As a holding company with no direct operations, Crum & Forster Holdings Corp.’s (referred to in this section as the Company) assets consist primarily of its investments in the capital stock of its insurance subsidiaries. See “Item 15. Exhibits and Financial Statement Schedules ¾ Schedule II, Holding Company Condensed Financial Statements”. The Company requires cash to meet its annual debt service obligations (approximately $26 million per year), to pay corporate expenses, including income taxes, and, ultimately, to repay the $330.0 million aggregate principal amount of senior notes due in 2017.
The aggregate carrying value of the Company’s investment portfolio, including cash and cash equivalents and assets pledged for derivatives, was approximately $4.0 billion at December 31, 2009 and 2008, of which $311.8 million and $709.8 million was held in cash, cash equivalents and short-term investments at December 31, 2009 and 2008, respectively. For detailed information on the Company’s investment portfolio, see Note 3 to the consolidated financial statements included in “Item 8. Financial Statements and Supplementary Data”.
Consolidated Statements of Shareholder’s Equity for the Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2009, 2008 and 2007
The Company’s investments in Odyssey include investments in Odyssey common and preferred stock. Upon election of the fair value option guidance for Odyssey preferred stock (concurrent with the acquisition and fair value option election for Odyssey common stock in December 2008), the Company recorded a realized loss of $2,350 on the consolidated statement of income and an unrealized gain of the same amount in other comprehensive income, which represents the reclassification of the cumulative change in fair value previously recorded in accumulated other comprehensive income.
ASC 815. In March 2008, the FASB issued guidance under ASC 815, Derivatives and Hedging (“ASC 815”), which is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures about: (i) how and why an entity uses derivative instruments; (ii) how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations; and (iii) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The Company adopted ASC 815 effective January 1, 2009, which did not affect the Company’s financial position or results of operations; however, the Company has expanded its disclosures regarding the effects of hedging activities.
At December 31, 2009, other invested assets include the Company’s investments in Advent and Odyssey, which are equity investments for which the Company has elected the fair value option, and a convertible preferred security that has been designated as held-for-trading. Changes in fair value of other invested assets are recognized as realized investment gains and losses in the consolidated statements of income in the period in which they occur and amounted to gains (losses) of $58,908, $(41,134) and $0 for the years ended December 31, 2009, 2008 and 2007, respectively. Other invested assets had a carrying value of $367,875 and $273,917 at December 31, 2009 and 2008, respectively.
On June 3, 2008 and November 26, 2008, the Company purchased shares in Arab Orient Insurance Company, a publicly traded insurance company based in Jordan, at a total cost of $11,277.
The Company’s corporate aggregate reinsurance contracts are of the type commonly referred to as “finite” reinsurance and cover or covered, in varying amounts and on varying terms, accident years 2002 and prior. The majority of these contracts have been commuted or had limits paid. The Company has not purchased corporate aggregate reinsurance since 2001 and does not currently have plans to purchase corporate aggregate reinsurance in the future. At December 31, 2009, only one retroactive contract with a remaining limit of $51,000 and one prospective contract with a remaining limit of $96,272 are in effect.
The effect of retroactive corporate aggregate reinsurance on components of the Company’s consolidated statements of income follows ((decrease) increase in indicated component):
In addition to the two contracts noted above, the Company also commuted the retroactive amendment to its prospective 1998 aggregate stop loss agreement. The effect of this commutation was a loss of $4,123 offset by $8,778 of unamortized deferred income released on commutation which resulted in a net pre-tax credit of $4,655 included in losses and LAE on the consolidated statement of income for the year ended December 31, 2008.
For the years ended December 31, 2009, 2008 and 2007, total interest expense on the notes was $27,818, $27,885 and $29,850, respectively, including amortization of related deferred financing costs, and, in respect of the 2013 Notes, accretion of the discount. In 2007, the Company also recognized additional costs related to the early retirement of its 2013 Notes of $21,187, which were comprised of premium payments, related fees and expenses and write-off of unamortized deferred financing costs. At December 31, 2009 and 2008, deferred financing costs incurred in conjunction with the issuance of the notes totaled $4,627 and $5,258, respectively, and are included in other assets on the consolidated balance sheet. These deferred financing costs are being amortized to interest expense on a straight-line basis over the duration of the notes.
The Company’s insurance subsidiaries are subject to state regulatory restrictions that limit the maximum amount of dividends they can pay to the Company. These regulations vary by state. The restrictions are generally based on the net income, investment income and policyholders’ surplus of each insurance company, and further provide that the payment of dividends must be from the earned policyholders’ surplus of the insurance company. Any payment of dividends above the regulatory limits is considered “extraordinary” and is subject to the approval of the Insurance Commissioner in the state of domicile. In October 2008, US Fire received prior regulatory approval from the Delaware Department of Insurance to pay, and paid, a $350,000 extraordinary dividend to the Company.