##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 Form 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number: 333-84068
 
 Crum & Forster Holdings Corp.
 (Exact Name of Registrant as Specified in its Charter)
 Delaware
    
    04-3611900(State or Other Jurisdiction of
    
    (I.R.S. Employer Identification Number)Incorporation or Organization)
 305 Madison Avenue, Morristown, New Jersey 07962
 (Address of principal executive office)
 (973) 490-6600  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
  Securities registered pursuant to Section 12(g) of the Act:
   o þ
 þ o
 o þ
 þ
  o o þ
 o þ
   Class
    
    Number of Shares Outstanding at March 7, 2007Common Stock, $.01 Par Value
    
    100
 Documents Incorporated by Reference




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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
    
    
    18Reserves
    
    
    19Asbestos, Environmental and Other Latent Exposures
    
    
    22Investments
    
    
    22Competition
    
    
    23Ratings
    
    
    24Insurance Regulatory Matters
    
    
    24Employees
    
    
    30ITEM 1A.
    
    RISK FACTORS
    
    
    31ITEM 1B.
    
    UNRESOLVED STAFF COMMENTS
    
    
    38ITEM 2.
    
    PROPERTIES
    
    
    38ITEM 3.
    
    LEGAL PROCEEDINGS
    
    
    38Litigation
    
    
    38Insurance Industry Investigations
    
    
    39ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
    
    
    39PART IIITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
    
    
    39ITEM 6.
    
    SELECTED FINANCIAL DATA
    
    
    39ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    41Critical Accounting Policies and Estimates
    
    
    41Summary of Operations
    
    
    50Results of Operations
    
    
    52Liquidity and Capital Resources
    
    
    59Contractual Obligations
    
    
    61Regulatory Issues
    
    
    62Off-Balance Sheet Arrangements
    
    
    62ITEM 7A.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    62Interest Rate Risk
    
    
    63Equity Price Risk
    
    
    63Foreign 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, 2006 and 2005
    
    
    66Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004
    
    
    67Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2006, 2005 and 2004
    
    
    68Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004
    
    
    69Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
    
    
    70Notes to Consolidated Financial Statements
    
    
    71
 2




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##### 



ITEM 9.
    
    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
    
    
    99ITEM 9A.
    
    CONTROLS AND PROCEDURES
    
    
    99Evaluation of Disclosure Controls and Procedures
    
    
    99Internal Control Over Financial Reporting
    
    
    99ITEM 9B.
    
    OTHER INFORMATION
    
    
    99PART IIIITEM 10.
    
    DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
    
    
    100Directors and Executive Officers
    
    
    100Key Employees of the Operating Companies
    
    
    101Audit Committee and Audit Committee Financial Expert
    
    
    101Compensation Committee
    
    
    101Compensation of Directors
    
    
    101Code of Ethics
    
    
    101ITEM 11.
    
    EXECUTIVE COMPENSATION
    
    
    101ITEM 12.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    
    101ITEM 13.
    
    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
    
    
    101ITEM 14.
    
    PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    
    102Audit Fees
    
    
    102Audit-Related Fees
    
    
    102Tax Fees
    
    
    102All Other Fees
    
    
    102Audit Committee Pre-Approval Policies and Procedures
    
    
    102PART IVITEM 15.
    
    EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
    
    
    102Financial Statement Schedules
    
    
    102Exhibits
    
    
    103SIGNATURES
    
    
    106POWER OF ATTORNEY
    
    
    106INDEX TO FINANCIAL STATEMENTS AND RELATED FINANCIAL STATEMENT SCHEDULES
    
    
    107Report of Independent Registered Public Accounting Firm on Financial Statement Schedules
    
    
    108Schedule I  Summary of Investments Other Than Investments in Related Parties
    
    
    109Schedule II  Condensed Balance Sheets of Crum & Forster Holdings Corp. at December 31, 2006 and 2005 (Parent Company Only)
    
    
    110Schedule II  Condensed Statements of Income of Crum & Forster Holdings Corp. for the Years Ended December 31, 2006, 2005 and 2004 (Parent Company Only)
    
    
    111Schedule II  Condensed Statements of Cash Flows of Crum & Forster Holdings Corp. for the Years Ended December 31, 2006, 2005 and 2004 (Parent Company Only)
    
    
    112Schedule IINote to Condensed Financial Statements of Crum & Forster Holdings Corp.
    
    
    113Schedule V  Valuation and Qualifying Accounts
    
    
    114EXHIBITS
  3




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##### 



STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
  
    
    Lowering or loss of one of the Companys financial strength ratings;
    
    Insufficient loss reserves, including reserves for asbestos, environmental and other latent claims;
    
    Occurrence of natural or man-made catastrophic events;
    
    Inability to obtain reinsurance coverage on reasonable terms and prices, particularly property catastrophe reinsurance;
    
    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;
    
    SEC requests for information from the Company;
    
    Inability to realize the Companys investment objectives;
    
    Loss of key producers;
    
    Exposure to emerging claims and coverage issues;
    
    Restrictions on the ability of the Companys insurance subsidiaries to pay dividends;
    
    Subordination of debt securities to the obligations and liabilities of the Companys insurance subsidiaries;
    
    Exposure to credit risk, in the event reinsurers or policyholders that owe the Company
premiums or reimbursement of deductibles paid by the Company on their behalf fail to pay;
    
    Adverse developments in the prospects or results of operations of Fairfax or its affiliates;
    
    Loss of key employees;
    
    Changes in governmental regulations;
    
    Exposure to credit risks on novated policies; and
    
    Limited ability to borrow.
  4




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##### 



PART I
 
 ITEM 1. BUSINESS
 
 Overview
     
 Corporate Structure
   5




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##### 



6




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##### 



Lines of Business
  Years Ended December 31,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2004$
    
    
    %
    
    
    $
    
    
    %
    
    
    $
    
    
    %Workers compensation
    
    $
    277.1
    
    
    
    20.5
    %
    
    $
    275.3
    
    
    
    25.1
    %
    
    $
    311.3
    
    
    
    27.3
    %Property
    
    
    375.6
    
    
    
    27.8
    
    
    
    296.9
    
    
    
    27.0
    
    
    
    299.1
    
    
    
    26.3General liability
    
    
    296.0
    
    
    
    21.9
    
    
    
    262.8
    
    
    
    24.1
    
    
    
    252.8
    
    
    
    22.2Commercial automobile
    
    
    222.5
    
    
    
    16.5
    
    
    
    192.6
    
    
    
    17.5
    
    
    
    190.1
    
    
    
    16.7Commercial multi-peril
    
    
    83.8
    
    
    
    6.2
    
    
    
    51.0
    
    
    
    4.6
    
    
    
    52.1
    
    
    
    4.6Other 1
    
    
    96.6
    
    
    
    7.1
    
    
    
    19.2
    
    
    
    1.7
    
    
    
    33.6
    
    
    
    2.9Total gross premiums written
    
    $
    1,351.6
    
    
    
    100.0
    %
    
    $
    1,097.8
    
    
    
    100.0
    %
    
    $
    1,139.0
    
    
    
    100.0
    %
 1
    Other includes accident and health, personal automobile, homeowners and
surety lines of business in 2006, associated principally with the Fairmont business.
In 2005 and 2004, other includes the surety line of business only.
 Workers compensation
 
    
    guaranteed cost products;
    
    large deductible policies; and
    
    retrospectively rated policies.
  
    
    the applicable premium rate, which varies according to the employees duties and the business of the employer;
    
    the policyholders experience modification factor (where applicable); and
    
    the policyholders payroll.
   7




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##### 



Years Ended December 31,2006
    
    2005
    
    2004Guaranteed cost
    
    
    87.7
    %
    
    
    84.7
    %
    
    
    78.3
    %Large deductible
    
    
    9.8
    
    
    
    12.8
    
    
    
    15.4Retrospectively rated
    
    
    2.5
    
    
    
    2.5
    
    
    
    6.3Total workers compensation
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
  General liability
 Years Ended December 31,2006
    
    2005
    
    2004Umbrella liability
    
    
    36.6
    %
    
    
    33.7
    %
    
    
    34.0
    %Products liability
    
    
    8.4
    
    
    
    8.6
    
    
    
    10.5Directors and officers liability
    
    
    7.1
    
    
    
    8.0
    
    
    
    9.7Employment practices liability
    
    
    2.8
    
    
    
    3.6
    
    
    
    3.8All other general liability
    
    
    45.1
    
    
    
    46.1
    
    
    
    42.0Total general liability
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 Commercial automobile
 Property
  Years Ended December 31,2006
    
    2005
    
    2004Fire and allied lines
    
    
    82.7
    %
    
    
    82.9
    %
    
    
    80.9
    %Inland marine
    
    
    8.4
    
    
    
    11.3
    
    
    
    12.4Other
    
    
    8.9
    
    
    
    5.8
    
    
    
    6.7Total property
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 8




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##### 



Commercial multi-peril
 Other
  Years Ended December 31,2006
    
    2005
    
    2004Accident and health
    
    
    66.7
    %
    
    
    
    %
    
    
    
    %Bail bonds
    
    
    12.0
    
    
    
    23.6
    
    
    
    13.6Personal automobile
    
    
    11.8
    
    
    
    
    
    
    
    Homeowners
    
    
    7.3
    
    
    
    
    
    
    
    Contract and commercial bonds
    
    
    2.2
    
    
    
    76.4
    
    
    
    86.4Total other
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 
 Geographic Distribution
  Years Ended December 31,2006
    
    2005
    
    2004California
    
    
    16.7
    %
    
    
    20.1
    %
    
    
    22.0
    %Florida
    
    
    10.7
    
    
    
    10.9
    
    
    
    9.8Texas
    
    
    9.6
    
    
    
    7.5
    
    
    
    6.3New York
    
    
    9.4
    
    
    
    10.0
    
    
    
    11.0New Jersey
    
    
    8.2
    
    
    
    8.6
    
    
    
    7.1Pennsylvania
    
    
    5.0
    
    
    
    5.4
    
    
    
    6.1Illinois
    
    
    3.3
    
    
    
    3.5
    
    
    
    4.1Massachusetts
    
    
    3.3
    
    
    
    3.4
    
    
    
    3.8Georgia
    
    
    3.1
    
    
    
    2.1
    
    
    
    2.5Kentucky
    
    
    1.7
    
    
    
    1.7
    
    
    
    1.6All other states1
    
    
    29.0
    
    
    
    26.8
    
    
    
    25.7Total direct premiums written
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 1
    No other state comprised more than 2.0% of total direct premiums written
in 2006, 2005 or 2004.
 9




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##### 



Business Development and Methods of Distribution
      Years Ended December 31,2006
    
    2005
    
    2004Wholesale brokers
    
    
    43.5
    %
    
    
    40.1
    %
    
    
    33.5
    %Independent regional retail firms
    
    
    34.4
    
    
    
    31.0
    
    
    
    31.6National brokers
    
    
    22.1
    
    
    
    28.9
    
    
    
    34.9Total direct premiums written
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
   Years Ended December 31,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2004Wholesale brokers
    
    $
    264.0
    
    
    $
    210.0
    
    
    $
    163.9Independent regional retail firms
    
    
    106.9
    
    
    
    91.1
    
    
    
    123.8National brokers
    
    
    91.7
    
    
    
    84.3
    
    
    
    134.0Total gross premiums written from new business
    
    $
    462.6
    
    
    $
    385.4
    
    
    $
    421.7
 10




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##### 



Certain business practices of
the insurance industry have become the subject of investigations by government authorities and
other parties and the subject of class action litigation
 
 Pricing and Underwriting
     The Company bears credit risk with respect to its
reinsurers and certain policyholders, and if one or more of them fails to pay, the Company could
experience losses which would reduce its net income .
  11




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##### 



Catastrophe Management
     12




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##### 



Reinsurance
   Maximum Reinsured(dollars in millions)
    
    Maximum Retention
    
    Limits1General liability:Umbrella
    
    $
    5.0
    
    
    $
    20.0Directors and officers liability  primary policies
    
    $
    2.0
    
    
    $
    8.0Directors and officers liability  excess policies
    
    Variable Quota Share 2
    
    $
    8.0Property 3
    
    $
    5.0
    
    
    $
    20.0Fidelity
    
    $
    2.8
    
    
    $
    17.2
 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
    Effective March 1, 2006, the Company increased its property per risk net
retention to $5 million from $2 million, reducing the maximum reinsured limits from $23
million to $20 million. The $5 million excess of $5 million layer is 100% reinsured by
nSpire Re Limited (nSpire, formerly ORC Re Limited), a Fairfax affiliate. In the
prior treaty year, 7.5% of this layer was placed with nSpire and 5% was placed with
Odyssey America Reinsurance Corporation (Odyssey America), another Fairfax affiliate.
  
 . The Company may be unable to obtain reinsurance coverage at reasonable prices or
on terms that adequately protect it
 13




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##### 



Terrorism Risk Insurance Act
of 2002 Catastrophic events could cause unanticipated losses and reduce
net income
    At December 31, 2006A.M. Best
    
    Security
    
    
    Reinsurance
    
    
    % of(dollars in millions)
    
    Rating1
    
    Provided
    
    
    Recoverable
    
    
    TotalInter-Ocean Reinsurance Company Limited
    
    2
    
    $
    387.7
    3
    
    $
    386.7
    
    
    
    22.3
    %North American Specialty Insurance Company
    
    A+
    
    
    206.4
    4
    
    
    372.6
    
    
    
    21.5TIG Insurance Company (TIG) 5,8
    
    B+
    
    
    
    
    
    
    137.5
    
    
    
    7.9Swiss Reinsurance America Corporation
    
    A+
    
    
    
    
    
    
    85.4
    
    
    
    4.9nSpire8
    
    2
    
    
    91.0
    6
    
    
    71.9
    
    
    
    4.2General Reinsurance Corporation
    
    A++
    
    
    0.1
    
    
    
    33.8
    
    
    
    2.0Lloyds Syndicates
    
    A
    
    
    
    
    
    
    31.6
    
    
    
    1.8Federal Insurance Company
    
    A++
    
    
    25.0
    4
    
    
    29.4
    
    
    
    1.7Hannover Ruckversicherungs-Aktiengesellschaft
    
    A
    
    
    2.1
    7
    
    
    28.2
    
    
    
    1.6Fairmont Specialty Insurance Company8
    
    B++
    
    
    
    
    
    
    27.4
    
    
    
    1.6Other
    
    
    
    
    128.9
    9
    
    
    529.4
    10
    
    
    30.5Total reinsurance recoverable
    
    
    
    $
    841.2
    
    
    $
    1,733.9
    
    
    
    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. Ratings are as of
March 1, 2007.2
    Not rated.3
    Includes the value of Delaware Reg. 1003 compliant trust accounts (Trusts) at
December 31, 2006 in the amount of $349.6 million and $38.1 million in letters of
credit.4
    Funds held at December 31, 2006. The funds held in respect of North America
Specialty Insurance Company are also effectively guaranteed by an upstream affiliated
insurer in the Swiss Re Group.5
    Effective December 16, 2002, International Insurance Company merged with TIG, a
Fairfax subsidiary. TIG had statutory capital and surplus at December 31, 2006 of $683
million. These recoverable balances arise principally from a restructuring in 1993,
prior to Fairfaxs acquisition of Crum & Forster. For further discussion, see Note 9 to
the consolidated financial statements included in Item 8. Financial Statements and
Supplementary Data.6
    Held in Trusts.7
    Held in letters of credit.8
    Fairfax affiliate.9
    Includes $116.6 million in letters of credit, $11.9 million in
funds held and $0.4 million in Trusts.10
    94% of these recoverable balances, after applying the
associated collateral, are from companies having an A.M. Best rating of A- or better.
 14




