then available in capital
markets, if any, to repay its debt securities at maturity. The Companys principal insurance
subsidiaries, US Fire and North River, account for 98.6% of combined statutory surplus at December
31, 2004. US Fire and North River may pay dividends of $88.5 million and $5 million in 2005,
respectively, without prior regulatory approval. The ability of the Companys insurance
subsidiaries to pay dividends depends on their statutory earned surplus (which is increased by
underwriting profit and investment income and decreased by underwriting losses, including losses as
a result of adverse development of prior periods), net income, investment income and other
regulatory restrictions, as well as any effects such dividends may have on the Companys ratings.
For further information on the regulation of dividends, see Insurance Regulatory Matters.
Because payment of dividends by the Companys insurance subsidiaries would decrease their statutory
surpluses, doing so would also adversely affect their ability to meet financial ratios and other
tests critical to maintaining their ratings and otherwise providing acceptable security to brokers
and to insureds. Their ability to pay dividends and, therefore, the Companys ability to meet its
obligations is limited by these and other factors. 39




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The Companys debt securities are effectively subordinate to all of the obligations of the
Companys insurance subsidiaries, including all of the Companys liabilities with respect to
insurance policies that the Company has written or will write in the future, and any other
subsidiary that does not guarantee the Companys debt securities. None of the Companys subsidiaries is a guarantor of the Companys debt securities. Additionally,
the indenture governing the Companys debt securities does not require subsidiaries the Company
acquires in the future to guarantee the Companys debt securities under certain circumstances,
including if any such subsidiary is regulated as an insurance company under relevant state law.
These non-guarantor subsidiaries have no obligation, contingent or otherwise, to pay any amounts
due pursuant to the Companys debt securities or to make any funds available therefor, whether by
dividends, loans, distributions or other payments. Any right that the Company has to receive any
assets of any of its subsidiaries upon the liquidation or reorganization of any such subsidiary,
and the consequent right of holders of the Companys debt securities to realize proceeds from the
sale of such assets, will be effectively subordinated to the claims of these subsidiaries
creditors and to coverage claims under insurance policies written by these subsidiaries. The Company may be unable to obtain reinsurance coverage at reasonable prices or on terms that
adequately protect it. The Company uses reinsurance to help manage its exposure to insurance risks. The availability and
cost of reinsurance are subject to prevailing market conditions, both in terms of price and
available capacity, which can affect business volume and profitability. Many reinsurance companies
have begun to exclude certain coverages from, or alter terms in, the policies that Crum & Forster
purchases from them. Some exclusions are with respect to risks that cannot be excluded in policies
the Company writes due to business or regulatory constraints, such as coverage with respect to acts
of terrorism, mold and cyber risk. In addition, reinsurers are imposing terms, such as lower per
occurrence and aggregate limits, on primary insurers that are inconsistent with corresponding terms
in the policies written by these primary insurers. As a result, Crum & Forster, like other primary
insurance companies, is increasingly writing insurance policies that, to some extent, do not have
the benefit of reinsurance protection. These gaps in reinsurance protection expose the Company to
greater risk and greater potential losses. Since September 11, 2001, the Company has experienced significant price increases for reinsurance
and has been forced to accept reduced reinsurance coverage. In addition, the scope of coverage in
reinsurance arrangements has been narrowed. For example, it is no longer possible to procure
unlimited reinsurance coverage for workers compensation business. Instead, coverage for an
accident year is subject to a maximum reinsured limit. Management has considered, and will
continue to consider, these changes in prices and terms from the third party reinsurance market in
determining how much reinsurance to purchase and whether to obtain reinsurance from its affiliates. In response, in
part, to such changes, the Company has reduced the amount of reinsurance coverage purchased and
increased the amount of reinsurance obtained from its affiliates. Furthermore, increased
reinsurance with Fairfax affiliates could increase the possibility that adverse development in the
financial condition of Fairfax or one of its subsidiaries could weaken the financial condition of
the Companys affiliated reinsurers. Any weakening of the financial condition of an affiliate from
which the Company has assumed, or to which the Company has ceded insurance obligations could
adversely affect the Companys ability to meet its financial obligations and could otherwise weaken
its financial condition. For further discussion of reinsurance transactions with affiliates, see
Reinsurance, Note 10 to the consolidated financial statements included in Item 8. Financial
Statements and Supplementary Data and Item 13. Certain Relationships and Related
TransactionsReinsurance Arrangements. For further discussion of TRIA, see Catastrophe
Management and Risk FactorsCatastrophic events could reduce net income.

 ; text-align: justify The Company bears credit risk with respect to its reinsurers and certain insureds and if one or
more of them fails to pay, the Company could experience losses, which would adversely affect the
ability of its insurance subsidiaries to pay dividends. Although reinsurance makes the assuming reinsurer liable to the extent of the risk ceded, the
Company is not relieved of its primary obligation to its insureds as the direct insurer. As a
result, it bears credit risk with regard to its reinsurers with respect to both receivable balances
reflected on the balance sheet and contingent liabilities arising from reinsurance protection on
future claims. The Company cannot be assured that its reinsurers will pay all reinsurance claims
on a timely basis, or at all. At December 31, 2004, the Company had reinsurance recoverable of
$1.8 billion due from approximately 315 reinsurers; however, the preponderance of this reinsurance
recoverable was with relatively few reinsurers. At such date, the five largest gross reinsurance
recoverable balances aggregated $1.1 billion, or 62.5% of the total reinsurance recoverable
balance. Application of collateral reduces the unsecured exposure to these five reinsurers to
$499.8 million as of that date. Periodically, the Company has contractual disputes with certain
reinsurers regarding coverage under reinsurance policies. Historically, this has principally
occurred in the interpretation of coverage relating to asbestos and environmental claims. Each
reinsurance claim is evaluated based on the facts of the case, historical experience with the
reinsurer on similar claims and existing case law, and any amounts deemed uncollectible are
included in the reserve for uncollectible reinsurance. If reinsurers are unwilling or unable to
pay amounts due under reinsurance contracts, the Company will incur unexpected losses and cash flow
will be adversely affected. For the years ended December 31,
2004, 2003 and 2002, the Company incurred charges for uncollectible reinsurance of $5 million, $5.3 million and
$0.6 million, respectively. For additional discussion of credit risk with regard to the Companys
reinsurers, see Reinsurance. 40




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The Company writes certain retrospectively rated policies (policies in which premiums are adjusted
based on the actual loss experience of the insured during the policy period) and large deductible
policies (policies where the insured retains a specific amount of any potential loss) in which the
insured must reimburse the Company for certain losses. Accordingly, the Company bears credit risk
on these policies and cannot be assured that its insureds will pay on a timely basis, or at all.
In the ordinary course of business, the Company is sometimes unable to collect all amounts billed
to insureds, generally due to disputes on audit and retrospectively rated policies and, in some
cases, due to insureds having filed for bankruptcy protection. In addition, if an insured files
for bankruptcy, the Company may be unable to recover on assets such insured may have pledged as
collateral. The Company reserves for uncollectible amounts in the period the collection issues
become known. The inability to collect amounts due reduces net income and cash flow and the
ability of the Companys insurance subsidiaries to pay dividends or make other distributions to it.
During 2004, 2003 and 2002, the Company incurred, or expected to incur, credit losses relating to
insured insolvencies, disputed premium audits and for insureds experiencing financial difficulties.
For the years ended December 31, 2004, 2003 and 2002, charges incurred for uncollectible premiums
and large deductible recoveries were $(2.8) million, $5.6 million and $9.7 million, respectively. Control of the Companys corporate actions is retained by Fairfax, which may have interests that
are different from the interests of holders of the Companys debt securities. Because of Fairfaxs beneficial ownership of Crum & Forster, it is in a position to determine the
outcome of corporate actions requiring stockholder approval, including:  
    Electing members of the Companys Board of Directors and appointment of members of the audit committee;
    Adopting amendments to the Companys charter documents;
    Approving a merger or consolidation, liquidation or sale, of all, or substantially all,
of the Companys assets, subject to insurance and other
regulatory approval;
    Transactions that would result in a change of control;
    Funding its or its affiliates requirements or losses by causing the Company to
distribute additional amounts to it, whether by requiring the Company to incur additional
indebtedness or otherwise engage in financial or other reinsurance, investment, tax sharing
or other transactions with Fairfax or its affiliates, subject to obtaining insurance
regulatory authority approval or non-disapproval, where necessary; and
    Entering into transactions with Fairfax or its affiliates, subject to obtaining
insurance regulatory authority approval or non-disapproval, where necessary. Because Fairfaxs interests as a stockholder may conflict with the interests of the holders of Crum
& Forsters debt securities, Fairfax may cause the Company to take actions that favor its
stockholders at the expense of the holders of the Companys debt securities. In addition, Fairfax
has in the past provided the Company, and continues to provide the Company, with certain services.
All of the Companys directors are also directors or officers of Fairfax and its affiliates.
Conflicts of interest could arise between the Company and Fairfax or one of its affiliates or
subsidiaries, and any conflict of interest may be resolved in a manner that does not favor the
Company. The Companys business could be adversely affected by the loss of one or more key employees. The Company is substantially dependent on a small number of key employees at the operating
companies, in particular Nikolas Antonopoulos, Mary Jane Robertson and Joseph Braunstein. The
experiences and reputations in the insurance industry of these executives are important factors in
Crum & Forsters ability to attract new business. The Companys success has been, and will
continue to be, dependent on its ability to retain the services of its existing key employees and
to attract and retain additional qualified personnel in the future. The loss of the services of
Mr. Antonopoulos, Ms. Robertson and Mr. Braunstein, or any other key employee, or the inability to
identify, hire and retain other highly qualified personnel in the future, could adversely affect
the quality and profitability of the Companys business operations. Each of Mr. Antonopoulos, Ms.
Robertson or Mr. Braunstein is currently bound by an employment contract for a term of two years
with automatic daily one-day extensions, such that the term of employment at any time is two years,
unless notice is given by either party. See Item 10. Directors and Executive Officers of the
RegistrantEmployment and Retirement Agreements; Change of Control Arrangements. The Company
currently does not maintain key employee insurance with respect to any of its employees. 41




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The Company is subject to extensive government regulation, which may limit the rates it can charge
or otherwise adversely affect its business. The Company is subject to extensive regulation and supervision in the states in which it does
business. Regulators oversee matters relating to rate setting with respect to certain lines of
insurance, trade practices, market conduct, policy forms, claims practices, mandated participation
in shared markets, types and amounts of investments, reserve adequacy, insurer solvency, minimum
amounts of capital and surplus, authorized lines of business, transactions with related parties,
the payment of dividends and a variety of other financial and non-financial components of an
insurance companys business. Regulators may limit the rates that an insurance company can charge
for certain lines of business so that premium rates may not keep pace with inflation. State
insurance laws and regulations are administered by agencies that have broad powers and are
concerned primarily with the protection of policyholders rather than stockholders or other
investors. It is possible that future regulatory changes or developments would impede rate
increases or other actions that the Company proposes to take to enhance its operating results, or
fundamentally change the business environment in which it operates. The Companys insurance subsidiaries typically are required to participate in mandatory property
and casualty shared market mechanisms or pooling arrangements that provide various insurance
coverage to individuals or other entities that are otherwise unable to purchase such coverage in
the commercial insurance marketplace. The amount of future losses or assessments from such shared
market mechanisms and pooling arrangements cannot be predicted with certainty. The underwriting
results of these pools historically have been unprofitable. Future losses or assessments from such
mechanisms and pooling arrangements could adversely affect the Companys results of operations or
financial condition. In recent years, the insurance regulatory framework has come under increased federal scrutiny and
certain Federal and state legislatures have considered or enacted laws that altered and, in many
cases, increased the regulation of insurance companies and insurance holding companies, such as
TRIA and state guaranty funds. Further, the NAIC and state insurance regulators are re-examining
existing laws and regulations, specifically focusing on investment practices, RBC guidelines,
interpretations of existing laws and the development of new laws. In addition, several committees
of Congress have made inquiries and conducted hearings as part of a broad study of the regulation
of insurance companies. Although the federal government currently does not regulate the business
of insurance directly, federal initiatives often affect the insurance industry in a variety of
ways. Future legislation, or NAIC initiatives, may have a detrimental effect on the conduct of the
Companys business, financial condition or results of operations. For further discussion, see
Insurance Regulatory Matters. If certain policies with respect to which other insurance companies have assumed liability from
Crum & Forster have not been effectively novated, the Company could be subject to increased
liabilities that are not reflected on the balance sheet, including with respect to asbestos,
environmental or other latent exposures. Prior to its acquisition by Fairfax in 1998, the Company was a subsidiary of Xerox Corporation. In
connection with the business realignment and restructuring of its insurance companies, Xerox
required the transfer of a number of policies and related assets and liabilities from certain of
the Companys insurance subsidiaries to other insurance companies also controlled by Xerox and vice
versa. These transfers were effected through assumption and indemnity reinsurance agreements
providing for 100% quota share reinsurance of the subject business by the assuming company. In
some cases, the assuming party also was required to seek a novation of certain policies. Novation
of an insurance policy attempts to effect the legal substitution of one insurance company for the
original policy-issuing company and generally requires either the express or implied consent of the
policyholder. If the novation process is challenged and not upheld (especially as to novation
achieved by implied consent), Crum & Forsters insurance subsidiaries could be responsible for
such novated business if the other party were to become insolvent. These liabilities are not
reflected on the consolidated balance sheets. The Companys reserves could be understated and the
credit risk associated with policies considered novated could also be materially understated. The
Company may be unable to recover its losses from the reinsurers that have reinsured these policies.
To date, the Company has not experienced any challenges of novations of these policies. Fairfaxs bank credit facilities and the indenture governing the Companys debt securities contain
restrictions applicable to the Company, which could have an adverse effect on its financial
condition. The agreements governing the bank credit facilities of Fairfax contain restrictive covenants that
prohibit Fairfax, with certain exceptions, from allowing Crum & Forster to borrow money or take
certain other actions. In addition, the indenture governing the Companys debt securities contains
various restrictive covenants that limit the Companys ability to, among other things, borrow money
and limit managements discretion in operating the Companys business. The Companys financial
flexibility in the future may be limited by the terms of these agreements. 42




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ITEM 2. PROPERTIES Crum & Forsters principal offices are located in space leased by the Company in Morristown, New
Jersey. The lease covers approximately 201,887 square feet of office space at 305 Madison Avenue.
The term of the lease ends December 31, 2022, and provides for up to four consecutive additional
terms; the first additional period for ten years and the second, third and fourth additional
periods for five years each, at the Companys option. The principal offices of Seneca are located in space leased by Seneca in New York, New York. The
lease covers approximately 21,500 square feet at 160 Water Street.
The term of the lease ends June 30, 2007. The Company also leases office space for its branch offices. Crum & Forster does not own any of
the real estate used for its operations. 
 ITEM 3. LEGAL PROCEEDINGS 
 Litigation 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 financial condition, results of
operations, or liquidity. However, it should be noted that the frequency of large damage awards, including punitive damage
awards that bear little or no relation to actual economic damages incurred by plaintiffs in some
jurisdictions, continues to create the potential for an unpredictable judgment in any given
matter. 
 Insurance Industry Investigations In October 2004, the New York State Attorney General filed a civil suit against several
participants in the insurance industry alleging certain fraudulent and anti-competitive activities.
Although the Company and its subsidiaries were not involved in the civil suit in any way, upon the
request of management, the board of directors engaged outside counsel to conduct an internal review
of the Companys relationships with its producers. The internal review did not disclose any
activities or conduct of the type alleged to have occurred in the civil suits. However, management
cannot be certain of what ultimate effect the civil suits, or any increased regulatory oversight
that might result from the civil suits, might have on the Companys business or on the insurance
industry as a whole. 43




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##### 



Certain of the Companys subsidiaries have received formal letters of inquiry and/or requests for
information from the departments of insurance of the States of Arizona, Delaware, New Jersey and
North Carolina. These states, which sent requests to multiple insurance companies and other
industry members, are requesting documents and seeking information relating to the conduct of
business between insurance brokers and certain Company subsidiaries. It is reported that other
governmental and regulatory authorities are conducting similar inquiries, and the Company or its
subsidiaries may receive additional request for information from these authorities. The Company
and its subsidiaries intend to cooperate fully with these requests for information. For further information on these insurance industry investigations, see Item 1. BusinessRisk
FactorsCertain business practices of the insurance industry have become the subject of
investigation by government authorities. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 
 PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER                PURCHASES
OF EQUITY SECURITIES None. 
 ITEM 6. SELECTED FINANCIAL DATA The table shown below presents selected financial data for each of the five years ended December
31, 2004. This financial information was prepared in accordance with GAAP. The GAAP statement of
operations data for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 and the GAAP
balance sheet data at December 31, 2004, 2003, 2002, 2001 and 2000 were derived from Crum & Forster
Holdings Corp.s consolidated financial statements, which have been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm. The consolidated
balance sheets at December 31, 2004 and 2003, and the related consolidated statements of income, of
shareholders equity, of comprehensive income and of cash flows for each of the three years ended
December 31, 2004, and accompanying notes, appear in Item 8. Financial Statements and
Supplementary Data. The combined statutory data has been derived from annual statutory financial
statements, which have been filed with the domiciliary states of the Companys insurance
subsidiaries, and prepared in accordance with SAP, which differs from GAAP. The selected financial data presented below should be read in conjunction with Item 7.
Managements Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and accompanying notes included in Item 8. Financial Statements
and Supplementary Data. The results for the year ended December 31, 2000 include the results for
Seneca from August 31, 2000, the date of its acquisition by Crum & Forster. Certain amounts in the
Companys prior year consolidated financial statements have been reclassified to conform to the
2004 presentation. 44




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##### 



Years Ended December 31,(dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000GAAP STATEMENT OF OPERATIONS DATA:Gross premiums written
    
    $
    1,138,961
    
    
    $
    1,104,211
    
    
    $
    898,368
    
    
    $
    777,536
    
    
    $
    661,061Net premiums written
    
    $
    918,300
    
    
    $
    890,823
    
    
    $
    669,473
    
    
    $
    541,473
    
    
    $
    487,731Premiums earned
    
    $
    907,709
    
    
    $
    768,872
    
    
    $
    609,512
    
    
    $
    500,175
    
    
    $
    503,974Investment
income and realized investment gains and losses 1
    
    $
    164,638
    
    
    $
    338,062
    
    
    $
    155,325
    
    
    $
    113,813
    
    
    $
    142,810Losses and LAE
    
    $
    761,512
    
    
    $
    652,334
    
    
    $
    460,458
    
    
    $
    601,674
    
    
    $
    384,936Income (loss) before
cumulative effect of
a change in
accounting principle
    
    $
    24,195
    
    
    $
    135,745
    
    
    $
    82,911
    
    
    $
    (106,509
    )
    
    $
    71,580Equity in
earnings of investees, net of tax
    
    $
    12,478
    
    
    $
    1,567
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -Cumulative effect of
a change in
accounting principle
    
    $
    -
    
    
    $
    -
    
    
    $
    64,809
    2
    
    $
    -
    
    
    $
    -Net income (loss)
    
    $
    24,195
    
    
    $
    135,745
    
    
    $
    147,720
    
    
    $
    (106,509
    )
    
    $
    71,580At December 31,(dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000GAAP BALANCE SHEET DATA:Total investments (including
cash and cash equivalents)
    
    $
    3,217,610
    
    
    $
    3,168,389
    
    
    $
    2,422,590
    
    
    $
    2,280,092
    
    
    $
    2,517,033Total assets
    
    $
    6,031,641
    
    
    $
    5,587,398
    
    
    $
    5,138,787
    
    
    $
    5,147,959
    
    
    $
    4,795,672Unpaid losses and LAE
    
    $
    3,356,213
    
    
    $
    3,178,166
    
    
    $
    3,235,101
    
    
    $
    3,423,793
    
    
    $
    3,306,741Long term debt 3
    
    $
    291,841
    
    
    $
    291,257
    
    
    $
    -
    
    
    $
    -
    
    
    
    -Shareholders equity
    
    $
    881,189
    
    
    $
    906,115
    
    
    $
    979,164
    
    
    $
    719,605
    
    
    $
    801,492Years Ended December 31,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000SELECTED FINANCIAL RATIOS BASED ON GAAP DATA:Loss and LAE ratio
    
    
    83.9
    %
    
    
    84.8
    %
    
    
    75.5
    %
    
    
    120.3
    %
    
    
    76.4
    %Underwriting expense ratio
    
    
    27.9
    
    
    
    29.3
    
    
    
    31.9
    
    
    
    37.3
    
    
    
    40.8Combined ratio
    
    
    111.8
    %
    
    
    114.1
    %
    
    
    107.4
    %
    
    
    157.6
    %
    
    
    117.2
    %Ratio of earnings to fixed charges 4
    
    
    1.3
    
    
    
    6.2
    
    
    
    6.6
    
    
    
    5
    
    
    
    6.2Years Ended December 31,(dollars in thousands)
    
    2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000SELECTED COMBINED STATUTORY DATA:Loss and LAE ratio
    
    
    86.1
    %
    
    
    84.5
    %
    
    
    77.6
    %
    
    
    143.1
    %
    
    
    97.3
    %Underwriting expense ratio
    
    
    27.7
    
    
    
    27.3
    
    
    
    31.2
    
    
    
    36.9
    
    
    
    42.8Combined ratio
    
    
    113.8
    %
    
    
    111.8
    %
    
    
    108.8
    %
    
    
    180.0
    %
    
    
    140.1
    %Policyholders surplus
    
    $
    1,206,547
    
    
    $
    1,107,435
    
    
    $
    856,393
    
    
    $
    708,388
    
    
    $
    769,483Ratio of net premiums
written to policyholders
surplus
    
    
    0.76x
    
    
    
    0.80x
    
    
    
    0.78x
    
    
    
    0.77x
    
    
    
    0.66x
  1
    Includes $40,725 of gains in 2003 from the sale of Hub International
Limited securities to an affiliate.2
    Represents remaining unamortized negative goodwill resulting from the
acquisition of Crum & Forster by Fairfax in 1998.3
    Aggregate principal amount of $300 million of the Companys 10-3/8% senior
notes due 2013, less unamortized original issue discount. There have been no
borrowings under the Fairfax note. For further information on the Fairfax note, see
Item 13. Certain Relationships and Related Transactions  Borrowing from Fairfax.4
    For purposes of determining the ratio of earnings to fixed charges, earnings
includes income before income taxes, adjusted for undistributed income or loss from
equity method investees and fixed charges. Fixed charges consist of interest expense,
amortization of capitalized expenses related to indebtedness and an estimate of
implicit interest included in rent expense. The calculation of the ratio of earnings
to fixed charges is filed as an exhibit to this Form 10-K.5
    Due to the loss in the year ended December 31, 2001, the ratio coverage was
less than 1:1. Additional earnings of $170.1 million would have achieved a coverage
ratio of 1:1. 45




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##### 



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS The following discussion and analysis should be read in conjunction with Crum & Forsters
consolidated financial statements and accompanying notes included in Item 8. Financial Statements
and Supplementary Data. Certain information constitutes forward-looking statements that involve
risks and uncertainties. For further discussion of forward-looking statements, see page 4. Actual
results may differ materially from the results discussed in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth under Item 1. Business
 Risk Factors. 
 Critical Accounting Policies and Estimates The Companys consolidated financial statements and related notes thereto are prepared in
accordance with GAAP. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of material contingent assets and
liabilities as of the balance sheet date and the revenues and expenses reported during the relevant
period. In general, managements estimates are based on historical experience, evaluation of
current trends, information from third party professionals and various other assumptions that are
believed to be reasonable under the known facts and circumstances. Crum & Forsters significant accounting policies are described in Note 2 to the consolidated
financial statements included in Item 8. Financial Statements and Supplementary Data. The
accounting policies and estimates discussed below are those that require management to make
assumptions about highly uncertain matters. If management were to make different assumptions about
those matters, or if actual results were to differ significantly from estimates, the Companys
reported consolidated results of operations and financial condition could be materially affected. Unpaid losses and loss adjustment expenses The most significant accounting estimates relate to the Companys reserves for unpaid losses and
LAE. Unpaid losses and LAE include reserves for unpaid reported losses and LAE and for IBNR
losses. The reserves for unpaid reported losses generally represent the estimated ultimate cost of
events or conditions that have been reported to the Company. IBNR reserves include estimates of
losses incurred but not reported to the Company, including estimates of expenses to settle claims,
such as legal and other fees and the general expenses of administering the claims adjustment
process. With regard to case reserves, the Company is notified of insured losses, and claims personnel or
independent claims adjusters hired by the Company initially set up case reserves for the estimated
amount of settlement, if any. The estimate reflects the judgment of claims personnel based on the
parameters of coverage provided in the insurance policy, general reserving practices, the
experience and knowledge of such personnel regarding the nature of the specific claim and, where
appropriate, advice of counsel, with the goal of setting the reserve at the ultimate expected loss
amount as soon as information becomes available. IBNR reserves are calculated by the Companys actuaries using several standard actuarial
methodologies, including paid and incurred loss development, the Bornheutter-Ferguson loss methods, the Berquist-Sherman loss methods and frequency and severity
approaches. The Companys actuaries utilize assumptions in determining their estimates. These
assumptions include loss development factors, loss ratios, reported claim frequency and severity.
The selected assumptions reflect the actuarys judgment based on historical data and experience.
Most IBNR loss reserves are established with respect to the Companys casualty business. Casualty
business generally has a longer tail (meaning a longer period of time between the occurrence of the
covered event and the ultimate settlement of the claim) than the Companys other lines of business.
Because many of the types of coverage offered by the Company involve claims that may not
ultimately be settled for many years after they are incurred, subjective judgments as to the
ultimate exposure to losses are an integral and necessary component of the loss reserving process. 46




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##### 



The Companys reserves are continuously reviewed in accordance with professional actuarial
standards. A variety of statistical and actuarial techniques are used to analyze current claim
costs, frequency and severity data, and prevailing economic, social and legal
factors. Other
variables such as past loss experience, changes in legislative conditions, changes in judicial
interpretation of legal liability and policy coverage, changes in claims handling practices and inflation are also taken
into consideration. Management considers not only monetary increases in the cost of what the
Company insures, but also changes in societal factors that influence jury verdicts and case law,
the Companys approach to claim resolution, and, in turn, claim costs. The Companys reserves are
analyzed by considering a range of estimates bounded by a high and low point, and records their
best estimate within that range. Management considers a best estimate to be one that has an
equal likelihood of developing a redundancy or deficiency as the loss experience matures. The
Companys actuaries conduct a full reserve study using these methodologies every six months, from
which point estimates of ultimate losses and LAE by line of business are selected. These target
loss ratios are used to determine loss and allocated LAE expectations each month by accident year
within each line of business. Each month, reported losses are reviewed against these expectations
to evaluate loss emergence trends. The Companys actuaries also conduct an internal ground-up study of asbestos and environmental
reserves every six months. Ground-up studies, which the Company conducts semi-annually, involve an
insured-by-insured evaluation considering the following factors: available insurance coverage,
including the role of any umbrella or excess insurance issued to the insured; limits, deductibles
and self-insured retentions; an analysis of each insureds potential liability; the jurisdictions
involved; past and anticipated future asbestos claim filings against the insured; loss development
on pending claims; past settlement values of similar claims; allocated claim adjustment expenses;
the potential role of other insurance; and applicable coverage defenses. The evaluations are based
on current trends without any assumption of potentially favorable or unfavorable legislation in the
future. In 2004, based on the Company's internal actuarial review and
an independent actuarial firm's
ground-up study of asbestos reserves, the Company strengthened its
asbestos reserves by $90.5 million. The independent actuaries last performed an independent
ground-up study of the Companys asbestos reserves in 1996. Losses and LAE are charged to income as they are incurred. This includes loss and LAE payments and
any changes in reported case and IBNR reserves. During the loss settlement period, reserves
established in prior years are adjusted as loss experience develops and new information becomes
available. Adjustments to previously estimated reserves, both positive and negative, are reflected
in the Companys financial results in the periods in which they are made, and are referred to as
prior period development. Due to this high level of uncertainty, revisions to these estimated
reserves could have a material impact on the Companys results of operations in the period
recognized, and ultimate actual payments for claims and LAE could turn out to be significantly
different from estimates. Asbestos reserves The Company has written general liability, commercial multi-peril and umbrella policies under which
its policyholders continue to present asbestos, environmental and other latent claims. The vast
majority of these claims are presented under policies written many years ago. There are
significant uncertainties in estimating the amount of reserves required for asbestos, environmental
and other latent exposure claims. Reserves for these exposures cannot be estimated solely with the
traditional loss reserving techniques described above, which rely on historical accident year
development factors and take into consideration the previously mentioned variables. Among the
uncertainties relating to asbestos, environmental and other latent reserves are a lack of
historical data, long reporting delays and complex unresolved legal issues regarding policy
coverage and the extent and timing of any such contractual liability. Courts have reached
different, and frequently inconsistent, conclusions as to when losses occurred, what claims are
covered, under what circumstances the insurer has an obligation to defend, how policy limits are
determined and how policy exclusions are applied and interpreted. Asbestos is the most significant and difficult mass tort for the insurance industry in terms of
claim volume and dollar exposure. The litigation environment has become increasingly adverse.
Plaintiffs often are able to choose from a number of potential venues to bring an action in the
court that they expect will be most advantageous to their claims. Many of the lawsuits are filed
in a small number of plaintiff-oriented jurisdictions, where significant verdicts historically have
been rendered against commercial defendants. Tort reform in certain jurisdictions initially
resulted in increased filings by plaintiffs seeking to avoid the potential effective date of the
reform legislation in 2003. In general, the number of new claims filed in 2004 declined slightly,
but it is too soon to predict whether this will constitute a trend in new filings. Management
believes that the insurance industry has been adversely affected by judicial interpretations that
have had the effect of maximizing insurance recoveries for asbestos claims, from both a coverage
and liability perspective. Even when these claims are resolved without loss payment, as a large
portion of them are, significant costs are incurred to defend the claims. Generally, only policies
underwritten prior to 1986 have potential asbestos exposure since most policies underwritten after
that date contain an absolute asbestos exclusion. Over the past few years, the industry has experienced an increase in the number of asbestos
claimants over prior years, including claims by individuals who do not appear to be impaired by
asbestos exposure. It is generally expected throughout the industry that this trend will continue.
The reasons for this evident increase are many: more intensive advertising by lawyers seeking
additional claimants; increased focus by plaintiffs on new and previously peripheral defendants; an
increase in the number of entities seeking bankruptcy protection; and
a rush to file claims before
potential implementation of proposed legislative reforms. To date, this continued flow of claims has forced 71 manufacturers and users of asbestos products into bankruptcy. These bankruptcies
have, in turn, aggravated both the volume and the value of claims against viable asbestos defendants.
Accordingly, there is a high degree of uncertainty with respect to future exposure from asbestos
claims, both in identifying which additional insureds may become targets in the future and in
predicting the total number of asbestos claimants. 47