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##### 



Affiliated reinsurers
   At December 31, 2006TotalReinsurance
    
    
    Paid
    
    
    Outstanding(dollars in millions)
    
    Recoverable
    
    
    Recoverable
    
    
    Reserves1
    
    
    CollateralTIG
    
    $
    137.5
    
    
    $
    1.4
    
    
    $
    136.1
    
    
    $
    nSpire
    
    
    71.9
    
    
    
    2.3
    
    
    
    69.6
    
    
    
    91.0Fairmont Specialty Insurance Company
    
    
    27.4
    
    
    
    0.2
    
    
    
    27.2
    
    
    
    Odyssey America
    
    
    13.0
    
    
    
    1.9
    
    
    
    11.1
    
    
    
    Clearwater Insurance Company
    
    
    3.5
    
    
    
    0.2
    
    
    
    3.3
    
    
    
    Other
    
    
    1.3
    
    
    
    0.2
    
    
    
    1.1
    
    
    
    1.3Total affiliated reinsurance recoverable balances
    
    $
    254.6
    
    
    $
    6.2
    
    
    $
    248.4
    
    
    $
    92.3
 1
    Includes case and IBNR reserves.
  Corporate aggregate reinsurance
     15




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##### 



Years Ended December 31,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2004Premiums earned
    
    $
    
    
    
    $
    
    
    
    $
    (7.6
    )Investment income
    
    
    (8.4
    )
    
    
    (19.9
    )
    
    
    (30.5
    )Losses and LAE
    
    
    (10.3
    )
    
    
    (8.1
    )
    
    
    (28.3
    )Income before income taxes
    
    $
    1.9
    
    
    $
    (11.8
    )
    
    $
    (9.8
    )
  (dollars in millions)2000 accident year prospective aggregate stop loss contract
    
    $
    37.61998 prospective aggregate stop loss contract
    
    
    367.5
    11998 aggregate stop loss contract amendment
    
    
    19.22001 retroactive adverse development contract for $400 million
    
    
    372.62001 retroactive adverse development contract for $100 million
    
    
    
    2Total
    
    $
    796.9
 1
    Includes $389 million, which has been recognized as a reduction of losses
and LAE less $21.5 million for additional premiums due on retrospectively rated
insurance policies that inure to the benefit of the reinsurer. Total amounts
recognized as a reduction of losses and LAE include the $389 million above, $37.6
million on the 2000 accident year prospective aggregate stop loss contract and $62.6
million of amortization of deferred gains on the retroactive reinsurance contracts.2
    Favorable development of the losses covered under this contract resulted in a
reduction in the reinsurance recoverable balance from $32.5 million at December 31,
2005 to $0 at December 31, 2006.
 Prospective corporate aggregate reinsurance
  Years Ended December 31,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2004Ceded losses and LAE
    
    $
    
    
    
    $
    
    
    
    $
    10.0Less: ceded premiums written and earned
    
    
    
    
    
    
    
    
    
    
    7.6Less: funds held interest charged to investment income
    
    
    3.0
    
    
    
    4.5
    
    
    
    9.2Income before income taxes
    
    $
    (3.0
    )
    
    $
    (4.5
    )
    
    $
    (6.8
    )
   16




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##### 



Retroactive corporate aggregate reinsurance
  Years Ended December 31,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2004(Decrease) increase in reinsurance recoverable due from reinsurers
    
    $
    (37.0
    )
    
    $
    (26.7
    )
    
    $
    117.7Less: related premiums paid
    
    
    (33.4
    )
    
    
    4.1
    
    
    
    56.5(Decrease) increase in income deferred during the year
    
    
    (3.6
    )
    
    
    (30.8
    )
    
    
    61.2Amortization of deferred income
    
    
    (12.9
    )
    
    
    (8.1
    )
    
    
    (18.3
    )(Decrease) increase in deferred income
    
    
    (16.5
    )
    
    
    (38.9
    )
    
    
    42.9Deferred income on retroactive reinsurancebeginning of year
    
    
    184.5
    
    
    
    223.4
    
    
    
    180.5Deferred income on retroactive reinsuranceend of year
    
    $
    168.0
    
    
    $
    184.5
    
    
    $
    223.4Funds held interest charged during the year
    
    $
    5.4
    
    
    $
    15.4
    
    
    $
    21.3
         17




---



##### 



Claims Management
  
    
    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
    
    exceptional customer service whereby the Company applies its resources toward pursuing
timely investigation and resolution of customer claims and reducing claims costs.
   At December 31,Pending Claims
    
    2006
    
    
    2005
    
    
    2004Workers compensation1
    
    
    10,974
    
    
    
    11,265
    
    
    
    11,293General liability
    
    
    5,378
    
    
    
    4,603
    
    
    
    4,687Commercial automobile
    
    
    5,223
    
    
    
    5,590
    
    
    
    4,141All other2
    
    
    2,539
    
    
    
    3,278
    
    
    
    1,916Total pending claims
    
    
    24,114
    
    
    
    24,736
    
    
    
    22,037
 1
    Excludes medical only claim counts.2
    The increase in the all other category in 2005 was driven by property claims
associated with the 2005 and 2004 hurricanes.
 Years Ended December 31,New Claims
    
    2006
    
    
    2005
    
    
    2004Workers compensation1
    
    
    7,307
    
    
    
    7,803
    
    
    
    8,053General liability
    
    
    3,635
    
    
    
    4,656
    
    
    
    3,647Commercial automobile
    
    
    15,502
    
    
    
    12,264
    
    
    
    11,845All other
    
    
    3,384
    
    
    
    4,005
    
    
    
    4,009Total new claims
    
    
    29,828
    
    
    
    28,728
    
    
    
    27,554
 1

    Excludes medical only claim counts of 13,947, 15,093 and 17,957 for the
years ended December 31, 2006, 2005 and 2004, respectively.
  18




---



##### 



Reserves
       19




---



##### 



At December 31, 2006Low End
    
    
    High Endof
    
    
    ofActuarial
    
    
    Actuarial(dollars in millions)
    
    Reserves
    
    
    Range
    
    
    RangeWorkers compensation
    
    $
    775.3
    
    
    $
    668.9
    
    
    $
    804.2General liability
    
    
    686.9
    
    
    
    579.5
    
    
    
    769.0Asbestos, environmental and other latent
    
    
    443.4
    
    
    
    323.5
    
    
    
    582.3Commercial automobile
    
    
    232.2
    
    
    
    197.3
    
    
    
    246.1Property
    
    
    165.0
    
    
    
    142.3
    
    
    
    167.8Other
    
    
    202.6
    
    
    
    172.3
    
    
    
    208.2Net of per risk reinsurance, gross of corporate aggregate reinsurance
    
    
    2,505.4
    
    
    
    2,083.8
    
    
    
    2,777.6Corporate aggregate reinsurance
    
    
    489.2
    
    
    
    436.7
    
    
    
    493.7Total reserves, net of per risk reinsurance and corporate aggregate reinsurance
    
    
    2,016.2
    
    
    $
    1,647.1
    
    
    $
    2,283.9Ceded unpaid losses and LAE
    
    
    1,355.3Gross unpaid losses and LAE
    
    $
    3,371.5
   Years Ended December 31,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2004Workers compensation
    
    $
    (58.5
    )
    
    $
    (1.4
    )
    
    $
    29.7General liability
    
    
    (31.9
    )
    
    
    (48.0
    )
    
    
    (6.6
    )Commercial multi-peril
    
    
    (22.8
    )
    
    
    (20.2
    )
    
    
    (0.6
    )Commercial automobile
    
    
    (10.9
    )
    
    
    (19.5
    )
    
    
    (3.2
    )Property
    
    
    1.6
    
    
    
    (40.7
    )
    
    
    (27.2
    )Asbestos, environmental and other latent
    
    
    33.9
    
    
    
    44.6
    
    
    
    100.5Other
    
    
    2.7
    
    
    
    24.7
    
    
    
    5.0Total (favorable) adverse development, net of per risk reinsurance
    
    
    (85.9
    )
    
    
    (60.5
    )
    
    
    97.6Amortization of deferred gain on retroactive corporate aggregate reinsurance
    
    
    (12.9
    )
    
    
    (8.1
    )
    
    
    (18.3
    )Other corporate aggregate reinsurance activity
    
    
    2.6
    
    
    
    
    
    
    
    (10.0
    )Total (favorable) adverse development, net of per risk and corporate
aggregate reinsurance
    
    
    (96.2
    )
    
    
    (68.6
    )
    
    
    69.3Add back: Per risk and corporate aggregate reinsurance
    
    
    (16.2
    )
    
    
    88.7
    
    
    
    70.8Total (favorable) adverse development, gross of reinsurance
    
    $
    (112.4
    )
    
    $
    20.1
    
    
    $
    140.1
 Losses and loss adjustment
expenses
 20




---



##### 



Ten-year analysis of consolidated loss and LAE development presented net of reinsurance with
supplemental gross data
 At December 31,(dollars in millions)
    
    1996
    
    
    1997
    
    
    1998
    
    
    1999
    
    
    2000
    
    
    2001
    
    
    2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006Reserves for unpaid losses
and LAE (net of reinsurance
recoverable)
    
    $
    2,414
    
    
    $
    2,420
    
    
    $
    2,532
    
    
    $
    2,225
    
    
    $
    1,770
    
    
    $
    1,577
    
    
    $
    1,494
    
    
    $
    1,873
    
    
    $
    2,010
    
    
    $
    1,990
    
    
    $
    2,016Paid (cumulative) as of:One year later
    
    
    571
    
    
    
    580
    
    
    
    680
    
    
    
    757
    
    
    
    676
    
    
    
    454
    
    
    
    160
    
    
    
    460
    
    
    
    481
    
    
    
    482Two years later
    
    
    971
    
    
    
    1,076
    
    
    
    1,246
    
    
    
    1,300
    
    
    
    1,026
    
    
    
    533
    
    
    
    521
    
    
    
    809
    
    
    
    815Three years later
    
    
    1,340
    
    
    
    1,508
    
    
    
    1,654
    
    
    
    1,565
    
    
    
    1,097
    
    
    
    824
    
    
    
    795
    
    
    
    1,065Four years later
    
    
    1,674
    
    
    
    1,797
    
    
    
    1,922
    
    
    
    1,626
    
    
    
    1,328
    
    
    
    1,049
    
    
    
    988Five years later
    
    
    1,862
    
    
    
    2,005
    
    
    
    1,919
    
    
    
    1,850
    
    
    
    1,504
    
    
    
    1,208Six years later
    
    
    2,020
    
    
    
    1,953
    
    
    
    2,084
    
    
    
    2,023
    
    
    
    1,637Seven years later
    
    
    1,943
    
    
    
    2,087
    
    
    
    2,237
    
    
    
    2,153Eight years later
    
    
    2,068
    
    
    
    2,223
    
    
    
    2,350Nine years later
    
    
    2,196
    
    
    
    2,329Ten years later
    
    
    2,292Liability re-estimated as of:One year later
    
    
    2,419
    
    
    
    2,588
    
    
    
    2,546
    
    
    
    2,258
    
    
    
    1,953
    
    
    
    1,596
    
    
    
    1,611
    
    
    
    1,942
    
    
    
    1,941
    
    
    
    1,894Two years later
    
    
    2,579
    
    
    
    2,592
    
    
    
    2,536
    
    
    
    2,445
    
    
    
    1,969
    
    
    
    1,749
    
    
    
    1,718
    
    
    
    1,932
    
    
    
    1,855Three years later
    
    
    2,574
    
    
    
    2,583
    
    
    
    2,600
    
    
    
    2,460
    
    
    
    2,093
    
    
    
    1,857
    
    
    
    1,702
    
    
    
    1,862Four years later
    
    
    2,571
    
    
    
    2,597
    
    
    
    2,614
    
    
    
    2,584
    
    
    
    2,203
    
    
    
    1,836
    
    
    
    1,643Five years later
    
    
    2,581
    
    
    
    2,613
    
    
    
    2,735
    
    
    
    2,680
    
    
    
    2,180
    
    
    
    1,787Six years later
    
    
    2,584
    
    
    
    2,743
    
    
    
    2,801
    
    
    
    2,676
    
    
    
    2,148Seven years later
    
    
    2,713
    
    
    
    2,820
    
    
    
    2,809
    
    
    
    2,652Eight years later
    
    
    2,799
    
    
    
    2,832
    
    
    
    2,801Nine years later
    
    
    2,817
    
    
    
    2,835Ten years later
    
    
    2,825Cumulative
(deficiency)/redundancy
    
    
    (411
    )
    
    
    (415
    )
    
    
    (269
    )
    
    
    (427
    )
    
    
    (378
    )
    
    
    (210
    )
    
    
    (149
    )
    
    
    11
    
    
    
    155
    
    
    
    96Gross liability  end of year
    
    
    3,446
    
    
    
    3,600
    
    
    
    3,637
    
    
    
    3,529
    
    
    
    3,340
    
    
    
    3,454
    
    
    
    3,250
    
    
    
    3,194
    
    
    
    3,371
    
    
    
    3,673
    
    
    
    3,371Reinsurance recoverable
    
    
    1,032
    
    
    
    1,180
    
    
    
    1,105
    
    
    
    1,304
    
    
    
    1,570
    
    
    
    1,877
    
    
    
    1,756
    
    
    
    1,321
    
    
    
    1,361
    
    
    
    1,683
    
    
    
    1,355Net liability  end of year
    
    
    2,414
    
    
    
    2,420
    
    
    
    2,532
    
    
    
    2,225
    
    
    
    1,770
    
    
    
    1,577
    
    
    
    1,494
    
    
    
    1,873
    
    
    
    2,010
    
    
    
    1,990
    
    
    
    2,016Gross re-estimated liability
at December 31, 2006
    
    
    4,204
    
    
    
    4,190
    
    
    
    4,209
    
    
    
    4,199
    
    
    
    3,876
    
    
    
    3,679
    
    
    
    3,396
    
    
    
    3,234
    
    
    
    3,246
    
    
    
    3,561Re-estimated reinsurance
recoverable at December 31,
2006
    
    
    1,379
    
    
    
    1,355
    
    
    
    1,408
    
    
    
    1,547
    
    
    
    1,728
    
    
    
    1,892
    
    
    
    1,753
    
    
    
    1,372
    
    
    
    1,391
    
    
    
    1,667Net re-estimated liability
at December 31, 2006
    
    
    2,825
    
    
    
    2,835
    
    
    
    2,801
    
    
    
    2,652
    
    
    
    2,148
    
    
    
    1,787
    
    
    
    1,643
    
    
    
    1,862
    
    
    
    1,855
    
    
    
    1,894Cumulative gross
(deficiency)/redundancy
    
    
    (758
    )
    
    
    (590
    )
    
    
    (572
    )
    
    
    (670
    )
    
    
    (536
    )
    
    
    (225
    )
    
    
    (146
    )
    
    
    (40
    )
    
    
    125
    
    
    
    112
 21




---



##### 



Asbestos, Environmental and Other Latent Exposures
    Years Ended December 31,2006
    
    
    2005
    
    
    2004(dollars in millions)
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    Net
    
    
    Gross
    
    
    NetUnpaid latent losses and allocated LAE (ALAE),
beginning of the year
    
    $
    617.6
    
    
    $
    475.1
    
    
    $
    681.4
    
    
    $
    516.0
    
    
    $
    666.5
    
    
    $
    491.9Latent losses and ALAE incurred during the year
    
    
    66.0
    
    
    