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##### 



Early asbestos claims focused on manufacturers and distributors of asbestos-containing products.
Thus, the claims at issue largely arose out of the products hazard and typically fell within the
policies aggregate limits of liability. Increasingly, insureds have been asserting that their
asbestos claims are not subject to these aggregate limits and that each individual bodily injury
claim should be treated as a separate occurrence, potentially creating even greater exposure for
primary insurers. Generally, insureds who assert these positions are installers of asbestos
products or property owners who allegedly had asbestos on their property. In addition, in an
effort to seek additional insurance coverage, some insureds that have eroded their aggregate limits
are submitting new asbestos claims as non-product claims or attempting to reclassify previously
resolved claims as non-product claims. Unlike product exposures, these non-product exposures are
argued not to be subject to aggregate limits, creating potentially greater exposure. The extent to
which insureds will be successful in obtaining coverage on this basis is uncertain and,
accordingly, it is difficult to predict the ultimate size of the claims for coverage not subject to
aggregate limits. The Companys asbestos exposure is related mostly to insureds that are peripheral defendants,
including a mix of manufacturers, distributors and installers of asbestos-containing products, as
well as premise owners. For the most part, these insureds are defendants on a regional, rather
than a nationwide, basis. As the financial assets and insurance recoveries of traditional asbestos
defendants have been depleted, plaintiffs are increasingly focusing on these peripheral defendants.
The Company is experiencing an increase in asbestos claims on its policies. Environmental reserves Hazardous waste sites present another significant potential exposure. The federal Superfund law
and comparable state statutes govern the cleanup and restoration of toxic waste sites and formalize
the concept of legal liability for cleanup and restoration by PRPs. These laws establish the means
to pay for cleanup of waste sites if PRPs fail to do so, and to assign liability to PRPs. Most
PRPs named to date are parties who have been generators, transporters, past or present landowners
or past or present site operators. Most sites have multiple PRPs. Most insurance policies issued
to PRPs did not expressly cover the costs of pollution cleanup since pollution was not a recognized
hazard at the time many of these policies were issued. Over time, judicial interpretations in many
cases have found that the scope of coverage of the policies included pollution exposure. Since
1986, however, most general liability policies exclude coverage for such exposures. There is great uncertainty involved in estimating liabilities related to these exposures. First,
the number of waste sites subject to cleanup is unknown. To date, approximately 1,575 cleanup
sites have been identified by the EPA and included in its National Priorities List. State
authorities have identified many additional sites. Second, the liabilities of the insureds
themselves are difficult to estimate. At any given site, the allocation of remediation cost among
the PRPs varies greatly depending upon a variety of factors. Third, different courts have been
presented with liability and coverage issues regarding pollution claims and have reached
inconsistent decisions on several issues. These uncertainties are unlikely to be resolved in the
near future. Uncertainties also remain as to the Superfund law itself. The excise tax imposed to fund Superfund
lapsed at the end of 1995 and has not been renewed. While a number of proposals to reform
Superfund have been put forward by various parties, no reforms have been enacted by Congress since
then. It is unclear what legislation, if any, will be enacted in the future and what potential
effect it will have on the insurance industry. In the absence of federal movement on Superfund,
the enforcement of Superfund liability is shifting to the states, which are reconsidering
state-level cleanup statutes and regulations. As individual states move forward, the potential for
conflicts among states becomes greater, increasing the uncertainty of the cost to remediate state
sites. The Companys
environmental pollution reserves have been developing as expected over the past few
years with new reports trending downward. In many cases, claims are being settled for less than
initially anticipated due to improved site remediation technology and effective policy buybacks.
However, due to the high level of uncertainty, revisions to these reserve estimates could have a
material impact on the Companys results of operations in the period recognized and the ultimate
actual payments for claims and LAE could turn out to be significantly different from estimates. 48




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##### 



Other latent claims reserves In addition to asbestos and environmental pollution, the Company faces exposure to other types of
mass tort claims. These other latent claims include those associated with silica, chemicals, lead,
sick building syndrome, gas and vapors, repetitive stress, paint and mold. Summary For the years ended December 31, 2004, 2003 and 2002, the Company has recognized adverse
development of prior years losses and LAE, before the benefit of corporate aggregate reinsurance,
of $97.6 million, $132.2 million and $26.6 million, respectively. Substantially all of such
development was attributable to asbestos reserves. Due to the inherent uncertainties in estimating
reserves for unpaid losses and LAE described above, and to the potential impact of recent trends,
the ultimate liability for the Companys loss and LAE reserves, and, in particular, its asbestos,
environmental and other latent claims reserves, may vary substantially from the amounts currently
reserved. For additional discussion on the Companys reserves, see Item 1. BusinessReserves and Notes 5
and 6 to the consolidated financial statements included in Item 8. Financial Statements and
Supplementary Data. Other than temporary declines in value of investments Declines in the market value of invested assets below carrying value are evaluated for other than
temporary impairment losses on a quarterly basis. Management considers an impairment as other
than temporary if evidence indicating that an investments carrying amount is recoverable within a
reasonable period of time is outweighed by evidence to the contrary. Recognition of impairment
losses for declines in the value of fixed income investments and equity securities attributable to
issuer-specific events are based upon all relevant facts and circumstances for each investment.
Factors considered by management include, but are not limited to, current and expected future
market and economic conditions, the impact of issuer-specific events, the nature of the investment,
the number of investment positions with losses, the severity and duration of the impairment and the
volatility of the securitys market price. For fixed income investments with unrealized losses due
to market conditions or industry-related events, management also considers the Companys ability
and intent to hold the investment for a period of time sufficient to allow a market recovery, or to
maturity, in the process of evaluating whether a security with an unrealized loss has suffered an
other than temporary decline. There are risks and uncertainties associated with determining whether declines in the fair value of
investments are other than temporary. These include significant subsequent changes in general
economic conditions, as well as specific business conditions affecting particular issuers,
subjective assessment of issuer-specific factors (seniority of claims, collateral value, etc.),
future financial market effects, stability of foreign governments and economies, future rating
agency actions and significant disclosure, accounting, fraud or corporate governance issues that
may adversely affect certain investments. In addition, significant assumptions and management
judgment are involved in determining if a decline is other than temporary. If management
determines that a decline in fair value is not other than temporary and, hence, a securitys value
is not written down at that time, there are potential effects upon future earnings and financial
position should management later conclude that some of the current declines in the fair value of
the investments are other than temporary declines. As of December 31, 2004, the Company had gross unrealized losses on available-for-sale fixed income
and equity investments of $67.5 million and no other than temporary impairments were recorded for
the year ended December 31, 2004. For the years ended December 31, 2003 and 2002, other than
temporary impairments amounted to $13.8 million and $0.3 million, respectively. For a more
detailed discussion of the Companys gross unrealized losses on available-for-sale securities, see
Note 4 to the consolidated financial statements included in Item 8. Financial Statements and
Supplementary Data. Reinsurance recoverable Amounts recoverable from reinsurers are initially estimated in conjunction with the establishment
of reserves for unpaid losses and LAE. These amounts may be adjusted as actual case reserves are
recorded and reinsured claims are settled. The ceding of risk to reinsurers does not relieve the
operating companies of their primary obligation to policyholders as the direct insurer.
Accordingly, the Company is exposed to the risk that any reinsurer may be unable, or unwilling, to
meet the obligations assumed under its reinsurance agreements. Management attempts to mitigate
this risk by obtaining collateral and by entering into reinsurance arrangements only with
reinsurers that have credit ratings and statutory surplus above
certain levels. 49




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##### 



In certain circumstances, including the significant deterioration of a reinsurers financial
strength rating, the Company may engage in commutation discussions with an individual reinsurer,
essentially canceling and settling the contract at its net present
value. The outcome of such discussions may result in a lump sum settlement that is less than the recorded
recoverable balance. Losses arising from commutations could have an adverse impact on the
Companys results of operations. An estimated allowance for uncollectible reinsurance recoverable is recorded on the basis of
periodic evaluation of balances due from reinsurers, judgments regarding reinsurer solvency, known
disputes, reporting characteristics of the underlying reinsured business, historical experience,
current economic conditions and the state of insurer/reinsurer relations in general, and at the
Crum & Forster companies in particular. As of December 31, 2004 and 2003, reinsurance recoverable was $1,804.8 million and $1,680.5
million, net of reserves for uncollectible reinsurance of $40.9 million and $39.9 million,
respectively. Bad debt expense for the years ended December 31, 2004, 2003 and 2002 related to
uncollectible reinsurance was $5 million, $5.3 million and $0.6 million, respectively. While
management believes the allowance for uncollectible reinsurance recoverable is adequate based on
information currently available, failure of reinsurers to meet their obligations could have a
material adverse impact on the Companys financial position and results of operations. At December
31, 2004, the five largest gross reinsurance recoverable balances aggregated $1,128.9 million, or
62.5% of the total reinsurance recoverable balance. Application of collateral reduces the
unsecured exposure to these five reinsurers to $499.8 million as of that date. The largest
unsecured balance as of December 31, 2004 was $194.1 million, due from an unaffiliated company
rated A+ by A.M. Best. Deferred income tax assets The Company recognizes deferred tax assets and liabilities based on differences between the
financial statement carrying amounts and the tax bases of assets and liabilities. Management
regularly reviews the Companys deferred tax assets for recoverability based on history of
earnings, expectations for future earnings and expected timing of reversals of temporary
differences. Although realization is not assured, management believes the recorded deferred tax assets are fully
recoverable based on estimates of the future profitability of Crum & Forsters taxable entities and
current forecasts for the periods through which losses may be carried forward. As of December 31, 2004, there are no valuation allowances against the Companys deferred tax
assets of $242.1 million. Should the assumptions of future profitability change, however, or the taxable income of
these entities fall below expectations, a valuation allowance, which could be significant, may have
to be established if management believes any portion of the deferred tax asset will not be
realized. A valuation allowance may also be required if there is a material change in the tax laws
such that the actual effective tax rate or the time periods within which the underlying temporary
differences become taxable or deductible change. 
 Summary of Operations The Company is a national commercial property and casualty insurance company with a focused
underwriting strategy, targeting specialty classes of business and overlooked market opportunities.
Operating through its home office and regional branch network, the Company writes a broad range of
commercial coverage, including workers compensation, general liability, property, commercial
automobile, commercial multi-peril and surety. The Company generally conducts business on a
brokerage basis through more than 1,000 producers located throughout the United States. The
Companys two largest producers accounted for approximately 14% and 6% of gross premiums written
for the year ended December 31, 2004. The Companys objective is to expand opportunistically into classes of business or market segments
that are consistent with its underwriting expertise and have the potential to generate an
underwriting profit. Management believes the Companys ability to identify and react to changing
market conditions provides it with a competitive advantage. Based on the experience and
underwriting expertise of management, the Company seeks to write new lines of business and expand
existing classes of business based on market conditions and expected profitability. The Company
offers insurance products designed to meet specific insurance needs of targeted insured groups and
underwrites specific types of coverage for markets that are generally underserved by the industry. The profitability of property and casualty insurance companies is primarily determined by their
underwriting results and investment performance. Underwriting results are the net result of a
companys premiums earned and amounts paid, or expected to be paid, to settle insured claims and
policy acquisition costs and other underwriting expenses. The insurance business is unique in that
premiums charged for insurance coverage are set without certainty of the ultimate claim costs to be
incurred on a given policy. This requires that liabilities be estimated and recorded in
recognition of future loss and settlement obligations. Due to the inherent uncertainty in
estimating these liabilities, there can be no assurance that actual liabilities will not exceed
recorded amounts or premiums received. The ultimate adequacy of premium rates is affected mainly
by the severity and frequency of claims, which are influenced by many factors, including natural
and man-made disasters, regulatory measures and court decisions that define and expand the extent
of coverage. Insurance premium prices are also influenced by available insurance capacity or the
industrys willingness to deploy capital to cover each insurable risk. 50




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##### 



Premiums collected are invested until funds are required to pay settled claims. Insurance company
investment portfolios generally must provide a balance among total return, capital preservation and
liquidity in order to generate sufficient funds for payment of claims as they are settled. The
Company follows a long-term, value-oriented investment philosophy, with the goal of optimizing
investment returns viewed on a total return basis, without reaching for yield, while maintaining
sensitivity to liquidity requirements. The Company attempts to protect its capital from loss.
Management believes that investing in debt and equity securities selling at prices below intrinsic
value better protects the Companys capital. Management measures the results of operations by monitoring certain indicators of growth and
profitability. Growth is generally measured in terms of gross premiums written. Management
further monitors growth in its gross premiums written in terms of its rate of retention of existing
insureds, increases or decreases in the pricing of renewed policies and the growth in new business
premiums. Management focuses on underwriting results, which are derived from certain amounts on the
consolidated statements of income and are considered a non-GAAP financial measure, to monitor
performance of the Companys underwriting operations. Underwriting results are measured both in
dollars and by the combined ratio, a standard industry measure. Underwriting profit or loss equals
premiums earned less losses and LAE, policy acquisition costs and other underwriting expenses, and
excludes investment results, interest expense and other income or expense. The latter are excluded
in order to analyze the direct relationship between the premiums earned and the related claim
costs, including the costs incurred to settle such claims, acquisition expenses and other
underwriting expenses. Net realized investment gains and losses relating to the Companys
investment portfolio are excluded by management when analyzing insurance operations, as they are
largely discretionary and are generally driven by economic factors that are not necessarily
consistent with key drivers of underwriting performance. The combined ratio expresses underwriting results as a percentage of premiums earned and generally
comprises two components: the loss ratio, which is the percentage of losses and LAE to premiums
earned, and the expense ratio, which is the percentage of the sum of policy acquisition costs and
other underwriting expenses to premiums earned. A combined ratio less than 100% indicates an
underwriting profit; a combined ratio greater than 100% indicates an underwriting loss. The property and casualty insurance business is cyclical and influenced by many factors, including
price competition, economic conditions, natural and man-made disasters (for example, hurricanes,
earthquakes and terrorism), interest rates, state regulations, court decisions and changes in the
law. Commencing in mid-2000 and through mid-2003, insurers generally achieved significant rate
increases and improved terms and conditions. In 2003, however, market capacity expanded,
particularly for property risks. In the fourth quarter of 2003 and through 2004, property risks
generally were written at or below expiring prices, and price increases in casualty lines slowed
considerably. Market competition intensified throughout 2004, particularly in the third and fourth
quarters. Renewal pricing in the Companys casualty lines increased by approximately 1% overall in
2004, but decreased by approximately 2% and 5% in the third and fourth quarters of 2004,
respectively. Renewal pricing in the Companys property lines declined by approximately 5% in
2004. 51




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##### 



Results of Operations The Companys results of operations are summarized as follows: Years Ended December 31,(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Gross premiums written
    
    $
    1,139.0
    
    
    $
    1,104.2
    
    
    $
    898.4Net premiums written
    
    $
    918.3
    
    
    $
    890.8
    
    
    $
    669.5Premiums earned
    
    $
    907.7
    
    
    $
    768.9
    
    
    $
    609.5Losses and LAE
    
    
    761.5
    
    
    
    652.3
    
    
    
    460.4Underwriting expenses
    
    
    253.0
    
    
    
    225.3
    
    
    
    194.5Underwriting results
    
    
    (106.8
    )
    
    
    (108.7
    )
    
    
    (45.4
    )Investment income and
realized investment gains and losses1
    
    
    164.6
    
    
    
    338.1
    
    
    
    155.3Interest and other expense (income)
    
    
    41.6
    
    
    
    24.6
    
    
    
    (16.1
    )Income before income taxes and cumulative effect of a change in
accounting principle
    
    
    16.2
    
    
    
    204.8
    
    
    
    126.0Income tax expense
    
    
    4.5
    
    
    
    70.6
    
    
    
    43.1Income before cumulative effect of a change in accounting principle
    
    
    11.7
    
    
    
    134.2
    
    
    
    82.9Equity in
earnings of investees
    
    
    12.5
    
    
    
    1.5
    
    
    
    -Cumulative effect of a change in accounting principle
    
    
    -
    
    
    
    -
    
    
    
    64.8
    2Net income
    
    $
    24.2
    
    
    $
    135.7
    
    
    $
    147.7Combined ratio
    
    
    111.8
    %
    
    
    114.1
    %
    
    
    107.4
    %
  1
    Includes $40.7 million of gains in 2003 from the
sale of Hub International Limited securities to an affiliate. Net income declined to $24.2 million in 2004 from $135.7 million in 2003, primarily due to
lower investment results. Underwriting results for 2004, compared to 2003, were marked by higher
catastrophe losses offset by decreased adverse development of prior years losses and LAE.
Catastrophe losses were higher in 2004 than in 2003, principally due to approximately $96 million
of losses, including reinstatement premiums of $13 million, associated with hurricanes Charley,
Frances, Jeanne and Ivan in the third quarter of 2004. Adverse development of prior years losses
and LAE in 2004 amounted to $69.3 million as compared to $118 million in 2003 and included adverse
development of latent reserves of $100.5 million and $153.6 million in 2004 and 2003, respectively. Net income rose to $135.7 million in 2003 from $82.9 million, excluding $64.8 million in 2002
related to the cumulative effect of a change in accounting principle pursuant to which the Company
wrote off its unamortized negative goodwill balance. The improvement was principally the result of
better investment results offset, in part, by a deterioration in underwriting results.
Underwriting losses increased primarily as a result of adverse development of prior years loss and
LAE reserves of $118 million, principally arising from asbestos exposures. For further discussion of loss development in each year, see Underwriting ResultsLosses and
Loss Adjustment Expenses. For further discussion of investment results, see Investment
Results, Liquidity and Capital Resources and Note 4 to the consolidated financial statements
included in Item 8. Financial Statements and Supplementary Data. 52




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##### 



Underwriting results Gross premiums written Gross premiums written by line of business are summarized as follows: Years Ended December 31,2004
    
    
    
    
    
    
    2003Increase/
    
    
    
    
    
    
    Increase/(dollars in millions)
    
    2004
    
    
    2003
    
    
    (Decrease)
    
    
    2002
    
    
    (Decrease)Workers compensation
    
    $
    311.3
    
    
    $
    288.0
    
    
    $
    23.3
    
    
    $
    205.6
    
    
    $
    82.4General liability
    
    
    252.8
    
    
    
    254.9
    
    
    
    (2.1
    )
    
    
    215.7
    
    
    
    39.2Property
    
    
    299.1
    
    
    
    319.2
    
    
    
    (20.1
    )
    
    
    270.2
    
    
    
    49.0Commercial automobile
    
    
    190.1
    
    
    
    168.6
    
    
    
    21.5
    
    
    
    131.6
    
    
    
    37.0Commercial multi-peril
    
    
    52.1
    
    
    
    42.9
    
    
    
    9.2
    
    
    
    49.7
    
    
    
    (6.8
    )Surety
    
    
    33.6
    
    
    
    30.6
    
    
    
    3.0
    
    
    
    25.6
    
    
    
    5.0Total gross premiums written
    
    $
    1,139.0
    
    
    $
    1,104.2
    
    
    $
    34.8
    
    
    $
    898.4
    
    
    $
    205.8
 For the year ended December 31, 2004, the Company reported gross premiums written of $1,139
million, representing an increase of $34.8 million, or 3.2%, over the year ended December 31, 2003.
The growth in gross premiums written was primarily due to an increase in the renewal retention
rate from approximately 60% in 2003 to approximately 65% in 2004, partially offset by a decrease in
new business of approximately 22%. Renewal retention rates increased despite the softening market,
particularly in the property lines, as a result of the maturing of the Companys book of business.
New business declined as the market has softened and competition for new business, particularly
from higher rated companies, has intensified. Overall, pricing remained relatively stable in 2004. For the year ended December 31, 2003, the Company reported gross premiums written of $1,104.2
million, representing an increase of $205.8 million, or 22.9%, over the year ended December 31,
2002. The growth in gross premiums written was primarily due to the combined impact of an increase
in the renewal retention level of 18 percentage points, price increases on renewal policies of
approximately 10% and an increase in new business of approximately 16%. The 2003 growth in new
business was attributable, in part, to the Companys significant expansion of California workers
compensation business. Casualty gross premiums written For the year ended December 31, 2004, gross premiums written in casualty lines, which include the
workers compensation, general liability and commercial automobile lines of business, increased by
$42.7 million, or 6.0%, as compared to the year ended December 31, 2003. This increase was
primarily due to modest increases in pricing on renewal policies and in the renewal retention rate,
partially offset by a reduction in new business. The renewal retention rate was negatively
affected by increased competition and the discontinuance of certain business programs accounting
for approximately $17.7 million of gross premiums written in 2003. For the year ended December 31, 2003, gross premiums written in casualty lines increased by $158.6
million, or 28.7%, as compared to the year ended December 31, 2002. This increase was primarily
due to increases in the renewal retention rate, pricing and new business in all casualty business
lines, including the expansion of operations in California. California workers compensation gross premiums written totaled $156.1 million, $147 million and
$74.2 million in 2004, 2003 and 2002, respectively. Property gross premiums written For the year ended December 31, 2004, gross premiums written in property lines, which include the
property, commercial multi-peril and surety lines of business, decreased by $7.9 million, or 2.0%,
as compared to the year ended December 31, 2003. This decrease was primarily due to reductions in
new business and price decreases on renewal policies, partially offset by an increase in the
renewal retention rate. Property production was affected by softening market conditions,
characterized by increased capacity in the marketplace and decreasing rates. 53




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##### 



For the year ended December 31, 2003, gross premiums written in property lines increased by $47.2
million, or 13.7%, as compared to the year ended December 31, 2002. This increase was primarily
due to an increase in renewal retention levels in the property business line. Net premiums written Net premiums written by line of business are summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002(dollars in millions)
    
    $
    
    
    %1
    
    
    $
    
    
    %1
    
    
    $
    
    
    %1Workers compensation
    
    $
    288.7
    
    
    
    92.7
    %
    
    $
    267.6
    
    
    
    92.9
    %
    
    $
    183.9
    
    
    
    89.4
    %General liability
    
    
    198.6
    
    
    
    78.6
    %
    
    
    191.6
    
    
    
    75.2
    %
    
    
    144.5
    
    
    
    67.0
    %Property
    
    
    184.3
    
    
    
    61.6
    %
    
    
    223.0
    
    
    
    69.9
    %
    
    
    201.6
    
    
    
    74.6
    %Commercial automobile
    
    
    182.7
    
    
    
    96.1
    %
    
    
    155.1
    
    
    
    92.0
    %
    
    
    119.8
    
    
    
    91.0
    %Commercial multi-peril
    
    
    47.1
    
    
    
    90.4
    %
    
    
    33.5
    
    
    
    78.1
    %
    
    
    36.9
    
    
    
    74.2
    %Surety
    
    
    24.5
    
    
    
    72.9
    %
    
    
    20.1
    
    
    
    65.7
    %
    
    
    15.1
    
    
    
    59.0
    %Total before corporate aggregate
reinsurance premiums
    
    
    925.9
    
    
    
    81.3
    %
    
    
    890.9
    
    
    
    80.7
    %
    
    
    701.8
    
    
    
    78.1
    %Corporate aggregate reinsurance premiums
    
    
    (7.6
    )
    
    
    (0.7
    )
    
    
    (0.1
    )
    
    
    
    
    
    
    (32.3
    )
    
    
    (3.6
    )Total
    
    $
    918.3
    
    
    
    80.6
    %
    
    $
    890.8
    
    
    
    80.7
    %
    
    $
    669.5
    
    
    
    74.5
    %
  1
    Percentage represents the percentage of net premiums written to gross premiums
written. For the year ended December 31, 2004, net premiums written increased by $27.5 million, or
3.1%, as compared to the year ended December 31, 2003. This increase was in line with the growth
in gross premiums written. For the year ended December 31, 2003, net premiums written increased by
$221.3 million, or 33.1%, as compared to the year ended December 31, 2002. This increase was
generally in line with the growth in gross premiums written after giving effect to ceded premiums
related to corporate aggregate reinsurance of $32.3 million in 2002. The decline in percentage of net premiums written to gross premiums written from 2002 to 2004 in
the property line was primarily the result of the purchase of increased catastrophe reinsurance
coverage and reinstatement premiums associated with the Florida hurricanes in 2004. The increase
in percentage of net premiums written to gross premiums written from 2002 to 2004 in the general
liability and commercial automobile lines is primarily the result of the discontinuation of certain
fully ceded business programs. Premiums earned Premiums earned by line of business are summarized as follows: Years Ended December 31,(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Workers compensation
    
    $
    285.6
    
    
    $
    211.0
    
    
    $
    179.2General liability
    
    
    202.2
    
    
    
    165.2
    
    
    
    134.5Property
    
    
    187.2
    
    
    
    209.1
    
    
    
    155.1Commercial automobile
    
    
    175.6
    
    
    
    132.3
    
    
    
    112.5Commercial multi-peril
    
    
    42.8
    
    
    
    33.1
    
    
    
    47.1Surety
    
    
    21.9
    
    
    
    18.3
    
    
    
    13.4Total before corporate aggregate reinsurance premiums
    
    
    915.3
    
    
    
    769.0
    
    
    
    641.8Corporate aggregate reinsurance premiums
    
    
    (7.6
    )
    
    
    (0.1
    )
    
    
    (32.3
    )Total premiums earned
    
    $
    907.7
    
    
    $
    768.9
    
    
    $
    609.5
 54




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##### 



Premiums earned reflect the amount of net premiums written applicable to the portion of the policy
term that expires in a given period. The Company generally earns premiums on a pro-rata basis over
the period in which the coverage is provided. For the year ended December 31, 2004, premiums
earned increased by $138.8 million, or 18.1%, as compared to the year ended December 31, 2003. The
larger increase in premiums earned relative to net premiums written was principally attributable to
the lag in recognition of the increased premiums written in the latter part of 2003. For the year ended December 31, 2003, premiums earned increased by $159.4 million, or 26.1%, as
compared to the year ended December 31, 2002. The growth in premiums earned was due to higher net
premiums written in 2003. Losses and loss adjustment expenses The Companys losses and LAE reflect the impact of corporate aggregate reinsurance, including the
amortization of deferred gain on retroactive reinsurance and cessions to prospective reinsurance
contracts. For further discussion of the accounting for reinsurance coverage and the amortization
of deferred income on retroactive reinsurance, see Item 1. BusinessReinsurance and Note 2 to the
consolidated financial statements included in Item 8. Financial Statements and Supplementary
Data. The Companys incurred losses and LAE are summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002(dollars in millions)
    
    Losses
    
    
    Ratio
    
    
    Losses
    
    
    Ratio
    
    
    Losses
    
    
    RatioAccident year, as reported
    
    $
    692.2
    
    
    
    75.7
    %
    
    $
    534.3
    
    
    
    69.5
    %
    
    $
    442.2
    
    
    
    68.9
    %Adverse (favorable) development of prior
years losses and LAE before impact of
corporate aggregate reinsurance:Accident year 2003
    
    
    (37.5
    )
    
    
    
    
    
    
    -
    
    
    
    
    
    
    
    -Accident year 2002
    
    
    (1.7
    )
    
    
    
    
    
    
    (34.9
    )
    
    
    
    
    
    
    -Accident year 2001
    
    
    (1.8
    )
    
    
    
    
    
    
    56.8
    
    
    
    
    
    
    
    1.7Accident year 2000
    
    
    32.4
    
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    3.5Accident year 1999
    
    
    36.4
    
    
    
    
    
    
    
    7.4
    
    
    
    
    
    
    
    6.1Accident year 1998 and prior
    
    
    69.8
    
    
    
    
    
    
    
    100.5
    
    
    
    
    
    
    
    15.3Total adverse development
    
    
    97.6
    
    
    
    10.7
    
    
    
    132.2
    
    
    
    17.2
    
    
    
    26.6
    
    
    
    4.2Amortization of deferred gain
    
    
    (18.3
    )
    
    
    
    
    
    
    (13.1
    )
    
    
    
    
    
    
    (8.3
    )Cessions to prospective reinsurance contracts
    
    
    (10.0
    )
    
    
    
    
    
    
    (1.1
    )
    
    
    
    
    
    
    -Total impact of corporate aggregate
reinsurance
    
    
    (28.3
    )
    
    
    (2.5
    )
    
    
    (14.2
    )
    
    
    (1.9
    )
    
    
    (8.3
    )
    
    
    2.4Incurred losses and LAE
    
    $
    761.5
    
    
    
    83.9
    %
    
    $
    652.3
    
    
    
    84.8
    %
    
    $
    460.5
    
    
    
    75.5
    %
 The adverse development before corporate aggregate reinsurance in calendar year 2004 of $97.6
million (10.7 percentage points) was primarily due to deficiencies in asbestos reserves of $90.5
million, principally recorded in the fourth quarter following the Companys internal actuarial
review and an independent actuarial firms ground-up study of such reserves. As previously noted,
there has been an industry-wide deterioration in asbestos liabilities caused by increases in the
number of claimants filing asbestos claims and attorneys targeting new and previously peripheral
defendants, including some of the Companys insureds. Additionally, environmental reserves were
strengthened by $10 million in the fourth quarter of 2004. Asbestos and environmental reserves
arise principally from general liability policies written in accident years prior to 1998. The
Company also recognized favorable development of $37.5 million for accident year 2003, primarily in property and workers compensation
and $30.7 million in 1998 and prior, principally in non-latent general liability. This was largely offset by unfavorable non-latent development of $68.8 million for accident
years 1999 and 2000, principally in the workers compensation and general liability lines. The adverse development before corporate aggregate reinsurance in calendar year 2003 of $132.2
million (17.2 percentage points) was primarily due to strengthening of asbestos reserves. Based on
its internal actuarial reserve review, the Company strengthened its asbestos, environmental and
other latent reserves by $153.6 million, of which asbestos liabilities accounted for $149.8
million. These reserve increases were partially offset by favorable non-latent development of
$53.1 million in accident year 1998 and prior and $34.9 million in accident year 2002, primarily in the workers compensation and commercial automobile lines.
Adverse development of $56.8 million was also recognized for accident year 2001 in all liability lines. 55




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##### 



Cessions to prospective corporate aggregate reinsurance in 2003 of $1.1 million includes the
benefit of cessions to the 2001 accident year treaty with nSpire, an affiliate of the Company, of
$55.1 million, partially offset by charges of $54 million associated with the commutation of two
prospective corporate aggregate reinsurance contracts. The commutation charge of $54 million included $27.2
million arising from the commutation of the aforementioned accident year 2001 treaty with nSpire
and $26.8 million related to commutation of a contract with an unrelated party covering accident
years 1992 and prior. The adverse development before corporate aggregate reinsurance in calendar year 2002 of $26.6
million (4.2 percentage points) includes $67.5 million for asbestos liabilities, which was driven
by increases in several large asbestos accounts. This adverse development was partially offset by
favorable non-latent development of $52.2 million in accident
years 1998 and prior, primarily
affecting the general liability and commercial multi-peril lines. Accident year loss and LAE ratios, as estimated at December 31, 2004 by line of business, net of
per risk reinsurance but before the benefit of corporate aggregate reinsurance, are summarized as
follows: Accident Years Ended December 31,2004
    