    33.9
    
    
    
    80.1
    
    
    
    44.6
    
    
    
    113.5
    
    
    
    100.5Latent losses and ALAE paid during the year
    
    
    97.4
    
    
    
    65.5
    
    
    
    143.9
    
    
    
    85.5
    
    
    
    98.6
    
    
    
    76.4Unpaid latent losses and ALAE, end of the year
    
    $
    586.2
    
    
    $
    443.5
    
    
    $
    617.6
    
    
    $
    475.1
    
    
    $
    681.4
    
    
    $
    516.0
   Asbestos
    
    
    Environmental
    
    
    Other Latent
    
    
    Total LatentNumber of policyholders
open at December 31,
2004
    
    
    452
    
    
    
    346
    
    
    
    187
    
    
    
    985Opened during the year
    
    
    86
    
    
    
    63
    
    
    
    85
    
    
    
    234Closed during the year
    
    
    110
    
    
    
    141
    
    
    
    71
    
    
    
    322Number of policyholders
open at December 31,
2005
    
    
    428
    
    
    
    268
    
    
    
    201
    
    
    
    897Opened during the year
    
    
    68
    
    
    
    47
    
    
    
    67
    
    
    
    182Closed during the year
    
    
    96
    
    
    
    72
    
    
    
    80
    
    
    
    248Number of policyholders
open at December 31,
2006
    
    
    400
    
    
    
    243
    
    
    
    188
    
    
    
    831
 Losses and loss adjustment expenses
 
 Investments
     22




---



##### 



At December 31,Rating
    
    2006
    
    
    2005AAA/Aaa
    
    
    98.8
    %
    
    
    93.2
    %AA/Aa2
    
    
    
    
    
    
    A/A2
    
    
    
    
    
    
    BBB/Baa2
    
    
    
    
    
    
    BB/Ba2
    
    
    
    
    
    
    1.0B/B2
    
    
    
    
    
    
    CCC/Caa or lower, or not rated
    
    
    1.2
    
    
    
    5.8Total fixed income securities
    
    
    100.0
    %
    
    
    100.0
    %
  Investment results
 
 Competition
 th rd
  23




---



##### 



The Company operates in a highly competitive
environment, which makes it more difficult to attract and retain business
 
 Ratings
   
 Insurance Regulatory Matters
  General
 
 24




---



##### 



Possible legislative and regulatory changes
    25




---



##### 



Certain business practices of the insurance
industry have become the subject of investigations by government authorities and other parties and
the subject of class action litigation
  Recent regulatory examinations
     Producer compensation investigations
  Regulation of dividends and other payments from the Companys insurance subsidiaries
  26




---



##### 



Capital adequacy
 
 27




---



##### 



NAIC IRIS ratios
   Investment regulation
  Guaranty funds
  28




---



##### 



Shared markets
    Insurance regulation concerning change or acquisition of control
  29




---



##### 



Terrorism Risk Insurance Act of 2002
     Catastrophic events could cause unanticipated losses and reduce net
income
 
 Employees
  30




---



##### 



ITEM 1A. RISK FACTORS
  If there are any negative changes in the financial strength ratings of the Companys insurance
subsidiaries, especially in the ratings issued by 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.
    The Company may incur a reduction in its net income if its reserves are insufficient.
  Losses and loss adjustment expenses
  31




---



##### 



Reserves for asbestos, environmental and other latent claims may be insufficient.
     32




---



##### 



Catastrophic events could cause unanticipated losses and reduce net income.
       The Company may be unable to obtain reinsurance coverage at reasonable prices or on terms that
adequately protect it.
  st
 33




---



##### 



The Company operates in a highly competitive environment, which makes it more difficult to attract
and retain business.
     Results in the property and casualty insurance industry are subject to fluctuations and
uncertainty, which may adversely affect managements ability to write policies.
  Certain business practices of the insurance industry have become the subject of investigations by
government authorities and other parties and the subject of class action litigation.
  Securities
and Exchange Commission (SEC) requests for information may adversely affect the Company
 34




---



##### 



Securities and Exchange Commission (SEC) requests for information may adversely affect the
Company .
   If the Company is unable to realize its investment objectives, its net income and financial
condition may be adversely affected.
  The loss of any of the Companys key producers could have an adverse effect on the Companys
ability to generate business.
  The effects of emerging claim and coverage issues on the Companys business are uncertain.
  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.
  35




---



##### 



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.
  The Company bears credit risk with respect to its reinsurers and certain policyholders, and if one
or more of them fails to pay, the Company could experience losses which would reduce its net
income.
    36




---



##### 



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.
  
    
    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 approvals;
    
    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.
  The Companys business could be adversely affected by the loss of one or more key employees.
  The Company is subject to extensive government regulation, which may limit the rates it can charge
or otherwise adversely affect its business.
    37




---



##### 



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.
   The indenture governing the Companys debt securities contains restrictions which could have an
adverse effect on the Companys financial condition.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
    
 ITEM 3. LEGAL PROCEEDINGS
 
 Litigation
   38




---



##### 



Insurance Industry Investigations
   Securities and
Exchange Commission (SEC) requests for information may adversely affect the Company Certain business practices of the insurance industry have become the subject of
investigations by government authorities and other parties and the subject of class action
litigation
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASER
OF EQUITY SECURITIES
  
 ITEM 6. SELECTED FINANCIAL DATA
  39




---



##### 



Years Ended December 31,(dollars in thousands)
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002GAAP STATEMENT OF INCOME
DATA:Gross premiums written
    
    $
    1,351,631
    
    
    $
    1,097,756
    
    
    $
    1,138,961
    
    
    $
    1,104,211
    
    
    $
    898,368Net premiums written
    
    $
    1,166,532
    
    
    $
    868,966
    
    
    $
    918,300
    
    
    $
    890,823
    
    
    $
    669,473Premiums earned
    
    $
    1,084,023
    
    
    $
    894,173
    
    
    $
    907,709
    
    
    $
    768,872
    
    
    $
    609,512Investment income and realized investment
gains and losses1
    
    $
    392,818
    
    
    $
    215,310
    
    
    $
    164,638
    
    
    $
    338,062
    
    
    $
    155,325Losses and LAE
    
    $
    666,079
    
    
    $
    615,505
    
    
    $
    761,512
    
    
    $
    652,334
    
    
    $
    460,458Policy acquisition costs and other
underwriting expenses
    
    $
    314,403
    
    
    $
    254,452
    
    
    $
    252,987
    
    
    $
    225,261
    
    
    $
    194,482Income before equity in earnings of
investees, net of tax and cumulative
effect of a change in accounting principle
    
    $
    299,121
    
    
    $
    138,743
    
    
    $
    11,717
    
    
    $
    134,178
    
    
    $
    82,911Equity in earnings of investees, net of tax
    
    $
    13,162
    
    
    $
    17,193
    
    
    $
    12,478
    
    
    $
    1,567
    
    
    $
    Cumulative effect of a change in
accounting principle
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    64,809
    2Net income
    
    $
    312,283
    
    
    $
    155,936
    
    
    $
    24,195
    
    
    $
    135,745
    
    
    $
    147,720
 At December 31,(dollars in thousands)
    
    2006
    
    2005
    
    2004
    
    2003
    
    2002GAAP BALANCE SHEET DATA:Total investments (including
cash and cash equivalents and
assets pledged for short-sale
obligations)3
    
    $
    3,926,276
    
    
    $
    3,720,538
    
    
    $
    3,495,509
    
    
    $
    3,168,389
    
    
    $
    2,422,590Total assets
    
    $
    6,443,554
    
    
    $
    6,482,879
    
    
    $
    6,031,641
    
    
    $
    5,587,398
    
    
    $
    5,138,787Unpaid losses and LAE
    
    $
    3,371,549
    
    
    $
    3,673,034
    
    
    $
    3,370,936
    
    
    $
    3,193,920
    
    
    $
    3,249,558Long term debt4
    
    $
    293,170
    
    
    $
    292,470
    
    
    $
    291,841
    
    
    $
    291,257
    
    
    $
    Shareholders equity
    
    $
    1,093,055
    
    
    $
    961,193
    
    
    $
    881,189
    
    
    $
    906,115
    
    
    $
    979,164
 Years Ended December 31,2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002SELECTED FINANCIAL RATIOS BASED ON GAAP DATA:Loss and LAE ratio
    
    
    61.5
    %
    
    
    68.8
    %
    
    
    83.9
    %
    
    
    84.8
    %
    
    
    75.5
    %Underwriting expense ratio
    
    
    29.0
    
    
    
    28.5
    
    
    
    27.9
    
    
    
    29.3
    
    
    
    31.9Combined ratio
    
    
    90.5
    %
    
    
    97.3
    %
    
    
    111.8
    %
    
    
    114.1
    %
    
    
    107.4
    %Ratio of earnings to fixed charges5
    
    
    11.0
    x
    
    
    4.4
    x
    
    
    1.3
    x
    
    
    6.2
    x
    
    
    6.6
    x
 Years Ended December 31,(dollars in thousands)
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003
    
    
    2002SELECTED COMBINED
STATUTORY DATA:Loss and LAE ratio
    
    
    61.9
    %
    
    
    69.4
    %
    
    
    86.1
    %
    
    
    84.5
    %
    
    
    77.6
    %Underwriting expense ratio
    
    
    28.0
    
    
    
    28.4
    
    
    
    27.7
    
    
    
    27.3
    
    
    
    31.2Combined ratio
    
    
    89.9
    %
    
    
    97.8
    %
    
    
    113.8
    %
    
    
    111.8
    %
    
    
    108.8
    %Policyholders surplus
    
    $
    1,406,822
    
    
    $
    1,313,988
    
    
    $
    1,206,547
    
    
    $
    1,107,435
    
    
    $
    856,393Ratio of net premiums
written to policyholders
surplus
    
    
    0.83
    x
    
    
    0.66
    x
    
    
    0.76
    x
    
    
    0.80
    x
    
    
    0.78
    x
 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
    Includes $535,594, $496,903 and $277,899 of assets pledged for short-sale
obligations at December 31, 2006, 2005 and 2004, respectively.4
    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.5
    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.
 40




---



##### 



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  
 Critical Accounting Policies and Estimates
   Unpaid losses and loss adjustment expenses
        41




---



##### 



42




---



##### 



Change in Ultimate LossLine of business
    
    Accident Years
    
    
    and ALAE (millions)Workers Compensation
    
    
    1999-2006
    
    
    $
    32.4General Liability1
    
    
    1999-2006
    
    
    $
    35.2Commercial Automobile
    
    
    2005-2006
    
    
    $
    7.6
  1

    Excludes asbestos, environmental and other latent.       Asbestos
reserves
 43




---



##### 



Asbestos reserves
     
 At December 31, 2006Attachment Point
    
    Estimated % of
    
    Estimated % of(dollars in millions)
    
    Total Policies
    
    Total Policy Limits$0 to $1
    
    
    73.5
    %
    
    
    45.8
    %$1 to $10
    
    
    20.5
    
    
    
    41.7$10 to $20
    
    
    1.8
    
    
    
    4.3$20 to $50
    
    
    2.2
    
    
    
    4.2Above $50
    
    
    2.0
    
    
    
    4.0Total policies with asbestos claims
    
    
    100.0
    %
    
    
    100.0
    %
  44




---



##### 



At December 31, 2006Number of
    
    
    Remaining(dollars in millions)
    
    Bankruptcies
    
    
    Policy LimitsNo insurance coverage issued to policyholder
    
    
    55
    
    
    $
    0Resolved
    
    
    18
    
    
    
    0Potential future exposure
    
    
    2
    
    
    
    20Total
    
    
    75
    
    
    $
    20
       45




---



##### 



At December 31, 2006Amounts
    
    AmountsSubject to
    
    Net ofSettlement
    
    Settlement(dollars in millions)
    
    Reported
    
    Agreements
    
    AgreementsNet unpaid losses and ALAE
    
    $
    348.2
    
    
    $
    8.1
    
    
    $
    340.13-year average net paid losses and ALAE
    
    $
    54.3
    
    
    $
    0.6
    
    
    $
    53.73-year survival ratios
    
    
    6.4
    
    
    
    
    
    
    
    6.3
  Net % ofAmount
    
    
    Total1Crum & Forster (dollars in millions)Paid losses and ALAE at December 31, 2006
    
    $
    419.6
    
    
    
    54.6
    %Net unpaid losses and ALAE (case and IBNR) at December 31, 2006
    
    
    348.2
    
    
    
    45.4Ultimate losses and ALAE at December 31, 2006
    
    $
    767.8
    
    
    
    100.0
    %Industry, as represented by A.M. Best Company (A.M. Best)2(dollars in millions)Paid losses and ALAE at December 31, 2004
    
    $
    31,900
    
    
    
    49.1
    %Net unpaid losses and ALAE (case and IBNR) at December 31, 2004
    
    
    33,100
    
    
    
    50.9Ultimate losses and ALAE at December 31, 2004
    
    $
    65,000
    
    
    
    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 March 27, 2006.   46




---



##### 



Environmental reserves
     47




---



##### 



At December(dollars in millions)
    
    31, 2006Net unpaid losses and ALAE
    
    $
    73.53-year average net paid losses and ALAE
    
    $
    17.33-year environmental survival ratio
    
    
    4.2
  Other latent reserves
   Summary
   48




---



##### 



Other than temporary declines in value of investments
 ,
    Reinsurance recoverable
     49




---



##### 



Deferred income tax assets
     
 Summary of Operations
     50




---



##### 



.
  51




---



##### 



Results of Operations
  Years Ended December 31,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2004Gross premiums written
    
    $
    1,351.6
    
    
    $
    1,097.8
    
    
    $
    1,139.0Net premiums written
    
    $
    1,166.5
    
    
    $
    869.0
    
    
    $
    918.3Premiums earned
    
    $
    1,084.0
    
    
    $
    894.2
    
    
    $
    907.7Losses and LAE
    
    
    666.1
    
    
    
    615.5
    
    
    
    761.5Underwriting expenses
    
    
    314.4
    
    
    
    254.5
    
    
    
    253.0Underwriting profit (loss)
    
    
    103.5
    
    
    
    24.2
    
    
    
    (106.8
    )Investment income and realized investment gains and losses
    
    
    392.8
    
    
    
    215.3
    
    
    
    164.6Interest and other expense
    
    
    41.0
    
    
    
    35.5
    
    
    
    41.6Income before income taxes and equity in earnings of investees
    
    
    455.3
    
    
    
    204.0
    
    
    
    16.2Income tax expense
    
    
    156.2
    
    
    
    65.3
    
    
    
    4.5Income before equity in earnings of investees
    
    
    299.1
    
    
    
    138.7
    
    
    
    11.7Equity in earnings of investees, net of tax
    
    
    13.2
    
    
    
    17.2
    
    
    
    12.5Net income
    
    $
    312.3
    
    
    $
    155.9
    
    
    $
    24.2Combined ratio
    
    
    90.5
    %
    
    
    97.3
    %
    
    
    111.8
    %
   Losses and loss
adjustment expenses Investment results
 Accounting for Investments in Real Estate
Ventures Accounting for Derivative Instruments and Hedging Activities Business Combinations
  52




---



##### 



Underwriting results
 Gross premiums written
  Years Ended December 31,2006
    
    
    
    
    
    
    2005Increase/
    
    
    
    
    
    
    Increase/(dollars in millions)
    
    2006
    
    
    2005
    
    
    (Decrease)
    