    
    2003
    
    
    2002Workers compensation
    
    
    72.0
    %
    
    
    71.9
    %
    
    
    83.9
    %General liability
    
    
    75.0
    %
    
    
    73.6
    %
    
    
    68.1
    %Property
    
    
    96.7
    %
    
    
    47.3
    %
    
    
    26.0
    %Commercial automobile
    
    
    67.6
    %
    
    
    68.2
    %
    
    
    78.6
    %Commercial multi-peril
    
    
    60.0
    %
    
    
    72.5
    %
    
    
    55.7
    %Surety
    
    
    47.4
    %
    
    
    58.0
    %
    
    
    61.1
    %Accident year loss and LAE ratio
    
    
    75.7
    %
    
    
    64.6
    %
    
    
    63.2
    %
 The accident year loss and LAE ratio increased from 63.2% for accident year 2002 to 75.7% for
accident year 2004. This increase primarily reflects the effects of hurricanes Charley, Frances,
Ivan and Jeanne of $96 million in 2004, including reinsurance reinstatement premiums of $13
million. Catastrophes added 12.7, 4.3 and 0.3 points to the Companys accident year loss and LAE
ratio in 2004, 2003 and 2002, respectively, and added approximately 58.6, 15.9 and 1.3 points to
the property accident year loss and LAE ratios, respectively. The accident year loss and LAE
ratios represent managements estimate, as of December 31, 2004, of the ultimate cost, expressed as
a percentage of net premiums earned for each respective year, of covered claims or events,
including settlement costs. For casualty lines of business in particular, where the tail, or
period from the occurrence of the claim to final settlement, may span several years, the estimates
are based on a number of assumptions and, accordingly, are subject to significant variability. See
Critical Accounting Policies and EstimatesLosses and loss adjustment expenses. The workers compensation loss ratio decrease of approximately 11.9 percentage points from accident
year 2002 to 2004 included the favorable impact of substantial price increases in 2003. The
Company has expanded its workers compensation writings in California since 2000. Management
believes that this business will continue to generate a profit; however, Crum & Forsters limited
historical experience in California adds an
additional measure of uncertainty to the Companys loss and LAE ratio. The property loss ratio increase of approximately 70.7 percentage points from accident year 2002 to
2004 reflects higher catastrophe losses in 2004 and reductions in pricing. The 2004 accident year commercial automobile loss ratio of 67.6% is lower than the accident year
2002 loss ratio of 78.6% as a result of price increases in the Companys commercial automobile line
of business. Underwriting expenses Underwriting expenses are comprised of policy acquisition costs and other underwriting expenses.
Policy acquisition costs are comprised principally of commissions paid to producers and premium
taxes. Other underwriting expenses consist of all other operating expenses associated with the
Companys underwriting activities, including salaries and benefits, information technology and
rent. The Companys underwriting expense ratio has trended downward, decreasing from 31.9% in 2002
to 27.9% in 2004, which was primarily attributable to premium growth rates which exceeded the Companys expense growth rate. 56




---



##### 



The Companys underwriting expense ratios, before and after adjustments for corporate aggregate
reinsurance, are summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Underwriting expense ratio, as reported
    
    
    27.9
    %
    
    
    29.3
    %
    
    
    31.9
    %Underwriting expense ratio, as adjusted for the impact of corporate aggregate reinsurance
    
    
    27.7
    %
    
    
    29.3
    %
    
    
    30.3
    %
 The Companys policy acquisition expense ratio increased from 12.5% in 2002 to 12.8% in 2003 and to
13.6% in 2004 primarily due to lower amounts of ceding commissions paid by reinsurers. The Companys other underwriting expense ratio decreased from 19.4% in 2002 to 16.5% in 2003 and to
14.3% in 2004 primarily reflecting premium growth rates in excess of expense growth rates. Investment results Information on the Companys investment results is summarized as follows: Years Ended December 31,(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Average investments, including cash and cash equivalents, at book value
    
    $
    3,101.1
    
    
    $
    2,667.1
    
    
    $
    2,403.3Investment income
    
    $
    85.1
    
    
    $
    69.9
    
    
    $
    113.8Realized investment gains
    
    
    79.5
    
    
    
    268.2
    
    
    
    41.5Equity in earnings of investees
    
    
    19.2
    
    
    
    2.4
    
    
    
    -Change in unrealized investment gains and losses and foreign currency translation
    
    
    19.0
    
    
    
    25.7
    
    
    
    172.2Total return on investments
    
    $
    202.8
    
    
    $
    366.2
    
    
    $
    327.5Gross investment yield1
    
    
    4.7
    %
    
    
    3.7
    %
    
    
    5.8
    %Net investment yield1
    
    
    3.4
    %
    
    
    2.7
    %
    
    
    4.7
    %Total return on investments
    
    
    6.5
    %
    
    
    13.7
    %
    
    
    13.6
    %
  1Including equity in earnings of investees. The Company manages its investment portfolio with an emphasis on total return. Total rate of
return was 6.5%, 13.7% and 13.6% for the years ended December 31, 2004, 2003 and 2002. The
decrease in the Companys total investment return in 2004 primarily reflected the favorable effect
of the significant rally in U.S. Treasury bonds in 2003, compared to a moderate weakening of the
bond market in 2004. Investment income was $85.1 million, $69.9 million and $113.8 million in
2004, 2003 and 2002, respectively. In 2004, the increase in investment income of $15.2 million, or
21.7%, was due to the combined effects of the reinvestment of cash balances into longer-duration
fixed income securities and higher earnings from equity method investees, partially offset by
interest charges relating to higher funds held under reinsurance contracts. The decrease in
investment income in 2003 of $43.9 million, or 38.6%, from 2002 was primarily the result of lower
investment yields caused by the change in investment mix within the Companys portfolio. The
proceeds from realized investment gains of $268.2 million in 2003 were held in historically
low-yielding short-term investments, pending long-term reinvestment, which occurred in 2004. The
net investment yield over the three-year period was also affected by interest charged on funds held
from reinsurers under reinsurance contracts. Funds held from reinsurers on
reinsurance contracts increased as the result of additional losses
ceded under such contracts during 2004. For further discussion of investment income, see Note
4 to the consolidated financial statements included in Item 8. Financial Statements and
Supplementary Data. Realized investment gains were $79.5 million in 2004, $268.2 million in 2003 and $41.5 million in
2002. Favorable economic conditions, primarily in the U.S. bond markets, resulted in significant
realized investment gains in 2003. Investment results in 2003 also benefited from $40.7 million of
realized investment gains generated from the sale of securities to an affiliate. For further
information on this transaction, see Note 4 to the consolidated financial statements included in
Item 8. Financial Statements and Supplementary Data. Included in realized investment gains in
2003 were $13.8 million of losses related to other than temporary impairments. No other than
temporary impairments were recorded in 2004. 57




---



##### 



Pre-tax equity in earnings of investees was $19.2 million and $2.4 million in 2004 and 2003,
respectively. The increase in equity in pre-tax earnings of investees in 2004 of $16.8 million, as
compared to 2003, was primarily attributable to higher earnings from Northbridge Financial
Corporation (Northbridge), which was purchased in the second quarter of 2003. Northbridge
contributed $18.1 million and $3.2 million to the Companys pre-tax equity in earnings of investees
in 2004 and 2003, respectively. In July 2004, as an economic hedge against a decline in the U.S. equity markets, the Company
executed short sales totaling approximately $200 million of Standard & Poors Depositary Receipts
(SPDRs). Simultaneously, the Company purchased two-year S&P Index call options (Options)
limiting the potential loss on the future purchase of the SPDRs to $40 million. The cost of the
Options was $6 million. Both the obligations to purchase the SPDRs and the Options are carried at
fair value in the consolidated financial statements and changes in the fair value of both the SPDRs
and the Options, totaling a loss of $15.2 million in 2004, are
recorded in realized investment
gains. The Company also incurs investment expense in an amount equal to the dividend earnings on
the SPDRs sold. Investment expense of $2.5 million relating to this transaction was recorded for
the year ended December 31, 2004. Included in realized investment gains are certain gains on sales of investments in Fairfax
affiliates. For further information on realized investment gains on sales of investments in
affiliates, see Note 4 to the consolidated financial statements included in Item 8. Financial
Statements and Supplementary Data. Interest and other expense (income) Interest and other expense (income) were $41.6 million, $24.6 million and $(16.1) million in 2004,
2003 and 2002, respectively. Interest expense on the Companys 10-3/8% senior notes issued in June
2003 increased to $33.2 million in 2004 from $18.7 million in 2003. Interest and other expense (income) in 2002 was principally composed of an $18.4 million gain
recognized in conjunction with the termination of the lease on the Companys home office in
Morristown, NJ, related to a fair value rent adjustment recorded at the date the Company was
acquired by Fairfax. The Company entered into a new lease arrangement effective December 31, 2002. Income tax expense The effective tax rate was 31.7%, including income taxes on equity in earnings of investees, for
the year ended December 31, 2004. The difference between the Companys effective tax rate and the
statutory rate of 35% was primarily due to the benefit of dividends received deductions. The
effective tax rate approximated the federal statutory income tax rate of 35% for the years ended
December 31, 2003 and 2002. 
 Liquidity and Capital Resources Holding company As a holding company with no direct operations, Crum & Forster Holdings Corp.s assets consist
primarily of its investments in the capital stock of its insurance subsidiaries, $16.2 million of
restricted cash and investments held in an interest escrow account for the next interest payment on
the Companys senior notes and deferred tax assets associated with holding company net operating
losses. The Company requires cash to meet its annual debt service obligations (approximately $31.1
million per annum), to pay corporate expenses and, ultimately, to repay the $300 million aggregate
principal amount of senior notes due 2013. Crum & Forsters ability to satisfy its corporate
obligations is primarily dependent on the dividend paying capacity of its subsidiaries. State
insurance laws restrict the amount of shareholder dividends that insurance companies may pay
without prior approval of regulatory authorities. For a detailed discussion of shareholder
dividend regulations, see Item 1. BusinessInsurance Regulatory Matters. The ability of the Companys insurance subsidiaries to pay dividends depends, among other things,
on such subsidiaries having positive statutory earned surplus. The Companys principal insurance
subsidiaries are US Fire and North River. On March 29, 2004, US Fire paid a cash shareholder
dividend of $80 million. Crum & Forster subsequently paid cash shareholder dividends to Fairfax
totaling $61.5 million. The remaining amount was used to pay corporate expenses including
satisfaction of an obligation to Fairfax in the amount of $7.9 million. North River did not pay
dividends in 2004, as it did not have positive statutory earned surplus at December 31, 2003.
Based on December 31, 2004 earned surplus, US Fire had capacity to pay ordinary dividends in 2005
in the amount of $88.5 million and North River had capacity to pay ordinary dividends in 2005 of $5
million. As of December 31, 2004, US Fire had statutory earned surplus of $173.1 million and North
River reported statutory earned surplus of $5 million. 58




---



##### 



On June 5, 2003, Crum & Forster Funding Corp. issued $300 million aggregate principal amount of
10-3/8% senior notes due 2013. Crum & Forster Funding Corp. was a Delaware corporation formed by
Policy Inc., an unaffiliated third party, as a special purpose entity, solely for the purpose of
issuing 10-3/8% senior notes due 2013. On June 30, 2003, Crum & Forster assumed all of Crum &
Forster Funding Corp.s outstanding obligations under such notes and the indenture governing such
notes. These notes, which bear interest payable semi-annually at 10-3/8%, mature on June 15, 2013.
The net proceeds from the offering of approximately $291 million were used to fund an interest
escrow account of approximately $63.1 million to make the first four semi-annual interest payments
on the notes and to pay a dividend to Fairfax in the amount of $217.9 million, with the remainder
used to pay certain financing costs. Under the terms of the Companys senior notes, the Company has
significant restrictions on the amount of new debt that may be incurred. Pursuant to a non-interest bearing standby credit agreement between Fairfax and the Company, under
certain circumstances the Company has the ability to borrow up to $40 million from Fairfax to meet
certain corporate obligations. Borrowings under this agreement, if any, bear no interest and are
due in June 2018. Through December 31, 2004, there have been no borrowings under this agreement. The agreements governing the bank credit facilities of Fairfax contain restrictive covenants
prohibiting Fairfax, with certain exceptions, from allowing Crum & Forster to borrow money,
encumber its property or assets, acquire or attempt to acquire direct or indirect control of
another person or asset where the acquisition is being contested or resisted, effect a
reorganization, consolidation, merger, amalgamation or other business combination with any person
other than a wholly-owned subsidiary of either Crum & Forster or Fairfax, dispose of property or
assets other than in a bona fide disposition for fair value to an arms length third party or to
Fairfax or one of its wholly-owned subsidiaries or enter into any agreements that limit the amount
of dividends or management fees payable by the Company to Fairfax. Although Crum & Forster is not
a party to the Fairfax credit facilities, it is expected, and should be assumed, that Fairfax will
not permit Crum & Forster to borrow additional funds unless it is permitted to do so pursuant to
the Fairfax credit facility. This affects the Companys ability to incur debt pursuant to bank
loans or raise funds in the capital markets. Cash used in financing activities, which relates principally to holding company activities, was
$62.5 million in 2004, primarily as the result of $61.5 million of dividends paid to Fairfax. Cash
provided by financing activities was $0.4 million and $0.3 million for 2003 and 2002 respectively.
Financing cash flows in 2003 were the result of offering costs from the issuance of the senior
notes, which were not paid until 2004. A capital contribution of $0.3 million was received from
Fairfax in 2002. Shareholders equity was $881.2 million at December 31, 2004, as compared to $906.1 million at
December 31, 2003. The decrease was primarily the result of dividends paid to Fairfax, partially
offset by current year earnings and increased net unrealized investment gains during 2004. Insurance subsidiaries At Crum & Forsters insurance subsidiaries, cash provided by operating activities primarily
consists of premium collections, reinsurance recoveries and investment income. Cash provided from
these sources is generally used for payment of losses and LAE, policy acquisition costs, operating
expenses, ceded reinsurance premiums, income taxes and shareholder dividends, when permitted.
Management believes that, for the foreseeable future, cash flows from operations at its insurance
subsidiaries will be sufficient to meet their operating liquidity needs. Cash provided by operating activities amounted to $125.3 million in 2004 and $387.5 million in 2003
and cash used by operating activities amounted to $110.5 million for 2002. The principal reasons
for the decline in cash flows from operations in 2004 were $234.5 million in proceeds received in
2003 as a result of the commutation of two reinsurance treaties (an additional $39.5 million in
proceeds from one such commutation was received in 2004) and in 2004, higher net losses paid
(partially attributable to higher catastrophe losses in 2004), partially offset by growth in
premium collections. Cash used in operating activities improved by $497.9 million in 2003 as a
result of the two aforementioned commutations, growth in gross premiums written, lower ceded
premiums under the corporate aggregate reinsurance program and higher reinsurance and other
recoveries. Cash used in investing activities during 2004 was $1,715.5 million primarily as a result of the
reinvestment of over $1 billion of cash and cash equivalents into higher yielding, longer-term
investments in the first quarter of 2004. Cash provided by investing activities in 2003 and 2002
was $1,484.9 million and $45.7 million, respectively. In 2003, sales of fixed income securities
generated proceeds, net of purchases, of $1,501.8 million, as compared to $105.8 million in 2002 as
the result of favorable economic conditions, primarily in the U.S. bond markets, in 2003. The
proceeds from such sales were invested in low-yielding short-term investments until reinvested in
the first quarter of 2004. 59




---



##### 



In July 2004, the Company pledged cash and U.S. Treasury securities as collateral for the Companys
obligation to purchase SPDRs (see Investment Results). At December 31, 2004, the fair value of
such collateral was $277.9 million. On January 21, 2005, the Company changed the custodian of
these assets to satisfy state regulatory requirements. The new custodian required that the
collateral be increased to approximately $327 million. The aggregate carrying value of the Companys investment portfolio, including cash and cash
equivalents, was $3.2 billion, $3.2 billion and $2.4 billion at December 31, 2004, 2003 and 2002,
respectively. The increase in invested assets in 2003 of $0.8 billion was partially the result
of operating cash flows of $387.5 million in 2003. Favorable market movements in the fixed income
and equity securities portfolio also contributed to the increase in invested assets. For detailed
information on the Companys investment portfolio, see Note 4 to the consolidated financial
statements included in Item 8. Financial Statements and Supplementary Data. The Companys investment portfolio has exposure to credit risk primarily related to fixed income
securities. Management attempts to control this exposure by emphasizing investment grade credit
quality in the fixed income securities purchased. Management believes that this concentration in
investment grade securities reduces the Companys exposure to credit risk to an acceptable level.
As of December 31, 2004 and 2003, 95.6% and 74.9% of the Companys fixed income portfolio consisted
of securities rated investment grade, respectively. The higher proportion of investment grade
securities at December 31, 2004 was due primarily to the reinvestment of more than $1 billion of
cash and cash equivalents principally in U.S. Treasury securities in March 2004. Fixed income
securities and cash and cash equivalents of $292.4 million and $171.8 million were on deposit with
various state regulatory authorities at December 31, 2004 and 2003, respectively, as required by
insurance laws. US Fire, North River, CF Indemnity and CF Insurance have each entered into master securities
repurchase agreements that allow these companies to raise funds through repurchase arrangements
with Fairfax. Under these agreements, US Fire and North River may raise a maximum of $100 million
at any one time and CF Indemnity and CF Insurance are limited to $5 million each. These
arrangements have not been utilized since 2000. The Companys combined policyholders surplus and statutory operating leverage (the ratio of
statutory net premiums written to end of year surplus) are summarized below: Years Ended December 31,(dollars in millions)
    
    2004
    
    
    2003
    
    
    2002Combined policyholders surplus
    
    $
    1,206.5
    
    
    $
    1,107.4
    
    
    $
    856.4Statutory operating leverage
    
    
    0.76x
    
    
    
    0.80x
    
    
    
    0.78x
 The Companys combined statutory policyholders surplus was $1,206.5 million at December 31, 2004,
as compared to $1,107.4 million at December 31, 2003. Statutory surplus is an important measure
utilized by management, regulators and rating agencies to assess the Companys ability to support
its business operations. Effective March 30, 2004, the State of Delaware enacted legislation to
adopt certain insurance accounting standards promulgated by the NAIC. The adoption of such
standards resulted in an increase in the Companys combined statutory policyholders surplus of
$28.1 million, principally relating to the recognition of goodwill. The increase in the Companys
combined statutory surplus was primarily attributable to statutory net income of $74.6 million and
unrealized investment gains of $75.6 million, partially offset by a dividend payment of $80
million. The Companys ratio of statutory net premiums written to surplus, a measure of operating
leverage, remained relatively stable in 2004, 2003 and 2002 and, according to data from A.M. Best,
was below the property and casualty commercial lines sector ratios of 1.1x, 1.2x and 1.3x,
respectively. 
 Contractual Obligations Estimates of future payments pursuant to the Companys contractual obligations as of December 31,
2004 are summarized as follows: (dollars in millions)
    
    Total
    
    
    2005
    
    
2006
to2007
    
    
    2008 to2009
    
    
    2010 andbeyondUnpaid losses and LAE
    
    $
    3,356.2
    
    
    $
    739.9
    
    
    $
    858.7
    
    
    $
    484.2
    
    
    $
    1,273.4Long-term debt, including interest payments
    
    
    564.6
    
    
    
    31.1
    
    
    
    62.3
    
    
    
    62.3
    
    
    
    408.9Operating leases
    
    
    87.3
    
    
    
    11.9
    
    
    
    18.1
    
    
    
    11.9
    
    
    
    45.4Short-sale obligations
    
    
    217.4
    
    
    
    -
    
    
    
    217.4
    
    
    
    -
    
    
    
    -Other contractual obligations
    
    
    31.7
    
    
    
    7.7
    
    
    
    5.6
    
    
    
    12.8
    
    
    
    5.6Total contractual obligations
    
    $
    4,257.2
    
    
    $
    790.6
    
    
    $
    1,162.1
    
    
    $
    571.2
    
    
    $
    1,733.3
 60




---



##### 



Unpaid losses and loss adjustment expenses The liability for unpaid losses and LAE includes reserves for unpaid reported losses and LAE and
for IBNR losses. The amounts shown above represent managements best estimate of the expected
timing of payments for losses and LAE given information currently available. Actual results may
differ significantly from these estimates. For additional information on the Companys unpaid
losses and LAE, see Item 1. BusinessReserves, Item 1. BusinessRisk Factors and Critical
Accounting Policies and EstimatesUnpaid losses and LAE. Long-term debt, including interest payments The Company has outstanding $300 million aggregate principal amount of 10-3/8% senior notes due
2013. Interest payments on such notes are approximately $31.1 million per year. For additional
information on the Companys senior notes, see Note 8 to the consolidated financial statements
included in Item 8. Financial Statements and Supplementary Data and Liquidity and Capital
ResourcesHolding Company. Operating leases The Company and its subsidiaries lease office space and equipment under long-term leases expiring
through the year 2022. The amounts above represent the minimum contractual rentals for such
operating leases as of December 31, 2004. For more information on the Companys operating leases,
see Note 12 to the consolidated financial statements included in Item 8. Financial Statements and
Supplementary Data. Short-sale obligations In July 2004, the Company executed short sales totaling approximately $200 million of SPDRs. The
Company has no contractual timeframe within which it must purchase the SPDRs it previously sold.
The table above represents managements best estimate of the timing of the purchase of the SPDRs.
The actual purchase date may differ from that estimate. For additional information on the SPDRs
transaction, see Investment Results and Note 4 to the consolidated financial statements included
in Item 8. Financial Statements and Supplementary Data. Other contractual obligations Included in other contractual obligations are expected contributions to health care and life
insurance benefit plans sponsored by the Company, payments under certain incentive and bonus plans
and payments under an information technology services agreement. The health care and life insurance benefit obligations represent managements best estimate of the
ultimate payments required to provide such benefits and such payments differ from the obligation
recognized on the balance sheet by approximately $1.7 million. The amounts included above for such
obligations represents managements best estimate of the timing of future payments. Actual
payments may differ significantly from these estimates. Although the Company provides various
benefit plans, programs and arrangements to its employees, the Company has reserved the right to
amend, modify or terminate these plans, programs or arrangements at any time, subject to the terms
and conditions of such plans, programs or arrangements and applicable law. For more information on
the Companys post-retirement benefit plans, see Note 11 to the consolidated financial statements
included in Item 8. Financial Statements and Supplementary Data. The incentive and bonus plans included herein are compensation arrangements for certain of the
Companys executives. These agreements are discussed further in Item 11. Executive Compensation.
The amounts shown above represent managements best estimate of the liabilities under these plans.
Actual payments could be materially different from those estimates. The Companys obligation on the information technology services agreement was taken without
consideration of renewal provisions. For additional information on this agreement, see Note 12 to
the consolidated financial statements included in Item 8. Financial Statements and Supplementary
Data. 
 Regulatory Issues For discussion of regulatory issues, see Item 1. BusinessInsurance Regulatory Matters. 61




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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is principally exposed to three types of market risk related to investment operations.
These risks are interest rate risk, equity price risk and foreign currency exchange rate risk. The
term market risk refers to the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, equity prices and foreign currency exchange rates. All market
sensitive instruments discussed here relate to the Companys investment assets, which are
classified as available-for-sale. Computations of the prospective effects of hypothetical interest rate, equity price and foreign
exchange rate changes shown below are based on numerous assumptions, including the maintenance of
the existing level and composition of fixed income, equity and foreign security assets, and should
not be relied on as indicative of future results. Certain shortcomings are inherent in the methods
of analyses presented in the computations of the fair value of fixed rate instruments and in the
computations of the impact of potential market movements on equity securities and foreign
securities. Actual values may differ from those projections presented should market conditions
vary from assumptions used in the calculation of the fair value of individual securities,
including, but not limited to, non-parallel shifts in the term structure of interest rates,
changing individual issuer credit spreads and non-parallel movements of foreign exchange rates or
equity prices. 
 Interest Rate Risk As of December 31, 2004, Crum & Forsters investment portfolio included $2 billion of fixed income
securities that are subject to interest rate risk. Fluctuations in interest rates have a direct
impact on the market values of these securities. As interest rates rise, market values of fixed
income portfolios fall, and vice versa. The table below displays the potential impact of market
value fluctuations on the Companys fixed income portfolio based on parallel 200 basis point shifts
in interest rates up and down, in 100 basis point increments. This analysis was performed on each
security individually. At December 31, 2004Fair Valueof Fixed Income
    
    
    Hypothetical
    
    
    Hypothetical(dollars in millions)
    
    Portfolio
    
    
    $ Change
    
    
    % Change200 basis point decline.
    
    $
    2,573.4
    
    
    $
    533.6
    
    
    26.2
    %100 basis point decline.
    
    $
    2,294.0
    
    
    $
    254.2
    
    
    
    12.5%Base scenario
    
    $
    2,039.8
    
    
    $
    -
    
    
    
    -%100 basis point increase
    
    $
    1,828.1
    
    
    $
    (211.7
    )
    
    
    (10.4)%200 basis point increase
    
    $
    1,646.8
    
    
    $
    (393.0
    )
    
    
    (19.3)%
 As of December 31, 2004 and December 31, 2003, a hypothetical 100 basis point increase in interest
rates would have resulted in a decrease of $211.7 and $37.5 million respectively, in the value of
the fixed income portfolio and a hypothetical 100 basis point decline in interest rates would have
resulted in an increase of $254.2 million and $44.9 million respectively. The increase in the
Companys exposure to interest rates was primarily due to the increase in the total fixed income
portfolio from $637 million at December 31, 2003 to $2,039.8 million at December 31, 2004 as the
result of the reinvestment of over $1 billion of short-term, low-yield investments into higher
yielding fixed income securities in March of 2004. 
 Equity Price Risk As of December 31, 2004, the Companys investment portfolio included $455.2 million of equity
securities. Marketable equity securities, which represented approximately 13.7% of the Companys
investment portfolio, including cash and cash equivalents, are exposed to equity price risk,
defined as the potential for loss in market value owing to declines in equity prices. A
hypothetical 10% decline in the price of each of these marketable equity securities would result in
a total decline of $44.1 million in the fair value of the equity portfolio at December 31, 2004.
As of December 31, 2003, a hypothetical 10% decline in the price of marketable equity securities
would have resulted in a total decline of $30.1 million in the fair value of the equity portfolio.
The increase in the Companys exposure to equity price risk is primarily the result of the increase
in the value of the equity portfolio from $311.3 million at December 31, 2003 to $455.2 million at
December 31, 2004. In July 2004, as an economic hedge against a decline in the U.S. equity markets, the Company
executed short sales totaling approximately $200 million of SPDRs. Simultaneously, the Company
purchased two-year S&P Index call options, limiting the potential loss on the future purchase of
the SPDRs to $40 million. A hypothetical 10% decrease in the price of the SPDRs would result in
approximately a $20 million decrease in the obligations to purchase the SPDRs. The Company expects
that a decline in the SPDRs obligations will offset losses in the equity portfolio in the event of a decline in the U.S.
equity markets. On January 25, 2005, the Company executed a short sale totaling an additional $100
million of SPDRs. In connection with this transaction, the Company also purchased a two-year S&P
Index call option, limiting the potential loss on the future purchase of these SPDRs to $20
million. 62




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Foreign Currency Exchange Rate Risk Through investments in foreign securities, the Company is exposed to foreign currency exchange rate
risk. Foreign currency exchange rate risk is the potential for loss in value owing to a
decline in the U.S. dollar value of these investments due to a decline in the exchange rate of the
foreign currency in which these assets are denominated. As of December 31, 2004, the Companys
total exposure to foreign denominated securities in U.S. dollar terms was approximately $348.8
million, or 10.8%, of the Companys total investment portfolio, including cash and cash
equivalents. The primary foreign currency exposures were in Canadian dollar denominated and Indian
Rupee denominated securities, which represented 3.3% and 2.9% of the Companys investment
portfolio, including cash and cash equivalents, respectively. The potential impact of a
hypothetical 10% decline in each of the foreign exchange rates on the valuation of investment
assets denominated in those respective foreign currencies would result in a total decline in the
fair value of the total investment portfolio of $34.9 million at December 31, 2004. As of December
31, 2003, a hypothetical 10% decline in foreign currency exchange rates would have resulted in a
total decline of $26.8 million in the fair value of the total investment portfolio. The increase
in the Companys exposure to foreign exchange rate risk is the result of the increase in foreign
denominated securities. 63




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##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 
 PageNumberINDEX TO CONSOLIDATED FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm
    
    
    65Consolidated Balance Sheets at December 31, 2004 and 2003
    
    
    66Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002
    
    
    67Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2004, 2003 and 2002
    
    
    68Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2004, 2003 and 2002
    
    
    69Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
    
    
    70Notes to Consolidated Financial Statements
    
    
    71
 64




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##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of
Directors and Shareholder of
Crum & Forster Holdings Corp. and Subsidiaries: In our opinion, the accompanying consolidated balance sheets and the related consolidated
statements of income, of shareholders equity, of comprehensive income and of cash flows present
fairly, in all material respects, the financial position of Crum & Forster Holdings Corp., an
indirect wholly-owned subsidiary of Fairfax Financial Holdings Limited, and its subsidiaries at
December 31, 2004 and 2003, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2004 in conformity with accounting principles
generally accepted in the United States of America. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform our audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion. As discussed in Note 3 to the consolidated financial statements, effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets. PricewaterhouseCoopers LLP
New York, New York
March 4, 2005 65




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##### 



CRUM & FORSTER HOLDINGS CORP. 
 CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) At December 31,2004
    
    
    2003ASSETSInvestments:Fixed income securities, at fair value (amortized cost of $2,062,246 and
$620,700 in 2004 and 2003, respectively)
    
    $
    2,039,846
    
    
    $
    636,979Equity securities, at fair value (cost of $378,598 and $273,457 in 2004 and
2003, respectively)
    
    
    455,153
    
    
    
    311,324Other invested assets
    
    
    293,406
    
    
    
    138,208Total investments
    
    
    2,788,405
    
    
    
    1,086,511Cash and cash equivalents
    
    
    429,205
    
    
    
    2,081,878Assets pledged for short-sale obligations
    
    
    277,899
    
    
    
    -Premiums receivable
    
    
    263,420
    
    
    
    276,618Reinsurance recoverable
    
    
    1,609,013
    
    
    
    1,516,112Reinsurance recoverable from affiliates
    
    
    195,799
    
    
    
    164,354Prepaid reinsurance premiums
    
    
    35,142
    
    
    
    39,351Deferred income taxes
    
    
    173,957
    
    
    
    163,379Deferred policy acquisition costs
    
    
    75,006
    
    
    
    71,644Other assets
    
    
    183,795
    
    
    
    187,551Total assets
    
    $
    6,031,641
    
    
    $
    5,587,398LIABILITIESUnpaid losses and loss adjustment expenses
    
    $
    3,356,213
    
    
    $
    3,178,166Unearned premiums
    
    
    528,592
    
    
    
    522,210Funds held under reinsurance contracts
    
    
    277,296
    
    
    
    225,632Accounts payable and other liabilities
    
    
    255,772
    
    
    
    283,494Deferred income on retroactive reinsurance
    
    
    223,360
    
    
    
    180,524Short-sale obligations
    
    
    217,378
    
    
    
    -Long-term debt
    
    
    291,841
    
    
    
    291,257Total liabilities
    
    
    5,150,452
    
    
    