    
    2004
    
    
    (Decrease)Workers compensation
    
    $
    277.1
    
    
    $
    275.3
    
    
    $
    1.8
    
    
    $
    311.3
    
    
    $
    (36.0
    )Property
    
    
    375.6
    
    
    
    296.9
    
    
    
    78.7
    
    
    
    299.1
    
    
    
    (2.2
    )General liability
    
    
    296.0
    
    
    
    262.8
    
    
    
    33.2
    
    
    
    252.8
    
    
    
    10.0Commercial automobile
    
    
    222.5
    
    
    
    192.6
    
    
    
    29.9
    
    
    
    190.1
    
    
    
    2.5Commercial multi-peril
    
    
    83.8
    
    
    
    51.0
    
    
    
    32.8
    
    
    
    52.1
    
    
    
    (1.1
    )Other
    
    
    96.6
    
    
    
    19.2
    
    
    
    77.4
    
    
    
    33.6
    
    
    
    (14.4
    )Total gross premiums written
    
    $
    1,351.6
    
    
    $
    1,097.8
    
    
    $
    253.8
    
    
    $
    1,139.0
    
    
    $
    (41.2
    )
  Years Ended December 31,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2004Accident and health
    
    $
    64.3
    
    
    $
    
    
    
    $
    Personal automobile
    
    
    11.4
    
    
    
    
    
    
    
    Homeowners
    
    
    7.1
    
    
    
    
    
    
    
    Surety
    
    
    13.8
    
    
    
    19.2
    
    
    
    33.6Total gross premiums written in other
    
    $
    96.6
    
    
    $
    19.2
    
    
    $
    33.6
   Casualty gross premiums written
    53




---



##### 



Property gross premiums written
   Other gross premiums written
  Net premiums written
  Years Ended December 31,2006
    
    
    2005
    
    
    2004(dollars in millions)
    
    $
    
    
    %1
    
    
    $
    
    
    %1
    
    
    $
    
    
    %1Workers compensation
    
    $
    272.0
    
    
    
    98.2
    %
    
    $
    266.7
    
    
    
    96.9
    %
    
    $
    288.7
    
    
    
    92.7
    %Property
    
    
    276.0
    
    
    
    73.5
    %
    
    
    145.8
    
    
    
    49.1
    %
    
    
    184.3
    
    
    
    61.6
    %General liability
    
    
    247.8
    
    
    
    83.7
    %
    
    
    208.6
    
    
    
    79.4
    %
    
    
    198.6
    
    
    
    78.6
    %Commercial automobile
    
    
    219.4
    
    
    
    98.6
    %
    
    
    189.0
    
    
    
    98.1
    %
    
    
    182.7
    
    
    
    96.1
    %Commercial multi-peril
    
    
    78.0
    
    
    
    93.1
    %
    
    
    45.7
    
    
    
    89.6
    %
    
    
    47.1
    
    
    
    90.4
    %Other
    
    
    73.3
    
    
    
    75.9
    %
    
    
    13.2
    
    
    
    68.6
    %
    
    
    24.5
    
    
    
    72.9
    %Total before corporate aggregate
reinsurance premiums
    
    
    1,166.5
    
    
    
    86.3
    %
    
    
    869.0
    
    
    
    79.2
    %
    
    
    925.9
    
    
    
    81.3
    %Corporate aggregate reinsurance premiums
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7.6
    )Total net premiums written
    
    $
    1,166.5
    
    
    
    86.3
    %
    
    $
    869.0
    
    
    
    79.2
    %
    
    $
    918.3
    
    
    
    80.6
    %
 1
    Percentage represents the percentage of net premiums written to gross premiums
written.
  54




---



##### 



Premiums earned
  Years Ended December 31,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2004Workers compensation
    
    $
    278.8
    
    
    $
    285.8
    
    
    $
    285.6Property
    
    
    246.2
    
    
    
    151.6
    
    
    
    187.2General liability
    
    
    227.7
    
    
    
    203.7
    
    
    
    202.2Commercial automobile
    
    
    203.9
    
    
    
    186.6
    
    
    
    175.6Commercial multi-peril
    
    
    61.9
    
    
    
    45.6
    
    
    
    42.8Other
    
    
    65.5
    
    
    
    20.9
    
    
    
    21.9Total before corporate aggregate reinsurance premiums
    
    
    1,084.0
    
    
    
    894.2
    
    
    
    915.3Corporate aggregate reinsurance premiums
    
    
    
    
    
    
    
    
    
    
    (7.6
    )Total premiums earned
    
    $
    1,084.0
    
    
    $
    894.2
    
    
    $
    907.7
  Losses and loss adjustment expenses
  Years Ended December 31,2006
    
    
    2005
    
    
    2004(dollars in millions)
    
    Losses
    
    
    Ratio
    
    
    Losses
    
    
    Ratio
    
    
    Losses
    
    
    RatioAccident year, as reported
    
    $
    762.3
    
    
    
    70.3
    %
    
    $
    684.1
    
    
    
    76.5
    %
    
    $
    692.2
    
    
    
    76.3
    %(Favorable) adverse development of prior
years losses and LAE before impact of
corporate aggregate reinsurance:Accident year 2005
    
    
    (10.2
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Accident year 2004
    
    
    (15.9
    )
    
    
    
    
    
    
    (59.2
    )
    
    
    
    
    
    
    Accident year 2003
    
    
    (11.3
    )
    
    
    
    
    
    
    5.6
    
    
    
    
    
    
    
    (37.5
    )Accident year 2002
    
    
    (10.0
    )
    
    
    
    
    
    
    4.5
    
    
    
    
    
    
    
    (1.7
    )Accident year 2001
    
    
    (16.6
    )
    
    
    
    
    
    
    2.4
    
    
    
    
    
    
    
    (1.8
    )Accident year 2000 and prior
    
    
    (21.9
    )
    
    
    
    
    
    
    (13.8
    )
    
    
    
    
    
    
    138.6Total (favorable) adverse development
    
    
    (85.9
    )
    
    
    (7.9
    )
    
    
    (60.5
    )
    
    
    (6.8
    )
    
    
    97.6
    
    
    
    10.7Impact of corporate aggregate reinsurance:Amortization of deferred gain
    
    
    (12.9
    )
    
    
    
    
    
    
    (8.1
    )
    
    
    
    
    
    
    (18.3
    )Other activity
    
    
    2.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10.0
    )Total impact of corporate aggregate
reinsurance
    
    
    (10.3
    )
    
    
    (0.9
    )
    
    
    (8.1
    )
    
    
    (0.9
    )
    
    
    (28.3
    )
    
    
    (3.1
    )Incurred losses and LAE
    
    $
    666.1
    
    
    
    61.5
    %
    
    $
    615.5
    
    
    
    68.8
    %
    
    $
    761.5
    
    
    
    83.9
    %
 55




---



##### 



Accident Years Ended December 31,2006
    
    2005
    
    2004Workers compensation
    
    
    71.8
    %
    
    
    64.3
    %
    
    
    64.3
    %Property
    
    
    76.3
    %
    
    
    121.6
    %
    
    
    75.1
    %General liability
    
    
    66.2
    %
    
    
    71.0
    %
    
    
    66.1
    %Commercial automobile
    
    
    72.2
    %
    
    
    62.8
    %
    
    
    66.8
    %Commercial multi-peril
    
    
    59.4
    %
    
    
    52.2
    %
    
    
    48.0
    %Other
    
    
    60.3
    %
    
    
    96.6
    %
    
    
    121.7
    %Accident year loss and LAE ratio
    
    
    70.3
    %
    
    
    75.4
    %
    
    
    68.0
    %
    56




---



##### 



Underwriting expenses
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Policy acquisition ratio
    
    
    14.3
    %
    
    
    14.1
    %
    
    
    13.6
    %Other underwriting expense ratio
    
    
    14.7
    
    
    
    14.4
    
    
    
    14.3Underwriting expense ratio
    
    
    29.0
    %
    
    
    28.5
    %
    
    
    27.9
    %
   Investment results
  Years Ended December 31,(dollars in millions)
    
    2006
    
    
    2005
    
    
    2004Average investments, including cash and cash equivalents, at book value1
    
    $
    3,780.9
    
    
    $
    3,618.0
    
    
    $
    3,213.3Investment income
    
    $
    220.0
    
    
    $
    131.1
    
    
    $
    85.1Realized investment gains
    
    
    172.8
    
    
    
    84.2
    
    
    
    79.5Pre-tax equity in earnings of investees
    
    
    20.2
    
    
    
    26.5
    
    
    
    19.2Change in unrealized investment gains and losses and foreign currency translation
    
    
    (139.0
    )
    
    
    (3.7
    )
    
    
    19.0Total return on investments
    
    $
    274.0
    
    
    $
    238.1
    
    
    $
    202.8Gross investment yield2
    
    
    7.2
    %
    
    
    5.5
    %
    
    
    4.5
    %Net investment yield2
    
    
    6.4
    %
    
    
    4.4
    %
    
    
    3.2
    %Total return on investments
    
    
    7.2
    %
    
    
    6.6
    %
    
    
    6.3
    %
 
 1
    Includes book value of assets pledged for short-sale obligations of $540.9 million,
$497.9 million and $279.8 million at December 31, 2006, 2005 and 2004, respectively.2
    Including pre-tax equity in earnings of investees. .
  57




---



##### 



58




---



##### 



Interest and other expense
  Income tax expense
  
 Liquidity and Capital Resources
 Holding Company
        59




---



##### 



Insurance subsidiaries
       .
    60




---



##### 



Years Ended December 31,(dollars in millions)
    
    2006
    
    2005
    
    2004Combined policyholders surplus
    
    $
    1,406.8
    
    
    $
    1,314.0
    
    
    $
    1,206.5Statutory operating leverage
    
    
    0.83x
    
    
    
    0.66x
    
    
    
    0.76x
  
 Contractual Obligations
  2008 to
    
    
    2010 to
    
    
    2012 and(dollars in millions)
    
    Total
    
    
    2007
    
    
    2009
    
    
    2011
    
    
    beyondUnpaid losses and LAE
    
    $
    3,371.5
    
    
    $
    1,207.6
    
    
    $
    1,511.2
    
    
    $
    292.6
    
    
    $
    360.1Long-term debt, including interest payments
    
    
    502.3
    
    
    
    31.1
    
    
    
    62.3
    
    
    
    62.3
    
    
    
    346.6Operating leases
    
    
    84.0
    
    
    
    12.6
    
    
    
    20.2
    
    
    
    14.1
    
    
    
    37.1Short-sale obligations
    
    
    400.2
    
    
    
    400.2
    
    
    
    
    
    
    
    
    
    
    
    Other long-term liabilities
    
    
    31.9
    
    
    
    1.1
    
    
    
    16.5
    
    
    
    2.0
    
    
    
    12.3Total contractual obligations
    
    $
    4,389.9
    
    
    $
    1,652.6
    
    
    $
    1,610.2
    
    
    $
    371.0
    
    
    $
    756.1
 Unpaid losses and loss adjustment expenses
 The Company may incur a
reduction in its net income if its reserves are insufficient Unpaid losses and loss adjustment expenses
 Long-term debt, including interest payments
 Holding company
 61




---



##### 



Operating leases
  Short-sale obligations
 Investment
results
 Other long-term liabilities
    
 Regulatory Issues
  
 Off-Balance Sheet Arrangements
  
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   62




---



##### 



Interest Rate Risk
  At December 31, 2006Fair Value ofFixed Income
    
    Hypothetical
    
    Hypothetical(dollars in millions)
    
    Portfolio
    
    $ Change
    
    % Change200 basis point decline
    
    $
    2,681.1
    
    
    $
    566.7
    
    
    
    26.8
    %100 basis point decline
    
    $
    2,373.1
    
    
    $
    258.7
    
    
    
    12.2
    %Base scenario
    
    $
    2,114.4
    
    
    
    
    
    
    
    
    %100 basis point increase
    
    $
    1,899.4
    
    
    $
    (215.0
    )
    
    
    (10.2
    )%200 basis point increase
    
    $
    1,716.8
    
    
    $
    (397.6
    )
    
    
    (18.8
    )%
 .
  
 Equity Price Risk
   
 Foreign Currency Exchange Rate Risk
  63




---



##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Page NumberReport of Independent Registered Public Accounting Firm
    
    
    65Consolidated Balance Sheets at December 31, 2006 and 2005
    
    
    66Consolidated Statements of Income for the Years Ended December 31, 2006, 2005 and 2004
    
    
    67Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2006, 2005 and 2004
    
    
    68Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2006, 2005 and 2004
    
    
    69Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004
    
    
    70Notes to Consolidated Financial Statements
    
    
    71
 64




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
  
 65




---



##### 



CRUM & FORSTER HOLDINGS CORP.
 
 CONSOLIDATED BALANCE SHEETS
 (Dollars in thousands, except per share amounts)
 At December 31,2006
    
    
    2005ASSETSInvestments:Fixed income securities, at fair value (amortized cost of $2,087,065 and
$2,073,443 in 2006 and 2005, respectively)
    
    $
    1,984,242
    
    
    $
    1,991,118Equity securities, at fair value (cost of $640,880 and $503,942 in 2006 and
2005, respectively)
    
    
    667,718
    
    
    
    595,944Other invested assets
    
    
    357,849
    
    
    
    391,132Short-term investments at cost, which approximates fair value
    
    
    14,130
    
    
    
    Total investments
    
    
    3,023,939
    
    
    
    2,978,194Cash and cash equivalents
    
    
    366,743
    
    
    
    245,441Assets pledged for short-sale obligations
    
    
    535,594
    
    
    
    496,903Accrued investment income
    
    
    34,581
    
    
    
    37,780Premiums receivable
    
    
    249,913
    
    
    
    245,795Reinsurance recoverable
    
    
    1,479,331
    
    
    
    1,806,082Reinsurance recoverable from affiliates
    
    
    254,595
    
    
    
    304,033Prepaid reinsurance premiums
    
    
    25,430
    
    
    
    31,308Deferred income taxes
    
    
    285,902
    
    
    
    175,207Deferred policy acquisition costs
    
    
    83,964
    
    
    
    70,807Other assets
    
    
    103,562
    
    
    
    91,329Total assets
    
    $
    6,443,554
    
    
    $
    6,482,879LIABILITIESUnpaid losses and loss adjustment expenses
    
    $
    3,371,549
    
    
    $
    3,673,034Unearned premiums
    
    
    576,182
    
    
    
    499,551Funds held under reinsurance contracts
    
    
    243,316
    
    
    
    277,868Accounts payable and other liabilities
    
    
    298,101
    
    
    
    264,525Deferred income on retroactive reinsurance
    
    
    168,018
    
    
    
    184,498Short-sale obligations
    
    
    400,163
    
    
    
    329,740Long-term debt
    
    
    293,170
    
    
    
    292,470Total liabilities
    
    
    5,350,499
    
    
    
    5,521,686Commitments and contingencies (Note 11)SHAREHOLDERS EQUITYCommon stock, $0.01 par value; 1,000 shares authorized; 100 issued and outstanding
    
    
    
    
    
    
    Additional paid-in capital
    
    
    740,993
    
    
    
    740,993Accumulated other comprehensive (loss) income, net of tax
    
    
    (36,978
    )
    
    
    53,443Retained earnings
    
    
    389,040
    
    
    
    166,757Total shareholders equity
    
    
    1,093,055
    
    
    
    961,193Total liabilities and shareholders equity
    
    $
    6,443,554
    
    
    $
    6,482,879
 The accompanying notes are an integral part of the consolidated financial statements.
 66




---



##### 



CRUM & FORSTER HOLDINGS CORP.
 