    4,681,283SHAREHOLDERS EQUITYCommon stock, $0.01 par value; 1,000 shares authorized; 100 issued and outstanding
    
    
    -
    
    
    
    -Additional paid-in capital
    
    
    740,993
    
    
    
    740,993Accumulated other comprehensive income, net of tax
    
    
    55,875
    
    
    
    43,496Retained earnings
    
    
    84,321
    
    
    
    121,626Total shareholders equity
    
    
    881,189
    
    
    
    906,115Total liabilities and shareholders equity
    
    $
    6,031,641
    
    
    $
    5,587,398
 The notes are an integral part of the consolidated financial statements. 66




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##### 



CRUM & FORSTER HOLDINGS CORP. 
 CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands) Years Ended December 31,2004
    
    
    2003
    
    
    2002REVENUESPremiums earned
    
    $
    907,709
    
    
    $
    768,872
    
    
    $
    609,512Investment income
    
    
    85,101
    
    
    
    69,902
    
    
    
    113,840Realized investment gains, including $40,725 of gains in 2003
from the sale of Hub International Limited securities to an
affiliate
    
    
    79,537
    
    
    
    268,160
    
    
    
    41,485Total revenues
    
    
    1,072,347
    
    
    
    1,106,934
    
    
    
    764,837EXPENSESLosses and loss adjustment expenses
    
    
    761,512
    
    
    
    652,334
    
    
    
    460,458Policy acquisition costs
    
    
    123,174
    
    
    
    98,683
    
    
    
    76,329Other underwriting expenses
    
    
    129,813
    
    
    
    126,578
    
    
    
    118,153Interest expense
    
    
    33,159
    
    
    
    18,677
    
    
    
    -Other expense (income), net
    
    
    8,456
    
    
    
    5,870
    
    
    
    (16,150
    )Total expenses
    
    
    1,056,114
    
    
    
    902,142
    
    
    
    638,790Income before income taxes, equity in earnings of investees and
cumulative effect of a change in accounting principle
    
    
    16,233
    
    
    
    204,792
    
    
    
    126,047Income tax expense
    
    
    4,516
    
    
    
    70,614
    
    
    
    43,136Income before equity in earnings of investees and cumulative effect
of a change in accounting principle
    
    
    11,717
    
    
    
    134,178
    
    
    
    82,911Equity in earnings of investees, net of tax
    
    
    12,478
    
    
    
    1,567
    
    
    
    -Income before cumulative effect of a change in accounting principle
    
    
    24,195
    
    
    
    135,745
    
    
    
    82,911Cumulative effect of a change in accounting principle, net of tax
    
    
    -
    
    
    
    -
    
    
    
    64,809NET INCOME
    
    $
    24,195
    
    
    $
    135,745
    
    
    $
    147,720
 The accompanying notes are an integral part of the consolidated financial statements. 67




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##### 



CRUM & FORSTER HOLDINGS CORP. 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (Dollars in thousands) Years Ended December 31,2004
    
    
    2003
    
    
    2002COMMON STOCKBalance, beginning and end of year
    
    $
    -
    
    
    $
    -
    
    
    $
    -ADDITIONAL PAID-IN CAPITALBalance, beginning of year
    
    
    740,993
    
    
    
    748,735
    
    
    
    748,424Capital contribution
    
    
    -
    
    
    
    1,076
    
    
    
    311Adjustment for acquisition of affiliates net assets
    
    
    -
    
    
    
    (8,818
    )
    
    
    -Balance, end of year
    
    
    740,993
    
    
    
    740,993
    
    
    
    748,735ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF TAXBalance, beginning of year
    
    
    43,496
    
    
    
    26,663
    
    
    
    (84,865
    )Unrealized investment gains and losses, net of
transfers to realized investment gains and losses
    
    
    7,344
    
    
    
    11,608
    
    
    
    111,392Foreign currency translation
    
    
    5,035
    
    
    
    5,225
    
    
    
    136Balance, end of year
    
    
    55,875
    
    
    
    43,496
    
    
    
    26,663RETAINED EARNINGSBalance, beginning of year
    
    
    121,626
    
    
    
    203,766
    
    
    
    56,046Net income
    
    
    24,195
    
    
    
    135,745
    
    
    
    147,720Dividends to shareholder
    
    
    (61,500
    )
    
    
    (217,885
    )
    
    
    -Balance, end of year
    
    
    84,321
    
    
    
    121,626
    
    
    
    203,766TOTAL SHAREHOLDERS EQUITY
    
    $
    881,189
    
    
    $
    906,115
    
    
    $
    979,164
 The accompanying notes are an integral part of the consolidated financial statements. 68




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##### 



CRUM & FORSTER HOLDINGS CORP. 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) Years Ended December 31,2004
    
    
    2003
    
    
    2002NET INCOME
    
    $
    24,195
    
    
    $
    135,745
    
    
    $
    147,720Change in components of other comprehensive income for the
year, before tax:Unrealized investment gains and losses
    
    
    11,297
    
    
    
    17,630
    
    
    
    171,995Foreign currency translation
    
    
    7,746
    
    
    
    8,039
    
    
    
    209Other comprehensive income for the year, before tax
    
    
    19,043
    
    
    
    25,669
    
    
    
    172,204Deferred income tax expense for the year:Deferred income tax expense from unrealized investment gains
and losses
    
    
    (3,953
    )
    
    
    (6,022
    )
    
    
    (60,603
    )Deferred income tax expense from foreign currency translation
    
    
    (2,711
    )
    
    
    (2,814
    )
    
    
    (73
    )Total deferred income tax expense for the year
    
    
    (6,664
    )
    
    
    (8,836
    )
    
    
    (60,676
    )Other comprehensive income for the year, net of tax
    
    
    12,379
    
    
    
    16,833
    
    
    
    111,528COMPREHENSIVE INCOME
    
    $
    36,574
    
    
    $
    152,578
    
    
    $
    259,248
 The accompanying notes are an integral part of the consolidated financial statements 69




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##### 



CRUM & FORSTER HOLDINGS CORP. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Years Ended December 31,2004
    
    
    2003
    
    
    2002OPERATING ACTIVITIESNet income
    
    $
    24,195
    
    
    $
    135,745
    
    
    $
    147,720Adjustments to reconcile net income to net cash from operating activities:Net accretion of discount on fixed income securities
    
    
    (5,143
    )
    
    
    (21,189
    )
    
    
    (30,587
    )Realized investment gains
    
    
    (79,537
    )
    
    
    (268,160
    )
    
    
    (41,485
    )Earnings of equity method investees
    
    
    (20,229
    )
    
    
    (11,796
    )
    
    
    (9,939
    )Depreciation and amortization
    
    
    4,649
    
    
    
    6,412
    
    
    
    9,031Deferred income tax (benefit) expense
    
    
    (17,244
    )
    
    
    24,888
    
    
    
    36,138Cumulative effect of a change in accounting principle
    
    
    -
    
    
    
    -
    
    
    
    (64,809
    )Other non-cash net income adjustments
    
    
    26,274
    
    
    
    6,541
    
    
    
    4,144Changes in:Premiums receivable
    
    
    11,698
    
    
    
    (58,448
    )
    
    
    (418
    )Reinsurance recoverable
    
    
    (53,618
    )
    
    
    446,164
    
    
    
    13,390Prepaid reinsurance premiums
    
    
    4,209
    
    
    
    19,237
    
    
    
    (16,234
    )Deferred policy acquisition costs
    
    
    (3,362
    )
    
    
    (17,613
    )
    
    
    (11,711
    )Other assets
    
    
    42,074
    
    
    
    7,049
    
    
    
    70,259Unpaid losses and loss adjustment expenses
    
    
    178,047
    
    
    
    (56,935
    )
    
    
    (202,390
    )Unearned premiums
    
    
    6,382
    
    
    
    102,715
    
    
    
    76,195Accounts payable and other liabilities
    
    
    6,925
    
    
    
    72,859
    
    
    
    (89,762
    )Net cash from operating activities
    
    
    125,320
    
    
    
    387,469
    
    
    
    (110,458
    )INVESTING ACTIVITIESPurchases of fixed income securities
    
    
    (3,084,984
    )
    
    
    (3,742,272
    )
    
    
    (490,279
    )Proceeds from sales of fixed income securities
    
    
    1,412,630
    
    
    
    5,244,052
    
    
    
    596,097Proceeds from maturities of fixed income securities
    
    
    190,209
    
    
    
    38,800
    
    
    
    12,550Purchases of equity securities
    
    
    (266,904
    )
    
    
    (192,814
    )
    
    
    (77,486
    )Proceeds from sales of equity securities
    
    
    166,298
    
    
    
    101,428
    
    
    
    27,278Purchases of other invested assets
    
    
    (141,410
    )
    
    
    (27,615
    )
    
    
    (24,011
    )Proceeds from sales of other invested assets
    
    
    12,232
    
    
    
    64,528
    
    
    
    3,506Proceeds from short-sale obligations
    
    
    199,746
    
    
    
    -
    
    
    
    -Cash pledged for short-sale obligations
    
    
    (200,748
    )
    
    
    -
    
    
    
    -Purchases of fixed assets
    
    
    (2,588
    )
    
    
    (1,240
    )
    
    
    (1,948
    )Net cash from investing activities
    
    
    (1,715,519
    )
    
    
    1,484,867
    
    
    
    45,707FINANCING ACTIVITIESDividends to shareholder
    
    
    (61,500
    )
    
    
    (217,885
    )
    
    
    -Deferred financing costs
    
    
    (974
    )
    
    
    (10,635
    )
    
    
    -Issuance of long-term debt
    
    
    -
    
    
    
    290,955
    
    
    
    -Interest escrow deposit
    
    
    -
    
    
    
    (63,115
    )
    
    
    -Capital contributions
    
    
    -
    
    
    
    1,076
    
    
    
    311Net cash from financing activities
    
    
    (62,474
    )
    
    
    396
    
    
    
    311Net change in cash and cash equivalents
    
    
    (1,652,673
    )
    
    
    1,872,732
    
    
    
    (64,440
    )Cash and cash equivalents, beginning of year
    
    
    2,081,878
    
    
    
    209,146
    
    
    
    273,586Cash and cash equivalents, end of year
    
    $
    429,205
    
    
    $
    2,081,878
    
    
    $
    209,146SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    $
    31,404
    
    
    $
    16,427
    
    
    $
    -Cash paid to parent for income taxes
    
    $
    47,970
    
    
    $
    27,506
    
    
    $
    6,435
 The accompanying notes are an integral part of the consolidated financial statements. 70




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  1.
    Organization and Basis of PresentationCrum & Forster Holdings Corp. (the Company or Crum & Forster) is a Delaware holding company,
which is 100% owned by Fairfax Inc., a Wyoming holding company. Fairfax Inc. is wholly owned by
FFHL Group Ltd., a Canadian holding company, which is owned by Fairfax Financial Holdings
Limited (Fairfax), a Canadian financial services holding company, which is publicly traded on
the Toronto Stock Exchange and on the New York Stock Exchange under the symbol FFH. The
Company, through its subsidiaries, provides a full range of commercial property and casualty
insurance distributed through an independent producer force located across the United States.Crum & Forster was established for the purpose of holding the capital stock of Crum & Forster
Holding Inc. (Holding), another wholly-owned subsidiary of Fairfax Inc., and had no operations
prior to becoming the parent of Holding. On June 5, 2003, a merger of entities under common
control occurred at historical cost, whereby the capital stock of Holding was contributed to
Crum & Forster and, accordingly, Crum & Forster became the parent of Holding. The consolidated
financial statements of Holding and its subsidiaries have become the Companys historical
financial statements.These consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America (GAAP) and include the accounts
of the Company, Holding and their wholly-owned subsidiaries, including United States Fire
Insurance Company (US Fire), The North River Insurance Company (North River), Crum & Forster
Indemnity Company (CF Indemnity), Crum and Forster Insurance Company (CF Insurance) and Crum
& Forster Underwriters Co. of Ohio (CF Underwriters). Effective July 1, 2004, CF Underwriters
was merged into US Fire. US Fire owns 100% of the stock of Crum & Forster Specialty Insurance
Company. North River owns 100% of the stock of Seneca Insurance Company, Inc. and its
subsidiaries. All material intercompany accounts and transactions have been eliminated in
consolidation.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 amounts in the Companys prior year
consolidated financial statements have been reclassified to conform to the 2004 presentation.2.
    Summary of Significant Accounting PoliciesSignificant accounting policies followed by the Company are summarized below:InvestmentsThe Companys fixed income and equity securities are categorized as available-for-sale and are
carried at their fair value based primarily on quoted market prices. Unrealized gains or losses
on the Companys investments, net of applicable income taxes, are included in other
comprehensive income.Unrealized losses that are deemed other than temporary are charged to operations. Recognition
of impairment losses for declines in value of fixed income and equity securities
attributable to issuer-specific events are based upon all relevant facts and circumstances for
each investment. Factors considered by management include, but are not limited to, current and
expected future market and economic conditions, the impact of issuer-specific events, the nature
of the investment, the number of investment positions with losses, the severity and duration of
the impairment and the volatility of the securitys market price. For fixed income investments
with unrealized losses due to market conditions or industry-related events, management also
considers the Companys ability and intent to hold the investments to maturity, or for a period
of time sufficient to allow a market recovery, in the process of evaluating whether a security
with an unrealized loss has suffered an other than temporary decline.Investments in entities that are consolidated subsidiaries of Fairfax, but are less than 50%
owned by the Company, are carried under the equity method of accounting. For all other
investments, the Company determines if it exercises significant influence based upon its
ownership of shares without consideration of the ownership interest of other Fairfax affiliates.
The Companys pro-rata share of earnings of equity method investees is recorded in the
consolidated statements of income. Earnings of investment companies and similar equity method
investees are reported in investment income and earnings of other equity method investees are
reported as equity in earnings of investees, net of tax. Dividends received from equity method
investees reduce the carrying value of the investment. 71




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  Realized investment gains or losses are determined on the basis of average cost. Investment
income is recorded as earned.Cash and cash equivalentsThe Company considers highly liquid investments purchased with a maturity of three months or
less to be cash equivalents.Deferred policy acquisition costsCertain costs, consisting of commissions and premium taxes incurred in the acquisition of policy
premiums, are deferred and amortized over the period in which the related premiums are earned.
Deferred policy acquisition costs are limited to their estimated realizable value, which
considers anticipated losses and loss adjustment expenses on the related policies and estimated
remaining costs of servicing the contracts. Realizability is determined without considering
investment income.GoodwillGoodwill is subject to an assessment of impairment on an annual basis, or more frequently under
certain circumstances. The assessment of impairment involves a two-step process whereby an
initial assessment for potential impairment is performed, followed by a measurement of the
impairment, if any. Impairments are charged to operations in the period in which the impairment
occurs. The Companys annual impairment test in 2004 and 2003 resulted in a conclusion that no
goodwill impairment has occurred. Goodwill is included in other assets on the consolidated
balance sheets.Unpaid losses and loss adjustment expensesThe estimated liability for unpaid losses and loss adjustment expenses (LAE) includes
estimates of the ultimate settlement value of reported claims, incurred but not reported claims,
future expenses to be incurred in the settlement of claims, and claim recoveries. These
estimates are determined based on the Companys loss experience, as well as consideration of
industry experience and current trends and conditions. The estimated liability for unpaid
losses and LAE is an estimate and future loss payments could differ significantly from initial
estimates. The methods of determining such estimates and the resulting estimated liability are
regularly reviewed and updated. Changes in the estimated liability for unpaid losses and LAE
are reflected in income in the period in which such changes are required.The Company maintains a reserve for uncollectible loss deductibles. This reserve includes both
specific allowances for probable uncollectible amounts and a non-specific reserve determined
principally on the basis of past collection experience. As of December 31, 2004 and 2003, the
amount of the reserve was $5,738 and $10,960, respectively.ReinsuranceThe Company reinsures, in the ordinary course of business, certain risks with other insurance
and reinsurance companies (reinsurers). These arrangements provide the means for greater
diversification of business and serve to limit the net loss potential of unusually severe or
frequent losses. The ceding of insurance does not discharge the original insurer from its
primary liability to its policyholder; however, the reinsurer that accepts the risk assumes an
obligation to the original insurer. The ceding insurer retains a contingent liability with
respect to reinsurance ceded to the extent that any reinsuring company might not be able, or
willing, to meet its obligations. Reinsurance recoverable includes the balances due from
reinsurers for paid and unpaid losses and LAE that are expected to be recovered from reinsurers.
Reserves for uncollectible reinsurance are determined based upon regular reviews of the
financial condition of reinsurers and assessments of other available information. Prepaid
reinsurance premiums represent the portion of premiums ceded to reinsurers applicable to the
unexpired terms of the ceded contracts.For retroactive reinsurance contracts, the excess of
reinsurance recoverable due from reinsurers pursuant to the
contracts over premiums paid for such reinsurance coverage is deferred and amortized as a
reduction to losses and LAE over the expected period of recovery using the interest method. 72




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  Funds held under reinsurance contractsPremiums withheld from reinsurers pursuant to the related reinsurance contracts are included in
funds held under reinsurance contracts on the consolidated balance sheets. Interest accrues on
these funds in accordance with the contract terms and is included as a reduction to investment
income on the consolidated statements of income. Interest on funds held under reinsurance
contracts is charged at rates between 7.0% and 7.5% per annum as specified in the related
reinsurance contract.Income taxesThe Company participates in tax sharing agreements that provide for the inclusion of the Company in
the consolidated federal income tax returns of Fairfax Inc. (the Fairfax Group), as well as the
consolidated or combined state income or franchise tax returns of Fairfax Inc. Subject to the tax
sharing agreements discussed in this paragraph, every member of the Fairfax Group is severally
liable for the federal income tax liabilities of the Fairfax Group, and may be liable under similar
rules for state income or franchise taxes of the entire group. Under the tax sharing agreements,
Crum & Forster and its insurance subsidiaries make payments to Fairfax Inc. equal to the amounts of
federal income taxes that each company would pay, subject to some adjustments, if they each had
filed their own separate federal income tax returns, and their shares of any state income or
franchise taxes. Thus, although the Company cannot currently offset its losses (including amounts
arising from interest expense on its senior notes) or losses of one of its subsidiaries against
income of another in computing the federal income tax payments to Fairfax Inc. under the tax
sharing agreements, Fairfax Inc. has agreed to amend the tax sharing agreements at such time and in
such a way as to permit the Company to utilize the holding company net operating losses prior to
their expiration.Deferred income taxes are provided for temporary differences between the financial statement and
tax bases of assets and liabilities. Such differences relate principally to deferred income on
retroactive reinsurance, unpaid losses and LAE, unearned premiums, net operating loss
carryforwards, unrealized net appreciation of investments, deferred policy acquisition costs and
deferred benefit plan payments. A valuation allowance against deferred tax assets is recorded
if it is more likely than not that all, or some portion of, the benefits related to deferred tax
assets will not be realized.PremiumsInsurance premiums are earned ratably over the terms of the related policies after deductions
for premiums ceded to reinsurers. Unearned premium reserves are established for the unexpired
portion of policy premiums. Premiums are accrued for retrospectively rated policies and on
policies subject to audit based on estimates throughout the contract or policy term. The
reserve for uncollectible premiums includes both specific allowances for probable uncollectible
amounts and a non-specific reserve determined principally on the basis of past collection
experience. As of December 31, 2004 and 2003, the amount of the reserve was $23,859 and
$22,359, respectively.Foreign currencyFinancial statements of foreign investees accounted for using the equity method are translated
into U.S. dollars in accordance with Statement of Financial Accounting Standards (SFAS) No.
52, Foreign Currency Translation. Under SFAS No. 52, investments in entities accounted for
under the equity method are translated into U.S. dollars at the rate of exchange in effect at
the date of the transaction and related equity earnings are translated at the average rate in
effect during this period. At each balance sheet date, the carrying amounts are translated into
U.S. dollars at the rate in effect at the balance sheet date and any translation gains or losses
are recorded in other comprehensive income.DerivativesThe Company periodically purchases certain derivative contracts for its investment portfolio
consistent with its overall investment strategy. Such derivative contracts are accounted for in
accordance with SFAS No. 133, Derivatives and Hedging, as amended, which requires derivatives
to be recorded at fair value on the balance sheet. Changes in fair value are recognized in the
statement of income, unless the derivative is designated, and effective, as a cash flow hedge.Accumulated other comprehensive income, net of taxAccumulated other comprehensive income includes unrealized investment gains and losses on the
Companys available-for-sale securities and foreign currency translation gains and losses
arising from the translation of financial statements of equity investees denominated in foreign
currencies. As of December 31, 2004 and 2003, unrealized investment gains included in
accumulated other comprehensive income were $45,479 and $38,135, respectively. As of December
31, 2004 and 2003, foreign currency translation gains were $10,396 and $5,361, respectively. 73




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  3.
    Accounting ChangesIn June 2001, the Financial Accounting Standards Board issued SFAS No. 142, Goodwill and Other
Intangible Assets, which addresses accounting and reporting for intangible assets. SFAS 142
eliminated the requirement for systematic amortization and instead imposes impairment testing,
at least annually, to determine whether the fair value of the reporting unit to which the
goodwill is ascribed supports its continued recognition. The acquisition of the Company by
Fairfax in 1998 resulted in the recognition of negative goodwill as a result of net assets
acquired in excess of the purchase price of $97,800. Under SFAS No. 142, the remaining
unamortized negative goodwill of $64,809 at December 31, 2001 was recognized as a cumulative
effect of a change in accounting principle on the consolidated statement of income in 2002.4.
    InvestmentsThe aggregate carrying value of the Companys investment portfolio was $3,217,610 and $3,168,389
at December 31, 2004 and 2003, respectively, and is comprised of available-for-sale securities,
other invested assets and cash and cash equivalents.Available-for-sale securitiesInvestments in available-for-sale fixed income and equity securities are summarized as below: At December 31, 2004Cost orAmortized
    
    
    GrossUnrealized
    
    
    GrossUnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed income securities:United States government and government agencies
and authorities
    
    $
    1,754,181
    
    
    $
    7,128
    
    
    $
    43,712
    
    
    $
    1,717,597States, municipalities and political subdivisions
    
    
    6,448
    
    
    
    187
    
    
    
    -
    
    
    
    6,635Public utilities
    
    
    5,072
    
    
    
    749
    
    
    
    -
    
    
    
    5,821Other corporate bonds
    
    
    296,545
    
    
    
    17,596
    
    
    
    4,348
    
    
    
    309,793Total fixed income securities
    
    
    2,062,246
    
    
    
    25,660
    
    
    
    48,060
    
    
    
    2,039,846Equity securities:Common stocks of banks, trusts and insurance
companies
    
    
    197,758
    
    
    
    78,995
    
    
    
    927
    
    
    
    275,826Common stocks of industrial and other companies
    
    
    180,840
    
    
    
    17,018
    
    
    
    18,531
    
    
    
    179,327Total equity securities
    
    
    378,598
    
    
    
    96,013
    
    
    
    19,458
    
    
    
    455,153Total available-for-sale securities
    
    $
    2,440,844
    
    
    $
    121,673
    
    
    $
    67,518
    
    
    $
    2,494,999
 74




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) At December 31, 2003Cost orAmortized
    
    
    GrossUnrealized
    
    
    GrossUnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed income securities:United States government and government agencies
and authorities
    
    $
    265,547
    
    
    $
    677
    
    
    $
    3,132
    
    
    $
    263,092States, municipalities and political subdivisions
    
    
    9,040
    
    
    
    483
    
    
    
    -
    
    
    
    9,523Public utilities
    
    
    59,092
    
    
    
    10,993
    
    
    
    -
    
    
    
    70,085Other corporate bonds
    
    
    287,021
    
    
    
    9,480
    
    
    
    2,222
    
    
    
    294,279Total fixed income securities
    
    
    620,700
    
    
    
    21,633
    
    
    
    5,354
    
    
    
    636,979Equity securities:Common stocks of banks, trusts and insurance
companies
    
    
    161,757
    
    
    
    17,218
    
    
    
    1,076
    
    
    
    177,899Common stocks of industrial and other companies
    
    
    111,700
    
    
    
    21,730
    
    
    
    5
    
    
    
    133,425Total equity securities
    
    
    273,457
    
    
    
    38,948
    
    
    
    1,081
    
    
    
    311,324Total available-for-sale securities
    
    $
    894,157
    
    
    $
    60,581
    
    
    $
    6,435
    
    
    $
    948,303
  The amortized cost and fair value of fixed income securities by contractual maturity are shown
below. Actual maturities may differ from maturities shown below due to the existence of call
features. At December 31, 2004, securities containing call features represented 1.1% of the
total fair value of the fixed income portfolio. At December 31, 2004AmortizedCost
    
    
    Fair ValueDue in one year or less
    
    $
    1,261
    
    
    $
    1,270Due after one year through five years
    
    
    59,659
    
    
    
    57,235Due after five years through ten years
    
    
    17,068
    
    
    
    16,031Due after ten years through twenty years
    
    
    1,472,516
    
    
    
    1,438,382Due after twenty years
    
    
    511,742
    
    
    
    526,928Total fixed income investments
    
    $
    2,062,246
    
    
    $
    2,039,846
  Certain individual available-for-sale securities had gross unrealized losses as of December 31,
2004 totaling $67,518, of which $48,060 was attributed to fixed income securities and $19,458
was attributed to equity securities. U.S. Treasury securities, the majority of which mature in
2020 or beyond, accounted for $43,712 of the gross unrealized losses in the fixed income
portfolio. The total gross unrealized losses of $67,518 represented 3.5% of the cost of such
securities in the aggregate. 75




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  The number of continuous months in which securities in an unrealized loss position had been in
such position is summarized as follows: At December 31, 2004Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    Unrealized
    
    
    
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:U.S. government and government
agencies and authorities
    
    $
    1,552,411
    
    
    
    $  43,120
    
    
    
    $  11,155
    
    
    
    $  592
    
    
    
    $  1,563,566
    
    
    
    $  43,712Other corporate bonds
    
    
    204,800
    
    
    
    4,348
    
    
    
    -
    
    
    
    -
    
    
    
    204,800
    
    
    
    4,348Total fixed income securities
    
    
    1,757,211
    
    
    
    47,468
    
    
    
    11,155
    
    
    
    592
    
    
    
    1,768,366
    
    
    
    48,060Equity securities:Common stocks of banks, trusts
and insurance companies
    
    
    6,873
    
    
    
    927
    
    
    
    -
    
    
    
    -
    
    
    
    6,873
    
    
    
    927Common stocks of industrial and
other companies
    
    
    80,576
    
    
    
    18,531
    
    
    
    -
    
    
    
    -
    
    
    
    80,576
    
    
    
    18,531Total equity securities
    
    
    87,449
    
    
    
    19,458
    
    
    
    -
    
    
    
    -
    
    
    
    87,449
    
    
    
    19,458Total unrealized losses
on available-for-sale
securities
    
    $
    1,844,660
    
    
    
    $  66,926
    
    
    
    $  11,155
    
    
    
    $  592
    
    
    
    $  1,855,815
    
    
    
    $  67,518
  At December 31, 2004, approximately $592, or 1.2%, of the fixed income portfolio gross
unrealized losses were attributable to two securities in a loss
position for greater than 12 consecutive months. One fixed income security had a gross unrealized loss totaling $1,094,
which exceeded 10% of its cost at December 31, 2004. No fixed income securities had losses that
were both greater than 12 consecutive months and exceeded 10% of cost.At December 31, 2004, no securities in the Companys equity portfolio had gross unrealized
losses attributable to securities in a loss position for greater than 12 consecutive months.
Four equity securities had gross unrealized losses totaling $19,454, which exceeded 10% of their
cost at December 31, 2004. The majority of the $19,454 loss was attributable to one equity
security in the pharmaceutical industry.Securities that are in a loss position are reviewed by management at least quarterly for
potential impairment. Managements review involves detailed credit analyses in the case of
non-U.S. Treasury securities. While a loss position for 12 consecutive months or a 10% price
decline is considered significant, upon review of securities in this category, management has
concluded that such price declines are temporary market price fluctuations. Management believes
the Company has sufficient liquid assets available to satisfy its operating needs and,
accordingly, has the ability to hold these securities until maturity or until the anticipated
recovery in market value occurs.The contractual maturity of the Companys fixed income securities with unrealized losses is
summarized as follows: At December 31, 2004UnrealizedFair Value
    
    
    LossDue in one year or less
    
    $
    -
    
    
    $
    -Due after one through five years
    
    
    48,466
    
    
    
    2,674Due after five through ten years
    
    
    12,024
    
    
    
    1,540Due after ten years through twenty years
    
    
    1,355,179
    
    
    
    37,777Due after twenty years
    
    
    352,697
    
    
    
    6,069Total fixed income investments in a loss position
    
    $
    1,768,366
    
    
    $
    48,060
 76




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  Investment income  The components of investment income for the years ended December 31, 2004, 2003 and 2002 are
summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Interest on fixed income securities
    
    $
    103,162
    
    
    $
    65,774
    
    
    $
    117,048Dividends on equity securities
    
    
    11,541
    
    
    
    6,971
    
    
    
    5,791Interest on cash and cash equivalents
    
    
    5,864
    
    
    
    11,552
    
    
    
    3,518Income on other invested assets
    
    
    5,850
    
    
    
    12,241
    
    
    
    12,037Gross investment income
    
    
    126,417
    
    
    
    96,538
    
    
    
    138,394Interest on funds held under reinsurance contracts
    
    
    (30,501
    )
    
    
    (18,458
    )
    
    
    (17,322
    )Investment expenses
    
    
    (10,815
    )
    
    
    (8,178
    )
    
    
    (7,232
    )Investment income
    
    $
    85,101
    
    
    $
    69,902
    
    
    $
    113,840
  Income on other invested assets includes earnings of investment companies and similar equity
method investees of $5,205, $11,229 and $9,939 in 2004, 2003 and 2002, respectively, and other
interest income. Pre-tax earnings of other equity method investees was $19,197 and $2,411 in
2004 and 2003, respectively. There were no earnings from other equity method investees in 2002.
Interest on funds held under reinsurance contracts is charged at rates between 7.0% and 7.5%
per annum, as specified in the related reinsurance contract.Investment gains and lossesThe components of realized investment gains for the years ended December 31, 2004, 2003 and 2002
are summarized below: Years Ended December 31,2004
    
    
    2003
    
    
    2002Fixed income securities:Gains
    
    $
    57,454
    
    
    $
    217,293
    
    
    $
    39,056Losses
    
    
    (150
    )
    
    
    (18,626
    )
    
    
    (3,099
    )Net
    
    
    57,304
    
    
    
    198,667
    
    
    
    35,957Equity securities:Gains
    
    
    40,833
    
    
    
    56,052
    
    
    
    5,829Losses
    
    
    (684
    )
    
    
    -
    
    
    
    (615
    )Net
    
    
    40,149
    
    
    
    56,052
    
    
    
    5,214Other invested assets:Gains
    
    
    3,484
    
    
    
    16,273
    
    
    
    344Losses
    
    
    (21,400
    )
    
    
    (2,832
    )
    
    
    (30
    )Net
    
    
    (17,916
    )
    
    
    13,441
    
    
    
    314Total realized investment gains and losses:Gains
    
    
    101,771
    
    
    
    289,618
    
    
    
    45,229Losses
    
    
    (22,234
    )
    
    
    (21,458
    )
    
    
    (3,744
    )Net
    
    $
    79,537
    
    
    $
    268,160
    
    
    $
    41,485
  Included in realized investment losses from other invested
assets for the year ended December 31, 2004 is a net loss of $15,237 related to the change in fair value of short-sale obligations
and related option contracts. These transactions are discussed further below. Included in
realized investment losses for the years ended December 31, 2003 and 2002 is $13,846 and $275
respectively, related to losses on other than temporary impairments. No such impairments were
recorded in 2004. 77




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##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  Changes in net unrealized investment gains and losses, net of transfers to realized gains and
losses, and the related tax effects, are summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Fixed income securities
    
    $
    (38,679
    )
    
    $
    (13,721
    )
    
    $
    172,047Equity securities
    
    
    38,688
    
    
    
    29,552
    
    
    
    (520
    )Other invested assets
    
    
    11,288
    
    
    
    1,799
    
    
    
    468Change in unrealized
investment gains and losses,
net of transfers to realized
gains and losses, before
income taxes
    
    
    11,297
    
    
    
    17,630
    
    
    
    171,995Deferred income tax expense
    
    
    (3,953
    )
    
    
    (6,022
    )
    
    
    (60,603
    )Change in unrealized
investment gains and losses,
net of transfers to realized
gains and losses, reflected
in shareholders equity
    
    $
    7,344
    
    
    $
    11,608
    
    
    $
    111,392
  Investments in affiliatesInvestments in affiliates are summarized as follows: Ownership PercentageDecember 31, 2004
    
    
    December 31, 2003
    
    
    at December 31, 2004Carrying
    
    
    
    
    
    Carrying
    
    
    Crum &Cost
    
    
    Value
    
    
    Cost
    
    
    Value
    
    
    Forster
    
    FairfaxZenith National Insurance Corp.
    
    $
    90,733
    
    
    $
    161,504
    
    
    $
    92,451
    
    
    $
    107,650
    
    
    
    16.8%
    
    
    
    24.4%Northbridge Financial Corporation
    
    $
    75,055
    
    
    $
    106,641
    
    
    $
    75,055
    
    
    $
    82,640
    
    
    
    15.2%
    
    
    
    59.2%HWIC Asia Fund
    
    $
    76,210
    
    
    $
    92,953
    
    
    $
    1,210
    
    
    $
    3,249
    
    
    
    16.5%
    
    
    
    98.5%Odyssey Re Holdings Corp.
    
    $
    17,824
    
    
    $
    17,925
    
    
    $
    17,824
    
    
    $
    17,824
    
    
    
    1.2%
    
    
    
    80.9%Advent Capital (Holdings) PLC
    
    $
    9,156
    
    
    $
    14,036
    
    
    $
    9,156
    
    
    $
    9,898
    
    
    
    11.4%
    
    
    
    46.8%Pacific
Century Fund I
    
    $
    10,000
    
    
    $
    10,000
    
    
    $
    -
    
    
    $
    -
    
    
    
    33.3%
    
    
    
    100.0%TRG Holding Corporation
    
    $
    5,025
    
    
    $
    7,517
    
    
    $
    5,025
    
    
    $
    7,999
    
    
    
    1.4%
    
    
    
    100.0%MFXchange Holdings Inc.
    
    $
    3,725
    
    
    $
    2,347
    
    
    $
    3,725
    
    
    $
    3,123
    
    
    
    9.3%
    
    
    
    100.0%Russel Metals Inc.
    
    $
    -
    
    
    $
    -
    
    
    $
    5,660
    
    
    $
    13,604
    
    
    
    -%
    
    
    
    -%
  The Companys investments in Northbridge Financial Corporation (Northbridge), HWIC Asia Fund
(HWIC), Odyssey Re Holdings Corp. (Odyssey),
Pacific Century Fund I (Pacific), TRG Holding
Corporation (TRG) and MFXchange Holdings Inc. (MFX) are accounted for using the equity
method and are included in other invested assets on the consolidated balance sheets. Earnings
from Northbridge, Odyssey, TRG and MFX are included in equity in earnings of investees, net of
tax on the consolidated statements of income. Earnings from HWIC and Pacific are included in
investment income on the consolidated statements of income. The Companys investment in Zenith
National Insurance Corp. (Zenith), Advent Capital (Holdings) PLC (Advent) and Russel Metals
Inc. (Russel) are carried at fair value and are included in equity securities on the
consolidated balance sheets. Changes in the fair value of Zenith, Advent and Russel are
recorded in accumulated other comprehensive income, net of tax.In December 2004, the Company sold corporate bonds with a face value of $62,500 to various
affiliates of Fairfax. The bonds were sold at fair market value ($52,292 in the aggregate) and
the Company realized a gain on these transactions of $12,114.On November 15, 2004, the Company invested $10,000 in Pacific, a fund owned 100% by Fairfax
affiliates, which invests primarily in Japanese equity securities. An additional $10,000 was
invested in Pacific in January 2005.On July 27, 2004, the Company sold 66,775 shares of Zenith common stock for total proceeds of
$2,748, resulting in a realized investment gain of $1,030.On June 29, 2004, the Company sold two million shares of Russel common stock for total proceeds
of $15,590, resulting in a realized investment gain of $9,930. 78




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  In December 2003, the Company redeemed approximately 1.8 million shares in HWIC at $33.50 per
share in order to realize an investment gain for statutory accounting purposes. HWIC is an
investment fund owned 98.5% by Fairfax and affiliates, which invests primarily in a diversified
portfolio of listed equity and equity-related securities in Asia. In order to complete the
redemption, HWIC liquidated a portion of the fund, selling underlying securities to third
parties. Total proceeds from the redemption were $59,999 and the Company realized a gain on the
redemption in the amount of $15,717. The Company reinvested $75,000 in HWIC during 2004.In December 2003, the Company acquired 800,000 shares of the common stock of Odyssey from TIG
Insurance Company (TIG), a wholly-owned subsidiary of Fairfax. Odyssey is a publicly traded
reinsurance company (NYSE:ORH) owned 80.9% by Fairfax and affiliates. The purchase was made at
$22.28 per share, which approximated the fair market value on the date of purchase. The total
cost of the Odyssey shares was $17,824 and market value as of December 31, 2004 was $20,168.In June 2003, the Company invested $3.7 million in MFX, an information technology services
company owned 100% by Fairfax.In May 2003, the Company acquired approximately 7.8 million shares of the common stock of
Northbridge, a subsidiary of Fairfax that completed an initial public offering of its common
stock in Canada (TO:NB), in exchange for common stock and debentures of Hub International
Limited (Hub) held by the Company. The fair value of the Hub investments held by the Company
at the date of the transaction, or $83,873, exceeded the Companys acquired interest in the net
assets of Northbridge by $8,818, which was recorded as an adjustment to the Companys additional
paid-in capital. The disposal of the Hub investments resulted in a realized gain of $40,725,
which was included in realized investment gains in the consolidated statement of income for the
year ended December 31, 2003. As of December 31, 2004, the market value of the Northbridge shares was $188,962.Equity method investeesThe Companys investment portfolio includes investments accounted for using the equity method.
These investments consist of equity interests of between 1.2% and 33.3% with a total carrying
value of $280,346 and $135,520 at December 31, 2004 and 2003, respectively, and are included in
other invested assets on the consolidated balance sheets. For the years ended December 31,
2004, 2003 and 2002, earnings of equity method investees was $24,402, $13,640 and $9,939,
respectively. Earnings of investment companies and similar equity method investees of $5,205,
$11,229 and $9,939 in 2004, 2003 and 2002, respectively, was included in investment income on
the consolidated statements of income. Pre-tax earnings of other equity method investees was
$19,197 and $2,411 in 2004 and 2003, respectively, was included in equity in earnings of
investees, net of tax, on the consolidated statements of income. There were no earnings from
other equity method investees in 2002. Dividends received from all equity method investees were
$4,173 and $1,844 in 2004 and 2003, respectively. No dividends were received from equity method
investees in 2002. The Companys aggregate share of its investees balance sheets is summarized
as follows: At
December 31,2004
    
    
    2003Cash and investments
    
    $
    503,323
    
    
    $
    288,447Total assets
    
    $
    798,717
    
    
    $
    528,151Total liabilities
    
    $
    518,088
    
    
    $
    393,544Shareholders equity or partners capital1
    
    $
    280,629
    
    
    $
    134,607
  1
    The difference between the Companys aggregate share of shareholders equity
or partners capital and the carrying value on the consolidated
balance sheets is
primarily due to goodwill arising on the acquisition of the investees.  The Companys aggregate share of its investees statements of income is summarized as
follows: Years
Ended December 31,2004
    
    
    2003
    
    
    2002Revenues
    
    $
    180,770
    
    
    $
    48,664
    
    
    $
    20,373Operating expenses
    
    $
    104,897
    
    
    $
    23,697
    
    
    $
    12,532Net income
    
    $
    24,402
    
    
    $
    13,640
    
    
    $
    9,939
 79




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  The Companys most significant equity method investees are discussed below:Northbridge Financial CorporationThe Company purchased its investment in Northbridge in May 2003 and holds a 15.2% interest at
December 31, 2004. For the years ended December 31, 2004 and 2003, pre-tax equity in earnings
of Northbridge were $18,118 and $3,180, respectively, and was included in equity in earnings of
investees, net of tax, on the consolidated statements of income. Dividends received from
Northbridge were $3,591 and $1,722 in 2004 and 2003, respectively.HWIC Asia FundThe Company holds a 16.5% interest in HWIC at
December 31, 2004. For the years ended December 31, 2004, 2003 and 2002, pre-tax equity in earnings of HWIC were $2,223, $14,059 and $7,957,
respectively, and was included in investment income on the consolidated statements of income.
No dividends have been received from HWIC.Short-sale obligations and derivativesIn July 2004, as an economic hedge against a decline in the equity markets, the Company executed
short sales totaling approximately $200,000 of Standard & Poors Depositary Receipts (SPDRs).
Simultaneously, the Company purchased two-year S&P Index call options (Options) limiting the
potential loss on the future purchase of the SPDRs to $40,000. The cost of the Options was
$6,000. Both the obligations to purchase the SPDRs and the Options are carried at fair value in
the consolidated financial statements. The fair value of the obligations to purchase the SPDRs
is included in short-sale obligations and the fair value of the Options is included in other
invested assets in the consolidated balance sheet. As of December 31, 2004, the net change in
the fair values of the SPDRs and the Options totaled a loss of $15,237 and was included in
realized investment gains on the consolidated statement of income. The Company also incurs
investment expenses in an amount equal to the dividend earnings on the SPDRs sold. Investment
expense of $2,495 was recorded for the year ended December 31, 2004. See Regulatory and other
deposits for a discussion of collateral relating to the SPDRs.On January 25, 2005, the Company executed an additional short sale of SPDRs in the amount of
$100,000. In connection with this transaction, the Company also purchased a two-year S&P Index
call option, limiting the potential loss on the future purchase of these SPDRs to $20,000.As of December 31, 2004, the fair value of the
Companys derivative contracts was $13,069, including the
Options discussed above. For
the years ended December 31, 2004 and 2003, the Company recorded net losses of $1,373 and
$2,709, respectively in realized investment gains as a result of changes in the fair value of
derivative contracts.On December 31, 2004, the Company entered into a four-month swap transaction whereby the Company
receives a total equity return on a publicly traded equity security in exchange for payment of a stated
rate of return tied to LIBOR. The notional value of the transaction is $42,175 and it had no
fair value or gain or loss as of December 31, 2004. Future changes to the market value will be
recorded as realized gains or losses.Regulatory and other depositsFixed income securities and cash and cash equivalents of $292,408 and $171,812 were on deposit
with various state regulatory authorities as of December 31, 2004 and 2003, respectively, as
required by insurance laws.In conjunction with the issuance of the Companys $300,000 aggregate principal amount of 10-3/8%
senior notes due 2013, Crum & Forster funded an interest escrow account in the amount of
$63,115. As of December 31, 2004, the escrow account balance of $16,212 was principally
invested in U.S. Treasury notes and is included in other assets on the consolidated balance
sheets. The interest escrow is required to be maintained until the next interest payment on the
senior notes is made in June 2005, after which time, in accordance with certain provisions in
the indenture, the Company is no longer required to hold funds in escrow for payment of interest
on its senior notes.In July 2004, in connection with the SPDRs transaction described in Investment Gains and
Losses, the Company pledged approximately $278,000 in cash and U. S. Treasury securities as
collateral for the obligation to purchase the SPDRs. These assets
are recorded in assets pledged for short-sale obligations on the consolidated balance sheet. As
of December 31, 2004, the fair value of the assets pledged for the purchase of the SPDRs totaled
$277,899 and consisted primarily of cash and U.S. Treasury securities. Effective January 21,
2005, the Company changed the custodian of these assets to satisfy state regulatory
requirements. The new custodian required that the collateral be increased to approximately $327,000. 80




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  5.
    Unpaid Losses and Loss Adjustment ExpensesChanges in the Companys liability for unpaid losses and LAE are summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Gross unpaid losses and LAE, beginning of year
    
    $
    3,178,166
    
    
    $
    3,235,101
    
    
    $
    3,437,491Less ceded unpaid losses and LAE
    
    
    1,321,004
    
    
    
    1,756,404
    
    
    
    1,876,338Net unpaid losses and LAE, beginning of year
    
    
    1,857,162
    
    
    
    1,478,697
    
    
    
    1,561,153Losses and LAE incurred related to:Current year
    
    
    692,258
    
    
    
    534,338
    
    
    
    442,151Prior years
    
    
    69,254
    
    
    
    117,996
    
    
    
    18,307Total losses and LAE incurred
    
    
    761,512
    
    
    
    652,334
    
    
    
    460,458Losses and LAE paid related to:Current year
    
    
    163,026
    
    
    
    113,394
    
    
    
    93,782Prior years1
    
    
    460,431
    
    
    
    160,475
    
    
    
    449,132Total losses and LAE paid
    
    
    623,457
    
    
    
    273,869
    
    
    
    542,914Net unpaid losses and LAE, end of year
    
    
    1,995,217
    
    
    
    1,857,162
    
    
    
    1,478,697Add ceded unpaid losses and LAE
    
    
    1,360,996
    
    
    
    1,321,004
    
    
    
    1,756,404Gross unpaid losses and LAE, end of year
    
    $
    3,356,213
    
    
    $
    3,178,166
    
    
    $
    3,235,101
  1
    Losses and LAE paid in 2003 for prior accident years are reduced by
$273,977 in proceeds from the commutation of two reinsurance contracts in December
2003.
Approximately $39,514 of such proceeds was received in January 2004.  A reconciliation of the ceded unpaid losses and LAE in the table above to the
reinsurance recoverable reflected on the balance sheets follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Ceded unpaid losses and LAE in the table above
    
    $
    1,360,996
    
    
    $
    1,321,004
    
    
    $
    1,756,404Reconciling items:Reinsurance recoverable on paid losses and LAE
    
    
    51,446
    
    
    
    66,445
    
    
    
    68,500Premiums paid for retroactive reinsurance
    
    
    190,520
    
    
    
    134,003
    
    
    
    96,212Deferred income on retroactive reinsurance
    
    
    223,360
    
    
    
    180,524
    
    
    
    132,781Loss sensitive cession1
    
    
    (21,510
    )
    
    
    (21,510
    )
    
    
    (21,510
    )Total reconciling items
    
    
    443,816
    
    
    
    359,462
    
    
    
    275,983Reinsurance recoverable on the consolidated balance sheets
    
    $
    1,804,812
    
    
    $
    1,680,466
    
    
    $
    2,032,387
  1
    Equals additional premiums due on retrospectively rated insurance
policies that inure to the benefit of the reinsurer.  The Company has exposure to asbestos and environmental pollution claims arising from the
sale of general liability, commercial multi-peril and umbrella insurance policies, the
predominance of which were written for accident years 1985 and prior. Estimation of ultimate
liabilities for these exposures is unusually difficult due to issues such as whether coverage
exists, the definition of an occurrence, the determination of ultimate damages and allocation of
such damages to financially responsible parties. 81




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  In 2004, based on the Companys internal actuarial review and an independent actuarial firms
ground-up study of asbestos reserves, the Company strengthened its asbestos reserves by $90,515,
principally in the general liability line. The reserve increase is consistent with an industry-wide deterioration in asbestos liabilities caused by increases in
the number of claimants filing asbestos claims and attorneys targeting new and previously
peripheral defendants, including some of the Companys insureds. Additionally, the Company
increased its environmental reserves by $10,007. These reserve increases were offset, in part,
by $20,000 of reserve decreases primarily in the general liability line for accident years 1997
and prior.For the year ended December 31, 2004, the Company incurred losses and LAE of approximately
$96,000 (including reinsurance reinstatement premiums of approximately $13,000) associated with
hurricanes Charley, Frances, Ivan and Jeanne. Such losses primarily affected the property line
of business.In 2003, the Company strengthened its asbestos reserves by $149,835 based on its latest
actuarial estimates. In addition, commutations of two reinsurance contracts resulted in a
$53,968 charge to incurred losses and LAE related to prior years. These reserve increases were
partially offset by favorable development of $34,919 for accident year 2002 and $47,592 for
accident years 2000 and prior.In 2002, the Company strengthened its asbestos reserves by $67,544 based on its latest actuarial
estimates. In addition, non-latent reserves were strengthened, primarily in the commercial
automobile liability and workers compensation lines of business for accident year 1999,
partially offset by favorable development in accident years 1992 and prior for workers
compensation, general liability and commercial multi-peril lines of business.The Company uses tabular reserving for workers compensation indemnity reserves and discounts
such reserves using a maximum interest rate of 5.0%. The amount of related discount was $84,902
and $94,257 at December 31, 2004 and 2003, respectively.  6.
    Asbestos and Environmental Losses and Loss Adjustment ExpensesChanges in the Companys liability for asbestos and environmental exposures are summarized as
follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002AsbestosGross unpaid losses and allocated LAE (ALAE), beginning of year
    
    $
    495,195
    
    
    $
    370,875
    
    
    $
    298,203Less ceded unpaid losses and ALAE
    
    
    128,787
    
    
    
    106,073
    
    
    
    70,057Net unpaid losses and ALAE, beginning of year
    
    
    366,408
    
    
    
    264,802
    
    
    
    228,146Net losses and ALAE incurred
    
    
    90,515
    
    
    
    149,835
    
    
    
    67,544Net paid losses and ALAE
    
    
    48,129
    
    
    
    48,229
    
    
    
    30,888Net unpaid losses and ALAE, end of year
    
    
    408,794
    
    
    
    366,408
    
    
    
    264,802Add ceded unpaid losses and ALAE
    
    
    113,891
    
    
    
    128,787
    
    
    
    106,073Gross unpaid losses and ALAE, end of year
    
    $
    522,685
    
    
    $
    495,195
    
    
    $
    370,875
 82




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands) Years Ended December 31,2004
    
    
    2003
    
    
    2002EnvironmentalGross unpaid losses and ALAE, beginning of year
    
    $
    130,511
    
    
    $
    163,165
    
    
    $
    217,787Less ceded unpaid losses and ALAE
    
    
    31,675
    
    
    
    57,373
    
    
    
    93,021Net unpaid losses and ALAE, beginning of year
    
    
    98,836
    
    
    
    105,792
    
    
    
    124,766Net losses and ALAE incurred
    
    
    10,007
    
    
    
    1,975
    
    
    
    (3,025
    )Net paid losses and ALAE
    
    
    23,680
    
    
    
    8,931
    
    
    
    15,949Net unpaid losses and ALAE, end of year
    
    
    85,163
    
    
    
    98,836
    
    
    
    105,792Add ceded unpaid losses and ALAE
    
    
    38,190
    
    
    
    31,675
    
    
    
    57,373Gross unpaid losses and ALAE, end of year
    
    $
    123,353
    
    
    $
    130,511
    
    
    $
    163,165
  The Company also maintains reserves for other latent exposures such as those associated with
silica, chemicals, lead, sick building syndrome, gas and vapors, repetitive stress, paint and
mold. Changes in the Companys liability for other latent exposures are summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Other LatentGross unpaid losses and ALAE, beginning of year
    
    $
    40,818
    
    
    $
    43,518
    
    
    $
    50,068Less ceded unpaid losses and ALAE
    
    
    14,117
    
    
    
    15,187
    
    
    
    22,753Net unpaid losses and ALAE, beginning of year
    
    
    26,701
    
    
    
    28,331
    
    
    
    27,315Net losses and ALAE incurred
    
    
    20
    
    
    
    1,830
    
    
    
    3,280Net paid losses and ALAE
    
    
    4,697
    
    
    
    3,460
    
    
    
    2,264Net unpaid losses and ALAE, end of year
    
    
    22,024
    
    
    
    26,701
    
    
    
    28,331Add ceded unpaid losses and ALAE
    
    
    13,333
    
    
    
    14,117
    
    
    
    15,187Gross unpaid losses and ALAE, end of year
    
    $
    35,357
    
    
    $
    40,818
    
    
    $
    43,518
  7.
    ReinsuranceThe components of the Companys net premiums written and premiums earned are summarized as
follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Premiums written:Direct
    
    $
    1,124,881
    
    
    $
    1,085,277
    
    
    $
    880,363Assumed from other companies, pools, or associations
    
    
    14,080
    
    
    
    18,934
    
    
    
    18,005Ceded to other companies, pools, or associations
    
    
    (220,661
    )
    
    
    (213,388
    )
    
    
    (228,895
    )Net premiums written
    
    $
    918,300
    
    
    $
    890,823
    
    
    $
    669,473Premiums earned:Direct
    
    $
    1,118,526
    
    
    $
    982,485
    
    
    $
    804,470Assumed from other companies, pools, or associations
    
    
    14,053
    
    
    
    19,077
    
    
    
    20,573Ceded to other companies, pools, or associations
    
    
    (224,870
    )
    
    
    (232,690
    )
    
    
    (215,531
    )Premiums earned
    
    $
    907,709
    
    
    $
    768,872
    
    
    $
    609,512
 83




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  The components of the Companys total reinsurance recoverable are summarized as follows: At December 31,2004
    
    
    2003Reinsurance recoverable on unpaid losses and LAE
    
    $
    1,753,366
    
    
    $
    1,614,021Reinsurance receivable on paid losses and LAE
    
    
    51,446
    
    
    
    66,445Total reinsurance recoverable
    
    $
    1,804,812
    
    
    $
    1,680,466
  The Company actively monitors and evaluates the financial condition of its reinsurers and
prepares estimates of the uncollectible amounts due from reinsurers. Such estimates are made
based on periodic evaluation of balances due from reinsurers, judgments regarding reinsurers
solvency, known disputes, reporting characteristics of the underlying reinsured business,
historical experience, current economic conditions and the state of reinsurer relations in
general and with the Crum & Forster companies in particular. Management attempts to mitigate
collection risk from reinsurers by obtaining collateral and by entering into reinsurance
arrangements only with reinsurers that have credit ratings and statutory surplus above certain
levels. Reinsurance recoverable on the consolidated balance sheets is stated net of reserves
for uncollectible reinsurance of $40,930 and $39,882 at December 31, 2004 and 2003,
respectively.At December 31, 2004, the Company had reinsurance recoverable of $1,804,812, due from
approximately 315 reinsurers. At such date, the five largest gross reinsurance recoverable
balances aggregated $1,128,876, or 62.5% of the total reinsurance recoverable balance.
Application of collateral reduces the unsecured exposure to these five reinsurers to $499,817 as
of that date. The largest unsecured balance as of December 31, 2004 was $194,091 with an
unaffiliated company rated A+ by A.M. Best Company.In December 2003, the Company commuted its Aggregate Excess of Loss Reinsurance Agreement with
Ridge Reinsurance Limited (Ridge Re), an unaffiliated reinsurer. The agreement provided the
Company with $233,750 of stop loss coverage related to accident years 1992 and prior. The limits
provided under the agreement had been fully utilized since 1995. Upon commutation of this
agreement, Crum & Forster received from Ridge Re the estimated present value of the ceded
liability of approximately $206,975. The excess of the nominal ceded liabilities over the
present value received of approximately $26,775 was recorded as a component of incurred losses
and LAE on the consolidated statement of income.Corporate aggregate reinsuranceThe Company purchases reinsurance to limit its exposure to loss
from any one claim or occurrence (per risk
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 reinsurance). The Companys corporate aggregate
reinsurance contracts cover or covered, in varying amounts and
on varying terms, accident years 2002 and prior and provide
either current accident year protection or adverse development
protection related to prior accident years. 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. Coverage under these contracts is generally
triggered when the loss ratio for the subject period exceeds a
specified level, or when reserves related to all periods prior
to a certain date exceed a stated amount. The Company will
recover ceded losses and LAE from its reinsurers as it settles
the related claims, which may occur over several years. These
contracts may provide for future payments to be made by Crum
& Forster when it cedes losses under such policies and
generally provide that interest expense is charged to the
Company, for the benefit of the reinsurers, on any premiums
withheld.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 to 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.


84



---



##### 





| | The effect of prospective and retroactive corporate aggregate
reinsurance on components of the Companys consolidated
statements of income is summarized as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------

Years Ended December 31,2004

    

    2003
    
2002Increase (decrease)Premiums earned
    

$
    (7,595
    )
    
    $
    (138
    )
    
    $
    (32,297
    )Investment income
    
    
    (30,501
    )
    
    
    (18,458
    )
    
    
    (17,322
    )Losses and LAE

    
    
    (28,318
    )
    
    
    (14,178
    )
    
    
    (8,332
    )Income before income taxes
    
    $
    (9,778
    )
    
    $
    (4,418
    )
    
    $
    (41,287
    )




| | As of December 31, 2004, reinsurance recoverable includes
$444,047 and $455,508 related to prospective and retroactive
corporate aggregate reinsurance contracts, respectively, of
which $507,186 has been recognized as a reduction of incurred
losses and LAE on the Companys consolidated statements of
income.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Prospective corporate aggregate reinsurance                                                                                                                                                                                                                                                                        
|
| | An analysis of activity in prospective corporate aggregate
reinsurance contracts follows:                                                                                                                                                                                                                          

Years Ended December 31,2004

    

    2003
    
2002Ceded losses
    
    $
    9,994
    
    
    $
    1,130
    
    
    $
    Less: ceded premiums
    
    
    7,595
    
    
    
    138
    
    
    
    32,297Less: funds held interest
    
    
    9,190
    
    
    
    7,452
    
    
    
    11,421Pre-tax earnings impact
    
    $
    (6,791
    )
    
    $
    (6,460
    )
    
    $
    (43,718
    )




| | The Company entered into an aggregate stop loss agreement with
an unaffiliated reinsurer covering accident year 2000, which
provided coverage of $118,493 and has been fully utilized by the
Company. Premiums and losses ceded pursuant to the contract were
$7,595 and $9,994, respectively, in 2004 and there were no
cessions to the contract in 2003 and 2002. Premium cessions
prior to 2002 were $68,758. As of December 31, 2004 and
2003, the Company had reinsurance recoverable balances of
$76,547 and $108,499, respectively, related to this agreement.                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | Loss cessions to prospective corporate aggregate reinsurance in
2003 of $1,130 includes the benefit of cessions to the 2001
accident year treaty with nSpire Re Limited (nSpire,
formerly ORC Re Limited), an affiliate of the Company, of
$55,098, partially offset by charges of $53,968 associated with
the commutation of two prospective corporate aggregate
reinsurance contracts. The commutation charge of $53,968
included $27,193 arising from the commutation of the accident
year 2001 treaty with nSpire and $26,775 related to commutation
of a contract with an unrelated party covering accident years
1992 and prior.
|
| | Retroactive corporate aggregate reinsurance                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | An analysis of activity in retroactive corporate aggregate
reinsurance contracts follows:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

Years Ended December 31,2004

    

    2003
    
2002Increase in reinsurance recoverable due from reinsurers
    
    $
    117,677
    
    
    $
    98,583
    
    
    $
    10,000Less: related premiums paid
    
    
    56,517
    
    
    
    37,792
    
    
    
    3,500Income deferred during the year
 
    
    61,160
    
    
    
    60,791
    
    
    
    6,500Amortization of deferred income
    
    
    (18,324
    )
    
    
    (13,048
    )
    
    
    (8,332
    )Change in deferred income
    
    
    42,836
    
    
    
    47,743
    
    
    
    (1,832
    )Deferred income on retroactive
    reinsurance  beginning of year
    
    
    180,524
    
    
    
    132,781
    
    
    
    134,613Deferred income on retroactive
    reinsurance  end of year
    
    $
    223,360
    
    
    $
    180,524
    
    
    $
    132,781Funds held
interest charged during the year
    
    $
    21,311
    
    
    $
    11,006
    
    
    $
    5,901




| | In 2001, the Company entered into adverse development contracts with two unaffiliated reinsurers. One
treaty provides $400,000 of reinsurance coverage for accident years 2000 and prior. As of December
31, 2004, the Company had ceded cumulative losses of $371,011, which is comprised of $140,565 in
2004, $10,446 in 2003, $10,000 in 2002 and $210,000 in 2001, and paid premiums of $58,056,
$3,656, $3,500 and $84,786 in 2004, 2003, 2002 and 2001, respectively, related to this contract.
All of the $28,989 remaining coverage on this treaty is available for asbestos development.
The second treaty provides $100,000 of coverage for accident periods prior to August 13, 1998.
As of December 31, 2004, the Company had ceded cumulative losses of $65,249, which is comprised
of $(22,888) in 2004 and $88,137 in 2003, and had a return of premium of $(1,539) in 2004 and
paid premiums of $34,136 in 2003 under this contract. None of the $34,751 remaining coverage on
this treaty is available for asbestos development. The premiums for both contracts are included
in funds held under reinsurance contracts on the consolidated balance sheets. The arrangements
described above are recorded as retroactive reinsurance, with reinsurance recoverable due from
reinsurers in excess of premiums paid for the coverage reflected on the balance sheets as
deferred income on retroactive reinsurance. Such deferred income is amortized based on the
expected amount and timing of future recoveries, using the interest method. In 2004, 2003, 2002
and 2001, the Company amortized $18,324, $13,048, $8,332 and $1,924 of deferred income,
respectively, which is included as a reduction to losses and LAE in the consolidated statements
of income.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