 CONSOLIDATED STATEMENTS OF INCOME
 (Dollars in thousands)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004REVENUESPremiums earned
    
    $
    1,084,023
    
    
    $
    894,173
    
    
    $
    907,709Investment income
    
    
    220,044
    
    
    
    131,123
    
    
    
    85,101Realized investment gains
    
    
    172,774
    
    
    
    84,187
    
    
    
    79,537Total revenues
    
    
    1,476,841
    
    
    
    1,109,483
    
    
    
    1,072,347EXPENSESLosses and loss adjustment expenses
    
    
    666,079
    
    
    
    615,505
    
    
    
    761,512Policy acquisition costs
    
    
    154,513
    
    
    
    125,804
    
    
    
    123,174Other underwriting expenses
    
    
    159,890
    
    
    
    128,648
    
    
    
    129,813Interest expense
    
    
    32,986
    
    
    
    32,915
    
    
    
    33,159Other expense
    
    
    8,096
    
    
    
    2,548
    
    
    
    8,456Total expenses
    
    
    1,021,564
    
    
    
    905,420
    
    
    
    1,056,114Income before income taxes and equity in earnings of investees
    
    
    455,277
    
    
    
    204,063
    
    
    
    16,233Income tax expense
    
    
    156,156
    
    
    
    65,320
    
    
    
    4,516Income before equity in earnings of investees
    
    
    299,121
    
    
    
    138,743
    
    
    
    11,717Equity in earnings of investees, net of tax
    
    
    13,162
    
    
    
    17,193
    
    
    
    12,478NET INCOME
    
    $
    312,283
    
    
    $
    155,936
    
    
    $
    24,195
 The accompanying notes are an integral part of the consolidated financial statements.
 67




---



##### 



CRUM & FORSTER HOLDINGS CORP.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 (Dollars in thousands)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004COMMON STOCKBalance, beginning and end of year
    
    $
    
    
    
    $
    
    
    
    $
    ADDITIONAL PAID-IN CAPITALBalance, beginning and end of year
    
    
    740,993
    
    
    
    740,993
    
    
    
    740,993ACCUMULATED OTHER COMPREHENSIVE
(LOSS) INCOME, NET OF TAXBalance, beginning of year
    
    
    53,443
    
    
    
    55,875
    
    
    
    43,496Unrealized investment gains
and losses, net of transfers
to realized investment gains
and losses
    
    
    (91,652
    )
    
    
    (3,326
    )
    
    
    7,344Foreign currency translation
    
    
    1,286
    
    
    
    894
    
    
    
    5,035Impact of initial adoption of
Statement of Financial
Accounting Standard No.158
    
    
    (55
    )
    
    
    
    
    
    
    Balance, end of year
    
    
    (36,978
    )
    
    
    53,443
    
    
    
    55,875RETAINED EARNINGSBalance, beginning of year
    
    
    166,757
    
    
    
    84,321
    
    
    
    121,626Net income
    
    
    312,283
    
    
    
    155,936
    
    
    
    24,195Dividends to shareholder
    
    
    (90,000
    )
    
    
    (73,500
    )
    
    
    (61,500
    )Balance, end of year
    
    
    389,040
    
    
    
    166,757
    
    
    
    84,321TOTAL SHAREHOLDERS EQUITY
    
    $
    1,093,055
    
    
    $
    961,193
    
    
    $
    881,189
 The accompanying notes are an integral part of the consolidated financial statements.
 68




---



##### 



CRUM & FORSTER HOLDINGS CORP.
 
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 (Dollars in thousands)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004NET INCOME
    
    $
    312,283
    
    
    $
    155,936
    
    
    $
    24,195Change in components of other comprehensive income for the year, before tax:Unrealized investment gains and losses
    
    
    (141,004
    )
    
    
    (5,116
    )
    
    
    11,297Foreign currency translation
    
    
    1,979
    
    
    
    1,375
    
    
    
    7,746Other comprehensive (loss) income for the year before tax
    
    
    (139,025
    )
    
    
    (3,741
    )
    
    
    19,043Deferred income tax benefit (expense) for the year:Deferred income tax benefit (expense) from unrealized investment gains
and losses
    
    
    49,352
    
    
    
    1,790
    
    
    
    (3,953
    )Deferred income tax expense from foreign currency translation
    
    
    (693
    )
    
    
    (481
    )
    
    
    (2,711
    )Total deferred income tax benefit (expense) for the year
    
    
    48,659
    
    
    
    1,309
    
    
    
    (6,664
    )Other comprehensive (loss) income for the year, net of tax
    
    
    (90,366
    )
    
    
    (2,432
    )
    
    
    12,379COMPREHENSIVE INCOME
    
    $
    221,917
    
    
    $
    153,504
    
    
    $
    36,574
 The accompanying notes are an integral part of the consolidated financial statements
 69




---



##### 



CRUM & FORSTER HOLDINGS CORP.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Dollars in thousands)
 Years Ended December 31,2006
    
    
    2005
    
    
    2004OPERATING ACTIVITIESNet income
    
    $
    312,283
    
    
    $
    155,936
    
    
    $
    24,195Adjustments to reconcile net income to net cash from operating activities:Net accretion of discount on fixed income securities
    
    
    (9,951
    )
    
    
    (4,554
    )
    
    
    (5,143
    )Realized investment gains
    
    
    (172,774
    )
    
    
    (84,187
    )
    
    
    (79,537
    )Earnings of equity method investees
    
    
    (102,898
    )
    
    
    (40,702
    )
    
    
    (20,229
    )Depreciation and amortization
    
    
    3,174
    
    
    
    3,460
    
    
    
    4,649Deferred income tax (benefit) expense
    
    
    (62,007
    )
    
    
    60
    
    
    
    (17,244
    )Other non-cash net income adjustments
    
    
    3,748
    
    
    
    20,161
    
    
    
    26,274Changes in:Accrued investment income
    
    
    3,199
    
    
    
    (5
    )
    
    
    29,010Premiums receivable
    
    
    (6,465
    )
    
    
    16,525
    
    
    
    11,698Reinsurance recoverable
    
    
    321,169
    
    
    
    (362,654
    )
    
    
    (53,618
    )Prepaid reinsurance premiums
    
    
    5,878
    
    
    
    3,834
    
    
    
    4,209Deferred policy acquisition costs
    
    
    (13,157
    )
    
    
    4,199
    
    
    
    (3,362
    )Other assets
    
    
    5,169
    
    
    
    10,344
    
    
    
    13,064Unpaid losses and loss adjustment expenses
    
    
    (301,485
    )
    
    
    302,097
    
    
    
    177,016Unearned premiums
    
    
    76,631
    
    
    
    (29,041
    )
    
    
    6,382Accounts payable and other liabilities
    
    
    26,840
    
    
    
    29,992
    
    
    
    7,956Net cash from operating activities
    
    
    89,354
    
    
    
    25,465
    
    
    
    125,320INVESTING ACTIVITIESPurchases of fixed income securities
    
    
    (518,443
    )
    
    
    (1,556,386
    )
    
    
    (3,084,984
    )Proceeds from sales of fixed income securities
    
    
    529,466
    
    
    
    1,498,385
    
    
    
    1,412,630Proceeds from maturities of fixed income securities
    
    
    62,305
    
    
    
    16,791
    
    
    
    190,209Purchases of equity securities
    
    
    (590,158
    )
    
    
    (240,099
    )
    
    
    (266,904
    )Proceeds from sales of equity securities
    
    
    635,348
    
    
    
    211,902
    
    
    
    166,298Purchases of other invested assets
    
    
    (58,137
    )
    
    
    (87,017
    )
    
    
    (141,410
    )Proceeds from sales of other invested assets
    
    
    143,542
    
    
    
    34,890
    
    
    
    12,232Purchases of short-term investments
    
    
    (14,130
    )
    
    
    
    
    
    
    Proceeds from short-sale obligations
    
    
    24,931
    
    
    
    100,013
    
    
    
    199,746Cash pledged for short-sale obligations
    
    
    (91,120
    )
    
    
    (113,604
    )
    
    
    (200,748
    )Purchases of fixed assets
    
    
    (1,656
    )
    
    
    (604
    )
    
    
    (2,588
    )Net cash from investing activities
    
    
    121,948
    
    
    
    (135,729
    )
    
    
    (1,715,519
    )FINANCING ACTIVITIESDividends to shareholder
    
    
    (90,000
    )
    
    
    (73,500
    )
    
    
    (61,500
    )Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    (974
    )Net cash from financing activities
    
    
    (90,000
    )
    
    
    (73,500
    )
    
    
    (62,474
    )Net change in cash and cash equivalents
    
    
    121,302
    
    
    
    (183,764
    )
    
    
    (1,652,673
    )Cash and cash equivalents, beginning of year
    
    
    245,441
    
    
    
    429,205
    
    
    
    2,081,878Cash and cash equivalents, end of year
    
    $
    366,743
    
    
    $
    245,441
    
    
    $
    429,205SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    $
    31,125
    
    
    $
    31,125
    
    
    $
    31,404Cash paid to parent for income taxes
    
    $
    178,063
    
    
    $
    77,808
    
    
    $
    47,970
 The accompanying notes are an integral part of the consolidated financial statements
 70




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)
 1. Organization and Basis of Presentation
     2. Summary of Significant Accounting Policies
  Investments
    71




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)
 Cash and cash equivalents
  Deferred policy acquisition costs
  Goodwill
  Unpaid losses and loss adjustment expenses
   Reinsurance
    72




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)
 Funds held under reinsurance contracts
  Income taxes
   Premiums
  Foreign currency
 Foreign Currency Translation
 Derivatives
 Accounting for Derivative Instruments and Hedging Activities
 73




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)
 Accumulated other comprehensive income, net of tax
 Employers Accounting for Defined Benefit Pension and Other
Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R)
 Recent accounting pronouncements not yet adopted
 Fair Value Measurements
 Accounting for Uncertainty in Income
Taxes Accounting for Income Taxes
 Accounting for Certain Hybrid Financial
Instruments   an amendment of FASB Statements Nos. 133 and 140
 74




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)
 3. Investments
  Available-for-sale securities
  At December 31, 2006Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed income securities:United States government and government
agencies and authorities1
    
    $
    2,015,975
    
    
    $
    65
    
    
    $
    129,717
    
    
    $
    1,886,323States, municipalities and political subdivisions
    
    
    4,892
    
    
    
    23
    
    
    
    2
    
    
    
    4,913Other corporate
    
    
    201,645
    
    
    
    21,483
    
    
    
    
    
    
    
    223,128Total fixed income securities
    
    
    2,222,512
    
    
    
    21,571
    
    
    
    129,719
    
    
    
    2,114,364Equity securities:Common stocks
    
    
    632,790
    
    
    
    37,633
    
    
    
    11,096
    
    
    
    659,327Preferred stocks
    
    
    8,090
    
    
    
    301
    
    
    
    
    
    
    
    8,391Total equity securities
    
    
    640,880
    
    
    
    37,934
    
    
    
    11,096
    
    
    
    667,718Total available-for-sale securities
    
    $
    2,863,392
    
    
    $
    59,505
    
    
    $
    140,815
    
    
    $
    2,782,082
 
 1

    Includes U.S. Treasury securities pledged for short-sale obligations at a fair
value of $130,122 (amortized cost of $135,447). At December 31, 2005Cost or
    
    
    Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    Losses
    
    
    Fair ValueFixed income securities:United States government and government agencies
and authorities1
    
    $
    1,940,757
    
    
    $
    534
    
    
    $
    62,678
    
    
    $
    1,878,613States, municipalities and political subdivisions
    
    
    7,144
    
    
    
    8
    
    
    
    9
    
    
    
    7,143Public utilities
    
    
    5,080
    
    
    
    733
    
    
    
    
    
    
    
    5,813Other corporate
    
    
    304,041
    
    
    
    2,560
    
    
    
    24,501
    
    
    
    282,100Total fixed income securities
    
    
    2,257,022
    
    
    
    3,835
    
    
    
    87,188
    
    
    
    2,173,669Equity securities:Common stocks
    
    
    493,942
    
    
    
    114,821
    
    
    
    22,754
    
    
    
    586,009Preferred stocks
    
    
    10,000
    
    
    
    11
    
    
    
    76
    
    
    
    9,935Total equity securities
    
    
    503,942
    
    
    
    114,832
    
    
    
    22,830
    
    
    
    595,944Total available-for-sale securities
    
    $
    2,760,964
    
    
    $
    118,667
    
    
    $
    110,018
    
    
    $
    2,769,613
 
 1

    Includes U.S. Treasury securities pledged for short-sale obligations at a fair value of $182,551 (amortized cost of $183,579). 75




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)
  At December 31, 2006AmortizedCost
    
    
    Fair ValueDue in one year or less
    
    $
    2,391
    
    
    $
    2,339Due after one year through five years
    
    
    240,025
    
    
    
    238,860Due after five years through ten years
    
    
    60,270
    
    
    
    60,048Due after ten years through twenty years
    
    
    422,944
    
    
    
    405,785Due after twenty years
    
    
    1,496,882
    
    
    
    1,407,332Total fixed income securities
    
    $
    2,222,512
    
    
    $
    2,114,364
   At December 31, 2006Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:United States government and
government agencies and
authorities1
    
    $
    280,147
    
    
    $
    2,856
    
    
    $
    1,603,624
    
    
    $
    126,861
    
    
    $
    1,883,771
    
    
    $
    129,717States, municipalities and
political subdivisions
    
    
    645
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    645
    
    
    
    2Total fixed income securities
    
    
    280,792
    
    
    
    2,858
    
    
    
    1,603,624
    
    
    
    126,861
    
    
    
    1,884,416
    
    
    
    129,719Equity securities:Common stocks
    
    
    252,533
    
    
    
    11,096
    
    
    
    
    
    
    
    
    
    
    
    252,533
    
    
    
    11,096Total equity securities
    
    
    252,533
    
    
    
    11,096
    
    
    
    
    
    
    
    
    
    
    
    252,533
    
    
    
    11,096Total securities in an unrealized
loss position
    
    $
    533,325
    
    
    $
    13,954
    
    
    $
    1,603,624
    
    
    $
    126,861
    
    
    $
    2,136,949
    
    
    $
    140,815
 
 1

    Includes U.S. Treasury securities pledged for short-sale obligations at a fair
value of $130,122 (amortized cost of $135,447).  76




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)
  At December 31, 2005Less Than 12 Months
    
    
    12 Months or More
    
    
    TotalUnrealized
    
    
    
    
    
    
    Unrealized
    
    
    
    
    
    
    UnrealizedFair Value
    
    
    Loss
    
    
    Fair Value
    
    
    Loss
    
    
    Fair Value
    
    
    LossFixed income securities:United States government and
government agencies and
authorities1
    
    $
    1,603,291
    
    
    $
    62,285
    
    
    $
    11,261
    
    
    $
    393
    
    
    $
    1,614,552
    
    
    $
    62,678States, municipalities and
political subdivisions
    
    
    1,337
    
    
    
    9
    
    
    
    
    
    
    
    
    
    
    
    1,337
    
    
    
    9Other corporate
    
    
    47,492
    
    
    
    14,218
    
    
    
    207,462
    
    
    
    10,283
    
    
    
    254,954
    
    
    
    24,501Total fixed income securities
    
    
    1,652,120
    
    
    
    76,512
    
    
    
    218,723
    
    
    
    10,676
    
    
    