85



---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  In 1998, in connection with the acquisition of the Company by Fairfax, the Company entered
into an aggregate stop loss agreement with an unaffiliated reinsurer, which provided coverage of
$367,500 and has been fully utilized by the Company. The contract
provided coverage for loss reserve development for August 13, 1998 and prior, the date of
acquisition of the Company by Fairfax. This contract is treated as prospective reinsurance. There were no
premium cessions to the contract in 2004, 2003 and 2002 and reinsurance recoverable on the
contract was $367,500 at both December 31, 2004 and 2003. The Company amended the
contract in 2001 to provide an additional $19,248 of coverage for a premium of $7,925, which was
recorded in 2001. This contract amendment is treated as retroactive reinsurance and has been
fully utilized by the Company. Amortization of deferred income on this amendment is included in
the amortization amounts discussed previously.For additional information on reinsurance transactions with related parties, see Note 10.
Related Party Transactions.8.
    Long-Term DebtOn June 5, 2003, concurrent with the merger of entities under common control described in note 1
above, Crum & Forster Funding Corp., an unaffiliated special purpose entity, issued $300,000
aggregate principal amount of senior notes (the Notes) in a private placement, with the sole
intent of having obligations under such Notes only until the Company could assume such
obligations. On June 30, 2003, the Company assumed Crum & Forster Funding Corp.s obligations
under the Notes. The Notes, which bear interest payable semi-annually at 10-3/8%, mature on
June 15, 2013. The net proceeds from the offering of approximately $290,955 were used to fund
an interest escrow account in the amount of approximately $63,115 to make the first four
semi-annual interest payments on the Notes and to pay a dividend to Fairfax in the amount of
$217,885, with the remainder used to pay related financing costs. The Notes contain certain
restrictions on incurrence of additional indebtedness, dividend payments to Fairfax, asset sales
and certain transactions with affiliates. In addition, the Company was required by the terms of
the Notes to use its best efforts to register the Notes, or similar instruments with
substantially the same terms to be exchanged for the Notes, with the Securities and Exchange
Commission. Pursuant to an exchange offer, which was completed on April 20, 2004, the Company
issued $300,000 aggregate principal amount of registered notes with substantially the same terms
as the Notes, in exchange for all of the outstanding Notes. As required by the terms of the
Notes, additional interest of $279 was incurred for the period from December 28, 2003 through
April 19, 2004, after which such additional interest was no longer payable on the Notes.For the year ended December 31, 2004, interest expense on the Notes was $33,159, including
additional interest described above, accretion of the discount on the Notes and amortization of
related deferred financing costs. As of December 31, 2004, deferred financing costs in
conjunction with the issuance of the Notes totaled $9,787 and were included in other assets on
the consolidated balance sheet. These deferred financing costs are being amortized to interest
expense on a straight-line basis over the ten-year duration of the Notes.Concurrent with the issuance of the Notes, the Company entered into a non-interest bearing
standby credit agreement, subordinate to the Notes, whereby Fairfax agreed, under certain
conditions, to lend up to $40,000 to Crum & Forster in order to meet certain corporate
obligations. Borrowings under this agreement, if any, are due in
June 2018. Through December 31, 2004, there have been no borrowings under this agreement.The current agreements governing the bank credit facilities of Fairfax contain restrictive
covenants, which prohibit Fairfax from allowing any of its subsidiaries to borrow money. These
agreements are not legally binding on Crum & Forster; however, given the potential negative
financial impact on Fairfax of violations of these covenants, it is expected, and should be
assumed, that Fairfax, as the sole shareholder, will not permit Crum & Forster to borrow unless
a modification or waiver of these covenants can be obtained.9.
    Income TaxesThe components of the income tax expense are summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Current
    
    $
    28,479
    
    
    $
    46,570
    
    
    $
    6,998Deferred
    
    
    (23,963
    )
    
    
    24,044
    
    
    
    36,138Total income tax expense
    
    $
    4,516
    
    
    $
    70,614
    
    
    $
    43,136
 86




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  Deferred income taxes reflect the income tax impact of temporary differences between the amount
of assets and liabilities for financial reporting purposes and such amounts as measured by
income tax laws and regulations. The deferred income tax expense above does not include $6,719
and $844 in 2004 and 2003, respectively, of income taxes, which are included in equity in
earnings of investees, net of tax, on the consolidated statements of income. There was no
deferred income tax expense on equity in earnings of investees in 2002. Total deferred income
tax (benefit) expense in 2004, 2003 and 2002 was $(17,244), $24,888 and $36,138, respectively.Components of deferred income tax assets and liabilities are summarized as follows: At December 31,2004
    
    
    2003Deferred tax assets:Deferred income on retroactive reinsurance
    
    $
    78,177
    
    
    $
    63,184Unpaid losses and LAE
    
    
    63,590
    
    
    
    77,883Unearned premiums
    
    
    34,764
    
    
    
    34,023Net operating loss carryforwards
    
    
    32,677
    
    
    
    19,972Employee benefit plans
    
    
    10,724
    
    
    
    10,912Other
    
    
    22,130
    
    
    
    19,204Deferred tax assets before valuation allowance
    
    
    242,062
    
    
    
    225,178Less: valuation allowance
    
    
    -
    
    
    
    2,179Deferred tax assets after valuation allowance
    
    
    242,062
    
    
    
    222,999Deferred tax liabilities:Unrealized net appreciation of investments and currency translation
    
    
    30,117
    
    
    
    23,451Deferred policy acquisition costs
    
    
    26,252
    
    
    
    25,076Other
    
    
    11,736
    
    
    
    11,093Deferred tax liabilities
    
    
    68,105
    
    
    
    59,620Total net deferred tax assets
    
    $
    173,957
    
    
    $
    163,379
  At December 31, 2004, the Company had net operating and other loss carryforwards of
approximately $93,362. These will expire between 2009 and 2024. Based on projections of
estimated future operations, management expects the deferred income tax asset to be recovered
from taxable income in future years.A reconciliation of income taxes at the statutory federal income tax rate to the Companys tax
expense is presented below: Years Ended December 31,2004
    
    
    2003
    
    
    2002% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofPre-tax
    
    
    
    
    
    
    Pre-tax
    
    
    
    
    
    
    Pre-taxAmount
    
    
    Income
    
    
    Amount
    
    
    Income
    
    
    Amount
    
    
    IncomeIncome taxes computed
on pre-tax operating
income
    
    $
    5,682
    
    
    
    35.0
    %
    
    $
    71,677
    
    
    
    35.0
    %
    
    $
    44,116
    
    
    
    35.0
    %Decrease in income
taxes resulting from:Dividends received
deduction and
tax-exempt income
    
    
    (1,861
    )
    
    
    (11.5
    )
    
    
    (1,331
    )
    
    
    (0.6
    )
    
    
    (1,248
    )
    
    
    (1.0
    )Other, net
    
    
    695
    
    
    
    4.3
    
    
    
    268
    
    
    
    0.1
    
    
    
    268
    
    
    
    0.2Total income tax expense
    
    $
    4,516
    
    
    
    27.8
    %
    
    $
    70,614
    
    
    
    34.5
    %
    
    $
    43,136
    
    
    
    34.2
    %
  Income tax expense shown on the consolidated statements of income excludes $6,719 and $844 of
deferred income taxes on equity in earnings of investees in 2004 and 2003, respectively. Total
income tax expense in 2004, 2003 and 2002, inclusive of these amounts, was $11,235, $71,458 and
$43,136, respectively, and the related effective tax rate was 31.7%, 34.5% and 34.2%,
respectively. 87




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  10.
    Related Party TransactionsReinsuranceThe Company and its subsidiaries have entered into various reinsurance arrangements with
affiliates. The approximate amounts by which income, expense, assets and liabilities are
increased (decreased) in the accompanying consolidated financial statements, with respect to
reinsurance assumed and ceded, are summarized as follows: At December 31,2004
    
    
    2003
    
    
    2002Statements of income:Net premiums written
    
    $
    (50,229
    )
    
    $
    (46,973
    )
    
    $
    (58,670
    )Premiums earned
    
    $
    (49,571
    )
    
    $
    (43,675
    )
    
    $
    (55,169
    )Losses and LAE
    
    $
    (50,235
    )
    
    $
    (46,528
    )
    
    $
    21,381Balance sheets:Premiums receivable
    
    $
    594
    
    
    $
    2,202Reinsurance recoverable from affiliates
    
    $
    195,799
    
    
    $
    164,354Prepaid reinsurance premiums
    
    $
    13,396
    
    
    $
    13,284Unpaid losses and LAE
    
    $
    9,505
    
    
    $
    13,268Unearned premiums
    
    $
    579
    
    
    $
    1,125Accounts payable and other liabilities.
    
    $
    10,451
    
    
    $
    1,123
  In the normal course of business, nSpire, a
Fairfax affiliate, participates in reinsurance agreements covering substantially all reinsured
lines of business. For the years ended December 31, 2004, 2003 and 2002, the Company ceded to
nSpire premiums of $43,750, $29,698 and $2,454, respectively. The Company had reinsurance
recoverable of $26,539 and $6,120 at December 31, 2004 and 2003, respectively, related to these
reinsurance agreements.The Company entered into an aggregate stop loss agreement covering accident years 2000 through
2002. For accident years 2002 and 2001, nSpire is the direct reinsurer. Accident year 2000 was
reinsured by a third party reinsurer that retroceded the liability to nSpire, which was
exhausted at December 31, 2003. The Company received cash for the full amount of the 2000
accident year cover in 2004. The Company retains an ultimate net loss up to 70% of net premiums
earned in 2002 and 73% in 2001. Accident years 2002 and 2001 are subject to a per-term
maximum recovery of $96,272 and $94,195, respectively. Pursuant to the agreement, the Company ceded premiums of $32,091
and $31,398 for accident years 2002 and 2001, respectively. As of December 31, 2004 and 2003,
no losses were ceded to nSpire under this contract for accident year 2002. During 2003, the
Company ceded losses of $55,098 for accident year 2001, which exhausted the limit. In December
2003, the Company and nSpire commuted the 2001 accident year liabilities of $94,195. In
connection with the commutation, Crum & Forster received the estimated present value of the
ceded liability of approximately $67,002 from nSpire. The excess of the nominal ceded
liabilities over the present value received of approximately $27,193 was recorded as a component
of incurred losses and LAE on the consolidated statement of operations. As of December 31,
2003, $39,514 of the settlement amount was recorded as a receivable in other assets on the
consolidated balance sheet and was received by the Company in January 2004.In the normal course of business, the Company has several reinsurance agreements in effect with
Odyssey and its subsidiaries, affiliates of Fairfax. Under these agreements, Odyssey
participates on contracts covering substantially all reinsured lines of business. For the years
ended December 31, 2004, 2003 and 2002, the Company ceded $7,247, $7,434 and $9,847,
respectively, in premiums to Odyssey and had reinsurance recoverable of $20,118 and $15,904 at
December 31, 2004 and 2003, respectively, on these reinsurance agreements.A former parent of the Company required the transfer of a number of policies and related assets
and liabilities among insurance companies controlled by the former parent, effective through
assumption and indemnity reinsurance agreements. The assuming parties were required to seek
novation of certain policies. As of December 31, 2004 and 2003, reinsurance recoverable from
related parties included $122,222 and $126,141, respectively, from TIG, a subsidiary of Fairfax.
Substantially all the recoverable balance arises from policies that had not been novated. 88




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  Effective March 1, 1999, the Company entered into a reinsurance agreement with Fairmont
Specialty Insurance Company (Fairmont, formerly Ranger Insurance Company), a subsidiary of
Fairfax, covering 100% of policies that are classified as excess liability for public entities
and that incept, renew, have an anniversary date or come into effect on or after March 1, 1999.
This business was produced by an agency affiliate of Fairmont. The agreement provides for the
Company to receive a ceding commission of 23% of direct premiums written that are subject to the
agreement. Effective June 30, 2002, this agreement was terminated and a new agreement was
signed with TIG covering the same business, at substantially the same terms. The new agreement
covers policies written on or after July 1, 2002. This agreement was terminated effective
September 1, 2003. The Company ceded premiums of $4,878 in 2002 to Fairmont and premiums of
$17,679 and $8,266 in 2003 and 2002, respectively, to TIG under these agreements. As of
December 31, 2004 and 2003, the Company had reinsurance recoverable of $14,776 and $7,009,
respectively, from Fairmont, and $8,922 and $4,476, respectively, from TIG, related to these
agreements.Effective February 1, 2002, the Company entered into an arrangement with TIG whereby the Company
issued policies on behalf of TIG totaling $22,923 in gross premiums written. The Company
entered into reinsurance agreements under which approximately 30% of the total risk under these
policies was ceded to TIG with the remaining 70% ceded to third party reinsurers. This
arrangement with TIG was terminated as of June 30, 2002. For the year ended December 31, 2002,
the
Company ceded $6,265 in premiums to TIG under this agreement. As of December 31, 2004 and 2003,
the Company had reinsurance recoverable of $3,196 and $4,677, respectively, from TIG related to
this agreement.Effective January 1, 2001, the Company entered into a reinsurance agreement with Lombard General
Insurance Company of Canada (Lombard), an affiliate of Fairfax, under which the Company has
agreed to reinsure 100% of the surety business of Lombard underwritten by the Company. The
agreement provides for a 10% ceding commission. For the years ended December 31, 2004, 2003 and
2002, the Company assumed $788, $1,103 and $1,091, respectively, in premiums from Lombard. As
of December 31, 2004 and 2003, the Company had $1,002 and $638 in reserves for this assumed
business.The Company has various facultative policies in the normal course of business in effect with
RiverStone Insurance (UK) Ltd., an affiliate of Fairfax. No premiums were ceded to RiverStone
Insurance (UK) Ltd. in 2004, 2003 and 2002. At December 31, 2004 and 2003, the Company had
reinsurance recoverable of $26 and $27, respectively, on these policies.Investment agreementsThe Company and its subsidiaries have entered into agreements with Hamblin Watsa Investment
Counsel Ltd. (Hamblin Watsa), a wholly-owned subsidiary of Fairfax, for investment management
services, and with Fairfax for investment administration services. Pursuant to the agreements,
fees, based upon assets under management, totaled $7,606, $7,506 and $6,672 for the years ended
December 31, 2004, 2003 and 2002, respectively, and were included as investment expenses in the
consolidated statements of income.A Master Repurchase Agreement between the Company and Fairfax, effective July 1, 2000, provides
for the repurchase of securities transferred to Fairfax in order to provide liquidity. The
Company is obligated to repurchase from Fairfax securities transferred at a price equal to the
amount initially raised from their sale plus the stated interest rate of each security pursuant
to its initial sale. There were no transactions conducted under this arrangement in 2004, 2003
or 2002.Other agreementsUnder an agreement effective July 1, 2000, the Company appointed RiverStone Claims Management
LLC (RiverStone), a wholly-owned subsidiary of Fairfax, as its claims manager to handle its
asbestos, environmental, other latent and construction defects claims. The expense incurred for
these services was $3,600 for the year ended December 31, 2004 and $2,100 per year for the years
ended December 31, 2003 and 2002. The Company also engages RiverStone on a contingent basis to
assist in reinsurance commutation negotiations. Fees for such services were $5, $338 and $38 in
2004, 2003 and 2002, respectively.Fairfax purchases insurance coverage on behalf of its affiliates, including comprehensive crime,
insurance companies professional liability, directors and officers liability and company
reimbursement, employment practices liability and fiduciary liability. The Companys share of
the expense incurred for this coverage was $1,396, $1,141 and $333 per year for the years ended
December 31, 2004, 2003 and 2002, respectively. 89




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  Under an agreement effective September 1, 2001, US Fire has agreed to obtain certain information
technology services, including production and operations support and systems development, on a
non-exclusive basis from Fairfax Information Technology Services, Inc. (FITS), a wholly-owned
subsidiary of Fairfax. Payments for these services for the years ended December 31, 2004, 2003
and 2002 were $14,464, $15,089 and $13,536, respectively. Of such payments, $9,064, $7,346 and
$7,262 were charged directly to expense for 2004, 2003 and 2002, respectively. The remaining
$5,400, $7,743 and $6,274 related to ongoing systems development costs for 2004, 2003 and 2002,
respectively. The Company expenses these costs over a five-year period, beginning on the date
the development project is placed in service. In 2004, 2003 and 2002, $2,576, $2,577 and
$1,319, respectively was charged to operations and approximately $16,318 and $13,494 was
included in other assets for the years ended December 31, 2004 and 2003, respectively. In
addition, FITS entered into an agreement with the Company effective January 1, 2001 pursuant to
which FITS is provided certain management and general services by the Company. Under this
agreement, $49 and $54 were billed by the Company for the years ended December 31, 2004 and
2003, respectively.Effective January 1, 2000, the Company entered into a service agreement with TIG to obtain
certain services relating to issuing policies and handling claims. Payments for these services
were $113, $250 and $336 for the years ended December 31, 2004, 2003 and 2002, respectively.The Company receives income from subleases of office space to Fairfax affiliates. Sublease
income received from affiliates in 2004, 2003 and 2002 amounted to $399, $398 and $349,
respectively.Under an agreement effective October 1, 2001 through January 1, 2004, the Company provided
certain claims services to TIG. Fees billed for these services were $84 and $157 in 2003 and
2002, respectively.The Company receives loss adjustment services from Cunningham Lindsey U.S., Inc., an affiliate
of Fairfax. Expenses incurred for these services were $64, $132 and $215 for the years ended
December 31, 2004, 2003 and 2002, respectively.Included in accounts payable and other liabilities as of December 31, 2004 and 2003 are amounts
payable to Fairfax and affiliates of $4,173 and $12,216, respectively.Management believes that the revenues and expenses related to the transactions with affiliated
entities would not be materially different if such transactions were with unaffiliated entities.11.
    Employee BenefitsThe Company sponsors a qualified defined contribution plan pursuant to sections 401(k) and
401(a) of the Internal Revenue Code, for which all employees are eligible after completing one
year of service. The Company makes an annual contribution equal to 3% of base salary and a
matching contribution equal to one-half of each employees contribution up to the first 6% of
base salary. Certain employees also have the opportunity to participate in a non-qualified plan
that permits contributions that would otherwise be limited by IRS regulations. Total defined
contribution plan expense was $3,154, $3,548 and $2,750 for the years ended December 31, 2004,
2003 and 2002, respectively.The Company provides postretirement health care and life insurance benefits to certain retired
employees. Medical benefits are provided to employees who were at least age 50 on January 1,
1994, and upon retirement are at least age 55 and have at least 15 years of service. Employees
hired before August 1, 1990 are eligible for retiree life insurance coverage based on defined
age, service and salary criteria. 90




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  A reconciliation of the changes in the postretirement plans benefit obligation, fair value of
assets, accrued benefit cost and a statement of the funded status is presented below. The
Company uses a December 31st measurement date for its postretirement health care and
life insurance plans. At December 31,2004
    
    
    2003Changes in benefit obligation:Benefit obligation at beginning of year
    
    $
    14,752
    
    
    $
    16,114Service cost
    
    
    1
    
    
    
    2Interest cost
    
    
    839
    
    
    
    989Plan participants contributions
    
    
    1,137
    
    
    
    1,266Actuarial gain
    
    
    (785
    )
    
    
    (722
    )Benefits paid
    
    
    (2,345
    )
    
    
    (2,897
    )Benefit obligation at end of year
    
    $
    13,599
    
    
    $
    14,752Change in fair value of assets:Fair value of assets at beginning of year
    
    $
    -
    
    
    $
    -Employer contributions
    
    
    1,208
    
    
    
    1,631Plan participants contributions
    
    
    1,137
    
    
    
    1,266Benefits paid
    
    
    (2,345
    )
    
    
    (2,897
    )Fair value of assets at end of year
    
    $
    -
    
    
    $
    -Accrued benefit cost:Funded status
    
    $
    (13,599
    )
    
    $
    (14,752
    )Unrecognized net actuarial gain
    
    
    (3,251
    )
    
    
    (2,610
    )Unrecognized transition obligation
    
    
    5,903
    
    
    
    6,720Accrued benefit cost
    
    $
    (10,947
    )
    
    $
    (10,642
    )
  The components of net periodic benefit cost are summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Service cost
    
    $
    1
    
    
    $
    2
    
    
    $
    4Interest cost
    
    
    839
    
    
    
    989
    
    
    
    1,100Amortization of transition obligation
    
    
    817
    
    
    
    817
    
    
    
    817Recognized net actuarial gain
    
    
    (146
    )
    
    
    (64
    )
    
    
    (204
    )Net periodic benefit cost
    
    $
    1,511
    
    
    $
    1,744
    
    
    $
    1,717
  The weighted average discount rate used in determining the accumulated postretirement benefit
obligation was 5.75% and 6.0% at December 31, 2004 and 2003, respectively. For purposes of
measuring the accumulated postretirement benefit obligation at December 31, 2004, the health
care cost trend rates are assumed to decline gradually from 8.5% for participants under age 65
and 10.5% for participants over age 65 in 2004 to 5.25% for all participants in the year 2010
and thereafter. Increasing the assumed health care cost trend rates by one percentage point in
each year would increase the accumulated postretirement benefit obligation at December 31, 2004
by $1,256, and the aggregate of the service and interest cost components of net periodic
postretirement benefit expense for 2004 by $72. Conversely, decreasing the assumed health care
cost trend rates by one percentage point in each year would decrease the accumulated
postretirement benefit obligation at December 31, 2004 by $923, and the aggregate of the service
and interest cost components of net periodic postretirement benefit expense for 2004 by $39.
The Companys expected contribution to the Plan in 2005 is $1,387. 91




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  As of December 31, 2004, the future benefit payments are expected to be as follows: 2005
    
    $
    1,3872006
    
    $
    1,4362007
    
    $
    1,4542008
    
    $
    1,4412009
    
    $
    1,3962010 - 2014
    
    $
    5,635
  Certain employees of the Company have been granted shares of restricted common stock of Fairfax
under the Fairfax Financial 1999 Restricted Share Plan. The restricted stock vests over periods
ranging from five to ten years. Amortization of $1,048, $1,174 and $1,181 for the years ended
December 31, 2004, 2003 and 2002, respectively, is included in the consolidated statements of
income.12.
    Commitments and ContingenciesThe Company and its subsidiaries lease office space and equipment under long-term leases
expiring through the year 2022. Minimum annual rentals are summarized as follows: 2005
    
    $
    11,9442006
    
    
    10,8652007
    
    
    7,1742008
    
    
    6,1652009
    
    
    5,6672010 and thereafter
    
    
    45,448Total minimum annual rentals
    
    $
    87,263
  The amounts above are reduced by space subleased to other companies in the aggregate amount of
$1,852.Rental expense, before sublease income, under these operating leases was $12,325, $18,558 and
$13,697 in 2004, 2003 and 2002, respectively. Rental expense for 2003 includes a $4,312 charge
for future rent payments on facilities that are currently vacant. The Company recognized
$1,821, $2,064 and $1,827, in 2004, 2003 and 2002, respectively, from subleases.Effective December 31, 2002, the Company entered into a 20-year operating lease for its home
office. This lease has total minimum lease payments remaining of $53,626, which are included in
the amounts above. In conjunction with the termination of the existing lease, the Company
recognized income of $18,409 in 2002 relating to a fair value rent adjustment recorded at the
date the Company was acquired by Fairfax.Effective October 12, 2000, the Company entered into an information technology services
agreement with American International Technology Enterprises, Inc. The agreement has an initial
term of five years and a renewal provision that extends the initial term by additional periods
of one year each. Under the agreement, the Company pays baseline charges for mainframe usage
and production system support with adjustments based on actual activity. Charges under the
agreement totaled $5,003, $7,426 and $12,653 in 2004, 2003 and 2002, respectively. As of
December 31, 2004, future estimated minimum payments required under the agreement are $3,570 in
2005. Upon 180 days prior written notice and payment of early termination fees, the Company may
terminate this agreement at any time. The mainframe usage and production system support early
termination fees are $171 and $547, respectively.The Company has purchased structured settlement annuities from various insurance companies in
order to settle certain claim liabilities. Should these other companies become unable to make
the annuity payments, the Company would be liable. The value of these annuities included in
reinsurance recoverable in the consolidated balance sheets at December 31, 2004 and 2003 was
approximately $152,022 and $151,873, respectively. Approximately 76.3% of this balance is due
from insurance companies rated A or better by A.M. Best Company. 92




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  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 financial position, results of operations or liquidity.
However, it should be noted that the frequency of large damage awards, including punitive damage
awards that bear little or no relation to actual economic damages incurred by plaintiffs in some
jurisdictions, continues to create the potential for an unpredictable judgment in any given
matter.  13.
    Dividend Restrictions, Statutory Information and CapitalizationThe Companys insurance subsidiaries are subject to state regulatory restrictions that limit the
maximum amount of dividends they can pay to the Company. These regulations vary by state. The
restrictions are generally based on the net income, investment income and policyholders surplus
of each insurance company, and further provide that the payment of dividends must be from the
earned policyholders surplus of the insurance company. Any payment of dividends above the
regulatory limits is subject to the approval of the Insurance Commissioner in the state of
domicile. The Companys insurance subsidiaries are domiciled in the states of Delaware, New
Jersey, New York and Arizona. In December 2003, US Fire and CF Indemnity changed their state of
domicile from New York to Delaware.The combined statutory basis net income and policyholders surplus of Crum & Forsters insurance
subsidiaries are presented below: Years Ended December 31,2004
    
    
    2003
    
    
    2002Net income
    
    $
    74,556
    
    
    $
    223,385
    
    
    $
    66,227Policyholders surplus
    
    $
    1,206,547
    
    
    $
    1,107,435
    
    
    $
    856,393
  GAAP differs in certain respects from the statutory accounting practices prescribed or permitted
by insurance regulatory authorities for the Companys insurance subsidiaries. Prescribed
statutory accounting practices include state laws, regulations and general administrative rules,
as well as a variety of publications of the NAIC. Permitted statutory accounting practices
encompass all accounting practices that are not prescribed; such practices differ from state to
state, may differ from company to company within a state and may change in the future.The principal differences between statutory policyholders surplus and shareholders equity
determined in accordance with GAAP relate to accounting for deferred federal income taxes,
deferred policy acquisition costs, unrealized gains and losses on fixed income securities and
deferred gains on retroactive reinsurance.US Fire owns in excess of 10% of the outstanding shares of Zenith, which requires the investment
to be valued as an affiliate under the Codification of Statutory Accounting Principles adopted
by the NAIC in 1998. US Fires state of domicile has granted a permitted accounting practice to
treat Zenith as a non-affiliated investment based on the absence of control by US Fire. As of
December 31, 2004 and 2003, this permitted accounting practice increased statutory surplus by
$11,305 and $16,050, respectively, over what it would have been had prescribed accounting
practice been followed. 93




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)  14.
    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: Years Ended December 31,2004
    
    
    2003
    
    
    2002Workers compensation
    
    $
    282,388
    
    
    $
    210,951
    
    
    $
    169,402General liability
    
    
    198,993
    
    
    
    165,199
    
    
    
    128,370Property
    
    
    187,177
    
    
    
    209,042
    
    
    
    146,216Commercial automobile
    
    
    174,416
    
    
    
    132,317
    
    
    
    106,269Commercial multi-peril
    
    
    42,833
    
    
    
    33,015
    
    
    
    45,898Surety
    
    
    21,902
    
    
    
    18,348
    
    
    
    13,357Total premiums earned
    
    $
    907,709
    
    
    $
    768,872
    
    
    $
    609,512
  The calendar year losses and LAE and losses and LAE ratios of the Companys lines of business
are summarized as follows: Years Ended December 31,2004
    
    
    2003
    
    
    2002Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioWorkers compensation
    
    $
    225,733
    
    
    
    79.9%
    
    
    $
    166,009
    
    
    
    78.7%
    
    
    $
    189,687
    
    
    
    112.0%General liability
    
    
    208,181
    
    
    
    104.6%
    
    
    
    241,928
    
    
    
    146.4%
    
    
    
    87,488
    
    
    
    68.2%Property
    
    
    154,868
    
    
    
    82.7%
    
    
    
    125,909
    
    
    
    60.2%
    
    
    
    56,244
    
    
    
    38.5%Commercial automobile
    
    
    112,331
    
    
    
    64.4%
    
    
    
    89,094
    
    
    
    67.3%
    
    
    
    116,405
    
    
    
    109.5%Commercial multi-peril
    
    
    43,910
    
    
    
    102.5%
    
    
    
    25,064
    
    
    
    75.9%
    
    
    
    2,247
    
    
    
    4.9%Surety
    
    
    16,489
    
    
    
    75.3%
    
    
    
    4,330
    
    
    
    23.6%
    
    
    
    8,387
    
    
    
    62.8%Total losses and LAE
    
    $
    761,512
    
    
    
    83.9%
    
    
    $
    652,334
    
    
    
    84.8%
    
    
    $
    460,458
    
    
    
    75.5%
  The Company does not allocate investment results or certain corporate expenses for purposes of
evaluating financial performance of each line of business.15.
    Quarterly Financial DataThe Companys unaudited quarterly financial data is summarized as follows: Three Months Ended(Unaudited)December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003
    
    
    2004
    
    
    2003Premiums earned
    
    $
    242,370
    
    
    $
    219,605
    
    
    $
    212,037
    
    
    $
    204,305
    
    
    $
    225,763
    
    
    $
    173,124
    
    
    $
    227,539
    
    
    $
    171,838Investment income1
    
    $
    59,202
    
    
    $
    54,709
    
    
    $
    24,720
    
    
    $
    27,815
    
    
    $
    38,796
    
    
    $
    184,942
    
    
    $
    61,117
    
    
    $
    73,007Losses and LAE
    
    $
    206,979
    
    
    $
    266,926
    
    
    $
    233,132
    
    
    $
    138,536
    
    
    $
    159,264
    
    
    $
    130,144
    
    
    $
    162,137
    
    
    $
    116,728Net income (loss)
    
    $
    14,727
    
    
    $
    (39,335
    )
    
    $
    (44,777
    )
    
    $
    13,854
    
    
    $
    19,091
    
    
    $
    111,394
    
    
    $
    35,154
    
    
    $
    49,832Combined ratio
    
    
    111.5%
    
    
    
    148.4%
    
    
    
    139.8%
    
    
    
    97.2%
    
    
    
    98.5%
    
    
    
    106.3%
    
    
    
    99.0%
    
    
    
    98.5%
  1
    Investment income includes realized investment
gains and losses and pre-tax equity in
earnings of investees.  This quarterly financial data is unaudited. However, in the opinion of management, all
adjustments (consisting of normal recurring adjustments) necessary to present fairly the results
of operations for such periods, have been made for a fair presentation of the results shown. 94




---



##### 



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE None. 
 ITEM 9A. CONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures The Companys principal executive officer and its principal financial officer have evaluated the
effectiveness of the Companys disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended, as of the end of the period
covered by this report. Based on that evaluation, such officers have concluded that the Companys
disclosure controls and procedures are effective as of the end of such period. 
 Changes in Internal Control Over Financial Reporting During the fourth fiscal quarter of the period covered by this report, there has been no change in
the Companys internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Companys internal control over financial reporting. The design of any system of controls and procedures is based, in part, upon certain assumptions
about the likelihood of future events. There can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions, regardless of how remote. 
 ITEM 9B. OTHER INFORMATION Effective January 1, 2005, amended employment agreements were entered into between each of Nikolas
Antonopoulos, President and Chief Executive Officer of the Company, Mary Jane Robertson, Executive
Vice President, Chief Financial Officer and Treasurer of the Company, Joseph Braunstein, President
of certain of the Companys insurance subsidiaries, and the Company, Crum & Forster Holding Inc.
and Fairfax. For a description of the terms and conditions of the employment agreements, see Item
11. Executive Compensation. The employment agreements are filed as exhibits to this annual
report on Form 10-K. On March 1, 2005, the Company put into effect the Crum & Forster Long Term Incentive Plan for
certain employees who hold senior management or officer positions with the Company or its
subsidiaries. For a description of the terms and conditions of the Long Term Incentive Plan, see
Item 11. Executive Compensation. The Long Term Incentive Plan is filed as an exhibit to this
annual report on Form 10‐K. 
 PART III 
 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 
 Directors and Executive Officers The Companys directors and executive officers are as follows: Name
    