    1,870,843
    
    
    
    87,188Equity securities:Common stocks
    
    
    189,543
    
    
    
    22,719
    
    
    
    115
    
    
    
    35
    
    
    
    189,658
    
    
    
    22,754Preferred stocks
    
    
    8,174
    
    
    
    76
    
    
    
    
    
    
    
    
    
    
    
    8,174
    
    
    
    76Total equity securities
    
    
    197,717
    
    
    
    22,795
    
    
    
    115
    
    
    
    35
    
    
    
    197,832
    
    
    
    22,830Total
    
    $
    1,849,837
    
    
    $
    99,307
    
    
    $
    218,838
    
    
    $
    10,711
    
    
    $
    2,068,675
    
    
    $
    110,018
 
 1

    Includes U.S. Treasury securities pledged for short-sale obligations at a fair value of $104,065 (amortized cost of $105,133).  At December 31, 2006UnrealizedFair Value
    
    
    LossDue in one year or less
    
    $
    
    
    
    $
    Due after one through five years
    
    
    229,281
    
    
    
    1,936Due after five through ten years
    
    
    51,511
    
    
    
    921Due after ten years through twenty years
    
    
    402,197
    
    
    
    17,382Due after twenty years
    
    
    1,201,427
    
    
    
    109,480Total fixed income securities in an unrealized loss position
    
    $
    1,884,416
    
    
    $
    129,719
 Investment income
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Interest on fixed income securities
    
    $
    106,391
    
    
    $
    112,788
    
    
    $
    103,162Dividends on equity securities
    
    
    17,181
    
    
    
    20,679
    
    
    
    11,541Income on other invested assets
    
    
    90,826
    
    
    
    19,681
    
    
    
    5,507Interest on cash and cash equivalents1
    
    
    39,086
    
    
    
    18,335
    
    
    
    6,207Gross investment income
    
    
    253,484
    
    
    
    171,483
    
    
    
    126,417Interest on funds held under reinsurance contracts
    
    
    (8,427
    )
    
    
    (19,904
    )
    
    
    (30,501
    )Investment expenses
    
    
    (25,013
    )
    
    
    (20,456
    )
    
    
    (10,815
    )Investment income
    
    $
    220,044
    
    
    $
    131,123
    
    
    $
    85,101
 1

    Includes interest of $16,893, $8,923 and $343 in 2006, 2005 and 2004,
respectively, on cash collateral pledged for short-sale obligations, as well as interest on
short-term investments. 77




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)
 Investment gains and losses
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Fixed income securities:Gains
    
    $
    62,769
    
    
    $
    87,318
    
    
    $
    57,454Losses
    
    
    (1,491
    )
    
    
    (786
    )
    
    
    (150
    )Net
    
    
    61,278
    
    
    
    86,532
    
    
    
    57,304Equity securities:Gains
    
    
    194,129
    
    
    
    51,490
    
    
    
    40,833Losses
    
    
    (15,857
    )
    
    
    (7,039
    )
    
    
    (684
    )Net
    
    
    178,272
    
    
    
    44,451
    
    
    
    40,149Derivative and short-sale securities:Gains
    
    
    1,998
    
    
    
    25
    
    
    
    2,908Losses
    
    
    (75,459
    )
    
    
    (49,292
    )
    
    
    (21,646
    )Net
    
    
    (73,461
    )
    
    
    (49,267
    )
    
    
    (18,738
    )Other invested assets:Gains
    
    
    6,828
    
    
    
    3,128
    
    
    
    822Losses
    
    
    (143
    )
    
    
    (657
    )
    
    
    Net
    
    
    6,685
    
    
    
    2,471
    
    
    
    822Total realized investment gains and losses:Gains
    
    
    265,724
    
    
    
    141,961
    
    
    
    102,017Losses
    
    
    (92,950
    )
    
    
    (57,774
    )
    
    
    (22,480
    )Net
    
    $
    172,774
    
    
    $
    84,187
    
    
    $
    79,537
   Years Ended December 31,2006
    
    
    2005
    
    
    2004Fixed income securities
    
    $
    (24,795
    )
    
    $
    (59,925
    )
    
    $
    (38,679
    )Equity securities
    
    
    (65,164
    )
    
    
    15,447
    
    
    
    38,688Other invested assets
    
    
    (51,045
    )
    
    
    39,362
    
    
    
    11,288Change in unrealized
investment gains and losses,
net of transfers to realized
investment gains and losses,
before income taxes
    
    
    (141,004
    )
    
    
    (5,116
    )
    
    
    11,297Deferred income taxes
    
    
    49,352
    
    
    
    1,790
    
    
    
    (3,953
    )Change in unrealized
investment gains and losses,
net of transfers to realized
investment gains and losses,
reflected in shareholders
equity
    
    $
    (91,652
    )
    
    $
    (3,326
    )
    
    $
    7,344
 78




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)
 Investments in related parties
  Ownership PercentageAt December 31, 2006
    
    
    At December 31, 2005
    
    
    at December 31, 2006Carrying
    
    
    Crum &Cost
    
    
    Carrying Value
    
    
    Cost
    
    
    Value
    
    
    Forster
    
    
    FairfaxNorthbridge Financial
Corporation
    
    $
    75,055
    
    
    $
    148,298
    
    
    $
    75,055
    
    
    $
    136,385
    
    
    
    15.2%
    
    
    
    59.2%HWIC Asia Fund
    
    $
    41,638
    
    
    $
    62,495
    
    
    $
    76,210
    
    
    $
    135,297
    
    
    
    36.3%
    
    
    
    92.7%Chou Associates
Management Fund
    
    $
    25,362
    
    
    $
    26,631
    
    
    
    
    
    
    
    
    
    
    
    5.1%
    
    
    
    26.3%Odyssey Re Holdings Corp
 common shares
    
    $
    17,824
    
    
    $
    22,337
    
    
    $
    17,824
    
    
    $
    18,664
    
    
    
    1.1%
    
    
    
    59.6%Advent1
    
    $
    17,870
    
    
    $
    22,146
    
    
    $
    19,295
    
    
    $
    13,347
    
    
    
    8.1%
    
    
    
    44.5%Dalton Greater China Fund
    
    $
    13,266
    
    
    $
    17,338
    
    
    $
    7,985
    
    
    $
    7,985
    
    
    
    37.2%
    
    
    
    62.6%Odyssey Re Holdings Corp
 preferred shares
    
    $
    8,090
    
    
    $
    8,391
    
    
    $
    10,000
    
    
    $
    9,935
    
    
    
    N/A
    
    
    
    N/ATRG Holding Corporation
    
    $
    5,025
    
    
    $
    8,089
    
    
    $
    5,025
    
    
    $
    8,339
    
    
    
    1.4%
    
    
    
    100%Rutland Fund A
    
    $
    4,538
    
    
    $
    5,922
    
    
    $
    6,925
    
    
    $
    7,686
    
    
    
    12.7%
    
    
    
    25.4%MFXchange Holdings Inc.
    
    $
    3,725
    
    
    $
    2,218
    
    
    $
    3,725
    
    
    $
    2,341
    
    
    
    9.3%
    
    
    
    100.0%
 1

    At December 31, 2006, cost includes a charge of $5,379 in respect of an other than temporary impairment charge.         79




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)
 Equity method investees
   At December 31,2006
    
    
    2005Cash and investments
    
    $
    590,389
    
    
    $
    638,831Total assets
    
    $
    947,285
    
    
    $
    962,537Total liabilities
    
    $
    635,244
    
    
    $
    612,740Shareholders equity or partners capital1
    
    $
    312,041
    
    
    $
    349,797
 
 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 purchase accounting adjustments.  Years Ended December, 312006
    
    
    2005
    
    
    2004Total revenues
    
    $
    360,264
    
    
    $
    228,960
    
    
    $
    184,662Total expenses
    
    $
    195,442
    
    
    $
    170,143
    
    
    $
    150,134Net income
    
    $
    108,011
    
    
    $
    45,477
    
    
    $
    24,402
  Northbridge Financial Corporation
  HWIC Asia Fund
  Cost method investments
  80




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 (Dollars in thousands)
 Short-sale obligations and derivative transactions
         Years Ended December, 312006
    
    
    2005
    
    
    2004Short-sale transactions and related options
    
    $
    (43,825
    )
    
    $
    (16,603
    )
    
    $
    (15,237
    )Credit default swaps
    
    
    (23,854
    )
    
    
    (30,245
    )
    
    
    (3,981
    )Embedded derivatives
    
    
    (4,590
    )
    
    
    
    
    
    
    Warrants and other derivatives
    
    
    (1,192
    )
    
    
    (2,419
    )
    
    
    480Total realized investment losses
    
    $
    (73,461
    )
    
    $
    (49,267
    )
    
    $
    (18,738
    )
 Regulatory and other deposits
   81




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
 4. Unpaid Losses and Loss Adjustment Expenses
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Gross unpaid losses and LAE, beginning of year
    
    $
    3,673,034
    
    
    $
    3,370,936
    
    
    $
    3,193,920Less ceded unpaid losses and LAE
    
    
    1,682,768
    
    
    
    1,360,996
    
    
    
    1,321,004Net unpaid losses and LAE, beginning of year
    
    
    1,990,266
    
    
    
    2,009,940
    
    
    
    1,872,916Losses and LAE incurred related to:Current year
    
    
    762,241
    
    
    
    684,069
    
    
    
    692,258Prior years
    
    
    (96,162
    )
    
    
    (68,564
    )
    
    
    69,254Total losses and LAE incurred
    
    
    666,079
    
    
    
    615,505
    
    
    
    761,512Losses and LAE paid related to:Current year
    
    
    158,000
    
    
    
    154,381
    
    
    
    164,057Prior years
    
    
    482,049
    
    
    
    480,798
    
    
    
    460,431Total losses and LAE paid
    
    
    640,049
    
    
    
    635,179
    
    
    
    624,488Net unpaid losses and LAE, end of year
    
    
    2,016,296
    
    
    
    1,990,266
    
    
    
    2,009,940Add ceded unpaid losses and LAE
    
    
    1,355,253
    
    
    
    1,682,768
    
    
    
    1,360,996Gross unpaid losses and LAE, end of year
    
    $
    3,371,549
    
    
    $
    3,673,034
    
    
    $
    3,370,936
  2006
    
    
    2005Ceded unpaid losses and LAE in the table above
    
    $
    1,355,253
    
    
    $
    1,682,768Reconciling items:Reinsurance receivable on paid losses and LAE
    
    
    70,933
    
    
    
    69,734Unamortized retroactive reinsurance recoverable
    
    
    329,250
    
    
    
    379,123Loss sensitive cession1
    
    
    (21,510
    )
    
    
    (21,510
    )Reinsurance recoverable on the consolidated balance sheets
    
    $
    1,733,926
    
    
    $
    2,110,115
 
 1

    Equals additional premiums due on retrospectively rated insurance
policies that inure to the benefit of the reinsurer.  82




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
       83




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
 5. Asbestos and Environmental Losses and Loss Adjustment Expenses
  Years Ended December 31,2006
    
    
    2005
    
    
    2004AsbestosGross unpaid losses and allocated LAE (ALAE), beginning of year
    
    $
    469,199
    
    
    $
    522,685
    
    
    $
    495,195Less ceded unpaid losses and ALAE
    
    
    92,418
    
    
    
    113,891
    
    
    
    128,787Net unpaid losses and ALAE, beginning of year
    
    
    376,781
    
    
    
    408,794
    
    
    
    366,408Net losses and ALAE incurred
    
    
    22,700
    
    
    
    31,550
    
    
    
    90,515Less: Net paid losses and ALAE
    
    
    51,243
    
    
    
    63,563
    
    
    
    48,129Net unpaid losses and ALAE, end of year
    
    
    348,238
    
    
    
    376,781
    
    
    
    408,794Add ceded unpaid losses and ALAE
    
    
    94,817
    
    
    
    92,418
    
    
    
    113,891Gross unpaid losses and ALAE, end of year
    
    $
    443,055
    
    
    $
    469,199
    
    
    $
    522,685
 Years Ended December 31,2006
    
    
    2005
    
    
    2004EnvironmentalGross unpaid losses and ALAE, beginning of year
    
    $
    111,536
    
    
    $
    123,353
    
    
    $
    130,511Less ceded unpaid losses and ALAE
    
    
    37,293
    
    
    
    38,190
    
    
    
    31,675Net unpaid losses and ALAE, beginning of year
    
    
    74,243
    
    
    
    85,163
    
    
    
    98,836Net losses and ALAE incurred
    
    
    9,898
    
    
    
    6,635
    
    
    
    10,007Less: Net paid losses and ALAE
    
    
    10,608
    
    
    
    17,555
    
    
    
    23,680Net unpaid losses and ALAE, end of year
    
    
    73,533
    
    
    
    74,243
    
    
    
    85,163Add ceded unpaid losses and ALAE
    
    
    37,103
    
    
    
    37,293
    
    
    
    38,190Gross unpaid losses and ALAE, end of year
    
    $
    110,636
    
    
    $
    111,536
    
    
    $
    123,353
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Other LatentGross unpaid losses and ALAE, beginning of year
    
    $
    36,838
    
    
    $
    35,357
    
    
    $
    40,818Less ceded unpaid losses and ALAE
    
    
    12,794
    
    
    
    13,333
    
    
    
    14,117Net unpaid losses and ALAE, beginning of year
    
    
    24,044
    
    
    
    22,024
    
    
    
    26,701Net losses and ALAE incurred
    
    
    1,299
    
    
    
    6,461
    
    
    
    20Less: Net paid losses and ALAE
    
    
    3,585
    
    
    
    4,441
    
    
    
    4,697Net unpaid losses and ALAE, end of year
    
    
    21,758
    
    
    
    24,044
    
    
    
    22,024Add ceded unpaid losses and ALAE
    
    
    10,705
    
    
    
    12,794
    
    
    
    13,333Gross unpaid losses and ALAE, end of year
    
    $
    32,463
    
    
    $
    36,838
    
    
    $
    35,357
 84




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
 6. Reinsurance
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Premiums written:Direct
    
    $
    1,202,296
    
    
    $
    1,078,670
    
    
    $
    1,124,881Assumed from other companies, pools and associations
    
    
    149,335
    
    
    
    19,086
    
    
    
    14,080Ceded to other companies, pools and associations
    
    
    (185,099
    )
    
    
    (228,790
    )
    
    
    (220,661
    )Net premiums written
    
    $
    1,166,532
    
    
    $
    868,966
    
    
    $
    918,300Premiums earned:Direct
    
    $
    1,157,562
    
    
    $
    1,108,690
    
    
    $
    1,118,526Assumed from other companies, pools and associations
    
    
    117,438
    
    
    
    18,106
    
    
    
    14,053Ceded to other companies, pools and associations
    
    
    (190,977
    )
    
    
    (232,623
    )
    
    
    (224,870
    )Premiums earned
    
    $
    1,084,023
    
    
    $
    894,173
    
    
    $
    907,709
  At December 31,2006
    
    
    2005Reinsurance recoverable on unpaid losses and LAE
    
    $
    1,662,993
    
    
    $
    2,040,381Reinsurance receivable on paid losses and LAE
    
    
    70,933
    
    
    
    69,734Total reinsurance recoverable
    
    $
    1,733,926
    
    
    $
    2,110,115
   85




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
 Corporate aggregate reinsurance
    Years Ended December 31,2006
    
    
    2005
    
    
    2004Premiums earned
    
    $
    
    
    
    $
    
    
    
    $
    (7,595
    )Investment income
    
    
    (8,427
    )
    