    
    Age
    
    
    PositionV. Prem Watsa
    
    
    54
    
    
    ChairmanNikolas Antonopoulos
    
    
    51
    
    
    President and Chief Executive OfficerMary Jane Robertson
    
    
    51
    
    
    Executive Vice President, Chief
Financial Officer and TreasurerFrank B. Bennett1
    
    
    48
    
    
    DirectorAnthony F. Griffiths1
    
    
    74
    
    
    DirectorRobbert Hartog1,2
    
    
    86
    
    
    Director
 1
    Audit committee member.2
    Chairman of the audit committee.
 95




---



##### 



V. Prem Watsahas served as the Companys Chairman since March 7, 2002 and served as its Chief
Executive Officer from May 20, 2003 to March 31, 2004. Mr. Watsa has served as Chairman and Chief
Executive Officer of Fairfax since 1985 and as Vice President of Hamblin Watsa since 1985. He
formerly served as Vice President of GW Asset Management from 1983 to 1984 and Vice President of
Confederation Life Investment Counsel from 1974 to 1983. Mr. Watsa has served as Chairman of
Odyssey since March 2001. Nikolas Antonopouloshas served as the Companys President since March 7, 2002 and as its Chief
Executive Officer since March 31, 2004. Mr. Antonopoulos served as the Companys Chief Operating
Officer from May 20, 2003 to September 29, 2004. Mr. Antonopoulos also served as President and a
director of Crum & Forsters principal insurance subsidiaries until June 18, 2004 and became the
Chief Executive Officer of such companies on April 2, 2004 and
the Chairman of the Boards on June
18, 2004. Mr. Antonopoulos formerly served as Principal at MMC Capital Inc. from 1996 to 1999.
Prior to 1996, Mr. Antonopoulos held a variety of senior operating positions in AIGs Domestic
Brokerage Group where he most recently held the position of Senior Vice President of Operations. Mary Jane Robertsonhas served as the Companys Executive Vice President and Chief Financial
Officer since March 7, 2002 and as its Treasurer since May 20, 2003. Ms. Robertson has served as
Executive Vice President, Treasurer and a director of the Companys principal insurance
subsidiaries since 1999. Ms. Robertson formerly served as Managing Principal and Chief Financial
Officer of Global Markets Access Limited from 1998 to 1999 and Senior Vice President and Chief
Financial Officer of Capsure Holdings Corp. from 1993 to 1997. Ms. Robertson is a director,
chairperson of the audit committee and a member of the corporate governance committee of Russell
Corporation, a publicly held, branded athletic and sporting goods company. Frank B. Bennetthas served as a member of the Companys board of directors since May 20, 2003.
Mr. Bennett is a director of Multiband Corporation, a publicly held telecommunications and media
services company, where he serves on the audit committee, and a director of Kona Grill Inc., a
privately held restaurant company. Since 1988, Mr. Bennett has also been President of Artesian
Capital, a private equity investment company. From 1996 through 1999, Mr. Bennett was co-founder,
Chairman and Chief Executive Officer of One Call Telecom, Inc., a private telecommunications
carrier. Mr. Bennett has served as a director of various private companies from 1990 through 2001,
including Waycrosse, Inc. and Integ, Incorporated, which was privately held from 1992 through 1996
and publicly held from 1996 through 2001. Beginning in 1996, Mr. Bennett served on the audit
committee of Integ, Incorporated until its merger in 2001 with Inverness Medical, Inc. Mr. Bennett
has also held various executive level positions at Mayfield Corp. and Piper, Jaffray Companies,
Inc. Mr. Bennett is also a director of Fairfax and Odyssey, where, in each case, he serves on the
audit committee. Anthony F. Griffithshas served as a member of the Companys board of directors since March 6,
2002. Since 1993, Mr. Griffiths has been an independent business consultant and corporate
director. Mr. Griffiths became the Chairman of Mitel Corporation, a telecommunications company, in
1987 and also assumed the positions of President and Chief Executive Officer in addition to that of
Chairman from 1991 to 1993. He is currently a director of Fairfax and several of its subsidiaries,
including Odyssey and HUB International Limited (Hub).
Mr. Griffiths is also a director of Alliance Atlantis Communications Inc.,
Leitch Technology Corporation, Vitran Corporation Inc., Counsel Corporation, IMI International
Medical Innovations and Russel Metals Inc. Mr. Griffiths serves on the audit committees of
Fairfax, Odyssey, Hub and Counsel Corporation. Robbert Hartoghas served as a member of the Companys board of directors since March 6, 2002. Mr.
Hartog has been President and a director of Robhar Investments Limited, a private investment
company, for the past seven years. He is a director of Fairfax and
several of its subsidiaries (including Odyssey) and Russel Metals Inc. Mr. Hartog serves on the audit committees of Fairfax,
Odyssey and Russel Metals Inc. 
 Key Employees of the Operating Companies Joseph F. Braunsteinhas served as the President of the Companys principal insurance subsidiaries
since June 18, 2004. Mr. Braunstein joined Crum & Forster in 2000 after 29 years at CIGNA
Corporation. At CIGNA, he led the Integrated Care business, which included workers compensation,
disability and health care. For most of his career, Mr. Braunstein held various field and product
line management roles in CIGNAs property and casualty, large risk and international businesses. 96




---



##### 



Bruce A. Esselbornserved as Chairman and Chief Executive Officer of Holding and its principal
insurance subsidiaries from 1999 through June 15, 2004 and April 2, 2004, respectively. Mr.
Esselborn agreed to serve as a consultant to Fairfax from his retirement date through December 31, 2004. From 1997 to 1999, Mr. Esselborn was a consultant to MMC Capital Inc., a global private equity investment firm that is a subsidiary of Marsh &
McLennan Companies, Inc. Mr. Esselborn formerly served as President of Capsure Holdings Corp. from 1990 to
1997, and Chairman, President and Chief Executive Officer of United Capitol Insurance Company,
which he co-founded in 1986. Prior to 1986, Mr. Esselborn held a variety of senior operating and
technical positions at the operating company level within AIGs domestic insurance business. 
 Audit Committee and Audit Committee Financial Expert The Companys board of directors has established an audit committee composed of Messrs. Bennett,
Griffiths and Hartog. The audit committees primary responsibilities include: engaging independent
accountants; appointing the chief internal auditor; approving independent audit fees; reviewing
quarterly and annual financial statements, audit results and reports, including management comments
and recommendations thereto; reviewing the Companys systems of controls and policies, including
those covering conflicts of interest and business ethics; evaluating reports of actual or
threatened litigation; considering significant changes in accounting practices; and examining
improprieties or suspected improprieties, with the authority to retain outside counsel or experts. All of the members of the audit committee are independent within the meaning of the regulations of
the Securities and Exchange Commission. In addition, the Board of Directors has determined that
Mr. Hartog, the Chairman of the audit committee, is qualified as an audit committee financial
expert within the meaning of the regulations of the Securities and Exchange Commission. 
 Compensation of Directors Messrs. Bennett, Griffiths and Hartog are compensated annually in the amount of $15,000, plus $750
per board meeting attended and their reasonable expenses of each attendance. In addition, Mr.
Bennett, Mr. Griffiths and Mr. Hartog serve on Crum & Forsters audit committee and receive $750
per committee meeting attended if held separately from a board meeting. 
 Code of Ethics The Company has adopted a Code of Ethics for Senior Financial Officers, which is filed as an
exhibit to this annual report on Form 10-K. 97




---



##### 



ITEM 11. EXECUTIVE COMPENSATION 
 Executive Compensation The following table sets forth certain compensation information for the Companys Chief Executive
Officer and other executive officers, referred to as the named executive officers, during the years
ended December 31, 2004, 2003 and 2002. Annual Compensation
    
    
    Long-Term Compensation AwardsOther
    
    
    
    
    
    
    Long-TermAnnual
    
    
    Restricted
    
    
    Incentive
    
    
    All OtherFiscal
    
    
    
    
    
    
    
    
    
    
    Compen-
    
    
    Stock
    
    
    Plan
    
    
    Compen-Name and Principal Position
    
    Year
    
    
    Salary
    
    
    Bonus1
    
    
    sation2
    
    
    Awards3
    
    
    Payouts
    
    
    sation4V. Prem Watsa5
    
    
    2004
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -Chairman and former
    
    
    2003
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -Chief Executive Officer
    
    
    2002
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -Nikolas Antonopoulos6
    
    
    2004
    
    
    $
    607,692
    
    
    $
    1,000,000
    
    
    $
    -
    
    
    $
    353,646
    
    
    $
    -
    
    
    $
    845,730President and
    
    
    2003
    
    
    $
    500,000
    
    
    $
    700,000
    
    
    $
    55,207
    
    
    $
    -
    
    
    $
    -
    
    
    $
    839,500Chief Executive Officer
    
    
    2002
    
    
    $
    400,000
    
    
    $
    500,000
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    22,500Mary Jane Robertson6
    
    
    2004
    
    
    $
    500,000
    
    
    $
    750,000
    
    
    $
    83,139
    
    
    $
    161,557
    
    
    $
    -
    
    
    $
    842,499Executive Vice President,
    
    
    2003
    
    
    $
    500,000
    
    
    $
    700,000
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    839,500Chief Financial Officer
    
    
    2002
    
    
    $
    400,000
    
    
    $
    500,000
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    22,500and TreasurerJoseph F. Braunstein6
    
    
    2004
    
    
    $
    375,000
    
    
    $
    550,000
    
    
    $
    -
    
    
    $
    161,557
    
    
    $
    -
    
    
    $
    295,483President of Crum & Forstersinsurance subsidiariesBruce A. Esselborn6
    
    
    2004
    
    
    $
    469,231
    
    
    $
    650,000
    
    
    $
    76,699
    
    
    $
    -
    
    
    $
    -
    
    
    $
    7,059,062Former Chief Executive Officer of
    
    
    2003
    
    
    $
    1,000,000
    
    
    $
    1,400,000
    
    
    $
    58,300
    
    
    $
    -
    
    
    $
    -
    
    
    $
    1,785,000Crum & Forsters
    
    
    2002
    
    
    $
    1,000,000
    
    
    $
    1,000,000
    
    
    $
    -
    
    
    $
    -
    
    
    $
    -
    
    
    $
    54,000insurance
subsidiaries
  1
    The amounts shown were earned in the year indicated and paid in the following
year.2
    In accordance with SEC rules, perquisite disclosure is only included where all
perquisites exceed the lesser of $50,000 or 10% of a named executive officers salary and
bonus. Includes payments by the Company with respect to the lease of an automobile for Mr.
Esselborn in 2003 and 2002, Mr. Antonopoulos in 2003 and Ms. Robertson in 2004 in amounts
of $25,419, $26,478, $23,989 and $23,256, respectively, and payments to compensate Mr.
Esselborn in 2003 and 2002, Mr. Antonopoulos in 2003 and Ms. Robertson in 2004 for higher
property tax expense incurred with respect to home relocation in amounts of $32,881,
$22,797, $31,218 and $59,883, respectively. Of the amount shown for Mr. Esselborn for
2004, $48,202 represents payments by the Company to reimburse Mr. Esselborn for the cost of
relocation expenses upon his retirement.3
    Mr. Antonopoulos, Ms. Robertson and Mr. Braunstein hold 5,000, 4,017 and 2,790
shares of restricted subordinate voting shares of Fairfax, respectively, granted under the
Fairfax Financial 1999 Restricted Share Plan, with values of approximately $842,500,
$676,865 and $470,115, respectively, as of December 31, 2004, based upon the closing price
of the subordinate voting shares of Fairfax on the New York Stock Exchange. Of those
amounts, 2004 grants of restricted subordinate voting shares of Fairfax to Mr.
Antonopoulos, Ms. Robertson and Mr. Braunstein under the Fairfax Plan were 2,664, 1,217 and
1,217 shares, respectively, with values of approximately $353,646, $161,557 and $161,557,
respectively, as of the grant date of October 1, 2004, based upon the closing price of the
subordinate voting shares of Fairfax on the New York Stock Exchange. Dividends declared by
the board of directors of Fairfax are payable on restricted subordinate voting shares of
Fairfax.4
    With respect to 2004, includes a contribution under the Individual Retirement Plan
of the United States Fire Insurance Company (IRP) for each of Mr. Antonopoulos, Ms.
Robertson, Mr. Braunstein and Mr. Esselborn in the amount of $8,307, $8,307, $12,150 and
$12,150, respectively (including a company matching contribution of $2,307, $2,307, $6150
and $6,150, respectively, and a company basic contribution of $6,000 each) and a
contribution under the Supplemental Individual Retirement Plan of the United States Fire
Insurance Company (SIRP) for Mr. Antonopoulos, Ms. Robertson and Mr. Esselborn in the
amounts of $24,923, $21,692 and $31,696, respectively (including a company matching
contribution of $15,923, $12,692 and $7,696, respectively, and a company basic contribution
of $9,000, $9,000 and $24,000, respectively). 98




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With respect to 2003, includes a
contribution under the IRP for each of Mr. Antonopoulos,
Ms. Robertson and Mr. Esselborn in the amount of $7,800, $7,800 and $12,000, respectively (including a company
matching contribution of $1,800, $1,800 and $6,000 and a company basic contribution of $6,000
each), and a contribution under the SIRP for Mr. Antonopoulos, Ms. Robertson and Mr. Esselborn
in the amounts of $19,200, $19,200 and $48,000 (including a company matching contribution of
$6,000, $6,000 and $24,000, respectively, and a company basic contribution $13,200, $13,200 and
$24,000, respectively). With respect to 2002, includes a contribution under the IRP for each
of Mr. Antonopoulos, Ms. Robertson and Mr. Esselborn in the amount of $7,408, $6,946 and
$10,600, respectively (including a company matching contribution of $2,308, $1,846 and $5,500
and a company basic contribution of $5,100 each), and a contribution under the SIRP for Mr.
Antonopoulos, Ms. Robertson and Mr. Esselborn in the amounts of $15,092, $15,554 and $43,400
(including a company matching contribution of $9,692, $10,154 and $24,500, respectively, and a
company basic contribution $5,400, $5,400 and $18,900, respectively). In 2003, the Company
awarded a bonus to each of Mr. Antonopoulos and Ms. Robertson in the amount of $3,250,000, Mr.
Braunstein in the amount of $1,000,000 and Mr. Esselborn in the amount of $6,900,000 in
recognition of each individuals service and contribution to the Company in 1999 through 2002.
The bonus vested or will vest 25% on each of July 1, 2003, July 1, 2004, July 1, 2005 and July
1, 2006 and was or will be payable, as applicable, within 10 days of vesting. Mr. Braunstein
was awarded an additional $99,999 in 2004, which amount vested or will vest, as applicable,
equally on July 1, 2004, July 1, 2005 and July 1, 2006. If an individual terminates employment
prior to any vesting date, he or she will forfeit payment of the unvested portion of the bonus.
Notwithstanding the foregoing, the unvested portion of the bonus will immediately vest and
become payable if such individual (i) dies, (ii) becomes disabled, (iii) retires, (iv) is
terminated without cause, (v) resigns for good reason or (vi) upon a change of control.
Accordingly, Mr. Esselborns recognition award vested in full on the date of his retirement and
the remaining portion of his award in the amount of $5,175,000 was paid out in 2004. Mr.
Esselborn also received those shares of Fairfax restricted subordinate voting shares granted to
him under the Fairfax Financial 1999 Restricted Share Plan, net of applicable withholdings
taxes, that had fully vested, and were valued at $1,840,216, based on the closing price of the shares on the New York Stock Exchange, on October 7, 2004.5
    V. Prem Watsa is compensated by Fairfax without reimbursement by the Company.
During 2004, 2003 and 2002, Mr. Watsa was paid total annual compensation of Cdn$600,000 in
each year and total other compensation of Cdn$15,500, Cdn$14,500 and Cdn$13,500,
respectively, by Fairfax. Since 2000, Mr. Watsa has agreed that his aggregate compensation
from Fairfax and Hamblin Watsa Investment Counsel Ltd. will consist solely of an annual
salary of Cdn$600,000 (and standard benefits provided to Fairfaxs executives generally),
with no bonus or other profit participation and no participation in any equity plans (other
than the payroll purchase plan).6
    Includes amounts paid by Crum & Forster
Holdings Corp. and
subsidiaries. 
 Employment and Retirement Agreements; Change of Control Arrangements Nikolas Antonopoulos Mr. Antonopoulos serves as the President and Chief Executive Officer of the Company pursuant to an
employment agreement with the Company, Crum and Forster Holding Inc. and Fairfax originally
effective as of January 1, 2003, as amended effective January 1, 2005. Under the agreement, Mr.
Antonopoulos will also serve as the Chairman of the Board, President and Chief Executive Officer of
Holding and the Chairman of the Board and Chief Executive Officer of the Companys insurance
subsidiaries, excluding Seneca and its subsidiaries. The agreement provides for an initial
two-year term with automatic one-day extensions thereafter, such that the employment period at any
time is two years unless notice is given by either Mr. Antonopoulos or Holding stating that the
term will not be extended. Mr. Antonopoulos will be compensated for services rendered with an
annual base salary of $700,000 (increased from $500,000 under the terms of the original employment
agreement), which will be reviewed by the board of directors of Fairfax within a 90-day period
following January 1st of each year that the agreement remains in effect, with a minimum
annual base salary set at $700,000. In addition, Mr. Antonopoulos may receive an annual cash bonus
awarded solely at the discretion of Fairfax or the Company. Mr. Antonopoulos is also entitled to
participate in The United States Fire Insurance Company 2003 Extraordinary Bonus Plan and the Crum
& Forster Holdings Corp. Long Term Incentive Plan and will receive reimbursement of reasonable
business expenses, a club membership, an automobile, personal financial planning and property tax
equalization. In the event Mr. Antonopoulos is terminated by the Company without cause, or he
resigns employment for good reason (including a change in control), Mr. Antonopoulos will
continue to receive, for three years following termination, his base salary and an annual cash
bonus equal to his base salary on the date of termination, plus all miscellaneous health, death and
disability benefits to which he was entitled immediately prior to termination. In addition, upon
such termination of his employment, the vesting provisions of the
Fairfax Financial Restricted Share Plan, the Crum & Forster
Holdings Corp. Long Term Incentive Plan and The United States Fire
Insurance Company 2003 Extraordinary Bonus Plan are
accelerated and the Company will provide placement services for one year at no cost to Mr.
Antonopoulos. Mr. Antonopoulos is subject to post-termination non-solicitation covenants for one
year following termination of employment and to a perpetual confidentiality covenant. 99




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Mary Jane Robertson Ms. Robertson serves as the Executive Vice President, Chief Financial Officer and Treasurer of the
Company, Crum & Forster Holding Inc. and its insurance subsidiaries, other than CF Specialty, for
which she serves as the President, and excluding Seneca and its subsidiaries, pursuant to an
employment agreement with the Company, Holding and Fairfax originally effective as of January 1,
2003, as amended effective January 1, 2005. The agreement provides for an initial two-year term
with automatic one-day extensions thereafter, such that the employment period at any time is two
years unless notice is given by either Ms. Robertson or Holding stating that the term will not be
extended. Ms. Robertson will be compensated for services rendered with an annual base salary of
$500,000, which will be reviewed by the board of directors of Fairfax within a 90-day period
following January 1st of each year that the agreement remains in effect, with a minimum
annual base salary set at $500,000. In addition, Ms. Robertson may receive an annual cash bonus
awarded solely at the discretion of Fairfax or the Company. Ms. Robertson is also entitled to
participate in The United States Fire Insurance Company 2003 Extraordinary Bonus Plan and the Crum
& Forster Holdings Corp. Long Term Incentive Plan and will receive reimbursement of reasonable
business expenses, a club membership, an automobile, personal financial planning and property tax
equalization. Termination without cause, resignation for
good reason, accelerated vesting provisions and post-termination
non-solicitation and confidentiality covenants applicable to Ms. Robertson are the same as those
provided to Mr. Antonopoulos, as described above. Joseph F. Braunstein Mr. Braunstein serves as President of the Companys insurance subsidiaries, excluding CF Specialty
and Seneca and its subsidiaries, pursuant to an employment agreement with the Company, Holding and
Fairfax effective as of January 1, 2005, which terminated his prior employment agreement. The
agreement provides for an initial two-year term with automatic one-day extensions thereafter, such
that the employment period at any time is two years unless notice is given by either Mr. Braunstein
or Holding stating that the term will not be extended. Mr. Braunstein will be compensated for
services rendered with an annual base salary of $500,000, which will be reviewed by the board of
directors of Fairfax and the Chief Executive Officer of Holding within a 90-day period following
January 1st of each year that the agreement remains in effect, with a minimum annual
base salary set at $500,000. In addition, Mr. Braunstein may receive an annual cash bonus awarded
solely at the discretion of Fairfax or the Company. Mr. Braunstein is also entitled to participate
in The United States Fire Insurance Company 2003 Extraordinary Bonus Plan and the Crum & Forster
Holdings Corp. Long Term Incentive Plan and will receive reimbursement of reasonable business
expenses, a club membership, an automobile and personal financial planning. Termination without
cause, resignation for good reason,
accelerated vesting provisions and post-termination non-solicitation and confidentiality
covenants applicable to Mr. Braunstein are the same as those provided to Mr. Antonopoulos, as
described above. Bruce A. Esselborn In October 1999, Fairfax entered into an employment agreement with Mr. Esselborn. The agreement
provided that Mr. Esselborn would serve as the Chairman and Chief Executive Officer of Holding and
of the Companys principal insurance subsidiaries. Effective June 15, 2004, Mr. Esselborn entered
into a retirement and consulting agreement with the Company, Fairfax and Fairfax Inc. Under the
agreement, Mr. Esselborn resigned as Chief Executive Officer of Holding and its principal insurance
subsidiaries, effective April 2, 2004, and as Chairman of the Board of Holding and its principal
insurance subsidiaries, effective as of June 18, 2004. The agreement provides that Mr. Esselborn
will receive a pro-rata cash bonus for the 2004 calendar year as determined by Fairfax Inc. and
remains entitled to the Fairfax restricted stock award granted to him pursuant to his original
employment agreement in accordance with the vesting schedule stated therein. In addition, Mr.
Esselborn will continue to receive life insurance and medical benefits similar to those provided to
him prior to his retirement and reimbursement for the cost of preparation of his 2004 personal
income tax returns. The agreement also provided that Mr. Esselborn serve as a consultant to
Fairfax Inc. for the remainder of the 2004 calendar year for which he will receive a retainer fee
of $250,000 and reimbursement of reasonable business expenses. Mr. Esselborn was subject to a
non-competition covenant during the consulting period. Long-term incentive plan; Change in control provision On March 1, 2005, the Company adopted the Crum & Forster Long Term Incentive Plan (the LTIP, the
Plan) for certain employees who hold senior management or officer positions with the Company or
any of its subsidiaries. The Plan provides for the award of approximately $10 million aggregate
value of phantom stock to participants that will fully vest on January 1, 2009, provided the
participant is then employed by the Company or any of its subsidiaries. The number of phantom
shares authorized of 10,000 is based on a pro forma number of actual shares outstanding of
1,000,000. Mr. Antonopoulos, Ms. Robertson and Mr. Braunstein were awarded units of phantom stock
in the amounts of 3,030, 1,520 and 1,520, respectively, which were valued at $3,092,873, $1,551,540
and $1,551,540, respectively, as of December 31, 2004, based upon the per share value. The per
share value is based on the book value of the Company, determined in accordance with Canadian GAAP, less
certain adjustments, divided by total proforma actual and phantom stock of 1,010,000, plus credit
for dividend equivalents. As soon as practicable following the vesting date, the participant will
receive from the Company a lump sum payment equal to the per share value as of the last day of the
calendar quarter ended prior to or concurrent with the vesting date multiplied by the number of
units awarded to the participant. In the event a participant is no longer employed by the Company
or its subsidiaries prior to the vesting date of the award, all rights in respect to the award
immediately terminate and all phantom stock awarded under the Plan are forfeited and cancelled and
dividend equivalents credited to such shares are forfeited. In addition, the Plan provides for
accelerated vesting of phantom stock awards upon the participants death or disability, retirement,
involuntary termination of the participants employment by the Company or its subsidiaries without
cause or by the recipient for good cause, or upon a change of control. Under the terms of the
Plan, if any payment a participant would receive under the Plan becomes subject to the excess
parachute tax rules then the participant will be entitled to receive an additional gross-up payment
from the Company in an amount that will fund the excise and related taxes. 100




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Compensation Committee Interlocks and Insider Participation The entire board of directors of the Company performs similar functions to a compensation
committee. Mr. Watsa, Chairman of the Board of the Company and Chairman and Chief Executive
Officer of Fairfax, served as the Chief Executive Officer of the Company until March 31, 2004. 
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth information with respect to the beneficial ownership of the
Companys capital stock by:  
    all those known by the Company to be beneficial owners of more than 5% of the
outstanding shares of Crum & Forsters common stock; and
    all executive officers and directors as a group. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange
Commission that deem shares to be beneficially owned by any person or group who has or shares
voting or investment power with respect to such shares. Unless otherwise indicated, the persons
named in this table have sole voting and investment control with respect to all shares beneficially
owned. Shares of Common StockName of Person or Group
    
    Shares Owned
    
    
    Percent of TotalFairfax Inc.1
    
    
    100
    
    
    
    100
    %Officers, directors as a group
    
    
    -
    
    
    
    -
  1
    Fairfax Inc. is a subsidiary of Fairfax. The principal office address of
Fairfax Inc. is 300 First Stamford Place, Stamford Connecticut 06902. The Sixty Two
Investment Company Limited (Sixty Two), a company controlled by V. Prem Watsa, the
Companys Chairman, owns subordinate and multiple voting shares representing 50.4% of
the total votes attached to all classes of shares of Fairfax. Mr. Watsa himself
beneficially owns and controls additional subordinate voting shares, which, together
with the shares owned by Sixty Two, represent 51.2% of the total votes attached to all
classes of Fairfaxs shares. 
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 
 Investment Agreements Crum & Forster Holdings Corp. and each of Crum & Forsters insurance subsidiaries have entered into
investment agreements with Hamblin Watsa and Fairfax. The investment agreements provide for an
annual base fee of 0.30% of the total assets managed, with certain exclusions, and maximum annual
investment management fees, including additional incentive fees based on performance relative to
appropriate benchmarks, of 0.40% of the total assets managed, with certain exclusions (provided
that any fees exceeding this threshold may be carried forward). In addition, the investment
agreements provide that, subject to certain restrictions, Hamblin Watsa may sell securities between
Crum & Forster affiliates. These investment agreements may be terminated by any party on 30 days written notice. For the year ended December 31, 2004, total fees of $7.6 million were incurred for services under
the agreements described above. 101




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Investments in and Transactions With Affiliates In December 2004, the Company sold corporate bonds with a face value of $62.5 million to various
affiliates of Fairfax. The bonds were sold at fair market value ($52.3 million in the aggregate)
and the Company realized a gain on these transactions of $12.1 million. In November 2004, the
Company invested $10 million in Pacific Century Fund I (Pacific), a fund owned 100% by Fairfax
affiliates, which invests primarily in Japanese equity securities. In January 2005, the Company
invested an additional $10 million in Pacific. In July 2004, the Company sold 66,775 shares of Zenith National Insurance Corp. (Zenith) common
stock for total proceeds of $2.7 million, resulting in a realized investment gain of $1 million.
Zenith is a publicly traded insurance company (NYSE:ZNT) whose common
stock is owned 24.4% by Fairfax and affiliates at December 31,
2004. In June 2004, the Company sold two million shares of Russel Metals Inc. common stock for total
proceeds of $15.6 million, resulting in a realized investment gain of $9.9 million. In January, March and April 2004, the Company reinvested a total of $75 million in HWIC, a fund
owned 98.5% by Fairfax affiliates, that invests primarily in listed equity and equity-related
securities in Asia. 
 Reinsurance Arrangements The Company has numerous reinsurance agreements in effect that include subsidiaries of Odyssey,
nSpire, Fairmont, TIG and Lombard General Insurance Company of Canada (Lombard), each an
affiliate of Fairfax. Under these arrangements the Companys affiliated reinsurers participate in
varying layers of risk across most of the Companys lines of business, including property,
umbrella, workers compensation, directors and officers liability, surety, environmental
liability and errors and omissions, and the Company has assumed risk from other affiliates relating
to surety and property catastrophe business. The majority of these agreements may be terminated on
90 days notice or less. For the years ended December 31, 2004, the Company ceded $0.1 million in
premiums to Clearwater Insurance Company (formerly Odyssey Reinsurance Corporation), $7.2 million
in premiums to Odyssey America Reinsurance Corporation and $43.7 million to nSpire. The Company
also assumed $0.8 million in premiums from Lombard and $(0.1) million in premiums from Odyssey
America Reinsurance Corporation for the year ended December 31, 2004. Other than the following,
participation by affiliates of the Company in each agreement is limited to 20% or less of the total
reinsurance purchased under the agreement:  
    Under an agreement effective as of March 19, 2003, the Company purchased coverage from
nSpire, a subsidiary of Fairfax, for TRIA-certified acts in an amount and on terms which
reduce the Companys exposure to such acts to the amount of the deductible based on the
Companys pro-forma stand-alone direct premiums earned, which had a pro-forma stand-alone
deductible of $98.3 million in 2004. Such coverage was not renewed for 2005;
    Under agreements effective April 1, 2004, which provide reinsurance for the Companys
workers compensation business, nSpire has a 29.35% participation in the Companys excess
of loss reinsurance, which provides coverage of up to $198 million in excess of the
Companys retention of $2 million per occurrence;
    Under agreements effective as of May 1, 2003, which provide reinsurance for the
Companys management protection business, including directors and officers liability,
employment practices liability and fiduciary liability, nSpire has a 100% participation in
the Companys excess of loss reinsurance, which provides coverage of up to $8 million in
excess of the Companys retention of $2 million for new and renewal primary policies.
nSpire also has a 100% participation in the Companys variable quota share reinsurance
treaty for excess policies under which nSpire assumes 60% of policy limits up to $5 million
and 80% of policies from $5 million to $10 million. The ceding commission is 27.5% under
both treaties;
    Under agreements effective as of May 1, 2003, which provide reinsurance for the
Companys surety bond business, nSpire has a 90% participation in the Companys excess of
loss reinsurance (subject to a 10% co-participation), which provides up to $7.5 million of
coverage in excess of the retention of $7.5 million per principal and has a 100%
participation on the per bond variable quota share reinsurance. The ceding commission rate
under the variable quota share is 42.5% and the percent ceded varies from 20% to 77.5%,
depending on the bond penalty;
    Under an agreement effective as of January 1, 2001, nSpire has a 100% participation in
the Companys aggregate stop loss reinsurance for accident years 2002, 2001 and 2000, which
provides 15 percentage points of loss and LAE ratio coverage in 2002 in excess of 70% 102