    
    (19,904
    )
    
    
    (30,501
    )Losses and LAE
    
    
    (10,289
    )
    
    
    (8,058
    )
    
    
    (28,318
    )Income before income taxes
    
    $
    1,862
    
    
    $
    (11,846
    )
    
    $
    (9,778
    )
  2000 accident year prospective aggregate stop loss contract
    
    $
    37,6511998 prospective aggregate stop loss contract
    
    
    367,500
    11998 aggregate stop loss contract amendment
    
    
    19,2482001 retroactive adverse development contract for $400,000
    
    
    372,5772001 retroactive adverse development contract for $100,000
    
    
    
    2Total
    
    $
    796,976
 
 1

    Includes $389,010 which has been recognized as a reduction of losses and LAE less
$21,510 for additional premiums due on
retrospectively rated insurance policies that
inure to the benefit of the reinsurer. Total amounts recognized as a reduction of losses
and LAE include the $389,010 above, $37,651 on the 2000 accident year prospective aggregate
stop loss contract and $62,575 of amortization of deferred gains on the retroactive
reinsurance contracts.2

    Favorable development of the losses covered under this contract resulted
in a reduction in the reinsurance recoverable balance from $32,540 at December 31, 2005 to
$0 at December 31, 2006. 86




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
 Prospective corporate aggregate reinsurance
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Ceded losses and LAE
    
    $
    
    
    
    $
    
    
    
    $
    9,994Less: ceded premiums written and earned
    
    
    
    
    
    
    
    
    
    
    7,595Less: funds held interest charged to investment income
    
    
    3,055
    
    
    
    4,509
    
    
    
    9,190Income before income taxes
    
    $
    (3,055
    )
    
    $
    (4,509
    )
    
    $
    (6,791
    )
   Retroactive corporate aggregate reinsurance
  Years Ended December 31,2006
    
    
    2005
    
    
    2004(Decrease) increase in reinsurance recoverable due from reinsurers
    
    $
    (36,983
    )
    
    $
    (26,699
    )
    
    $
    117,677Less: related premiums paid
    
    
    (33,392
    )
    
    
    4,105
    
    
    
    56,517(Decrease) increase in income deferred during the year
    
    
    (3,591
    )
    
    
    (30,804
    )
    
    
    61,160Amortization of deferred income
    
    
    (12,889
    )
    
    
    (8,058
    )
    
    
    (18,324
    )(Decrease) increase in deferred income
    
    
    (16,480
    )
    
    
    (38,862
    )
    
    
    42,836Deferred income on retroactive reinsurancebeginning of year
    
    
    184,498
    
    
    
    223,360
    
    
    
    180,524Deferred income on retroactive reinsuranceend of year
    
    $
    168,018
    
    
    $
    184,498
    
    
    $
    223,360Funds held interest charged during the year
    
    $
    5,372
    
    
    $
    15,395
    
    
    $
    21,311
    87




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
     7. Long-Term Debt
   2008
    
    
    105.188
    %2009
    
    
    103.458
    %2010
    
    
    101.729
    %2011 and after
    
    
    100.000
    %
     88




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
 8. Income Taxes
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Current
    
    $
    225,250
    
    
    $
    74,518
    
    
    $
    28,479Deferred
    
    
    (69,094
    )
    
    
    (9,198
    )
    
    
    (23,963
    )Total income tax expense
    
    $
    156,156
    
    
    $
    65,320
    
    
    $
    4,516
   At December 31,2006
    
    
    2005Deferred tax assets:Investments
    
    $
    60,550
    
    
    $
    6,105Deferred income on retroactive reinsurance
    
    
    58,807
    
    
    
    64,575Net operating loss carryforwards
    
    
    57,584
    
    
    
    44,950Unpaid losses and LAE
    
    
    53,624
    
    
    
    54,285Unearned premiums
    
    
    41,357
    
    
    
    35,581Unrealized net depreciation of investments and currency translation
    
    
    19,881
    
    
    
    Employee benefit plans
    
    
    13,772
    
    
    
    11,576Other
    
    
    18,199
    
    
    
    18,246Deferred tax assets
    
    
    323,774
    
    
    
    235,318Deferred tax liabilities:Unrealized net appreciation of investments and currency translation
    
    
    
    
    
    
    28,807Deferred policy acquisition costs
    
    
    29,387
    
    
    
    24,783Other
    
    
    8,485
    
    
    
    6,521Deferred tax liabilities
    
    
    37,872
    
    
    
    60,111Total net deferred tax assets
    
    $
    285,902
    
    
    $
    175,207
   Years Ended December 31,2006
    
    
    2005
    
    
    2004% of
    
    
    
    
    
    
    % of
    
    
    
    
    
    
    % ofPre-tax
    
    
    
    
    
    
    Pre-tax
    
    
    
    
    
    
    Pre-taxAmount
    
    
    Income
    
    
    Amount
    
    
    Income
    
    
    Amount
    
    
    IncomeIncome taxes computed on
pre-tax operating income
    
    $
    159,347
    
    
    
    35.0
    %
    
    $
    71,422
    
    
    
    35.0
    %
    
    $
    5,682
    
    
    
    35.0
    %(Decrease) increase in
income taxes resulting from:Dividends received
deduction and tax-exempt
income
    
    
    (3,264
    )
    
    
    (0.7
    )
    
    
    (3,903
    )
    
    
    (1.9
    )
    
    
    (1,861
    )
    
    
    (11.5
    )Prior year audit adjustment
    
    
    
    
    
    
    
    
    
    
    (1,653
    )
    
    
    (0.8
    )
    
    
    
    
    
    
    Other, net
    
    
    73
    
    
    
    
    
    
    
    (546
    )
    
    
    (0.3
    )
    
    
    695
    
    
    
    4.3Total income tax expense
    
    $
    156,156
    
    
    
    34.3
    %
    
    $
    65,320
    
    
    
    32.0
    %
    
    $
    4,516
    
    
    
    27.8
    %
   89




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
 9. Related Party Transactions
 Reinsurance
  At December 31,2006
    
    
    2005
    
    
    2004Statements of income:Net premiums written
    
    $
    92,472
    
    
    $
    (52,895
    )
    
    $
    (50,229
    )Premiums earned
    
    $
    56,990
    
    
    $
    (54,575
    )
    
    $
    (49,571
    )Losses and LAE
    
    $
    31,338
    
    
    $
    (130,596
    )
    
    $
    (50,235
    )Balance sheets:Premiums receivable
    
    $
    7,249
    
    
    $
    136Reinsurance recoverable from affiliates
    
    $
    254,595
    
    
    $
    304,033Prepaid reinsurance premiums
    
    $
    9,611
    
    
    $
    11,199Unpaid losses and LAE
    
    $
    52,193
    
    
    $
    6,858Unearned premiums
    
    $
    33,958
    
    
    $
    64Accounts payable and other liabilities
    
    $
    8,779
    
    
    $
    18,855
     90




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
        Investment agreements and related party transactions
  91




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
    Other agreements
        92




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
    10. Employee Benefits
   Employers Accounting for Defined Benefit
Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and
132(R)
  93




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
 At December 31,2006
    
    
    2005Changes in benefit obligation:Benefit obligation at beginning of year
    
    $
    11,398
    
    
    $
    13,599Service cost
    
    
    1
    
    
    
    Interest cost
    
    
    591
    
    
    
    645Plan participants contributions
    
    
    1,298
    
    
    
    1,321Actuarial gain
    
    
    (18
    )
    
    
    (1,533
    )Benefits paid
    
    
    (2,324
    )
    
    
    (2,634
    )Benefit obligation at end of year
    
    $
    10,946
    
    
    $
    11,398Change in fair value of plan assets:Fair value of plan assets at beginning of year
    
    $
    
    
    
    $
    Employer contributions
    
    
    1,026
    
    
    
    1,313Plan participants contributions
    
    
    1,298
    
    
    
    1,321Benefits paid
    
    
    (2,324
    )
    
    
    (2,634
    )Fair value of assets at end of year
    
    $
    
    
    
    $
    Funded status of the plan at end of year
    
    $
    (10,946
    )
    
    $
    (11,398
    )Unrecognized net actuarial gain
    
    
    
    
    
    
    (4,456
    )Unrecognized transition obligation
    
    
    
    
    
    
    5,086Liability for post retirement benefit obligation recorded in the balance sheet
    
    $
    (10,946
    )
    
    $
    (10,768
    )
  At December 31,2006Net actuarial gain
    
    $
    4,186Transition obligation
    
    
    (4,270
    )Total
    
    $
    (84
    )
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Service cost
    
    $
    1
    
    
    $
    
    
    
    $
    1Interest cost
    
    
    591
    
    
    
    645
    
    
    
    839Amortization of transition obligation
    
    
    817
    
    
    
    817
    
    
    
    817Recognized net actuarial gain
    
    
    (288
    )
    
    
    (327
    )
    
    
    (146
    )Net periodic benefit cost
    
    $
    1,121
    
    
    $
    1,135
    
    
    $
    1,511
  94




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
    Including
    
    
    ExcludingMedicare
    
    
    MedicareSubsidy
    
    
    Subsidy2007
    
    $
    1,144
    
    
    $
    1,5422008
    
    $
    1,139
    
    
    $
    1,5542009
    
    $
    1,109
    
    
    $
    1,5402010
    
    $
    1,055
    
    
    $
    1,4962011
    
    $
    974
    
    
    $
    1,4162012 - 2016
    
    $
    4,384
    
    
    $
    5,463
    11. Commitments and Contingencies
  2007
    
    $
    12,5662008
    
    
    10,9632009
    
    
    9,2862010
    
    
    7,8562011
    
    
    6,2602012 and thereafter
    
    
    37,059Total minimum annual rentals
    
    $
    83,990
  95




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
       12. Dividend Restrictions, Statutory Information and Capitalization
   96




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Net income
    
    $
    253,324
    
    
    $
    151,924
    
    
    $
    74,556Policyholders surplus
    
    $
    1,406,822
    
    
    $
    1,313,988
    
    
    $
    1,206,547
   13. Segment Reporting
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Workers compensation
    
    $
    278,761
    
    
    $
    285,775
    
    
    $
    282,388Property
    
    
    246,255
    
    
    
    151,578
    
    
    
    187,177General liability
    
    
    227,740
    
    
    
    203,703
    
    
    
    198,993Commercial automobile
    
    
    203,862
    
    
    
    186,601
    
    
    
    174,416Commercial multi-peril
    
    
    61,885
    
    
    
    45,653
    
    
    
    42,833Other
    
    
    65,520
    
    
    
    20,863
    
    
    
    21,902Total premiums earned
    
    $
    1,084,023
    
    
    $
    894,173
    
    
    $
    907,709
  Years Ended December 31,2006
    
    
    2005
    
    
    2004Accident year loss and LAE ratios:
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    Ratio
    
    
    Amount
    
    
    RatioWorkers compensation
    
    $
    200,242
    
    
    
    71.8
    %
    
    $
    211,027
    
    
    
    73.8
    %
    
    $
    204,938
    
    
    
    72.6
    %Property
    
    
    187,773
    
    
    
    76.3
    %
    
    
    170,852
    
    
    
    112.7
    %
    
    
    181,010
    
    
    
    96.7
    %General liability
    
    
    150,810
    
    
    
    66.2
    %
    
    
    140,650
    
    
    
    69.0
    %
    
    
    151,606
    
    
    
    76.2
    %Commercial automobile
    
    
    147,116
    
    
    
    72.2
    %
    
    
    118,624
    
    
    
    63.6
    %
    
    
    118,635
    
    
    
    68.0
    %Commercial multi-peril
    
    
    36,785
    
    
    
    59.4
    %
    
    
    26,989
    
    
    
    59.2
    %
    
    
    25,684
    
    
    
    60.0
    %Other
    
    
    39,515
    
    
    
    60.3
    %
    
    
    15,927
    
    
    
    76.2
    %
    
    
    10,385
    
    
    
    47.4
    %Total accident year losses and LAE
    
    
    762,241
    
    
    
    70.3
    %
    
    
    684,069
    
    
    
    76.5
    %
    
    
    692,258
    
    
    
    76.3
    %Prior years loss development
    
    
    (96,162
    )
    
    
    (8.8
    )
    
    
    (68,564
    )
    
    
    (7.7
    )
    
    
    69,254
    
    
    
    7.6Calendar year losses and LAE
    
    $
    666,079
    
    
    
    61.5
    %
    
    $
    615,505
    
    
    
    68.8
    %
    
    $
    761,512
    
    
    
    83.9
    %
  97




---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
 14. Accounting Adjustments in Respect of Certain Investments Related to Prior Periods
 Accounting for Investments
in Real Estate Ventures Business
Combinations
 Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements
  15. Quarterly Financial Data
  Three Months Ended(Unaudited)December 31,
    
    
    September 30,
    
    
    June 30,
    
    
    March 31,20063
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Premiums earned
    
    $
    292,845
    
    
    $
    228,741
    
    
    $
    279,631
    
    
    $
    191,898
    
    
    $
    264,828
    
    
    $
    241,980
    
    
    $
    246,719
    
    
    $
    231,554Investment
income1,2
    
    $
    50,399
    
    
    $
    28,124
    
    
    $
    72,514
    
    
    $
    59,547
    
    
    $
    109,014
    
    
    $
    98,363
    
    
    $
    181,140
    
    
    $
    55,727Losses and LAE3
    
    $
    124,929
    
    
    $
    129,703
    
    
    $
    190,457
    
    
    $
    169,632
    
    
    $
    181,681
    
    
    $
    162,537
    
    
    $
    169,012
    
    
    $
    153,633Net income2,3
    
    $
    82,272
    
    
    $
    43,081
    
    
    $
    45,865
    
    
    $
    6,101
    
    
    $
    67,783
    
    
    $
    67,199
    
    
    $
    116,363
    
    
    $
    39,555Combined ratio3
    
    
    71.0
    %
    
    
    82.5
    %
    
    
    97.4
    %
    
    
    122.3
    %
    
    
    98.5
    %
    
    
    94.7
    %
    
    
    97.0
    %
    
    
    93.9
    %
 1

    Investment income includes realized investment gains and losses and pre-tax
equity in earnings of investees.2

    Includes adjustments described in Note 14 to the consolidated financial statements.3

    Based on its loss reserves review as of September 30, 2006, the Company recognized
approximately $71.5 million ($46.5 million after-tax) of favorable loss and LAE development
in the fourth quarter of 2006.
 98




---



##### 



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
 
 Evaluation of Disclosure Controls and Procedures
   
 Internal Control over Financial Reporting
   
 ITEM 9B. OTHER INFORMATION
  99




---



##### 



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
 
 Directors and Executive Officers
  Name
    
    Age
    
    PositionV. Prem Watsa
    
    56
    
    ChairmanNikolas Antonopoulos
    
    53
    
    President and Chief Executive OfficerMary Jane Robertson
    
    53
    
    Executive Vice President, Chief Financial Officer and TreasurerFrank B. Bennett1,2
    
    50
    
    DirectorAnthony F. Griffiths1,3
    
    76
    
    DirectorPaul Murray1
    
    75
    
    Director
 1

    Audit committee and compensation committee member.2

    Chairman of the audit committee.3

    Chairman of the compensation committee.
 V. Prem Watsa
 Nikolas Antonopoulos
 Mary Jane Robertson
 Frank B. Bennett
 Anthony F. Griffiths
 Paul Murray
 100




---



##### 



Key Employees of the Operating Companies
 Joseph F. Braunstein
 
 Audit Committee and Audit Committee Financial Expert
   
 Compensation Committee
  
 Compensation of Directors
  
 Code of Ethics
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
 
 101




---



##### 



ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  Years Ended December 31,(dollars in thousands)
    
    2006
    
    
    2005Audit fees
    
    $
    1,142.6
    
    
    $
    878.2Audit-related fees
    
    
    1,209.8
    
    
    
    817.0Tax fees
    
    
    11.0
    
    
    
    All other fees
    
    
    1.7
    
    
    
    1.7Total fees billed by principal accountants
    
    $
    2,365.1
    
    
    $
    1,696.9
 
 Audit Fees
  
 Audit-Related Fees
  
 Tax Fees
  
 All Other Fees
  
 Audit Committee Pre-Approval Policies and Procedures
  
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
 Financial Statement Schedules
  102




---



##### 



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, 2003.10.1
    
    Investment Agreement among Hamblin Watsa, Fairfax and
North River effective as of January 8, 2004
    
    Exhibit 10.1 to the Form 10-K of the
Company for the year ended December
31, 2004, filed on March 7, 2005.10.2
    
    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
    
    Exhibit 10.3 to the Form 10-K of the
Company for the year ended December
31, 2004, filed on March 7, 2005.10.4
    
    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
    
    Exhibit 10.6 to the Form 10-K of the
Company for the year ended December
31, 2004, filed on March 7, 2005.10.7
    
    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, 2003.10.13
    
    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.
 103




---



##### 



ExhibitNumber
    
    Exhibit
    
    Location*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
    
    Addendum to the Tax Sharing Agreement between Fairfax
Inc. and Crum & Forster Holding Inc., effective as of
January 1, 2005.
    