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of subject net premiums earned, in 2001 in excess of 73% of subject net premiums earned and in 2000 in excess of 66% of subject net premiums earned, in each case up to a
maximum annual payment of 15% of subject net premiums earned, subject to maximum annual
payments of $150 million for accident years 2002 and 2001 and $125 million for accident year
2000. Accident year 2000 was reinsured by a third party reinsurer that retroceded the
liability to nSpire, which was exhausted at December 31, 2003. The Company received cash
for the full amount of the 2000 accident year cover in 2004. The Company commuted the
liabilities associated with the 2001 accident year portion of this agreement in December
2003;
    In a number of reinsurance treaties that provide coverage for Senecas directors and
officers liability, employment practices, boiler and machinery, environmental and
technology errors and omissions business for various periods from 1997 to the present,
Odyssey participates in varying percentages up to 36% of the total coverage;
    Effective January 1, 2001, the Company entered into a reinsurance agreement with Lombard
under which the Company has agreed to reinsure 100% of the surety business of Lombard
underwritten by the Company. The agreement provides for a 10% ceding commission. This is
a continuous-term agreement that can be cancelled by either party with 60 days prior
written notice; and
    The Company has a 12.3% assumed reinsurance participation in a $102 million property
catastrophe reinsurance cover through Odyssey for calendar year 2003. Odyssey receives a
ceding commission of acquisition cost plus 7.5%. This agreement was terminated effective
January 1, 2004. 
 Claims Services and Management Arrangements Under an agreement effective as of July 1, 2000, the Company appointed RiverStone, a wholly owned
subsidiary of Fairfax, as its claims manager to handle certain claims, including environmental,
asbestos, other latent and construction defects claims, referred to RiverStone by US Fire within
the full policy limits and to recommend the amount of loss reserves to be established for each
claim. In 2004, the Company paid fees of $3.6 million to RiverStone in connection with this
agreement. The agreement is terminable by either party on 60 days written notice. US Fire and CF Indemnity have each entered into a services agreement, effective January 1, 2000,
with TIG, an affiliate of Fairfax, to obtain certain services relating to issuing policies and
handling claims in return for payments reflecting the actual cost of providing such services. The
agreement can be automatically extended for successive one-year terms unless terminated by either
party on 180 days written notice. Expenses incurred for these services were $300,000 for the year
ended December 31, 2004. In the normal course of business, the Company receives loss adjustment services from Cunningham
Lindsey U.S., Inc., an affiliate of Fairfax. Expenses incurred for these services were
approximately $64,000 for the year ended December 31, 2004. 
 Information Technology Services Agreement Under an agreement effective September 1, 2001, US Fire obtains certain information technology
services on a non-exclusive basis from Fairfax Information Technology Services, Inc. (FITS), a
wholly owned subsidiary of Fairfax. The agreement requires US Fire to make monthly payments based
on a mutually agreed annual budget (annually adjusted to actual expenses), which payments amounted
to $14.5 million in 2004 for capital and operating expenditures. Under the agreement, FITS is the
prime contractor in overseeing, managing and providing information technology services, including
software application development, voice support, arranging for third party licenses, capacity
planning, manpower, data protection and asset lifecycle management. The initial term of the
agreement is five years and US Fire has the option of extending the initial term for any number of
successive one year periods on the same terms on 90 days written notice prior to the end of the
then current term. The agreement is renewable at the option of FITS, subject to agreement upon
pricing and other terms and conditions. The agreement is terminable by US Fire at any time in
whole or in part on 180 days written notice. 
 Benefit Claims Payment Agreement US Fire participates in a program of employee welfare benefits that has been established by Fairfax
Inc., including dental and medical plans for employees and designated retirees. US Fire entered
into a benefit claims payment agreement effective January 1, 2001 with Fairfax wherein US Fire has
agreed to fund one or more accounts as directed by Fairfax in amounts sufficient to cover
disbursements related to the Companys employees by the plans service provider and US Fires
proportionate share of plan-related expenses and such other amounts as they may agree. This
agreement was terminated effective January 1, 2005. 103




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Fairfax Insurance Coverage On behalf of the Company and its subsidiaries, Fairfax has purchased an insurance policy from a
number of insurance companies rated A+ or better by A.M. Best covering comprehensive crime,
insurance companies professional liability, directors and officers liability and company
reimbursement, employment practices liability and fiduciary liability. Additionally, Fairfax has
purchased added individual directors and officers liability insurance protection. The Companys
share of the premiums paid in 2004 for this coverage was $1.5 million. 
 Tax Sharing Arrangements The Company participates in tax sharing agreements that provide for the inclusion of the Company in
the consolidated federal income tax returns of Fairfax Inc. (the Fairfax Group), as well as the
consolidated or combined state income or franchise tax returns of Fairfax Inc. Subject to the tax
sharing agreements discussed in this paragraph, every member of the Fairfax Group is severally
liable for the federal income tax liabilities of the Fairfax Group, and may be liable under similar
rules for state income or franchise taxes of the entire group. Under the tax sharing agreements,
Crum & Forster and its insurance subsidiaries make payments to Fairfax Inc. equal to the amounts of
federal income taxes that each company would pay, subject to some adjustments, if they each had
filed their own separate federal income tax returns, and their shares of any state income or
franchise taxes. Thus, although the Company cannot currently offset its losses (including amounts
arising from interest expense on its senior notes) or losses of one of its subsidiaries against
income of another in computing the federal income tax payments to Fairfax Inc. under the tax
sharing agreements, Fairfax Inc. has agreed to amend the tax sharing agreements at such time and in
such a way as to permit the Company to utilize the holding company net operating losses prior to
their expiration. Under these tax sharing agreements,
Fairfax Inc. is responsible for filing and paying taxes with respect to all consolidated or
combined returns which include Fairfax Inc., Crum & Forster and its subsidiaries. Fairfax Inc. and
the other members of the Fairfax Group are solely responsible, and are obligated to indemnify and
hold the Company harmless, for any taxes that are attributable to Fairfax Inc. and such other
members of the Fairfax Group. 
 Borrowing from Fairfax The Company has entered into a non-interest bearing subordinated stand-by credit facility note with
Fairfax whereby Fairfax will make available to Crum & Forster up to $40 million, which the Company
may borrow from time to time only and so long as necessary to meet corporate obligations. The
credit facility note to Fairfax does not place any conditions or limitations on the Companys
ability to draw thereunder; however, the indenture under which the Companys debt securities were
issued restricts the ability to use these funds for so long as the Company is required to maintain
the interest escrow account related to the Companys debt securities. Amounts borrowed under the
note to Fairfax are due in 2018 but may be paid back early without penalty, provided that such
payment is permitted under the indenture. The Companys obligations under the credit facility note
to Fairfax are subordinated to the Companys senior indebtedness, including its obligations under
the Companys debt securities. Amounts borrowed under the credit facility note do not bear
interest. US Fire, North River, CF Insurance and CF Indemnity have each entered into master securities
repurchase agreements with Fairfax. Each agreement provides for the repurchase of securities that
are transferred to Fairfax from time to time in order to provide liquidity in the event that the
Company is required to pay claims or other corporate obligations, subject to an aggregate
limitation for US Fire and North River of $100 million and $5 million for each of CF Indemnity and
CF Insurance. Under each agreement, the Company is obligated to repurchase from Fairfax the
securities that are transferred for this purpose before the end of the calendar year in which the
original purchase took place at a price equal to the amount initially raised from their sale plus
the stated interest rate of each security pursuant to its initial sale. During the time that such
securities are transferred to Fairfax, the Company is entitled to receive the income payable on
such securities. There were no transactions under these agreements in 2004. Management cannot
assure that Fairfax will be able to lend the Company the amounts it seeks to borrow from time to
time. Fairfax is not an obligor of the Companys obligations under its debt securities. 
 Other Agreement The Company receives income from subleases of office space to Fairfax affiliates. Sublease income
received from affiliates in 2004, 2003 and 2002 amounted to $0.4 million, $0.4 million and $0.3
million, respectively. 104




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##### 



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The Companys principal accountants are PricewaterhouseCoopers LLP (PwC). Aggregate fees billed
and services provided are summarized as follows: Years Ended December 31,(dollars in thousands)
    
    2004
    
    
    2003Audit fees
    
    $
    702.7
    
    
    $
    689.4Audit-related fees
    
    
    668.4
    
    
    
    941.3Tax fees
    
    
    2.0
    
    
    
    14.3All other fees
    
    
    1.6
    
    
    
    1.6Total fees billed by principal accountants
    
    $
    1,374.7
    
    
    $
    1,646.6
 
 Audit Fees The aggregate fees billed for the years ended December 31, 2004 and 2003 for professional services
rendered by PwC for the audit of the Companys annual financial statements and review of the
financial statements included in the Companys Form 10-K and Forms 10-Q or for services that are
normally provided by PwC in connection with statutory and regulatory filings or engagements totaled
$702,730 and $689,373, respectively. 
 Audit-Related Fees The aggregate fees billed for the years ended December 31, 2004 and 2003 for audit-related services
totaled $668,421 and $941,350, respectively. Audit-related services performed by PwC in 2004
consisted primarily of providing advice with respect to the Sarbanes-Oxley Act of 2002 and the
annual audit of the Companys benefit plans. The audit-related services performed by PwC in 2003
consisted primarily of reviewing the Companys debt offering documents, reviewing the Companys
debt registration with the Securities and Exchange Commission on Form S-4 and the annual audit of
the Companys benefit plans. 
 Tax Fees Aggregate fees for services billed in 2004 and 2003 were $2,000 and $14,300 for tax return and
consulting services. 
 All Other Fees The aggregate fees billed for each of the years ended December 31, 2004 and 2003 for all other
services totaled $1,590 and consisted of fees for online accounting database subscription services. 
 Audit Committee Pre-Approval Policies and Procedures All services to be performed for the Company by PwC must be pre-approved by the Companys audit
committee. The audit committee has delegated the authority to grant such pre-approvals to the
committee chairman, which approvals are then reviewed by the full committee at its next regular
meeting. Typically, however, the full audit committee reviews matters to be approved. 
 PART IV 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES 
 Financial Statement Schedules See index to financial
statements and related financial statement schedules on page 109. 105




---



##### 



Exhibits ExhibitNumber
    
    Exhibit
    
    Location*3.1
    
    Certificate of Incorporation
    
    Exhibit 3.1 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.3.2
    
    Amended and Restated By-Laws
    
    Exhibit 3.2 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.4.1
    
    Indenture between Crum & Forster Funding
Corp. and The Bank of New York effective as
of June 5, 2003
    
    Exhibit 4.1 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.4.2
    
    First Supplemental Indenture among the
Company, Crum & Forster Funding Corp. and The
Bank of New York effective as of June 30,
2003
    
    Exhibit 4.2 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.4.3
    
    Registration Rights Agreement between the
Company and J.P. Morgan Securities Inc. for
itself and on behalf of initial purchasers
effective as of June 5, 2003
    
    Exhibit 4.3 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.4.4
    
    Interest Escrow Agreement effective as of
June 30, 2003 between the Company and The
Bank of New York
    
    Exhibit 4.4 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.4.5
    
    Initial Escrow Agreement effective as of June
5, 2003 between the Company and The Bank of
New York
    
    Exhibit 4.5 to Amendment No. 3 to the
Registration Statement on Form S-4
(No. 333-107722) of the Company filed
on February 24, 2004.10.1
    
    Investment Agreement among Hamblin Watsa,
Fairfax and North River effective as of
January 8, 2004
    
    Filed herewith.10.2
    
    Investment Agreement among Hamblin Watsa,
Fairfax and CF Insurance effective as of
January 8, 2004
    
    Exhibit 10.2 to Amendment No. 3 to
the Registration Statement on Form
S-4 (No. 333-107722) of the Company
filed on February 24, 2004.10.3
    
    Investment Agreement among Hamblin Watsa,
Fairfax and Seneca Specialty effective as of
January 1, 2002
    
    Filed herewith.10.4
    
    Master Repurchase Agreement between North
River and Fairfax effective as of January 8,
2004
    
    Exhibit 10.4 to Amendment No. 3 to
the Registration Statement on Form
S-4 (No. 333-107722) of the Company
filed on February 24, 2004.10.5
    
    Master Repurchase Agreement between CF
Insurance and Fairfax effective as of January
8, 2004
    
    Exhibit 10.5 to Amendment No. 3 to
the Registration Statement on Form
S-4 (No. 333-107722) of the Company
filed on February 24, 2004.10.6
    
    Investment Management Agreement among Hamblin
Watsa, Fairfax and the Company effective as
of December 21, 2004
    
    Filed herewith.10.7
    
    Investment Agreement among Hamblin Watsa,
Fairfax and US Fire effective as of October
1, 2002
    
    Exhibit 10.7 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.8
    
    Investment Agreement among Hamblin Watsa,
Fairfax and Seneca effective as of January 1,
2002
    
    Exhibit 10.8 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.9
    
    Investment Agreement among Hamblin Watsa,
Fairfax and CF Indemnity effective as of
January 1, 2002
    
    Exhibit 10.9 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.10
    
    Investment Agreement among Hamblin Watsa,
Fairfax and CF Specialty effective as of
January 1, 2002
    
    Exhibit 10.10 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.11
    
    Intentionally left blank10.12
    
    Tax Allocation Agreement between Fairfax Inc.
and the Company effective as of June 5, 2003
    
    Exhibit 10.12 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on August 7, 2003.
 106




---



##### 



ExhibitNumber
    
    Exhibit
    
    Location*10.13
    
    Intercompany Tax Allocation Agreement between
Fairfax Inc. and US Fire and CF Indemnity and
Seneca effective as of December 15, 2000
    
    Exhibit 10.13 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.14
    
    Tax Allocation Agreement among the Company,
Fairfax Inc., Odyssey Re Holdings Corp.,
RiverStone Group, LLC and TIG Holdings, Inc.
effective as of January 1, 2000
    
    Exhibit 10.14 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.15
    
    Master Repurchase Agreement between CF
Indemnity and Fairfax effective as of July 1,
2000
    
    Exhibit 10.15 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.16
    
    Master Repurchase Agreement between US Fire
and Fairfax effective as of July 1, 2000
    
    Exhibit 10.16 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.17
    
    Intentionally left blank10.18
    
    Administrative Services Agreement between US
Fire and Fairfax Information Technology
Services, Inc. effective as of January 1,
2001
    
    Exhibit 10.18 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.19
    
    Services Agreement between TIG Insurance
Company and US Fire effective as of January
1, 2000
    
    Exhibit 10.19 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.20
    
    Services Agreement between TIG Insurance
Company and CF Indemnity effective as of
January 1, 2000
    
    Exhibit 10.20 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.21
    
    Claims Service and Management Agreement
between US Fire and RiverStone Claims
Management LLC effective as of July 1, 2000
    
    Exhibit 10.21 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.22
    
    Claims Service and Management Agreement
between US Fire and International Insurance
Company effective as of October 1, 2001
    
    Exhibit 10.22 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.23
    
    Put Agreement between US Fire, ORC Re Limited
and Fairfax effective as of June 28, 2002
    
    Exhibit 10.23 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.24
    
    Standby Credit Facility Note between the
Company and Fairfax effective as of June 30,
2003
    
    Exhibit 10.24 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.25
    
    Exchange Agreement between Fairfax Inc. and
the Company effective as of June 5, 2003
    
    Exhibit 10.25 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.26
    
    Supplemental Individual Retirement Plan of US
Fire effective as of August 13, 1998
    
    Exhibit 10.26 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.10.27
    
    Employment Agreement of Mary Jane Robertson
effective as of January 1, 2003
    
    Exhibit 10.27 to Amendment No. 1 to
the Registration Statement on Form
S-4 (No. 333-107722) of the Company
filed on September 22, 2003.10.28
    
    Employment Agreement of Nikolas Antonopoulos
effective as of January 1, 2003
    
    Exhibit 10.28 to Amendment No. 1 to
the Registration Statement on Form
S-4 (No. 333-107722) of the Company
filed on September 22, 2003.10.29
    
    Employment Agreement of Bruce Esselborn
effective as of October 1, 1999
    
    Exhibit 10.29 to Amendment No. 1 to
the Registration Statement on Form
S-4 (No. 333-107722) of the Company
filed on September 22, 2003.10.30
    
    Aggregate Stop Loss Reinsurance Treaty
between the Company and ORC Re Limited
effective as of January 1, 2001
    
    Exhibit 10.30 to the Registration
Statement on Form S-4 (No. 333-107722) of the Company filed on
August 7, 2003.
 107




---



##### 



ExhibitNumber
    
    Exhibit
    
    Location*10.31
    
    Retirement and Consulting Agreement of Bruce
Esselborn effective as of June 15, 2004
    
    Exhibit 10.31 to the Form 10-Q of the
Company for the period ended
September 30, 2004, filed on November
5, 2004.10.32
    
    Amended and Restated Employment Agreement of
Nikolas Antonopoulos effective as of January
1, 2005
    
    Filed herewith.10.33
    
    Amended and Restated Employment Agreement of
Mary Jane Robertson effective as of January
1, 2005
    
    Filed herewith.10.34
    
    Employment Agreement of Joseph Braunstein
effective as of January 1, 2005
    
    Filed herewith.10.35
    
    Crum & Forster Holdings Corp. Long Term
Incentive Plan
    
    Filed herewith.12.1
    
    Statement Regarding Calculation
of Ratio of Consolidated Earnings to Consolidated Fixed Charges
    
    Filed herewith.14.1
    
    Code of Ethics for Senior Financial Officers
    
    Filed herewith.21.1
    
    List of the Companys Subsidiaries
    
    Filed herewith.24.1
    
    Powers of Attorney
    
    Included on the signature page hereof.31.1
    
    Certification of President and Chief
Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
    
    Filed herewith.31.2
    
    Certification of Executive Vice President,
Chief Financial Officer and Treasurer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
    
    Filed herewith.32.1
    
    Certification of President and Chief
Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
    
    Filed herewith.32.2
    
    Certification of Executive Vice President,
Chief Financial Officer and Treasurer
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
    
    Filed herewith.
   *
    
    Exhibits not filed herewith are incorporated herein by reference to documents
previously filed with the Securities and Exchange Commission. 108




---



##### 



SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized. CRUM & FORSTER HOLDINGS CORP.(Registrant)Date: March 4, 2005
    By:

/s/ Nikolas AntonopoulosNikolas AntonopoulosPresident and Chief Executive OfficerDate: March 4, 2005
    By:

/s/ Mary Jane RobertsonMary Jane RobertsonExecutive Vice President, Chief Financial Officerand Treasurer 
 POWER OF ATTORNEY Know all persons by these presents, that each person whose signature appears below constitutes and
appoints Nikolas Antonopoulos and Mary Jane Robertson, and each of them separately, his or her true
and lawful attorney-in-fact, with full power of substitution and re-substitution, to sign in his or
her name, place and stead, in any and all capacities, to do any and all things and execute any and
all instruments that such attorney may deem necessary or advisable under the Securities Exchange
Act of 1934, as amended, and any rules, regulations and requirements of the U.S. Securities and
Exchange Commission in connection with this Annual Report on Form 10-K and any and all amendments
hereto, as fully for all intents and purposes as he or she might or could do in person, and hereby
ratifies and confirms all said attorneys-in-fact and agents, each acting alone, and his or her
substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated. Signature
    
    Title
    
    DateBy:/s/
    V. Prem Watsa

    
    Chairman of the Board
    
    March 1, 2005V. Prem WatsaBy:/s/
    Nikolas Antonopoulos
    
    President and Chief Executive Officer
    
    March 4, 2005Nikolas AntonopoulosBy:/s/
    Mary Jane Robertson
    
    Executive Vice President, Chief
Financial Officer and Treasurer
    
    March 4, 2005Mary Jane RobertsonBy:/s/
    Frank B. Bennett
    
    Director
    
    March 1, 2005Frank B. BennettBy:/s/
    Anthony F. Griffiths
    
    Director
    
    March 1, 2005Anthony F. GriffithsBy:/s/
    Robbert Hartog
    
    Director
    
    March 1, 2005Robbert Hartog
 109




---



##### 



PageNumberINDEX TO FINANCIAL STATEMENTS AND RELATED FINANCIAL STATEMENT SCHEDULESConsolidated Financial Statements.
    
    64Financial Statements of Northbridge Financial Corporation.
    
    *Financial Statement SchedulesReport of Independent Registered Public Accounting Firm on Financial Statement Schedules
    
    110Schedule ISummary of Investments Other Than Investments in Related Parties.
    
    111Schedule IICondensed Balance Sheets of Crum & Forster Holdings Corp. at December 31,
2004 and 2003
        (Parent Company Only).
    
    112Schedule IICondensed Statements of Income of Crum & Forster Holdings Corp. for the
Years Ended December 31, 2004,
        2003 and 2002 (Parent Company Only).
    
    113Schedule IICondensed Statements of Cash Flows of Crum & Forster Holdings Corp. for the
Years Ended December 31,
        2004, 2003 and 2002 (Parent Company Only).
    
    114Schedule IIISupplementary Insurance Information.
    
    **Schedule IVReinsurance.
    
    **Schedule VValuation and Qualifying Accounts.
    
    115Schedule VISupplementary Insurance Information.
    
    **
  *
    
    Northbridge Financial Corporation (Northbridge) is a significant subsidiary as
defined in Regulation S-X of the Securities and Exchange
Commission. Financial
statements for Northbridge will be filed with the Securities and Exchange Commission as
an amendment to this Form 10-K as required by the provisions ofRegulation S-X.**
    
    Schedule omitted as required information is contained within the consolidated financial
statements included in Item 8. Financial Statements and Supplementary Data. 110




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULES To the Board of
Directors and Shareholder of Crum & Forster Holdings Corp. and Subsidiaries: Our audits of the
consolidated financial statements referred to in our report dated March 4,
2005 appearing in this 2004 annual report on Form 10-K of
Crum & Forster Holdings Corp. and subsidiaries also included an audit of the
financial statement schedules listed in Item 15 of this Form 10-K. In our opinion, these financial
statement schedules present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP New York, New York
March 4, 2005 111




---



##### 



SCHEDULE I CRUM & FORSTER HOLDINGS CORP.
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
(Dollars in thousands) At December 31, 2004Amount at whichAmortizedCost
    
    

EstimatedFair Value
    
    

Shown
in theBalance SheetFixed income securities:United States government and government agencies and authorities
    
    $
    1,754,181
    
    
    $
    1,717,597
    
    
    $
    1,717,597States, municipalities and political subdivisions
    
    
    6,448
    
    
    
    6,635
    
    
    
    6,635Public utilities
    
    
    5,072
    
    
    
    5,821
    
    
    
    5,821Convertibles and bonds with warrants attached
    
    
    6,331
    
    
    
    5,237
    
    
    
    5,237Other corporate bonds
    
    
    290,214
    
    
    
    304,556
    
    
    
    304,556Total fixed income securities
    
    
    2,062,246
    
    
    
    2,039,846
    
    
    
    2,039,846Equity securities:Common stocks of banks, trusts and insurance companies
    
    
    96,052
    
    
    
    100,286
    
    
    
    275,826Common stocks of industrial and other companies
    
    
    180,840
    
    
    
    179,327
    
    
    
    179,327Total equity securities
    
    
    276,892
    
    
    
    279,613
    
    
    
    455,153Other invested assets
    
    
    56,022
    
    
    
    xx,xxx
    
    
    
    293,406Total investments
    
    $
    2,395,160
    
    
    $
    x,xxx,xxx
    
    
    $
    2,788,405
 112




---



##### 



SCHEDULE II CRUM & FORSTER HOLDINGS CORP. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF CRUM & FORSTER HOLDINGS CORP.
BALANCE SHEETS
(Dollars in thousands) At December 31,2004
    
    
    2003ASSETSCash and cash equivalents
    
    $
    752
    
    
    $
    363Restricted cash and cash equivalents
    
    
    16,212
    
    
    
    46,855Investments in consolidated subsidiaries
    
    
    1,121,219
    
    
    
    1,139,239Other invested assets
    
    
    8,395
    
    
    
    -Deferred income taxes
    
    
    20,849
    
    
    
    8,785Other assets
    
    
    9,806
    
    
    
    10,732Total assets
    
    $
    1,177,233
    
    
    $
    1,205,974LIABILITIESAccounts payable and other liabilities
    
    $
    4,193
    
    
    $
    3,647Accounts payable to affiliates
    
    
    10
    
    
    
    4,955Long-term debt
    
    
    291,841
    
    
    
    291,257Total liabilities
    
    
    296,044
    
    
    
    299,859SHAREHOLDER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 income, net of tax
    
    
    55,875
    
    
    
    43,496Retained earnings
    
    
    84,321
    
    
    
    121,626Total shareholders equity
    
    
    881,189
    
    
    
    906,115Total liabilities and shareholders equity
    
    $
    1,177,233
    
    
    $
    1,205,974
 113




---



##### 



SCHEDULE II CRUM & FORSTER HOLDINGS CORP. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF CRUM & FORSTER HOLDINGS CORP.
STATEMENTS OF INCOME
(Dollars in thousands) Years Ended December 31,2004
    
    
    2003
    
    
    2002REVENUESEquity in earnings of subsidiaries
    
    $
    46,594
    
    
    $
    152,015
    
    
    $
    135,436Investment income
    
    
    478
    
    
    
    545
    
    
    
    5Realized investment gains
    
    
    2,395
    
    
    
    -
    
    
    
    46Total revenues
    
    
    49,467
    
    
    
    152,560
    
    
    
    135,487EXPENSESInterest expense
    
    
    33,159
    
    
    
    18,677
    
    
    
    -Other expense (income), net
    
    
    4,175
    
    
    
    6,898
    
    
    
    (18,738
    )Total expenses
    
    
    37,334
    
    
    
    25,575
    
    
    
    (18,738
    )Income before income taxes
    
    
    12,133
    
    
    
    126,985
    
    
    
    154,225Income tax (benefit) expense
    
    
    (12,062
    )
    
    
    (8,760
    )
    
    
    6,505NET INCOME
    
    $
    24,195
    
    
    $
    135,745
    
    
    $
    147,720
 114




---



##### 



SCHEDULE II CRUM & FORSTER HOLDINGS CORP. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF CRUM & FORSTER HOLDINGS CORP.
STATEMENTS OF CASH FLOWS
(Dollars in thousands) Years Ended December 31,2004
    
    
    2003
    
    
    2002OPERATING ACTIVITIESNet income
    
    $
    24,195
    
    
    $
    135,745
    
    
    $
    147,720Adjustments to reconcile net income to net cash from operating activities:Earnings of equity method investees
    
    
    (46,594
    )
    
    
    (152,015
    )
    
    
    (135,436
    )Dividends received from subsidiary
    
    
    77,000
    
    
    
    -
    
    
    
    -Realized investment gains
    
    
    (2,395
    )
    
    
    -
    
    
    
    -Net accretion of discount on fixed income securities
    
    
    274
    
    
    
    328
    
    
    
    -Amortization
    
    
    1,763
    
    
    
    945
    
    
    
    522Deferred income tax (benefit) expense
    
    
    (12,062
    )
    
    
    (8,760
    )
    
    
    6,550Changes in:Other assets
    
    
    31,081
    
    
    
    18,175
    
    
    
    69Accounts payable and other liabilities
    
    
    546
    
    
    
    3,567
    
    
    
    (23,527
    )Accounts payable to affiliates
    
    
    (4,945
    )
    
    
    1,977
    
    
    
    2,966Net cash from operating activities
    
    
    68,863
    
    
    
    (38
    )
    
    
    (1,136
    )INVESTING ACTIVITIESPurchases of other invested assets
    
    
    (6,000
    )
    
    
    -
    
    
    
    -FINANCING ACTIVITIESDividends paid to shareholder
    
    
    (61,500
    )
    
    
    (217,885
    )
    
    
    -Deferred financing costs
    
    
    (974
    )
    
    
    (10,635
    )
    
    
    -Issuance of long-term debt
    
    
    -
    
    
    
    290,955
    
    
    
    -Interest escrow deposit
    
    
    -
    
    
    
    (63,115
    )
    
    
    -Capital contributions
    
    
    -
    
    
    
    1,076
    
    
    
    311Net cash from financing activities
    
    
    (62,474
    )
    
    
    396
    
    
    
    311Net change in cash and cash equivalents
    
    
    389
    
    
    
    358
    
    
    
    (825
    )Cash and cash equivalents, beginning of year
    
    
    363
    
    
    
    5
    
    
    
    830Cash and cash equivalents, end of year
    
    $
    752
    
    
    $
    363
    
    
    $
    5SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    $
    31,404
    
    
    $
    16,427
    
    
    $
    -
 115




---



##### 



SCHEDULE V CRUM & FORSTER HOLDINGS CORP.
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands) Balance at
    
    
    Charges to
    
    
    Charged to
    
    
    
    
    
    
    Balance atYear
    
    Description
    
    

Beginningof Year
    
    

Costs
andExpenses
    
    

OtherAccounts
    
    
    Deductions
    
    

End
ofYear2004
    
    Reserve for uncollectible premiums
    
    $
    22,359
    
    
    
    -
    
    
    
    1,787
    1
    
    
    (287
    )2
    
    $
    23,8592003
    
    Reserve for uncollectible premiums
    
    $
    22,095
    
    
    
    -
    
    
    
    1,611
    1
    
    
    (1,347
    )2
    
    $
    22,3592002
    
    Reserve for uncollectible premiums
    
    $
    21,259
    
    
    
    -
    
    
    
    5,651
    1
    
    
    (4,815
    )2
    
    $
    22,0952004
    
    Reserve for uncollectible reinsurance
    
    $
    39,882
    
    
    
    5,000
    3
    
    
    -
    
    
    
    (3,952
    )4
    
    $
    40,9302003
    
    Reserve for uncollectible reinsurance
    
    $
    35,542
    
    
    
    5,281
    3
    
    
    -
    
    
    
    (941
    )4
    
    $
    39,8822002
    
    Reserve for uncollectible reinsurance
    
    $
    38,316
    
    
    
    636
    3
    
    
    -
    
    
    
    (3,410
    )4
    
    $
    35,5422004
    
    Reserve for uncollectible loss deductibles
    
    $
    10,960
    
    
    
    (4,604
    )5
    
    
    -
    
    
    
    (618
    )6
    
    $
    5,7382003
    
    Reserve for uncollectible loss deductibles
    
    $
    7,208
    
    
    
    4,008
    5
    
    
    -
    
    
    
    (256
    )6
    
    $
    10,9602002
    
    Reserve for uncollectible loss deductibles
    
    $
    3,246
    
    
    
    4,057
    5
    
    
    -
    
    
    
    (95
    )6
    
    $
    7,208
  1
    Primarily represents increases to the reserve for uncollectible premiums
charged against premiums earned.2
    Primarily represents uncollectible premiums written off to the reserve.3
    Primarily represents increases to the reserve for uncollectible reinsurance charged
to losses and LAE.4
    Primarily represents uncollectible reinsurance recoverable balances written off to
the reserve.5
    Primarily represents (decreases)/increases to the reserve for uncollectible loss
deductibles that is charged to losses and LAE.6
    Primarily represents uncollectible loss deductibles written off to the reserve. 116