    Exhibit 10.17 to the Form 10-Q of the
Company for the period ended
September 30, 2005, filed on October
28, 2005.10.18
    
    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
    
    Intentionally left blank10.26
    
    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
    
    Intentionally left blank10.28
    
    Intentionally left blank10.29
    
    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, 2003.10.31
    
    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
    
    Exhibit 10.32 to the Form 10-K of the
Company for the year ended December
31, 2004, filed on March 7, 2005.
 104




---



##### 



ExhibitNumber
    
    Exhibit
    
    Location*10.33
    
    Amended and Restated Employment Agreement of Mary
Jane Robertson effective as of January 1, 2005
    
    Exhibit 10.33 to the Form 10-K of the
Company for the year ended December
31, 2004, filed on March 7, 2005.10.34
    
    Employment Agreement of Joseph Braunstein effective
as of January 1, 2005
    
    Exhibit 10.34 to the Form 10-K of the
Company for the year ended December
31, 2004, filed on March 7, 2005.10.35
    
    Crum & Forster Holdings Corp. Long Term Incentive Plan
    
    Exhibit 10.35 to the Form 10-K of the
Company for the year ended December
31, 2004, filed on March 7, 2005.10.36
    
    Addendum to the Tax Sharing Agreement between Fairfax
Inc. and the Company effective as of January 1, 2005
    
    Exhibit 10.36 to the Form 10-Q of the
Company for the period ended
September 30, 2005, filed on October
28, 2005.10.37
    
    Amendment Number 1 to the Investment Agreement among
Hamblin Watsa, Fairfax and CF Specialty effective as
of January 1, 2005
    
    Exhibit 10.37 to the Form 10-Q of the
Company for the period ended
September 30, 2005, filed on October
28, 2005.10.38
    
    Amendment Number 1 to the Investment Agreement among
Hamblin Watsa, Fairfax and Seneca effective as of
January 1, 2005
    
    Exhibit 10.38 to the Form 10-Q of the
Company for the period ended
September 30, 2005, filed on October
28, 2005.10.39
    
    Amendment Number 1 to Employment Agreement of Joseph
Braunstein effective as of April 14, 2006
    
    Exhibit 10.39 to the Form 10-Q of the
Company for the period ended June 30,
2006, filed on August 21, 2006.12.1
    
    Statement Regarding Calculation of Ratio of
Consolidated Earnings to Consolidated Fixed Charges
    
    Filed herewith.14.1
    
    Code of Ethics for Senior Financial Officers
    
    Exhibit 14.1 to the Form 10-K of the
Company for the year ended December
31, 2004, filed on March 7, 2005.24.1
    
    Power 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.
 105




---



##### 



SIGNATURES
  CRUM & FORSTER HOLDINGS CORP.
(Registrant)Date: March 7, 2007
    
    By:
    
    /s/ Nikolas AntonopoulosNikolas AntonopoulosPresident and Chief Executive OfficerDate: March 7, 2007
    
    By:
    
    /s/ Mary Jane RobertsonMary Jane RobertsonExecutive Vice President, Chief Financial Officer and Treasurer
 
 POWER OF ATTORNEY
   Signature
    
    Title
    
    DateBy: /s/
    
    V. Prem Watsa
    
    Chairman of the Board
    
    March 7, 2007V. Prem WatsaBy: /s/
    
    Nikolas Antonopoulos
    
    President and Chief Executive Officer
    
    March 7, 2007Nikolas AntonopoulosBy: /s/
    
    Mary Jane Robertson
    
    Executive Vice President, Chief Financial Officer and Treasurer
    
    March 7, 2007Mary Jane RobertsonBy: /s/
    
    Frank B. Bennett
    
    Director
    
    March 7, 2007Frank B. BennettBy: /s/
    
    Anthony F. Griffiths
    
    Director
    
    March 7, 2007Anthony F. GriffithsBy: /s/
    
    Paul Murray
    
    Director
    
    March 7, 2007Paul Murray
 106




---



##### 



INDEX TO FINANCIAL STATEMENTS AND RELATED FINANCIAL STATEMENT SCHEDULES
 PageNumberConsolidated Financial Statements
    
    
    64Financial Statement SchedulesReport of Independent Registered Public Accounting Firm on Financial Statement Schedules
    
    
    108Schedule ISummary of Investments Other Than Investments in Related Parties
    
    
    109Schedule IICondensed Balance Sheets of Crum & Forster Holdings Corp. at December 31,
2006 and 2005 (Parent Company Only)
    
    
    110Schedule IICondensed Statements of Income of Crum & Forster Holdings Corp. for the
Years Ended December 31, 2006, 2005 and 2004 (Parent Company Only)
    
    
    111Schedule IICondensed Statements of Cash Flows of Crum & Forster Holdings Corp. for the
Years Ended December 31, 2006, 2005 and 2004 (Parent Company Only)
    
    
    112Schedule IINote to Condensed Financial Statements of Crum & Forster Holdings Corp.
    
    
    113Schedule IIISupplementary Insurance Information
    
    
    *Schedule IVReinsurance
    
    
    *Schedule VValuation and Qualifying Accounts
    
    
    114Schedule VISupplementary Insurance Information
    
    
    *
 *
    
    Schedule omitted as required information is contained within the consolidated financial
statements included in Item 8. Financial Statements and Supplementary Data.
 107




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENT SCHEDULES
    
 108




---



##### 



SCHEDULE I
 CRUM & FORSTER HOLDINGS CORP.
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
(Dollars in thousands)
 At December 31, 2006Amount atwhichCost or
    
    
    
    
    
    
    Shown inAmortized
    
    
    Estimated
    
    
    the BalanceCost
    
    
    Fair Value
    
    
    Sheet1Fixed income securities:United States government and government agencies and authorities
    
    $
    2,015,975
    
    
    $
    1,886,323
    
    
    $
    1,886,323States, municipalities and political subdivisions
    
    
    4,892
    
    
    
    4,913
    
    
    
    4,913Other
    
    
    201,645
    
    
    
    223,128
    
    
    
    223,128Total fixed income securities
    
    
    2,222,512
    
    
    
    2,114,364
    
    
    
    2,114,364Equity securities:Common stocks
    
    
    589,558
    
    
    
    610,551
    
    
    
    610,551Preferred stocks
    
    
    
    
    
    
    
    
    
    
    Total equity securities
    
    
    589,558
    
    
    
    610,551
    
    
    
    610,551Other invested assets
    
    
    96,011
    
    
    xxx,xxx
    
    
    
    97,072Total investments
    
    $
    2,908,081
    
    
    $x,xxx,xxx
    
   
    $
    2,821,987
 1

    Excludes investments in related parties at fair value of $201,952 at December 31,
2006.
 109




---



##### 



SCHEDULE II
 CRUM & FORSTER HOLDINGS CORP. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION OF CRUM & FORSTER HOLDINGS CORP.
BALANCE SHEETS
(Dollars in thousands)
 At December 31,2006
    
    
    2005ASSETSCash and cash equivalents
    
    $
    1,680
    
    
    $
    1,705Investments in and advances to/from consolidated subsidiaries
    
    
    1,321,675
    
    
    
    1,202,924Other invested assets
    
    
    9,925
    
    
    
    6,358Deferred income taxes
    
    
    50,688
    
    
    
    36,905Accrued investment income
    
    
    2
    
    
    
    4Other assets
    
    
    7,465
    
    
    
    8,626Total assets
    
    $
    1,391,435
    
    
    $
    1,256,522LIABILITIESAccounts payable and other liabilities
    
    $
    5,210
    
    
    $
    2,859Long-term debt
    
    
    293,170
    
    
    
    292,470Total liabilities
    
    
    298,380
    
    
    
    295,329SHAREHOLDER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
    
    
    (36,978
    )
    
    
    53,443Retained earnings
    
    
    389,040
    
    
    
    166,757Total shareholders equity
    
    
    1,093,055
    
    
    
    961,193Total liabilities and shareholders equity
    
    $
    1,391,435
    
    
    $
    1,256,522
  110




---



##### 



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 31,2006
    
    
    2005
    
    
    2004REVENUESEquity in earnings of subsidiaries
    
    $
    337,879
    
    
    $
    181,904
    
    
    $
    50,494Investment income
    
    
    702
    
    
    
    1,096
    
    
    
    478Realized investment gains (losses)
    
    
    1,667
    
    
    
    (4,254
    )
    
    
    2,395Total revenues
    
    
    340,248
    
    
    
    178,746
    
    
    
    53,367EXPENSESInterest expense
    
    
    32,986
    
    
    
    32,915
    
    
    
    33,159Other expense, net
    
    
    8,762
    
    
    
    3,878
    
    
    
    10,175Total expenses
    
    
    41,748
    
    
    
    36,793
    
    
    
    43,334Income before income taxes
    
    
    298,500
    
    
    
    141,953
    
    
    
    10,033Income tax benefit
    
    
    (13,783
    )
    
    
    (13,983
    )
    
    
    (14,162
    )NET INCOME
    
    $
    312,283
    
    
    $
    155,936
    
    
    $
    24,195
  111




---



##### 



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 31,2006
    
    
    2005
    
    
    2004OPERATING ACTIVITIESNet income
    
    $
    312,283
    
    
    $
    155,936
    
    
    $
    24,195Adjustments to reconcile net income to net cash from operating activities:Equity in earnings of subsidiaries
    
    
    (337,879
    )
    
    
    (181,904
    )
    
    
    (50,494
    )Dividends
and other receipts from subsidiaries1
    
    
    128,901
    
    
    
    95,617
    
    
    
    83,000Realized investment (gains) losses
    
    
    (1,667
    )
    
    
    4,254
    
    
    
    (2,395
    )Net accretion of discount on fixed income securities
    
    
    
    
    
    
    2
    
    
    
    274Amortization
    
    
    1,861
    
    
    
    1,790
    
    
    
    1,763Deferred income tax benefit
    
    
    (13,783
    )
    
    
    (13,983
    )
    
    
    (14,162
    )Changes in:Other assets
    
    
    (192
    )
    
    
    16,300
    
    
    
    31,081Accounts payable to affiliates
    
    
    
    
    
    
    (10
    )
    
    
    (4,945
    )Accounts payable and other liabilities
    
    
    2,351
    
    
    
    (1,332
    )
    
    
    546Net cash from operating activities
    
    
    91,875
    
    
    
    76,670
    
    
    
    68,863INVESTING ACTIVITIESPurchases of other invested assets
    
    
    (1,900
    )
    
    
    (2,217
    )
    
    
    (6,000
    )FINANCING ACTIVITIESDividends paid to shareholder
    
    
    (90,000
    )
    
    
    (73,500
    )
    
    
    (61,500
    )Deferred financing costs
    
    
    
    
    
    
    
    
    
    
    (974
    )Net cash from financing activities
    
    
    (90,000
    )
    
    
    (73,500
    )
    
    
    (62,474
    )Net change in cash and cash equivalents
    
    
    (25
    )
    
    
    953
    
    
    
    389Cash and cash equivalents, beginning of year
    
    
    1,705
    
    
    
    752
    
    
    
    363Cash and cash equivalents, end of year
    
    $
    1,680
    
    
    $
    1,705
    
    
    $
    752SUPPLEMENTAL CASH FLOW INFORMATIONCash paid for interest
    
    $
    31,125
    
    
    $
    31,125
    
    
    $
    31,404Cash paid for income taxes
    
    $
    
    
    
    $
    
    
    
    $
    
 1
  112




---



##### 



SCHEDULE II
 CRUM & FORSTER HOLDINGS CORP. (PARENT COMPANY ONLY)
NOTE TO CONDENSED FINANCIAL STATEMENTS OF CRUM & FORSTER HOLDINGS CORP.
  113




---



##### 



SCHEDULE V
 CRUM & FORSTER HOLDINGS CORP.
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
 ChargesBalance at
    
    to Costs
    
    Charged to
    
    
    
    
    
    Balance atBeginning of
    
    and
    
    Other
    
    
    
    
    
    End ofYear
    
    Description
    
    Year
    
    Expenses
    
    Accounts
    
    Deductions
    
    Year2006
    
    Reserve for uncollectible premiums
    
    $
    24,437
    
    
    
    
    
    
    
    2,347
    1
    
    
    (1,453
    )2
    
    $
    25,3312005
    
    Reserve for uncollectible premiums
    
    $
    23,859
    
    
    
    
    
    
    
    1,509
    1
    
    
    (931
    )2
    
    $
    24,4372004
    
    Reserve for uncollectible premiums
    
    $
    22,359
    
    
    
    
    
    
    
    1,787
    1
    
    
    (287
    )2
    
    $
    23,8592006
    
    Reserve for uncollectible reinsurance
    
    $
    34,441
    
    
    
    9,500
    3
    
    
    
    
    
    
    (1,164
    )4
    
    $
    42,7772005
    
    Reserve for uncollectible reinsurance
    
    $
    40,930
    
    
    
    7,206
    3
    
    
    
    
    
    
    (13,695
    )4
    
    $
    34,4412004
    
    Reserve for uncollectible reinsurance
    
    $
    39,882
    
    
    
    5,000
    3
    
    
    
    
    
    
    (3,952
    )4
    
    $
    40,9302006
    
    Reserve for uncollectible loss deductibles
    
    $
    8,680
    
    
    
    (1,192
    )5
    
    
    
    
    
    
    
    
    
    $
    7,4882005
    
    Reserve for uncollectible loss deductibles
    
    $
    5,738
    
    
    
    3,000
    5
    
    
    
    
    
    
    (58
    )6
    
    $
    8,6802004
    
    Reserve for uncollectible loss deductibles
    
    $
    10,960
    
    
    
    (4,604
    )5
    
    
    
    
    
    
    (618
    )6
    
    $
    5,738
 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 increases (decreases) to the reserve for uncollectible loss
deductibles charged to losses and LAE.6
    Primarily represents uncollectible loss deductibles written off to the reserve.
 114